Malta: The Balanced Scorecard: Just A Dashboard

Last Updated: 15 December 2014
Article by Steve Stivala

Would you drive a car without a speedometer, fuel gauge, tachometer and all the other instruments on the dashboard? You definitely would not if you are a prudent driver. Yet many executives still 'drive' their organisation without a dashboard that gives them information on its performance from multiple perspectives. Using a Balanced Scorecard (BSC) approach, an organisation would have the opportunity to be able to assess performance from both a financial perspective, and from other perspectives that drive financial results. However, a dashboard is not enough. It is not only important to know what is happening while you are driving, it is even more important to know where you are going and how to arrive at your next destination.

The BSC goes beyond simply measuring performance. It is a strategic management tool that enables the understanding of an organisation's strategy, the translation of the strategic objectives to operational activities, the alignment of operations to strategy and the communication of strategy throughout the organisation.

Do you really understand your organisation's strategy?

It is not sufficient for an organisation to be more operationally effective than its rivals; it also needs a good strategy for either performing different activities or similar activities in different ways. The BSC is about enabling an organisation to deliver long-term value to shareholders and it is the strategy that describes a differentiated value proposition that could achieve long-term competitive advantage.

It is therefore imperative for an organisation, especially executives, to understand strategy more deeply than simply a mission statement or vague vision. Some organisations do not even have a formal vision and strategy in place and differing interpretations of the company's objectives and strategy by key personnel are common place. An unambiguous vision and strategy is the starting point of BSC design and therefore necessitates the definition of an organisation's vision and strategy in clear terms. This process brings out every executive's interpretation and is discussed and refined until there is consensus. In this way, the BSC would ensure that top management is aligned and has clearly defined and understood the organisation's objectives and strategy.

Is your strategy translated into operational activities?

Successfully implementing strategy is one of the greatest challenges that businesses face in practice. Even the most brilliant vision and strategy would most probably not be realised if it is not translated into more concrete and well defined operational terms. A great tool for formalising strategy and the mapping of causal links between activities in an organisation is called a strategy map; a framework that illustrates how strategy links tangible and intangible assets to value-creating processes (Kaplan & Norton, 2004). The strategy map allows executives to translate the strategy into actionable, operational terms that follow a logical, causal flow. A simple example of a strategy map can be seen in the illustration below.

Such a strategy map can give a high-level depiction of how an organisation uses its resources to add value to its customers and, ultimately, its shareholders.

The next step in translating strategy into operational activities after drafting a strategy map is the BSC itself; it translates the objectives and logic in the strategy map into more specific measures and targets. Each perspective in the BSC will have a number of objectives that describe the specific things that must be performed well for the successful implementation of strategy. The progress of the attainment of each objective can be gauged through a number of measures or KPIs.

Measures can either indicate the achievement of objectives in the form of outcome measures (lagging measures) or give early indication of strategy implementation success in the form of performance drivers (leading measures). A good balance of both types of measures could give a clear picture of historical results and the drivers of future results. The table overleaf gives some further insight on leading and lagging performance measures.

This process of defining, understanding and translating vision into strategy, strategy into a strategy map and into performance measures that link through cause-and-effect relationships is what differentiates the BSC from an ad-hoc set of financial and non-financial indicators.

Is the organisation aligned to the strategy?

A strategy map describes how resources and activities add value and reach corporate goals. The BSC dashboard includes causally linked measures in order to keep track of the attainment of goals. However such goals can only be met if the organisation is aligned to the strategy. There could be activities that run counter to the attainment of the organisation's objectives, or activities that have a silo focus and not on how these activities may support the organisation.

The key to obtaining organisational alignment is cascading the BSC. This means further breaking down the BSC to different business units and even further down to teams or individuals. Cascading will help establish an understanding of the strategy throughout the organisation and the roles every individual, team and business unit have in achieving its objectives.

This process also provides consistency and alignment throughout all levels of the organisation. Only through cascading can the BSC be truly meaningful to the whole organisation and helps embed the BSC culture and is key to successful implementation.

With a cascaded BSC an organisation can align its activities with the organisation's strategy by allocating resources (budgeting) using the BSC. Focus can be placed on processes that achieve the organisation's goals rather than taking a departmental silo perspective. This also facilitates the identification of non-value-adding activities for a leaner organisation.

Is your strategy communicated effectively throughout your organisation?

What use is implementing the BSC if it is not communicated effectively and made part of organisational culture? Cascading the BSC is a huge step towards achieving this. These lower-level BSCs are tools that assist leaders to effectively communicate the organisation's purpose and strategy, and how each individual fits in the big picture and can make a significant contribution towards achieving such goals. Effective communication is key for motivating personnel and achieving organisation-wide buy-in.

There are several ways an organisation can communicate its strategy beyond simply cascading the BSC and providing departments and individuals with a copy. Typical examples include company meetings, presentations, brochures, periodic newsletters, educational programmes, training and the organisation's intranet. The method of communication would depend on the organisation's preferences, culture and budget. Whichever methods may be considered most effective by an organisation, the key point is that communication goes hand-in-hand with motivation and should be done frequently and coherently.

Common misconceptions about the Balanced Scorecard

"The BSC is just a performance measurement tool"

The fact that the BSC is not simply a collection of measures in distinct categories has already been discussed in some detail in this article. However the level at which a BSC is implemented differs throughout organisations. Some implemented as a dashboard, however studies suggest that the greatest success and change emanate from organisations that use the BSC as a strategic management tool as described.

"Implementing the BSC is a project"

The BSC is not a project, in the sense that it does not have a definite period. The BSC is a representation of the organisation's strategy and the way the organisation operates to achieve its goals, and since an organisation's environment is dynamic, so too should be its strategy and, therefore, the BSC. An organisation that does not update its BSC frequently will end up with irrelevant measures and a strategy that is outdated. The BSC is an iterative process and should evolve with the organisation.

"The BSC is for large organisations only"

The BSC concept is very malleable and can be applied to and implemented in organisations of any size. In the cases of smaller organisations, the cascading process would be much simpler or even unnecessary and the communication process simpler. Nothing about the BSC precludes SMEs. The BSC has also been successfully adopted in the public sector and in non-profit organisations.

Executive Sponsorship

Ensuring there is the backing and ownership of top management is arguably the most critical success factor. The BSC is a tool that takes a top-down approach and requires that top management believes in the tool and understands its importance and the benefits it brings. Robert Kaplan and David Norton, the original proponents of the BSC stated in their book The strategy focused organisation that "the single most important condition for success is the ownership and active involvement of the executive team... if those at the top are not energetic leaders of the process, change will not take place". As with most major initiatives, the successful implementation, use and maintenance of the BSC depends highly on the level of commitment and support of top management.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Steve Stivala
 
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