One of the strengths of Balanced Scorecard is its ability to work in conjunction with existing management processes such as EVA, Activity Based Costing and Budgeting. 3rd Generation Balanced Scorecard is typically used as the hub of a strategic management system because it provides an easy-to-use mechanism for the selection and co-ordination of other management tools.
In 100 words
Most definitely you can deploy Balanced Scorecard effectively alongside many other important management tools and processes. When working with clients, 2GC particularly sees the Balanced Scorecard linked to Planning, Quality and Risk Management. In addition, the results of 2GC’s Annual Survey of Balanced Scorecard Usage indicates that this is true in more general terms, with the most common processes linked to Balanced Scorecard being Planning, Budgeting, Individual Performance Management, Quality and Risk management. Notwithstanding this empirical situation, it is still important to understand the conceptual links between the various tools/processes and in this FAQ we cover some of these in more detail.
Can you link Balanced Scorecard with other management tools?
One of the strengths of the Balanced Scorecard is its ability to work well in conjunction with existing management processes and associated tools. Modern versions of Balanced Scorecard (see the 2GC FAQ What is a Balanced Scorecard?) are often used at the centre of a strategic management system as they provide an easy to use mechanism for the selection and co-ordination of management tools being applied in the pursuit of strategic goals.
When used in this way, the Balanced Scorecard has two roles: first, to inform and prioritise the selection of which other tools to use; second, to report the outcome from the application of these tools when used to achieve strategic objectives. In this FAQ we look at how some of these common management tools can link with the Balanced Scorecard.
Here we are talking about both longer-term or Strategic Planning (this can be anywhere from 3 to a 20 year time horizon - the latter being common in defence or utility businesses) and annual Corporate Planning. The effective use of Balanced Scorecard necessitates a clear articulation of long-term goals with a strategy against which to measure and monitor and thus, the completion of a Strategic Plan.
With regards to annual or Corporate Plans - the Balanced Scorecard is a vehicle to provide a rounded, broad suite of measures and milestones on non-financial elements of the plan. Without it Corporate Plans tend to be synonymous with budgets, as explained in the following paragraph.
While 90% of organisations say they have a strategic plan, many of these are still managed on the basis of budgets. As a consequence, short-term financial pressures and incremental planning implicitly determine the organisations’ long-term strategy, undermining the achievement of stated strategic goals. The Balanced Scorecard provides a useful framework for redefining a budgeting process in a way that aligns budgeting goals with the strategic goals of the business. Some firms have suggested that the positive effect of using the two tools in combination is further enhanced by moving to ‘rolling budgets’ allowing changes in strategy to be reflected in the budget on an ongoing basis, rather than via annual ‘step changes’.
With the recent financial crises (2008/09), the issue of Risk Management has taken on a new life within many organisations and not just in the Financial Services sector. There has been a rise in the number of academic and consulting approaches to linking Performance and Risk Management, nevertheless, they are still different tools and processes that need to be developed individually. Risk management and strategic performance management overlap - a key risk to the organisation will be failure to effectively implement its strategy; a key strategic driver will be taking steps to mitigate major organisational risks. However they are not the same: most of an organisation’s strategic agenda will be driven by trying to satisfy future stakeholder needs; most of an organisation’s risk agenda will be the identification and mitigation risks associated with the organisation’s current operational activities.
Quality management tools, such as Six Sigma, European Foundation for Quality Management (EFQM) Excellence Model, ‘Lean’ Manufacturing, Kaizen, and ISO Standards, have grown in use since their introduction during the quality movement of the late 80s. However, quality tools have sometimes been applied as operational quick-fix improvement initiatives, without justification of a strong business case rooted in the organisation’s strategy. With no or weak links to strategic or corporate performance management systems, the initiatives are not seen as means to long-term ends focused on stakeholder value creation. Consequently, they eventually suffer from funding problems, training and remuneration issues and risk being discontinued before having made any significant impact on the organisation.
- Improvement goals are negotiated rather than based on stakeholder requirements, fundamental process limits, and improvement process capabilities;
- There is no deployment system that breaks high level goals down to the sub-process level where actual improvement activities reside.
The benefits of a Balanced Scorecard cannot be underestimated in its ability to gather together the complex strands and requirements of an organisation and provide a single, disciplined framework for assessment, decision-making and measurable action based on what we know we need to achieve as a business.
Using 3rd Generation Balanced Scorecard at the centre of a corporate performance management framework provides an opportunity to close this strategic/operational divide required for the successful implementation of quality management tools:
- Destination Statements provide a holistic strategic context against which to identify the most important processes where quality initiatives are likely to reap the biggest benefits,
- The identification of Strategic Objectives helps translate long-term goals of the Destination Statement into medium-term priorities to be reflected in operational plans,
- Performance measures are defined by strategic priorities, but based on local ownership and operational relevance,
- Two-way communication supports downward communication of changes in strategic direction, and upward communication of operational insights and learning.
Individual Performance Management - Goal setting and Pay/Rewards
The performance management ideal is the effective linking of corporate/organisational goals to team and individual goals throughout the organisation. This requires a clear articulation and communication of strategy and long-term goals by senior management which can then be interpreted by teams and then subsequently included as appropriate in individuals’ goals. The Balanced Scorecard mechanism is a key way of ensuring that strategy and long-term goals are communicated fully within an organisation - by way of a cascade process (see 2GC FAQ Cascading: Developing, Linking and Aligning Multiple Balanced Scorecards). We see over 40% of our survey respondents indicating that this is done in their organisations.
A similar number also then link their Balanced Scorecards to pay/rewards in order to underpin the goal setting work. We do not believe it is essential to have this link as management thinking is increasingly showing that intrinsic rewards (sharing and celebrating team success, individual job satisfaction etc) are better motivators than extrinsic pay rewards.