Balance Scorecards and Your Business Philosophy: Is it worth the costs?
The “Balanced Scorecards” as posited by Robert S. Kaplan and David P. Norton began what we see today (with Apple and tech giants like Google) the paradigm shift from shareholder centric strategy to a customer centric proposition “balanced” with financial perspective, internal business processes, while staying relevant with innovation and learning. So in essence, all four are interdependent and creates a balanced scorecard that is linked in part to compensation measured equally on a financial perspective, internal business perspectives, customer perspectives, and innovation perspectives.
The reason I believe this model is worth the costs of both time (should be implemented in phases strategically) and money is two-fold; it is grounded in sociology and is psychologically-driven and it is a simple yet powerful strategic plan.
First: The Balanced Scorecards theory as stated from Kaplan and Norton began in a 1992 paper published in the Harvard Business Review (Jan-Feb) titled “The Balanced Scorecard- Measure that drive performance” in which the basics were laid down in response to what the author stated were two competing forces that really should be complimenting each-other, they were judge a business by its customer performance and business processes OR by its monetary financial gains and stockholder satisfaction.
Kaplan and Norton posited that both should be the benchmark of success and tied to financial incentives and must go equally further by judging the business on innovation as well. This resulted in the four equal perspectives. Financial- “How do we look to shareholders”, internal business “What must we excel at”, customer “How do customers see us” and innovation/ learning “Can we continue to improve and create value”. (Kaplan and Norton, p. 72, 1992)
In 1996, the authors expanded and said these four principles can drive incentives to greatness, but can be further used to create a strategy. In their article (reprinted in HBR, July 2007) titled “Using the Balanced Scorecard as a Strategic Management System” Kaplan and Norton posited that the previous scorecard was excellent at achieving short term profitability, but a new set of four perspectives can take the previous four perspectives and create four broad steps to create strategic goals. They are Translating the Vision: garner buy-in across rather than top-down approach, Communicating and Linking: educate the force and tie incentives to set goals, Business Planning: setting targets/ milestones and allocating resources, and then Feedback and Learning: an after action review and reflection.
Drawing off Abraham Maslow’s 1962 Hierarchy of Needs, Peter Druckers 1954 “The Practice of Management, George Odiorne’s 1965 “Management by Objectives” (MBO), the fourteen principles of management found in Henri Fayol’s “Administration Industrielle of Generale” and Jack Stack’s 1992 book “The Great Game of Business” for which Open-Book Management is found to name a few, the Balanced Scorecard for short-term and long-term strategic paradigm is grounded in some of the best business research in the past century. (Knapp, 2001)
|Original author unknown- found on several webpages worldwide|
This brings me to the second reason. Today, we know that in order for corporations to succeed in this competitive and fast changing climate, businesses must garner buy-in from the employees using the customer’s perspective as their guide while pleasing shareholders using a longer term focus. Shareholders are more apt to look forward and this is where the innovation curve must be sold on all involved. Resorting to “cash-cows” and short term results opens a business to “Disruptive Innovation” as touted by Dr. Clayton Christensen in his various works.
The main criticism from such authors as Arthur M. Schneiderman in his 1999 article “Why Balanced Scorecards Fail” is that this scorecard is too simplistic and that many goals are set either too high or too low and not means-tested or based. (Schneiderman, 1999) Schneiderman opts for goals that are means tested and then weighted based on the sometimes conflicting guidance intrinsically set forth by shareholders. In order to accomplish this, the author adopts the Quality Function Deployment (QFD) three phase guideline of first establishing numerically weighted stakeholder wants and needs for improvements, quantitatively rank them based on impact on these requirements, and then create appropriate metrics to evaluate the processes used.
I believe this to be outdated and short-sighted. Shareholders only hold the interest of financial gains and may not be in for the long run. In fact, they may sell their shares at the first sign of trouble instead of staying invested for the long run with the corporation’s best interest at heart. While I believe having the employees invested in shares of the corporation, typically the shareholders that really matter are those that hold large numbers of shares or priority stock.
This is why I prefer the Balanced Scorecard approach and its historical foundation. Using employee morale, promise of longevity in employment when feasible (Maslow’s Needs), and tying incentive (short and long term) to the viability of the corporation, the Balanced Scorecard places everyone at stake for both the rewards and risks of behavior.
Nathan J. Kerr, MS, PMP is the co-owner and founder of PMCertDC – Washington D.C.’s metro area premier project management boot camp provider. With our primary location in Tysons, Virginia, we hold classes throughout the Washington D.C. metro area and anywhere online.
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Kaplan, R., & Norton, D. (1992). The balanced scorecard: Measures that drive performance. Boston, Mass.: Harvard Business Review Press.
Kaplan, R., & Norton, D. (1996). Using the balanced scorecard as a strategic management system. Boston, MA: Harvard Business School Pub.
Knapp, K. (2001, June 1). The balanced scorecard: Historical development and context, as developed by Robert Kaplan & David Norton. Foundations of Management. Anderson University, Anderson, IN.
Schneiderman, A. (1999). Why balanced scorecards fail. Journal of Strategic Management, 1-8.