Balanced Scorecard: Adoption for Government & Non Profit

www.theinternationaljournal.org > RJSSM: Volume: 02, Number: 12, April-2013 Page 122

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 – 400064 , India

Email : [email protected]; [email protected]

Abstract

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 2003. 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


(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, 2006


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.

4.1.1. 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


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 10-

074(HBS)

An example of a BSC is shown below: Figure 3


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 20–25 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.

4.1.2 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


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 (1990–1996) to performance

management (1996–2000), 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.


4.1.2. 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, high-

level 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. 71-79, January-February 1992.


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.


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Documents

Balanced Scorecard: Adoption for Government & Non Profit