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Nicholas COE, Steve LETZA*Bournemouth University, UK

Two decades of the balanced scorecard: A review of developments

Abstract: Having recently celebrated its 20th birthday since its inception in 1992, the Balanced Scorecard has come a long way from its humble beginnings as a sim-ple performance measurement tool. Over this period it has undergone a number of developments regarding its design and implementation. Kaplan & Norton, the origi-nators of the balanced scorecard, have continued to build on their initial work, while stimulating numerous academics and practitioners to comment and adapt on their original fi ndings. Th e scorecard has now grown into an eff ective management tool that directs strategy throughout many organisations globally.Keywords: balanced scorecard, performance management, implementing strategy.JEL codes: L10, L21, L26, M41.

Introduction

Th e balanced scorecard has captured the imagination of many executives and senior managers and has been introduced as a performance measurement tool and mechanism to implement strategy in many companies globally. Th is pa-per sets out to track the developments in the balanced scorecard over the two decades of its existence. Section 1 considers the inception of the scorecard and Section 2 tracks the developments over the two decades. Section 3 exam-ines the modern context, the so-called third generation phase and Section 4 presents a case study from 2GC which details the third generation balanced scorecard. Th e conclusion highlights the contribution of the balanced score-card to the implementation of strategy in modern organisations.

POZNAŃ UNIVERSITY OF ECONOMICS REVIEW Volume 14 Number 1 2014

* Corresponding author: sletza@bournmouth.ac.uk.

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1. Inception

Th e Balanced Scorecard (BSC) is a strategic performance measurement system devised aft er a yearlong multi-company research project by Kaplan & Norton (K&N). Th ey, like many other academics at the time, realised that traditional fi nancial performance measures, which worked well in the industrial era, were out of touch with what companies were trying to achieve today [Kaplan & Norton 1992]. It was no longer tangible assets that create organisational value but intangible assets. Th ey also noted that today’s managers realised the im-pact that measures have on performance but few actually grasped the impact measurement could have on strategy [Kaplan & Norton 1993]. Furthermore they stressed that no single measure could provide a clear performance tar-get, hence managers require a balanced presentation of fi nancial and opera-tional measures [Kaplan & Norton 1992].

Th e result of this was a scorecard (Figure 1) that combined four diff erent perspectives to link overall performance. Th e BSC supplemented fi nancial measures, which display the results of actions already taken, with operational

Figure 1. Th e Balanced ScorecardSource: Adapted from: [Kaplan & Norton 1992]

Financial Perspective

GOALS MEASURES

Customer Perspective

GOALS MEASURES

Innovation and Learning Perspective

GOALS MEASURES

Internal Business Perspective

GOALS MEASURES

How Do Customers See Us?

How Do We Look to Shareholders?

What MustWe Excel at?

Can We Continue to Improve and Create Value?

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measures such as customer satisfaction, internal processes and innovations. Each perspective helped answer a basic performance question: Can we con-tinue to improve and create value? What must we excel at? How do customers see us? How do we look to Shareholders? [Kaplan & Norton 1992].

In 1993 K&N used Rockwater, a worldwide leader in underwater engineer-ing and construction to illustrate the BSC in use. Each box contained a small number of measures that related to that perspective. In the case of Rockwater they had 20 measures with no more than 6 in each box. As you can see there are some attempts to provide connections between strategy and the measure-ments (Figure 2), however it is widely recognised that these links were weak and forged [Lawrie & Cobbold 2004].

2. Development

Th e original concept, although widely received, was not without fl aws [Letza 1996]. Th e underlying notion of the BSC involved placing 4–5 measures into four boxes as a performance measurement tool. Th e method used to select

Figure 2. Rockwater’s Strategic ObjectivesSource: Adapted from: [Kaplan & Norton 1993]

The Vision

“As our customers’ preferred provider, we shall be the industry leader. This is our

mission.”

Strategy

Services that Surpass Needs

Customer Satisfaction

Continuous Improvement

Quality of Employees

Shareholder Expectations

Fina

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Return on Capital

Cash Flow

Project Profitability

Reliability of Performance

Cust

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Value for Money Tier ICompetitive Price Tier IIHassle-Free RelationshipHigh-Performance ProfessionalsInnovation

Inte

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Shape Customer RequirementTender EffectivenessQuality ServiceSafety/Loss ControlSuperior Project Management

Grow

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Continuous Improvement

Product and Service Innovation

Empowered Work Force

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these measures (fi ltering) and which measures should appear in which per-spective (clustering) was initially vague [Lawrie & Cobbald 2004]. Th is was apparent with Rexam Custom Europe (RCE) as they encountered problems limiting the 35 measures fi rst proposed when implementing the scorecard [Letza 1996].

Furthermore, despite stating that vision and strategy were at the centre of the BSC [Kaplan & Norton 1992], there was little connection off ered between how simply placing measures in a box actually linked to an overall strategy. As a result the design was usually segregated into four perspectives, whereby a group of people would focus on fi nancial measures; a group of people would focus on customer measures etc. Th is led to inconsistent measures and tar-gets [Lawrie 2011]. However, these issues started to be addressed with further publications by K&N in 1996 and 2000.

K&N started to revise and improve the BSC as they obtained more expe-rience with it, [Bible, Kerr & Zanini 2006]. Th e 1996 article acted to reduce some of the ambiguity surrounding implementation. It introduced four man-agement processes that contributed to linking long term strategic objectives with short term actions [Kaplan & Norton 1996]. Th e fi rst process, ‘translating the vision’, helped managers build consensus and clarify the organisations vi-sion and strategy. Th is enabled ‘communicating and linking’ where managers could communicate long term strategic goals throughout the organisation. Th e ‘linking’ aspect helps to align employees’ individual performance with the strategy. ‘Business planning’ involves milestone and target setting and align-ing strategic incentives with these targets. Finally ‘feedback and learning’ al-lowed managers to monitor and evaluate performance in regard to balanced scorecard perspectives.

Th e four aspects combined to move the BSC away from a strictly high-level management tool. Th e introduction of goal setting and targets coupled with personalised scorecards (Figure 3) for employees provided a sense of to-getherness, aligning personal targets to overall strategic objectives. In a single snapshot employees’ were able to see the organisations strategy and how their individual measures contributed to these corporate goals.

K&N’s fourth article released in 2000 focused on how strategy could be ex-plicitly linked to the perspectives by way of mapping. Th e strategy map embeds diff erent items of organisation BSC into a cause-and-eff ect chain connecting desired outcome with drivers of those results [Kaplan & Norton 2000]. While the 4 perspectives remain there is greater causality between them as shown in Figure 4. Th e three ‘leading’ indicators that provide information on current performance are driving the lagging indicator of fi nancial perspective. Th is

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represented a signifi cant change from 4 boxes each with their own measures with little or no relationship between them.

Th is scorecard is not only an improvement in terms of implementation it’s also visually more astute. Th e mapping allows logical links to be drawn. For example employee training aff ects customer satisfaction which increases customer loyalty which in turn impacts fi nancial results. However, even with these enhancements it became increasingly hard to set targets for the meas-ures chosen [Kaplan & Norton 2010].

Despite these developments it can be argued the BSC has remained rather rigid in terms of design. As K&N [1993] stated “each organisation is unique and so follows its own path for building a balanced scorecard”. Letza [1996] also commented that each organisation has a unique culture which must be taken into consideration before embarking on the design of the BSC. Th erefore, it seems rather illogical that such a fi xed design was illustrated in the early years of the BSC.

Figure 3. Th e Personal Scorecard Source: Adapted from: [Kaplan & Norton 1996]

The Personal ScoreboardCorporate Objectives

- Double our corporate value in seven years- Increase our earnings by an average of 20% per year- Achieve and internal rate of return 2% above the cost of capital

- Increase both production and research by 20% in the next decade

Corporate Targets Scorecard Measures Business Unit TargetsTeam/IndividualObjectives and

Initiatives1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1.

Financial100 120 160 180 250 Earnings (in millions of dollars)

100 450 200 210 225 Net Cash Flow

100 85 80 75 70 Overhead & operating expenses 2.Operating

100 75 73 70 64 Production costs per barrel

100 97 93 90 82 Development costs per barrel

100 105 108 108 110 Total annual production 3.Team/Individual Measures Targets1.

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For the most part, four perspectives continued to be used, albeit with great-er fl exibility and slight variations in name. For example ‘Internal Business’ later became ‘Internal Process’ perspective. Furthermore, the original fi nance perspective question posed by Kaplan and Norton [1992] ‘How do we look to Shareholders?’ was signifi cantly fl awed as the BSC starting being used in public sector organisations.

Letza’s [1996] study into three companies in Europe produced some varia-tions in design. An example of this can be seen with RCE. A precision coater and converter of fl exible materials for customer special orders; their strate-gy was aimed at growing the business organically by 20% each year through continuous improvement and extraordinary growth. As a  result they only used three perspectives of shareholder, extraordinary growth and continu-ous improvement that formed a triangular scorecard (Figure 5). Th e model showed sales growth and process improvement, the forward looking/ lead-ing measures, driving fi nancial performance, the backward looking / lagging measures [Letza 1996].

Th ese developments see the transition away from a  simple stand-alone performance measurement tool to a rallying framework for core managerial processes [Bible, Kern & Zanini 2006], encompassing the whole organisation. Th ey addressed the early implementation issues the BSC faced while provid-ing greater fl exibility in terms of design.

Figure 5. Rexam Balanced ScorecardSource: [Letza 1996]

Shareholders’ perspective(investment perspective)

Extraordinary growth(sales growth)

Continuous improvement(process improvement)

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3. Modernization

Lawrie and Cobbold [2004] split the development of the BSC into three gen-erations. First generation scorecards are those that occur between its founda-tions in 1992 and precede the follow up publications by K&N. Second genera-tion scorecards include these later K&N articles and books that act to address the weaknesses of implementation and causality. Th ird generation scorecards are a refi nement of second-generation design with new features intended to give better functionality and strategic relevance. Th is development comes as a result of the BSC move into non-profi t and public sector organisation in the early 2000’s. Non-profi t organisation without shareholders rendered the fi nancial perspective useless.

One key enhancement relates to a further design element; the ‘destina-tion statement’. Destination statements were usually created at the end of the design process by challenging managers to imagine the impact the strategic objectives, chosen earlier in the design process, would have on the organisa-tion. Th is process helped identify inconsistencies in the profi le of objectives chosen [Lawrie & Cobbold 2004].Th is concept was by no means a new one. Th e development simply involved making the destination statement the fo-cal point of the BSC not an aft erthought.

A second development was a move away from the rigid four perspectives labels. As previously stated the validity of these perspectives can be ques-tioned when dealing with non-profi t and public sector organisations. Lawrie and Cobbold [2004] concluded that careful choice of category heading during the design of the destination statement can be equally eff ective in selecting non-fi nancial measures. A simple choice of ‘activity’ and ‘outcome’ objectives linked with simple causality removes debate about missing perspectives. Th e only issues now were whether the right activities are represented and whether the correct outcomes from these activities are shown. Th e activity perspective replaced the ‘learning & growth’ and ‘internal process’ perspectives and out-come perspective replaced the ‘fi nancial’ and ‘customer’ perspectives.

Despite these developments, the fundamental principles remained. Combinations of non-fi nancial and fi nancial measures play a huge part in driving strategy.

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4. Modern case study

2GC is a consultancy fi rm specialising in strategic performance measurement issues faced by modern day organisations. A large part of their work involves the design and implementation of the third generation balanced scorecard. Th eir website provides a theoretical case study that segregates the BSC into three parts.

Th e destination statement (Figure 6) is a concise yet detailed description of what the organisation is set to achieve in the future. Th is period is typi-cally 3 -5 years. Once completed it provides documentation that is used to eff ectively communicate strategy throughout the organisation (2GC 2009).

Th e strategic linkage model (Figure 7) has similarities to K&N strategy maps, with the lines illustrating the connections between the perspectives. Th e model is used to establish short to medium term activities that lead to short to medium term outcomes (2GC 2009).

Th e measures and targets (Figure 8) is used to track the objectives previ-ously set out in the strategic linkage model (2GC 2009). Th is has a number of similarities to the personal BSC illustrated previously.

BSC Soft ware

Th e rise of the BSC has coincided with immense technological enhance-ments. Which have gone hand-in-hand with the developments in the score-card over the past two decades. Soft ware can now be customized and auto-mated to summarise, collect and display data that relates to the BSC [Bible, Kerr & Zanini 2006]. For example IBM Cognos Business Intelligence soft ware contains a Scorecard analytics that provides access to balanced scorecard re-ports, analysis and alerts for all employees [IBM 2013].Th e wait to see the aff ect leading indicators had on fi nancial performance is removed, allowing management to respond instantly.

Where now?

Future Direction of the BSCCurrently organisations implement type 1 scorecards as a strategic perfor-

mance tool, but there are in fact 4 types as shown in fi gure 9 [Lawrie 2010]. Th ey all contain measures and outcomes, but vary in terms of design and

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OUTC

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ACTI

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O3: Agency Estate (E08)

O4: Environmental Footprint (E02)

O2: Environmental Impact (E02)

O1: Partners & Customers use EA Business Solutions

O5: Partners & Customers influenced

by EA (ER1)

O6: Customers rate EA as Best in Class (E12)

O7: Brand(s) known by clients (E05)

O10: Informing Government (D03)

O8: EA is Trusted Advisor / Partner (E01, E03)

O9: Delivery of Programme (E06)

O11: Advocacy (E01)

O12: Awareness (E05)

O13: Environmental Incidents (E05)

A1: Deliver Procurement

Improvements (R0C3 R05)

A2: Maintain Quality (14001/0001) (R0C1/AFG)

A3: Better Processes for Better Services

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A5: Implement Change Programmes

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A4: Develop our people (R0C3, R0C4)

A6: Improve Health Safety (R0C1)

A8: Improve Productivity (ROC5,

AP2, AP7)

A7: Change our Systems (R0C4, R0C5, AP7, AP0)

A9: Go and meet people

Figure 8. Balanced Scorecard Measures and TargetsSource: Adapted from: [2GC Active Management 2009]

Figure 7. Strategic Linkage ModelSource: [2GC Active Management 2009]

Objective Status Measure Value Target Performance comments for objective Objective OwnerF1.1 -30p 150p Dividend expected kept at 28p for whole year, but share

prices still around 1.000 pence leading to low P/E compared with sector and results from previous years

NGF1.2 8 18

F2.1 200 186 Increasing cash inflow from divisions A and D but levels of investments in B, C and E makes the group cash negative

for at least another 12 monthsNGF2.2 -6 4

F3.1 1.550 1442 Division E still far behind budgets. C positive but below budget. A on budget (flat budgets). L4L sales positive in D

driven by brands. C index 120 on L4L.NGF3.2 652 466

F3.3 93% 90%F4.1 17 24 No major M&A targets in sight yet. Pipelone cover -50%

due to aggressive growth targets combined with severe scarcity of targets. Profit mix and growth market numbers

not available yet.

NGF4.2 257 600

F5.1 7.65% 7.44%Cost on average 10% > category 1 competitors. On level

with category 2 competitors. NG

Ash 1.1 65% 74 More shareholders vary about our future earnings potential due to drop in TSR and general negative press. All is down

to next big announcement indicating new thrust and direction

ESAsh 1.2 8 7

Outperform capital markets

Cash & assetmanagement

Sales & profit growth from existing

businesses

Succesful deal doing

Competetive cost of capital via capital

structure

Shareholders support and book strategies

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implementation. Th is will result in increasing divergence and specialisation between each type in the years to come.

Conclusions

Since its origin in 1992 the Balanced Scorecard (BSC) has been so widely re-ceived that the Harvard Business Review labelled it as one of the most infl u-ential management ideas of the 20th century. Furthermore K&N’s fi rst book ‘Translating Strategy into Action’ sold in excess of 250,000 copies and was translated into 12 languages [Bible, Kerr & Zanini 2006].

Th e vast changing dynamics of modern organisations along with the move into the public sector has proved to be a major challenge for the BSC over the last two decades. However, in keeping with the robust nature of the in-terest the balanced scorecard has evolved and adapted to keep pace with the changes and is today as popular with senior managers in all types of organi-sations as it was two decades ago Many early implementation of scorecards failed due to the initial weaknesses in the design and lack of knowledge and understanding of the process of implementation. Th e innovations to address

Figure 9. Future direction of the balanced scorecardSource: Adapted from: [2GC Active Management 2011]

Type 1Strategic Performance

Management

Type 2Operational Performance

Management

Type 3Monitoring and Evaluation

of activities

Type 4Personal recognition

and rewards

Strategy EffortSp

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Prec

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these issues, have transformed the BSC into what it is today; an eff ective ‘stra-tegic management’ tool used to implement strategy throughout many organi-sations globally.

References

2GC Active Management, 2009, How a Public Sector Agency Reinvigorated its Balanced Scorecard: A Balanced Scorecard Case Study, Berkshire: 2GC Active Management, http://2gc.eu/resource_centre/balanced-scorecard.

2GC Active Management, 2011, Performance Management using the Balanced Scorecard: Th e Past, Th e Present, Th e Future. Berkshire: 2GC Active Management, http://videolectures.net/szko2011_lawrie_management/.

Bible, L., Kerr, S., Zanini, M., 2006, Th e Balanced Scorecard: Here and Back, Management Accounting Quarterly, 7 (4), pp. 18–23.

IBM, 2013, Balanced Scorecard, IBM, New York, http://www-01.ibm.com/soft ware/analytics/cognos/balanced-scorecard.html.

Kaplan, R.S., Norton, P., 1992, Th e Balanced Scorecard – Measures Th at Drive Perfor-mance, Harvard Business Review, 70 (1), pp. 71–79, http://ehis.ebscohost.com/eds/.

Kaplan, R.S., Norton, P., 1993, Putting the Balanced Scorecard to Work, Harvard Business Review, 71 (5), pp. 134–142.

Kaplan, R.S., Norton, P., 1996, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, 74 (1), pp. 75–85.

Kaplan, R.S., Norton, P., 2000, Having Trouble with Your Strategy? Th en Map It, Harvard Business Review, 78 (5), pp. 167–174.

Lawrie, G., Cobbold, I., 2004, Th ird-generation Balanced Scorecard: Evolution of an Eff ective Control Tool, International Journal of Productivity & Performance Management, 53 (7), pp. 611–623.

Lawrie, G., 2011, Performance Management Using the Balanced Scorecard – Th e Past, Th e Present, Th e Future, http://videolectures.net/szko2011_lawrie_management/ [access: 21 February 2013].

Letza, S.R., 1996, Th e Design and Implementation of the Balanced Scorecard: An Analysis of Th ree Companies in Practice, Business Process Re-engineering & Management Journal, 2 (3), 54–76.

Olve, N.G., Roy, J., Wetter, M. 1999. Performance Drivers: A Practical Guide to the Balanced Scorecard, John Wiley & Sons Ltd., Chichester.