BALANCED SCORECARD - AN EMERGING DIMENSION

By
Manav Jindal & Sanjeev Bansal
Faculty Member
Punjab Institute of Management and Technology
Near GPS, Mandi Gobindgarh -147301, Punjab
Ph 01765-254755, 241056
E-mail :
manav_jdl@yahoo.com

After the revelation of Frauds at Enron and Worldcom, it has become clear that accounting cannot convey the company's performance in the real sense to the external parties. This limitation of accounting to measure company performance has given birth to a number of new techniques like Economic Value Added (EVA), Market Value Added (MVA), Earning before interest, Tax, depreciation and Amortization (EBITDA), core earnings and Balanced Scorecard. In the present article, we have touched the last aspect of the above stated tools to measure the company performance i.e.

BALANCED SCORECARD

Every Corporate Entity can reveal its performance through income statement and position statement. These statements have remained static over a long period of time. These can easily measure the tangible aspect of business but unable to reveal anything about the intangible aspect of the business  - the solution lies in implementing the technique of Balanced Scorecard to evaluate a company's performance   Balanced Scorecard---An introduction and its perspectives Kaplan and Norton observed that due to the involvement of numerable variables in the attainment of corporate goals it was becoming increasingly difficult for management to obtain a perfect balance between the operational and financial factors.  In order to resolve this problem they developed the balanced scorecard approach, which supplemented traditional financial measures with criteria that measured performance from the perspective of customers, internal business processes, and learning and growth. This approach enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth. It provides a framework involving critical indicators or key business factors to balance the long- term and short-term objectives. It links and balances financial and non-financial indicators, tangible and intangible measures, internal and external aspects, performance drivers and outcomes. It also balances the external measures like shareholders, customers and internal measures like critical business processes, innovation, learning, and growth. It considers results from past efforts and the measures that drive future performance. Recognizing some of the weaknesses and vagueness of previous management approaches, this approach was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School and David Norton (Balanced Scorecard Collaborative).

The balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. It captures both the financial and non-financial aspects of a company's strategy and discusses the cause and effect relationship that drives business results. It is a proven tool to translate a company's strategy into action. Thousands of Organizations from Fortune 1000 have been harnessing the scorecard benefits for many years. Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

The balanced scorecard suggests that we view the organization from four perspectives, and develop metrics, collect data and analyze it relative to each of these perspectives:


1. The Learning and Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge economy, Human resources are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. The Organisation has to identify the infrastructure that must be built in order to create long term growth and improvement. The objective is to build up mechanism to fill up the existing gaps in knowledge and processes and to be continually innovative. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed.

2. The Business Process Perspective This perspective refers to internal business processes. This perspective allows the managers to know how well their business is running, and whether its products and services conform to customer requirements. It should be carefully analyzed by those who know these processes most intimately. The main focus of this perspective is on defining the critical business processes in which the organization seeks to excel. The company must understand its value chain. In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes.

3. The Customer Perspective Current business philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. Key parameters in this perspective to be analyzed are customer satisfaction, customer retention, new customer acquisition and market share in targeted segments. Major Dimension's affecting customer response and profitability are product and service attributes, customer relations and image and reputation. 


4. The Financial Perspective These measures do not disregard the traditional need for financial data. Timely and accurate financial data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. A Balanced Scorecard must be balanced. In this context, the internal auditor may prove helpful to create and monitor the scorecard since he has access to company wide measure of performance.


The BSC-A Continuous Technique and Not Just Another Project

Project management is the effort to manage work within a finite, clearly scoped, hierarchically structured, linear development process with a definite beginning and end. Whereas the Balanced Scorecard management system is not just another project. It is fundamentally different from project management in several respects.  The first distinction lies in the topology: the balanced scorecard management process, is a continuous cyclical process. It has neither beginning nor end. Its task is not directly concerned about the mission of the organization, but rather with internal processes and external outcomes.The system's control is based on performance metrics that are tracked continuously over time to look for trends, best and worst practices, and areas for improvement. It delivers information to managers for guiding their decisions.

Utility of the Balanced Scorecard in the Corporate Sector

- It is helpful to the executives as it provides an insight on the critical drivers of the organizational success. The management can use that knowledge to question and learn from the strategy. It improves the bottom line by reducing process cost and improving productivity and mission effectiveness.
- By deploying this technique, the management can ensure that everyone in the organization is focusing on the aligned goals and objectives.
- Measurement of process efficiency provides a rational basis for selecting what business process improvements to make first.
- It allows managers to identify best practices in an organization and expand their usage elsewhere.
- The visibility provided by a measurement system supports better and faster budget decisions and control of processes in the organization. This means it can reduce risk.
- Visibility provides accountability and incentives based on real data, not anecdotes and subjective judgements. This serves for reinforcement and the motivation that comes from competition.
- It permits benchmarking of process performance against outside organizations.
- A performance measurement system such as the Balanced Scorecard allows an agency to align its strategic activities to the strategic plan. It permits-- often for the first time -- real deployment and implementation of the strategy on a continuous basis.
- The Balanced Scorecard makes it easier for the management to act on various measures. It enables them to move faster at the real issues and these issues, if tackled timely, will definitely result in improvement in quality and productivity.
- 10.A Balanced Scorecard measures high level issues and presents them easily to the management to act on.

Limitation of Balanced Scorecard Tool

- A Balanced Scorecard must be balanced. If it doesn't include both financial goals as well as non-financial goals, it will lose its utility. So if correct measures are not included in a Balanced Scorecard, the companies will find it difficult to deploy it into action.
- In case, a Balanced Scorecard becomes too functionally oriented, then too many measures and too many numbers will come into the picture and therefore, the effectiveness of the tool will be lost
- Another main limitation of Balanced Scorecard is that it does not help the management in improving the important drivers that affect the success of a company.
- Balanced Scorecard needs continuous review by the companies. It should be updated regularly because the main drivers keep on changing. A static Balanced Scorecard will result in measuring the wrong things and therefore could cause to go down the wrong path.

Implementation of Balanced Scorecard tool and the results

Since its inception in 1992 by Dr. Robert Kaplan and Dr. David Norton, the Balanced Scorecard has been implemented in thousands of corporations, government bodies and other organizations. Recent studies have shown that the Balanced Scorecard is used at close to half of the fortune 500 and FT 50 companies. A number of organizations have reported break through financial result as a result of their use of the Balanced Scorecard tool. A few name to mention in this category are Mobil Oil, CIGNA, AT & T Canada, City of charlotte, National Reconnaissance Office, Hilton Hotels, Wells Fargo Bank and UPS. In this point, a special reference may be made of Mobil's US marketing and refining division who were last in their industry profitability in 1993. To overcome this drastic situation, they broke up their organization into 18 different business units and the Balanced Scorecard was used to convey the strategy to these new business units. Each business unit built its own Balanced Scorecard, which was cascaded, from the corporate Balanced Scorecard. Within two years of implementation of this valuable tool, Mobil moved from last to first in their industry. They retained this position for five consecutive years.

Balanced ScoreCard  - An Indian perspective

The Balanced Scorecard is a framework for integrating the measures derived from the vision and strategy of an organization with the financial measures of its past performance. The objectives and measures are drawn from four perspectives: financial, customer, internal business process and learning and growth. Once set up, the scorecard allows managers to show results focussed on both the long and short term measures of success. The concept is still new to Indian corporate, though it was developed some time ago in 1992. In the Indian context, Organizations like the Murugappa group and the Mahindras have adopted the Balanced Scorecard. But overall, there are not more 4-5 organizations in India that are using this technique.


From the above points, it becomes clear that the Balanced Scorecard technique offers numerous advantages to the organizations using it. But as far as Corporate India is concerned, there is little awareness among the organizations about this newly used tool of performance measurement. With the integration of the financial markets worldwide, it is high time for the Indian companies to implement this technique at the earliest. As far as the implementation aspect is concerned, it takes approximately six months to a year which is not a very long period. Therefore, it is advised that the organisation should come forward and realise the true potential of Balanced Scorecard.

Manav Jindal & Sanjeev Bansal
Faculty Member
Punjab Institute of Management and Technology
Near GPS, Mandi Gobindgarh -147301, Punjab
Phone : 01765-254755, 241056, E-mail :
manav_jdl@yahoo.com

Source : E-mail

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