Ways to use Balanced Scorecard
Balanced Scorecard in any organization is a linking instrument that is used in discussion of virtually any activity or business aspect. For example, all companies want to keep their customers, clients and buyers satisfied. All companies have their own internal business processes and well established practices. All commercial organizations want to make profits and prepare their companies for future.
At some moment, every successful company comes to the stage when it has to think about cause and effect ties. That’s why Balanced Scorecard implementation implies development of a more effective management system. BSC is used to channel company business efforts into the strategy and strategic vision, perform evaluation and monitoring through measurement of key performance indicators. It is also important to make decisions and offer response actions based on evaluation of key performance indicators.
As compared to other tools and methods of describing organization strategies, Balanced Scorecard has two prominent features. The first one is a simple format of a strategy map which is described by unlimited number of key performance indicators for each of the four perspectives/categories: financial, customer, internal business processes, learning and growth. The second distinctive feature is particular focus on interrelation of perspectives and indicators. Perfectly formulated strategy map will reflect strategic logic of cause and effect ties between current activity and long-term success.
Strategy maps aim at changing organization conduct based on a dialog. Everything that company does (for example, education, improvements in customer service etc.) is based on the belief that such steps will contribute much to implementation of strategic goals. Cause and effect ties implanted to any efficient strategy map vividly demonstrate “business logic” which derives benefit from correct today’s decisions and actions in order to achieve success in future. As a result, strategy maps translate strategy into action (everyday decisions and duties of personnel).
It is rather difficult to evaluate efficiency of using Balanced Scorecard. This is explained by HOW Balanced Scorecard is USED. Recent surveys have shown that many companies claim to use Balanced Scorecard or are going to use this system in the near future. However, the actual number of companies whose management systems are based on Balanced Scorecard is much lower. Most respondents are sure that they really use Balanced Scorecard, but in fact it is not so. Thus, it would be interesting to have a precise look at the ways in which BSC might be used:
• Many companies are using Balanced Scorecard as the scheme for discussing strategies but not as regularly used management tool;
• Some companies are planning and organizing reports in the form of four or five perspectives included to Balanced Scorecard. In order to get a general model they share existing key performance indicators without prior discussion of a strategy. This is supported by the fact that the format of strategy maps looks quite attractive, but such use of Balanced Scorecard is unlikely to bring companies potential benefits.
• In some cases Balanced Scorecard is introduced as a substitution for budgeting system, in other cases budgets and strategy maps are coexisting. The most widely used option is combination of strategy maps and cash flow plans. This is explained by the fact that budgets always played a dual role: they structured goals by activity types and made forecasts as to money demands. The first role is acquired by strategy maps, while operational plans play the second role.
• Balanced Scorecard may be used for the entire company, for a certain part of the business, on certain hierarchical levels, departments and even individual employees. Cause and effect ties between different strategy maps differ depending on what hierarchical they are implemented. Some corporations have unified interrelated indicators, while in others strategy maps and key performance indicators are custom made for every “user.”
• The key problem is supposed ties between indicators. For example, one supplier of software and IT solutions requires integration of information collected from all departments of organization while others our run the interested in logics than in figures. Obviously, identified indicators are easier to summarize (for instance, revenue). Then would be reasonable to calculate average market share or average employee contribution? Does department always implement its goals if its structural subdivisions have justified general expectations, but certain internal deviations have been found?
• Some companies use strategy maps when making preparations for project implementation. At that, learning and growth perspective may be referred both to the project itself and to the company in general if its life cycle is long enough.
• Certain companies also attempt to implement strategy maps for such corporate management functions as IT and HR. In these cases there should be differences between strategy maps for IT and HR departments and IT/HR policy of the entire company.
• Government, public and nonprofit organizations begin to use Balanced Scorecard and the system is gaining popularity among such organizations.
These numerous options of Balanced Scorecard use demonstrate that BSC is a suitable method to discuss any activity. It would be fair to say that there is no one correct way to use Balanced Scorecard. That’s why, before implementation of Balanced Scorecard it is vital to know what part of organization or what activity aspect requires thorough discussion, and who will be involved in implementation of Balanced Scorecard. Organization process of BSC implementation is very important. What company departments and employees will participate in development of strategy and key performance indicators?
Balanced Scorecard as a tool that makes information public
Companies rarely use strategy maps as annual reports. But general and financial reports are very often using such notions as intellectual potential. This means that Balanced Scorecard system has greatly influenced the concept of compiling annual reports.
On the one hand, how can one trust nonfinancial reports of the company in regard to customers, processes and development efforts, of if traditional accounting reports are not always trust? Can such reports be subjected to audit? Is it true that nonfinancial assets depend on internal and external variables that cannot be checked and verified?
On the other hand, use of nonfinancial indicators which may be somewhat discouraging is explained by the fact that modern business cannot be described with simple notions and terms, as it was several decades ago. Modern business has new requirements and demands for information contained in strategy maps.
Strategy maps do not only reflect important financial and operational information, but it also tells about company strategy in a simple form. Moreover, strategy maps will be understood both for business gurus, experienced investment managers, shareholders, advertisers and ordinary employees.
A new trend or developing standard?
It is obvious that goals and capabilities of Balanced Scorecard projects have changed. Early projects were focused on operational management. Soon, Balanced Scorecard was declared a strategic management tool to be used all companies.
Corporations that run different business types face difficulties in formulation of a corporate strategy, and financial indicators are usually more suitable and even sufficient for this level. That’s why the bulk of the job on implementation of Balanced Scorecard is performed on the level of departments and business units, or even lower levels, of where nonfinancial indicators and cause and effect ties are more attractive than indicators of traditional control systems. Some companies even claim that strategy maps should be built from bottom to the top instead of being imposed from the top.
There are also differences in implementation of declared goals. Some Balanced Scorecard projects still remain useless pile of information, although company top management was very enthusiastic about Balanced Scorecard concept and to be an active part in development of strategy, although this strategy was never implemented. This means that Balanced Scorecard and strategy maps failed to become effective strategic management tools.
At the same time some companies focused on regular evaluation and reporting as an important element of Balanced Scorecard project. Sometimes, even top management did not participate in discussion of strategy.
As a result, often strategic maps turn into presentation slides that will have nothing to do with reality, or Balanced Scorecard becomes a tool to evaluate and control car and performance of the company which has nothing to do with the company strategy. Sometimes Balanced Scorecard is even used as a database to share and report information.
Well, it is really difficult to build an effective strategy maps without making BSC project a senseless ritual. A BSC project can become a real challenge for the company. This is partially explained by the avalanche of literature and studies dedicated to Balanced Scorecard theory. It all looks great on paper. But the company should learn to live with Balanced Scorecard and strategy maps. No one claims that it will be easy. That’s why preparations for implementation of Balanced Scorecard should be given due attention. Company owners and top management must decide why they want to use Balanced Scorecard and whether they really need it. Otherwise, Balanced Scorecard will become the most expensive management control system or database the company have ever used.