What is a balanced scorecard?
The Balanced Scorecard (BSC) was first developed and used in Analogue Devices in the late 1980s. Following a Harvard research project the approach was popularised by Robert Kaplan and David Norton in 1992, as a multidimensional performance measurement framework. The underpinning factor was that organisations should not just measure their financial performance but have a set of balanced measures across different areas of the business. With the initial balanced scorecard its authors proposed that companies create strategic measures in four interlinked perspectives: financial perspective, customer perspective, internal process perspective, and learning & growth perspective.
The latest evolution of the BSC emphasises the use of Strategy Maps. Strategy Maps help visualise the cause-and-effect relationships between strategic objectives in the four different perspectives. The premise of Strategy Mapping is that financial performance is achieved by delivering a unique customer value proposition. In order to deliver the customer proposition the organisation needs to identify the critical internal processes it needs to excel at. Strategy Maps also help identify the intangible assets underlying the processes and customer proposition. Kaplan and Norton divide their intangible assets into human capital (e.g. skills and competencies of people), information capital (e.g. databases and KM systems), and organisational capital (e.g. corporate culture).
The goal of today’s balanced scorecard is to improve an integrated understanding of performance across disciplinary silos and to use performance measures to monitor strategic progress and to challenge the strategic direction.
What are the effects of Performance Measurement and Management Systems?
A number of survey studies indicate that organisations with integrated and balanced performance management systems (PMS) perform better than others. A US survey’s results shows that PMS, used as a management control tool, increases both organisational sales and profits, and reduces overhead costs by 25%; while another found that PMS improves the return on assets and stock market performance. Other researchers found less tangible benefits, such as customer or employee satisfaction. Indeed, some also show that PMS increases employee communication and collaboration while facilitating buy-in of the implementation of strategic objectives.
Despite the great promises from these survey studies, some organisations do not see the positive effects in their financial accounts. In fact, some suggest that it is very difficult to isolate the financial effect of PMS from other management systems. A couple of senior managers from fast-moving organisations reported that their general perception is that PMS might have a negative effect on their financial performance, because PMS consumes significant resources and time. On the other hand, some managers suggested that performance management systems create a greater business impact by driving people’s behaviours, and creating new practices and routines, than just by trying to increase their business’s profits alone.
These studies suggest that the effects of performance management systems need to be better understood in order to maximise their benefits and manage the negative effects. In general, organisations should pay more attention to the ‘internal effects’ [intermediate effects] of performance management because they directly affect the way organisations operate. These internal effects are the engines that drive an organisation’s results (e.g. profitability, reputation, productivity, etc.).
A research project carried out by the Centre for Business Performance at Cranfield University shows a mix of positive as well as negative effects from performance management systems (PMS). Among the top positive effects from PMS are:
- Focus people’s attention on what is important to the company
- Propel business improvement
- Improve customer satisfaction
- Increase productivity
- Align operational performance with strategic objectives
- Improve people satisfaction
- Align people behaviours towards continuous improvement
- Improve company reputation
The top negatives effects from PMS reported from this research are:
- Time consuming
- Demands considerable financial investment
- Bureaucratic – too many measures make PMS bureaucratic
- Over-complicated measures – difficult to understand and manage.
- Misleading prioritization – ‘red’ measures can divert attention from most critical measures
- Mechanistic – can discourage entrepreneurial intuition.
- Monotonous. Managers have to continuously refresh the way in which performance is reviewed.
This research concluded that organisations need to identify and understand both effects to transform the negative effects and optimise the positive effects
- Lingle, J. H. and Schiemann, W. A. (1996), “From the balanced scorecard to strategic gauges: Is measurement worth it?”, Management Review, 85(3), pp. 56-61. Gates, S. (1999), “Aligning strategic performance measures and results” New York, US.
- Lawson, R., Stratton, W. and Hatch, T. (2003), “The benefits of a scorecard system”. CMA Management June/July, pp. 24-26
- de Waal, A. A. (2003), “Behavioural factors important for the successful implementation and use of performance management systems” Management Decisions 41(8), pp. 688-697
- Martinez V., Kennerley M., Harpley R., Wakelen R., Hart K., and Webb J. (2006), “The study of the effects of performance measurement and management systems in the way the company operates”; EDF Energy Company Report.; Research Supported by the EPSRC
Why do companies use performance measures?
The literature reports that organisations measure performance to:
- Monitor productivity
- Communicate strategy to employees
- Reduce cost and waste
- Review business strategy
- Support the compensation and reward system
- Control operations
- Communicate strategy to external stakeholders – external reporting
- Encourage improvement and learning
- Influence, evaluate and reward behaviour
- Have an internal and external feedback
- Measure business results
- Manage the budgeting process
- Manage operations processes
- Monitors managers’ productivity
- Manage strategy implementation
- Inform managerial decision-making processes
- Plan strategic actions of the business
- Comply with legal requirements
- Comply with non-negotiable parameters
- Reinforce accountability
Recent research carried out by the Centre for Business Performance at Cranfield School of Management shows that organisations generally implement performance management systems to:
- Establish position
- Communicate direction
- Influence behaviour
- Stimulate action
- Facilitate learning
- Implement strategy
Few organisations suggested that they had implemented performance management systems because it became a legal requirement to report non-financial data. While others said that their PMS was a requirement to gain customers’ contracts – particularly in fast-moving environments, such as the telecommunications and automotive industries, where managing suppliers’ performance is critical to the business.
- Franco-Santos, M., Kennerley, M., Micheli, P., Martinez, V., Mason, S., Marr, B., Gray, D. and Neely, A. (2007), “Towards a definition of a business performance measurement system”, International Journal of Operations and Production Management, Vol. 27 No. 8, pp. 784 – 801.
- Bourne, M. C. S. & Bourne, P. A., (2007) Balanced Scorecard – Instant Manager, Hodder, London.
What is a Strategy Map?
The idea of mental models to help senior management teams develop and represent their strategy was first muted by Eccles & Pyburn in 1992. The idea was to create a visual representation of the organisations strategy that the senior team could debate and share. This approach has subsequently evolved.
Strategy maps were introduced by Kaplan and Norton (2000). It is a diagram that describes how an organisation creates value which is based on the four traditional Balanced Scorecard perspectives: financial, customer, internal processes, and learning & growth. However, instead of presenting the strategic objectives in separate boxes, they will be put in an explicit cause-and-effect relationship which each other. Kaplan and Norton (2000) describe the strategy map as a map providing “a visual representation of a company's critical objectives and the crucial relationships among them that drive organizational performance…. Strategy maps can depict objectives for revenue growth; targeted customer markets in which profitable growth will occur; value propositions that will lead to customers doing more business and at higher margins, the key role of innovation and excellence in products, services, and processes; and the investments required in people and systems to generate and sustain the projected growth” (p. 168). From a larger perspective, strategy maps show how an organization will convert its initiatives and resources, including intangible assets, into desired outcomes.
Kaplan and Norton propose a generic template for the development of a strategy map and argue that “The template provides a common framework and language that can be used to describe any strategy”. (170) It contains four distinct regions - financial, customer, internal process, and learning and growth -that correspond to the four perspectives of the balanced scorecard. In particular “from bottom to top, the template shows how employees need certain knowledge, skills, and systems (learning and growth perspective) to innovate and build the right strategic capabilities and efficiencies (internal process perspective) so that they can deliver specific value to the market (customer perspective), which will lead to higher shareholder value (financial perspective)” (p.169).
- Kaplan R.S., Norton, D.P., (2000), “Having Trouble with Your Strategy? Then Map It”, Harvard Business Review, September-October, pp. 167-176.
- Eccles, R. G. & Pyburn, P. J., (1992), "Creating a Comprehensive System to Measure Performance", Management Accounting [US], Oct., 41 - 44.
What is Six Sigma?
Six Sigma is a corporate quality program, one that emphasizes identifying and avoiding variation. It was Motorola that conceptualised Six Sigma as a quality goal in the mid 1980s when it recognised that modern technology was so complex that old ideas about acceptable quality levels were no longer applicable. However, the term, and the company's innovative Six Sigma programme, only came to real prominence in 1989 when Motorola announced it would achieve a defect rate of not-more-than 3.4 parts per million within five years. This claim effectively changed the focus of quality management, from one where quality levels were measured in percentages (parts per hundred) to a discussion of parts per million or even parts per billion. It was not long before many of the large organisations (Xerox, Boeing, General Electric (GE), Kodak) were following Motorola's lead.
Essentially, "Six Sigma" is a term that represents a stretch goal for process quality. Sigma is a letter in the Greek alphabet used by statisticians to denote the standard deviation, a statistical measure of variation in a process, and thus 'sigma quality levels' can be used to describe the output of a process in terms of the deviation of the process from its quality norm. A Six Sigma quality level is said to equate to 3.4 defects per million opportunities (or 99.99966 percent accuracy). A defect can be anything from a faulty part to an incorrect customer bill. In other words, when a process reaches Six Sigma quality, the process output variability is so low compared to the requirements that the process is essentially producing perfect output quality or “zero defects.”
Six Sigma teams use extremely rigorous data collection and statistical analysis to ferret out sources of errors and to find ways to eliminate them. The basic approach is to identify and evaluate a defect, analyse the causes, make improvements, and then control those improvements.
What are 'Process Behaviour Charts'?
Business processes operate in a world of random change. In this world few processes produce consistent performance, actual performance is difficult to assess, and future performance is almost impossible to predict. It is difficult to argue against such a premise when we consider examples of real world processes. Process Behaviour Charts are essentially a graphical tool for assessing the range of performance we can expect a process to deliver over time. These charts can help us to answer a variety of questions about a particular process:
- Are our processes capable of delivering the performance we need?
- What range of performance does the process produce?
- Does the data suggest that anything is affecting the process?
By combining the insight created by Process Behaviour Charts with our knowledge of the context in which the process operates we can answer the all important question of what is the process likely to do in the future? But how can a process be predictable when it displays the high levels of random variation that we so often see in the real world? Control charts solve this problem by identifying the upper and lower bounds of process performance. Using a simple set of analytical rules, interpretation of the chart relative to these ‘control limits’ provides information on whether the process is stable or not. For a process that is stable, the limits show the range of random performance variation that we can expect the process to produce, given that nothing unexpected affects the process. This random variation is created by chance, or common, causes – the myriad factors that are always present within processes.
The Process Behaviour Chart below shows an example of process performance data – the percentage of patients who are seen in an A&E department – for which the Government target is 98%. The chart shows that performance has improved in two stages. During period 1 the level of common cause variation was unacceptably large, and the mean performance was 93.1%. Following improvements to the process, the impact of common cause has been reduced during period 2, giving a mean performance of 98.2%. The lower control limit is still only 96% though, so this process still broke the 98% target on occasion. The second process improvement created the stable performance shown in period 3, with a mean of 99.6%, and a lower control limit of 98.1% - just above the target. This process will, unless something untoward happens, produce an acceptable level of performance in the future, as shown by the dotted lines to the right of the chart. As new data points are collected, they can be assessed against these predicted limits. If they represent normal operation, they will fall within the control limits. If they fall outside the limits they may indicate the presence of a special cause. These causes are not part of the usual group of random causes that affect a process. Special causes are usually identifiable, and unlike common causes it is usually economically worth our while to find and eliminate these causes. The chart shows that there was a special cause present on the 4th January – the performance of the department dropped to just 75.7%. This may have been caused by the demands on the department being unusually high that day, staff shortages, or a particularly difficult mix of cases. The chart itself does not provide the answer, but it does raise the question – the task of management is to find out why this special cause occurred, and prevent it from happening again.
The rules for interpreting Process Behaviour Charts are qualitative, and not statistical in nature. They are intuitive, visual, easily learnt and applied, and lend themselves to group discussion and debate, meaning that they can facilitate organisational learning and communication of insights. In summary, Process Behaviour Charts allow us to analyse current process performance and to predict future performance using time-series data collected from the process. Although based on sound statistical theory, they are simple to use and do not require more than a basic mathematical knowledge. They are appropriate for the analysis of many business processes at all levels and within all functions of an organisation, from Operations to Finance.
Why can targets be divisive?
Targets are the 'roadmap' used by organisations as guides towards continuous improvement. However, targets, and the organisational culture that normally accompanies them, can lead to conflict between stakeholders. If targets are applied without connection to strategic goals and without knowledge of capability, a number of factors make them destructive. From a psychological perspective, employees may find working within an incapable system under unrealistic targets a far from motivating experience. In such circumstances people begin to display a variety of coping behaviours, ranging from ‘gaming the numbers’ to withdrawal. The damage to culture and performance can be extensive, leading to divisions between functions, between management and workforce, and between individuals.
There is also a systemic problem with the use of targets. Not only do they foster a deterministic approach to performance management - a "go - no go" attitude that further alienates employees; but they can also disrupt performance through inappropriate local optimisation. The use of targets simplifies the operation of an organisation to a manageable level, but this approach is unlikely to create the required capability in the management control system - organisations are often far too complex to be controlled by target setting alone.
Even in cases where a target performance is attainable, targets can be divisive. Comfortable attainment of a target may be as detrimental to employee performance as a target that is too stretching. The resulting gaming behaviours displayed will again lead to reduced organisational effectiveness and functional conflict. In this scenario targets prevent teamwork, and work against a shared strategic vision.
Moreover, it is important to define and consider two types of targets: absolute and relative. Targets are said to be absolute when they do not incorporate contextual differences between functions or individuals. Relative targets take into account such differences and, when applied fairly and transparently, can minimize some of the perverse effects of targets. In most circumstances absolute targets will be found to be more divisive than relative ones.
In summary, the appropriate use of targets can make organizations improve their performance – (when the terrain becomes familiar we can operate more effectively by discarding the map, and using our knowledge to guide us). However, if we cling too long to the limited security that the map provides, it soon becomes more of a hindrance than a help!
What are intangibles?
Intangibles refer to non physical resources and capabilities that can provide organisations with a competitive advantage or future performance benefits. A widely accepted classification splits intangibles into the following broad categories:
- Human resources
- Structural (or organisational) resources
- Relational resources
Human resources refer to the skills and competences of people within the organisation. Structural resources include organisational processes and routines, systems and database content, as well as intellectual property such as patents, trade secrets, and copy rights. Relational resources include relationships with customers and other stakeholders, networks, and alliances.
What is the EFQM?
The EFQM is a not for profit foundation created in 1989 by the leaders of 14 large European businesses to help improve the quality of effectiveness of European Industry. The foundation was created to counter the international competitive threat especially from the USA and Japan
The EFQM has an ‘excellence’ model that is used to inform self-assessment and benchmarking. A prestigious annual award is given to organizations that demonstrate their compliance with this model.
The EFQM Excellence Model is a non-prescriptive framework based on 9 criteria, sub-divided into ‘enablers’ and ‘results’.
The enablers encompass: -
- policy and strategy
- partnership and resources and
The results encompass: -
- people results
- customer results
- society results and
- key performance results
The model is formulated so that the enablers are the drivers of the results and the results provide feedback to the enablers.
Further details can be found at www.efqm.org
Is the EFQM compatible with Balanced Scorecard?
There are debates over how the EFQM model complements or conflicts with the Balanced Scorecard. Some companies, such as BT have operationalised both at the same time. In presentations, they have suggested that the Balanced Scorecard matches the "results" end of the EFQM framework.
However, the EFQM model is very definitely a multiple stakeholder framework, where as the Balanced Scorecard is customer and financial owner focused, so the overlaps may not be as strong as some suggest. In this respect it is closer to The Performance Prism.
What is a Value Proposition?
A value proposition is an implicit promise a company makes to customers to deliver a particular combination of values. Each proposition searches for the unique value that can be delivered to a chosen market. Thus, value propositions help organisations to focus on a selected market and narrow their operational focus (Treacy and Wiersema, 1996; Martinez and Bititci, 2000, 2001).
The term “value proposition” is relatively new and places emphasis on companies to change from the traditional functional view of activities to an externally oriented view in the form of value delivery (Bower and Garda, 1985; Martinez, 2003). It looks at a business from a customer perspective, rather than internally oriented activities and can be achieved as a consequence of a reciprocal relationship between organisations and stakeholders in a network (constellation) (Norman and Ramirez, 1999).
For more detail information about this research issue see
What is the difference between a Success Map and a Strategy Map?
Success Maps is a term developed by Neely & Adams in 1999 in association with their Performance Prism framework. Their white paper on “Measuring Business Combinations & Alliances” (for Accenture) of April 2000 was one of the first to reference the term. Prior to this they had referred to such conceptualisations, which tended to be horizontal rather than vertical representations, as Measures Trees. Their book “The Performance Prism” (Financial Times Prentice Hall, 2002)* also introduced the notion of Failure Maps, now more commonly referred to as Risk Maps.
Success Maps provide a conceptualisation of how the wants and needs of one or more stakeholders are satisfied by an organisation’s strategies, processes and capabilities. This linking diagrammatic approach provides a more pictorial, and therefore more easily understandable, visualisation of the often quite complicated inter-relationships between the component elements needed to deliver value to an organisation’s various stakeholders and so enable the creation of a practical and measurable business performance model. Failure or Risk Maps illustrate the opposite – the components that could potentially lead to a business performance glitch that could have an adverse impact on the organisation’s stakeholders (e.g. investor or customer defection, bungled mergers or alliances, supply chain failure, regulatory fines, etc.).
Strategy Maps is a term developed by Kaplan & Norton to illustrate the supposed cause-and-effect relationship between the four perspectives (Financial, Customer, Internal Process, Learning & Growth) of their Balance Scorecard framework. The term came into common parlance around 2001 with the publication of their Harvard Business Review article (Jan-Feb) “Having Trouble With Your Strategy? Then Map It!” and their book of the same year “The Strategy-Focused Organization” (Harvard), in which Chapters 3 and 4 are dedicated to building strategy maps. Kaplan & Norton subsequently published their “Strategy Maps” book (Harvard) in 2004.
The essential difference between the two terms lies in the real differences between what the two frameworks seek to achieve. On the one hand, the Performance Prism framework takes a holistic view of an organisation’s ability to achieve success through building proactive reciprocal relationships with its various key stakeholders (by satisfying their wants and needs as well as those of itself) through its strategies, processes and capabilities. The Balanced Scorecard, on the other hand, takes a purely strategic view as its inventors have always said it should, linking its financial (investor) and customer perspectives – the framework’s only two apparent stakeholders – with the internal processes perspective and the, often somewhat awkward and confusing, learning and growth perspective.
- *Neely, A. D., Adams, C. & Kennerley, M., (2002), The performance prism, the scorecard for measuring and managing business success, FT Prentice Hall, London.
For critique, see
- Marr, B. Adams, C., (2004), The balanced scorecard and intangible assets: similar ideas, unaligned concepts Measuring Business Excellence, 8, 3, pp18-27.
What is an Intellectual Capital Statement?
Intellectual capital statements are reports designed to provide information about the intangible and intellectual resources of organisations. Such reports can have different objectives and take different formats. They can be voluntary external reports produced to provide stakeholders with a better picture of an organisation’s assets structure but can equally be created as internal management documents that identify and clarify the role and importance of intangible assets as drivers of performance. Different guidelines have been produced on how to design intellectual capital statements, and some countries have passed laws that make it compulsory for some organisations to produce IC statements (e.g. Austria for Universities).
What is the Performance Prism?
The Performance Prism is a stakeholder-focused management framework designed to help organisations to decide what is most important to measure and manage, and how to integrate the results as part of a performance management system. Its stakeholder focus makes the Performance Prism relevant to contemporary strategic and operating environments in diverse commercial, public sector and charitable organisations.
The Performance Prism is a flexible modern management framework that provides a structured process. It builds on the best parts and seeks to address the shortcomings of earlier frameworks and their associated methodologies, such as the Balanced Scorecard (and the various reiterations made to its sub-sets by its authors over the last decade that attempt to patch some of its more obvious inadequacies), the work on shareholder value creation, and the various self-assessment frameworks, like the Malcolm Baldrige award criteria and the EFQM’s business excellence model.
Three fundamental premises underpin the Performance Prism concept. First, it is no longer acceptable (or even feasible) for organisations to focus just on the needs of one or two of their stakeholders – typically shareholders and customers – if they wish to survive and prosper in the long term. Second, an organisation’s strategies, processes and capabilities have to be aligned and integrated with one another if the organisation is to be best positioned to deliver real value to all of its crucial stakeholders. Third, organisations and their stakeholders need to recognise that their relationships are reciprocal – stakeholders have to contribute to organisations, as well as expect something from them; relationships are symbiotic and so there are interdependencies.
The Performance Prism consists of five inter-related perspectives on performance that pose some extremely important questions:
- Stakeholder Satisfaction – Who are our key stakeholders and what do they want and need?
- Stakeholder Contribution – What do we want and need from our stakeholders (on a reciprocal basis)?
- Strategies – What strategies do we need to put in place to satisfy the wants and needs of our key stakeholders, while satisfying our own requirements too?
- Processes – What processes do we need to put in place to enable us to execute our strategies?
- Capabilities – What capabilities do we need to put in place to allow us to operate, maintain and enhance our processes?
Together these five perspectives provide a comprehensive and integrated framework for thinking about organisational performance in today’s working environment.
In this way, the Performance Prism helps to identify each of the critical components that need to be addressed, from a performance measurement and management point of view, in order to satisfy both the various stakeholders’ and the organisation’s wants and needs. Clearly, organisations must choose which crucial elements of these perspectives or facets of the Performance Prism framework they wish to focus their performance management attentions on at any given time during their evolution.