The idea of a Balanced Scorecard
Authors: David Garnett and Hannah Farrugia
By definition, social enterprises need to be ‘business-like’. In the absence of market signals and shareholder pressures, not-for-profit organisations need to be able to answer the question: ‘How do we know whether we are getting value-for-money from our limited resources?’ To address this question, social entrepreneurs, like any business managers, have to control costs, manage risks, and monitor performance.
Monitoring and measuring performance
Business monitoring has both informal and formal aspects. Monitoring outcomes on a day-to-day basis is an integral part of informal supervisory activity (line management) and reflective practice (employee awareness of the effects of individual decisions). Formal monitoring usually involves establishing periodic reviews of targets and outcomes that are recorded and then fed back into the wider processes of staff development and strategic and operational planning.
There are three broad, interrelated monitoring approaches. All three are normally employed in the monitoring of social businesses.
- Spot-checking: typically involves the examination of data and other information relating to a specific time and place (a sort of snap-shot of the current position). Annual financial accounts and statements are examples of this approach.
- Comparative analysis: involves looking at the organisation’s performance as compared with other similar organisations. This approach typically involves ‘benchmarking’ and can lead to the production of ‘league tables’. This can involve belonging to a benchmarking group of similar agencies. Comparative analysis is now used extensively by boards of management and other internal monitoring groups as a mechanism for gauging progress. It can be a vehicle for spreading good practice by asking the question: ‘Who is better than us and why?’
- Longitudinal analysis: involves charting progress over a period. Compared with ‘spot-checking’ this is a dynamic approach and is typically used to determine the extent to which ‘continuous improvement’ is being achieved. Longitudinal analysis is often referred to as trend analysis
The formal measurement of outcomes, involves the use of performance indicators (PIs). Performance indicators may be collected for local or national purposes.
A distinction is often made between ‘general’ and ‘key’ PIs. General performance indicators (GPIs) tend to focus on a range of operational targets and are used to monitor and manage the effectiveness of individuals, teams, projects, processes, procedures and specific areas of policy. Key performance indicators (KPIs) are predetermined quantifiable measurements that focus on the critical success factors of an organisation. KPIs are often used by boards, governing committees, executive managers and regulators to check an organisation’s success against its declared objectives and strategic goals.
Key Performance Indicators (KPIs) can be linked to the business mission, vision and values (Morard, et al. 2012), and this can produce a deeper understanding of how measurements come together to enhance the effectiveness of performance monitoring.
One recognised danger of the PI approach is the creation of a fragmented and disaggregated monitoring process in which PIs are presented and considered as isolated data sets and targets. This lack of connectedness between units of information inhibits the ability of the organisation to achieve a properly coherent understanding of its record and prospects. In response to this problem, a management monitoring tool called the “balanced scorecard” was developed in the early 1990s at the Harvard Business School by Robert Kaplan and David Norton.
The balanced scorecard (BSC) is both theory and method. The method seeks to translate an organisation’s mission and strategy into a comprehensive set of performance measures that provides a framework for strategic monitoring and management. The original BSC model used a “four perspective” approach that coordinates information into an interrelated network embracing the objectives of (i) financial viability; (ii) customer needs and expectations; (iii) internal business processes; and (iv) learning and growth. The method is being developed by a number of social businesses as a way of measuring how they are performing against the totality of their strategic objectives.
Many argue that, in the past, performance figures, particularly when presented as a league table, have failed to take proper account of local circumstances and have therefore been difficult to interpret. For these reasons, their publication often carries ‘health warnings’ from practitioners, academic commentators, and even from the monitoring agencies themselves. However, despite these reservations, it is clear that the drive to achieve ‘continuous improvement’ (see Garnett 2015) requires formal mechanisms of comparison between similar types of organisation operating in similar ways to achieve similar ends.
Business environments differ from sector to sector and are constantly changing. Any monitoring technique needs to be (a) appropriate to the business area being reviewed – we would monitor a hospital rather differently from a housing association; and (b) appropriate to current needs and expectations – we would monitor a hospital’s performance against different criteria today than we would ten years ago.
The Relevance of Balanced Scorecards to Housing Management
Robert Kaplan and David Norton (1993: p134) originally advocated the scorecard approach as a method for translating “an organisation’s mission and strategy into a comprehensive set of performance measures that provides a framework for strategic management”. The basis of their model involves the organisation focusing on the four key “business perspectives” identified above.
The current literature on BSC focuses on its application in commercial profit-maximising firms. The typical social landlord is a not-for-profit organisation with a focus on service delivery and community investment rather than on simple profitability and shareholder interests. The technique’s relevance in this field largely stems from the fact that service-orientated organisations are becoming aware of the need to demonstrate to service users and funding agencies that they are providing value-for-money from the use of their limited and valuable resources. This awareness of the importance of target monitoring becomes more acute as social housing providers progressively move towards decentralisation and deregulation (Gruis, 2005).
Benefits and prerequisites of implementing a Balanced Scorecard
The BSC provides organisations with a method for structuring performance information and then assisting in the intelligent reporting of outcomes. Its key feature is that it provides a balanced assessment that integrate a multiplicity of goals from a variety of perspectives. In this way, as well as providing a systematic target-checking tool, the balanced scorecard tracks all important elements of a company’s strategy – from financial viability, continuous improvement and stakeholder satisfaction to team work, partnership working and interagency projects.
It is the ability of the BSC to transform strategic aims into KPIs that distinguishes it from other methods (McAdam & Walker, 2003; Otley, 1999). The model incorporates traditional financial viability measures but, in addition, explicitly tracks outcomes that focus on relevant non-financial factors. These additional factors can be of major interest to the organisation but are often not captured by traditional monitoring. To give but one example, ‘customer loyalty’ might well be seen to be a relevant factor (albeit difficult to measure) in a service-focussed organisation (Isabel, 2011).
BSC can be regarded as a mechanism for accommodating multiple criteria evaluation (MCE). MCE seeks to take account of a variety of outcomes that might result from a single decision. Housing investment and management decisions are multi-faceted in that they often seek to achieve a mix of financial, technical, social, legal, political, environmental and administrative outcomes (Garnett and Perry 2005 p.400), and BSC is specifically designed to allow managers to view performance in several areas at once (Kaplan & Norton, 2005).
[NB. The UK government tends to use the term “analysis” when analysing policy plans and “evaluation” when considering the results of policies and practices.]
Originally the BSC was developed as a critique of those existing tools that focused (sometimes exclusively) on financial evaluations. It was argued that the over-dependence on financial measures meant organisations often failed to take proper account of other aspects of performance that could assist in the creation of future economic value (Isabel, 2011).
To be fully effective, the BSC approach needs to be seen as an aspect of the organisation’s business philosophy and its commitment the multiple criteria analysis (Garnett 1999). It is likely to have a limited effect when it is adopted in a half-hearted way or where its principles are only embraced by senior staff (with no filter-down commitment within the organisation), or where the scorecard exercise is treated as a one-time event (Al-Zwyalif, 2012).
The implementation process requires senior management and the Board to be supportive and enthusiastic. The introduction of a balanced scorecard approach should begin by inducting senior managers into the technique’s principles and processes and ensuring that they appreciate how it will help them, their departments and the organisation as a whole (Ritter, 2003).
Its implementation can bring about a fundamental change in the organisation’s general approach to management. Indeed, in many cases, its introduction will result in a culture shift, and bring about “a fundamental change in the underlying assumptions about performance management” (Kaplan & Norton, 2005: p180).
The BSC assists in the visualisation of performance in a cross-sectional model linked to a strategic vision that coordinates all the various aspects of the organisation’s operations. To give an analogy we might say that it is similar to the dials and indicators in an airplane cockpit (Kaplan & Norton, 2005 p.174). The argument here is that just as it would be fatal for an aircraft pilot to rely on one instrument without any reference to the whole display of information, so it is dangerous for those piloting the company’s business to react to isolated performance indicators without cross-referencing the information with the whole range of evaluated data.
There is no one, definitive approach to the BSC process. To be effective, the technique’s general principles need to contextualised so that it can address local circumstances and meet current requirements and expectations. In other words, the model needs to be fine-tuned to each organisation’s needs. In operation the scorecard tracks all important elements of a company’s strategy and its effective use requires it to reflect the organisation’s mission, values, strategy, technology, organisational culture and environment.
The four perspectives of the traditional Balanced Scorecard
The standard BSC model categorises KPIs into four broad perspectives: financial, customer, internal processes, and innovation & learning. These four organising perspectives help to evaluate the business performance from a variety of strategically important (‘business-critical’) points of view. In this way the technique seeks to allow for the periodic presentation of information that is (i) related to defined strategic objectives; (ii) measureable (where possible, expressed in numbers); (iii) associated with goals that are attainable; (iv) easily understood by those using the scorecard; (v) comparable; and (vi) trend orientated.
It is an understanding of the interrelationships between the four perspectives that enables the organisation to appreciate the interrelated nature of the primary data: and it is this appreciation that helps to produce a “balanced” approach to management decision-making.
“…..no single measure can provide a clear performance target or focus attention in the critical areas of the business” (Kaplan& Norton, 2005. p172).
The four suggested interrelated perspectives for categorising KPIs can be split into long-term (‘lagging’) indicators, and short-term (‘leading’) indicators. This distinction helps the organisation to identify the important relationship between strategic and operational policies and practices.
Although the standard model identifies four over-arching perspectives, this division should not be set in stone. Others have identified six (Ahn, 2001), or even nine (Lohman, et al. 2004), emphasising how BSC implementation needs to be flexible and reflect the specific needs of different market segments or particular organisations.
Scorecards are not intended to replace traditional financial and risk-management measures. They should be regarded as complementary tools that help to identify deficiencies in management systems and, in particular, to point up any failure to link the organisation’s long-term strategy with its short-term actions.
The four perspectives are intended to help close the gap between the “development of strategy and its implementation” (Kaplan, & Norton, 1992: p79). They were identified as a means of linking real investments to perceived outcomes. They need to be considered as a whole and used as a way of holding the organisation to account “to legislators and other stakeholders in terms of meeting public expectations” (Behn, 2003: p586).
Establishing an effective scorecard
Using relevant measures to gauge success is essential in the monitoring of both public and private sector organisations.
The BSC brings together, in a single management report, many of the seemingly disparate elements of a business agenda. At the same time it requires management to consider all of the important operational measures from a variety of business sensitive perspectives. Successful implementation requires a lead from management and an ownership by all. Best practice suggests that the framework of KPIs should emerge from discussions and workshops with individuals and teams. The more time invested in the early stages the more effective will be the final model and the outcomes achieved.
A Case Study: Housing Association
This real-life case study outlines the processes carried out by an English medium-sized ‘transfer’ housing association (managing some 4,000 homes). The quoted views expressed are based on a small sample from this one organisation.
The association had been in existence for 11 years when the Board approved a shift to a balanced scorecard approach to performance monitoring. The process of implementation was monitored and the experiences of those leading the change recorded.
New government welfare and related policies, changing demographics, rising user expectations, and an increasingly challenging economic environment had all impacted on the work of the association. Together these forces created pressure to demonstrate that the association really was making the best use of its limited and valuable resources. A key aspect of the Board’s drive to achieve value-for-money was the creation of an evidence-based assurance that the association would provide a quality service from the various perspectives of its stakeholders.
What was sought was a monitoring and reporting framework that would allow the Board, together with the executive team, to check progress towards the organisation’s mission and strategic goals whilst maintaining the ability for managers and others interested in specific performance issues to drill down to operational levels.
The work of introducing the new system was led by the executive group who were fully aware from a review of previous case studies that the introduction would involve understanding and overcoming a number of practical and cultural constraints and difficulties. Anticipated problems included identifying and displaying the relationship between performance and strategy (Otley, 1999), and the difficulty of agreeing and endorsing one correct model (Erbasi et al. 2012). At the start of the process it was clear that executive members had varying opinions and concerns about the nature and scope of the proposed change.
The drive to introduce a BSC approach effectively began with the purchase of specialist performance management software. The process of selecting the appropriate software package produced a focused dialogue that helped the team clarify the objectives of the proposal.
It was hoped that, in line with the experience of other organisations, the new system would enable of KPIs to be lined up with sought for organisational objectives. In addition, there was an intention that the scorecard would provide intelligent forecasts of strategic performance (Morard, et al. 2012). It was felt that the existing performance management framework did not provide this level of intelligence and was overly structured to monitor outcomes at operational levels. This structure inhibited the ability to link operational performance and projects to strategic planning. When the team were asked what they felt the drivers were for the organisation, they highlighted the importance of measuring the right things and linking these measures to strategy and the corporate plan.
“the drivers for this organisation are going to be what the organisation is here to do and what we are trying to achieve as an organisation and how are we going to measure the effectiveness of that achievement” (Executive Interview).
The Central Role of Management
The executive team were aware that the current system provided inadequate information regarding strategic performance and it was hoped that the introduction of a BSC would enable the organisation to rationalise key strategic measures and projects, then translate the goals and progress into a visual model.
“This would make the current context of our strategy more visual” (Executive Interview).
It was hoped to provide “balanced perspectives”, and the ability to drill down to operational levels through an agreed performance hierarchy of reporting.
It was recognised at the outset that, in this sort of cultural shift, failure often arises when there is a lack of management buy-in or when timeframes are unrealistic, or the organisation lacks the resources to ensure the model delivers the desired outcomes.
“I know typically in other organisations when they have done this sort of thing they have had people dedicated to it for a period to make it work” (Executive Interview).
It is often mistakenly thought a performance model once implemented is the finished result, treated as a one-off event (Al-Zwyalif, 2012). However, it was recognised that the effectiveness of a performance model depends on its “flexibility to meet the needs, not only of the organisation, but the changing external environment” (Executive Interview).
As identified previously performance management is often embedded in organisational culture, and successful implementation of the BSC requires a fundamental change in management philosophy and approach (Erbasi, et al. 2012). This means that successful implementation requires understanding what the change entails and communicating this throughout the organisation. It also requires and management to understand that their own ‘buy in’ needs to be genuine, enthusiastic and visible.
It was understood that a BSC approach has to be focused and that there is no need to measure everything. Experience shows that management should concentrate on improving those activities that impact most on the organisation’s strategic goals and those that affect the various ways in which the organisation is perceived by its key stakeholders (Ritter, 2003).
Planning the implementation: coherence and flexibility
Projects that involve cultural change are likely to fail when implementation is not given suitable consideration. It was therefore seen to be essential that the introduction of the new system be steered by a coherent plan and a clear implementation strategy that the whole organisation could regard as being rational and worthwhile. This involved ensuring that those charged with implementing the new arrangements were “absolutely clear about what it was the Board and executive team want to be achieved”. (Executive Interview).
Coherence was seen to be a primary concern. In particular, it was anticipated that the BSC approach would help performance and strategy to align. By being both clear and coherent, the new system was expected to allow managers at all levels to present quantifiable performance information in ways that would be both easy to understand and allow for coordinated judgements to be made about how specific operational areas are impacting on wider corporate goals.
To achieve coherence it was also seen to be essential that the new integrated performance management software be embedded in the organisation’s day-to-day operational processes and procedures. For all these reasons, it was understood that one of the most important prerequisites for successful implementation was clarity of planning.
In addition to being coherent, it was recognised that the new arrangements needed to be flexible. It was agreed that the model and its applications would need to adapt over time as circumstances and goals altered. It was also recognised that the information captured by the process would be used in a flexible and intelligent way.
“In times of financial crisis or pressure you are going to have far more focus on the financial areas within the scorecard, but that doesn’t necessarily follow as at other times we might focus on the operational aspects. It depends on the business needs at any one time”. (Executive Interview).
Once established, the scorecard needs to be used intelligently and its structure and content constantly reviewed. Its use at Board and other meetings should not be ritualised – it should be regarded as a working tool and its design should remain a work in progress. Like any sophisticated tool, it should be designed in a way that allows its features to be adapted and fine-tuned to changing needs. One thing however, remains constant: “The outcomes and performance measures must be capable of being used to measure progress on our business objectives and pursue our mission and vision.” (Interview 03: 2013).
It was appreciated that a BSC should be more than an internal control tool. Its use should allow the organisation to demonstrate its ability to meet the needs and expectations of specific external stakeholders and the wider community that has an interest in the association’s work.
“In future it’s going to be increasingly important for us to explain to the wider community who we are and what we are achieving.” (Executive Interview 04: 2013).
In the immediate future this was seen to be especially important because of the major changes in welfare provision that came into force in April 2013. These reforms included, among other things: a greater emphasis on localism, the introduction of a ‘bedroom tax’, benefit caps, and the introduction of Universal Credit.
As part of the survey, the executive team were asked about the extent to which they considered that the new processes were supported by team leaders and middle managers (in line with best practice experiences – Al-Zwyalif, 2012). It was felt that time spent on internal communications had borne results and the organisation understood both the nature of, and reasons for, the proposed changes. There was, however, some scepticism about the feasibility of the timeframe for developing a fully effective BSC. Some feedback indicated concerns about whether the speed of its introduction might result in an ineffective model that would then lead to a lack of support (or even cynicism) from staff. There were also concerns over the complicated nature of the performance framework and how this would be managed.
The practice literature places emphasis on ‘phasing in’ changes as a way of minimising management anxiety and organisational disruption (Otley, 1999). Part of this process would require continuous consultation with managers during the period in which the new processes were being planned and introduced as the organisation’s performance framework.
An inevitable early constraint on the introduction of the BSC system was the need to invest time and resources in staff training. The purchase of the software package brought this issue to the fore. The issue of training was intensified by an awareness that the commercial software would need to be explored and adapted in order to meet the specific needs of the organisation. The executive team had seen the BSC operating in other organisations, and had become aware that in all cases the basic package had been modified to meet individual organisational requirements. One person commented that some examples were “frankly either not balanced or were clunky in terms of the way they worked” (Executive Interview).
We should bear in mind that the BSC approach was originally designed for private sector firms. It is inevitable that its effective application in not-for-profit organisations will require significant adaptations. The NHS is an example of a service area where the BSC was introduced with difficulty. In this area its introduction proved to be organisationally complex (NHS, 2013). This experience underlines the fact that the standard model cannot simply be transferred into the social housing sector without thoughtful adaptations. The basic adaptations should “stem from the nature of its accountability to citizens within communities rather than to shareholders” (Sharma, B & Gadenne, D. 2011: p167-184).
In a particular housing association, the BSC needs to be tailored to focus on how social and economic value is measured and delivered.
“Our purpose is to maximise the amount of value we generate – so we need to have a scorecard that identifies and measures how much value is being generated and how it is being distributed to stakeholders and shared with the community” (Chairman of the Board),
Summary and conclusion
The development of KPIs in the four balanced perspectives (Kaplan & Norton: 1993) is not as easily achieved in community and service focussed organisations. This highlights the need for housing associations to measure aspects of performance in a way that focuses on delivering shared and social value rather than solely on financial performance. Having said this, social enterprises are businesses and the financial viability has to remain the most important KPI if the organisation is to survive and prosper.
The key expected benefits from developing a BSC philosophy and its associated practices were identified as follows.
- Making explicit the links between the performance of day-to-day operational practices and periodic projects on the one hand and the achievement of strategic priorities and goals on the other.
- Providing information to management teams and monitoring committees that is relevant, clear and easily understood.
- Identifying short and long-term trends.
- Providing data and other information that will provide an evidence base for identifying gaps in performance.
- Identifying areas of performance successes and concerns that will help inform future management decisions.
- Providing coordinated, coherent information that will help the organisation to become more efficient, effective and equitable as judged by its key stakeholders.
- Helping identify social dividends and indicate how social value is shared in the community.
References and Further Reading:
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Behn , R . 2003 . ‘ Why Measure Performance? Different Purposes Require Different Measures ’ , Public Administration Review , 63 , 586 – 606 .
Erbasi, A. & Parlakkaya, R. (2012). The use of Analytic Hierarchy Process in the Balanced Scorecard: An Approach in a Hotel Firm. Business Management Review . 2 (2), p23-37.
Garnett D (1999), ‘Absent Voices: Accommodation the Interests of Future Generations Through Multiple Rationality Analysis’, in the International Journal of Sustainable Development, Vol.2 No.4.
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Gruis, V. (2005). Financial and Social Returns in Housing Asset Management: Theory and Dutch Housing Associations’ Practice. Urban Studies. 42 (10), p1771-1794.
Isabel, H. (2011). The Balanced Scorecard: The Evolution of the Concept and its Effects on Change in Organisational Management. EBS Review. 28 (1), p1-15.
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McAdam, R., & Timothy, W. (2003). An Inquiry into Balanced Scorecard within Best Value Implementation in UK Local Govemment. Public Administration, 81(4), 873-892.
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Sharma, B & Gadenne, D. (2011). Balanced Scorecard Implementation in a Local Government Authority: Issues and Challenges. . Australian Journal of Public Administration. 70 (2), p167-184.
The case organisation – a housing association (2013), interview quotes from Executive Team and corporate plan.
Zhayda, G. (2011). Analysis of Housing Partnerships Using the Balanced Scorecard Framework. FIU Electronic Theses and Dissertations, p476.