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The Balanced Scorecard is a technique for linking strategies with a balanced set of relevant measures. In essence, this is nothing new compared to Management By Objectives (MBO) except that MBO never emphasized the need for balance and relevance w.r.t. measures. There was a hidden assumption in MBO, namely that organizations have balanced and relevant measures. But as we all know now, this is not the case. Hence, the Balanced Scorecard is truly a method worth discussing and implementing. The dimensions that the standard Balanced Scorecard incorporate are the following;
Some of these dimensions may be formulated differently from time to time depending on the strategies. The point is that the aforementioned dimensions are the ones that most often suffice, but that other dimensions may be equally relevant. If we look at the historic developments within the field of management, it seems that the Balanced Scorecard has two roots;
However, it can be argued that MBO is so profound to any modern management practice, that it is more correct to trace the origins of the Balanced Scorecard to ABM. This is not strange since Prof. Kaplan played a major role in articulating both ABC and the Balanced Scorecard. This means that understanding ABM is an advantage in order to understand the Balanced Scorecard, at least to the extent that one realizes that the Balanced Scorecard cannot be implemented without being able to identify relevant measures. Organizations without ABM cannot do this effectively for several dimensions since their cost accounting systems report distorted and irrelevant information most of the time. For this reason, many organizations will not reap the full benefits of a Balanced Scorecard implementation. But what is a relevant measure? Firstly, the word 'relevance' implies that there is a relationship between the measure and something. This 'something' is the strategy of the organization because the strategy tells how the organizations is to attain its objectives. Hence, using the Balanced Scorecard requires that the strategy is well formulated and clear. Otherwise, defining relevant measures will be impossible, or at least very difficult. Secondly, it is important to understand the difference between 'counting' and 'measuring'. Counting occurs when the organization gathers information that has no larger context or purpose as defined in, for example, a strategy. Measuring involves the same activities as counting - for example, using bar code scanners to keep track of cycle time - but there is a context in which the gathered information can be used to create knowledge about the organization. Hence, knowledge about the organization is contextual, that is, if we are to describe how well an organization is doing we must first know what the organization is trying to do. From the discussion above it follows that relevance and measuring are interrelated - it is impossible to have irrelevant measures or relevant counting. Also, measuring involves 'cause and effect' thinking in the sense that a measure is supposed to register the effect on the organization's performance by certain causes. For example, a measure of customer satisfaction can register how satisfied the customers are with the products (effect on the organization) given the products, the customer service and so on (causes). The cause and effect thinking is important since that ensures relevance between actual performance and the measured performance. But because the measured performance will never be equal to the actual performance, it is important that the measures are balanced also with respect to (in addition to financial and non-financial);
Essentially, the Balanced Scorecard should be tight, focused and tell the story of the objectives, the strategy and the road towards them. Equally important, it should clarify what is not the objectives and not the strategy. |
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