BSC as business maturity indicator
Reasons for emergence of strategic performance evaluation tools
Business management issues are most important in any business. In the early stages of business development it was enough to organize simple bookkeeping system which made it possible for business owners and shareholders to adequately evaluate business value, perform efficiency analysis, identify revenue, organize necessary managerial actions etc. But as competition was becoming tougher and with development of technologies there appeared new important business factors – growing volumes of intangible assets that had a great impact on business efficiency and value. Thus, if 20 years ago nonmaterial assets constituted only 38% from total assets volume, now this figure is approaching 85. Moreover, even those assess that cannot be directly evaluated are considered to be primary assets. For example, the fighting spirit of the company is referred to intangible assets. Although they cannot be directly evaluated making bring quite real revenue and losses for the company. Business evolution and progress required implementation of more effective management systems.
During the last several decades business owners started to ask themselves whether the reach their goals and how they do that. Emergence of such questions is accounted for the following reasons:
- The scope of business ventures have incredibly grown as the business turned international;
- There is very little time for decision making (if 50 years ago the company had six years to construct a new automobile, now car producers have only two years in order to stand tough competition in the market);
- Decision-making is based not on the prime data but expected future results.
In such a way, modern business requires effective system to manage strategy implementation and communicate strategy, tactics and operational management.
BSC model
Balanced scorecard as a compass for modern business
Modern company requires a compass that would show the right direction in the changeable and sometimes violent business world. Balanced scorecard system created by Norton and Kaplan is such a compass. The idea of BSC is based on two statements:
- The right implementation of strategies is more important than the strategy quality;
- Use of financial indicators only in company management will not make it possible to fully reach the goal of increasing company value.
Balanced scorecard is implemented in companies with the aim of putting strategy into action. The key mission of balanced scorecard is strengthening of business strategy, formalization of strategy, explanation of strategy to every company employee, establishment of monitoring and feedback systems. BSC is a management tool aimed at implementation of a long-term strategy. It transfers strategic goals developed by top managers into a set of interrelated and balanced indicators which are capable of representing critical success factors of current and future state of the company. Balanced scorecard can show implementation degree of a strategy through evaluation of financial and nonfinancial indicators.
Classical model by Norton and Kaplan of includes four groups (categories) of key performance indicators connected with cause and effect ties:
- Financial;
- Customer;
- Internal business processes;
- Learning and growth.
These four categories are applied in most organizations. At the same time, it is always recommended to take into account specific character of every individual company, and amend this model with indicators and perspectives relevant to a certain company.
Balanced scorecard modal developed by Norton and Kaplan makes it possible for top managers to focus on those areas which are really important for strategy implementation, as well as use most important information having the greatest influence on company efficiency. Moreover, BSC represents the idea of the so-called “responsible organization”, i.e. organization in which everyone knows his roles and responsibilities. Of one of the greatest advantages of balanced scorecard is that it is based on both past, present and future events, thus becoming a “three dimension” model.
A few words about BSC advantages
Balanced scorecard is quite universal and can be applied to manage every business aspect, including nonmarket processes. This is not another mathematic-economic model, but an entirely new approach to business management, superior level of business thinking, advanced logic of strategic decision making. Balanced scorecard can be called an accounting system. It is an inseparable part and sometimes even the nuclear of organization management system. BSC can measure things that cannot be evaluated in terms of accounting. Of course, financial indicators in balance scorecard are key elements, but at the same time they cannot give a complete characteristic of the entire business.
In the age of information and IT technologies implementation efficiency is playing the most important role, as all key managerial decisions will be made based on the obtained data. Will lack or distortion of information have a negative impact on BC implementation? Without any doubt, the answer is YES! That means that BC model should include indicators representing the quality and efficiency of IT system implementation. In general, it should be noted that a set of key performance indicators in balance scorecard, their structure and priority is defined according to company strategy. Sometimes, financial indicators may not have a supreme priority.
Balanced scorecard in combination with other management systems
Balanced scorecard can be successfully used with other management systems and methodology is implemented in various organizations. First and foremost, these are budgeting system, quality management system (QMS) and reengineering.
There is a misbelief that budgeting can fully substitute balanced scorecard. But budgeting system is the technology for operational management, and really focuses on results and strategic goals, while balanced scorecard makes it possible for an organization to communicate strategic planning with budgeting. The maximum effect from combination of budgeting and balanced scorecard in strategic and operational management is obtained through automation of these processes based on a shared IT platform. At that, it is necessary to include started values of balanced scorecard financial indicators in the annual budget.
Requirements to implementation of quality management system are partially relevant to implementation of balanced scorecard. Above all, this is necessity to integrate top management in the process of quality management. In such a way this requirement directly refers to strategic management area. Scorecard with support of quality management system implementation must perform functions which are supported by BSC as well:
- Understanding of quality strategy at all levels of an organization;
- Ties between different projects of a company;
- Communication of selected quality strategy outside the company.
As a result, we can see interrelation of these systems which makes it possible for the company to improve quality management system and implement balanced scorecard at the same time.
Interrelation of balanced scorecard and reengineering is especially interesting. Usually strategic goals set by business owners or shareholders seem unachievable or non realistic to linear managers. That’s why implementation of balanced scorecard without reengineering methods is almost impossible. Thus, top managers of very far from every day operations in the company, and their views on company management are based on financial indicators which represent past events. Reengineering makes it possible for top managers to understand business processes and factors in depth which helps them reach strategic goals.
Reengineering of business processes changes almost everything in the company because personnel, intellectual capital, management and values are interrelated. We call them for elements of business system diamond. The key element is company business processes or the ways in which job is done, the second one is intellectual capital in organization structure, the third is management evaluation system, and the last is organization culture – values and personnel attitude. Relations between these elements play a key role.
Reengineering in BSC implementation enables company management to effectively review existing business processes and integrate them in full. At the same time, using a range in Erie methods, balance scorecard helps business shift from “Brownian motion” to “ordered motion”, intensify synergy effect etc.
As a result of this process, balanced scorecard becomes an effective tool to stimulate and motivate employees who would aim at implementation of specified goals. It can force an employee to use a previously identified path. Statistics show that 88% of companies using balanced scorecard to motivate employees consider this system extremely effective.
What is necessary to implement balanced scorecard?
It is impossible to implement balanced scorecard without proper preparation. This looks exactly like the house built without foundation. Such a house will not last for long and will collapse every next second. The foundation of balanced scorecard is:
- Readiness of top management to develop a strategy and objectives (competent and professional personnel should be in charge of BSC implementation);
- Introduction of managerial accounting, budgeting and controlling system;
- Effective system to collect information, prompt analysis of financial and nonfinancial operations;
- Education of personnel, formation of appropriate corporate culture;
- Successful functioning of qualities management system (as already said above, BSC and QMS supplement each other).
Does immature business need BSC?
Not all companies need balanced scorecard. In other words, balanced scorecard implementation would not be reasonable for any company. In order to implement balanced scorecard the company should mature or reach a certain level. This is the highest degree of business culture, a new stage of development.
BSC and reengineering
There a special systems and standards identifying maturity of the company, like People-CMM model (People Capability Maturity Model) which can be easily used in balanced scorecard. This model is based on identification of key processes and related practice elements, successful implementation of which signals about relevant maturity level of the company. At that, processes and practice elements of the same level become the basis for implementation of processes and practice elements of the higher level. People-CMM scale is composed of evolution stages which the company undergoes as it becomes mature:
- Initial;
- Managed;
- Defined;
- Predictable;
- Optimizing;
An organization will be considered immature in case all processes depend on certain performers and managers, and decisions are made spontaneously. In a mature company management procedures are clearly defined. As a rule, it is recommended for the companies at the fourth level of maturity to implement balanced scorecard.
Benefits of balanced scorecard implementation
If all preparations for BSC implementation are made and the company has reached required maturity level, such a company will enjoy the benefits of balanced scorecard implementation. If properly implemented and maintained balanced scorecard will make it possible to:
- Managed business as one single whole;
- Fully communicate company strategy with operational management;
- Make business transparent;
- Optimize balance of interests for customers, shareholders and personnel;
- Communicate balanced scorecard with management methods aimed at increase of company value;
- Increase growth potential for short and long-term success;
- Timely locate problematic areas;
- Integrate balanced scorecard with controlling system;
- Executive effective control over linear managers;
- Decrease volumes of corporate reports;
- Help ordinary employees better realize development prospects and company value system.
Implementation of balanced scorecard is recommended for huge companies with a complex organization structure. BSC implementation is additional positive indicator for investors. It means that the business is under control. BSC is also viewed as intangible asset which increases company value in the market.
If the wrong strategy was chosen, business owner can timely locate mistake and introduce necessary corrections long before such a mistake will cause massive losses.
But sometimes happens that BSE signals on successful strategy implementation, but in fact there are no positive results. Well, perhaps the wrong implementation model was chosen. In such a case it is recommended to perform an expertise of BSC model by competent specialists. In addition, it is necessary to remember that balanced scorecard system is a mechanism for strategy implementation, and it does not substitute strategy.
As already said, in today’s business the ability to implement strategy matters more than the strategy itself. IT technologies can do that, but one should not forget that these are just tools. People interested in company success stand behind all managerial decisions.
Implementation of balanced scorecard in the company signals about business success. As improvement of the strategy and indicators in the system is a continuous process, it is recommended to review its model and introduce amendments according to changes in external and internal environment.
