Critical Review of The Balanced Scorecard -Measures That Drive Perfornnance - Essay Example

Introduction It is a widely accepted fact that the organization’s measurement system strongly affects the behaviour of the employees and the managers (Kaplan & Norton, 1992). However, the measurement has to stretch beyond the financial measures, which worked well during the industrial era. With the current turbulent market conditions and intense competition, a customer focused approach has become important. Moreover, to remain competitive, firms have to also be cognizant of how costs could be kept to the minimum. This could be possible through optimizing the internal processes. Kaplan and Norton recognized that no single measure is sufficient to evaluate a firm’s performance. To achieve the organizational goals, four different perspectives have to be viewed objectively – financial, customer, internal process and learning and growth or innovation. The Balanced Scorecard (BSC) developed by Kaplan and Norton enables the organization to look at the business from four different perspectives. It has a customer-focused approach, scrutinizes the internal processes, and determines innovation and growth. These are the non-financial perspectives but it also considers the shareholders’ interest, thereby also looking into the financial perspective. To minimize information overload, the number of measures were limited in the beginning and the authors suggested that new measures could be added whenever a new suggestion was made. The BSC measures are supposed to drive performance as it gives a quick but comprehensive view of the business. However, further studies and use of BSC suggests that merely developing the BSC is not sufficient. This requires other actions or measures to be adopted by the organization. Content Summary The BSC was initially developed to measure financial and non-financial performance and the users were able to generate reports that help them enhance performance on different measures. Literature from different authors and studies suggests that to derive benefits from BSC, the corporate strategy should be aligned with it. The company mission and vision statement need to be understood. Kaplan and Norton also suggested that evaluation on the implementation of BSC should be done in short-term so the corrections could be made when necessary. However, the strategic planning should be devised on long-term basis. The growth in the use of the BSC has to a large extent been because of the consultants’ propagation of the concept. The concept of BSC has been applied in various fields like the healthcare, the retail sector, the supply chain industry, as a tool for enhancing corporate communication or even for transforming the organization into a learning organization. It has also been tested in institutes of higher learning. Although initially designed for the public sector, the application of BSC has also been tested in the public sector to see whether it caters to the information required by all the stakeholders. Many tend to believe that BSC can be successful in larger organizations with many business units and not for small organizations. However, having too many units could also lead to complication in managing the BSC as the overall corporate strategy needs to be achieved. At the same time, it may not be cost effective for smaller firms to implement the use of BSC. Moreover, most often small firms do not have a corporate strategy or any vision in place. The benefits from the BSC can be derived based on how the team works. Individuals cannot be asked to take charge of developing the scorecard. Hence, when the team is involved, how the team members cooperate or interact can impact the performance or development of the BSC. This is important because how the groups use the BSC is critical to the success of its implementation. Suggestions have been made that the BSC should be linked to a well defined business strategy. Several reasons have been cited by different authors which may not produce the expected synergies. These include lack of organizational commitment, lack of top management support and involvement or it could also be having too many measures which deter management from implementing the scorecard. Besides, filtering out the most relevant information is also critical to the success of the BSC. Evaluation The Balanced Score Card (BSC) was initially developed as a comprehensive measurement system that incorporated a set of financial and non-financial performance measures which covered different organizational functions and perspectives (Kaplan & Norton, 1992). The non-financial measures included customer satisfaction, internal processes, and the organizations innovation and improvement activities, which they considered drivers of future financial performance. Those that used the BSC found that the reports generated helped them to become customer-oriented, shorten the response time and improve quality. To effectively use the BSC, the companies needed to set up their own goals for time, quality and performance and then translate these goals into specific measures. They proposed that the BSC could be used as a management system that motivate people to be innovative in different functions such as development of products and processes including customer satisfaction and market development (Kaplan & Norton, 1993). The BSC could also be used as a tool to define and communicate priorities to the managers, employees, investors and even customers. To create value for the company, the strategic objectives have to be translated into tangible goals and actions. The authors cite examples of companies that could transform their vision and strategy into the BSC’s four sets of performance measures. Apple, for example uses BSC as a device to plan long-term performance. They have been able to shift their focus from product and technology to customer. However, as far as external reporting is concerned, the BSC does not provide information to the investing community, admit the authors. Kaplan and Norton (1996) later transformed the BSC into long-term strategic planning and operational budgeting process. This helped to detect the critical drivers that could bring about breakthrough performance in an organization. It was also found to be a powerful tool to achieve aggressive targets. It allowed the managers to monitor the strategy adopted and compare performances. The authors suggested that managers should set short-term milestones for the scorecard measures instead of measuring performance after a considerable period of time. This serves to monitor the strategy and performance and bring about change whenever necessary. The concept was further modified by Kaplan and Norton (2001) when they suggested that the BSC framework could even help to transform the mission and vision into strategic themes. Consultants play a vital role in the use and application of the performance measurement tools. Braam, Benders and Heusinkveld (2007) wanted to determine the application and effectiveness of the BSC in Netherlands. This study was based on secondary data and the authors used the print-media indicators (PMI) to analyse how popular the concept was in the management circles in Netherlands. They used online contents as the major source of empirical data. The Dutch authors have referred to BSC as a management fashion but this study did not find this to be true based on the data collected. However, the consultants in Netherlands were the main disseminators of the BSC and their publications served to influence the management in to accepting BSC as an important tool. BSC got wider coverage in accounting magazines than in general management or HRM categories which suggests that it was given more importance as a measure of financial performance. However, 40% of the publications reviewed by the authors did consider BSC as a strategic management system which is what Kaplan and Norton (1996) had suggested. While the concept of BSC did pick up over time in Netherlands, in HRM it remained confined to evaluation and compensation system. This was a very intensive study because data had been analyzed from 227 articles from 64 different Dutch journals. Such intensive data collection would not be possible in any study where primary data is collected. The study found that consultants play a vital role in the use of BSC because 50% of the authors in the professional media were consultants. BSC can be successful if it is integrated with an incentive plan (Chu, Wand & Dai, 2009). This was determined in Taiwan in the nursing department where the hospitals aimed to enhance the performance by integrating it with the incentive plan. This was a first study of the BSC-based incentive plan in Taiwan’s health care industry. The study was conducted at the most prestigious teaching hospital in Taiwan employing over 5300 people. The nursing department’s performance improved within two years of the implementation of the revised incentive plan. Kaplan and Norton had suggested that short-term milestones would help to evaluate the strategy and the hospital did evaluate its strategy in two years. As in Netherlands, in Taiwan too, the implementation of BSC is used for compensation plans. Before this plan was implemented, the nurses were paid based on seniority and the bonuses were based on the subjective assessments by the supervisors. Under the new plan, the nurses received a base salary as well as a share of the group bonus which was again based on the group performance rating. This can be called long-term strategic planning with short-term evaluation strategy, as has been envisaged by Kaplan and Norton. Farneti and Guthrie (2008) contend that Kaplan and Norton had originally designed the BSC for the private sector. The authors cite from other critiques that its application in the public sector organizations had some weaknesses because it was unable to account for all the stakeholders – the environmental and social matters could not be included. However, Farneti and Guthries did find that several public sector organizations had used the BSC and hence studied its utility and benefits in the Italian and Australian local government organizations (LGOs). Based on a case study approach, they conducted qualitative semi-structured interviews to collect data. The BSC model in Italy helped to improve internal communications apart from improving the capacity of the managers and other employees. The employees could focus on achieving the goals thereby leading to improvement of services for the citizens. In both cases – Italy and Australia, the BSC model helped improve the internal processes but no improvement was found in the case of external reporting. However, since the study was limited to two countries, it cannot be generalized that BSC cannot help improve the external reporting process in the case of LGO. Although BSC is described as a group process, not much of information was available on why it is beneficial to have group rather than individuals to develop score cards. Hughes, Caldwell, Gjerde and Rouse (2005) studied how groups use BSC and use the information provided. The man-hours needed to develop the scorecards are huge and this time spent should provide cost benefits. There is an entire team involved in the decision-making and there would be contribution of ideas from many individuals. However, not all ideas contributed would be of equal standard and this requires filtering out information that is weak or substandard. The authors engaged 46 MBA students who were split into 12 groups and they generated 1258 ideas. The ideas that are fed into the initial stages of development are critical and hence it requires filtering out inappropriate ideas. However, this does not imply that the group that filters out inappropriate ideas has the capability of contributing insightful and innovative ideas. A group must comprise of a diverse set of individuals each with a different perspective which could make the team efficient in developing the right metrics. This then suggests that the success of the BSC depends to a large extent on the people involved in the implementation process. The BSC has been used not merely at the corporate organizations but also at institutions of higher learning. The knowledge and extent of awareness of the BSC was tested at the HEI (higher educational institutions) in Malaysia (Krishnan, Chan, Jayaprakash & Shaikh, 2008). After restructuring, the Malaysian higher education system had private institutions as well as foreign universities with branch institutes. This was done with a view to produce and equip the students to be competent at a global level. The study was based on 338 questionnaires sent out to the HEIs in Malaysia. Since the number of questions was large, the response rate was just 12% which is quite poor. The study found that the HEIs do use the four dimensions of the BSC as a part of their performance measurement tool. The usage of BSC in the HEIs in Malaysia at the time of this study was relatively new but the level of awareness was high. Moreover, the institutes developed their own performance measurement tool using the BSC approach. Leauby and Wentzel (2002) found that the implementation of BSC can be complicated in larger organizations with many business units. Each department has its own unique problems and hence the scorecard has to be tailored to suit those requirements. At the same time, the firm’s strategy too has to be considered for overall efficiency and performance. Moreover, the authors state that abundance information is available in the organizations and the different units but sorting and filtering the necessary information is a challenge while the key to success of BSC lies in using the most relevant data. Hence, they contend that the number of measures in each of the four categories should be limited which could enable the managers to extract the relevant information. The BSC should also enable empowerment to the divisional employees so that they could accomplish and achieve the goals. The authors also found that top management involvement enhances the performance measures in a firm. McNair and Watts (2009) find several drawbacks of the BSC. BSC requires a well-developed corporate strategy but small firms seldom have this in place. BSC claims to enhance customer satisfaction but there are no external measures to evaluate the firm performance as the customer views. The model does not define linkages to other key concepts such as critical success factors (CSF) and key performance indicators (KPI). This gives an impression that BSC is something unique, while it is just another performance measure. The authors also contend that individuals should not set their own goals because there would be a tendency to keep targets low. At the same time, they suggest that performance measures should be set by the top management while control must start from the bottom of the organization. According to Parmenter (2002) if the BSC does not succeed the reason is the lack of commitment, understand and prioritizing of the process. Organizations very often make half-hearted attempts to set up the balanced scorecard and moreover the senior management team also applies their own strengths in varying degrees. All these only delay the process of implementation which may also result in failure. The BSC approach by Kaplan and Norton requires that firms must do well in all areas and should not be dependent on excellence in one area to make up for the deficiencies in other areas. However, poor communication and lack of cohesiveness among the top management could negatively affect the use of BSC. While the firms gather data on all four measures, while taking decision, they do not use all the data. The BSC has also been criticized as a weak measurement tool because it is difficult to identify the variables and determine how they relate to each other. Moreover, BSC has been found to be too expansive and requires the use of too many variables which can deter management from using it. Other criticism include that the number of measures should be limited and these should be linked to key stakeholder issues. Based on these assumptions and criticism Knotts, Jones and Udell (2006) studied the use and implementation of the BSC in 236 small mass merchandise suppliers. They found that a balanced approach is necessary in evaluating a firm’s performance. Merely including the BSC measures were not sufficient, these should be supported by product attributes which could give a complete picture. This has also been found by Park, Lee and Yoo (2005) who suggest that a unique mix of product and service attributes can improve product leadership. They also find that set performance measures cannot fit every company because each company has its own corporate characteristics which determine the importance of measures. In the field of supply chain, Wal-Mart could bring about efficiencies in its business process through the use of BSC. Wal-Mart has 60,000 suppliers globally and they allowed the suppliers one full year to add data on their scorecard (Newman, 2007). Wal-Mart wanted to streamline is packaging because the health and beauty products are packaging intensive. The data from its suppliers helped the company to use the BSC to measure and then bring about efficiencies in its process. The result was use of less packaging, use of more effective materials in packaging and these materials could be sourced from more efficient suppliers. However, this is true for large organizations such as Wal-Mart where the control is at the headquarters and their organizational goal is cost reduction. This was also possible because a firm must have supply chain orientation (Hult, Ketchen, Adams & Mena, 2008), which Wal-Mart had. Having a supply chain orientation not affects the performance of internal processes but also the performance of other three measures. A study by Chia, Goh and Hum (2009) found that the senior supply chain executives still focus on the traditional financial measures such as gross revenue, profit before taxes and cost reduction. If the Fortune 500 companies can integrate all their departments into one, the service level breakdowns in supply chain could be reduced (Slota, 2002). The implementation of the BSC has been found to reduce stock mis-picks. It also becomes easier to detect deficiencies and carry out the instructions to attain perfection. Even customer retention was found to be better. Pangarkar and Kirkwood (2007) contend that the BSC can help businesses meet their goal provided they are able to link this tool to a well defined business strategy. All the business units have to be aligned round the same principles. Organizations today aim to become learning organizations, but in the BSC framework the “learning and development” dimension sit at the bottom of the diagram which apparently minimizes the importance of this perspective. Kaplan and Norton however refute this saying that leaning and growth is the foundation on which an organization grows. In fact, the organizational objective may be to enhance customer loyalty and retention, and to achieve this, the organization has to invest in training its people. The internal processes have to be developed through training, and hence what Kaplan and Norton contend, is true. The goal may be connected to any of the three dimensions and learning and development support the other three dimensions. Hence, for the success of the BSC, the vision and mission statement of the company should be clear in the minds of the senior executives. Ritter (2003) used the BSC to monitor corporate communications. Again, the company vision and corporate strategy have to be clearly set and the process to achieve has to be defined. To achieve the corporate mission requires constant evaluation of the corporate communication plan. Ritter suggests that the key success factors for effective communication have to be identified which would enable the company to achieve the objectives set. These key success factors have to be organized according to the four dimensions of the BSC. Through the study of Siemens Argentina, Ritter found that BSC can be used to measure corporate communication and with continuous improvement, it can be aligned with the rest of the organization. BSC helps to identify what does not work so that corrections to the communication plans may be made immediately. Long-term communication policy can be ascertained and the communications strategy can be streamlined with the corporate strategy. Conclusion The BSC was initially developed as a comprehensive measurement system that incorporated a set of financial and non-financial performance measures which covered different organizational functions and perspectives. However, as organizations started using it, several factors came to light. It was found that it is not viable for smaller organizations because of the costs involved and because they do not have a corporate strategy in place. For larger organizations, it is essential that the different business units are pursuing the overall corporate strategy. The BSC has been successfully implement on both private and public sector organization, in businesses as well as in the health care and the education sector. However, The BSC does have certain critical success factors. These include the involvement of members in the team having diverse skills sets. The scorecard must be linked to the corporate goals and objectives without which the reports generated may not serve the purpose. The senior management should have a clear view of the potential of the BSC because it has been found that unless they are sure of the benefits, they would not be involved or would not be able to encourage others to use it. Overall, a balanced approach is necessary in evaluating a firm’s performance. If effectively used, BSC can enhance corporate communications and make the organization a learning organization. The strategy should be long-term although monitoring the performance of the BSC should be done at short intervals. References Braam, G.J.M., Benders, J., & Heusinkveld, S. (2007). The balanced scorecard in The Netherlands: An analysis of its evolution using print-media indicators. Journal of Organizational Change Management. 20 (6), 866-879 Chia, A., Goh, M., & Hum, S. (2009). 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