Monday, March 16, 2009

Balanced Scorecard by Murad S. Mirza

Balanced Scorecard has been extensively used by organisations as an aide for translating strategy into action. This rendering is manifested in ‘a comprehensive set of performance measures that provides a framework for a strategic measurement and management system’ (Kaplan & Norton 1996, p. 2). While a sizeable number of proponents tout its success, there are sufficient detractors that demand a more insightful study into the merits of utilizing the respective tool.

Consequently, this paper examines some of the key advantages and disadvantages of the Balanced Scorecard and provides an assessment of its overall value in being an effective strategic tool for organisations seeking to gain a competitive edge. The main content is divided into three main sections. First two sections expound upon the advantages and disadvantages of using the Balanced Scorecard, respectively. Whereas, the third section provides solutions to justify its overall usefulness. The conclusion sums up the main ideas presented in the paper and ends on a note of optimism for ardent practitioners of the respective tool.

There are several advantages to using the balanced scorecard with some commentators equating it to ‘a new language’ (Keyes 2005, p. 4). First, it is an effective way to align an orgnisation’s strategies with the interests of three primary stakeholders, i.e., Shareholders, Customers and Employees, by providing ‘a broad and overarching skin to the structural architecture of the business’ (Nair 2004, p. 6). This is manifested in its ‘focus on goal congruence’ (Hoffecker & Goldenberg, Newing, cited in Dinesh & Palmer 1998, p. 365) with the short and long term performance goals embedded in the four perspectives that can be cascaded from a macro (organisational) level to a micro (individual) level as an organisation becomes more adept at linking all facets of its operational functions to the strategic priorities.

Second, it addresses both the financial and non-financial criteria in terms of performance management and encourages the users to provide a balanced picture of quantitative and qualitative measures pertaining to primary stakeholders. For example, looking at the achievement of ‘profit-per-gallon targets’ (Marquardt 1997, p. 21) by Mobil Oil Corporation in the Financial Perspective, while, concentrating on satisfaction levels in the Customer Perspective. Such an approach ensures ‘a baseline or benchmark-somewhere from which to start’ (Stewart 2001, p. 39), which can also lead to a proactive approach for developing solutions in areas where traditional methods of management fail due to difficulties in measurement. Consequently, it reinforces greater accountability and demonstrates results that accurately reflect the ‘true performance’ (Niven 2003, p. 39) of an organisation.

Third, it concentrates on ‘future performance’ (Marquardt 1997, p. 18) by emphasizing the significance of lead indicators. This does not mean a negation of lag indicators, rather, an affirmation of a balance that needs to recognize a forward thinking approach as opposed to over accentuation of past results. Such an approach enhances the competitiveness of an organisation, especially, in markets that are hard to monopolize or not run by cartels and are usually characterised by low profit margins and a proliferation of competitors seduced by low barriers of entry. This becomes even more ‘conducive to learning organisations within which hypotheses regarding cause-&-effect relationships can be tested’ (Mooraj 1999, p. 489) through ‘strategic reviews’ (Kaplan & Norton 1996, p. 85).

Fourth, it invites greater employee participation since their voice is incorporated due to the presence of Learning & Growth Perspective. Consequently, the element of trust is enhanced which is ‘essential to the maintenance of a positive psychological contract’ (Shields 2007, p. 48). Such an emphasis also propels the HR function out of the wilderness of serving as a purely operational function into the role of a strategic business partner. This enables HR practices to ‘contribute to business performance through a multidimensional approach—building organizational capabilities, improving employee satisfaction, and increasing customer and shareholder satisfaction and commitment’ (Yeung & Berman 1997, p. 333). Its also lays a foundation for the harmonization of cross-functional relationships in stepping out of functional silos and working towards an integrated ‘Big Picture’ scenario.

Fifth, it can be linked with the management of rewards that are based upon the defined performance criteria. This removes any ambiguity from the judging and dispensing of rewards and strengthens the element of felt-fairness, especially, pertaining to ‘procedural justice’ (Shields 2007, p. 57). The respective link between Balanced Scorecard results and compensation also helps in bringing about a ‘more rapid and robust organizational change’ (Manas 1999, p. 15). This can also be facilitated by a ‘Personal Scorecard’, adopted by Mobil Oil Corporation that connects ‘the achievement of overall organisation goals and the compensation practices that directly touch individuals’ (Marquardt 1997, p. 24).

Balanced Scorecard is not a panacea for all ills afflicting an organisation. Its drawbacks are also plenty in number. First, its ability to serve three primary stakeholders, i.e., Shareholders, Customers and Employers, also restricts an organisation’s efforts in branching out to a broader range of stakeholders, e.g., Communities, Suppliers, Government Regulators, Environmental Groups, etc., especially, in terms of Corporate Social Responsibility (CSR) initiatives. This can lead to a myopic view for organizations in industries that produce products with a potential for undesirable impact on environment, .e.g., Oil & Gas, Fertilizer, Tobacco, Mining, Asbestos, etc. An added element is inability of the Balanced Scorecard to ‘monitor the competition or technological developments’ (Norreklit 2000, p. 78), which can create a blind spot in terms of strategic positioning and remaining competitive within the markets served.

Second, it assumes organizations to be rational, which disregards the unique traits of organizations that are often molded by factors such as, strategy, structure, culture, insider politics or even regional differences. These elements are even more pronounced in multinational subsidiaries that tend to develop their own organizational dynamics due to the distinct nature of internal and external environment and the success or failure of the Balanced Scorecard may depend upon the cognizance and effective management of these undercurrents, e.g., success in China may require the incorporation of the Guānxi system, which is based upon long term relationships with an inherent element of reciprocity, as a significant part of the overall strategy.

Third, it is a strenuous exercise to translate long term corporate objectives, especially, non-financial, into individual targets/goals since that requires the development of clear links and weights to signify a balanced emphasis throughout the various levels of organisational hierarchy with a cooperative workforce. This becomes more difficult for organisations with complicated structures and multiple management levels manifested in subsidiaries that are spread over several geographical regions embedded with dual reporting relationships. The situation further exacerbates when competing unions in the same organisation vie for easier, rather than ‘stretch targets’ (Kaplan & Norton 1996, p. 221). For example, in the Airlines Industry, Pilots Union and Aircraft Engineers Union are often at loggerheads due to the blame game played in the context of improving operational efficiencies.

Fourth, Balanced Scorecard ‘ignores trade-offs between different measures’ (Andon, Baxter, Mahama 2005, p. 31) which may also be in conflict with each other. This also impacts the linear supposition of causal relationships, which is actually ‘a logical relationship’ (Norreklit 2000, p. 82) between the four perspectives. For example, higher level of customer retention initiatives may depend upon the financial health of the company in terms of running effective marketing campaigns. Another element that complicates the respective situation is the temporal disparities between the aforementioned perspectives, e.g., Financial perspective is normally short term as compared to the Learning & Growth perspective, which in turn, is highly dependent upon the financial results of the organisation.

Fifth, Balanced Scorecard is essentially a tool which requires training for proper usage since the cost of poor application may be disastrous, especially, for an organisation embarking upon an ambitious restructuring program. It also requires the presence of certain level of operational sophistication with regards to availability of desired data to measure the required parameters complemented by ‘a mechanism for improvement’ (Dutta 2002, p. 154). Therefore, it is not advisable for organisations that are in the embryonic or early phases of their evolution. Additionally, as a tool, it is a means to an end; therefore, care must be taken to ensure that the means do not become more important than the desired targets/goals, especially, in terms of deciphering the metrics used in depicting performance measures or confused with the notion of effective strategic thinking or good performance management.

It is a difficult decision to take an unequivocal positive stance on the effectiveness of the Balanced Scorecard after going through the advantages and disadvantages of its utilisation, however, as a ‘Big Picture’ strategic management aide, the respective tool does have significant benefits. This can be supported by looking at the associated disadvantages and realizing whether some measures can be adopted to mitigate their impact.

First, organisations need to clearly identity their primary stakeholders and if they are more than the ones served by the Balanced Scorecard, then the respective tool needs to be customized accordingly. It is especially critical for organisations that cannot afford to renege on their CSR responsibilities or those serving high technology turnover markets, e.g., computer manufacturing firms. This will also strengthen the content validity by ensuring that interests of all key stakeholders are adequately represented.

Second, as long as the senior management recognizes that the application of Balanced Scorecard needs to be considered with the unique characteristics of their organisation and ensures that an effective communication strategy is implemented concurrently, the irrationality within the organisational domain can be countered that can also pave the way for ‘the accomplishment of cultural reform’ (McNamara & Mong 2005, p. 16). Effectiveness, in this respect, primarily refers to anticipating and managing concerns of primary stakeholders, especially, employees, and ensuring that informal channels, e.g., the grapevine, can be used as an advantage.

Third, a team led by an ‘Evangelist’, i.e., a senior manager, and comprising of ‘Ambassadors’, i.e., middle managers, ‘with high credibility among their fellow employees’ (Olve, Petri, Roy & Roy 2004, p. 4) from each function concerned, should be formed with adequate training in the knowledge and application of the Balanced Scorecard. This team should spearhead the initiatives in translating all performance measure, financial and non-financial, and ensuring the allocation of weights, as required, to reflect the prioritisation within each function of the four perspectives. For example, Marketing & Sales Department will have a stronger emphasis on measures related to achieving Customer Satisfaction, whereas, HR Department will have more focus on measures pertaining to Learning & Growth of employees.

Fourth, the aforementioned team should have the decisional freedom to negotiate on measurement trade-offs that complement the strategic priorities, previously decided by the top management for the organisation, with final decision resting with the team leader. The resulting performance measures should constitute part of the Balanced Scorecard and reviewed at defined intervals in terms of their efficacy. Any discrepancies pertaining to the respective performance measures should be sorted out according to their ability in projecting the desired results on a consistent basis. The periodic review should also analyse the need for adding or deleting elements based upon their continued relevance while examining the continued validity and reliability of the Balanced Scorecard.

Fifth, application of the Balanced Scorecard should be preceded by a gap analysis conducted by a senior manager, e.g., potential team leader for subsequent implementation that explores and clearly identifies areas that can be adequately catered by the utilization of the respective tool. The decision for its application should only be taken at a mature phase of an organisation with relevant data sources in place and a clear understanding of the end goals justified by the cost/benefit analysis. This should be further complemented by conducting an interactive informative session for the senior and middle management personnel deemed to be the opinion leaders within the organisation to ensure minimum resistance by winning some early devotees crucial for the initial lift-off.

This paper has considered the advantages and disadvantages of using the Balanced Scorecard. It has been argued that the advantages outweigh the disadvantages if certain steps are taken to mitigate the impact of the latter. The first section highlighted the advantages, especially, as an effective aide for making strategy actionable through an integrated functional approach that recognizes contributions from a non-traditional strategy partner, i.e. the HR function. The second section highlighted the disadvantages centered on the ill-advised use of the Balanced Scorecard as a means to all ends. Whereas, the third section legitimized its use as an effective performance management tool by suggesting solutions to mitigate its pitfalls.

The observations and suggestions provided in this paper are based upon previous studies done primarily in the western world and the author’s own professional experiences and therefore cannot be taken as applicable in all working environments and requires further research, especially, from a eastern perspective. However, it is expected that at least some of the highlighted issues will find a common ground with other situational settings and cross fertilization of solutions can take place accordingly.

Overall, the success stories of the Balanced Scorecard with high profile industry leaders like Mobil Oil Corporation, AT&T, British Airways, Ericsson Enterprise, etc., the constant endeavours to ensure its continued relevance and customized usage, do provide a strong case for considering it as a premier tool for deploying a strategic management system. No tool is perfect or can claim to provide the ultimate solution for business success, however, the Balanced Scorecard, with its ability to overcome issues pertaining to ‘abstraction, short-sightedness, monetary orientation, simplification and lack of focus on intangible resources’ (Johanson, Skoog, Backlund & Almqvist 2006, p. 853), has proven credentials to be a serious contender. Therefore, Mr. Kaplan and Mr. Norton, count me as a fan!

You can reach Mr. Mirza, MBA at

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