- The four dimensions that make the balanced scorecard are
- Balanced Scorecard Approach to HR:
- Balancing The Scorecard
- What is the Balanced Scorecard?
- The Balanced Scorecard and Measurement-Based Management
- Management By Fact
- Implementation Of Scorecards
The Balanced Scorecard is a tool used to evaluate the effectiveness of Human Resource Management and was developed by Kaplan and Norton.
In this method, HR evaluates not only the financial performance of the organization but also takes into consideration key performance indicators of customer service, internal business processes, and learning & growth achieved by the organization.
The four dimensions that make the balanced scorecard are
The management can determine the long-term and short-term financial performance of the organization that results from the actions undertaken by the administration during the financial year.
Through this dimension, the management tries to find out the perception of customers towards the organization and the customer retention and satisfaction levels.
Under this, the management evaluates the efficiency of the production processes in terms of, how well the order was processed, when the delivery was made, and what was the cost incurred per order.
Learning and Growth:
This dimension talks about if any new technology or novice product is introduced into the organization, customer retention, and the efficiency of training programs conducted for the personnel. It focuses on how well the organization’s resources were utilized; which results in the overall growth of the organization.
Earlier, the evaluation tools just focused on the financial performance of the organization through its past records, but with the balanced scorecard, the organization can keep a track of the past as well as forecast the future performance of its operations.
Balanced Scorecard Approach to HR:
The balanced scorecard approach to management was first laid out by Robert Kaplan and David Norton in 1992. This broad management strategy that separates an organization’s goals into quantifiable metrics can be applied to human resources to tackle the activities and metrics affecting the allocation of manpower and resources. The BSC approach is represented by four quadrants, each of which represents a different approach to strategy.
The Financial Perspective
The financial perspective is the foundation of the BSC approach. In this quadrant, the HR manager asks “How does the performance of the organization’s team look to shareholders?” The approach is to focus on the financial performance of the company as essential for its long-term survival. Without dedicated and motivated staff, financial success is impossible to achieve, so collecting accurate financial data as it relates to HR is important for the company’s overall strategy. Importantly though, financial data is historical. It tells the HR manager what has happened to the staff in the past, but it may not necessarily indicate what’s currently happening. The other three quadrants help to fill in this gap.
The Customer Perspective
The customer perspective is about considering the effects of HR policies on consumers. The HR manager asks herself “How does the organization’s staff look to customers?” Customers value a friendly and communicative business environment and so keeping staff positive and outgoing is essential to gauging financial success. Satisfied customers keep coming back and HR can have a huge impact on this turnover.
The Business Process Perspective
The business process perspective seeks to answer two questions: “How effective is the organization at its internal operations?” and “Where must the organization excel to remain profitable?” Here, the HR manager is taking an internal perspective and is seeking to measure the performance of the staff against the goals the business has established. There are several metrics that can be measured, including the quality of products and services, the time it takes to answer customer inquiries, and inventory management.
The Learning and Growth Perspective
The final quadrant of the balanced scorecard approach is the learning and growth perspective. For many businesses, this can be the most important part of the scorecard. It asks the question “What can the organization do to improve?” Instead of focusing on past performance and current trends, the learning and growth perspective focuses on the development of the business’s employees. The idea is to create an open team-centered atmosphere where employees feel free to bring up problems and solutions.
Balancing The Scorecard
The balanced scorecard approach takes the data and information gathered from the four quadrants and combines the information into a cohesive plan for action. Front the HR perspective, this means deciding on new processes for staff development, payroll adjustments, increased benefits or employee compensation, and motivation programs.
The balanced scorecard is a new management concept that helps managers at all levels monitor results in their key areas. An article by Robert Kaplan and David Norton entitled “The Balanced Scorecard – Measures that Drive Performance” in the Harvard Business Review in 1992 sparked interest in the method, and led to their business bestseller, “The Balanced Scorecard: Translating Strategy into Action”, published in 1996.
There’s nothing new about using key measurements to take the pulse of an organization. What’s new is that Kaplan and Norton have recommended broadening the scope of the measures to include four areas:
- Financial performance
- Customer knowledge
- Internal business processes
- Learning and growth
This allows the monitoring of present performance, but also tries to capture information about how well the organization is positioned to perform well in the future.
Kaplan and Norton cite the following benefits of using the balanced scorecard:
- Focusing the whole organization on the few key things needed to create breakthrough performance.
- Helping to integrate various corporate programs, such as quality, re-engineering, and customer service initiatives.
- Breaking down strategic measures to local levels so that unit managers, operators, and employees can see what’s required at their level to rolling into excellent performance overall.
Similarity to Hoshin Planning
The balanced scorecard has strong similarities to Hoshin Planning or hoshin kanri, the organization-wide strategic planning system used widely in Japanese companies. Both seek breakthrough performance, alignment, and integrated targets for all levels. The balanced scorecard suggests which specific areas should be measured for a balanced picture, but this isn’t contradictory to Hoshin Planning, One thing that the Japanese emphasize is “catchball”, the process of give and take between levels that help to define strategy in Japanese companies. The balanced scorecard method seems to be more of a one-way street – the executive team creates the strategy, and it cascades down from there.
One Cautionary Note
You tend to get what you measure for since people will work to achieve the explicit targets which are set. Dr. Deming feared this effect, noting that people would skew their work to meet particular incentive pay targets. For example, emphasizing traditional financial measures tends to encourage short-term thinking – like rigging shipping schedules to make the monthly sales look good, or aggressively discounting to meet year-end targets. Kaplan and Norton, recognizing this, urge a more balanced set of measurements, which is good.
Even so, people will work to achieve their scorecard goals and may ignore important things which are not on the scorecard. Or, if the scorecard is not refreshed often enough, what looked like an important goal in January may not be very germane in June. Kaplan and Norton recognize these risks, and they don’t pretend that they have said the final word on scorecards.
What is the Balanced Scorecard?
A new approach to strategic management was developed in the early 1990s by Drs. Robert Kaplan and David Norton. They named this system the ‘balanced scorecard’. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective.
The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
Kaplan and Norton describe the innovation of the balanced scorecard as follows”
“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial-age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information-age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.
The balanced scorecard suggests that we view the organization from four perspectives, and develop metrics, collect data and analyze it relative to each of these perspectives”
The Balanced Scorecard and Measurement-Based Management
The balanced scorecard methodology builds on some key concepts of previous management ideas such as Total Quality Management(TQM), including customer-defined quality, continuous improvement, employee empowerment, and – primarily – measurement-based management and feedback.
In traditional industrial activity, “quality control” and “zero defects” were the watchwords. In order to shield the customer from receiving poor-quality products, aggressive efforts were focused on inspection and testing at end of the production line. The problem with this approach – as pointed out by Deming – is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects.
What Deming saw was that variation is created at every step in a production process, and the causes of variation need to be identified and fixed. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a system with feedback loops. The feedback data should be examined by managers to determine the causes of variation, what are the processes with significant problems, and then they can focus attention on fixing that subset of processes.
The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcome of business strategies. This creates a “double-loop feedback” process in the balanced scorecard.
You can’t improve what you can’t measure. So metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.
So the value of metrics is in their ability to provide a factual basis for defining:
- Strategic feedback to show the present status of the organization from many perspectives for decision makers.
- Diagnostic feedback into various processes to guide improvements on a continuous basis.
- Trends in performance over time as the metrics are tracked.
- Feedback around the measurement methods themselves, and which metrics should be tracked.
- Quantitative inputs to forecasting methods and models for decision support systems.
Management By Fact
The goal of making measurements is to permit managers to see their company more clearly – from many perspectives – and hence to make wiser long-term decisions. The Baldrige Criteria (1997) booklet reiterates this concept of fact-based management:
“Modern businesses depend upon measurement and analysis of performance. Measurements must derive from the company’s strategy and provide critical data and information about key processes, outputs, and results. Data and information needed for performance measurement and improvement are many types, including:
Customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial.
Analysis entails using data to determine trends, projections, and cause and effect – that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors’ or with ‘best practices’ benchmarks.”
“A major consideration in performance improvement involves the creation and use of performance measures or indicators. Performance measures or indicators are measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to the customer and/or company performance requirements represents a clear basis for aligning all activities with the company’s goals. Through the analysis of data from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals.”
The Learning and Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people – the only repository of knowledge – are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode.
Government agencies often find themselves unable to hire new technical workers and at the same time are showing a decline in the training of existing employees. This is a leading indicator of ‘brain drain’ that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for the success of any knowledge-worker organization.
Kaplan and Norton emphasize that ‘learning’ is more than ‘training’; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call “high-performance work systems.” One of these is the Intranet.
The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions, these are not something that can be developed by outside consultants.
In addition to the strategic management process, two kinds of business processes may be identified:
- Mission-oriented processes, and
- Support processes.
Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these processes. The support processes are more repetitive in nature, and hence are easier to measure and benchmark using generic metrics.
The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customer focus and customer satisfaction are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of the kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.
The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever is necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to an “unbalanced” situation with regard to other perspectives.
There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.
Implementation Of Scorecards
The premise of an HR scorecard is that HR can and should develop metrics to demonstrate how HR activities impact profitability. The process we recommend is:
- Identify the critical deliverables for Human Resources.
- Identify HR’s customers(for the deliverables)
- Define HR activities that provide the critical deliverables (such as high-talent staffing or a retention initiative)
- Conduct a cost-benefit analysis of activities that provide deliverables.
Lastly, it is essential to ask the right questions to determine if HR is providing the appropriate deliverables. Examples of these questions are:
- How many exceptional candidates do we recruit and retain for each strategic job opening?
- How many hours of results-orientated training do new employees receive annually?
- What is the differential in merit pay between high-performers and low-performers?