The intention of this essay is to analyse the ‘Balanced Scorecard’ and to review its effectiveness as a performance management tool. It will review briefly the short history of the ‘Balanced Scorecard’ and then analyse each of the different aspects of the management tool and describe how they link together.
History of the Balanced Scorecard
The notion of the ‘Balanced Scorecard’ first appeared in the Harvard Business Review in 1992 in an article titled “The Balanced Scorecard – Measures that Drive Performance,”authored by Robert Kaplan and David Norton (Kaplan and Norton 1992). They had conducted a year-long study with “12 companies at the leading edge of performance measurement, [and] devised a ‘balanced scorecard’”as a result of their research (Kaplan and Norton, 1992, p.71).
A ‘Balanced Scorecard’ is a “strategic planning and management system that is used to align business activities to the vision and strategy of the organisation, improve internal and external communications, and monitor organisation performance against strategic goals”(Balanced Scorecard Institute, Unknown). It was brought out of the necessity to include non-financial indicators to measure performance, where in the past businesses and managers focused primarily on financially-based indicators to measure performance. These financially-based performance measurement systems “worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today”(Kaplan and Norton, 1992, p.71).
After spending a year with various companies, Norton and Kaplan realised that “Managers want a balanced presentation of both financial and operational measures”(Kaplan and Norton, 1992, p.71). The recognition of the importance of operational measures was a milestone in performance measurement systems, as financially-based measurements help indicate the final outcomes of actions and processes already set in place, whilst operational measures help aid the driving of future financial performance.
Since its inception in 1992 the ‘Balanced Scorecard’ is now “adopted by thousands of private, public, and non-profit enterprises around the world”(Kaplan, 2010, p. 2). Which provides testament to its importance and effectiveness as a performance management system, it is likely that businesses that have implemented the systems have seen profound impacts on their profit margins and the happiness and innovativeness’ of their workforce.
The Four Perspectives
The scorecard itself is made up of four different perspectives; Financial, Customer, Internal Business Processes, and Learning & Growth. By looking at these different perspectives the balanced scorecard “provide[s] answers to four 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?”(Kaplan and Norton, 1992, p.72) By providing senior managers with information from four important perspectives, another benefit of implementing a scorecard is that it minimises information over-load by “add[ing] value by providing both relevant and balanced information in a concise way for managers”(Mooraj, Oyon and Hostettler, 1999, p.489).
To understand more completely how the interaction of the phases helps an organisation create additional financial value whilst aiding in the learning and growth, internal business processes and customer satisfaction perspectives see the appendix for fig.1, and fig.2. The four different perspectives and the way they interconnect are an important issue, as such it is also important to analyse each of them on an individual basis; first it must be recognised that each of the perspectives is made up of Objectives, Measurements, Targets and finally Programmes.