PERFORMANCE MANAGEMENT BALANCED SCORE CARD

INTRODUCTION TO BALANCED SCORE CARD

The Balanced Scorecard (BSC) is a strategic performance management framework that allows
organizations to manage and measure the delivery of their strategy. The concept was initially
introduced by Robert Kaplan and David Norton in a Harvard Business Review Article in 1992 and
has since then been voted one of the most influential business ideas of the past 75 years. Like most
good ideas, the concept of the Balanced Scorecard is very simple. Kaplan and Norton identified four
generic perspectives that cover the main strategic focus areas of a company. The idea was to use this
model as a template for designing objectives and measures in each of the following perspectives.

BALANCED SCORECARD PERSPECTIVES

 The Financial Perspective covers the financial objectives of an organization and allows managers
to track financial success and shareholder value. This is concerned with the shareholders view of
performance. Shareholders are concerned with many aspects of financial performance Amongst the
measures of success like Market share, Revenue growth, Profit ratio, Return on investment,
Economic value added, Return on capital employed, Operating cost management, Operating ratios
and loss ratios, Corporate goals, Survival, Profitability, Growth, Process cost savings and Increased
return on assets etc.

 The Customer Perspective covers the customer objectives such as customer satisfaction, market
share goals as well as product and service attributes. This seeks to identify how well the business is
performing, whether the products and services offered meet customer expectations, the critical
processes for satisfying customers, Activities in which the firm excels, and in what must it excel in
the future. The internal processes that the company must be improved if it is to achieve its objectives
and this perspective is concerned with assessing the quality of people and processes. Potential goals
for the internal perspective include Improve core competencies, Improvements in technology,
Streamline processes, Manufacturing excellence, Quality performance, Inventory management,
Quality and Motivated workforce.

 The Internal Process Perspective covers internal operational goals and outlines the key processes
necessary to deliver the customer objectives. This perspective deals how customers perceive the firm.
This focuses on the analysis of different types of customers, their degree of satisfaction and the
processes used to deliver products and services to customers. Particular areas of focus would include
Customer service, new products, new markets, Customer retention, Customer satisfaction, and what
does the organization need to do to remain that customer‟s valued supplier. Potential goals for the
customer perspective could include Customer satisfaction, new customer acquisition, Customer
retention, Customer loyalty, Responsiveness, Efficiency, Reliability and Brand Image.

 The Learning and Growth Perspective covers the intangible drivers of future success such as
human capital, organizational capital and information capital including skills, training, organizational
culture, leadership, systems and databases. This perspective is concerned with issues such as how can
they continue to improve and create value, in which areas must the organization improve. How can
the company continue to improve and create value in the future and what should do to make this
happen. Potential goals for the innovation and learning perspective include new product
development, Continuous improvement, Technological leadership, HR development and Product
diversification.

FROM MEASUREMENT DASHBOARDS TO STRATEGY MAPS

When it was first introduced the Balanced Scorecard perspectives were presented in a four-box
model. Early adopters created Balanced Scorecards that were primarily used as improved
performance measurement systems and many organizations produced management dashboards to
provide a more comprehensive at a glance view of key performance indicators in these four
perspectives. However, this four box model has now been superseded by a Strategy Map, which is
the heart of modern Balanced Scorecards. A Strategy Map places the four perspectives in relation to
each other to show that the objectives support each other.

CAUSE-AND-EFFECT LOGIC
A Strategy Map highlights that delivering the right performance in the one perspective (e.g. financial
success) can only be achieved by delivering the objectives in the other perspectives (e.g. delivering
what customers want). You basically create a map of interlinked objectives. For example:

 The objectives in the Learning and Growth Perspective (e.g. developing the right competencies)
underpin the objectives in the Internal Process Perspective (e.g. delivering high quality business
processes).

 The objectives in the Internal Process Perspective (e.g. delivering high quality business processes)
underpin the objectives in the Customer Perspectives (e.g. gaining market share and repeat business).

 Delivering the customer objectives should then lead to the achievement of the financial objectives
in the Financial Perspective.

Strategy maps therefore outline what an organizations wants to accomplish (financial and customer
objectives) and how it plans to accomplish it (internal process and learning and growth objectives).
This cause-and-effect logic is one of the most important elements of best-practice Balanced
Scorecards. It allows companies to create a truly integrated set of strategic objectives. For best
practice examples please visit our case study section. The danger with the initial four-box model was
that companies can easily create a number of objectives and measures for each perspective without
ever linking them. This can lead to additional activities as well as a strategy that is not cohesive or
integrated.

THE KEY BENEFITS OF USING BALANCED SCORECARDS

Research has shown that organizations that use a Balanced Scorecard approach tend to outperform
organizations without a formal approach to strategic performance management. The key benefits of
using a Balanced Scorecard include:

1. Better Strategic Planning – The Balanced Scorecard provides a powerful framework for building
and communicating strategy. The business model is visualized in a Strategy Map which forces
managers to think about cause-and-effect relationships. The process of creating a Strategy Map
ensures that consensus is reached over a set of interrelated strategic objectives. It means that
performance outcomes as well as key enablers or drivers of future performance (such as the
intangibles) are identified to create a complete picture of the strategy.
2. Improved Strategy Communication & Execution – The fact that the strategy with all its
interrelated objectives is mapped on one piece of paper allows companies to easily communicate
strategy internally and externally. We have known for a long time that a picture is worth a thousand
words. This „plan on a page‟ facilities the understanding of the strategy and helps to engage staff and
external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a
strategy that is not understood by everybody.

3. Better Management Information – The Balanced Scorecard approach forces to design key
performance indicators for their various strategic objectives. This ensures that companies are
measuring what actually matters. Research shows that companies with a Balanced Scorecard
approach tend to report higher quality management information and gain increasing benefits from the
way this information is used to guide management and decision making.

4. Improved Performance Reporting – Companies using a Balanced Scorecard approach tend to

produce better performance reports than without such a structured approach to performance
management. Increasing needs and requirements for transparency can be met if companies create
meaningful management reports and dashboards to communicate performance both internally and
externally.

5. Better Strategic Alignment – Balanced Scorecard enables better alignment of the organization‟s
strategic objectives. In order to execute a plan well, organization need to ensure that all business and
support units are working towards the same goals. Cascading the Balanced Scorecard into those units
will help to achieve that and link strategy to operations.

6. Better Organizational Alignment – Well implemented Balanced Scorecards also help to align
organizational processes such as budgeting, risk management and analytics with the strategic
priorities. This will help to create a truly strategic focused organization.

These are compelling benefits and however, they will not be realized if the Balanced Scorecard is
implemented half-heartedly or if too many short cuts are taken during the implementation.

STRATEGY MAP:
A strategy map is a diagram that is used to document the primary strategic goals being pursued by an
organization or management team. It is an element of the documentation associated with the
Balanced Scorecard.
BENEFITS OF STRATEGY MAPS
They tell the story of the strategy: Well designed strategy maps enable you to tell the story of the
strategy easily and allow people to read the story of the strategy as well. This dramatically increases
understanding of the strategy so people can contribute to it. They put the strategy on a single page:
They are extremely powerful at creating a conversation around the strategy and checking
understanding. Instead of strategy being in thick documents, it is on a single page. Many say this is
the most powerful part of strategy maps. They describe how the strategy will be executed with a
simple cause and effect model.
Strategy maps don't just say what you are trying to achieve. They explain very simply, how you plan
to get there because they contain a simple, but powerful cause and effect model, they explain what
differences you want to make in the organization, that will filter through to better results for your
customers and ultimately improved financial outcomes.
They provide objectives rather than measures: Strategy maps help you avoid behaviors caused by
a poor choice of measures by starting with objectives, so that you describe what you want to achieve
(as well as how to measure it). That way, inappropriate measures get replaced with more suitable
ones that better represent what you are trying to achieve.
They show the themes of the strategy: Strategy maps help you explain the themes and components
of your strategy. Quite often you will have a strategy with tensions and internal pressures like build
more sales, but don't increase costs, or improve quality and service with less people. Most strategies
have these tensions; otherwise they would not be interesting or challenging. Strategy maps help to
explain these on a single page, so that the organization does not become like a car with the brake and
accelerator being used alternatively. They also provide the framework for designing and managing
the programmed change in an organization. They ensure the cascading of balanced scorecards: If
you have ever tried to cascade measures through an organization you will have hit problems
relatively quickly. Whilst some do drill down easily, others are incompatible with different
departments, functions, areas, and levels of management. So strategy maps are a powerful way to
cascade objectives through the organization so people can understand them and contribute to them.
They can be used to review progress against the strategy: Strategy maps are not static tools. They
are tools of management that get refined and developed as management learns from their strategy.
When management teams use strategy maps in their meetings the conversation rises to a highest
level, there is less operational detail and more time spent reviewing whether the strategy is working
or not, and why. This also raises the heads of people in the organization who are also then able to
discuss, understand and contribute to the strategy so that it is more likely to be delivered.

CASE STUDY
The organization in this case is a large insurance company named “SKS insurance company” based
in the city of Hyderabad, India. Its main activities involved under-writing business risk for large
corporate clients through a network of agents, advice clients on financial plans, different types of
insurances, obtain information on claims, applications and related documents, and acquire cash
reserves to ensure payment of future benefits. The company was established in 2001, and had grown
rapidly with 110 staff by September 2004. Minimum educational qualification for employees in SKS
is Bachelor’s degree in mathematics, actuarial science, statistics, or a business-related discipline,
such as economics, finance, or accounting. Job profiles and responsibilities in SKS insurance
company is given in Appendix-1. The existing management systems are not efficiently supporting
the current activities of the organization. The company‟s top level management believed that the
organization‟s strategy is not inline with the individual objectives as a result the company
performance has decreased when compared with the previous year‟s performance. Due to this reason
the top management arranged a meeting on a project to address the following objectives. To

1. Build a more effective way of informing individual objectives and aligning them with
organizational and departmental goals

2. Create an individual performance management process that supported the needs of the
organization and encouraged the correct behaviors from staff and teams.

The executive board appointed a new Development team consists of quality manager, HR manager
and Finance manager. After conducting a research they understood that the primary issue was the
problem with strategic management.
SOLUTION FOR THE CASE:
To deliver these objectives, the executive team decided to introduce a performance management
approach based on Balanced Score Card. It was hoped that the BSC would inform individual
objectives while aligning corporate, team and individual goals.
STEPS FOR IMPLEMENTING BALANCED SCORE CARD:
WORKSHOP NO: 1 During the first workshop each Department was given instruction to review
the Corporate mission and adjusted this to reflect how they saw their Division‟s performance and
achievements five years ahead. Then they were asked to work from this shared view of the future to
build a Strategy Map and produced first draft Objective definitions. In total this work took each team
about one and half days of workshop based activity. The team proposed to adopt different objective
setting approaches at three levels

1. Top Level: In the BSC approach they should formulate mission statement (3 year goals) and
strategy map (annual objectives). The objective should be developed by the senior management team
through goal setting exercise.

2. Department Level: Here the strategy maps (annual objectives) need to be developed that would
support top level goals.

3. Individual Level: Annual individual task and developmental objectives should be chosen by the
employ inline with their line managers.

WORKSHOP NO: 2 In order to finalize the definition of the objectives selected during the first
workshop the second workshop was used. Here the measures and targets were chosen to track these
objectives, and to agree how the resulting Balanced Scorecard was going to be used in the
management of the Department.
The outcomes for each of the three levels were developed in a four step design process.

MISSION STATEMENT:
The design process began with the construction by the executive board and this was a well defined
picture of the future (next 5years). The mission statement is to:

1. Gain consensus on strategy;

2. Provide an effective tool for internal strategic communication;

3. Enable departments, teams and staff to identify their potential contribution to achieving the
mission;

4. Provide a degree of long-term context and scale for the setting the targets.

STRATEGY MAP:
The development team started developing a strategic map by mapping strategic objectives and the
relationships amongst objectives. The strategic map describes the strategic objectives at corporate
level. The departmental management team had to next design mini strategic maps for their
departments. Each strategic map should document the department‟s strategic objectives. It should be
derived from the corporate mission statement strategic map and the strategic objective definition.
Thus the departmental strategic map will identify how the department would contribute to achieve
corporate goals. The objectives were revised and validated with the executive board. Finally, each
department strategic map will be shared with all other departments thus promoting strategic
communication. The figure below shows the strategy map for IT department.
The idea behind building these departmental strategic map was that the enabled departmental
consensus on short to medium term priorities.

SELECTING PERSONAL OBJECTIVES:

All staff defined a handful of personal objectives for the year ahead. The principles of personal
objective selection were as follows:

1. A maximum of 5 business objectives and 2 development objectives (eg. training) were selected per
person.

2. Personal (business) objectives were to directly support a departmental or corporate Strategic

Objective.

3. Objectives would be weighted for importance, with a maximum weighting for development goals:
20% for new hires, and 5% for experienced staff.

4. Managers were expected to concentrate more on financial and business process perspectives.

5. Each personal objective was to have a measure and target for the year ahead.

6. Objectives and targets across individual members of a department should „add up‟ to departmental
objectives and targets.

EXAMPLE: PERSONAL OBJECTIVES FOR SALES EXECUTIVE The approach taken in

personal measure selection ensured employee objectives directly supported strategy. Additionally,
the work fostered team dialogue on goals and targets, both shared and individual. Also developed a
clear, shared understanding of personal objectives between staff member and manager was also
developed in the process. Balanced sets of personal objectives (with measures and targets) were
defined, and the activity also supported the employee-capabilities development strategy.
In the personal objective, we have to analyze perspectives of financial, customer, internal business
process and learning and growth for building strategic map. For each perspective we have given weight-
age for calculating performance. If you take an example of financial perspective, the employee
performance is only 38.42%. Here the performance is based on annual salary, incentives as % of salary,
increase in profit per sales executive and percentage increase in training cost and weight-age of 3, 2, 2
and 3 was given respectively for each area. The total weight-age for financial perspective is 3. This
weight-age will tell which area is more important for that perspective.

LEARNINGS FROM THE CASE

1. Rather than a traditional directive “top-down” objective setting process, allowing local autonomy
in the choice of the objectives to support the organization ensured that the content of departmental
objectives was more relevant to employees.
2. Engaging teams and individuals in setting objectives helped create more buy-in to their delivery.
With its simple structure and engaging process, the Balanced Scorecard approach proved a
particularly effective mechanism to clearly communicate and gain value to objectives.

3. Using different management processes to set objectives at different levels of the organization
produced a flexible, simple and efficient system of control.

4. It helped to ensure that HR strategies could support improvement and more specifically helped
inform the design of the individual performance management process.

CONCLUSION The idea of the Balanced Scorecard is simple but extremely powerful if
implemented well. As long as you use the key ideas of the Balanced Score Card to create a unique
strategy and visualize it in a cause-and-effect map it will give wonderful results. It will help us align
the organization and its processes to the objectives identified in the strategic map, design meaningful
key performance indicators and use them to facilitate learning and improved decision making. Thus it
will lead to better performance in the long term. A case on how to improve the internal
communication process in an insurance company was used to describe the process of implementing a
balanced score card. Thus the Balanced Score Card helped the organization towards continual
improvement in internal communication and also to achieve share holder, customer, business process
and employee in term of finance, service, operations and learning perspectives respectively.