17 Feb Balanced Scorecard
Steps to building a balanced scorecard:
1. Plan the balanced scorecard process
2. Assess, mission vision and values
3. Develop strategy and objectives
4. Prepare a strategy map
5. Develop measures and targets to reach
6. Identify new initiatives
7. Evaluate results
Plan on revisions to your balanced scorecard on a continuous basis that incorporates feedback.
Caveats When Implementing a Balanced Scorecard
- Ask whether benefits will exceed costs (but remember that implementation of an initial BSC need not be costly)
- Be aware of dangers of attempting to maximize multiple dimensions without specifying tradeoffs
- Don’t concentrate exclusively on non-financial dimensions
- Avoid implementation shortcomings
“Periodic financial statemend remind executes that improved quality, response time, productivity, or new products benefit the company only when they are translated into improved sales and market share, reduced operating expenses, or higher asset turnover. Ide3ally, companies should specify how improvements in quality, cycle time, quoted lead times, deliver, and new product ingtroduction will lead to higher market share, operating margins, and asset turnover or to reduced operating expenses.” –Kaplan and Norton, 1992 “The Balanced Scorecard: Measure that Drive Performance
Common Mistakes in Implementing a Balanced Scorecard Approach
“Most companies have made little attempt to identify areas of non-financial performance that might advance their chosen strategy.” –Ittner and Larcker
MISTAKE 1: Not linking measures to strategy
- Not developing causal links
- Using BSC as an off-the-shelf checklist
- Feeling compelled to have multiple measures in all four areas without regard to relevance to strategy. Companies often implement too many measures using equal weights which may not be correct for all companies.
MISTAKE 2: Not validating links
- Only 21% of companies had traced improvement in nonfinancial measures to actual financial results
- Companies didn’t test basic hypotheses about links such as: reduction in employee turnover leads to higher productivity etc.
MISTAKE 3: Not setting the right targets
- Example: goal of 100% satisfaction for 100% of customers
- Cost to establish 100% satisfaction may not be justified by increase in customer profitability
MISTAKE 4: Measuring incorrectly
- Measures that lack validity (not measuring the right concept)
- Measures that lack reliability (include too much random error)
- Collecting data before you know the questions to be answered
- Inconsistent measures implemented by different units with the company
Implementation Lessons from Experienced Users
- Recognize that different strategies have different times-to-payoff. Typically process improvements and efficiencies payoff quickly. Enhanced customer relationships payoff in an intermediate amount of time. Innovation and learning investments payoff long-term.
- After the balanced scorecard is built, follow through with deploying, managing and supporting the system
- View the balanced scorecard development process as an on-going revision process, not a one-time project
Because the balanced scorecard can be subject and could be treated as more of a process than an event, it is suggested that all of these measures be brought together and studied over a period of time and implemented on an “as needed” basis. Overtime, make sure that each measure is adjusted to fit the needs of the particular company you may be working with.
*This information was taken from a lecture taught by Dr. David Burkstaller, Foster School of Business Seattle, WA.