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A Practitioners Guide to the Balanced Scorecard

Research Report

A Practitioners Report Based on:Shareholder and Stakeholder Approaches to Strategic

Performance Measurement Using the Balanced Scorecard

ByAllan Mackay


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Copyright. No part of this publication may be reproduced,stored in a retrieval system, or transmitted in any form or byany means, electronic, mechanical, photocopying, recordingor otherwise, without the prior permission of IIBFS.

IIBFS makes no representation and gives no warranty as tothe accuracy of the information contained herein and doesnot accept any responsibility for any errors or inaccuracies inor omissions from this document (whether negligent orotherwise) and IIBFS shall not be liable for any loss ordamage howsoever arising as a result of any person acting orrefraining from acting in reliance on any information

contained herein. No reader should rely on this document asit does not purport to be comprehensive or to render advice.This disclaimer does not purport to exclude any warrantiesimplied by law that may not be lawfully excluded.


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A Practitioners Guide to the Balanced Scorecard 1

AcknowledgementsThis guide has its foundations in theresearch, Shareholder and StakeholderApproaches to Strategic PerformanceMeasurement Using the BalancedScorecard conducted for The CharteredInstitute of Management AccountantsResearch Foundation* by theInternational Institute of Banking andFinancial Services (IIBFS) at LeedsUniversity. In preparing this text I havedrawn heavily on this research. My rolehas been that of both editor and authorand I hope that in preparing the text Ihave not detracted from the valuablecontribution of the original work.

It has been impossible to compile thePractitioners Guide without usingsignificant elements of the original textand full recognition for this importantwork is rightly due to the originalresearchers, predominantly PhilAisthorpe. His scholarly contributionmade this guide possible and much ofhis original work is incorporated intothe Guide. He was ably supported and

mentored by Professor Kevin Keasey, DrHelen Short, Robert Hudson, KevinLittler and Jose Perez Vazquez. They arealso owed a debt of gratitude. My workhas also benefited from the guidance ofProfessor Kevin Keasey and the patientproof reading and suggestions fromKevin Littler. Dr Phil Barden of TheCentre for Performance Managementand Innovation assisted me to enterthis field and has provided a valuableoverview of emerging developmentsthroughout the project.

LeedsOctober 2004

* The Chartered Institute of Management

Accountants Research Foundation has since

been subsumed into the General Charitable

Trust of the Chartered Institute of

Management Accountants

October 2004

Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. The History and Development of the Scorecard. . . . . . . . . . . . . . . . . . . . . . . . 8

2. The Balanced Scorecard Explained . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3. Scorecard Foundations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

4. Building a Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5. Communication,Action, Presentation & Feedback . . . . . . . . . . . . . . . . . . . . . 31

6. Stakeholder Balanced Scorecards: Examples from the Public Sector . . . . . 34

7. Common Threads and Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Appendix 1. The Research Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Appendix 2. Case Study 1 English Nature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Appendix 3. Case Study 2 Mersey Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Contents


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A Practitioners Guide to the Balanced Scorecard2

Kaplan and Nortons Balanced Scorecard is a concept stillwidely used and respected in todays business environment.What follows, provides guidance and advice on thedevelopment and implementation of a Balanced Scorecardfor those organisations considering the introduction of aScorecard or those that have adopted the approach withlimited success. It is applicable for both public andcommercial enterprises.

The Practitioners Guide was written as part of a projectreceiving financial support from the Chartered Institute ofManagement Accountants Research Foundation. The projectinvolved reviewing the current academic literature, followedby a telephone survey in which 460 major UK organisations,

embracing both the public and commercial sectors,participated.

The telephone survey was the catalyst for a focused postalquestionnaire survey of 60 of the organisations developingperformance measurement systems. After the telephonesurvey semi-structured interviews were conducted in 45 ofthe organisations. Finally, a detailed investigation on a casestudy basis was carried out at each of ten major respondents.

Historically, the majority of organisations, particularly thosein the private sector, have relied on financial and costaccounting measures to assess their performance. Financial

measures continue to be of fundamental importance toorganisations. However, there is a growing awareness that ifan organisation is going to succeed in the contemporarybusiness and political environment, it will have to generateand take account of a wider range of measures, reflecting therequirements of customers, shareholders, employees, and thecommunities around them.

Traditional financial and cost accounting measures recordwhat has happened in a previous period and are oftenreferred to as lag indicators. Relying solely on this type ofindicator has been likened to steering a ship by its wake ordriving a car viewing the route through the rear viewmirrors. In the early 1990s there was a growing awareness

that organisations needed a wider set of measures,compatible with their increasingly complex operatingenvironments and this was the catalyst that spurred Kaplanand Norton (1991) to develop the Balanced Scorecard.

The original Kaplan and Norton model illustrated leading andlagging indicators in four different perspectives: Financial;Customer; Internal Processes; and Learning and Growth.AsKaplan and Norton state:

The name reflected the balance provided between shortand long term objectives, between financial and non-financial measures, between lagging and leading indicators,and between external and internal performanceperspectives.

One of the major strengths of the Balanced Scorecard is itsadaptability. Indeed, the originators make it clear that theirfour quadrants are only a template.Although the term,

Balanced Scorecard, might conjure up an initial impression ofa table of measurements or key performance indicators, it isin fact a process comprising of a number of carefully inter-linked steps.The real power of a properly developed BalancedScorecard is that it links the performance measures to theorganisations strategy. Organisations implementing aScorecard process are forced to think clearly about theirpurpose or mission; their strategy and who the stakeholdersin their organisation are and what their requirements mightbe.They also need to evaluate quite clearly the time scales inwhich they hope to achieve their strategic objectives.

The Balanced Scorecard process involves bringing together

the key members of an organisation to debate and reach aconsensus on the purpose of the organisation, therequirements of its stakeholders and its strategy. By doing so,it moves beyond being a performance measurement tool toalso being a useful aid to strategic development.

Many of the early adopters of the system were either largecommercial operations in the USA, or organisations withstrong American links. Consequently, much of the quiteextensive management literature tended to be US-centricand weighted towards commercial organisations.

The research undertaken for The Chartered Institute ofManagement Accountant Research Foundation (CIMA) by The

International Institute of Banking and Financial Services(IIBFS) was therefore specifically designed to provide aninsight to management on the application of the BalancedScorecard process based on the experience of UKorganisations.The research also focused on the veryimportant issue of stakeholder participation. The findings ofthe research indicated increasing stakeholder participation inthe Scorecard process within the public sector. Indeed, theresearch highlighted how the Scorecard could embrace theUK Governments policies such as the Best Value Regimewith its requirements to Challenge, Compare, Consult,Compete and Collaborate.

Preface


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The Introduction to the guidebook describes the researchcarried out and details Balanced Scorecard utilisation in UKorganisations.

Chapter 1 deals with the history and development of theBalanced Scorecard and the contextual setting of theScorecard relative to other common performancemanagement and measurement systems.

Chapter 2 is particularly aimed at the reader who isencountering the Scorecard for the first time and providesa detailed explanation of the major components of aBalanced Scorecard process.

Chapter 3 describes the foundations to a cohesive andcoherent Balanced Scorecard process and highlights thefundamental questions that the organisation mustconsider.

Chapter 4 reviews various design and implementationissues and draws heavily on the case studies that formedpart of the research conducted by IIBFS, to outline aframework for developing a Scorecard in a commercialorganisation.

Chapter 5 describes the critical issues of launching andcommunicating the Balanced Scorecard to the members of

the organisation and to external stakeholders. It alsocompletes the circle by describing the feedback systemsthat allow the organisation to make refinements, and adaptto changing environments.

Chapter 6 fills a large gap in the existing literature byfocusing on an example of stakeholder inclusion in theBalanced Scorecard. It provides an overview of how a publicsector organisation, with a large number of stakeholders,may go about developing a Balanced Scorecard. Thischapter overlaps with many of the themes in the precedingchapters but this has been necessary to maintain acohesive structure useful for practitioner application. Ifanything, the overlaps reinforce some of the critical

requirements for good Scorecard design in private sectororganisations.The examples in this chapter are intended tobe informative of the Scorecard approach and are notintended to reflect clinical or local authority best practice.

Chapter 7 highlights some of the key findings from theresearch and links them to more detailed work by BalancedScorecard experts. The chapter draws conclusions from theresearch findings and identifies common threads betweenthe private and public sectors.



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What is a Balanced Scorecard?Although in recent years few managers will have managed toavoid a discussion of the Balanced Scorecard, many will nothave a full understanding of the Balanced Scorecard process,how it works, what resources are required and whether itreally is a new approach to performance measurement. Thefollowing paragraphs attempt to clarify some of these issues.

Perhaps the most obvious role of the Balanced Scorecard isthe Scorecard element i.e. to record and clearly illustrate thesmall number of key measurements (20-25) that allow busyexecutives to quickly evaluate what is going on in criticalareas of their organisation. However, if the BalancedScorecard is to merit its description as an innovativeapproach to performance measurement, it has to be muchmore than a scoring or results recording mechanism.

The use of the word Balanced reflects the roots of theBalanced Scorecard in concerns that organisations weregiving too much emphasis to short term financial and

budgetary issues. Many business leaders, academics andconsultants recognised that a short term financial orbudgetary focus could lead to other important, but perhapslonger term issues, such as customer development, changingmarkets, standards of service and organisational learning,being given insufficient attention or possibly neglectedaltogether.

In response to those concerns, Kaplan and Norton (1991)formulated an organisation model comprising of fourquadrants to represent and focus attention on what they sawas the key components, timescales and perspectives of anorganisations strategy.

The Kaplan and Norton template, illustrated in Figure 1,suggests that a Balanced Scorecard will comprise ofquadrants giving equal consideration to both long term andshort term Financial Performance, Customer Issues, InternalBusiness Processes and Organisational Learning and Growth.

Introduction

Financial

Vision & StrategyInternal Business

ProcessesCustomers

Learningand Growth

Figure 1:The Balanced Scorecard


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These quadrants may not be appropriate for all organisationsbut one of the strengths of the Balanced Scorecard process,which will be discussed in more detail in later chapters, isthat organisations have the freedom to use whateverquadrants or perspectives that best suit their environmentand strategy.

Perhaps more importantly, and what starts to differentiate awell-constructed Balanced Scorecard from othermeasurement systems, is that the Scorecard translates thestrategy into relevant operational terms and reflects theorganisations detailed understanding of the causal linkagesbetween measures and quadrants. Further, the Scorecard isgroundbreaking in the balance provided by the recording of

results achieved (lag indicators) and the illustration ofexpected results (lead indicators).

The research that underpins this guidebook highlights thatthe presentation of the key performance measures is only thetip of the iceberg. Balanced Scorecard users are keen toemphasise that the process of designing a Balanced Scorecardwith its debates about goals, quadrants, perspectives andcritical measurements, is an extremely useful process oftesting the strategy and aligning the organisation behind thestrategic goals. The research highlights that a properlyexecuted Balanced Scorecard process requires every level ofthe organisation to have a clear and agreed understanding of:

Why the organisation exists its fundamental goal; What the organisation values; The organisations vision for the future; The critical measures that will make a real difference to the

organisations performance; Who the stakeholders are and how their views can be

collected and reflected in the respective quadrants of aBalanced Scorecard; and

How the quadrants and measurements link together(causal links) to ensure the organisation moves towards itsstrategic goals and objectives.

Is the Balanced Scorecard a new process?

Some critics have suggested that there is nothing new inlooking beyond financial and accounting measures toevaluate an organisation.There is certainly a considerablebody of evidence that leading experts, such as Hopwood,Argyris, Ridgway and Parker, were highlighting the inadequacyof single measures of success many years before thedevelopment of the Balanced Scorecard.

For example, Lee Parkers (1979) Divisional PerformanceMeasurement: Beyond an Exclusive Profit Test, suggests that:

Further attention could usefully be paid to thedevelopment of divisional productivity indices, projected

monetary benefits of the maintenance of certain marketpositions, costs versus benefits of product development,division social accounts for social responsibility, and humanresource accounting for aspects such as personneldevelopment, employee turnover, accident frequency etc.

Hopwoods (1973) work provides a comprehensive overviewof performance measures in an accountancy context andsuggests, inter alia:

While not denying that management is a multifacetedtask, accounting systems do not aim to reflect all of itsvalued and important variety. Many crucial socialbehaviours are completely ignored, and although thenarrowly economic implications of some others may bereflected, even such a limited representation remainsincomplete and invariably occurs with a delay. But morethan being partial, behaviours intended to improve theaccounting indices can actually conflict with other equallynecessary behaviours.

In a similar vein, Ridgway (1956) also describes howmeasures need to be weighted in order to:

adequately balance the stress on the contradictoryobjectives or criteria by which performance of a particularorganisation is appraised.

There is no doubt that this body of work by establishedscholars, reflects the concerns that may eventually haveprovided the catalyst for the development of the BalancedScorecard. It may also be argued that a diligent and well-readmanager could have pieced all of this work together and

developed a balanced performance measurement system.However, it can equally be argued it took the BalancedScorecard to make what was previously implicit, explicit, andin a way that captured the imagination of business leadersand managers.

It may also be argued that the Balanced Scorecard goesbeyond the earlier work by taking performance measurementfurther than the boundaries of accountancy alone, and bybringing focus to the causal links between measures. It makesan explicit link between performance measures and strategyand provides a means for strategy to be translated intooperational measures that are relevant to the people taskedwith implementing strategy and change.

Olve, Roy and Wetter (1999) capture elements of this debatein their comment that:

The scorecard often becomes a catalyst for discussionswhich actually could have been held without it but whichbecome essential when it is used.



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A Practitioners Guide to the Balanced Scorecard Introduction6

Is it just another management fad?Since its arrival in the United Kingdom in the 1990s theBalanced Scorecard has achieved significant penetration intoa wide spectrum of commercial organisations.The growingpopularity of the Scorecard has led to an explosion of interestin the use of this procedure, and Appendix 1 to this reporthighlights how 30% of the top 100 UK Corporates (by marketcapitalisation) have adopted the Balanced Scorecard.

It is perhaps fair to say that the UK public sector was slowerto adopt the Balanced Scorecard process but at the time ofthis survey 31% of the 51 organisations contacted were usingor intending to use the Balanced Scorecard.The currentLabour Governments initiatives for modernisation of thepublic sector have led to a significant increase in interest inthe Balanced Scorecard. Several Government publicationshave made reference to a Balanced Scorecard approach. Forexample, the Audit Commissions website provides a wealthof useful information, examples and a very helpful toolkit1.

If we accept conference proceedings, books and journalarticles as an indicator of interest it would appear that theBalanced Scorecard is gaining an ever-increasing audienceand is becoming a familiar tool in the modern managerstoolkit.With the rapid expansion in the implementation anduse of Balanced Scorecards, it has become necessary todetermine just how this approach to performance

measurement is currently being used in the UK, and toidentify and disseminate examples of best practice to aid UKmanagement. This guidebook attempts to fill this gap andprovide some of the answers to the above questions.

Does it work?Although any Internet search will reveal a number ofqualitative reports on Balanced Scorecard implementation,there is little quantitative evidence from UK organisationsdirectly linking performance improvements and BalancedScorecard initiatives. Nevertheless, there are a significantnumber of qualitative reports from satisfied users in bothprivate and public sector organisations2.

1 http:// www.bvps. audit commission.gov.uk

2 Wisniewski M, (2001), Rigby DK (2001), Goodman (2002), Brooke

(2002) see bibliography

Frigo (2002) provides an interesting overview of the AmericanInstitute of Management Accountants 2001 PerformanceMeasurement study which highlighted that BalancedScorecard users rated their systems as very good toexcellent in supporting managements objectives,communicating strategy to employees, and supportinginnovation.The response to questions about the effectivenessof performance measures saw financial measures receivinghigh ratings and customer, internal business processes, andlearning and growth measures receiving progressively lowerratings.The learning and growth quadrant received the lowestrating and Frigo posits that this is not unexpected andhighlights the challenges of measuring intangibles. He reflectsthat organisations, which relate intangible assets such as

human and information capital to the value creation process,are more successful in developing performance measures inthose areas. He also notes that many of the BalancedScorecard users interviewed had significantly improved theircustomer performance measures by using the Scorecardimplementation process as an opportunity to understandcustomer segments, expectations and value propositions.

Not all experts support the Balanced Scorecard and some,such as Jensen (2002), contend that it is flawed because itdoes not actually give managers a score that is a single-valued measure of how they have performed. He proposes aprocess he calls enlightened value maximisation and

suggests that organisations should define a true (singledimensional) score for measuring performance for theorganisation or division (and it must be consistent with theorganisations strategy). as long as their score is definedproperly, (and for lower levels in the organisation it willgenerally not be value) this will enhance their contribution tothe firm.

Birchard (1996) suggests that the Balanced Scorecard isbelieved to be successful because of its ability to define thecritical success factors and measures that focus on growthand long term success. However, Birchard also suggests thatthe Balanced Scorecard may be inappropriate fororganisations with short-term financial problems or

undergoing restructuring.


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Palmer and Parker (2001) provide an interesting and thoughtprovoking perspective by applying physical scienceuncertainty principles to performance measurementsystems.Their report suggests that a key factor in developinga successful Balanced Scorecard is the identification ofaggregate level measures and in support of this argumentthey use Lucass (Lucas 1995) study highlighting thedifficulties in developing specific worker level measures thatmatch higher level ones.They highlight the similaritybetween the Balanced Scorecards focus on critical successfactors and examples from Activity Based Management(ABM) which suggest that rather than having accurateproduct costing as the focus, organisations can make largegains by identifying and focusing on one or two critical input

drivers.These drivers are very similar to the BalancedScorecards critical success factors, and in terms of physicalscience uncertainty principles can be represented as strangeattractors3 around which the system can organise itself at anew level of suitability.

For readers who wish to have more quantitative evidence ofthe popularity or otherwise of the Balanced Scorecard andother management tools, Bain & Company carry out anannual survey to investigate the experience of companiesadopting leading management tools. The results of thissurvey and other useful information are posted on their web

site4

.

3 Gleick, James, 1988 Chaos-Making a New Science, London,

Heinemann

4 http:// www.bain.com

A Practitioners Guide to the Balanced Scorecard Introduction 7


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The fundamental principles of financial accountingmeasurement were first developed centuries ago to supportthe methods of doing business that were prevalent at thattime.The use of financial records has evolved with thedevelopment of business structures. Financial measures tendto reflect contemporary organisational thinking andindustrialisation and mechanisation have both been stronginfluences in this regard for most of the 20th century. Sincethe Industrial Revolution bureaucratisation of theorganisation and the division of labour have been dominantthemes.As the German sociologist Max Weber (1947) noted:bureaucracy is a form of organisation that exhibits themechanistic concepts of precision, regularity, reliability andefficiency achieved through the fixed division of tasks and

detailed rules and regulations.

1.1 The Organisation as a MachineThe industrial era was the era of the machine and this had astrong influence on accounting methodologies. It wasrelatively easy to use a machine metaphor to aidunderstanding of organisations (Morgan, 1997). Such thinkingrequired top-down control, and so classical theoristsdeveloped the concept of organisations as rational systemsthat should be streamlined to operate in as efficient amanner as possible.The emergence of ScientificManagement, as pioneered by Frederick Taylor, reinforced theconcept of the organisation as a machine. Taylor was an

American engineer and is best known for his time-and-motion studies, characterised by detailed observation of allaspects of a work process to find the optimum mode ofperformance.

These dominant schools of thought had a strong influence onthe development of financial and cost accounting protocols.They evolved around issues such as how to deal with thecapital cost of tangible assets and with measuring theefficiency of men and machines.

1.2 21st Century ModelsAs we move into the 21st century, the emphasis has movedfrom tangible assets to knowledge-based strategies founded

on intangible assets, and a movement away from top-downstrategic formulation.The new business environment of theso-called Information Age has become dependent on controlof such issues as employee knowledge (Stewart, 1997),organisational empowerment (Simons, 1995), competitivecapabilities (Stalk et al, 1992), intangible resources (Hall,1992), and core competencies (Prahalad and Hamel, 1990). Inthis regard, the fundamental accounting principle of placing amonetary value on the productive assets of organisationscreates increasing difficulty. As Kaplan and Norton point out,

Ideally, this financial accounting model should have beenexpanded to incorporate the valuation of a companys

intangible and intellectual assets Realistically, however,difficulties in placing a reliable financial value on suchassets as process capabilities, employee skills, motivation [and] customer loyalty will likely preclude them fromever being recognised in organisational balance sheets.(1996a:7)

Additionally, traditional financial accounting methods relateto specified periods of time and accounting systems, even attheir most sophisticated, inform management as to how acorporation has performed in accordance with pre-determined standards within a specific period. Ifmanagement is to lift its vision towards the competitivehorizon, it needs to step back from the periodicity of pureaccounting measurement. Performance, in this context, isusually measured in terms of transaction related activity (e.g.sales, direct costs, amortisation, etc.) conducted in themarket place and completed within the period underconsideration.Transaction dependent measures tend toemphasise the sequential value chain of business functions asproducts are supplied into a competitive market (Porter,

1985). By contrast, they may fail to recognise the valuecreating, cross-functional capacities and multi-periodprocesses inherent to the organisation.

Accounting measures may provide little indication of theimportance of change programmes undertaken within theorganisation that, although not affecting current transactionactivity, will have a significant effect on earnings in multiplefuture periods. Indeed, basing the criteria for performancesuccess on financial results can lead companies to rewardinappropriate behaviour by managers. Management may seekto enhance profitability in the current accounting period byeliminating valuable investment programmes and thereby

damaging future competitiveness. Historical cost accountingmethods have a limited role in forecasting future competitivesuccess. Historical measures, such as Return on Investment(ROI) and Return on Capital Employed (ROCE), are poor toolsfor plotting the future direction of a company within its mainmarkets and industry sector.

1.3 Tableau de BordThe concept of taking account of more than just financialmeasures is not new, but it is one that has developed at anincreasing pace with the advent of the Information Age.Perhaps the earliest formalised measurement system of thistype was the French process of Tableau de Bord that emergedin the early part of the 20th century. Broadly translated from

the French, tableau de bord means a dashboard, a series ofdials giving an overview of a machines performance, such asthe array of instruments used by car drivers or airline pilots.

The association with machines is not surprising as the systemwas first evolved by process engineers attempting to evolvetheir production processes by having a better understandingof the relationships between their actions and processperformance; the cause and effect relationship. In an attemptto improve local decision making, the engineers developedseparate tableaux for each sub unit that reflected the overallstrategic aims of the organisation. As their objective was tostudy cause and effect relationships, the engineers did not

limit their measurements to financial indicators and used awide range of operational measures to evaluate local actionsand impacts.

1. The History and Development of the Balanced Scorecard


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Figure 2:The EFQM model

Innovation and Learning

Enablers Results

Leadership

People

Management

Processes

People Satisfaction

Policy & StrategyCustomer

Satisfaction

Resources Impact on Society

Business Results

Although the Tableau de Bord has been around for over 50years, it was only in the last quarter of the 20th century thatthe movement away from reliance on financial measuresgained impetus. One of the main catalysts appears to havebeen increasing global competition.

1.4 The Performance PyramidMcNair et al (1990) designed a model that they called theperformance pyramid based on the concepts of total qualitymanagement. The performance pyramid represents anorganisation resolved into four interdependent levels.The firstlevel is the traditional corporate management layer and thesecond; the companys sub units. The third level is not astructural business unit but rather is a representation of all

the processes that are critical to the organisations success such as creating customer satisfaction. It is from this levelthat operational goals such as quality and delivery time, arederived. In the performance pyramid model, differentmeasurement frequencies are adopted to meet the perceivedrequirements of different levels of management.

In the lower, customer facing or operational base of thepyramid, measures are relatively frequent, for example, inunits of days or weeks.As we advance up the pyramidthrough the hierarchical levels of management, measurementfrequencies reduce, and the emphasis is on financialmeasures. One of the strong themes underpinning this

model, and one that has a resonance with the Tableau deBord, is the concept of a strong cause and effect linkagebetween the lower operational measures and the higherfinancial measures and the use of the pyramid to illustratethis relationship.

1.5 The EP2

M ModelAdams & Roberts (1993) progressed the evolution ofmeasurement systems by promoting their use as a means offostering an organisational culture in which constant changeis seen as normal and which has a fundamental requirementfor effective measures that can be promptly reviewed andwhich provide rapid feedback to decision makers.Their modelis encapsulated by the formula EP2M: Effective Progress andPerformance Measurement, and stresses the importance ofmeasures in four areas:

External measures customers, markets, suppliers,partners, etc

Internal measures efficiency and productivityof internal processes

Top down measures implementing the strategy

Bottom up measures empowering employees

1.6 The Malcolm Baldridge and EFQM ModelsTwo very similar, and quite prominent, measurement modelswere developed as a result of USA and European Governmentinitiatives to counter the threatened Japanese domination ofglobal markets. Both schemes feature awards for variousclasses of organisations.The American scheme is known as

the Malcolm Baldridge National Quality award and itsEuropean counterpart is the European Foundation for QualityManagements Business Excellence (EFQM) model. Thefamiliar structure of the latter model is shown in Figure 2.



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A Practitioners Guide to the Balanced Scorecard The History and Development of the Balanced Scorecard10

The Results section of the model describes what theorganisation has achieved, and is currently achieving, whereasthe Enablers show how those results are being achieved.TheBusiness Excellence model is a way of auditing theperformance of the organisation against each of the nineelements shown in Figure 2.Those elements are weightedand the overall score determines how the organisation isperforming.The EFQM framework is predominantly used as ameans of continuously improving processes, as well as auseful source of benchmarking data.

1.7 Origins of the Balanced ScorecardIn 1990, Dr David P. Norton and Professor Robert S. Kaplanconducted a research study project, sponsored by KPMG Peat

Marwick, into the performance measurement systems of 12companies.The emphasis of their research project, entitledMeasuring Performance in the Organisation of the Future,was to investigate and address the limitations of traditionalfinancial based systems for monitoring performance. Focusingon financial measures, it was argued, led companies to focuson the short term and, potentially, left them ill prepared forfuture competitive engagement.

Over the course of 1990, participants of the research studybegan to shape out the structure of the Balanced Scorecard.The results of the original study were subsequently publishedin an article in The Harvard Business Review (Kaplan and

Norton, 1992).As corporate interest in their approachincreased, Kaplan and Norton were able to further developtheir ideas on the design and application of the BalancedScorecard (Kaplan and Norton, 1992; 1996a-e; Norton,1997).

Of all the models discussed, the EFQM, Business ExcellenceModel and the Balanced Scorecard have been the mostwidely adopted by UK organisations. Each model appears tohave its own champions specialising in their implementationand promotion.

1.8 The Balanced Scorecard v The EFQM ModelKaplan and Lamotte (2001) contend that there are five majorways in which the Balanced Scorecard exceeds the BusinessExcellence model:

They suggest that the EFQM and Baldridge models verifythat a strategy exists and is well followed. However, theycontend that the links between the enablers and results areimplicit. In contrast, they suggest the process of buildingtailored Balanced Scorecards gives much more emphasis tocause and effect linkages.

The EFQM and Baldridge models evaluate internal processperformances against benchmarked best practices and, as aresult, focus on continuous improvement. In contrast,target setting with the Balanced Scorecard permitsaspirations for radical performance allowing Scorecardorganisations to become the benchmarks for others.

Quality Models, such as the EFQM and Baldridge, strive toimprove existing organisational practices but applying theBalanced Scorecard often reveals entirely new processes atwhich an organisation must excel.

Quality programmes are often referred to as continuousimprovement programmes. However, there is a danger withthe EFQM and Baldridge models that scarce resources

might be expended on incrementally improving inefficientbut existing processes. Kaplan and Norton suggest that theBalanced Scorecard is a better tool for prioritising whichprocesses should be allocated resources and which shouldbe dropped.

The Balanced Scorecard integrates budgeting, resourceallocation, target setting, and reporting, and feedback onperformance into ongoing management processes.Historically, the EFQM and Baldridge models evaluated andscored leadership and strategy setting as if they wereindependent processes. With the Balanced Scorecard theyare inextricably linked together.

Nevertheless, Kaplan and Lamotte (2001) do concede thateach model adds a useful dimension to the other, and inusing the two together a management team leverages theknowledge and insights from each approach. Both approachesfoster deep dialogues about performance, supported bymanagement processes that link strategy to operations toprocess quality.

Key Points:

Financial models need to reflect contemporary organisational thinking.

20th century accounting systems reflected top-down control and the influence of tangible assets such as machines. 21st century systems need to consider more intangible assets such as employee knowledge, core competencies, etc.

The Business Excellence model and the Balanced Scorecard complement each other and can be used together to capturethe knowledge and insights from each approach.


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The Scorecards guiding concept is to move managers awayfrom focusing purely on financial outcomes and to consider amore balanced portfolio of multiple financial and non-financial measures closely linked to strategic objectives.Afterall, no single performance indicator can succinctly capturethe complexity of how an entire organisation is performing.The Scorecard encourages managers not to rely solely onhistorical measures and emphasises the need for leadindicators that point to the future direction of theorganisation.The key question under consideration becomesless what have we achieved? and more what are we likely toachieve in the future? Enabled by this change of perspective,the emphasis of the Scorecard approach is to measure thestrategic as well as the operational. Scorecard measures are

selected to describe and monitor the organisations progressin implementing and achieving its strategy. Monitoring thesemeasures enables management to plot the futurecompetitive direction of the organisation.This shift in focus,from operational activity to strategic guidance, has becomeincreasingly important as external competitive environmentshave become more dynamic and internal organisationalstructures have become more fluid and complex.

2.1 Balanced Scorecard QuadrantsThe generic Balanced Scorecard proposed by Kaplan andNorton (1996a) consists of four interrelated quadrants, eachcontaining objectives and measures from a distinctperspective (see Figure 3). These perspectives are termed:

Financial Customer Internal Processes Learning and Growth

The scope of these perspectives is designed to cover thewhole of the organisations activities both internally andexternally, both current and for the future.

2. The Balanced Scorecard Explained


Figure 3 : The Balanced Scorecard Quadrants

Internal View

FinancialObjectives and Performance Measures

Associated with the ShareholdersPerception and Expectation of theOrganization

Internal Business ProcessesObjectives and Performance MeasuresAssociated with the Organisations InternalProductive Processes

CustomerObjectives and Performance Measures

Associated with the Customers Perceptionof and Interaction with the Organisation.

External View

DevelopmentalFocus

ActivitiesFocus

Learning and GrowthObjectives and Performance MeasuresAssociated with the Development ofEnabling Culture and Competencies


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A Practitioners Guide to the Balanced Scorecard The Balanced Scorecard Explained12

Once it has been formulated, the organisations strategy istranslated into specific objectives that can be classifiedwithin each of these four perspectives. Once these objectiveshave been identified, appropriate quantitative measures are

devised to report and monitor the success in achieving theseobjectives. Table 3 lists examples of objectives and measuresthat may appear in each of the four measurementperspectives.

Table 3: Examples of Quadrant Objectives and Measures

Learning & Growth Internal Business Processes

Financial Customer

Objectives

To value our staff

To maximise productivity

To develop a skilledworkforce

To provide internalinformation

To create organisationalalignment

To cultivate a corecompetence in ...

Objectives

To achieve a higher returnon investment

To see significant revenuefrom our new productlaunch

To maximise profitabilityper transaction

To minimise our cost ofobtaining funds

To delight ourshareholders

To improve our cash flow

Measures

Employee Retention Index

Output per Head

Number of Training HoursCompleted Per Head

Information AvailabilitySurvey Index

Peer Evaluation MeasuresWithin / Between Teams

Skill and TechnologyMeasures Related toDesired Competence

Measures

ROI, ROCE

Revenue Growth onSelected Product Lines

Unit Costs

Credit Rating

Value Added Measures

Creditor Days

Objectives

To continually challengecompetitor products in the

market place

To compete on productreliability

To compete oncompetitive logisticscapabilities

To compete on productdelivery channel mix

To capture a unique supplychain

To reinvent our valuecreation system

Objectives

To dominate our majormarkets

To delight our targetedcustomers

To increase revenuethrough repeat purchases

To grow our business in aselected target group

To add margin throughimage or fashion

To build customerrecognition

Measures

Time to Market for NextGeneration of Products

Production Defect Rates

Stock Replenishment CycleTimes

Volumes of TransactionsConducted Through Eachof Our Delivery Channels

Percentage of SuppliersRevenue Dependent on Us

Benchmarking Index forSupplier of OutsourcedActivities

Measures

Market Share

Customer SatisfactionSurvey Results

Customer Retention OverTime

Customer Acquisition FromTarget Group

Marketing Spend as aPercentage of Sales

Corporate Image or BrandAwareness Polls

Suggested Measures: Kaplan and Norton (1996a)


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The preceding table highlights that whilst a number of themeasures may be useful performance indicators they are oflimited use as drivers of shareholder value. Stakeholder ratioscan also be resolved into two main groups; ratios derivedfrom the organisations accounts and ratios that link theorganisations accounts and stock market values. Thefollowing table gives a brief overview of these measures. Forreaders wanting a more detailed explanation the FinancialTimes guide will again prove very useful.

Operational Measures

Ratio

Profit and Return onSales (ROS)Operating profit/Sales income

Return on CapitalEmployed (ROCE)Capital Employed = FixedAssets + Stock + Debtors Creditors

Explanation

Perhaps the simplest and most widespreadoperational measure in the private sector isprofit or return on sales (ROS). It is calculated byexpressing the operating profit as a percentageof the sales income. Operating or trading profitis simply the monies left once the costs ofproducing and selling the product have beendeducted from the sales income.As all thenumbers come from the profit and loss account

it is relatively easy to calculate and it can beused by managers to give a high level indicationof progress and competitive position.

Return on capital employed is a morecomprehensive measure than return on sales asit links the operating profit to the capitalinvested. The ROCE is calculated by expressingthe operating profit as a percentage of thecapital employed. The term capital employed isnot tightly defined and this has given rise a wide

range of labels and definitions including returnon capital (ROC), return on investment (ROI)and return on net assets (RONA).Althoughdifferent organisations tailor the definition ofcapital employed to reflect their particularenvironment, a simple and robust calculation isprovided by the formula opposite.

ROCE, ROI, RONA provide a link between thebalance sheet and the profit and loss accountand the actions of increasing profit and reducingassets required to increase ROCE should alsoimprove cash flows. However, the use ofROCE/ROI/ RONA ratios have a number of

weaknesses that can mislead and distortdecision making, particularly when linked tomanager reward systems. Emmanuel & Otley(1990) highlight the major difficulties with theseratios and offer a number of alternatives.

Weaknesses

ROS varies from industry toindustry and it can be misleading ifused to compare organisations.

It concentrates solely on the profitand loss account and does nothighlight cash flow or balance sheetissues.

It does not give managers an insightinto the investment required to

generate the sales, interest paid, ortax issues.

Increasing ROS does not necessarilylead to the creation of shareholdervalue.

ROCE can be very misleading ifused to compare organisations ordivisions operating in differentmarket segments or areas wherediffering accounting standards areapplied.

The issues of asset valuation and

the treatment of acquired goodwillare problematic and unless fullyexplored may make validcomparisons very difficult.

It can encourage managers tofavour shorter-term strategies thatreduce capital investment with aresulting negative impact on thefuture of the business.

It is not a useful measure fororganisations with low levels oftangible assets e.g. consultancyfirms, recruitment agencies etc.

There is little correlation between

ROCE and shareholder value.


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A Practitioners Guide to the Balanced Scorecard The Balanced Scorecard Explained 15

Shareholder Ratios

Ratios derived from the Public Accounts

Ratio

Return on Equity (ROE)PAIT/Ordinary share capital +Reserves

Earnings per Share (EPS)Earnings/Shares

Dividend CoverEarnings/Dividend

Explanation

Return on equity is quite similar to ROCE and iscalculated by expressing the annual earnings asa percentage of the shareholders equity. Theannual earnings are defined as the profit afterinterest, tax and all charges other than ordinarydividends. In this context equity is defined as theamount of cumulative share capital and retained

profits that have been invested in the companysince its foundation.

This very popular measure is calculated byexpressing the annual earnings as a percentageof the average shares in issue during the year. Itis a simple calculation and very much a favouritewith stock market analysts and the boards ofpublic companies as it gives a robust indicator ofthe markets view of the company.

This is an important measure for shareholderswho focus on dividends paid as it highlights theproportion of earnings paid out in dividend. It isusually expressed as a multiple.

Weaknesses

It is only a useful measure forshareholders who have been withthe company since its foundation.

Like ROCE there can be problemswith the valuation of fixed assetsand variations in the treatment ofgoodwill.

ROE does not take account of sharevalue in the stock market.

The correlation between ROE andshareholder value is relatively low.

It is not a useful measure forcomparing different companies asdifferent companies are likely tohave issued very different numbersof shares.

It can encourage managers tomanage stock market perceptionsby holding back on the issue of new

shares or by share buyback.

Ratios linked to Stock Market InformationRatios based on stock market information can change every day as prices change to reflect market influences andperceptions.Whilst measures derived from published accounts can be influenced by managers, measures determined bystock market variables are much more difficult to manipulate.

One of the key components of any stock market derived measure is market capitalisation and this can be simply expressedas the product of the total shares issued and the current share price. It is a useful measure as it normally provides the

starting point for calculating the sums required for mounting a take-over bid for a public company.

Price to Book RatioMarket capitalisation/Shareholders equity

Price Earnings RatioCurrent share price/Earnings per share

Dividend YieldDividend per share/Current share price

The ratio is only useful for comparative purposes in thecontext of a specific market sector but as a general rulefrom the shareholder perspective, the higher the multiple,the better.

The price to earnings ratio is usually expressed as amultiple and is probably the most useful comparativemeasure in the stock market. It provides a useful indicatorof future expectations and the higher the multiple themore the market expects of future performance. Priceearnings ratios again provide the best comparisons when

benchmarked against companies in the same marketsector.

The dividend yield is expressed as a percentage. It isimportant to investors who are more interested inimmediate income than capital growth.


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Free Cash FlowAlthough operational measures take account of operationalcash flow, shareholders and analysts are likely to be moreinterested in full cash flow or, as it is sometimes called, freecash flow.The objective of calculating free cash flows is toassess what is available for shareholders before deciding onthe distribution of discretionary profits.According to Henneland Warner (1998) free cash flow analysis is a usefulindicator if a company is generating enough cash to providefuture value for its shareholders.

As one might imagine a negative or low cash flow projectionmay be an indication of trouble ahead. However, capitalexpenditure and the treatment of goodwill can distort themeasure and analysts may attempt to account for anyunusual fluctuations and normalise the capital expenditurefigure.

A number of financial commentators have attributed theemphasis on cash to concerns and debates about the validityof conventional accounting measures and the issuessurrounding the treatment of goodwill in company accounts.As a result of these concerns, analysts and business leadersevolved measures that embrace the more traditional profitindicators, cash flows and shareholder value. Perhaps themost prominent of these measures are economic value added(EVA) and market value added (MVA).

Economic Value Added (EVA)A good basic formula isEVA = Post-tax profit a charge on capital employed

Although economic value added is heralded as a newmeasure, it is in reality a long established measure given anew acronym. In its original format the measure was calledresidual income (RI) and was in fairly widespread use in theUSA in the early years of the 20th century. EVA and RI areclosely linked by their objective of ensuring that the totalcosts of resources consumed in the period, including the costof capital, are included in any profit calculation.

As a result of the focus on the cost of capital the EVAmeasure is very useful for bringing balance sheet issues intothe profit and loss account and consequently raising theirprofile with managers. Unlike some of the more traditionalmeasures which are expressed as multiples or percentages,EVA is expressed in actual monetary values and consequentlycan be a very meaningful management objective.

EVA can also be a very useful measure for evaluating whethernew opportunities, business streams or investments will addvalue to a business. It can also send out a strong signal toanalysts that the company has a strong focus on preservingor growing shareholder value. However, it is worth noting

that despite its many benefits EVA is not a simple measure tounderstand.There can be a wide variation in the factorsincluded in calculating profit and capital employed. Henneland Warner (1998) report that a leading consultancy hasidentified 'a possible 164 adjustments which can be appliedto the profit or capital employed numbers before arriving atEVA.

Market Value Added (MVA)The following formula has been generally accepted:Current MVA = Present value of future EVAs

MVA is similar to both EVA and the price to book ratio. MVAis expressed as a money surplus rather than as a multiple andis a robust measure of value created. It can give a very clearindication of the link between shareholder value andmanagement actions, and is generally accepted as a betterindicator of longer term potential than EVA.

Lehn and Makhija (1996) provide a useful overview of EVAand MVA as well as providing an interesting insight by linkingEVA and MVA to the rate of removal of Chief ExecutiveOfficers. Fera (1997) also provides a good overview of EVAand MVA and how they can be used as a tool for evaluatingstrategic choices.

2.3 The Customer QuadrantIn todays competitive markets, the key emphasis for mostexecutives will be the customer. Many organisations havetaken up the challenge of focusing on customer satisfaction,identifying customer needs and re-engineering their businesscapabilities from the customer interface. Many of theinspiring mission statements formulated by organisations willemphasise a commitment to delighting the customer atevery turn. If these goals are to be achieved in a profitable

business context, organisations need to monitor and managetheir interaction with their chosen customer base. In thepublic sector there is, at least conceptually, the requirementfor a customer focus and this is clearly outlined incontemporary government policies and their emphasis onstakeholder participation. (Many public sector organisationsare uncomfortable with the word customer and prefer tothink in terms of recipients of their services, citizens, orstakeholders).

The objectives recorded within the Customer quadrant of theBalanced Scorecard may be both contemporary and futureorientated. They may relate to both existing and potentialcustomers and markets.Table 3 provides some examples of

customer objectives and measures. Measures of customersatisfaction record the success the organisation has achievedto date in pleasing its existing customer base with itsproducts and services.These measures may be collectedthrough appropriate customer surveys. Measures of customerloyalty and retention can provide management with aninsight into longer-term trends in its association with thesecustomers. Measures of attitudes towards the organisationand levels of recognition within selected segments of thepublic can help identify markets for the future.


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The key to selecting the most appropriate Customer quadrantobjectives and measures is the identification of customervalue propositions that will meet the needs of chosencustomer segments. In his best selling book CompetitiveAdvantage: Creating and Sustaining Superior Performance,management guru Michael Porter states:

An organisations competitive advantage growsfundamentally out of the value a firm is able to create forits buyers that exceed the firms cost of creating it. Value iswhat buyers are willing to pay.(Porter, 1985)

Porter (1980; 1985) describes how buyer value is created and

imparted into goods and services through an organisationsvalue chain and how, in a competitive market, that value ismade representative within the price paid at the time ofpurchase. From the customers perspective, however, it shouldbe remembered that value is experiential. Public sectororganisations also have value chains and leading edgethinking in public organisations, such as the NHS, isencouraging health care providers to consider their service asit might be perceived by the patient travelling along thechain.The case study of English Nature in the Appendices,describes how it set about mapping and clarifying its valuechain.

A customers perception of the value received from thepurchase will vary over the consumption lifespan of theproduct or service in question.The Customer quadrant of theBalanced Scorecard may be used to shed light on thecustomers perception of the value they receive from theattributes of the products or services that they purchase orreceive.

To achieve sustained competitive success however,companies need to be focusing on far more than their currentproducts and customers. Companies should strive tocontinually surprise their customers with products whichmeet needs that they never even knew they had (Hamel andPrahalad, 1996:118). In competing for future success,

organisations need to be continually developing the valuepropositions to be made available to their customers foryears to come.

2.4 The Internal Business Processes QuadrantThe Internal Business Processes perspective is about doing.Objectives and measures in this quadrant of the Scorecardfocus on the operational aspects of an organisations activity.Non-financial measures are commonly used for monitoringoperational processes; for example, in terms of quality,timeliness and output volumes. Such measures, inconjunction with activity based costing systems, provide amechanism for control and improvement of an organisations

processes. It is in this quadrant that public sectororganisations are likely to include measures relating toservice delivery.

For the commercial company enhanced operational processesare a necessary but not sufficient condition for competitivesuccess. In his 1996 Harvard Business Review article, What isStrategy? Michael Porter draws a clear distinction betweenthe need for operational effectiveness and strategicpositioning. He notes that:

The quest for productivity, quality, and speed has spawneda remarkable number of management tools andtechniques: total quality management, benchmarking,time-based competition, outsourcing, partnering, re-engineering, and change management.Although theoperational improvements have often been dramatic, manycompanies have been frustrated by their inability to

translate those gains into sustainable profitability Acompany can outperform rivals only if it can establish adifference that can be preserved.

In the Balanced Scorecard of a commercial business, theInternal Business Processes objectives and measures shouldnot focus solely on enhancing processes per se but shouldalso focus on those capabilities that deliver competitiveadvantage.The objectives and measures should cover suchareas as bringing new products to the market, productionoperations, logistics and delivery channels. Corporations inthe computer industry for example, seek competitiveadvantage through the rapid development of new products

that effectively make current products obsolete. Othermanufacturing organisations may seek to differentiate theirproducts on the basis of longevity and reliability and mayneed to focus on low-defect production quality measures andobjectives. By contrast, Stalk, Evans and Shulman (1992)emphasise the way in which supply chain logistics capabilitiescan become the heart of competitive strategy in the retailindustry. Within the financial services industry, objectives andmeasures relating to delivery channel usage are playing anincreasing role in identifying competitive strategies.

2.5 The Learning and Growth QuadrantThe Learning and Growth quadrant focuses on enabling theorganisation.The objectives within this perspective deal with

the cultivation of an infrastructure for future developmentand organisational learning. These objectives deal with thestrategic investment in people, processes, informationsystems and organisational culture.The identification of thekey strategic measures to be used in this quadrant representsa challenge for management.Although most businesseswould agree with the logic of investing in skills training andefficient information systems, it is not always clear how toidentify the strategic significance of soft issues such as teammotivation, creativity cultures and knowledge management.Table 3 provides some examples of objectives and measureswithin the Learning and Growth quadrant.



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Kaplan and Norton suggest that Learning and Growthmeasures should deal with issues of employee skills,motivation, and organisation alignment and informationsystems capabilities. In their research of US corporations,however, they discovered that the Learning and Growthquadrant was the most under-utilised. In 1996 theyconcluded that,

When it comes to specific measures concerning employeeskills, strategic information availability, and organizationalalignment, companies have devoted virtually no effort formeasuring either the outcomes or the drivers of thesecapabilities (1996a: 144).

With issues such as human capital (Stewart, 1997), employeeempowerment (Simons, 1995), and the strategizingcontribution of the individual (Hamel, 1996) increasingly onthe management agenda, the Learning and Growth quadranthas an important role to play in the control of modernbusiness. In their best selling book, Competing for the Future,business professors Gary Hamel and C.K. Prahalad (1996) putanother slant on this notion of an enabling infrastructure.They suggest that the key to competitive success over time isto cultivate hard to replicate core competencies that can beleveraged to make a disproportionate contribution tocustomer-perceived value. Core competencies are defined interms of bundles of skills and technologies that are resident

across an entire organisation (Prahalad and Hamel, 1990).Acore competence represents the sum of learning acrossindividual skill sets and individual organisational units(Hamel and Prahalad, 1996:223).

The Learning and Growth perspective may therefore beapplied to monitor the acquisition, cultivation andexploitation of core competencies (Aisthorpe et al, 1998).With an enabling infrastructure in place, the organisation willneed to apply this potential into developing the key internalprocesses at which it must excel in order to meet itscustomer objectives or service delivery agreements.

2.6 Outcome Measures and Performance Drivers

In the Balanced Scorecard there are generally two types ofmeasures.The first are sometimes referred to as outcomemeasures because they describe the results of past actions,such as the utilisation of resources or activities performed.This type of measure is normally found in the higherquadrants of a traditional Scorecard Financial andCustomer.The second are referred to as performance driversbecause they represent hypotheses about actions that willdetermine or influence future outcomes. For example, if weimprove staff training we will retain customers and earnhigher margins.Well-designed Scorecards will attempt tocombine outcome measures and performance drivers withinand between quadrants.

2.7 Linking the Quadrants: Cause and Effect RelationshipsKaplan and Nortons (1996a) research highlights the causeand effect linkages between the measures in the variousquadrants.When designing Scorecards, attention needs to begiven to the understanding of cause and effect linkages.Figure 4, overleaf, shows some hypothetical linkages that mayexist between performance measures in the variousquadrants. For example, it may be hypothesised that anincrease in production quality may flow through into a rise incustomer satisfaction measures.

Some relationships between measures may be verifiedthrough experience and analysis. The perception of thevalidity of the linkages will often be strongly influenced bythe time allowed for the desired effect to materialise. Forexample, solving a shortage of staff in an NHS hospital byimplementing training may take several years; whilst reducingproduct development time could quite quickly influencecustomers perceptions of a commercial organisation.Although cause and effect terminology can make linkagesseem deliberate and positive, this may not in fact be the case.It is unlikely that managers will be able to anticipate all theeffects of their actions and there may well be someunexpected and negative side effects. Organisations will needto remain watchful and ready to respond.


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Each quadrant of the Scorecard reflects a key focus and themeasures in each quadrant should be selected such that

there are no perverse measures; i.e. measures do not conflictwith each other. However, it should not be assumed that allof the measures must necessarily be related to each other.AsOlve et al (1999) comment,

If we could relate all measures to each other, then wecould put a monetary value on computer literacy orcustomer service for example.

Kaplan and Norton (1996a) emphasise the Financial quadrantas the focus of all the objectives in the three other quadrantsand, for many organisations, the Financial quadrant may alsodetermine the pace at which strategic change can take place.For example, if an organisation needs to generate cash flow,

this will set the priority for action. Similarly, if a publicorganisation is in danger of overspending its budget, it mayhave to compromise certain objectives and prioritise itsactions.

Key Points:

The Balanced Scorecard encourages managers toconsider a portfolio of both financial and non financialmeasures.

Balanced Scorecard measures are linked to theorganisations strategic objectives.

The generic Balanced Scorecard contains fourquadrants: Financial; Customer; Internal BusinessProcesses; Learning and Growth.

Contemporary Scorecard designs increasingly reflectthe importance of the customers (or citizens)perspective.

Balanced Scorecard measures should reinforce eachother.


Figure 4: Hypothesising Linkages between Scorecard Measures

Learning & Growth Internal Business Processes

Financial Customer

Skills Training

Investment

Revenue

Productivity Quality

CustomerSatisfaction

CustomerRetention

ProductDevelopment Time

Costs


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Whilst there may be many reasons for an organisationadopting a Balanced Scorecard, seeking to effect changewhich results in performance improvement is likely to be highon the list.As we have seen, the motive for Scorecardimplementation is inexorably linked to organisationalstrategy. To make effective changes, an organisation needs toseek clarity in a number of interrelated areas if the resultingScorecard is to provide a cohesive route to its chosenobjectives.

3.1 Vision and ValuesThe organisation needs to have a clear and concise view of itspurpose or mission; the reason why it exists, and the corevalues that will guide its actions. It needs a clear vision of

how it wishes to evolve and a strategy of how to get there.Kakabadse (2001) describes a process he calls visioning bywhich the key actors in an organisation reach a consensusabout the future of the organisation. Whether an organisationis in the private or public sector, it is unlikely that it will havethe ability to formulate a vision without taking account of awide range of stakeholders. Senge (1990) also makes aninvaluable contribution to the understanding of the processof building a shared vision and the role of mental models inhis seminal work, The Fifth Discipline- The Art & Practice ofThe Learning Organisation.

3.2 Stakeholder Analysis

A stakeholder is defined, in the broadest sense, as anyonewho has a legitimate interest in the performance of anorganisation. Some will have more power than others and theprudent organisation will identify all of its stakeholders, rankthem in a hierarchy and develop a process to understandtheir needs and aspirations. For the private sectororganisation, the primary stakeholders are likely to be itsshareholders and its key customer groups. Researchconducted for this report shows that, for most organisations,strategy formulation remains an essentially internal process.This presents a challenge to organisations, particularly to thepublic sector where the Government is keen to establishmuch more stakeholder participation.The case study ofMersey Travel in Appendix 3 describes how one organisation

has tried to reflect the views of a wide range of stakeholdersin its planning and measurement processes.

3.3 Strategy FormulationOnce the organisation has clarified its vision, the core valuesof the organisation will define the manner in which theorganisation will move towards that vision of the future.Adetailed plan of how to get there is then laid out in theorganisations strategy formulation.As part of thisundertaking, the organisation may also need to clarify itsethical position, and unless its values reflect a culture of trust,empowerment and team working, it is unlikely that all thebenefits of the Balanced Scorecard process will be achieved.

Whilst it is beyond the scope of this guide to detail theextensive literature relating to organisational strategy, thereare a number of fundamental issues that need to beconsidered before starting to build a Scorecard.The first ofthese is the ongoing debate as to the relationship betweenthe formulation of strategy and its implementation.Thisdistinction between the determination of goals and theadoption of courses of action necessary for carrying outthese goals, was acknowledged as early as Chandlers (1962)popularisation of the concept of business strategy.

3.4 The Theory of Strategic ChoiceThis separation of strategy roles is often played out inaccordance with the Theory of Strategic Choice, which states

that organisations change in accordance with the vision, ideasand objectives of its strongest members (Stacey, 2000).Thephenomena is often caricatured as the members of the seniormanagement team locked in a darkened room until theydevelop the strategy that will subsequently be implementedby the rest of the organisation.

The management literature of the 1990s highlights this issueand advocates that strategy formulation should not beconfined to the top of the organisational pyramid. Rather,strategy should enjoy a much wider constituency ofparticipants in order to maximise the creative andinformational input (see Simons, 1995; Hamel, 1996; Stacey,

2000; Stewart, 1997).The modern literature further claimsthat as todays corporations have to operate in increasinglydynamic and turbulent environments, strategy needs to beboth forward looking and change orientated (Hamel &Prahlahad 1996).

Industry case studies conducted for this report confirm theprevalence of the orthodox approach in UK organisations. Inthe cases examined, the organisations maintained adistinction between formulation and implementation, withthe senior teams developing the strategy and then grapplingwith the issues of communicating and aligning the rest of theorganisation to the strategy. There were some notableexceptions, with the case studies revealing that a few of the

organisations had gone to considerable lengths to involve abroad cross section of staff in the strategy formulationprocess. For example,

We set up a series of working groups effectively in all ofthe management areas in the business.Their challenge wasto look at performance measures that were already usedand decide whether those were adequate or whether theyrequired change.The guide that was given was to say, thinkabout what you actually talk about in terms ofperformance when you have your management meetings(Major Power Company).

3. Balanced Scorecard Foundations


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3.5 Strategic ArchitectureHaving noted that the strategy upon which the BalancedScorecard process is based needs to be dynamic and futureorientated, it is worth briefly considering a modern strategyformulation approach that encapsulates these principles.Hamel and Prahalad (1989; 1993; 1996) postulate a strategicmanagement framework in which organisations pursue futurecompetitive success through the re-invention of theirmarkets and the deployment of core competencies (Prahaladand Hamel, 1990).They call the formulation process throughwhich an organisation translates its current corecompetencies into future competitive success, StrategicArchitecture (Hamel and Prahalad, 1996:117). Strategicarchitecture represents the information road map of theorganisations progress towards its anticipated competitiveambitions. Indeed, Hamel and Prahalad emphasise that,

Strategic architecture is a broad opportunity approachplan.The question addressed by a strategic architecture isnot what we must do to maximise our revenues or share inan existing product market, but what we must do today, interms of competence acquisition, to prepare ourselves tocapture a significant share of the future revenues in anemerging opportunity arena (1996:121).

The road map to future success not only emphasises theorganisations destination but also informs about the route

necessary to achieve it.

Whilst the appeal of capturing forward competitive success iscompelling, Hamel and Prahalads method for formulatingstrategy content presents certain difficulties. First, conceptswhich work well at a corporate level and generically betweenindustries, may be difficult to translate into actual resourceallocations in specific organisations (Hamel and Prahalad,1996:223). Managers must be able to encapsulate and takehold of information about core competencies and futurecompetitive ambitions in a tangible way if they are to bemanaged. Second, a method is required to communicatestrategic architecture throughout the organisation in orderfor it to form the basis of a shared dialogue about strategy

and to generate strategic alignment.

One useful methodology which aids the solidity of graspingstrategic architecture construction and also creates a robustcommunication platform for strategy, is the use of StrategyObjects (Littler et al, 2000).The methodology breaks downboth strategy formulation and implementation monitoringinto common building blocks.The gaps between strategyformulation and implementation may be overcome byconstructing the organisations strategy for future successand its performance measurement system from thesecommon elements.

3.6 Steps to Strategic SuccessThere are many different approaches to the formulation ofstrategy, but many strategists would agree key steps alongthe path to success include:

Translating strategic vision into goals, objectives andmeasures;

Identifying and adopting the courses of action, resourceallocations and necessary routes to achieving theseobjectives;

Communicating this vision to all relevant stakeholders andbuilding consensus; and

Monitoring and managing the implementation of theseactivities.


Key Points:

The organisation needs to have a conciseunderstanding of its purpose and core values.

Prudent organisations conduct stakeholder analysisand understand stakeholders needs and aspirations.

Strategy formulation should not be confined to thetop of the organisational pyramid.

The Balanced Scorecard can provide a commonlanguage and architecture for formulating strategy.


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Having been through the difficult process of formulating astrategy, the organisation needs to ensure that it has asystematic method for translating its newly developedstrategy into operational objectives and measures.This is acritical transition and one that many organisations fail tomake. In their book The Strategy Focused Organization,Kaplan and Norton (2001) provide evidence that the abilityto execute strategy is more important than the quality of thestrategy itself.They cite the frightening statistic,

that only ten percent of effectively formulated strategiesare successfully implemented.

4.1 Executive Commitment

If this common experience is to be remedied, there are anumber of key issues that will have to be addressed; butperhaps the most fundamental to successful strategyimplementation is the total and visible buy in of allmembers of the senior management team.The IIBFS researchdemonstrated that a number of change projects have runinto difficulties because of a lack of commitment from seniormanagement. An executive from a major power companymade the following comments:

We had one sort of false start in introducing it [theBalanced Scorecard].The executive at that time was stillvery much preoccupied with managing the old world,

which was a predominant thing, so they werent really veryenthusiastic about it.

A similar problem was seen in water utility:

It was a very drawn out process really and one of the keykillers was that there was no support at the top table itwas just another initiative like EFQM we didnt havesignificant buy-in. I think the buy-in was one of the criticalitems in the process.

Some organisations gave a distinct impression that theBalanced Scorecard was only for middle management andbelow. The main board would concern themselves with themeasures important to the City. Quite how theseorganisations were seeking to achieve their strategicobjectives was not apparent but there must have been

significant difficulties in convincing employees to buy in to aprocess that their leaders overtly disregarded.

4.2 Getting StartedThe organisation needs to have the commitment of thesenior executives and key opinion formers before it can startto develop its Balanced Scorecard. Once this is achieved thereare a number of important stages to implementation.Thesesuggested stages, along with some potential anticipated timerequirements, are illustrated in the chart below.

The chart below can only be indicative of the timerequirements.The actual requirement will be dictated by the

main constraint, which is typically seen to be the availability ofsenior executives.This in turn will be dictated in some measureby the weight of emphasis the organisations leaders give to theScorecard process.

4. Balanced Scorecard Implementation

Figure 5: Key Phases in Scorecard Development

Action Duration Month 1 Month 2 Month 3 Month 4 Month 5Days

1 Appoint champion 1

2 Select implementation team 1

3 Decide organisation units 1

4 Overall scorecard design 75 Interview & brief key players 21

6 Refine strategy objectives 3

7 Synthesise results of action 1

8 Senior management workshop 1

9 Agree SMART measures 5

10 Sub group meetings 20

11 Strategy mapping 7

12 Draft scorecards 5

13 Second workshop 1

14 Agree all measures 7

15 Devise appropriate reward system 3

16 Design implementation plan 5

17 Start implementation or pilot 1


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4.3 A Scorecard ChampionResearch indicates the importance of appointing a championor sponsor for the Scorecard process to act in the role ofarchitect, and to lead the organisation through theimplementation phase.Whilst it is not necessary for thearchitect to be a member of the top team, research hasshown that this is a pivotal role requiring a strong andinfluential leader who can influence all levels in theorganisation.

4.4 Choosing the Implementation TeamOnce the champion has been selected, they will typicallydraw together a team to assist with the design andimplementation stages of the Scorecard process. In manycases, a Scorecard system will involve people from differentdepartments or functions within an organisation. It isimportant that all the diverse interests involved feel somesense of ownership for the project.A major pharmaceuticalcompany took this approach:

We set it up as a multi-functional team with a sponsorwho actually is the Supply Chain and ManufacturingDirectorright from the word go we wanted to make surethat the manufacturing and commercial people both had astake in what we were doing .

As well as a careful blending of functional skills, such as IT

and human resources, it is worthwhile considering thepersonalities of the team members. Personality profiling(such as the Belbin process) will assist the architect inconstructing a well balanced team.

4.5 The Overall Scorecard StructureThe next phase of the Scorecard process is for the overallstructure of the Scorecard template to emerge from theteams deliberations. Research indicates that developmentteams do not need to be constrained by the template of theScorecard as originally postulated.Whilst the Kaplan andNorton Scorecard process evolved around their fourquadrants, many of the UK organisations used a differentnumber of perspectives. This is highlighted in the survey

results shown in Figure 6, opposite.

4.6 QuadrantsThe most common deviation from the generic model is the

number of Scorecard perspectives (for example, quadrants)and their focus. Many public sector organisations remain, forexample, uncomfortable with the enduring prominence givento financial performance measures and commentators havesuggested alternative designs that such organisations mightbe more comfortable with (Olve et al, 2000).


Figure 6: Conformance with the Generic Scorecard Design

How closely does the design of your performancemanagement system conform to the Balanced Scorecardas defined by Kaplan and Norton?

%oforgan

isationssurveyed

12

10

8

6

4

2

00 1 2 3 4 5 6 7

Different Same


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A Practitioners Guide to the Balanced Scorecard Balanced Scorecard Implementation24

In this alternative model:

The financial sector is replaced by a performance focusrecording the achievements of the public sectororganisation;

The customer focus is replaced by a relationship focusrecording the organisations interfaces with the citizens itserves;

The activity focus records the internal activities of theorganisation; and

The future focus is similar to the learning and growth

perspective and directs the public sector organisationsthoughts to the future. This will encompass demographicissues such as the future requirement for schools androads. It will also consider the skills required for the future.For example, local government may have to consider thetraining and skill implications of E government.

The choice of perspective could be directed and clarified bythe organisational strategy, but the architect will need toensure that the quadrants or equivalent are agreed beforemoving on in the process. Customisation, in general, allows acompany to adapt the basic framework whilst adhering toconceptual ideas. In fact Kaplan and Norton (1996a) state:

The Balanced Scorecard must reflect the structure of theorganisation for which the strategy has been formulated.

In attempting to reflect the structure of the organisation, thearchitect and the design team must evaluate if it is desirableand feasible to cascade the Scorecard structure down throughthe organisation, or across business functions.They also needto decide to what extent it is possible to tailor the Scorecardto the different levels of an organisation and for differentdivisions or departments without losing sight of the overallstrategic priorities and objectives.

4.7 Cascading the ScorecardThere are clear theoretical advantages to cascading the

Scorecard down through an organisation. It can encouragecommitment to, and alignment with, the organisationsstrategic objectives. It is important that the Scorecardtemplates in use are relevant to the actual activities of thepeople at the level to which it is addressed. If the Scorecardtemplate is seen as too abstract or far removed from theactual work situation, it is likely to fall into disuse. On theother hand, it is important that the Scorecard templates arenot set up in a purely expedient way, simply to provide somestructure to the day to day activities of particular groups ofemployees. Throughout an organisation, scorecard templatesshould be designed with the overarching aim of being trulyaligned with the strategic objectives.

Figure 7: Alternative Scorecard Perspectives

Relationship Focus

Performance Focus

Future Focus

Ac

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