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Saturday, 20th April 2024 |
| Balanced scorecard helps put the emphasis on corporate strategy |
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| Balanced scorecards help to focus a company on its strategy and goals and is a process that can enhance a company’s reputation and credibility, says Patrick Durkin. |
Information about a company’s potential for creating shareholder wealth is key for any prospective investor. While annual reports give a primarily historical perspective and provide limited information on these matters, the reporting of forward looking information by companies is generally very sparse. This is where the balance scorecard comes into play.
It is essential a means of assessing a company’s strategy and seeing whether or not it is meeting targets it sets for itself.
Analysts and institutional investors are keen to understand a company’s strategy and the key value drivers that must be managed in order to succeed. They want to know what the company’s vision is and how the company plans to achieve this. They also want to know if the organisation has the ability to implement its chosen strategy?
Knowledge of these aspects will give investors a greater understanding about the company and its future potential. One of the roles of effective management, therefore, is to explain to investors the way the company operates, leading to an enhancement of the company’s reputation.
Clearly, it is not just a question of better communication: what is said must also be put into practice. Research shows that the ability to execute strategy is more important than the quality of the strategy itself in shaping corporate valuations. In the majority of cases companies lose value not because of bad strategy but because of bad execution. One problem is that while strategies are changing more quickly, the tools used for implementing strategies have not kept pace.
Balance scorecard
A balanced scorecard can be used to address these two issues. Firstly it can be used for strategy implementation (and communication to external and internal parties). Secondly, the balanced scorecard can help to maximise the value of intangible assets.
As companies move to dynamic business models, it becomes increasingly important for them to expand beyond backward-looking, financial measures. To be effective, companies need to look forward and take account of the cause-and-effect relationships between such areas as production, customer relationships, internal processes and intangible assets.
The concept and methodology of balanced scorecard was originally created by Dr Robert Kaplan and David Norton in the 1990s, through a research study to deal with the shortcomings of traditional financial systems. It enables organisations to accelerate the execution of their strategies and track progress towards their objectives.
A typical balanced scorecard will include a strategy map that describes the key initiatives to be followed to achieve the strategic objectives and shows the cause and effect relationships that exist between them. This is often viewed from ‘perspectives’, such as finance, customer, process and innovation, as an aide to ensure the completeness and robustness of the plan. The strategy map is then populated with actions, responsibilities, milestones and measures that implement and track progress towards the objectives.
The finance director can use a balanced scorecard to focus the company’s strategy on creating value. The corporate vision can be communicated to the entire work force and empower all employees to think proactively, before events occur that demand a reaction. Corporate knowledge can be drawn upon to make decisions based on hard facts, not assumptions. Analysis of future performance indicators that generate value can be made and actions can be modified accordingly.
This means that implementing a balanced scorecard will speed up the implementation of strategy, by helping to communicate objectives internally, so that everyone can see how their work contributes towards the corporate aims. It also helps to describe the strategy in measurable terms by translating the strategy into Key Performance Indicators (KPIs) that are reported clearly and on time.
Using a balanced scorecard demonstrates the company’s sources of future wealth creation - it shows the investments made in intangible assets and how these are expected to deliver a return in the future. The value of longer term plans will be easier to explain and the benefits can be tracked to make sure they are delivered in line with the plan.
The system also reduces wasted time and expenditure by reducing uncertainty and directing the planning, budgeting and resource allocation activities.
Making the scorecard automatic
Most companies realise that the balanced scorecard needs to be integrated with their existing information and management processes. Otherwise, the scorecard will stand out on its own, and run the risk of becoming out of sync with the way the company operates on a day-to-day basis. The scorecard transcends the traditional departmental walls, embracing corporate wide issues and objectives. Appropriate information is likely to appear on several different databases spread around the company.
So, an integrated information strategy is an essential ingredient to roll out the balanced scorecard to the whole of an organisation. This will ensure there is only ‘one version of the truth’ and consistency of performance indicators used throughout the company.
A software system needs to be capable of collecting, transforming, modelling and analysing the information needs of the company.
The key to becoming a strategy focused organisation is to put strategy at the centre of the management process. Software can be used to represent your strategic map and turn strategic objectives into metrics, automate data collection and route the resulting scorecards to the appropriate internal audience. Performance indicators may need to be aggregated at various levels and given a weighting to reflect their relative importance to the company.
Aggregating data for a corporate view of performance can lead to unnoticed failures lower down the hierarchy. If a business unit in the corporate hierarchy fails to meet the threshold for a given measure, a flag can appear at the organisational level.
Software used should automate and streamline the collection and distribution of information and offer supporting information for each measure such as hyper links and drill down.
The system
Each business unit can develop its own scorecard aligned with the overall business strategy. Scorecards can also be created for external suppliers and partners who affect the success of the organisation. Software needs to support consistency between the various scorecards, show target and actual performance and also support target setting and collaboration between the people involved.
Everyone within the organisation needs to understand the strategy, be aligned with it and be capable of executing it within their own area. Actions and responsibilities can be clearly assigned in line with the corporate goals through a common environment where they and their managers can share knowledge and act on it. Software should support commentaries and notes to be used to give context to the measures and capture ideas, decisions and actions.
Long term strategic initiatives can be translated into short term milestones on which budgets and other operational plans are based. The results are communicated and changes to the strategy can be made as necessary. Software needs to integrate with existing applications, particularly the financial budgeting and planning areas, to ensure consistency.
Models such as the balanced scorecard are wholly dependent on the quality of the information fed into them. What’s more, they must be sufficiently flexible and scalable to meet specific organisational requirements now and in the future.
No balanced scorecard system is a ‘once and for all’ solution. Objectives and actions will be constantly reviewed and where necessary changed to reflect new priorities. Balanced scorecards demonstrate the variety of influences on companies and form an excellent basis for discussions on strategic improvements in performance. By demonstrating the effect that initiatives and actions have on outcomes, an automated balanced scorecard can also motivate managers and staff at all levels. And a well motivated employee will deliver excellent service to well satisfied customers generating sustainable profit. The balanced scorecard in action! |
Patrick Durkin is country manager of SAS Ireland.
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| Article appeared in the April 2001 issue.
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