Topic:
“Balanced Scorecard based performance
appraisal system”
Submitted To:
Dr. Neerja,
Lect. – P.M.S,
LIM.
Conclusion
Bibliography
1. INTRODUCTION
1.1. Background of the Concept of Balanced Scorecard
Throughout the history of contemporary management theories starting from the ones that
were introduced between the intrusion of the mass production in the beginning of the 20th
century and until today, all the gurus of management have been trying to find uniform
solutions on more efficient allocation and use of very limited resources available to
businesses.
In the down of the century, Frederick W. Taylor established the very concepts of resource
allocation in his Principles of Scientific Management. In 1920 it went around assembly line
and motion studies as the first experience from systematic mass production had given
theorists quite a lot of materials to be analyzed from the point of view of using traditional by
blue-collar employees more efficiently. In the 1930, the main topic was motivation of
employees, as it turned out that human nature does not enable to work long hours on a
repetitive tasks without frustration level getting so high enough to diminish productivity. In
the 1940 and 1950, the first statistical and linear methods were introduced in trying to
measure logistics of the operations management and its implications to overall company
success in financial-analysis side.
In the beginning of 1980, partly because of introduction of electronic data processing
equipment and quick development of computers, the whole array of management techniques
were initiated. The particular reasons for the vast development of the new theories were
catalyzed mainly by ever growing competition generated through more systematic use of
computers, and of course also by rapid growth of the importance of human capital.
During the industrial age, the financial control systems were developed in major companies
to facilitate and monitor efficient allocations of financial and physical capital. A summary
financial measure such as return-on-capital-employed (ROCE) could both direct a company’s
internal capital to its most productive use and monitor the efficiency by which operating
divisions used financial and physical capital to create value for shareholders.
The emergence of the information era, however, in the last decades of the 20th century, has
made obsolete many of the fundamental assumptions of the industrial age competition. The
information age environment for both manufacturing and service organizations requires new
capabilities for competitive success. The ability of any company to mobilize and exploit its
intangible assets has become far more decisive that investing and managing tangible, physical
assets.
Today automation and productivity have increased the number of people performing analytic
functions: engineering, marketing, management and administration. Therefore, these people
are more viewed as problem solvers, not as variable costs. In other words, information age
ahs brought about the concept of knowledge management.
The shift to successful knowledge management has introduced a variety of improvement
initiatives such as; JIT, TQM, Lean enterprise, Time-based competition, Customer-focused
organizations etc. Some of those programmes have meant in practice real breakthrough and
improvement, others have proven to be in the best case just a short-time disturbance, but in
the worst cases total failures resulting in disarray or even bankruptcy of a particular company.
The main reason for that lies in five main implementation problems:
1. Current performance measurement systems are based on the traditional financial
accounting model, which does not enable to objectively analyze information-age
companies;
2. If some non-financial performance measurement even is made, it is solely based on
employees’ tactical performance, not on strategic performance,
3. Majority of management and employee salary-based motivation schemes are only
short-run profit oriented, that does not enable to align towards long-run profit
oriented, that does not enable to align towards long-run goals;
4. Overall company strategy is not closely linked to organizational and personal
improvement programmes; and
5. Strategy is not generally linked to resource allocation, which results in under
financing some of the crucial parts of organization’s development.
As for today, superior financial performance and efficiency in production are just not enough
to gain sufficient competitive advantage but more and more attention needs to be paid to
intangible sides of business.
Introduced in the beginning of 1990 by Robert S. Kaplan and David P. Norton, the balanced
Scorecard uses a balanced measurement system that comprises of the old financial side and
three new perspectives of:
• Business processes (operational efficiency);
• Growth and learning (knowledge management);
• Customers (satisfaction and image of company to outside partners)
1.2. Balanced Scorecard – Concept
The long-term success of any organization is determined by the capabilities and the
competencies it has developed. One of the tools for organizational appraisal that is gaining
immense popularity is the BSC, developed by Robert S. Kaplan and David P Norton in 1992.
i. This innovative tool is unique in two ways compared to the traditional performance
measurement tools. They are
ii. It considers the financial indices as well the non financial ones in determining the
Corporate performance level and
It is not just a performance measurement tool but is also a performance management system.
Today’s businesses require a better understanding of their customers (both existing and
potential) and their needs, better streamlined processes and highly skilled people for ensuring
future survival and sustainable growth. This shows that the focus of action has rightly
considered the non financial aspects apart from the financial indices. This tool is the end
result of sustained efforts to find an ideal tool to measure performance and provide a link to
strategy and action. The decisions about the future actions form the key to success of any
enterprise in this fast changing business environment.
The aim of the BSC is to direct, help, mange and change in support of the longer term
strategies are all about. It acts as catalyst for bringing in the change element within the
organization. This tool is a comprehensive framework which considers the following
perspectives and tries to get answers to the following questions-
1. Financial Perspective-how do we look at shareholders?
2. Customer Perspective – how should we appear to our customers?
3. Internal Business Processes Perspective – what must we excel at?
4. Learning and growth perspective – can we continue to improve and create value?
Hence, from the above lines we can say that this tool has considered not only the financial
results to be important but also those factors which actually drive an organization towards
future successes as mentioned earlier. The tool has given stress on the other areas which are
required to ‘balance’ the financial perspective in order to get a total view about the
organizational performance and improve the same. The framework tries to bring a balance
and linkage between the-
i. Financial and the Non-financial indicators,
ii. Tangible and the Intangible measures,
iii. Internal and the External aspects and
iv. Leading and the lagging indicators
1.3. The Concept of Performance Appraisal
The process of evaluating the performance of the holder of the job based on the
requirements contained in his/her job description.
This is the most helpful tool an organization can use to maintain and enhance
productivity and facilitate progress towards strategic goals.
It is a means to monitor the way employee work and assess how this matches with
organizational needs.
Through this managers form impressions about the employees and seek to maximize
the contribution of each individual.
2. Review of Literature:
1. Balanced Scorecard Implementation in SMEs: reflection on literature and
practice
By Henrik Andersen, 2GC Active Management, Allborg University, February, 2009
This paper discusses the potential benefits to SMEs in adopting the BSC methodology and
the underlying management processes most relevant to SMEs. It also makes observations
about how use and value may differ between BSC application in large and smaller
enterprises.
Observing success criteria, BSC prove an effective tool for SMEs in meeting the challenge
posed by the need to introduce more efficient strategic planning processes while retaining the
competitive advantage of having relatively simple structures.
2. Study on BSC of Commercial Bank in Performance Management System.
By Yansheng Zhang, South China University of technology, Academy Publisher
2009
This paper makes study about how to use the BSC as a tool, which is applied to commercial
banks performance management system, and points out that it breakthrough the defects in the
traditional single application of financial indicators which measures performance. And it
raises the value of performance management appraisal system based on the introduction of
customer factors, internal business processes, employee learning and growth and financial
factors. This paper also makes study about the commercial banks in the performance of the
BSC Management System mechanism, the strategy of application, application limitations,
and outlook on the future of commercial banks.
3. E-Balanced Score System for Performance Planning and Management of
Lectures in Higher Education Institutions.
By Yu May Leen, University of Malaya, Kuala Lumpur, November 2008.
In this study, an electronic based scorecard for measuring the job performance and the
excellence of lecturers in a public higher learning institution was proposed. The aim of the
study is to develop a better means of performance planning and performance measurement
and management. The results of data analysis showed a) poor alignment of top management
strategies with the tactical plans of staffs and b) positive support for an improved
performance measurement system, both from the respondents and the management. Possible
reasons for average awareness of the tool and top management aspirations are i) the current
performance measurement system is partially automated making alignment efforts futile and
ii) ineffective methods of communicating strategies.
4. Using The Balanced Scorecard: Lesson learned from the U.S. Postal Service and
the Defense Finance and Accounting Service
By Nicholas J. Mathys, Kenneth R. Thompson, University of Florida, Dec, 2008.
In this study an attempt is made to know how U.S.P.S & D.F.A.S developed the BSC, how
they modified the approach to meet their needs, what lessons were learned in its application,
and what organizations might do to increase their success with the BSC approach.
The results show that both the organizations had successful applications of the BSC.
Performance improved on all the key areas that each organization measured. In addition,
employee satisfaction improved in both organizations. This was especially significant for
Defense Finance and Accounting Service, as they had undergone some very dramatic
reductions in force. Finally, customer satisfaction improved dramatically in both
organizations and value added improved in the multiple measures that were used.
5. Developing A System For Assessment of Organizational Performance Using
Balanced Scorecard Approach and SAP R/3
By Gary Baker & Kathleen M, International Journal of Quality and Productivity
Management, Vol. 07, No. 01, December, 2007.
It is suggested that strategic objectives will be achieved with effective corporate performance.
Accurately measuring corporate performance remains a challenge, not only with regard to
what indicators of performance should be measured, but also with regard to how to measure
the indicators. This paper provides a framework for exploring some of these challenges.
Measuring the effectiveness of HRM practices can be facilitated using an Enterprise
Resource Planning system such as SAP R/3. Such system generates information, data and
subsequently reports on HRM practices, independently and in relation to other functional
areas of business. Finally, it is proposed that the BSC approach for measuring corporate
performance be used since measuring HRM is a critical feature of this tool.
6. Using Balanced Scorecard for Subcontractor Performance Appraisal
By, S. Thomas NG, Hong Kong, China, FIG Working Week, 13-17 May, 2007
This paper discusses the issues in developing a BSC model for subcontractor performance
appraisal. The structure of the balanced scorecard model for subcontractor performance
appraisal is proposed. Finally, a prototype Internet-based model for appraising subcontractors
based on the balanced scorecard concept is presented. The initial results indicate that it is
possible to establish a BSC model to formalize the subcontractor performance appraisal
decisions. Being regarded as a reliable and practical means for performance evaluation, the
BSC should have a high potential for improving the quality of subcontractor appraisal
decisions.
7. Balanced Scorecard and Its Information System: The Performance Data
Warehouse
By, Ettore Riccciardi, London School of Economics, London, UK, 2005
This paper intents to highlight the importance of a particular Information System dedicated,
Performance Data Warehouse, and to describe how it supports the BSC on a long term
dynamic relationship. The BSC is both a performance appraisal tool and a strategic
management system that places particular emphasis on the business strategy definition. Once
the firm has defined its competitive strategy, the BSC needs an IS strategic orientation aimed
to support the organization and its information requirements.
The Performance Data Warehouse fits very well into this context because it enables any
member of the organization to read and to recognize aggregated data belonging to 14
different strategic areas.
8. Balanced Scorecard in Indian Companies
By Manoj Anand, B.S.Sahay, Vikalpa, Volume 30, No 2, April-June 2005.
In this article, the authors identify the extent of the usage of the Balanced Scorecard by
corporate India, explore whether Indian firms use all the four perspectives, namely, customer,
financial, internal business, and learning and growth in their performance scorecard and
evaluate the performance of the BSC as a management tool.
The major findings of this study are; the BSC adoption rate is 45.28% in corporate India
which compares favorably with 43.90% in the U.S. The difficulty in assigning ‘weightage’ to
the different perspectives and in ‘establishing cause and effect relationship among these
perspectives’ has been found to be the most critical issue in the implementation of the BSC in
Corporate India. Most companies claimed that the implementation of BSC has led to the
identification of cost reduction opportunities in their organizations which, in turn, has
resulted in improvement in the bottom line.
9. Overview of Construction and Implementation of Balanced Scorecard.
By Marko Rillo, Estonian Business School, Tallinn, 2000
The overall objective of the thesis is to analyze the use of Balanced Scorecard as a
performance measurement tool in the areas of general management and strategic
management. The author finds that the BSC is definitely a useful tool to renew an
organization’s mission and strategic objectives.
The author found in the thesis show that the BSC may be considered as one of the best
remedies in tackling with the questions concerning.
a) Linking strategic vision and long-term objectives to short term tactics; b). Directing
sophisticated and different critical paths of success in the light of strategic
management; c) Efficient performance measurement; d) Review of strategic vision in
the light of day-to-day operations management.
10. Management by Objectives and the Balanced Scorecard.
By David Dinesh, Elaine Palmer, Journal of Management History, 1998.
This article compares and contrasts the two management systems i.e. MBO & BSC. The
examination concludes that the philosophical intents and practical application of MBO and
the BSC stem from similar precepts. The examination of patterns of MBO implementation
also illuminates possible problems in the application of BSC. Implementation of MBO
suffers from two main problems. Partial implementation and Patent disregard for MBO’s.
The forecast is that partial implementation will remain as a problem for the BSC.
BIBLIOGRAPHY:
Journals Referred:
Gary Baker & Kathleen M, December 2007, International Journal of Quality and
Productivity Management, Vol. 07, No. 01.
David Dinesh, Elaine Palmer, 1998, Journal of Management History, Vol. 7.
Marko Rillo, 2000, Overview of Construction and Implementation of Balanced
Scorecard, Estonian Business School, Tallinn, Vol-30.
Manoj Anand, B.S.Sahay, April-June 2005, Vikalpa, Volume 30, No 2.
I.M. Pandey, January - March 2005, Balanced Scorecard: Myth And Reality, Vikalpa,
Volume 30, No 1, PP-60.
Abhijit Sinha, March 2006, Balanced Scorecard: A Strategic Management Tool,
Vidyasagar University Journal of Commerce, Vol. 11.
Website Address:
www.balancedscorecard.org, Balanced Scorecard Institute, USA.
www.managementhelp.org
http://www.ucsfhr.ucsf.edu/files/implementationguide.doc
http://www.emeraldinsight.com/10.1108/00251749810223529