Balanced scorecard: keep it simple!

Citation

Seraphim, D. (2006), "Balanced scorecard: keep it simple!", Measuring Business Excellence, Vol. 10 No. 2. https://doi.org/10.1108/mbe.2006.26710baf.002

Balanced scorecard: keep it simple!

Balanced scorecard: keep it simple!

Introduction

In recent years, balanced scorecards have been proposed and widely used to measure organisational performance from different perspectives that help companies focus on their critical areas, and to translate their strategy into action. It is also viewed as a powerful communication tool.

Traditional accounting based performance measures have been characterised as being “financially based, internally focused, backward looking and more concerned with local departmental performance than with the overall health or performance of the business” (Bourne et al., 2003a).

Kaplan (Kaplan and Norton, 1992), who introduced the balanced scorecard (BSC) concept, claims that no single measure can provide a clear performance target or focus attention on the critical areas of business. He proposes the balanced scorecard concept as a way to allow managers to look at the organisation from four important perspectives, and provide answers to four basic questions: How do customers see us? (customer perspective); What must we excel at? (internal perspective); Can we continue to improve and create value? (innovation and learning perspective); How do we look to shareholders? (financial perspective).

Wongrassamee et al. (2003) view the purpose of the balanced scorecard as being a help to communicate and implement an organisation’s strategy, a framework containing a set of financial and non-financial measures chosen to aid a company in implementing its key success factors, which are defined in the company’s strategic vision.

Bourne et al. (2003b), however, report that many organisations failed in their attempt to implement the balanced scorecard concept, and that successful implementation may take several years.

Thus, an organisation might hesitate to undertake the implementation of the balanced scorecard concept, as some authors suggest that it might require time and important financial resources.

It is therefore relevant to examine whether a “simple” implementation, with limited time and financial investments might be successful, and whether it can still foster the positive outcomes highlighted in the literature.

Such is the path selected by a precast concrete manufacturing company operating in the United Arab Emirates.

Based on its original approach to the implementation of the balanced scorecard concept, recommendations for “simple” implementations are examined.

Reasons for the selection of a “simple” approach

The company under study is a precast concrete manufacturing company based in the United Arab Emirates. It had just started to recover from an important financial crisis, triggered by a badly-planned increase of production capacity. In order to overcome this crisis, the organisation had opted for the implementation of total quality management (TQM) principles which had led it to define its strategic objectives and improve the effectiveness of its ISO quality system.

The possibility of using the balanced scorecard concept to better align its performance measurement system to its strategy was uncovered through literature review.

However, the organisation could not follow the advice of Kuwaiti (2004), who suggests creating a new permanent post dedicated to the performance measurement process, nor hire an external consultant to supervise the implementation, as it could prove to be too demanding on the finances of the company, which were still weak.

It was thus decided to attribute the supervision of the implementation of the balanced scorecard concept to the researcher, as part of her responsibilities, with instructions that the financial and time investments should be kept to a minimum.

Organisation’s approach to balanced scorecard implementation

The balanced scorecard concept was rarely used in 2003 in the United Arab Emirates, although the system was already widely implemented in some countries, (according to Marr and Neely (2003) over 50 percent of the large US firms had adopted BSC by the end of 2000) proving that many companies had found its utilisation useful.

According to a preliminary study, a minimal implementation of the system was possible, based on the following considerations:

• •

  The company was TQM oriented and Wongrassamee et al. (2003) report that despite having some significant differences, the TQM and BSC approaches are developed from similar concepts.

• •

  The company’s strategic objectives had already been defined and were detailed in a “Strategic Plan” document.

• •

  Some performance measurement indicators were available, and continual improvement objectives had been defined during a recent ISO effectiveness review.

It was decided that the adaptation of the balanced scorecard system to the company should have the following characteristics:

• •

  It should not involve any heavy investment (such as a specialised software).

• •

  It should be updated easily (not more than two man-days) every three months.

• •

  Its main data should be grouped on a single sheet of paper (A3 size).

• •

  It should be easily readable.

• •

  It should provide the possibility to retrieve detailed information on all provided indicators.

The company’s balanced scorecard system should provide the following information at a glance:

• •

  Current position of the company.

• •

  Progress trend of the company’s position.

• •

  Balanced view of this progress.

• •

  Targeted improvements.

• •

  Ability of the company’s system to meet the targeted improvements.

Thus, the balanced scorecard system should be the “dashboard” of the company, allowing decision makers to grasp easily the performance of the system and of its constitutive elements, in order to direct their efforts meaningfully.

Figure I was developed in order to describe how the balanced scorecard concept would be integrated and aligned with the other elements already in place in the company’s quality system (strategic objectives and continual improvement objectives).

Figure 1 Alignment of the balanced scorecard system within the quality system of the company

Initial development

It was decided that the initial BSC system should be based on whatever data were readily available in the company in order to be operational as soon as possible, rather than on a “theoretical” system that would be the “perfect” match to the defined strategic objectives. However, the goal of the company was to gradually evolve towards this “perfect” match.

Thus, two documents were to be developed in parallel: the initial balanced scorecard which would reflect the performance measurement indicators currently available in the company; a list of “missing” indicators, for which a measurement system would have to be defined later in order for the BSC to match better the defined strategic objectives.

Two types of performance measurement indicators were currently available. Some process owners had developed a number of performance indicators that were used internally to measure aspects of the process performance; continuous improvement (CI) objectives had been defined for each process, according to the ISO 9001:2000 requirements.

The balanced scorecard development process was performed as follows:

• •

  The strategic objectives of the company, as reported in the “Strategic Plan” document developed by the company, were reviewed, and the existence of corresponding performance indicators examined.

• •

  When available, the indicator(s) were placed on one of the four perspectives along with their current value and their targeted value when available (mostly for CI objectives). When such was not the case, a list of possible corresponding indicators was developed, each of them associated with an estimated degree of development difficulty (low, medium, high).

• •

  The four perspectives of the obtained scorecard were then reviewed. It was found out that if a high number of indicators were available on some perspectives (such as the process excellence perspective), others when underdeveloped (such as the innovation & learning perspective). When too many performance indicators were available, only the key ones were retained. As some targeted values and dates were not available for some of the retained indicators, these data were defined with the help of the concerned process owners, in line with the matching strategic objective.

• •

  From the list of “missing” performance indicators, the management selected the ones which were to be developed first, according to the number of indicators already available on the corresponding perspective (priority to perspectives with few indicators), to their perceived importance and to their perceived difficulty of development.

The obtained balanced scorecard was far from being perfect: It was not very “balanced” (some perspectives were comprised of a few indicators only), and was not a perfect reflection of the strategic objectives (some important objectives were not translated in terms of KPIs).

However, it was easy to update (as based on the knowledge readily available in the organisation), and actions for improvements had been clarified.

Key employees were briefed on the rationale behind the adoption of the BSC system and received the initial version. They were requested to provide their active help in improving the system. The following arguments were brought forward:

• •

  They will receive an update of the BSC every three months, which will help them position the progresses of their processes according to the overall progress of the company. This tool had been developed not only for the top management benefit, but also for their own.

• •

  Spending time developing meaningful performance indicators or updating currently defined ones is important: Their visibility is enhanced by the balanced scorecard system.

• •

  Their efforts in improving the performance of their processes in line with the company’s strategy would no longer be overlooked. They will be reflected in the corresponding KPIs, and thus highly visible.

The development of this initial balanced scorecard had been performed in a couple of weeks.

Maintenance and development of the BSC system

Every three months, readings on the BSC sheet are updated. This requires a varying amount of time, depending on whether the strategic objectives (which are typically updated once per year), have been updated or not.

On average, a total of two man-hours are spent by the department in charge of the BSC maintenance, and half an hour by the top management, when the balanced scorecard review does not correspond to a strategic plan review.

When it does, the department in charge needs four additional hours in order to prepare a proposal of matching indicators to the top management and to the concerned process owners, and top management validation takes in average two additional hours.

The update is performed in three steps.

Step 1. Update of the current measures. Around half of the indicators of the BSC are selected as CI objectives by process owners (for example, 26 of the 54 KPI in March 2004 were CI objectives). Updating these indicators consists generally of a simple reading of the corresponding CI forms.

Among the other indicators, many are published at regular intervals and readily available. In a few cases, process owners are contacted and provided the current measure.

It may be noted that not all indicators might be updated every three months.

Step 2. Progress towards targeted value. A targeted value and targeted date are defined for each KPI. Historic data as well as a graphical representation of those data are available for each indicator. The new current reading is added to those historic data, and the graphical representation updated.

If the target date is reached, indicators are classified as “achieved”, “nearly achieved” and “not achieved”.

If the target date is not reached, the trend is analysed and Indicators are classified as “will probably be achieved”, “may not be achieved” and “will probably not be achieved”.

In the balanced scorecard, colour-codes are used to reflect probabilities of target achievement.

Step 3. Current trend. In some cases, the progress towards targeted value classification does not reflect the trend of the indicators. An indicator may be classified as “will probably not be achieved” and still progress favourably, although not as fast as targeted.

For each indicator, an ascending arrow placed next to the indicator represents a positive trend, and a descending arrow a negative trend (see Figure 2 and Table I).

Figure 2 Example of balanced scorecard (to be printed on a A3 size sheet)

Table I Detailed example of one of the four balanced scorecard perspectives

BSC implementation: success and advantages

There are several advantages to the implementation of the balanced scorecard system. During the initial development, it proved a powerful means of learning and of assessing the effectiveness of the measurement system, which lead to major strategic improvements. Later on it was used to ensure the alignment of the company with its strategy, to measure its success, and to provide input knowledge during strategy reviews. It was also found a powerful communication means.

Assessing the adequacy of the measurement system to the strategy

The learning process during the initial development of the balanced scorecard started with the shocking realisation that for around half of the strategic objectives defined, no performance indicators were ready available.

Interviews with concerned process owners revealed that in most of the cases they were aware that the strategic objectives had been set and that they were clear about their responsibility in regards to them. Process owners often stated that they had started working towards their achievement, and recognised that they could at best have only a rough unmeasured estimation of their success so far.

When asked why they did not set in place corresponding measurement systems, two answers were offered: no one told them that they had to, and they did not know how and what to measure.

This highlighted an important dysfunction in the strategic deployment process, as progress on half of the strategic objectives was impeded by the lack of corresponding measurement system. This learning triggered both immediate and long-term actions.

Among the immediate actions, one department was put in charge of providing support to process owners in regards to performance measurement improvements, and process owners were informed that they were not only responsible for implementing strategic objectives, but also for providing measured assessment of their success. While some indicators could be defined easily, and measurement obtained within the coming months, challenging improvements in the measurement system were selected as strategic objectives during the next strategy review.

Assessing and improving the balance of the strategy

The strategic plan of the company under study had been developed taking into consideration the recommendations of a local TQM award body. Therefore, the management assumed that it was balanced. However, once the draft of the first version was completed, it appeared that this was not the case.

While indicators on several perspectives had to be trimmed in order to retain only key ones, one of the four perspectives was nearly bare of indicators: The innovation and learning perspective, which had been next to forgotten during the previous review of the strategic plan, while the emphasis was placed on managerial and process improvements.

Several indicators of innovation and learning activities were immediately developed, initial measures taken and target sets. During the following review of the strategic plan, it was verified that objectives in regard to innovation and learning were set.

Thus, although the initial balanced scorecard was built according to the strategy defined by the company, the initial development of the balanced scorecard influenced in return the strategy of the organisation.

Aligning the quality system with the strategy

As shown in Figure 1, the implementation of the BSC system in the company under study has been a major element of success in the overall alignment of the quality system with the strategy. It has also provided an important link between strategic objectives and continuous improvement objectives.

The company had a previous history of an ineffective ISO system, in which records were maintained for the sake of the certification body, often without link to its actual operations. Although, when first selected by the process owners, the alignment of continuous improvement objectives with the policy and strategy of the company was verified, the management dreaded that their link to the strategy may in time be forgotten, and that process owners may regard them as an unrelated ISO requirement, particularly as it was difficult for the top management to follow and comment on the progress of each of them regularly.

Placing continuous improvement objectives on the balanced scorecard is stating that they are the road towards strategy achievement, and their high degree of visibility and review ensures that this strategic focus is not lost.

Improving the communication and knowledge

The adoption of the balanced scorecard system has greatly improved the communication system of the organisation, as the summarising of all KPIs, their progresses and the achievement of planned targets on a single sheet of paper, could be widely spread among employees.

The overall performance of the company and as well as its trend became easy to grasp, and is proving a good support of discussion during managerial meetings.

The increased knowledge it provides is also widely used by the company during strategy review period, particularly to analyse strengths and weaknesses of the organisation.

Success of the balanced scorecard implementation

The implementation has been possible with a minimum of time and financial investment, as the company had opted for an initial implementation that reflected the current performance of its measurement system, and a progressive improvement based on the lessons learned through that initial implementation.

The success of the company in implementing the BSC system has also been externally assessed. The organisation participated in 2003 in a local total quality management award. It obtained a score of 87 per cent in the “Measurement, analysis and improvement” category, which enabled it to secure a Diamond Award in this competition.

Recommendations

Based on the successful implementation of the balanced scorecard concept by a company having limited financial and time means for such implementation, the recommendations for companies in a similar situation can be drawn:

1. 1.

   A successful “simple” implementation of the BSC concept does not require the hiring of an external consultant or the creation of a full time position. This is particularly important for small companies, organisations facing financial difficulties, or even for organisations planning to develop complex BSC implementations, as a first step towards this objective.

2. 2.

   As the BSC concept aims to translate the strategy of a company into actions, a strategic plan or least strategic orientations must to be defined first.

3. 3.

   The selection of performance indicators to be placed on the BSC must be drawn from the strategic objectives defined by the organisation. The selection process must be triggered by the following questions, in that order:

4. 4.
   • •

     What are our strategic objectives?

   • •

     For each objective, what measured performance indicators are currently available?

   • •

     To which of the four perspectives does this indicator correspond? An available performance indicator which does not have a direct link to a strategic objective should not be included in the BSC.

5. 5.

   If the company is ISO certified (which is not compulsory to implement a “simple” version of the BSC concept), it has already defined objectives for continuous improvement. When looking for performance indicators related to a strategic objective, these continuous improvement objectives should be considered in priority, as targeted dates and values are already defined, and as collecting current performance measures should be straightforward.

6. 6.

   The first draft of BSC should be reviewed for coherence. If a perspective contains too many indicators, only the key ones should be retained, as one of the aims is to grasp in a single glance the overall performance of the organisation. If a perspective does not contain any indicators or only a few ones, either the strategy of the company is unbalanced and needs to be worked on, or the measurement system for that perspective needs to be worked on.

7. 7.

   It is important to communicate the aims of the BSC implementation to key employees, to highlight the importance of the measures they provide, and to send them the updated readings regularly. After all, the updating process will require a minimum of time only if they are ready to cooperate.

8. 8.

   The obtained document should reflect the strategic measurement system as currently available and not the measurement system as the company wishes it to be. Thus, it will not be “perfect” from the start, but imperfections in terms of balance or imperfect reflection of strategic objectives through KPIs must be noted, and progressively reduced.

9. 9.

   Each time the company updates its strategy, the BSC indicators have to be checked and updated if required.

Conclusions

Organisations should not be wary of implementing the BSC concept. A successful implementation is possible even for small companies or companies in financial difficulties. It can also be useful as a first step towards a more complex implementation, as it will clarify the usefulness of the concept.

Implementing the BSC concept is a powerful tool to assess the performance of the strategic system of an organisation and identify its strengths and its weaknesses. From the “imperfections” of a “simple” implementation, the following knowledge can be gained:

• •

  A lack of “balance” in one or several perspectives means that either the defined strategy itself is unbalanced, or that the measurement system of the underdeveloped perspectives is not satisfactory.

• •

  If no corresponding performance indicator can be identified for a specific strategic objective, there is a low chance that the related strategy deployment will take place, and the organisation will not be able to assess whether or not it progresses in the intended direction. A corresponding measurement system is to be developed. Kaplan and Norton (1992) express this opinion by saying that “What you measure is what you get”.

Thus, companies should not have for aim to define a “perfect” balanced scorecard, with limited correspondence to its actual situation. The “current performance” data of such system may very well never be updated because the company does not have the means to update it, and it will remain a “wishful thinking”.

Instead, the organisation should start by developing a system that truly reflects its current ability to measure progresses on strategic objectives. This will have several beneficial outcomes:

• •

  Regularly updating the BSC indicators will take a minimum of time, as the corresponding measurement system is readily available.

• •

  Process owners will be aware that the measured performance assessments they provide are both visible and useful to the overall performance of the company, and will be ready to cooperate when asked to develop other performance indicators.

• •

  Strengths and weaknesses of the strategic planning and the strategic deployment systems of the organisation will be highlighted by the implementation of the BSC concept. Weaknesses may be addressed gradually.

This does not mean that once the company has experienced the benefits of a successful “simple” BSC implementation, it will not wish to implement a more complex version, having for aim, for example, to report the performance of the strategic deployment down the line, or to assess the company’s performance using a dedicated BSC software. However, a previous successful “simple” implementation is useful, as it would demonstrate to key employees the foreseen advantages of the BSC concept, and pave the way for a more complex one.

Daniele SeraphimCurrently preparing a PhD in the University of Glamorgan, UK entitled “Implementing total quality management principles in a construction company in the United Arab Emirates”. This research work is based on her experience as Support and Development Manager in a precast manufacturing company, where she supervised the implementation of total quality principles.