Saturday, March 31, 2012

The Balance ScoreCard

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The Balanced Scorecard.

One of the most interesting concepts addressed by Kaplan and Norton in their book (Kaplan and Norton, The Strategy-Focused organization, HBS Press, 000) is the increasingly used by companies of the Balanced Scorecard as a basic skeleton to structure performance reporting. The Balanced Scorecard enables management to translate the mission, the goals and the strategies of the company, its different business units and management functions into a coherent set of performance measures. This set of performance measures is divided into four aspects (1) the shareholder’s or financial perspective, which groups the measures assessing the extent to which the company realizes the shareholder’s expectations;() the customer’s perspective which measures the perception of the company by its clients;()the internal processes perspective which determines the performance of critical internal processes ;(4) and the innovation and learning perspective which measures the learning ability , the growth potential and the improvement and change capacity.

The authors proposed the use of the Balance Scorecard not only as a tool to communicate and follow up in the strategy to be realized, but also as basis for evaluating and gratifying managers. Gratifying managers on the basis of the Balanced Scorecard is consistent with the goal of creating a better strategic alignment. As the authors mentioned out of fifteen companies using the Balanced Scorecard, thirteen have linked their remuneration system to the Balanced Scorecard.

Another advantage of the use of the Balanced Scorecard is its link to the actually relevant company’s strategic objectives. When developing a Balanced Scorecard the critical success factors are identified, beginning from the mission and including the goals and the strategy. Then, the most appropriate performance measures are selected for these critical success factors or strategic objectives.

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According to the authors, the Balanced Scorecard offers, besides the financial performance reporting of previous periods, also a valuable insight into the evolution of the critical success factors which are of vital importance to the future financial success. In this sense the Balanced Scorecard can be considered as measurement tool which contributes to a more effective strategic management of the company and to the creation of a “Strategy-Focused Organization”.

I have been a part of many organizations that can benefit from the practical recommendations that the authors exposed in their book. Concerning the effectiveness of remuneration systems based on the Balance Scorecard I totally agreed with the authors when they pointed out the necessity of basing the remuneration of managers on objective measures (output) instead of subjective measures (behavioral). Also the authors accurately proposed that the remuneration of managers should be limited to certain number of Balanced Scorecard measures. Not all the measures should have the same weight, since not all of them would have the same impact in the desirable outputs, namely company performance.

Other recommendation in the same aspect includes finding a balance between measures for individual performance and team performance. They also warned not to link remuneration to the Balanced Scorecard if the measures need to be frequently adapted in a fast changing environment. The authors also recommend linking the remuneration of managers not too quickly to the Balance Scorecard, due to the fact that the first scorecards are only preliminary and the reported performance data are still insufficiently reliable in a first phase.

The Five Principles of the Strategy-Focused Organization.

In this book the authors introduced a revolutionary approach to company’s strategy. This new approach includes making the company’s strategy a continuous process owned not only by upper management but also by everyone involved in the company’s performance. In this spirit the authors identify five common principles of a Strategy-Focused Organization.

The first principle refers to the necessity to translate the strategy to operational terms. Once managers identify specific performance standards and develop an implementation strategy, it is important to describe the new performance standards to all the employees involved in the organization. In a strategy-focused organization everyone must understands the performance measures and the goals and objectives of the organization.

The second principle refers to the necessity of aligning the organization to the strategy. In a strategy-focused organization, work units should become strictly linked to the company’s strategy through common goals and objectives. The supreme goal under this principle is the creation of enough synergy capable to ensure that the linkages continue to work.

The third principle identified in the book is to make the strategy everyone’s everyday job. In a strategy-focused organization, upper management uses the Balance Scorecard to communicate and educate their employees in relation to the newest business strategies. Everyone understands the strategy and understands how they can impact the goals and objectives of the organization within their own scope of influence.

The fourth principle refers to the necessity to make strategy a continual process. In a strategy-focused organization, managers meet regularly to discuss and review the strategy. Managers use the strategy to learn of new issues and goals. Also they use strategy for the implementation of new processes for change. As a result, the managers gain new ideas and knowledge that can be use immediately to improve organizational performance.

The fifth principle refers to the necessity to mobilize change through executive leadership. This principle involve the importance of ownership and active involvement of the executive team. The authors note that executives use the Balance Scorecard as a vehicle to communicate a vision for future performance that is better than the present.

Parting Thoughts

The model of the Strategy-Focused Organization can be of a high benefit for the company that I’m presently working with. Unfortunately the lack of synergy between the different work units is currently producing a divorce between the company’s strategy and the employees. It is very unclear the direction and strategy that upper management is currently following. Some of the factors that brought us to this situation are explained in this book. Among them the lack of senior management commitment, too few individuals involved in building the scorecard and the fact that the scorecard is kept at the top of the organization as an unconnected element to the rest of the company. The company is missing the point that strategy requires change from virtually every part of the organization. Strategy requires teamwork to coordinate these changes. Strategy implementation requires continual attention and focus on the change initiatives and performance against targeted outcomes. As the author’s point out, if those at the top are not energetic leaders of the process, change will not take place, strategy will not be implemented, and the opportunity for breakthrough performance will be missed.

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