Critique of the Balanced Scorecard Approach

Abstract

The following paper offers a critique of the Balanced Scorecard approach to organizational strategy. The paper will also address the potential limitations of the approach,
while comparing emerging approaches to organizational strategy. The paper will also present an example where the Balanced Scorecard approach failed to reach expectations.

Introduction

            The Balanced Scorecard approach, as developed by Robert S. Kaplan and David P. Norton of the Harvard Business School, is a tool that can be used by organizations to take their strategy and help to convert that strategy into action (Kaplan & Norton, 2006).  The authors contend that for organizations to reach the goals delineated within their vision and/or mission statements they need to create value within their organization. Kaplan & Norton constructed the Balanced Scorecard approach to help organizations improve their enterprise-value proposition using a framework consisting of four key perspectives.

The Balanced Scorecard Structure

            The Balanced Scorecard is at its most basic level is a tool to help organizations arrive at a better understanding the cause-and-effect relationships that exists within the organizational structure (Kaplan & Norton, 2006). The four areas that encompass the Balanced Scorecard approach are financial, customer, internal process, and learning/growth as shown in figure 1. 

Figure 1

The goal of the four areas is to be able to have measurable objectives within each area based on drivers that can be evaluated against one another to determine cause-and-effect. This relationship between the four areas should help the organization determine where weak points between the four areas are and provide measurable way to create enterprise-value, and to strengthen the strategy within the organization. Kaplan (1996) sums up the Balanced Scorecard in this way, “(the Balance Scorecard) is a system that provides real insight into an organization’s operations, balances the historical accuracy of financial numbers, with the drivers of future performance, and assists us in implementing strategy. The Balanced Scorecard is the tool that answers all these challenges.”

Limitations of the Balanced Scorecard

            The Balanced Scorecard seems, on the surface, to be a good tool to help answer the questions Kaplan writes about, but there are some areas that an organization needs to address when deciding whether or not to implement the Balanced Scorecard approach.

            The primary issue with the Balanced Scorecard approach seems to be time. Although simple in format, using a single sheet to present the approach, the depth of the cause-and-effect relationships could take quite a while to develop. The approach does not appear to offer any “quick fix” measures to an organizational strategy. Time is crucial, and part of the approach heralds the need to make quicker adjustments to uphold the value of the organization, but the quickness of the approach seems to remain in question to some degree. For organizations like Global Financial Services, time was a factor in their decision concerning how to implement their strategy,

“The balanced scorecard system demanded more time than the PIP due in part to the large amount of required paperwork at the branch level. Under the PIP program, branch managers allocated bonus pools to other branch employees at their discretion. Under the scorecard process, branch managers prepare scorecards for all branch employees, including tellers, and make bonus recommendations to area directors based on their overall evaluation of the employee (“above par,” “at par,” “below par”). Branch managers typically spend two and a half to four days per quarter compiling scorecards and reviewing them with branch employees” (Ittner, Larcker, & Meyer, 1997).

The time factor is critical on many levels. As in the GFS example above, it is quite possible that when the implementation takes too long the strategy can change mainly due to changing indicators (Kaplan & Norton, 2001). If an organization is measuring with information that is out of date, the whole focus could have changed and now the measurement process has become a distraction.

            Kaplan & Norton discuss how having too few measures per perspective can become a limiting factor when using the Balanced Scorecard approach. They discuss how having the right mix of leading indicators (what drives the process) and lagging indicators (the outcome of the process) is the key to successful implementation of the Balanced Scorecard (Kaplan & Norton, 2001). The limitation here arises when the disparity between indicators makes the cause-and-effect relationship difficult to determine due to lack of balanced information. The opposite of this situation can also limit an organization’s implementation of strategy.

            There is a need to limit the number of indicators and select only the indicators that reflect the strategy and are the most critical (Kaplan & Norton, 2001). An over-abundance of indicators could, and according to Kaplan (2001), and will lead to a lack of focus trying to track too many indicators at the same time.

            It should go without mention, but an organization can eliminate their effective strategy implementation by selecting measures that are not linked to their organizational strategy. This can happen when an organization to list all of their key performance indicators without discerning which measures are actually linked to their strategy (Kaplan & Norton, 2001). Having measurements that are not part of the organizational strategy means that, when complete, the Balanced Scorecard is not translated into something that they can act upon and/or derive benefit from.

Alternative Approaches

The beginning level that might be used for implementing organizational strategy could be the basic vision or goal/s strategy. This type of approach is normally implemented by the top level management (McNamara, 2007). It usually entails a mission statement that gives a brief summary of why the organization exists, what services are provided, and how they will meet the client’s needs. This Approach would also include a vision statement explaining briefly what the preferred future of the organization should look like. With both of these items in place the top-level management team would formulate a strategic plan, and they would implement as well as oversee and update the plan as needed.

If an organization has limited resources or any number of troublesome issues, they may want to use the issue-oriented approach. This approach focuses on finding and implementing the remedy for 3-5 of their biggest challenges (McNamara, 2007). This is definitely more of a shot-range strategic approach. This approach can be determined by people other than the upper-level management as long as the plan meets their approval. This approach relies heavily on the feedback from their customers. Often when addressing issues that are hindering organizational success, the financial returns are the lagging indicators while the customer feedback is the leading indicator of whether or not the strategy is working.

The most “free-flowing” approach would be an “organic” approach. Some organizations function better using the more mechanistic (cause-and-effect) approaches, but for some the “organic” or more accurately described “value” approach might work better. This type of approach rallies around common values (McNamara, 2007). In the “organic” mode one would expect to find a more open dialog type environment, in which processes are discussed, and the strategy is more focused on learning and less on how it is measured.   

            The movement within the business arena seems to be geared more toward a real-time approach to strategy. As fast as things change these days it is easy to see how methods, measurements, and indicators could become out of date in a short span of time. By the time an organization defines their vision, mission, values, strategy, strategic plan, measurements, and implement all of these they might miss their window of opportunity to make needed changes in a timely manner. Instead of score-carding the plan, in the real-time approach the plan would change so often that having up-to-date research and evaluations might be more important than waiting to determine cause-and-effect.

Conclusion

            Having an organization that aligns itself with a vision and mission that are constantly and consistently evaluated seems to be the better foundation on which to build an organizational strategy. Like any good builder needs the right tools, an organization needs a “tool” as well to proved them the best possible information in order that they can make decisions that will improve their enterprise value proposition, board and shareholder alignment, main office to field office support, customer service, supplier relations, and corporate unity. Kaplan (2006) explains that, “The single most important component of the organizational alignment occurs at…the linkage of business unit strategies to the enterprise value proposition.” The Balanced Scorecard approach offers organizations a tool to help achieve just what Kaplan suggested.

           

References

Ittner, C., Larcker, D., & Meyer, M. (1997, November 1). Performance, Compensation, and The Balanced Scorecard Approach. Retrieved May 28, 2012, from Strategic Management: http://knowledge.wharton.upenn.edu/paper.cfm?paperid=405

Kaplan, R., & Norton, D. (2006). Alignment. Boston: Harvard Business School Press.

Kaplan, R., & Norton, D. (1996). The Balanced Scorecard. Boston: Harvard Business Press.

Kaplan, R., & Norton, D. (2001). The Strategy-Focused Organization. Boston: Harvard Business School Press.

Maltz, A., Shenhar, A., & Reilly, R. (2003). Beyond the Balanced Scorecard. Long Range Planning Journal , 187-204.

McNamara, D. C. (2007). Field Guide to Nonprofit Strategic Planning and Facilitation. Retrieved May 27, 2012, from Authenticity Consulting: http://www.authenticityconsulting.com