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Balanced Scorecard | Definition, Process, Framework, Advantages and Disadvantages

balanced scorecard

Contents -
  1. Meaning and Definition of Balanced Scorecard.
  2. Balanced Scorecard Framework / Four Perspectives of Balanced Scorecard.
  3. Process of Balance Scorecard.
  4. Balanced Scorecard in Human Resource Accounting.
  5. Advantages and Disadvantages of Balanced Scorecard.

What is Balanced Scorecard ?


Balanced scorecard system provides feedback on internal since processes and external outcome to continuously improve organisational performance and results. Balanced scorecard is a comprehensive performance measurement framework that translate and organisations strategy into clear objective, measure, target and initiatives. It integrates the measures used across the organisation and help it grapple with the intangible or intellectual asset. Thus, when fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerves centre of an enterprise. Balanced scorecard represents a management system that can motivate breakthrough improvements in critical areas of product customers and market development.

Definition of Balanced Scorecard


According to Kaplan and Norton :
" 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 investment 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".

According to David Chaudron :
Balanced scorecard is defined as,
  1. A way of measuring organisational, business unit or department success.
  2. A way of balancing long-term and short-term actions.
  3. A way of balancing different measures of success such as - Financial, Customer. Internal operations, Human Resource Systems and Development.
  4. A way of tying strategy to measures to action.

Balanced Scorecard Framework / Four Perspectives of Balanced Scorecard


Many companies have performance measurement systems that incorporate financial and non-financial measures. The objectives and measures view organisational performance from four perspectives, which are as follows :



1. Financial Perspective -
The Balanced Scorecard retains the financial perspective since financial measures are valuable in summarizing the readily measurable economic consequences of action already taken. Financial performance measures indicate whether a company's strategy implementation and execution are contributing to bottom-line improvement. Financial objectives basically relate to profitability measured, e.g. by operating income, Return on capital employed and economic value added, Alternative financial objectives can be rapid sales growth or generation of cash flow.
In addition to increasing returns, most organisations are concerned with the risk of these returns. Therefore, when it is strategically important, this organisation will want to incorporate explicit risk management objectives into their financial perspective. Thus, all objectives and measures in the other scorecard perspectives should be linked to achieving one or more objectives in the financial perspective.
In the Balanced Scorecard, financial measures play a vital role. They define the financial performances expected from the strategy and they serve as ultimate targets for the objectives and measures of all the other scorecard perspectives. The choice of the appropriate financial measures that company will incorporate in its Balanced Scorecard also depends on the business's life cycle and strategic theme.

2. Customer Perspective -
These perspective aims at identifying the customer and market segments in which
the business units will choose to compete. The managers should then determine the best measures of the business unit's performance for these targets. In this perspective, managers must first determine core measures that will describe the successful outcomes of a well formulated and implemented strategy. These core measures include customer satisfaction, retention, new customer acquisition, customer profitability an market and account share in each specific segment. However, these measures present some of the disadvantage of the financial measures. It reflects post performance and the equivalent of driving by looking in the rear view mirror of car. This perspective captures the ability of the organisation to provide goods and service the effectiveness of all the facilities to customers, which are leads to higher satisfaction. Needs and desires of customers have to be attended properly because customer pay for the organisation's cost and provide for its profit.

3. Internal Business Process -
In this perspective, the managers must identify the internal processes that are
crucial to their organisations. Those crucial processes are also the ones that should help then deliver superior value to their customer and achieve financial target. This perspective is another example of the superiority of the Balance Scorecard upon traditional performance measures. The Balanced Scorecard go beyond the simple assessment of existing processes, it will usually identify new processes that the organisation should implement in order to be successful. In this perspective, Balanced Scorecard should not only consider operations processes but also innovation processes. By incorporating innovation processes measured, the Balanced Scorecard provides a manager with a set of a tool that does not only reflect the short-term, but also give in insight of about the long-term.
This perspective also focuses on internal result that leads to financial success and satisfied customers. Key process is monitored to ensure that outcomes will be satisfactory.

4. Learning and Growth Perspective -
This perspective works at the ability of employees, the quality of information systems and the effects of organisational alignment in supporting accomplishment of organisational goal. Internal business processes will only succeed if adequately skilled and motivated employees, supplied with accurate and timely information, are driving them.
Finally, through the learning and growth perspective, managers identify the organisational infrastructure that would best fit strategic goals. While in the other three perspectives, the managers identify where the organisation stands now and where it has to be in the future in order to be successful, this fourth perspective really tells them about how to get there. The learning and the growth perspective have three dimensions, people, system and organisation perspectives. With financial, customer and internal perspective, mangers were able to identify the gaps between existing organisational resources and the ones required being successful. The only way to close gaps is for the organisational to judicial invest in employees and information technology and to design the most appropriate organisational structures that could support their strategy.

balanced scorecard

Process of Balance Scorecard 


The scorecard journey has two phases :
  • Building the scorecard
  • Implementing the scorecard
Six-step frameworks are used to build an organisation's balanced Scorecard and an additional step to implement the scorecard system throughout all levels of an organisation. At the end of the first six steps, the high-level corporate scorecard is developed and it forms the basis for subsequent scorecard development. Sometimes, scorecard journey begins in a strategic business unit or support unit, in which case the unit scorecard is built
first and becomes the basis for subsequent unit and corporate scorecards.

Phase One : Building a Balanced Scorecard :

Building the scorecard consists of six steps :

1. Assessment of Organisations -
Step one is an assessment of the organisation's foundations, its core beliefs,
market opportunities, competition, financial position, short and long-term goals and an understanding of what satisfies customers. Many organisations have completed this basic step, typically as a self-assessment at an off-site workshop for managers and executives. Usually, an organisation's strengths, weaknesses, opportunities and threats are developed, discussed and documented. There is no need to repeat this "environmental scan" of an organisation if the information is available and current, say within the past six months. It is important, however, to ensure that the assumptions that underline the basis for the organisation's existence and its business strategies are still valid and sound. Other important aspects of the self-assessment steps are to choose a champion and the core Balanced Scorecard team, set a schedule for the development steps, secure resource commitments necessary to develop and sustain the scorecard system and develop a roil-out communications plan to build buy-in and support for the changes that will follow. Communications planning includes internal and external public information activities that will be used to spread the word about the Balanced Scorecard initiative and what it means for managers and all employees.

2. Development of Overall Business Strategy -
Step two is the development of overall business strategy. In larger organisations, several overarching strategic themes are developed that contain specific business strategies. Examples of common strategic themes include, Build the Business, Improve operational Efficiency and Develop New Products. For public sector organisations, strategic themes might include, addition to describing what the approach is, business strategy, by elimination, identifies what approaches have not been selected. Strategy is a hypothesis of what we think will work and be successful. The remaining steps in the scorecard building phase provide the basis for testing whether our strategies are working, how efficiently they are being executed and how effective they are in moving the organisation forward toward its goals.

3. Decomposition of Business Strategy -
Step three is a decomposition of business strategy into smaller components called objectives. Objectives are the basic building blocks of strategy, the components or activities that make up complete business strategies.

4. Creation of Strategic Map -
In Step four a strategic map of the organisation's overall business strategy is created. Using cause-effect linkages (if-then logic connections), the components (objectives) of strategy are connected and placed in appropriate scorecard perspective categories. The relationship among strategy components is used to identify the key performance drivers of each strategy that, taken together, chart the path to successful end outcomes as seen through the eyes of customers and business owners. A strategic map for a transactions-based company, shows how an objective (effect) is dependent on another objective (cause) and how, taken together, they form a strategic thread from activities to desired end outcomes. 

5. Measurement of Performances -
In Step five, performance measures are developed to track both strategic and operational processes that are used  to produce outcomes. Desired, outcomes are measured from the perspective of internal and external customers and processes are measured from the perspective of the process owners and the activities needed to meet customers requirements. Relationship among the results the company want to achieve and the process needed to get the results must be fully understood before the company can assign meaningful performance measures.

6. Review -
In Step six, new initiatives are identified that need to be funded and implemented to ensure that our strategies are successful. Initiatives developed at the end of the scorecard building process are more strategic than if they are developed in the abstract.

Phase 2 : Implement Scorecard :

In this phase, the organisation's Balance Scorecard is further broken into
departmental level scorecard, so that each department can focus on the elements of the complete organisation's scorecard. This helps in micromanaging the activities and their monitoring at lower level at intervals best suited to specific goals. The overall scorecard of the organisation reports data from departmental scorecard and is reviewed by higher management on monthly / quarterly meetings.

Balanced Scorecard in Human Resource Accounting (HRA)


Human Resource Accounting (HRA) involves accounting for the company's management and employees as "Human capital" or assets that provide future benefits. Traditional accounting treats costs related to a company's human resources as expenses on the income statement that reduce profit, rather than as assets in the balance sheet that have future value for the company. HRA suggests that the process of measurement, as well as the measures themselves, have relevance in decision-making. The Balanced Scorecard developed by Robert Kaplan, a professor at Harvard University, and David Narton, a consultant is a framework to organise the process of measuring groupings of financial and non-financial performance measures that support the strategies particular in an organisation. The Balanced Scorecard includes the performance areas in the multiple dimensions of financial, internal process, customer, and learning and growth. It facilitates linking company goals to these key performance indicators in order to measure critical factors that have a significant impact on the future success of the company. Both HRA and the Balanced Scorecard facilitate the importance of a long term rather than a short-term perspective in management decision-making and performance evaluation.

The Balanced Scorecard is a powerful tool for performance measurement. In addition to the historical financial measures often considered lagging or backward looking, the Balanced Scorecard performance approach scores additional leading or forward looking measures, which predict performance and success over the long-term. Although HRA measures may have relevance for the "Financial component, probably the most practical HRAapplication is in the forward looking "Learning and Growth " component which provides measures to access how the company will be able to continue to improve and create value as a result of skilled and innovative employees, positive corporate culture, and technological development, all factors which impact the development of other areas. HRA measures can assist in measuring Learning and Growth component as a key performance indicators related to employee's training and management development, employee retention, and their value in the organisation.

Human Resource Accounting (HRA) measures may be useful as a component of the Balanced Scorecard. Human Resource Accounting (HRA) involves accounting for the company's management and employees, as "Human capital" or assets that provide future benefits. The Balanced Scorecard is a performance measurement process that focuses on multiple dimensions of Financial, Internal Process, Customer, and Leaning and Growth. It is believed that Human Resource Accounting measures incorporated in a Balanced Scorecard performance measurement system can help an organisation to define and orchestrate its strategy for success.

Both HRA and the Balanced Scorecard have adapted to changes in the economic environment, and both recognise the importance of human capital in innovation and technology, crucial factors for the long-term success of organisations. The origins of HRA came about from the shift in an industry-based economy with a
focus on physical assets such as factory, machines and equipment, to a high technology, information and innovation-based environment with a focus on the expertise, talents, creativity, skills and experience of people - the company's human capital. With the recognition of this human capital intensive economy, starting in the 1960s a growing body of theoretical, empirical and field research ensued in order to develop accounting for human assets, referred to for the first as Human Resource Accounting by Brummet, Flamholtz and Pyle.

External reports for public companies, and often for private companies seeking financing, must follow "Generally Accepted Accounting Principles (GAAP)" in order to encourage objective, reliable and verifiable measurement to facilitate-assessment of the company's financial standing and comparability among organisations. It recognised that there are problems with reporting human assets on the balance sheet for external financial reporting in that there is subjectivity in measuring human assets. The same problems holds true for reporting intangible assets such as goodwill and patents that have been internally generated rather than paid for through a corporate acquisition. Just as GAAP does not allow reporting of human resources as assets, accounting rules do not allow for these intangible assets to be reported as assets.

HRA has implications for both external financial reporting and internal managerial reporting. As some authors have recently discussed, although the importance of human capital in firm value creation is firmly established in the literature, the level of emphasis placed on human capital disclosure by prepares of financial statements is minimal. External financial reporting is utilized in financial statements in organisations' annual reports distributed to external users such as stockholders, bankers and potential investors and lenders.

Whereas there are difficulties in external financial reporting of HRA measures, HRA may best be used as a managerial tool to aid in making decisions that will benefit the long-run strategic goals and profitability of the company. As opposed to external financial reporting, managerial reporting does not require adherence to a strict set of GAAP in specific financial statements in acceptable format reported to the public. However even if human assets are not reported on the face of external financial statements, HRA can play a crucial role in internal managerial decision making-, and HRA measures can be used to show that investments in a company's human resources may result, in long-term profit for the company. Over the years of its development, HRA has been shown to be a useful tool in measurement and management in organisations.

As much as the measures themselves are relevant in managerial decisions, it is also useful to recognize that when managers go through the process of HRA measurement treating human resources as capital assets, they are more likely to make decisions that treat the company's employees as long-term investments of the company. Flamholtz describes the HRA paradigm in terms of the "Psycho-Technical Systenis (PTS)' approach to organisational measurement. According to the PTS approach, the two functions of measurement are :
  • Process functions in the process of measurement
  • Numerical information from the numbers themselves.
Whereas one role of HRA is to provide numerical measures, and even more important role is the measurement process itself. The HRA measurement process as a dual function attempts to increase recognition that human capital is paramount to the organisation's short and long-term productivity and growth. When managers go through the process of measuring human resources, they are more likely to focus on the human side of the organisation and are more likely to consider human resources as valuable organisational resources who should be managed as such.

The Balanced Scorecard also recognizes the importance of the process of measurement in getting management to pay attention to strategic areas that will improve the long-term success. For example, a strategy for success includes management's consideration of attention to leading or forward looking performance measures based on leaning and growth, which are relevant in improving the company's ability to innovate. Factors such as amount spent on employee training, employee satisfaction and employee retention are measured, and performance graded as a part of the balanced scorecard approach.

In a potential layoff decisions with use of HRA measures. included in the learning and growth component of an organisation's Balanced Scorecard, rather than only traditional accounting measures, management is better likely to see the hidden costs to the company's human resources and the long-term implications to the human assets. This is because HRA views human resources as assets or investments which must be maintained for long-run productivity. 

Although management docs need to know tile results of past decisions through the, financial information management also needs to know the future impact of current decisions, and the Balanced scorecard accommodates this need. As reported in Atkinson, et al., surveys indicate that  60% to 70% of companies worldwide use some version of the Balanced Scorecard approach, and that the Balanced Scorecard has been adapted in public sector and non-profit organisation as well.

Just as the field of HRA has grown globally, significant interest in HRA has expanded and crossed over into fields old than accounting including economics, organisational management and organisational culture and inspired related research. The Balanced Scorecard approach to performance measurement which has gained substantial attention and use in recent years provides farther opportunities for utilization of Human Resource Accounting measures. 
Layoffs may affect future for long-term decreases in profits from lost productivity, costs of re-hiring and re-training when business returns and costs of lower morale of existing workforce. If management quantified. the actual costs of layoffs, management might be less inclined to use layoffs as a way to cut cost and boost short term profits at the expense of long-run productivity and profits. 

Advantages of Balanced Scorecard


Advantages of balanced scorecard are as follows:

1. Periodic Reporting of Status of Strategic Goals -
Balanced scorecard forms the key part of management system and therefore is discussed periodically. This helps keeping everyone in the organisation aligned and
achieve growth through balanced Scorecard.

2. Employees Identify Themselves with Goals -
Employees working to achieve the goals identified in the balanced Scorecard can clearly identify themselves with how they are helping the organisation to achieve its growth. It is very important that employees are explained the balanced Scorecard at each possible opportunity to help them understand the way their achievements are paving path for the organisation's future. Employees then feel proud to be involved in the efforts they put-in on day-to-day basis. This further helps employees getting aligned to company's vision and mission.

3. Communicates Strategy to the Organisation -
Balanced Scorecard clearly defines the steps the organisation would take to achieve its goals through well thought of strategy. The working of the strategy, setting priorities in line with various internal and external constraints helps the lender-ship appreciate the chosen strategy and its need.

4. Consensus on the Strategy at Executive Level -
Building a balanced scorecard requires brain storming at board / higher level where discussion are held on organisations vision and its core values. This helps in every one getting aligned about these basics and helps executives look for growth strategies clearly. Balanced Scorecard discussions sets the priorities for the organisation and senior executives can visualize the future more clearly.

5. Translates Strategy into Meaningful Goals -
Building a balanced Scorecard requires determination of specific goals and targets. The organisation now has a clear vision of what is to be done to achieve its goals. With the priorities and the game plan clearly defined, every one now focuses on achieving the goals.

6. Processes Focus to Achieve Strategic Goals -
Having established a balanced Scorecard forces various process owners to modify the key processes of the organisation to achieve identified goals. Since these processes directly affect the organisation's performance, they are likely to be the key processes. With focus concentrated on processes, the organisation meets the customer's expectations more efficiently and helps to make the organisation more competitive.

Disadvantages of Balanced Scorecard


Balanced Scorecard has the following disadvantages :

1. Lacks Direct Links between Financial and Non-Financial Segments -
The balanced Scorecard lacks direct, explicit links between financial and non-financial segments and hence, relegate the non-financial segments to the back of the bus', whenever there is a conflict with the financial segments.

2. Distracts from Achieving Actual Goals -
Balanced scorecard can add a new type of reporting without necessarily improving quality or financial numbers, so, it seems to be an additional set of non-value-added reporting or, worse, a distraction from achieving actual goals.

3. A Scorecard and not Decision-Making Tool -
Since it is a scorecard, it cannot be used as a tool though it can help in assessing performance.

4. Performance is Subjective -
Balanced Scorecard performance is subjective. Unlike quality levels, it cannot be quantified except by surveys or management opinion. Mandating a specific number of training hours per year to meet an "learn and innovate" doesn't necessarily mean all employees take courses that help them in their jobs or that attending classes to fill in the quota is better than working on the assembly line. Demanding high employee morale can hurt managers, since morale is not always a manager's purview.

5. Ignores Bottom-Up Perspective -
Scorecards are a top-down focus for the business. It avoids the bottom up perspective.

6. Leads to Lack of Focus -
Focusing on scoreboards can lead to a lack of focus on the underlying actions that produce a good score.

7. Does not Give Timely Information -
It provide legging metrics that do not produce timely information.

8. High Initial Cost -
Implementing a balanced scorecard system can cost a lot of money in training time and additional money for any consultants that are needed during the process.

9. Leads to Reluctance to Change -
It can lead to reluctance to change within the organisation.

10. Produces Measures from Diversified Divisions -
It produces measures from diversified divisions that cannot be aggregated at the corporate level.
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