Building a balanced scorecard
In their 1993 paper, Kaplan and Norton offered guidance on how to build a balanced scorecard. The process they discussed applies to business units and describes what they refer to as “a typical project profile” for developing balanced scorecards. In brief, here are the eight steps they list.
- Preparation: The organization identifies the business unit for which a top-level scorecard is appropriate. Broadly defined, this is a business unit that has its own customers, distribution channels, production facilities and finance performance measures.
- First round of interviews: A balanced scorecard facilitator interviews senior managers for about 90 minutes each to obtain input on strategic goals and performance measures.
- First executive workshop: Top management convenes with the facilitator to start developing the scorecard by reaching a consensus on the mission and strategy and linking the measurements to them. This can include video interviews with shareholders and customers.
- Second round of interviews: The facilitator reviews, consolidates and documents input from the executive workshop and interviews each senior executive to form a tentative balanced scorecard.
- Second executive workshop: Senior management, their subordinates and a larger number of middle managers debate the vision, strategy and the tentative scorecard. Working in groups, they discuss the measures, start to develop an implementation plan and formulate “stretch objectives for each of the proposed measures.”
- Third executive workshop: Senior executives reach a consensus on the vision, objectives and measurements hashed out in the prior two workshops and develop stretch targets for each measure; once this is complete, the team agrees on an implementation plan.
- Implementation: A newly formed team implements a plan that aims to link performance measures to databases and IT systems, to communicate the balanced scorecard throughout the organization and to encourage the development of second-level metrics for decentralized units.
- Periodic reviews: A quarterly or monthly “blue book” on the balanced scorecard measures is prepared and viewed by managers. The balanced scorecard metrics are re-visited annually as a part of the strategic planning process.
SECOND AND THIRD GENERATION
Kaplan and Norton stressed that the balanced scorecard is not a template to be applied to businesses in general or even industry-wide. Businesses must devise customized scorecards to fit their different market situations, product strategies and competitive pressures.
Neither should the balanced scorecard approach be viewed strictly as a performance measurement system. Rather, it is a strategic management system that will “clarify, simplify and then operationalize the vision at the top of the organization,” Kaplan and Norton wrote. How a company’s mission statement and vision are operationalized is up to the employees.
“The measures are designed to pull people toward the overall vision,” Kaplan and Nolan wrote. “Senior managers may know what the end result should be, but they cannot tell employees exactly how to achieve that result, if only because the conditions in which employees operate are constantly changing.”
In the mid-1990s, the scorecard was modified to strengthen the link between performance measures and strategic objectives using a “strategy map.” In the late 1990s, the design approach was again tweaked to include the vision or destination statement — a statement of what “strategic success” or the “strategic end state” would look like.
Critics, popularity of the balanced scorecard
Criticism of the balanced scorecard method includes charges that Kaplan and Norton failed to cite earlier research on this method and complaints about technical flaws in its methods and designs. Others have noted that the four perspectives do not reflect important aspects of nonprofit organizations and government agencies — for example, social dimensions, human resource elements and political issues.