The development of the Balanced Scorecard as a strategic management

The Balanced Scorecard is a widely adopted performance management framework first described in the early 1990s. More recently it has been proposed as the basis for a ‘strategic management system’. This paper describes its evolution, recognising three distinct generations of Balanced Scorecard design. The paper relates the empirically driven developments in Balanced Scorecard thinking with literature concerning strategic management within organisations. It concludes that developments to date have been worthwhile, highlights potential areas for further refinement, and sets out some possible topics for future research into the field. The Balanced Scorecard and its development The Balanced Scorecard was first introduced in the early 1990s through the work of Robert Kaplan and David Norton of the Harvard Business School. Since then, the concept has become well known and its various forms widely adopted across the world (Rigby, 2001). By combining financial measures and non-financial measures in a single report, the Balanced Scorecard aims to provide managers with richer and more relevant information about activities they are managing than is provided by financial measures alone. To aid clarity and utility, Kaplan and Norton proposed that the number of measures on a Balanced Scorecard should also be constrained in number, and clustered into four groups (Kaplan and Norton, 1992, 1993). Beyond this, the original definition of Balanced Scorecard was sparse. But from the outset it was clear that the selection of measures, both in terms of filtering (organisations typically had access to many more measures than were needed to populate the Balanced Scorecard) and clustering (deciding which measures should appear in which perspectives) would be a key activity. Kaplan and Norton proposed that measure selection should focus on information relevant to the implementation of strategic plans, and that simple attitudinal questions be used to help determine the appropriate allocation of measures to perspectives (Kaplan and Norton, 1992). In essence the Balanced Scorecard has remained unchanged since these early papers, having at its core a limited number of measures clustered into groups, and an underlying strategic focus. But modern Balanced Scorecard designs also have a number of features that clearly differentiate them from earlier examples. This paper describes these changes as an evolution through three distinct ‘generations’ of Balanced Scorecard design. 1 Generation Balanced Scorecard Balanced Scorecard was initially described as a simple, “4 box” approach to performance measurement (Kaplan and Norton, 1992). In addition to financial measures, managers were encouraged to look at measures drawn from three other “perspectives” of the business: Learning and Growth; Internal Business Process; and Customer, chosen to represent the major stakeholders in a business (Mooraj et al, 1999). Definition of what comprised a Balanced Scorecard was sparse and focused on the high level structure of the device. Simple ‘causality’ between the four perspectives was illustrated but not used for specific purpose. Kaplan and Norton’s original paper’s focus was on the selection and reporting of a limited number of measures in each of the four perspectives (Kaplan and Norton, 1992). The paper suggested use of attitudinal questions relating to the vision and goals of the organisation to help in the selection of measures to be used, and also encouraged the consideration of ‘typical’ areas of interest in this process. Kaplan and Norton’s original work makes no specific observations concerning how the Balanced Scorecard might improve the performance of organisations; the implication is that the provision of accessible relevant measurement data itself will trigger improved organisational performance. However, they do imply that the source of these improvements is changes in behaviour: “It establishes goals but assumes that people will adopt whatever behaviours and take whatever actions are necessary to arrive at those goals”. In the light of this, the basis for selecting the goals represented by the Balanced Scorecard is of some importance. But in their first paper Kaplan and Norton say little about how a Balanced Scorecard could be developed in practice beyond a general assertion that design involved “putting vision and strategy at the centre of the measurement system” (1992). Later writing includes increasing amounts of proscription about development methods, concluding with a lengthy description of one such process in their first book on the subject published in 1996. Figure 1 – 1 Generation Balanced Scorecard Figure 1 shows a diagrammatic representation of Kaplan and Norton’s original Balanced Scorecard design. We will subsequently refer to this type of Balanced Scorecard design as a ‘1 Generation’ Balanced Scorecard. Key attributes of the design and suggested development process for this type of Balanced Scorecard are summarised in the table below. Practical Experiences with 1 Generation Balanced Scorecards The authors’ professional experience suggests that 1 Generation Balanced Scorecards are still being developed, and that they probably still form the large majority of Balanced Scorecard designs introduced into organisations. This is reflected in the literature, where books and articles that use more advanced representations of Balanced Scorecard are only recently appearing (Olve et al, 1999, Kaplan and Norton, 2000, Niven, 2002). But despite its huge popularity as a concept, and apparently widespread adoption, relatively few detailed case studies concerning Balanced Scorecard implementation experiences appear to exist in the academic literature. Those few that do focus primarily on the architecture of the Balanced Scorecard design (e.g. Butler et al, 1997), and associated organisational experiences (e.g. Ahn, 2001). Commercial / practitioner writing on Balanced Scorecard is more extensive (e.g. Schneiderman, 1999), but often more partisan (e.g. Lingle et al 1996). But in general the literature endorses the utility of the approach (Epstein et al, 1997) but notes weaknesses in the initial design proposition, and recommends improvements (e.g. Eagleson et al, 2000, Kennerley et al, 2000). 2 Generation Balanced Scorecard The practical difficulties associated with the design of 1 Generation Balanced Scorecards are significant, in part because the definition of a Balanced Scorecard was initially vague, allowing for considerable interpretation. Two significant areas of concern were filtering (the process of choosing specific measures to report), and clustering (deciding how to group measures into ‘perspectives’). Discussions relating to clustering continue to be rehearsed in the literature (e.g. Butler et al, 1997, Kennerley et al, 2000), but discussions relating to filtering are less common, and usually appear as part of descriptions of methods of Balanced Scorecard design (e.g. Kaplan and Norton, 1996, Olve et al, 1999). Perhaps the most significant early change translated the attitudinal approach to measure selection proposed initially be Kaplan and Norton (e.g. “To succeed financially, how should we appear to our shareholders? ”) into a process that yielded a few appropriate key measures of performance in each perspective. A solution was the introduction of the concept of ‘strategic objectives’ (Kaplan and Norton, 1993). Initially these were represented as short sentences attached to the four perspectives, and were used to capture the essence of the organisation’s strategy material to each of the areas: measures were then selected that reflected achievement of these strategic objectives. Although subtle, this approach to measure selection quite different from that initially proposed, since strategic objectives were developed directly from strategy statements based on a corporate vision or a strategic plan. Another key development concerned causality. Causality between the perspectives had been introduced in early ‘1st Generation’ Balanced Scorecard thinking (see Figure 1). ‘2nd Generation’ Balanced Scorecard saw the idea of causality developed further. Instead of simply highlighting causal links between perspectives, internal documents from one consulting firm’s work in 1993 shows an early attempt to indicate linkages between the measures themselves. This improvement was also proposed later by others (Newing, 1995). Measure based linkages provided a richer model of causality than before, but presented conceptual problems – for example, the use of measures encouraged attempts to ‘prove’ the causality between measures using various forms of analysis (indeed this is still the case – e.g. Brewer, 2002). Collectively the changes in design described here represent a materially different definition of what comprises a Balanced Scorecard compared to Kaplan and Norton’s original work we will refer to Balanced Scorecards that incorporate these developments as ‘2 Generation Balanced Scorecards’. The impact of these changes were characterised by Kaplan and Norton in 1996 as enabling the Balanced Scorecard to evolve from “an improved measurement system to a core management system” (Kaplan and Norton 1996). Maintaining the focus that Balanced Scorecard was intended to support the management of strategic implementation, Kaplan and Norton further described the use of this development of the Balanced Scorecard as the central element of “a strategic management system”. One consequence of this change in emphasis was to increase the pressure on the design process to accurately reflect the organisation’s strategic goals. Over time the idea of strategic linkage became an increasingly important element of Balanced Scorecard design methodology, and in the mid 1990’s Balanced Scorecard documentation began to show graphically linkages between the strategic objectives themselves (rather than the measures) with causality linking across the perspectives toward key objectives re