Balanced Scorecard: Adoption for Government & Non Profit Organization

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1 Abstract Balanced Scorecard: Adoption for Government & Non Profit Organization Dr. Sarita Vichore, Associate Professor, Durgadevi Saraf Institute of Management Studies S.V. Road, Malad West, Mumbai , India sarita.vichore@gmail.com; sarita.vichore@dsims.org.in Ever since its innovation in the 1990s, the balanced scorecard has won acceptance as a tool to monitor corporate performance. The balanced potential has developed and evolved into a strategic management instrument for-profit sector. Now, nonprofits are becoming familiar with, and trying to use, balanced scorecards. This paper explains what balanced scorecards are and gives critically important tips about how to adapt them successfully into the non-profit world. The purpose of this study is twofold. First, the paper will give insights into the understanding of the concept of Balanced Scorecard (BSC). Secondly, the paper will further look at the function of BSC as a support tool for Government & Non- Profit Organization. Based on literature review and exploratory qualitative research this paper concludes, that for the government and non-profit organizations, given the competitive environment, greater Balanced Scorecard Performance measurement diversity may be expected to greatly focus on measures of outputs and outcomes such as better community services, but may also include input measures such as employee learning and growth, quality and natural resource consumption. Key Words: - Balanced Scorecard, Government Organizations, Non Profit Organizations, For- Profit Organizations. 1. Introduction In the present environment, government and Non -Profit organisations have come under ostensibly constant and continual pressures from both internal and external sources to demonstrate improvements in performance and achievement of goals and objectives (Bevir et al., 2003; and Hood and Peters, 2004). As a result, they now place more emphasis on the implementation of BSC type performance measurement diversity than ever before (Niven, 2003; Smith, 1993; Modell, 2005; and Hoque and Adams, 2008). Originally proposed by Kaplan & Norton (1992) as a tool to monitor corporate performance, the balanced potential has developed and evolved into a strategic management instrument. Soon after its creation, the concept was widely disseminated and implemented by executives and the academia throughout the world (Kallás &Sauaia, 2004). The method s efficiency has elicited distinct opinions among companies in diverse implementation environments. An annual study conducted by Bain & Company (2004) interviewed executives from 708 companies from five continents; the balanced scorecard was used by approximately 52% of top executives in Additionally, responders registered their level of satisfaction with this tool as of 3.8 (range, 0-5). 2. Literature Review In general, economic theory suggests that an organisation implements a performance measurement system to evaluate the performance of its operations, including program and budgetary decisions ( Ittner et al., 2003; and Chenhall, 2005). Further, management uses performance measures to track employee performance against agreed targets. Proponents of performance measurement systems advocate that performance measurement allows employees at all levels of the business to assess progress in achieving targets and to take corrective action where necessary. Kaplan and Norton > RJSSM: Volume: 02, Number: 12, April-2013 Page 122

2 (1992,1993, 1996 and 2001) advocate that BSC concepts expand on mere financial measures and incorporate non-financial measures such as customer satisfaction, internal business processes and employee learning and growth. Niven (2003) suggests that government organisations experience some degree of difficulty applying the original architecture of the BSC, mainly due to the overriding financial perspective. Therefore, Niven (2003) recommends three different types of performance measures for the public sector: (a) input measures; (b) output measures; and (c) outcome measures. As pointed out earlier, inputs and outputs focus on the program or service, whereas outcomes focus on the results of the program in terms of how it operates and what it achieves. The BSC (balanced scorecard) is not derived from strategic management concepts. Its origin is related to the limitation of the traditional performance measurement methods; whose usage without complementation gives managers limited view of companies strategic performance and future value creation (Kaplan & Norton, 1992). This point is also one of the strategic planning problems raised by Ansoff et al. (1976). Nevertheless, following its evolution, the instrument has become an important strategic management tool. More than a trivial measurement exercise, the BSC motivates breakthrough improvements in critical business areas, such as product development, internal processes, customer relations and marketing (Kaplan & Norton, 1993). The BSC is a management tool that presents the corporate vision and strategy through a strategy map that includes goals and performance measures organized according to four distinct perspectives: financial, customer, internal-processes, and learning & growth perspectives. These measures should be interconnected in order to communicate a small number of general strategic issues, such as the corporate growth, risk reduction, or productivity enhancement (Kaplan & Norton, 1997). After the onset of this management tool and initial applications to North American corporations, not only authors but also executives realized that its scope had expanded beyond the original concept (Júlio & Neto, 2002, Campos, 1998). In fact, Kaplan & Norton (2000a) noticed that certain companies that adopted BSC successfully revealed a consistent pattern for strategic management, named as Strategy Focused Organization. In a website based study conducted by the Balanced Scorecard Collaborative, 300 respondents from various industries (approximately 50% users of the BSC) listed the main reasons that drove their organization to the BSC and strategy focused organization (Downing, 2000). The reason most frequently given is alignment between strategy and the organization (two-thirds of the responses). Other reasons are presented in Figure 1 and reinforce the perceived benefits of the BSC not only as a measurement system, but as a strategic management tool. After ten years since its onset, a set of studies analyzed its results and benefits. Kallás & Sauaia (2004) conducted a business games experiment showing a positive impact from the BSC implementation. Additionally, Kallás & Coutinho (2006) identified positive correlation between use of the balanced scorecard and company value in the Brazilian stock exchange. Developments in Business Simulation and Experiential Learning, Volume 33, > RJSSM: Volume: 02, Number: 12, April-2013 Page 123

3 Figure 1 Reasons for implementing the BSC (Downing, 2000) 3. Research Objective The purpose of this study is twofold. First, the paper will work around the understanding of the concept of Balanced Scorecard (BSC). Secondly, the paper will further look at the function of BSC as a support tool for Government & Non Profit Organizations so as to learn its adoptability to the strategic environment of the business. 4. Methodology The research is an exploratory research. To understand the concept of BSC as well as understanding the key aspects of the function of BSC as a support tool for government & non- profit organization the method used is reviewing the literature done in past and also studying the working papers which are currently been researched. This connects with the theoretical background of the research. For the analysis of BSC, the study of BSC implementation and relevant publication on the development of related area is been studied. 4.1 The Balanced Scorecard The balanced scorecard (BSC) is the most widely applied performance management system today. The BSC was originally developed as a performance measurement system in 1992 by Dr. Robert Kaplan and Dr. David Norton at the Harvard Business School. Unlike earlier performance measurement systems, the BSC measures performance across a number of different perspectives a financial perspective, a customer perspective, an internal business process perspective, and an innovation and learning perspective. Through the use of the various perspectives, the BSC captures both leading and lagging performance measures, thereby providing a more balanced view of company performance. Leading indicators include measures, such as customer satisfaction, new product development, on-time delivery, employee competency development, etc. Traditional lagging indicators include financial measures, such as revenue growth and profitability. The BSC performance management systems have been widely adopted globally, in part, because this approach enables organizations to align all levels of staff around a single strategy so that it can be executed more successfully Balance Scorecard for Performance Measurement: Figures 2 & 3 are drawn from the articles written by Robert S. Kaplan for the Balanced Scorecard (BSC). The BSC retains financial metrics as the ultimate outcome measures for company > RJSSM: Volume: 02, Number: 12, April-2013 Page 124

4 success, but supplements these with metrics from three additional perspectives customer, internal process, and learning and growth that were proposed as the drivers for creating long-term shareholder value. Figure 2:-Translating Vision and Strategy: Four Perspectives Conceptual Foundations of the Balanced Scorecard Robert S. Kaplan Working Paper (HBS) An example of a BSC is shown below: Figure 3 > RJSSM: Volume: 02, Number: 12, April-2013 Page 125

5 Organizations have adapted the BSC to their particular external and internal circumstances. Both commercial and not-for- profit organizations have successfully used the BSC framework. Since 1992, Drs. Kaplan and Norton have studied the success of various applications of the BSC in different types of organizations. Companies have used as few as four measures and as many as several hundred measures when designing a BSC performance measurement system. Based on their research, it has been found that a BSC framework using about measures is the usual recommended best practice. Smaller organizations might use fewer measures, but it is generally not advisable to go beyond a total of 25 measures for any single organization, holding company, or conglomerate group of holding companies. Figure 4a: - Example an Ideal Balanced Scorecard Figure 4b:- Example an Ideal Balanced Scorecard Figure4a&4b:- is drawn from an article written by Dr. David Norton. The brief article explained the need for balancing the number of measures in all four perspectives, with greater emphasis on process measures, because the process perspective is the primary domain through which organizational strategy is implemented Strategy Maps Eight years after introducing the BSC, Kaplan and Norton published an article entitled, Having Trouble with Strategy, Then Map It! The article introduced the concept of a Strategy Map to the BSC framework. A Strategy Map enables organizations to clarify their strategy and assist organizations with creating their BSC framework and measures. A generic corporate strategy map is provided below to illustrate the Strategy Map concept. The strategy map links intangible assets and critical processes to the value proposition and customer and financial outcomes (Kaplan & Norton, 2000). The weakest link in a strategy map and Balanced Scorecard was the learning and growth perspective. For many years, as one executive described it, the learning and growth perspective was the black hole of the Balanced Scorecard. (Kaplan & Norton, 2000) While companies had some generic measures for employees, such as employee satisfaction and morale, turnover, absenteeism and lateness (probably growing out of the stakeholder movement of the previous decade), none had metrics that linked their employee capabilities to the strategy. A few scholars had investigated the connection between improvements in human resources and improved financial performance (e.g. Huselid & Becker, 1996) Dave Norton led a research project in 2002 and 2003 with senior HR professionals to explore how to better link the measurement of human resources to strategic objectives. From this work > RJSSM: Volume: 02, Number: 12, April-2013 Page 126

6 came the concepts of strategic human capital readiness and strategic job families and, by extension, the linkages to information capital and organizational capital. These important extensions to embed the capabilities of a company s most important intangible assets were described in an HBR article and a book (Kaplan & Norton, 2004a&b) Figure 5 :-Example of a Generic Strategy Map Johnson, Christian C., Introduction to the Balanced Scorecard and Performance Measurement Systems. As a result of continued research and innovations over the last 15 years, the BSC has gone through an evolutionary process of improvement, from performance measurement ( ) to performance management ( ), to becoming a globally recognized best practice for strategic management (2001 to present). In fact according to Kaplan & Nortan, the benefits a firm can obtain from properly implementing the BSC include Translating strategy into more easily understood operational metrics and goals; Aligning organizations around a single, coherent strategy; Making strategy everyone s everyday job, from CEO to the entry-level employee; Making strategic improvement a continual process; and Mobilizing change through strong, effective leadership. After studying the successful implementations of BSC by early adopters it was proposed by Kaplan & Nortan the following five leadership and management processes for successful strategy execution, helping to create the strategy-focused organization (SFO) (Kaplan & Norton 2001): 1. Mobilize change through executive leadership 2. Translate the strategy 3. Align the organization to the strategy 4. Motivate employees to make strategy their everyday job 5. Govern to make strategy a continual process This research completed the transformation of the Balanced Scorecard from a performance measurement system to an interactive management system for strategy execution. > RJSSM: Volume: 02, Number: 12, April-2013 Page 127

7 Balanced Scorecard for the Government &Non-Profit Enterprises While initially developed for private sector enterprises, the Balanced Scorecard was soon extended to Government &Non-Profit Enterprises. Prior to the development of the Balanced Scorecard, the performance reports of Government &Non-Profit Enterprises including the public sector enterprise focused only on financial measures, such as budgets, funds appropriated, donations, expenditures, and operating expense ratios. Clearly, however, the performance of Government &Non- Profit Enterprises including the public sector enterprise cannot be measured by financial indicators. Their success has to be measured by their effectiveness in providing benefits to constituents. The Balanced Scorecard helps Government &Non-Profit Enterprises including the public sector enterprise select a rational use of nonfinancial measures to gauge their performance with constituents. Since financial success is not their main aim, Government &Non-Profit Enterprises cannot use the standard architecture of the Balanced Scorecard strategy map where financial objectives are the ultimate, highlevel outcomes to be achieved. Government &Non-Profit Enterprises normally place an objective related to their social impact and mission, such as reducing poverty, pollution, diseases, or school dropout rates, or improving health, education, and economic opportunities etc. A non-profit or public sector agency s mission represents the accountability between it and society, as well as the rationale for its existence and ongoing support. The measured improvement in such case is the social impact objective, which may take years to become noticeable, which is why the measures in the other perspectives provide the short- to intermediate-term targets and feedback necessary for year-to-year control and accountability. One additional modification is required to expand the customer perspective. Donors or taxpayers provide the financial resources they pay for the service while another group, the citizens and beneficiaries, receive the service. Both constituents and resource suppliers should be placed at the top of a Government &Non-Profit Enterprises strategy map. (Kaplan & Nortan 2001) Figure 6:- Private & Government & Non- Profit Organisations Matrix Kaplan, R. S.; Norton, D. P. (1992) The Balanced Scorecard Measures That Drive Performance. Harvard Business Review. Boston, V. 70, N. 1, P , January-February > RJSSM: Volume: 02, Number: 12, April-2013 Page 128

8 The alteration of a balanced scorecard concept from for-profit to non-profit organizations is not direct. The basic ideas behind creating a balanced scorecard are as valid for non-profits as they are for corporate businesses, but the implementation of this idea needs to be modified a bit to make it work effectively in the non-profit world. 5. Conclusion Given the competitive environment, greater BSC performance measurement diversity (Ittner et al., 2003) might be expected to greatly focus on measures of outputs and outcomes such as better community services, but may also include input measures such as employee learning and growth, quality and natural resource consumption. According to Martello, Watson and Fischer (2008) rather than understanding what a balanced scorecard is supposed to accomplish, why, and how, many managers simply implement a balanced scorecard as if it were a recipe. While the technique described in professional literature accumulates the wisdom and experience of many people and represents a form of best practice, it should not be copied blindly under the assumption that one size fits all. In particular, the four major dimensions (financial, customer, internal, and innovation and learning) can and should be modified to fit an organization. This is particularly true when the organization is a non-profit. Another problem that organizations frequently make is jumping into a measurement program too fast and making the program too complicated. Deriving meaningful measurements, gathering reliable data, developing useful analytical techniques, and educating managers about how to use the data are all difficult steps. Doing all this at one time with a bucket full of 50 different measures is doomed to failure. It has been observed that organizations, where managers do not have experience with measurement programs, or fail to heed the warnings of those who do, typically underestimate the difficulties of implementing a balanced scorecard program. Thus it won t be surprising that given the focus of Managing (or working) for Outcomes framework where it is emphasised by governments that government agencies should focus on results and outcomes. These findings are consistent with Cavalluzzo and Ittner s (2004) results-oriented emphases in the performance measurement systems of US government agencies. These results also support the view (Hood, 1991 and 1995) that encouraging a broader set of performance measures in government means managing outcomes, not rules. 6. Recommendations In recent years, the cooperation and interaction between non-profit organisations and companies on BSC(Balanced Scorecard) have been increasing. Yet the effect remains questionable because the BSC performance is still majorly evaluated by financial data only. However, from the non-profit organisation s standpoint, the performance of BSC should be explored from different aspects instead of financial outcomes. It is advisable that the variables involved in exploring the performance of executing a BSC on a government and a non-profit organization requires building a reliable measurement index and exploring a related structure between each perspective. 7. Limitations The whole research is conducted based on the views and reviews of the BSC practitioners and researchers. Hence scope for further research is to understand the issues related to explore further whether Non-responsive departments are non-adopters of Balanced Scorecard. > RJSSM: Volume: 02, Number: 12, April-2013 Page 129

9 References:- Ansoff, H. I.; Declerk, R. P.; Hayes (Org). (1976) From Strategic Planning To Strategic Management. 4. Ed. Vanderbilt University: John Wiley & Sons, Bevir, M., R.A. W. Rhodes and P. Weller (2003), Traditions of Governance: Interpreting the Changing Role of the Public Sector, Public Administration, Vol. 81, No. 1, pp Campos, J. A. (1998) Cenário Balanceado:Painel de Indicadores Para Gestão Estratégica Dos Negócios. São Paulo: Aquariana, Cavalluzzo, K.S. and C.D. Ittner (2004), Implementing Performance Measurement Innovations: Evidence from Government, Accounting, Organizations and Society, Vol. 29, pp Chenhall, R.H. (2005), Integrative Strategic Performance Measurement System, Strategic Alignment of Manufacturing, Learning and Strategic Outcomes, Accounting, Organizations and Society, Vol. 30, pp Chenhall, R.H. (2005) and K. Langfield-Smith (1998), Adoption and Benefits of Management Accounting Practices: An Australian Study, Management Accounting Research, Vol. 9, pp Clark, C. and D. Corbett (1999), Reforming the Public Sector Problems and Solutions (Allen & Unwin, Sydney). Downing, L. (2000) Progress Report on the Balanced Scorecard: A Global Users Survey. Balance Scorecard Report. Harvard Business School Press, v. 2 n. 6, p. 7-9, November-December Hoque, Z. (2008), Measuring and Reporting Public Sector Outputs/Outcomes: Exploratory Evidence from Australia, International Journal of Public Sector Management, Vol. 21, No. 5, pp Hoque, Z. and C. Adams (2008), Measuring Public Sector Performance: A Study of Government Departments in Australia, Research Monograph (CPA Australia, Melbourne). Hoque and Adams ( 2011) The Rise and use of Balanced Scorecard Measures in Australian Government Departments Financial Accountability & Management, 27(3), August 2011, Hood, C (1991), A Public Management for All Seasons, Public Administration, Vol. 69, No. 1, pp Hood, C (1995), The New Public Management in the 1980s: Variations on a Theme, Accounting, Organizations and Society, Vol. 20, pp Hood, C and G. Peters (2004), The Middle Ageing of New Public Management: Into an Age of Paradox? Journal of Public Administration Research and Theory, Vol. 14, pp Huselid, M.A., & Becker, B.E Methodological issues in cross-sectional and panel estimates of the Human Resource-firm performance link. Industrial Relations, 35, Ittner, C.D. and D.F. Larcker (1998), Innovations in Performance Measurement: Trends and Research Implications, Journal of Management Accounting Research, Vol. 10, pp > RJSSM: Volume: 02, Number: 12, April-2013 Page 130

10 Ittner, C.D and M. Meyer (2003), Subjectivity and the Weighting of Performance Measures: Evidence from a Balanced Scorecard, The Accounting Review, Vol. 78, No. 3, pp Johnson, Christian C., Introduction to the Balanced Scorecard and Performance Measurement Systems Júlio, C. A.; Neto, J. S. (Org). (2002) Estratégia e Planejamento : Autores e Conceitos Imprescindíveis. São Paulo : Publifolha, Estratégia e Planejamento: Autores e Conceitos Imprescindíveis. São Paulo: Publifolha, Kallás, D;. Coutinho, A. (2006) Balanced Scorecard Implementation for Strategy Management: Variation of Manager Opinion in Real and Stimulated Companies. Developments in Business Simulation and Experiential Learning, Volume 33, 2006 Kallás, D.; Sauaia, A. C. A. (2004) Implementation and Impacts of the Balanced Scorecard: an Experiment with Business Games. Developments in Business Simulation and Experiential Learning, Las Vegas, Volume 31, 2004, Reprinted in The Bernie Keys Library, available from Kaplan, R. S.; Norton, D. P. (1992) The Balanced Scorecard Measures That Drive Performance. Harvard Business Review. Boston, V. 70, N. 1, P , January- February Kaplan, R. S.; Norton, D. P. (1993) Putting the Balanced Scorecard to Work. Harvard Business Review. Boston, V. 71, N. 5, P , September-October Kaplan R.S. and Norton D.P. (1996). Translating Strategy into Action, HBS Press, Boston,USA Kaplan, R. S.; Norton, D. P. (1997) A Estratégia em Ação: Balanced Scorecard. 4. Ed. Rio de Janeiro: Campus,1997. Kaplan, R. S.; Norton, D. P. (2000) Having Trouble with Your Strategy? Then Map It. Harvard Business Review. Boston, Volume Seventy-Eight, Number Five, September-October 2000b, Kaplan R.S. and Norton D.P. (2000). The Strategy Focussed Organisation, HBS Press, Boston, USA Kaplan, R. S.; Norton, D. P. (2000a) Organização Orientada para a Estratégia: Como as Empresas que adotam o Balanced Scorecard prosperam no novo Ambiente de Negócios. Rio de Janeiro: Campus, 2000a. Kaplan, R. S. and D.P. Norton (2001) The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Competitive Environment, Boston: HBS Press. Kaplan, R. S. and D.P. Norton (2004a), Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Boston, HBS Press. Kaplan, R. S. and D.P. Norton (2004b). Measuring the Strategic Readiness of Intangible Assets, Harvard Business Review (February): Kaplan, R.S. and D.P. Norton (1992), The Balanced Scorecard Measures that Drive Performance, Harvard Business Review (Jan-Feb), pp Modell, S. (2001), Performance Measurement and Institutional Processes: A Study of Managerial Responses to Public Sector Reform, Management Accounting Research, Vol. 12, pp > RJSSM: Volume: 02, Number: 12, April-2013 Page 131

11 Modell, S. (2005), Performance Management in the Public Sector: Past Experiences, Current Practices and Future Challenges, Australian Accounting Review, Vol. 15, No. 3, pp Smith, P. (1993), Outcome-Related Performance Indicators and Organizational Control in the Public Sector, British Journal of Management, Vol. 4, pp Martello, M, John G. Watson and Michael J. Fischer( 2008) Implementing A Balanced Scorecard In A Not-For-Profit Organization Journal of Business & Economics Research September 2008 Volume 6, Number 9 Niven, P.R. (2003), Balanced Scorecard: Step by Step: For Government and Non-Profit Agencies (John Wiley & Sons, Hoboken, New Jersey). > RJSSM: Volume: 02, Number: 12, April-2013 Page 132