Andersen Arthur Human Capital Services
Arthur Andersen
Human Capital Services
The "Balanced Scorecard" and the New Performance Management
Reprinted with permission from Profile Pursuit
By Oliver Overstall Introduction What is the 'Balanced Scorecard' Approach to Performance Engagement? What are the Pros and Cons? Introducing a Scorecard Approach What Practical Role should the Human Resources Team Play? Introduction Businesses have always had to measure their performance, whether against internal targets and standards or against those set by the external competition. The focus of this measurement has, traditionally, been surprisingly narrow. Performance, particularly at the most senior levels, has been predominantly assessed in terms of financial measures. But where does this leave the other factors which can, ultimately, drive that financial performance, such as customer satisfaction, effective people management or environmental or regulatory requirements? For many executives, and their boards, the difficulties associated with measuring these 'softer' factors can appear almost insurmountable, forcing most businesses back to a reliance on the 'hard' measures of financial performance (albeit seasoned with the occasional set of 'personal objectives' or market share assessments). Yet now, a growing number of businesses in Britain and America have begun to explore and introduce a new framework for the management of performance. The advocates of this approach believe that it allows realistic measurement of both hard and soft aspects of performance. They also see it playing a valuable role on the shop floor as well as in the boardroom. This new framework is known as the 'balanced scorecard.' What is the 'Balanced Scorecard' Approach to Performance Management ? A 'balanced scorecard' is a new way of measuring performance against wider corporate objectives, primarily by taking the emphasis away from purely financial measures. The approach made its first appearance in the Harvard Business Review in a series of articles by Robert Kaplan and David Norton. In essence, Kaplan and Norton suggested that the scorecard could give management an effective means of converting their business's strategic objectives into an effective set of performance measures. Most significantly, the scorecard approach complements traditional financial indicators with measures of performance from a variety of other, broader corporate perspectives. In the classic model, these might include measurements relating to customers, business operations, and to the growth of skills within the business, and the capacity to adapt to change. But the advocates of the scorecard, and a growing number of performance management experts, take pains to emphasize the role of the scorecard not just in the process of managing objectives, but also of determining what these objectives should be. The holistic approach to corporate performance means the balanced scorecard allows the appropriate weight to be given to the key business areas, such as customer service, R&D, operations and finance, supporting this by asking strategic, forward-looking questions. While the four broad perspectives below (Fig. 1) give a flavour of the typical scorecard, in practice the measures for each of them will vary for different companies.
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Arthur Andersen Human Capital Services
FIGURE 1 Financial : q What are our shareholders expectations ? q Are we delivering sufficiently high returns on their investment? q Are our current returns sustainable? Business Operations : q Which processes do we excel at, and will they provide a source of long-term value? q How effectively are we managing our costs, and those of our suppliers? q How does our rate of innovation compare with our competitors? Customer Attitudes: q What is it about us that our customers value? q How do our products compare against key domestic and international competitors, on quality and on cost? Skills and change : q How do our employees view us? q Are we adapting and improving at a fast enough rate? q Do our employees understand our strategic direction? But does the scorecard approach address the shortcomings of traditional performance measurement? Traditional performance measurement processes have been critisized for a wide variety of reasons, but a major concern for many HR professionals, primarily those charged with making the link between the measurement of performance and incentive arrangements, has been that of business relevance. Financial measures may legitimately be the most fundamental in any business, and they can be disaggregated to a very low level (or converted, for example, through 'waste reduction' targets, into meaningful measures at shop floor level). But they can be less relevant in some parts of the business than others. In contrast, performance management systems which are highly devolved, with specific measures tailored very closely to the needs of an individual unit, may lead to a loss of focus. In the worst case, some performance measures may encourage either unnecessary risk-taking or behaviour which, ultimately, is at the expense of other parts of the business. The scorecard, by forming a framework for a family of performance measures and processes, can retain a focus, while at the same time allowing measures to be tailored so that they are relevant to all parts of the business, and its external shareholders. In essence, the scorecard approach is also new in its attempt to put a hard edge on softer aspects of performance. What are the Pros and Cons Any ? HR practitioner is rightly skeptical of new processes, particularly in the complex, and expensive, world of performance management. So what are the disadvantages of this new approach? The first concern that emerges is the scorecard's potential vulnerability to all the same problems as have afflicted traditional performance management systems; in particular: q Lack of genuine top management support for the process;
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Lack of relevance to participants, particularly through their inability to influence the factors being measured; Unrealistic and vague goals; and Inflexibility in the face of change.
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Arthur Andersen Human Capital Services
Encouragingly, the very strength of the scorecard approach over other, earlier approaches may be its very ability to address these traditional concerns of performance management: q The scorecard is likely to be most effective when it genuinely reflects the corporate 'mission' and has the same level of ownership at board level. In this sense, the growing interest in the use of relative measures of performance (where earnings per share can be less attractive as a measure than, for example, total shareholder return) may also open the door for wider use of the scorecard approach in determining board level rewards and increasing institutional acceptance. For example, in the case of the major financial institution, the balanced scorecard is at the heart of the management process for the new annual bonus scheme for directors.
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The scorecard is a framework that can cover a wide range of different measures, but can also provide a linking theme or structure for baskets of very different measures, at different levels and in different parts of the organisation.
The scorecard is not intended to be a static document. In comparison, or contrast with, the corporate 'mission' statement, while the scorecard can be viewed as a vehicle for delivering the mission, it is likely to change its shape and content far more frequently, to ensure that the mission itself is delivered. Introducing a Scorecard Approach As with any new strategic approach, the key starting point if anyone is to take the new initiative seriously, involves securing top-level commitment. In many cases, the introduction of a balanced scoreboard approach has flowed from board initiated strategic remuneration reviews. In the case of a major, global financial institution, the new arrangement, in the form of a head office bonus scheme, offered a means to strengthen relations with the internal customers of head office operations, and incentive achievements of common values.
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Much of the success of a scorecard approach, which will ensure its value is maximized, lies in the careful steps needed to identify what any business' core values and business drivers are. The process is likely to involve four main steps:
1. First, a thorough understanding is needed of the businesses' strategy and
processes. This, and every other stage, requires full understanding of the business' systems, the relationships between them and the factors which have the highest impact on performance.
2. The first process should lead to a clear understanding of the key success factors for
each process and for the organisation as a whole, answering both the question of what drives high ...