Apr 7, 2010

The ‘secret’ behind the power of the Balanced Scorecard

Sometimes we wonder how large organizations with several lakhs/thousands of employees, manage their business and hold its employees together, when small organizations find it difficult to keep even a hundred employees together. After being associated with large organizations such as TCS and Flextronics for several years, and working closely with several mid-size organizations, I find the secret lies in ‘alignment’. There could be chaos at local level, but there is alignment at the overall level; alignment to the values, vision, key objectives, strategy, goals and so on.

How do they bring this alignment? They have established processes for their core business functions and there is a mechanism to measure business performance using proven framework such as Balanced Scorecard.

So many management concepts and fads came and gone in the last few decades, but Balanced Scorecard remains very relevant today and organizations are finding new ways of leveraging it and extending its capability. What makes Balanced Scorecard powerful and relevant even today? (Some aspects of this we have seen in the previous article.)

According to Paul Niven (Management Consultant and author), the tool’s longevity can be traced to its ability to solve several fundamental business issues facing all organizations today. In his article, he highlights the following issues organizations face today while measuring performance.

The Limitations of Financial Measures: Traditional focus on financial measures alone is not suitable for today’s environment. The chief criticism levied at financial measures is that they’re tantamount to driving a car by using only the rear-view mirror. You get a great view of where you’ve been, but little guidance towards where you’re headed. Balanced Scorecard gives a system that balances the historical accuracy and integrity of financial measures with the drivers of future financial success.

The Rise of Intangible Assets: In vast majority of modern organizations, what’s driving your success is not tangible assets, but intangible assets such as employee knowledge, databases full of rich information and culture of innovation that really drive value. Some recent estimates peg the value of intangibles as high as 75 percent of an organization’s true worth. Balanced Scorecard is a performance measurement system that sheds light on the value of intangibles and allows us to predict and drive future economic success.

The Challenge of Executing Strategy: Competition in any industry had significantly increased in the last few years. Hence it is vital to execute your strategy quickly. From an often quoted Fortune magazine study from 1999 found that 70 percent of CEO failures came not as a result of poor strategy, but the inability to execute. In this context, Balanced Scorecard has emerged as powerful strategy execution tool.

Balanced scorecard is centred on organization’s vision and strategy. Unlike traditional performance measurement systems that have financial controls at their core, the Balanced Scorecard begins with an organization’s vision and strategy. Then the vision and strategy are translated into performance measures that can be tracked and used to gauge the success in the successful implementation of vision and strategy.

In the same article, Paul Niven gives an example on how companies use Balanced Scorecard for resource allocation and for controlling expenditure in alignment with the business strategy.

To appreciate the beauty of the Balanced Scorecard, one should look at ‘The Building Blocks of the Balanced Scorecard’ and understand how it supports the core elements of business management - strategy, planning, measurement and reporting.

One notable feature of the Balanced Scorecard is ‘Cascading’, which is very effective in bringing in organizational alignment. Cascading refers to a process of developing Balanced Scorecards at lower levels of your business. It is about translating the corporate-wide scorecard down to first business units, support units or departments and then teams or individuals. These scorecards must align with the organization’s highest level Scorecard. This eliminates issues such as 1) employee actually running counter to the organization’s goals because they have a different understanding of what you are trying to accomplish 2) various departments in your organization focus on activities within their own silo more than on how they support the organization’s mission and vision.

Thus the differentiating features such as focus on strategy and employee alignment around a few key goals make the Balanced Scorecard a very effective performance management tool for modern organizations to achieve breakthrough financial results.

1 comment:

  1. Very well written Thomas. Thanks for sharing. I am going to refer to this article in my blog.