A critical analysis of the Balanced Scorecard - with special consideration to its implications for HRM and HR-policy

Contents

Abstract

1. Introduction

2. The Balanced Scorecard by Kaplan/Norton
2.1. The BSC as a measurement system
2.2. Development and design of the BSC
2.3. The BSC as a management instrument

3. The BSC and its implications for human resource management
3.1. The learning-and-growth perspective
3.1.1 Development and measurements of the perspective
3.1.2. Quality of measures and drivers
3.1.3. Critical evaluation
3.2. Analysis of the relationship between HRM and the BSC
3.2.1. Contribution of HRM to the BSC
3.2.2. Critical evaluation – opportunities and risks
3.2.3. Contribution of the BSC to HRM
3.2.4. Critical evaluation – opportunities and risks

4. The BSC and its implications in high-performance-work-systems and models of corporate governance
4.1. Models of corporate governance and its implication in HR-strategies
4.2. Impact and implications of the BSC in companies with short-term and long-term orientated HR-policies

5. Conclusion

Appendix

References

Abstract

The Balanced Scorecard is designed and implemented as a strategic management and measurement system. It uses a broad range of innovative indicators and enfolds the overall strategy. Especially, it has extensive implications on human resource processes and its strategic orientation within a company. The development and implementation of a complete BSC is associated with the parallel adoption of a high-performance-work-system and a long-term orientated HR-strategy. With support of the BSC, human resource management becomes a partner with business, which manages its employees as adding value assets and includes HRM in business strategy. HRM gains in importance and makes an essential contribution to the business-wide human resource and organisation development. Empirical results show that it is possible to successfully implement the BSC and the involved long-term orientated HR-strategy in both already long-term and stakeholder orientated enterprises and previously short-term and shareholder orientated companies. Different researchers verified that the implementation of a BSC by simultaneous use of a HPWS is associated with an essential improvement of business performance and development as well as better financial results and higher profitability.

Die Balanced Scorecard wird als strategisches Management- und Kennzahlen-System konzipiert und verwendet. Dabei macht die Scorecard von vielen innovativen Faktoren Gebrauch, welche die unternehmensweite Strategie umfassen und beeinflussen. Insbesondere das Personalmanagement eines Unternehmens und dessen strategische Ausrichtung sind von der Einführung einer BSC betroffen. Entwicklung und Einführung einer vollständigen Scorecard sind mit der gleichzeitigen Implementierung eines High-Performance-Work-Systems und somit langfristig ausgerichteter Personalstrategien verbunden. Das Human Resource Management wird nunmehr als bedeutungsvolle Unternehmensinstitution gesehen. Es trägt erheblich dazu bei, dass das Humankapital eines Unternehmens als wertschöpfender und vorteilbringender Wert angesehen wird. Das Human Resource Management gewinnt somit an essentieller Bedeutung und trägt erheblich zur unternehmensweiten Personal- und Organisationsentwicklung bei. Empirische Studien haben gezeigt, dass die BSC und der damit gleichzeitige Gebrauch von langfristig ausgerichteten Personalstrategien sowohl in bereits langfristig und stakeholder ausgerichteten Unternehmen als auch in bisher noch kurzfristig und shareholder orientierten Organisationen erfolgreich implementiert werden können. Vielmehr haben die Studien auch ergeben, dass die Implementierung einer BSC und die gleichzeitig erfolgende Einführung eines High-Performance-Work-Systems in einer wesentlichen Erhöhung der Wertschöpfung und des Unternehmenswachstums resultieren als auch verbesserte finanzielle Ergebnisse und höhere Profitabilität mit sich bringen.

1. Introduction

Today companies compete in a complex and dynamic competition where organisations are forced to conform permanently to changing conditions. With changing competition, requirements on human resource management (HRM) and human resource (HR) policies increase. HRM is increasingly seen as a relevant competitive factor. The Balanced Scorecard (BSC) is an innovative measurement and management instrument which gives organisations the opportunity to conform to and challenge these changing circumstances. The innovative aspect is that in addition to financial objectives also customers, internal processes and even human capital attract notice. The BSC poses a challenge to HRM, since the HR-department changes from a passive to an active, customer-orientated, and creating part of the strategy implementation. So through the implementation of a BSC, companies meet the new requirements in respect of HRM and human capital gains in importance. It is increasingly seen as one of the key drivers and primary source of competitive advantages. The purpose of this dissertation is to point out the considered HR-aspects within the implementation process of a scorecard and to show to what extent this process influences HRM and HR-policies and how HRM supports management when introducing the BSC. Further it is described in detail in which way the BSC and changing HRM have an impact on different models of corporate governance with their different orientated HR-policies and if it can be implemented successfully.

The dissertation is divided into three essential parts. First of all it is necessary to give an overview about the basics of the BSC in chapter two. Intension, concept, development and the way of implementing are shown. Chapter three covers the BSC’s implications for HRM. At the beginning the learning-and-growth perspective, which is related to HRM to a great extent, is considered in detail. Development and measurements are shown and examined critically. Afterwards an analysis of the relationship between HRM and the BSC occurs. It is investigated to what extent HRM supports and makes a contribution to the concept and implementing process of the BSC. The analysis is completed by a critical evaluation of the opportunities and risks and the efficiency of these contributions. The same happens to the relation and contribution of the BSC to HRM. It is shown to what extent the BSC supports HRM and which innovative HR-aspects are considered through the implementation of the BSC. A critical evaluation completes this part as well. In chapter four the BSC’s implications in different models of corporate governance with their different orientated HR-strategies are pointed out. It is analysed how the HR-strategy emerging due to BSC and changing HRM influence shareholder- and stakeholder-orientated companies and to what extent these different orientated enterprises can adopt these HR-policies. To conclude, the results of the dissertation are appreciated critically in the final conclusion.

2. The Balanced Scorecard by Kaplan/Norton

The BSC is a measurement and management system which was developed by Robert S. Kaplan and David P. Norton in the early 1990es. Its development was the answer to the increasing criticism on the one-dimensionality of other performance measurement systems, the focus of which was limited to financial and past figures. For living up to the insisting and future needs of the information age and to the changing competitive conditions, pure finance- orientated control mechanisms are inadequate (WEBER/SCHAEFFER 1999: 2ff). Today companies need controlling systems which include and consider companies’ strategies and objectives and which are able to measure recent and future business units’ value and contribution to organizations’ performance. Therefore the BSC complements financial measures of past performance with non-financial measures of future performance. The aim is to find a balance between short term and long-term targets, between financial and non- financial measures, between early and late indicators and internal and external performance perspectives (SPECKBACHER/BISCHOF 2000: 796). The new perspectives to be considered are from the point of view ofKAPLAN/NORTONthe customer, the internal- business-process and the learning-and-growth perspective, whereby intangible assets as knowledge, innovation or customer satisfaction are becoming more focused on companies’ strategy. These four perspectives provide the framework for the BSC (1996b: 8f). The authors emphasize that the choice and the number of the additional drivers is variable and depends on companies´ vision and strategy as well as their industrial branch and profit orientation. SoKAPLAN/NORTONalso underline that the BSC is adaptive for private and profit-orientated as well as for public and non-profit organisations (1996b: 179f).

2.1. The BSC as a measurement system

For each above specified perspective, special objectives have to be derived from the strategy. In addition to this step it is necessary to develop performance measures which are used to control the degree of target achievement as well as to determine set targets and possible initiatives to achieve the strategically set targets. On the whole, management “can now measure how their business units create value for current and future customers and how they must enhance internal capabilities and the investments in people, systems, and procedures necessary to improve future performance” (KAPLAN/NORTON 1996b: 8). Finally, the BSC provides a framework to translate the strategy into operational terms, as shown in Figure 1.

Figure 1: The four perspectives of the BSC

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(KAPLAN/NORTON 1996b: 9)

Figure 1 clarifies that company’s vision and strategy are the central aspects of the BSC system. They are considered by the four different perspectives, which transform vision and strategy into operative and measurable figures (KAPLAN/NORTON 1996b: 47ff):

Financial perspective

This perspective indicates the company’s financial success and profitability from the view of the shareholder. It is shown to what extent the implementation of the BSC and the strategy make a contribution to the financial performance improvement of the concerning organisation. Classic indicators related to profitability are for instance operating income, equity return, return-on-capital-employed or economic value-added as well as rapid sales growth or generation of cash flow (KAPLAN/NORTON 1996b: 47ff).

Customer perspective

The customer perspective reflects organisation’s strategic objectives in reference to its customer and market segments in which the company will compete. These chosen segments constitute the revenue basis of company’s financial objectives. After identifying and targeting its market and customer segments, the corporation is able to determine the individual objectives, measures and initiatives for the chosen segments.KAPLAN/NORTONdetermine two different sets of measures. The first set contains the core measures. These are in general attributes like market share, customer retention, acquisition, satisfaction and profitability. The other set includes specific drivers and represents customers’ value propositions, which vary between companies and industries. This set gives information about what companies have to provide their customers to create the highest possible degree of loyalty, satisfaction, acquisition, retention and market share. These customer value propositions can be organised into three categories, which are the product/service attributes (e.g. functionality, quality and price), customer relationship (e.g. quality of buying experience and personal relationships) and image and reputation (intangible aspects, which influence the organisation’s attractiveness for the customer) (1996b: 63ff).

Internal-business-process perspective

This perspective is used by management to identify the critical internal processes which affect the business strategy and its success in achieving the financial and customer-orientated aims. “The internal-business-process measures focus on the internal processes that will have the greatest impact on customer satisfaction and achieving an organization’s financial objectives” (KAPLAN/NORTON 1996b: 27). This perspective can be illustrated with the generic value-chain model, where each set of processes creates value for customers and financial results.KAPLAN/NORTONclassify internal processes into three parts. The first part is the innovation process, which is used for determining customer demands and designing and developing the requested products and services. Suitable measures are cycle times in relation to developing and introducing new products, manufacturing process capabilities or sales percentages of new and old products. In the operation process, the second step within the value-chain model, the products and services are produced and delivered to the customers. This process can be measured by cycle times, production flexibility or error rates, e.g. the final stage is the post-sale service. Here, customer service is offered which includes warranty and repair activities, treatment of defects and returns or the processing of payments. Possible measures could be response, reaction or repairing time (1996b: 92ff).

Learning-and-growth perspective

The last perspective of the BSC develops objectives and measures for the advancement of a learning and developing organisation. The learning-and-growth perspective constitutes the basis of the BSC and creates the infrastructure, which is necessary to achieve the individual objectives of the other perspectives and to realise the business strategy.KAPLAN/NORTONclassify three principal categories for this perspective: employee capabilities, information systems capabilities and motivation, empowerment and alignment. Management has hence to invest in employees’ skills and knowledge, enhancing information technology and systems and aligning organisational procedures and routines. This perspective underlines the importance of the above specified future investments and emphasizes that HR must be seen as a source of increasing profitability and achieving long-term growth and objectives. Employee capabilities can be quantified by employee satisfaction, retention, training and skills. Real-time availability of accurate, critical internal customer and internal process information to employees can be seen as measures for information systems capabilities. A possibility for measuring motivation, empowerment and alignment is the examining of the number of suggestions per employee or the degree of personal, team and departmental alignment with strategic objectives (1996b: 126ff).

2.2. Development and design of the BSC

Developing and designing a BSC can generally occur in seven steps. First of all, a corporation’s top-management has to clarify and define the company’s global vision and strategy. After settling on vision and strategy, the different perspectives to be considered have to be determined. Thirdly, the individual strategic objectives within each perspective are concretised (KUNZ 2001: 13ff). In step four, a chain of cause-and-effect relationships is formed, whereby management can analyse to what extent the different targets are in relation to one another. The aim is to link the different perspectives and individual objectives of the BSC to realise the consistent business strategy. This occurs with the help of this chain of cause-and-effect relationships which can be expressed by a sequence of if-then statements. The result is a strategy which is based on a set of hypotheses about cause-and-effect, which include all factors of the four perspectives (KAPLAN/NORTON 1996b: 29ff). In this manner a concept of strategy tracing is developed, which describes the desired development and its focuses (KÖNIG/REHLING 2002: 6). By questioning different coherences between the strategic objectives, it is possible to discover weaknesses of the BSC and to revise it afterwards. The new framework of linking cause-and-effect relationships is therefore also called strategy map (BISCHOF/SPECKBACHER 2001a: 49). It specifies the critical elements and their linkages to business strategy. After the BSC’s implementation, management is able to identify all strategic elements and measures which create the highest value for the company and analyse factors’ implications for one another. This strategy map is always based on a top-down approach, starting with the destination. At the end, this approach is transferred to a bottom-up-feedback loop. Due to this continuous ascertainment of the relevant data, it will be possible to determine whether the company is “on the right path” and in which units it has to intervene (KAPLAN/NORTON 1996b: 149f). Figure 2 illustrates a demonstrative example of a strategy map.

Figure 2: Example for a cause-and-effect chain based on hypotheses in a strategy map

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For evaluating the specified targets and the progress of strategy, measures have to be identified for all perspectives in step five. It is recommended that the maximum number of measures should not be more than 25, five to seven for each perspective. Then, target values are determined, which reflect the aimed value of the measures. These should be orientated to the next three to five years, with yearly stages of objectives. By the use of the strategy map, measures, target values, and organisation’s strategy are documented well and easy to communicate (BORGES/SCHMIDT 2002: 106ff). Finally, initiatives are developed which ensure the achievement of the target values. The concept of the BSC is hence also based on a top-down approach. All objectives and initiatives are consequently derived from business’ global strategy and vision, which are identified by the top-management (KÖNIG/REHLING 2002: 7f).

2.3. The BSC as a management instrument

In addition to the function as a performance measurement instrument, the BSC has also been developed as a strategic management system which supports companies’ executives to manage their strategy over the long-run and achieve their long-term strategic aims. The BSC is rather the link between developing and implementing a strategy (KAPLAN/NORTON 1996b: 10). Its development let management “introduces four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions” (KAPLAN/NORTON 1996a: 75). To manage a strategy in the long-run, four processes are necessary, within the above specified development of the BSC occurs:

Clarifying and translating the vision and strategy

At the beginning the strategic overall planning is set. So the scorecard process starts with clarifying company’s general vision and strategy for the next three to five years set by its top-management. Management and executives of all business units come together to gain consensus about the main objectives of the company. After settling on the business’ vision and strategy, management determines the different perspectives to be considered and translates vision and strategy into a set of specific strategic objectives and measures which will represent the long-term drivers of success. The main BSC is designed (KAPLAN/NORTON 1996b: 10f).

Communicating and linking

In the next process BSC’s global strategic objectives and measures are communicated throughout the company. Thus it is ensured that all company employees internalise the global strategy and understand the strategic objectives which are necessary to realise business’ vision and strategy (KAPLAN/NORTON 1996b: 12). Companies break down the BSC to several business units and hence link the global strategy to departmental and individual objectives and measures. Using the corporate scorecard as a template, each business unit translates its strategy into its own scorecard. So many different individual BSCs can be developed within the company, and by doing this each department or individual sets goals which have to be achieved. Aim of this process is to define and measure the respective strategy contribution of each business unit (BORGES/SCHMIDT 2002: 116). Hence it is possible to implement an incentive system by aligning the global objectives with individual objectives, which links rewards to the unique performance measures of each department or employee (KAPLAN/NORTON 1996a: 79f).

Planning and target setting

“Developing your Balanced Scorecard provides an excellent opportunity to tie resource allocation and strategy together” (NIVEN 2003: 20). So the integration of the BSC in the annual planning and budgeting process occurs. On the one hand, business has now to quantify the long-term outcomes it wishes to achieve. Otherwise also short-term target values are quantified for the measures on the scorecard which have to be accomplished by every business unit (KAPLAN/NORTON 1996b: 195f). At this point, the allocation of company’s resources occurs through the focus of financial and material inputs on the strategy. Also, possible initiatives are identified and coordinated to achieve the long-term strategic objectives, in the case of defaulting the requirements(KAPLAN/NORTON 1996a: 84).

Strategic feedback and learning

This process is considered as the most important and innovative part of the BSC. It gives companies the capacity as a strategic learning framework through continuous feedback and learning. The BSC enables a consistent inspection of the chosen strategy through the regular estimation of the target achievement by the departments or individual employees (KAPLAN/NORTON 1996a: 77). Now, especially the strategy map is spotlighted. With the chain of cause-and-effect relationships and the integration of measures, target sets and essentially achieved results, management has the ability to check whether the formulated strategy is working, and if not, why. It is hence possible to discover its weaknesses and the units with needs of improvement. The preceding top-down approach of the BSC is here transferred to the bottom-up-feedback loop. Finally improvement and learning processes can be implemented by the management (KAPLAN/NORTON 1996a: 84f).