Do your business’s budgets bear any resemblance to its long-term strategic objectives. "No" is not an uncommon response. A probable reason?
You haven't factored any financial metrics into your long-term strategies yet more than likely you have established long-term benchmarks for areas like customer relations, internal processes and learning and growth. You have probably placed financial emphasis on short-term financial measures but a failure to factor in financial metrics leaves a gap between the development of a strategy and its implementation.
A holistic approach which addresses this serious business omission has been implemented successfully in hundreds of US organisations. Called the “balanced scorecard” it was developed in the early 1990’s by Drs Robert Kaplan (Harvard Business School) and David Norton (Renaissance Solutions, Inc).
The balanced scorecard methodologyThe balanced scorecard supplements traditional financial measures with criteria that measures its performance along with three additional perspectives: learning and growth; internal business processes; and customers.
The balanced scorecard methodology includes:
- customer-defined quality
- continuous improvement
- employee empowerment
- measure-based management
- feedback.
This methodology enables you to track financial results while at the same time monitors the progress in building the capabilities and acquiring the intangible assets required for your business's future growth.
The four processesThe rationale is dependent on four processes which bind short-term business activities to long-term objectives. These are:
- Translating the vision
Firstly you need to get your staff to be able to act on the words in your business's corporate vision and strategy statements. To do this they must first be expressed as an integrated set of objectives and measures and then agreed to by all senior executives.
Simple awareness of corporate goals will not change people’s behaviour - whereas the balanced scorecard effectively empowers you to build a consensus around the vision you have for the business.
- Communicating and linking
The process allows managers to communicate their strategy up and down the organisation. Overarching company strategic objectives and measures are translated into unit objectives and individual goals. Personal scorecards for individual performance and remuneration become intrinsically tied to company scorecards enabling individual employees to understand how their productivity supports the company’s overall long-term strategy.
- Business planning
Strategic planning, budgeting, “change management”, priority-setting, allocation of resources, and other initiatives are integrated into the overall business plan ensuring that financial budgets support all strategic goals. Performance measures for the four scorecard processes are agreed upon and influential “drivers” and milestones of the desired outcomes are identified.
- Feedback and learning
Mechanisms are established to enable strategic feedback and review. As the process progresses a learning process occurs. Outcomes are considered, theories are adjusted and refinements can be made continually as strategies are modified to reflect real-time scenarios.
Translating a business strategy into actionWhen fully deployed the balanced scorecard is more than just a method of broadening a company’s performance measures. Importantly it:
- supplies the framework for the process of change
- empowers employees with the ability to correctly translate the words of a company’s mission statement into actions
- highlight gaps in employees’ skills and information systems
- systematically marshals a businesses’ resources around a manageable set of activities
- enables information from a larger representation of the company to be built into internal objectives and thus a stronger commitment to achieving the goals
- improves the bottom line by reducing process cost and improving productivity and mission effectiveness
- enables process efficiency to be measured
- provides a rationale for prioritising business improvements
- allows managers to identify “best practices”
- reduces risk by implementing a measurement system which supports better and faster budget decisions
- provides accountability and incentives based on real data
- permits benchmarking of the process performance against competitive businesses
- collects a history of projects and process cost data enabling a business to better estimate future cost projections more accurately
- encourages superior performance
The balanced scorecard in actionThe following is a three-year action plan of how one company successfully built and implemented a strategic management system based on the balanced scorecard process.
- Clarifying the vision
An executive team of ten team members was formed. They worked together over three months. Their mission was to develop a balanced scorecard which would translate a generic company vision into a strategy that is understood and can be communicated right the way down the line.
- Communicating to middle management
Over a period of four to five months the top three layers of management, one hundred people, were brought together to learn about and discuss the new strategy. The balanced scorecard became their communication vehicle.
Using the corporate scorecard as the template, each business unit translated its strategy into their own unit’s scorecard. Managers addressed the following basic questions:- How do customers see us?
- What must we excel at?
- Can we continue to improve and create value?
- How do we look to shareholders?
This process took between six and nine months.
- Eliminating non-strategic investments
By the six month strategic priorities had been clarified and the corporate scorecard identified many active programs that were not contributing to the strategy.
- Launching corporate change programs
In this same period the corporate scorecard identified the need for cross-business change programs. These were launched while the business units prepared their individual scorecards.
- Reviewing business unit scorecards
Between the ninth and eleven months the CEO and the executive team review the individual business unit’s scorecards. The review permits the CEO to participate knowledgeably in shaping business unit strategy.
- Refining the vision
During the twelfth month the review of business unit scorecards identified several cross-business issues not initially included in the corporate strategy. The corporate scorecard is updated.
- Communicating the balanced scorecard to the entire company
At the end of one year when the management teams were comfortable with the strategic approach, the scorecard is disseminated to the whole organisation. This process is an ongoing one and the balanced scorecard is now a routine part of the management process.
- Establishing individual performance
During the thirteenth and fourteenth months the top layers of management linked their individual objectives and incentive compensation to their scorecards. This process is an ongoing one and the balanced scorecard is now a routine part of the management process.
- Updating long range plans and budgets
Five-year goals are established for each measure. The investments required to meet those goals are identified and funded. The first year of the five-year plan becomes the annual budget. This process occurs during the fifteenth to seventeenth months. This process is an ongoing one and the balanced scorecard is now a routine part of the management process.
- Conducting monthly and quarterly reviews
Corporate approval is sought for each of the business unit’s scorecards. Following approval of the individual business unit’s scorecard, a monthly review process supplemented by quarterly reviews that focus more heavily on strategic processes begins. This process is an ongoing one and the balanced scorecard is now a routine part of the management process.
- Conducting annual strategy reviews
At the start of the third year the initial strategy has now been achieved and the corporate strategy requires updating. The executive committee lists ten strategic issues. Each business unit is asked to develop a position on each issue as a prelude to updating its strategy and scorecard. Once again this process will be performed on a regular schedule.
- Linking everyone’s performance to the balanced scorecard
Early in the third year all employees are asked to link their individual objectives to the balanced scorecard. The entire organisation’s incentive compensation is linked to the scorecard. Again this process becomes a routine part of the management process and is performed regularly.
Put succinctly the balanced scorecard is a distinctive management system that focuses on vision and strategy, linking today’s actions with tomorrow’s goals. In the words of the designers Kaplan and Norton, think of the balanced scorecard as software to translate your company’s strategy into action.
Sources and linkshttp://www.balancedscorecard.org/
http://www-mmd.eng.cam.ac.uk/people/ahr/dstools/paradigm/balanc.htm
http://www.schneiderman.com/concepts/Scorecard/scorecard.htm
Kaplan, Robert S and Norton, David P Using the balanced scorecard as a strategic management system Harvard Business Review 1996