Balanced Score Card

A Good info on Balanced Score Card : http://www.balancedscorecard.org/FAQs/index.html

How does the balanced scorecard compare to the Six Sigma management approach?

We get this question so frequently that we must assume it is an assignment by management professors to their students everywhere. Here is the definition of Six Sigma from Quality America: "Six Sigma is a Quality Improvement methodology structured to reduce product or service failure rates to a negligible level (roughly 3.4 failures per million opportunities). To achieve these levels, it encompasses all aspects of a business, including management, service delivery, design, production and customer satisfaction."

Think about what this definition assumes. The context is a manufacturing process. The business is producing large numbers of similar products and/or services, maybe in the millions, so that the error rate can be assumed to be normally distributed, and its statistics can be reliably calculated. Therefore, this is a quality improvement approach that is appropriate for manufacturing or basic service organizations where large numbers of repetitive processes are done. In such a business, Six Sigma provides a way of analyzing and improving the quality of processes. Six Sigma was developed at Motorola, GE and Allied Signal. In recent years, the concept has been expanded with training programs and literature, but these basic assumptions remain the same.

Many modern businesses, as well as government and nonprofit organizations, do not have processes that produce large quantities of repetitive products or services. For instance, scientific research and development organizations may manage a handful of very large programs. IT system developers may work for years to build one new system. Disaster management agencies may encounter only a small number of incidents per year. For these "knowledge worker" types of organizations, most of the assets are intangible and many services are unique. In such cases, it is not meaningful to measure defect rates, and the improvement of processes is only one of many strategies a company may adopt. A different type of strategic management and performance improvement system is needed. The balanced scorecard offers an alternative to Six Sigma and other traditional management systems that emerged from industrial production businesses.

However, both Six Sigma and the balanced scorecard practitioners use similar best practices in management to designand deploy these systems. They both require dedicated top-level management support, a dedicated team of change agents, strategic alignment, implementation of improvement initiatives as projects, cultural change management, and a combination of top-down and bottom-up development. Also, Six Sigma practitioners often adopt the balanced scorecard as a way of deriving appropriate performance metrics. There are numerous consulting companies trained in the facilitation and deployment process for either system.

Frequently Asked Questions about the Balanced Scorecard

What is the balanced scorecard?
The balanced scorecard is a measurement-based strategic management and learning system for all organizations. It provides a method of aligning business activities to the strategy, and monitoring performance of strategic goals over time. It was originated by Robert Kaplan and David Norton in about 1990. It may also clarify things by identifying what the balanced scorecard is not: It is not a form of project management. It is not a performance measurement system or a control system or a process improvement system. It is not a tool or technique. It is not a piece of software. It is not an employee evaluation system. It is not the latest "management fad". And it is not kept on paper scorecards. The balanced scorecard may have aspects of some of these things, but they are incidental to what the balanced scorecard is, and what it attempts to do for organizations.

Since most of the work of organizations is packaged in the form of projects, success of the balanced scorecard ultimately depends on the commitment and cooperation of project managers. If the corporate executives have aligned performance measures to strategy, then successful managers should expect appropriate recognition and rewards based on their program's strategic importance as well as its performance.

What are the benefits of the balanced scorecard approach?
Many modern businesses and government agencies hold most of their value in their intangible assets, namely their people, and the knowledge those people have. Also, modern companies recognize that mission success (or competitiveness in the case of commercial companies) is largely driven by the ideas and innovations that come from their people. Industrial-age management practices, focused on financial metrics and supply-chain production, are not appropriate in this new environment. Financial metrics are lagging indicators that tell what happened in the past. Knowledge workers communicate and create in complex ways, and their work does not fit the supply-chain model. Therefore, executives need a new way to assess how well their organization is functioning, how to predict future performance, and how to align the organization toward new strategies to achieve breakthrough performance. The balanced scorecard has evolved to support strategic planning and management this new work environment. The balanced scorecard transforms the strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be measured. It enables excutives to truly execute their strategies.

Are there any disadvantages or problems with the balanced scorecard?
Yes, just as there are challenges associated with any innovative management idea or any effort that seeks to change the status quo in a large organization. It is somewhat difficult and time-consuming to implement a comprehensive balanced scorecard system in a large organization. It will require sustained top-level support and commitment to ramp-up and put the system in place. This is where most of the difficulties and problems emerge. Do not embark on a balanced scorecard initiative unless your organization has a high-ranking champion, has adequate funding, and is ready to meet the challenges of change.However, what is the alternative? Every organization needs to know how well its strategies are performing, how to execute these strategies effectively, and how to collect data to report to its sponsors or customers. Regardless of what it is called, the processes and practices used in successful modern organizations will likely be similar to those of the balanced scorecard.
Isn't the balanced scorecard just the latest management fad that will soon pass away?
The "buzz word" may change, but not the underlying concepts, which are here to stay for a long time -- thinking strategically, measuring performance, evaluating results, feedback -- these are fundamental concepts in management that have been around a long time and will be here in the future. So managers who learn the methods of the balanced scorecard will be in a better position to lead in the future. They will have the right skills to think, plan and assess the success of their organizations -- these skills will be valuable for the forseeable future.

I am a program manager. What's in it for me?
The balanced scorecard is intended as a strategic system for managing a whole portfolio of programs within an organization. However, as a manager of one or more such programs, the balanced scorecard can help you. It raises the visibility of program performance -- not only in traditional on-time, on-budget terms, but also in terms of its strategic significance to the desired outcomes of the whole organization. So, if you know that you are working on a program that is vital and strategic, the balanced scorecard and its measurements can help you to defend your program. Also, since strategy is everyone's job, you can use the balanced scorecard's strategic map to guide the direction of your program to maximize outcome performance. As the de facto expert in your program's definition of performance, you have the right to define what metrics will be used to measure your program's performance -- in many cases, these metrics cannot be dictated from above. You also have the authority and responsibility to measure your own program's performance.

Is the balanced scorecard relevant to private-sector companies?
By now, many major corporations have adopted, or are in the process of implementing the balanced scorecard as their framework for executing strategy and monitoring performance. It has been found to be an effective way to achieve that most elusive of executive goals: execution. Also it has been accepted by most of the business departments of colleges and universities as a part of their management curriculum.

Is the balanced scorecard relevant to government agencies?
Taxpayers, the ultimate customers of government, are demanding more accountability for the use of their funds. They want to see tangible results from all government agencies, at all levels. In the US, this demand is reflected in the Government Performance and Results Act of 1993, one of the most influential new laws affecting how the Federal Government works. More recently, the President's Management Agenda, promulgated by the Office of Management and Budget, includes language requiring performance-based scoring and budgeting of all activities of agencies in accordance with top-level strategies. The balanced scorecard is the only framework readily available that can align strategy, performance and budgeting to meet these requirements. Therefore, government agencies are increasingly looking to the balanced scorecard approach.

Is the balanced scorecard relevant to nonprofit organizations?
Nonprofit organizations are committed to a mission, and they need to focus their limited resources efficiently in order to achieve mission effectiveness and value for their recipients and sponsors. The balanced scorecard system has a multiple focus on several perspectives, including financial performance. For a nonprofit organization, profit is not a determining goal of strategy; alternative financial goals may be related to the cost and value of mission activities. In this case, the balanced scorecard provides a comprehensive framework that will help their directors to define strategies, track performance, and provide data to show their various customer groups how well they are performing in terms of mission value and outcomes.

What companies are using the balanced scorecard?
By 2004, the balanced scorecard has been at least partially implemented in about 57% of global corporations, according to a survey by Bain. This site contains some examples of companies and government organizations that have reported their use of the balanced scorecard.

What are some examples of proven benefits of the balanced scorecard for companies that have implemented it?
In many commercial organizations, the activities and performance associated with strategic plans are proprietary, and not available for outside examination. However, the experience of managers in hundreds of organizations has been reported, with mostly favorable results and some lessons learned. Also, numerous governmental organizations are continuing to adopt the balanced scorecard, with increasing data being reported on the web and increasing satisfaction with the results. We have prepared a database of over 130 of these organizations.

How is the balanced scorecard implemented?
Briefly, these steps are:
Organizational Assessment
Identify Strategic Themes
Define Perspectives and Strategic Objectives
Develop a Strategy Map
Derive Performance Metrics
Craft and Prioritize Strategic Initiatives
Automate and Communicate
Cascade the BSC Through the Organization
Collect Data, Evaluate and Revise

How is the balanced scorecard implemented in ... (your business sector here).
Every business sector or company has some generic processes, as well as some unique processes or features. If this were not the case, your company would be no different from its competitors. For governmental organizations, although there is no competition, there should also be no duplication; each agency and jurisdiction is unique. It is not possible on this web site to describe the special features of each business sector's balanced scorecard. The generic features appropriate for most organizations are described here. For specific application to your company, we recommend that you obtain initial training, and incorporate balanced scorecard steps into your strategic planning process. To accelerate the initial implementation, the services of an experienced consultant are worthwhile. These preparatory steps will provide a rapid and customized approach to implementing the balanced scorecard for your company's needs.

How long does it take to implement?
Typically, building and implementing the corporate-level (Tier 1) balanced scorecard (the first 7 steps in our process) takes about 2-3 months, depending on several factors. This effort is usually done by a cross-functional team guided by an experienced balanced scorecard facilitator. Some consultants claim that it can be done in a much shorter time, but that is unrealistic. The original text of Kaplan & Norton on the balanced scorecard estimated a total time of 26 months for full deployment of the balanced scorecard down to the level of individual employees (Tier 3). In any case, a sustained effort at change management and education is needed.

How much does it cost to implement?
The total cost may be estimated as follows:
No. of team members x time on team activities
Facilitator cost
RFP and software evaluation labor cost
Software licensing cost
Installation and testing cost
Annual maintenance and upgrade cost (typically 20% of initial cost)

How does the balanced scorecard compare to the Six Sigma management approach?
We get this question so frequently that we must assume it is an assignment by management professors to their students everywhere. Here is the definition of Six Sigma from Quality America: "Six Sigma is a Quality Improvement methodology structured to reduce product or service failure rates to a negligible level (roughly 3.4 failures per million opportunities). To achieve these levels, it encompasses all aspects of a business, including management, service delivery, design, production and customer satisfaction."

Think about what this definition assumes. The context is a manufacturing process. The business is producing large numbers of similar products and/or services, maybe in the millions, so that the error rate can be assumed to be normally distributed, and its statistics can be reliably calculated. Therefore, this is a quality improvement approach that is appropriate for manufacturing or basic service organizations where large numbers of repetitive processes are done. In such a business, Six Sigma provides a way of analyzing and improving the quality of processes. Six Sigma was developed at Motorola, GE and Allied Signal. In recent years, the concept has been expanded with training programs and literature, but these basic assumptions remain the same.

Many modern businesses, as well as government and nonprofit organizations, do not have processes that produce large quantities of repetitive products or services. For instance, scientific research and development organizations may manage a handful of very large programs. IT system developers may work for years to build one new system. Disaster management agencies may encounter only a small number of incidents per year. For these "knowledge worker" types of organizations, most of the assets are intangible and many services are unique. In such cases, it is not meaningful to measure defect rates, and the improvement of processes is only one of many strategies a company may adopt. A different type of strategic management and performance improvement system is needed. The balanced scorecard offers an alternative to Six Sigma and other traditional management systems that emerged from industrial production businesses.

However, both Six Sigma and the balanced scorecard practitioners use similar best practices in management to designand deploy these systems. They both require dedicated top-level management support, a dedicated team of change agents, strategic alignment, implementation of improvement initiatives as projects, cultural change management, and a combination of top-down and bottom-up development. Also, Six Sigma practitioners often adopt the balanced scorecard as a way of deriving appropriate performance metrics. There are numerous consulting companies trained in the facilitation and deployment process for either system.

How does an activity-based costing (ABC) system compare to the balanced scorecard?
ABC can provide valuable information on where funds are being spent in an organization's business activities and processes. This information provides an important input to the balanced scorecard's financial and business process perspectives. Although it is difficult to implement ABC, a simplified approach is being developed by Dr. Robert Kaplan, who invented both ABC and the BSC. These two tools complement each other and together can lead to a much more effective alignment of resources to strategy.

Can you please give me a list of metrics or KPI's (key performance indicators) for my balanced scorecard?
No. The balanced scorecard is not a cookbook of performance measures. It requires creative strategic thinking and difficult decisions by a large team of people to develop an effective balanced scorecard system. No two organizations are alike. "Some assembly is required."

How does the balanced scorecard compare to the Baldrige? EFQM? APIC?
The Baldrige Award, the European EFQM, and APIC (Army Performance Improvement Criteria) are examples of organizational assessment tools. Assessment of an organization's current status is the first step in our nine-step methodology for building a balanced scorecard. The balanced scorecard uses assessment data to determine what improvements and breakthroughs in performance are most needed, so that strategies can be crafted to meet these needs. The BSC includes much more than assessment, but these tools are useful to get a full picture of the situation in an organization, and they are recommended as an initial step in strategic planning and management.

What are the implications of balanced scorecard on budgetary systems?
The balanced scorecard, being a strategic management system, can serve as the "front end" for a performance-based budget. Its performance measures and strategic plans can provide rational guidance for resource allocation. In fact, some organizations have gone so far as to develop flexible strategic organizations and financial management systems that allow continuous reallocation of funds, without the need for major cyclical efforts in budgeting.
Where can we get training?

How can we ensure that our balanced scorecard system is maintained in the long term?
It is important not only to build the system right, but to maintain it by continual use and re-education of personnel on its purpose and benefits. Since everything is changing in the business environment, a balanced scorecard program is never "done" -- it is an ongoing journey. So the key is to maintain strategic alignment to the top-level mission and the desired long-term strategic results -- these are unlikely to change much, and they provide a "pivot" around which everything else revolves. Leaders should help to clarify this vision. Use our recommended communication techniques to keep people focused on these results and the strategies for getting there.