Over During the 1990s, when businesses were increasingly
Over the last couple of decades, the task of measuring the success of organizational performance has become increasingly difficult, challenging both the academia as well as the practitioners to come up with better frameworks for performance measurement. In the past, the reliance on financial key metrics to measure the health of companies from many industries has often shifted the focus towards a short-term, quarterly reported financial data geared towards the satisfaction of shareholders, and the perspective of investing in the future has taken the back seat.
Despite the widespread use of financial measurements for many years, there are examples of new emerging frameworks in the last decades, meant to extend the scope of the performance measurement beyond traditional financial metrics. Among them, the Balanced Scorecard (BSC) is one of the most successful and well-known example.
The Balanced Score card was first introduced by Kaplan and Norton (1992), as a mean to fix the flaws of past frameworks, and provide more depth to any organizational performance analysis (Verzola et.al, 2009). Their objective was to overcome the shortcomings of the tools used in traditional financial-based performance analysis. According to Kaplan and Norton (1992), financial measurement such as ROI or EPS were often misleading and insufficient for managers seeking the betterment of their enterprises. During the 1990s, when businesses were increasingly more dependent on other factors such as customer satisfaction or their own capacity to learn and adapt, traditional metrics felt out of step with the modern requirements.
As a multi-dimensional framework for decoding the strategy into identifiable objectives, BSC typically uses 15-20 measurements across 4 categories (Customer perspective, Internal Business perspective, Financial perspective and Innovation & Learning perspective) to provide a thorough image of the company, similarly to how the cockpit of an airplane provides real-time data to the pilots.
One decade after its development, BSC was being implemented by many successful businesses belonging to Fortune 1000 (Hendricks, 2004). Moreover, in the coming years BSC was further adopted not only by enterprises, but also by private, public and non-profit organizations (Kaplan, 2010). The main advantage of BSC over traditional financial metrics, which proliferated its widespread use so early, was the focus on the three additional perspectives, to provide a deep, holistic view (Kaplan, 2010).
According to Kaplan and Norton (1995). There are four characteristics that make the Balanced Scorecard stand out. Firstly, the BSC reflects the company’s strategy in a top-down manner. Most framework measures tracked by companies are bottom-up, which is irrelevant for the overall strategy, according to the other, although this statement is contested by other scholars in the organizational performance literature. Secondly, while traditional financial measurements track progress only from a single perspective, on the quarter-to-quarter basis, without any indication for managers on how to improve performance during the next period, BSC addresses both current and future success from multiple perspectives. The authors describe the framework as forward-looking. On the other hand, traditional metrics only define how a company is doing in the last reported period and no regard is being given to how performance might be improved in the future.
Furthermore, the balanced scorecard includes both internal and external measures. This allows managers to identify shortcomings in their businesses and to make sure success in one department is not achieved at the expense of another. Lastly, the balanced scorecard is a tool that helps practitioners focus. Often, managers look at more measurements than necessary. It is therefore important, for the purpose of avoiding unnecessary confusion, to limit the score of the measurement to 15-20 different metrics, each costumed design for the unit to which it applies.
Despite its widespread use, the balance scorecard has been proven to be insufficient in certain areas and for different types of industries. When implementing this framework, managers often discover that its results can be overwhelmingly difficult to interpret and do not always lead to conclusions that are easy to follow and to implement.
As noted by Atkinson, Waterhouse and Wells (1997), there are a couple of inconsistencies in the model. Firstly, BSC fails to value the role that employees and suppliers play in helping a company achieve its objectives. Secondly, the model downplays the importance of the community in defining the context in which an enterprise activates. Lastly, it does a poor job in highlighting the performance measures of stakeholder’s contribution.
Arguably the greatest weakness of the balanced scorecard is its lack of consideration for a company’s human resources. This problem has been identified by many successful businesses. Unilever for example, who has been using BSC for many years, was compelled to add a fifth HR dimension to its personalised model, in order to better reflect its competences and address future critical issues.
The motivated employees, as described by Smith (1998), play a critical role, especially in the service industry. The Balanced Scorecard overlooks the importance of quality human resources for the future health of a company. Often times, especially in service industries, the efficient management of human resources, and not physical resources, is the ultimate driver of organizational performance. Furthermore, Smith adds, the model is often overwhelming, as it provides constructs for multiple measures, with no clear forecast for long-term performance. He concludes that there is a need for additional empirical validation.
Another purpose of the balanced scorecard is to solve the issues regarding the historical characteristic of the financial measures. The BSC achieves this by bringing together financial and non-financial measurements in a cause-and effect relationship. This relationship assumes a linkage between the four dimensions of the BSC in an order (organizational learning and growth-> internal business processes -> customer perspective -> financial measurements). Due to the nature of the feed-forward control system (de Haas & Kleingeld,1999), which is supposed to fix the problem of the historical accounting data, the assumption that there is a cause-and effect relationship between these elements is essential. Nørreklit (2000) has proven nonetheless that such a cause-and-effect relationship between these areas is largely an exaggeration. For example, despite a great covariation between customer loyalty and financial performance, it is not implied that increased customer loyalty result in long term financial success. At most, it can be inferred that gaining loyal customers is expensive, but that does not necessary mean that loyal customers are cheap, because this argument would be a logical fallacy.
Another criticism to BSC is brought for its aspiration to solve problems regarding the strategic implementation. Firstly, the model fails to account for any developments in technology or competition. Hence, it does not take into consideration the risk and the uncertainty derived from particular events that could render the present strategy invalid. Secondly, the top-down character of the model assumes decisions are communicated from higher levels of management to lower tiers, even though they provide no clear path as to how senior management involves lower management in the implementation process, apart from executive announcements, videos, town meetings and newsletters (Kapan & Norton,1996). Concepts such as organizational learning or employee empowerment are mentioned in the authors thesis and likewise considered unproblematic by them. Nevertheless, in a top-down hierarchical measurement, it is highly important to clearly define ways by which senior managers address and integrate such concepts with lower management and employees. What is more, the authors disregard any future complication in the implementation process and consider winning the support for the system unproblematic. Therefore, BSC often makes for a questionable strategic management tool, since it top-down model is not always rooted in the lower tier environment of the organization(Nørreklit,2000). Because the authors have the intention to address commonly recognized problems, their model might not provide a valid model (Nørreklit,2000). It can be therefore inferred that the balance scorecard, at least from the perspective of human resource, is rather poorly developed, and as consequence, it has received numerous criticism in the literature for not being rooted in the dynamic environment of an organization (Simons, 1995; Nørreklit,2000). Due to this shortcoming, there is a real risk that such a control model could lead to dysfunctional behavior and loss of strategic control.
Some of this criticism has motivated both practitioners and research to look past the balanced score card and to develop their own adapted versions of it, by adding new elements as they see fit.
What is more, some scholars have emphasised the need to go even further and propose now tools for performance management analysis. Since 2000, a couple of new developments and framework, some originating from BSC, have appeared in the literature. Some of these new frameworks have highlighted a few problems such as identification of relevant performance measurements, the lack of integration of all stakeholders, the lack of a larger variety of business perspectives, just to name a few.
Nevertheless, all criticism considered, the balanced scorecard was, at its inception, an innovative tool meant to bring an extensive view over the performance of a company, and a definitive improvement over the traditional financial measurements. But, in a dynamic environment, characterized by turbulent business environments, it suffers from shortcomings and there is a definitive need to go beyond this approach.
Finally, to wrap up, although the BSC has benefitted from significant prime time, in both academia and business, most of its former beneficiaries have begun turning an eye toward more versatile model and a less “balanced view” that permits better customization. Although the balanced perspective of BSC considers all four dimensions equally important, there is often a need to ignore certain areas in order to focus and fix a more pressing problem. This is where BSC can prove to be overwhelming and highly specialized frameworks are better suited for the question at hand. As in real life, it is better to visit a specialist doctor for treating a life-treating disease than to go to a general practitioner that has a balanced education, who would otherwise be very helpful in provide treatment for a larger variety of health problems.
Kaplan, R. S., & Norton, DP. (1992). The balanced scorecard: Measures that drive performance. Harvard Business Review.
Hendricks, K. B. (2004). The balanced scorecard: To adopt or not to adopt? Ivey Business Journal. November/December Issue 2004
Kaplan, R. S.(2010). Conceptual foundations of the Balanced Scorecard. Harvard Business School, Working Paper 10-074.
Kaplan, R. S., & Norton, D. P. (1995). Putting the balanced scorecard to work. Performance measurement, management, and appraisal sourcebook, 66, 17511.
Atkinson, A. A., Waterhouse, J. H., & Wells, R. B. (1997). A stakeholder approach to strategic performance measurement. Sloan management review, 38(3), 25.
M. Smith. Measuring organizational effectiveness. Management Accounting 34–36 (1998).
Verzola, A., Bentivegna, R., Carandina, G., Trevisani, L., Gregorio, P., & Mandini, A. (2009). Multidimensional evaluation of performance: experimental application of the balanced scorecard in Ferrara university hospital. Cost Effectiveness and Resource Allocation, 7(1), 15.