INSTITUT TADBIRAN AWAM NEGARA
KAMPUS WILAYAH UTARA
SUNGAI PETANI
KEDAH

TEL : 604-4218321   FAKS : 604-4214489

The Balanced Scorecard

Kaplan and Norton summarize the rationale for 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 to develop metrics, collect data and analyze it relative to each of these perspectives:

• The Learning and Growth Perspective
• The Business Process Perspective
• The Customer Perspective
• The Financial Perspective

It can be seen that these four perspectives relate directly to four of the (1996) Baldridge Criteria categories: Customer Focus (Category 7); Business Results (Category 6); Business Processes (Category 5) and Human Resources (Category 4). Customer focus and business results together made up half the total points in the 1996 Baldrige score. There is therefore a harmony between these two descriptions.

The Balanced Scorecard for Strategic Management

The balanced scorecard methodology extends the key concepts of Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and -- primarily -- measurement-based management and feedback.

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 the end of the production line. The problem with this approach 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.

Metrics

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 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:

• The present status of the organization from many perspectives for decision makers
• Trends in performance over time as the metrics are tracked
• Feedback into various processes to guide improvements on a continuous basis
• Quantitative inputs to forecasting methods and models for decision support

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 of 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 &emdash; 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 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."

Taken from The Balanced Scorecard Institute website