Performance Measurement and the Need for a Balanced Scorecard (BSC)
Performance Measurement and the Need for a Balanced Scorecard (BSC)
We have thought of creating additional content as a means to facilitate more learning about BSC, because it may not be possible to continue congregating in a hotel conference room. We know that when you gain full understanding of balanced scorecard, the rest of the staff in your City, District or Municipal Council will rely on you not only for advice on the technical aspects of this relatively new framework, but also on the broader subject of strategic planning, strategy execution, performance measurement and management. Therefore, I want to encourage you to learn as much as possible about this subject to create the much-needed value. We shall be posting more lessons on this platform.
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There is a common saying that “What gets measured gets done/ managed” (Peter Ferdinand Drucker).
The limitations of financial measures
Before the Balanced Scorecard emerged, the only popular measures were the financial measures, which focused on the performance of physical/ tangible assets. These measures were based on metrics from financial statement analysis intended to track, monitor, and analyze the financial performance of an organization, as well as help investors to visualize their ROI. They were limited and insufficient. Why? Because they neglected the contribution of intangible assets, as the drivers of performance.
So, when organizations spend money to train employees, improve processes, develop innovations for new projects/ programs/ products, or improve service delivery to create client satisfaction and loyalty, the financial metrics were unable to pick out this intangible value and measure it. There were no measures to link employees to the critical enablers of organizational transformation. This gap was the primary motivation of balanced scorecard—to provide balanced measures of organizational performance across the 4 perspectives. The other motivation was of course Strategy formulation and execution. Whereas, strategy formulation is usually done by Planners and top executives, execution must be done by all employees not just a few.
Harvard Business Review editor Thomas Stewart recently captured the essence of this notion succinctly and powerfully when he said, “The most important of all are ‘soft’ assets such as skills, capabilities, expertise, cultures, loyalties and so on. These are the knowledge assets—intellectual assets—human capital—and they determine success or failure of the organization. They are opposed to the notion that looked at employees as a cost center, rather than the strategic partners that drive transformation, performance and value creation. The result of this was the rampant retrenchment and downsizing to cut costs. They had not yet discovered that humans possess capital—“the human capital” or “intellectual assets”, which are a means of production owned by employees not organizations. Let’s pick up this discussion another day… it could go deeper.
If you can’t measure how your human capital is performing then you are not managing them very well. You may not measure a person in financial terms like how much a s/he is worth but you can measure client satisfaction, customer loyalty, innovativeness, effectiveness of processes, employee skills, employee engagement, culture, and so on. Measuring makes them more manageable because “what gets measured gets managed”.
BSC offers a structured comprehensive framework for measuring all the important assets and capabilities of the organization through 4 lenses called the Perspectives. Unlike other planning frameworks, BSC also offers a framework for strategy formulation and execution. It links the strategic plan to performance measurement and management, and tells the logical story of cause and effect relationships between strategic objectives on a strategy map.
Now that we have started bringing technical terms in the picture, I suggest we first define them.
The organization’s purpose described in the language of the business, including who is served and what products, programs and services are provided to customers and stakeholders.
A vivid, emotionally inspiring, time-specific picture of a future to which the organization aspires.
The organization’s beliefs and principles that articulate the culture of the organization. These are the standards that describe how employees and the organization are expected to behave internally and externally. They serve as the basis for decision-making and influence actions in everyday situations.
An organizational management activity that is used to set priorities, focus energy and resources, strengthen operations, ensure that employees and other stakeholders are working toward common goals, establish agreement around intended outcomes/results, and assess and adjust the organization's direction in response to a changing environment. It is a disciplined effort that produces fundamental decisions and actions that shape and guide what an organization is, who it serves, what it does, and why it does it, with a focus on the future. Effective strategic planning articulates not only where an organization is going and the actions needed to make progress, but also how it will know if it is successful. The result of the planning process is a strategic plan.
The document used to communicate with clarity the organizational goals, the actions needed to achieve those goals and all the other critical elements developed during the planning exercise.
The positioning choices made, and the actions taken, from many choices and actions that are potentially available, to move the organization from its current state to some desirable future state. How an organization intends to accomplish its vision; an approach, or “game plan”. While Military strategy has been around for millennia, organizational strategy is relatively new but has been a game changer for those that have embraced it.
The process of developing and choosing the most appropriate and effective strategy.
The process of carrying out a strategy or turning a plan into reality.
Strategic Results (or Goals)
End outcomes from successfully executing the organization’s strategy.
The three or four strategic focus areas that build on the customer value proposition to define the organization’s high-level business strategy, break down the vision and mission into action, and focus energy on desired strategic results.
A process of thinking about all the elements of an organization’s approach to doing business, starting with the elements with the broadest impact, such as regulations, environment, policy, values, and culture.
External and internal analyses and assessments of an organization’s competitive position, policies and regulations, governance, markets, capacity and capability, clients, and stakeholders. Outputs of the Scan include the SWOT assessment, the PESTEL analysis, and any other relevant studies and analyses.
The universe of people, groups, and organizations that have an interest in the organization; examples include: customers, employees, vendors, regulators, directors, suppliers, and community groups.
An integrated strategic planning and performance management system that communicates with clarity an organization’s vision, mission, and strategy to employees and other stakeholders; aligns day-to-day work to vision and strategy; provides a framework for prioritizing programs and projects; and uses strategic performance measures and targets over four perspectives to measure progress.
A Perspective is a view of organizational strategic performance viewed through a particular “lens”. Four basic perspectives are traditionally used to encompass an organization's activities, although the specific names might be adapted to fit the particular vernacular of the organization. Typical perspectives include financial (or stewardship in the public sector), customer (stakeholder), internal process, and organization capacity (or learning and growth). The organization's business model, which encompasses its mission, vision, and strategy, determine the appropriate perspective names.
To translate the organization-wide strategic plan (referred to as Tier 1) down to first support units or departments (Tier 2) and then teams or individuals (Tier 3). The end result should be focus across all levels of the organization that is consistently aligned with the organization’s strategy.
Tiers are the different levels of scorecards created during the cascading process during the Alignment Step. Tier 1 refers to the top level of organization activities and to a top-level, organization-wide scorecard; Tier 2 refers to business and support unit scorecards and activities (e.g., departments, directorates, regions, offices – one level below the top level); and Tier 3 refers to scorecards and activities for individual employees or groups of employees acting as a team performing similar jobs.
The existence of a consistently clear understanding of the organization’s mission, vision and strategy throughout an entire organization. An aligned organization is one where everyone understands how what they do contributes to the aspirations of the organization and it is clear how support units, and employees interact to create value for the organization’s clients and connect to the organization’s vision.
Employee Scorecards/ Performance Agreement
A summary of each employee’s performance plan—personal objectives, performance measures and targets, and individual activities—aligned with unit strategy and strategic objectives (part of the alignment process).
A structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state.
New or continuing projects and actions designed to improve performance of one or more strategic objectives.
The specific continuous improvement activities, balanced across the perspectives that break down strategy into smaller components and make strategy actionable by involving all employees in operationalizing the organization’s goals.
A graphic that shows the cause-and-effect relationships between objectives in four perspectives. Linked objectives show how value is created by the organization.
The desired level of performance for the reporting period in question
Weighted scoring is a framework designed to help teams prioritize outstanding tasks by assigning a numeric value to each objective or initiative or task, based on priority ranking (effort versus value analysis)
The comprehensive collection of ongoing activities and processes that organizations use to systematically coordinate and align resources and actions with mission, vision, and strategy throughout an organization. Strategic management activities transform a static plan into a system that provides strategic performance feedback to decision making and enables the plan to evolve and grow as requirements and other circumstances change.