About the paper
The paper is commissioned to discuss the utility of the Balance Score Card, which is turning out to be a revolutionary management tool over the past 25 years of its establishment. A one of a kind management tool that balances the organizational objectives within the spectrum of financial as well as non-financial considerations, has been adopted by organizations around the world. However, the adoption of balanced scorecard does not guarantee success as it depends upon the characteristics and organizational architecture of the company that is adopting it. In this paper, we will discuss two real life scenarios citing the journey of an organization that has benefited from the Balance Score Card while others have failed to reap any benefit.
Balanced Score Card
Balanced Score Card is a revolutionary management control tool that has changed the conventional thinking of organizations around the world and how the performances within the organization should be accessed. Introduced in 1991 by Harvard Emeritus Robert Kaplan and David Norton, Balanced Score Card was brought into the corporate scenario when companies were ready to transform themselves to compete in the world of digital information. The one framework that was added to the vision of performance measurement by Balanced Score Card was to align the business activities to the vision and strategy of the organization and exploiting intangible assets with more decisiveness than their physical assets. Another considerable aspect, and which many management pundits agree that was the core reason of the success of Balanced Score Card, was that it never asked the companies to disregard financial measures, rather it only asked the companies to complement the financial measures with non-financial measures and thus give the managers a more balanced view of the organizational performance. A private research group suggests that around 50% of the large-cap US firms have adopted Balanaced Score Card and the utility is now extending further in Asia and Middle East too. Additionally, this management tool has been listed as one of the top management tools and influential business ideas of the world.
The courier and parcel delivery company, United Parcel Services(UPS), set an example for the entire corporate community that how Balanced Score Card(BSC) can be used even when your company isnt struggling. During 1994, UPS was enjoying huge profits and was rated as industry behemoth by the experts. However, the company’s CEO realized that his company is under danger and if it do not the change the focus to customers, it will not be able to realize the opportunities triggered by global expansion and e-commerce industry. Henceforth, to continue to run on the bullish path,the company decided that it should understand its customers in a better way and how to deliver the products. By this point, UPS was measuring everything of financial terms, in fact, ninety(90) percent of its measurement were in financial terms and employees had clearly stated that how their individual performance was affecting the company’s performance.
Hence, the company’s CEO, Oz Nelson finally decided that the company should focus on quality measures of key process and approved the adoption of new process improvement model through Balanced Score Card(BSC). Discussed below are the hierarchal steps taken by the company to design Balanced Score Card(BSC) for its organization:
-Aligning the future vision of the organization with the Balanced Score Card
After deciding to go with the Balanced Score Card as part of its improvisation model, the management first articulated the company’s vision and aligned it to the desired position in the future, which majorly related to focus on the consumer and other quality measures of the key business process. Thereafter, it established the organizational goals using four key point-of-arrival(POA) metrics namely:
Customer Satisfaction
Employee Relation Index
Competitive Position
Time in transition
The Balanced Score Card was finally created as part of which the four perspectives, financial, customer, internal business processes, and people, were aligned with these four metrics while each of these metrics was assigned goals and measures to keep a check on them.
Communicating the Campaign across the ranks
Under the old and conventional measurement system at UPS, the key business plans or models were never communicated throughout the organization, and as a result, the attitude of ‘’I do not know how my daily performance affected the organizational performance’’ prevailed as only few top managerial employees were aware of the big picture.
However, with the adoption of BSC model, the management made sure that the campaign is effectively communicated even through low ranks of the organization. Therefore, after educating and training the top management about the Balanced Score Card model, the management launched the three-year, five-phase communication and education program to communicate the model to the rest of the workforce. By the end, over 300,000 employees of the company were educated with the BSC model and the company witnessed significant improvement in employee satisfaction with elimination of ‘’I do not know how my daily performance affected the organizational performance’’ attitude from the organization. By the end of 1999, the Employee Relations Index question (“What I do every day makes a difference”) surged from a 67% favorable rating in 1995 to 84%
-Making Strategy Everyone’s Job
After developing and communicating the meaning and expectations from the BSC model, the management now deployed Balanced Scorecard measures through frontline managers as part of which, each manager established goals for the measures assigned to them with mandatory assessment of the progress in every 30 days. The objective here was clear, ‘’ Making Strategy Everyone’s Job’’. Stated otherwise, each manager was responsible for developing strategies to meet measures assigned to them and each strategic plan was accessed every three months and managers who had made those plans checked whether the activities have been completed and if the goals have been reached. The compensation of the managers was also affected how well they were able to meet the goals assigned to them as part of measures of the Balanced Score Card (BSC).
Apart from frontline managers, the management also deployed the same strategy for supervisors and the plan developed by them were also used as the basis of their quality performance reviews. Overall, the individual level business related to the Balanced Scorecard account for 80% of the quality performance review while the remaining 20% attributed to core business process, management and leadership skills.
Feedback and Update
After experiencing success in the first phase of the implementation of BSC model, the management decided to update the measures of the Balanced Scorecard Model and the changes introduced further promoted the aura of ‘Balanced Approach’ throughout the organization. Citing the need of updating he measures of Balanced Score Card, Doug Schultz, corporate operational excellence manager, “When we rolled this out in 1996, people easily blew past the financial goals, but that was only 25% of how we measure performance. People weren’t as strong in some other areas. In order to drive UPS forward, we had to raise the bar. We did that by measuring people’s performance from a balanced approach. ‘’ The updates introduced within the BSC framework were:
In order to be considered successful, every frontline manager was required to succeed in in all four Balanced Scorecard perspectives.
The overall outcome of Point-of-Arrival was showcased to everyone in the organization to urge the feeling of responsibility and see the impact of their efforts on the organizational goals
Even the budgeting and planning function was linked as one business function driven by Balanced Score Card
The final review
With an adoption of an organized approach for Balanced ScoreCard model, UPS experienced a remarkable gain in terms of profitability and overall business functions. By the end of 1999, within five years of adopting the BSC project, the company was transformed into a more nimble, customer focused and solution oriented business that was ready to grab the opportunities offered by e-commerce company. While service reliability had improved remarkably with the company handling 8.7 million packages every day, UPS also witnessed improved revenue figures, which,post the adoption of the BSC model were increasing by 10% annually compared to 3% growth in the industry. Profitability had also improved by 30% and 40% during 1998 and 1999, respectively. Validating the success of the company, even Forbes awarded the title of ‘’Company of the year’’ in 1999 while Businessweek described the company as ‘’Foot soldiers of the dot.com revolution’’
In short, Balanced Scorecard provided a road map of a shared vision of the future goals of the organization that allowed everyone to contribute to the organizational performance.
It is considerable that adopting the Balanced Scorecard Model just for the sake of it or just because your peer company is doing so, is not a right approach and can be detrimental to the company. Companies, which use too few measures, or fails to focus on critical measures or just fail to maintain the balance between the organizational objectives and measures selected, are prone to fail despite of their adoption of BSC model. Professor Claude Lewy of the Free University of Amsterdam has found that 70 percent of the scorecard implementations have failed and the percentage is increasing as the company fails to recognize the suitable measures for their organizational goals.
While there are many instances of failure of scorecard implementation, but the one that is profoundly used as a benchmark example is that of Analog Devices, the first company to develop Balanced Scorecard even before the concept was officially introduced by Kaplan and Norton. Important to note, during 1987, as part of the Quality Improvement Program of the company, vice-president of quality and productivity at Analog Devices, Arthur Schneiderman, framed a balanced scorecard with a commitment to achieve a major improvement in quality, cost and on-time delivery performance. Ironically, the adoption of balanced scorecard did bring in remarkable operational improvements, but at the expense of financial losses. In other words, the company failed to translate he operational improvements into increases sales and higher profit margins because of which, the stock price plummeted by 70% in three years of the adoption of balanced scorecard, and the failure to create a link between operational improvements and financial measurements eroded the shareholder value and the model of Balanced Scorecard was tagged as ‘Failed’ in Analog Devices Inc.
Even the then chairman and president of Analog Inc, Ray Stata, had cited that at the time of development of the Balanced Scorecard his company had developed a view that the majority of the companies are targeted towards reporting financial information to stockholders and other stakeholders while giving a least consideration to fundamental operational performance. Therefore, to address the issue, they designed the balanced scorecard with the barest of financial information and placed greater emphasis on quality improvement goals.
The outcome of the scorecard in terms of improvement in operational performance was astounding. For each increment of time that equals half-life, the defect level drops by 50%. For instance, if the initial defect level was 10% earlier, post the implementation of scorecard, that was down to 5%, and after six months, it was down to 2.5%. However, in the quest to improve operational performance, the company ignored the financial performance and kept on witnessing decreasing sales figure, profit margins and bearish trend in the stock price.
Henceforth, it was the inability of Analog’s management to carry a balanced vision on operational and financial performance of the company that led to the failure in their balanced scorecard model.
Lesson to learn from UPS: Designing success not failure
It is considerable that adopting the Balanced Scorecard Model just for the sake of it or just because your peer company is doing so, is not a right approach and can be detrimental to the company. Companies, which use too few measures, or fails to focus on critical measures or just fail to maintain the balance between the organizational objectives and measures selected, are prone to fail despite of their adoption of BSC model. Professor Claude Lewy of the Free University of Amsterdam has found that 70 percent of the scorecard implementations have failed and the percentage is increasing as the company fails to recognize the suitable measures for their organizational goals. The founder of BSC, Robert Kaplan and David Norton has redundantly proposed that if the balanced scorecard fails, the fault is the implementation and organizational process not the scorecard.
Below discussed are the reasons, which we consider as the factors that ensured that UPS deigned success with the implementation of Balanced Score Card and not the failure:
As for UPS, the company realized the astounding success as right from the beginning of the adoption of BSC model, it had a legitimate reason to re-organize its organizational architecture and make it a customer-focused organization as it wanted to generate maximum benefits from the future opportunities to be offered by booming e-commerce industry.
ii) Assigning the task to experienced individual
The company appointed experienced professional, Michael Brown, who was the manager of corporate measurement, to design the measures and construct the Balanced Scorecard for the organization. Leveraging its experience, Michael Brown only included measures that aligned with the organization’s future vision and established the goals that aligned with the company’s mission statement. This approach ensured that the company have a legitimate BSC measures to work upon.
iii) Effective communication of the BSC model
Learning from their mistakes when the management refrained from communicating the plans through different ranks in the organization, UPS’s management ensured effective communication of the BSC model and involved more than 300000 individuals. Moreover, the communication was designed in a cohesive manner, including the education and coaching that helped the employee understand the real essence of the BSC model and understanding as how their actions affects the operational performance of the company.
iv) Commitment of Senior Management
As cited by Robert Kaplan and David Norton, the foremost and probable reason of the failure of BSC model is the lax attitude of senior management who rather than taking the charge themselves, delegate the process to middle management. However, as for UPS, it was the company’s CEO who took the charge and made sure that the model spreads throughout the organization. In fact, the first training program of the BSC model in UPS was designed for educating the senior management only, and after its success, the senior management designed the training program for the rest of the workforce.
In short, it was the commitment of the senior management that turned out to be one of the most important factors behind the success of UPS’s Balanced Scorecard Model.
v) Applying updates
While many companies get excited with the initial success, UPS was not one of them. During 1998, two years after the launch of the initial phase, the company updated the entire process and required its managers to be successful in all the four perspectives relating to:
Customer Satisfaction
Employee Relation Index
Competitive Position
Time in transition
The update came at the time when all the departments were surpassing the financial targets assigned to them and the reason cited for the update was the quest to generate additional operational improvement and see the improvement from the balanced approach and not just the financial figures.
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