Article: Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part 1. Robert S. Kaplan and David P. Norton (2001).
The balanced scorecard is a giant step in not only performance measurement, but in strategic management of any organization. Purely financial measurement systems record the outcome of the past actions and therefore, are irrelevant for timely management actions. Reliance on the financial measurements only also focuses on short-term performance, rather than long-term value creation.
Other non-financial scorecard measurement systems were usually separate checklists, designed for a specific process or organization. They were not linked together in a logical system that goes all the way to the organization’s strategy.
Balanced scorecard is tailored to the realities of the 21st century, where the company value have shifted from tangible to intangible assets. Numbers does not easily measure intangible assets such as customer relationship, the organization’s staff quality or the internal climate that inspires innovation and problem solving.
Balanced scorecards supplement the traditional financial measurements of an organization performance and allow to better evaluate the overall performance of a company. They also are the great tools to show the position of an organization on the way to achieving strategic goals. Strategy maps are the useful instruments in evaluating such position.
What potential problems could result from implementing the balanced scorecard?
There are several potential problems in implementing the balanced scorecard. Some organization develop a system of scorecards that utilized measurements, other than the financial ones. However, the separate scorecards are not the same as the strategy maps that link together the strategic goals, the ways to achieve these goals and measure the performance on the way to achieving such goals. Separate scorecards fail to show how the measured goals will be achieved and they also do not allow to monitor the progress on the way to achieving such goals.
Key Performance Indicators (KPI) is another example of a scorecard that seems to be performing the same task, but falls short in comparison with the real balanced scorecard. Usually KPI measurements are focused on an initiative and not an outcome. KPI scorecards are useful when the processes they measure are linked to strategy at some higher level. KPI scorecards that are not part of a more complex strategy map, can produce conflict of targets within the company, may lead to wrong management decisions and even employees cheating in order to achieve the measured goal.
The most common mistake when implementing scorecards is to install a set of separate measurements that are not linked together and not liked to an organizational strategy. The properly organized balanced scorecard system together with the strategy map should show the strategy of the organization and the way the strategic goals will be achieved by all levels of the company.
