Balanced scorecard system, no matter how much revolutionary it can be, is not an entirely new concept. As known, balanced scorecard is used to measure business performance through evaluation of key performance indicators which help company management set realistic strategic goals and work out methods to achieve them. Until the early 1990s businesses, military and government bodies used measurement based or fact based management which evaluated financial indicators only. And that was the difference between traditional measurement management and balanced scorecard which includes 3 other perspectives besides financial (they are financial, customer, internal processes and learning and growth). Read more on 4 BSC perspectives here.
It should be noted that measurement based management flourished during the industrial revolution/industrial age. Now the times have changed, thus requiring new approaches. But measurement-based management is a predecessor of balanced scorecard and consequently it deserves attention.
The history of post industrial management dates back to early 1950s and is largely associated with W. Edwards Deming. Together with a Japanese manager Genichi Taguchi, Deming worked out a concept of innovation, quality and employee empowerment. Contrary to prior beliefs, Deming considered personnel as the company’s source of knowledge that generated ideas to improve quality of products/services.
What was special about traditional control in industry? Producers were afraid that customers will be supplied with poor quality products. So, industrial companies undertook very aggressive actions aimed at inspection, control and testing the quality of products before they are shipped to customers. But the key problem was that the company management never solved the root of the problem, but was rather fighting its consequences. Deming underscored that every stage of production process needs to be analyzed. If it’s possible to eliminate defects at one of the production stages, there will be less rejected production items. So, in other words Deming offered to include all business processes is into one measurement system with a good feedback mechanism. Moreover, this meant to be a continuous process.
Deming approaches were adopted by the government and the military in the late 1980s in the US. During that time a Baldrige Award was created. This was basically a questionnaire for large and small companies. The company that had the largest score enjoyed the main trophy and handsome advertising opportunities. In course of time the Baldrige criteria has become an indicator or a guide lying for business success. It is possible to say that the questionnaire of Baldrige award was something like a balanced scorecard, as the companies that had won the award used the measurement system in which strategic and tactical plans were combined, analyzed and measured. It doesn’t mean that companies and managers who failed to win the award were doing a bad job. Baldrige criteria rather gave an answer to the question “How well do we know how well we do our work?”
Gov’t bodies added measurement-based management to their arsenal. Every department had to have a strategic plan, set targets and of course was forced to measure performance from time to time. Budgeting of governments bodies directly depends on their performance, as taxpayers want to see progress.
But the problem is that traditional government and industrial organizations always used data of one kind. We are talking about financial data. For example, government bodies often subsidized when they operate at a loss. So, the key goal was to keep this loss at a certain level, while to the contrary, private companies where over-focused on revenue figures.
There is nothing wrong with financial information. It is objective and more than precise. But can financial figures tell us everything about well being of a company? Financial information tells stories about past, but every manager should look to the future. This is where Balanced Scorecard System came into play with a set of indicators that get a basic idea of what may, can and should happen in future, and what needs to be done to see this future. Without strategic vision running business is like driving a car with your eyes closed – you never know where you get in the next second.
So, balanced scorecard came as alternative to financial indicators although it includes financial indicators in the general set of KPIs. Balanced scorecard helps managers measure how much strategies are effective or if they effective anyway.
Transition to Balanced Scorecard was the requirement of time. With the technology progress it became increasingly difficult to evaluate performance of white collar workers. Tangible indicators in industry turned into intangible indicators in the modern business. So, balanced scorecard turned out extremely effective and thus popular in the new economic and social realities of the early 1990s.
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