Understanding the Balanced Scorecard
In 1992, Dr. Robert S. Kaplan and David P. Norton revolutionized strategic management with the creation of the balanced scorecard (BSC). By the end of the 20th century, the BSC would become the dominant force in project and strategic management, giving companies ever-increasing control over performance. The model is still used today in many industries, including government, educational and non-profit organizations.
The balanced scorecard remains one of the ten most used tools in business, because of the tremendous staying power and flexibility the model offers. Studies show more than 80 percent of American companies use the BSC to make long- and short-term decisions about their strategic plans, and over 70 percent use a BSC on at least a quarterly basis.
What is a Balanced Scorecard?
A balanced scorecard is a closed-loop tool to compare actual performance within an organization to the expected performance and strategic plan. Managers examine the difference between the two values to make decisions about individual and departmental performance, as well as the company’s long-term vision.
A BSC also helps streamline projects, by providing managers a comprehensive view of a project in a single report, highlighting the most important information. Project managers then use a variety of financial and non-financial data to tweak the strategy of an organization or a department within an organization to align goals more closely. The data collected helps managers adapt when issues threaten to undermine the long-term plan.
How is a BSC Used By Organizations?
By using a BSC effectively in their company, managers can introduce strategic solutions to the challenges they face. The following key benefits show the value of this project management method in a variety of businesses.
A Look At Non-Financial Metrics
Challenge: The rise of internet access forced banks to reconsider their traditional service models. Wells Fargo was one of the first major institutions to adopt an online banking strategy through the formation of its online financial services (OFS) group.
Initial response to the online service was mixed. Customers found the site difficult to use and navigate, and the OFS team faced intense internal criticism. The OFS department desperately needed an investment in technology to secure a more stable online platform, but upper management was hesitant to invest in an unproven department. Leaders within the OFS group found it difficult to explain their struggles and long-term value, because of Wells Fargo’s insistence on using standard financial metrics to determine success.
BSC Solution: The OFS group adopted the balanced scorecard as a way to communicate the value that the department brought to the organization. Using a series of non-financial metrics, including customer requests and proving adaptability to a new financial paradigm and the future of technology in banking, the OFS team demonstrated that current losses were a stepping stone to greater profitability overall. In less than five years, they proved its model was viable, as the company was able to attract new customers by using its online banking platform as a point of differentiation from its competition.
Interconnectivity Of Processes
Challenge: Tesco UK faced declining sales for almost a decade. At the start of the 21st century, the company’s CEO ordered an examination of the company’s practices to determine which factors were undermining the company’s growth strategies. Company officers discovered enormous customer dissatisfaction and much lower than average return customer sales. Customers consistently ranked poor service from the staff as their number one reason for not coming back. When executives investigated the reason behind the poor service, they uncovered exceptionally high turnover rates and an unhappy workforce.
BSC Solution: In 2007, the company created the “Steering Wheel” based on the balanced scorecard model. The “Steering Wheel” detailed the objectives for the company across four important areas: customer experience, employees, finance, and operations. Tesco used the “Steering Wheel” to demonstrate how a change in one aspect of the company created ripple effects that spilled over into other facets. For instance, improving wages in the finance sector increased employee retention and satisfaction, which created a better customer experience. The model has been modified since 2007 to include community/corporate responsibility.
Managing Large Scale Visions
Challenge: Sunnybrook Health Services Center in Toronto, Canada is an enormous teaching hospital with hundreds of employees working on very different tasks. At the turn of the 21st century, Sunnybrook found managing its strategic vision difficult, because the scope of the institution was so broad that most strategic management models were unwieldy.
BSC Solution: Sunnybrook turned to the balanced scorecard model as a way to incorporate the disparate missions of the institution into a focused strategic vision. The hospital developed eight goals for the institution that were in line with both its mission as a teaching/research center and a functioning hospital. The BSC improved communication between departments when the strategic goals overlapped, and by 2014 Sunnybrook had become a leader in patient care and safety indicators.
Balanced scorecards will remain a vital tool for strategic planning and project management in the 21st century. The model’s ability to integrate metrics across departments enables companies to take a macro view of their strategic vision and proactively institute change.
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