Business models - Balancing act

The last decade has brought a wealth of new ideas to management and organisational theory. Competitive advantage, customer care, TQM, Business Reengineering and downsizing have all at some time occupied centre stage as the new technique to be applied to corporate ills. But within these organisations spare a thought for those tasked with getting on with the day-to-day job of running the business. The management and staff on the receiving end of the many shifts in thinking and practice can be forgiven for feeling confused. What, amid all the changes, are they really supposed to be focusing on? Where, among the changed directions and new ideas are the really critical levers of the business which need to be monitored, managed and controlled?

Moving in parallel with such changes has been a much greater emphasis on the importance of measurement, and in particular performance measurement.

Measurement underpins the running of an enterprise; and establishing suitable measures and then using them as a tool for management is a skill in itself. But determining which areas of the business to measure has become a challenge in itself. Suddenly the important numbers are no longer so clear. Should it be the demands (and satisfaction) of the customer?

Is the performance of internal processes, as benchmarked against best in class, more critical? Or should the long established financial ratios still act as the overriding yardstick in making key decisions?

The traditional basis of measurement has tended to be financial or accounting figures which measure the progress of the business through metrics such as profit & loss, revenue growth and earnings per share. But increasingly such measures are beginning to look restricted; they are based primarily on what the organisation has achieved in the past 12 months, rather than what they are achieving now, or what they are capable of achieving in the future. They give little or no clue to whether customers’ needs are being met or how processes are performing. The other drawback is that such measures are also extensively used by those outside the organisation as indicators of value and performance. So in any large corporation they have become important not merely for the purpose of management and control internally, but as a way of demonstrating performance (and value) to the watching audience of analysts, shareholders and stakeholders.

While this may be fine in theory, the reverence accorded to such measures can result in an almost unhealthy obsession for optimising the financial figures, sometimes at the expense of all else. Attention still needs to be paid to the organisation’s processes and how they are performing to ensure they will remain viable and contribute to the financial performance in the long term. Similarly, a real understanding of what customers want is important so that short-term decisions can be balanced by the needs of the organisation in the long term to deliver the products and services which customers require.

The Balanced Scorecard is an attempt to incorporate these diverse needs by incorporating a number of different areas for measurement within one model. By drawing several measures together within one framework, it also becomes a much more powerful tool for decision making. In the complexity of the modern organisation almost any significant decision will have knock-on effects in different areas. But by placing differing objectives and perspectives together within one framework it is possible to look at the impact of any one action on several different objectives. Short-term and long-term, internal and external objectives can be considered side by side, rather than in isolation.

At the heart of the Balanced Scorecard are four “perspectives” which are used to represent (and thus balance) the different objectives and needs of an organisation. These four segments are concerned with the customer (what they want and how they see the organisation); internal operations (how the organisation produces its goods and services); innovation and learning (the ability to learn and innovate); and finally the more established financial view. Objectives and goals which reflect strategic aims are defined within each of the areas, and then backed up by measures to track performance in those areas.

The customer perspective, not surprisingly, identifies measures for those things which are of most importance to an organisation’s customers. While customer service and attention to customer needs are concepts which slip readily off the lips of every chief executive and senior manager, actually attending to such needs, and providing the right level of service is a different matter. Organisations quite often have firmly held ideas of what they think their customers want which are somewhat different from the reality.

The customer perspective forces an organisation to examine relationships with the customer and define their requirements and expectations in terms of time, quality, service and cost. Which of these are the most important will depend on the customers themselves and the industry and products in question. Where quality is the absolute overriding requirement, cost and time may be of less importance; alternatively, where the product is more of a commodity the requirement is more likely to be focused on cost imperatives. Either way, the objectives are translated into specific measures such as the percentage of satisfied customers (which may be measured by independent surveys), the speed of delivery, the number of faults and so on.

Defining such measures has two impacts. Firstly it gives a very clear target forcing the organisation to get beyond folklore and assumptions, and drill down to a real understanding of what customers actually want (and are willing to pay for). Secondly, by doing so, the Scorecard forces the organisation to focus on those activities which will actually make a difference to that performance. In many cases what such a close analysis of customer requirements reveals is that there are several rather than just one type of customer. In this case the measures can be developed to address the associated implications for product and service delivery.

The internal perspective is concerned with the selection of measures relating to the internal capabilities and competencies of the organisation – the day-to-day activities which produce, deliver, and provide the goods or services from which it earns its keep. Setting goals and measures in these areas forces an examination of those aspects of the business which will in turn impact the customer measures developed above – cycle time, cost, quality and so on. So for example, where the objective is to achieve excellence in production (to meet a customer requirement for quality) the measure might translate into specifics such as the number of defects per 100. Where internal effectiveness is key, the measure might focus on the cost of the process.

This is a key element of the Scorecard approach, that it attempts to convert overall, strategic objectives into specific targets and visible numbers at an operational level. High-level objectives are thus translated into immediate measures which have enough relevance at a local level to actually influence performance.

The other important attribute of the internal perspective is that its focus on internal or operational capabilities dovetails neatly with the whole concept of business processes. The very areas the internal perspective is intended to address are none other than the organisation’s business processes. While the redesign and reengineering of business processes has been embraced with huge enthusiasm, it has not always enjoyed great success in its application. The Balanced Scorecard provides a structured way of putting BPR initiatives in context – so that they are seen to be part of a wider game plan, rather than “yet another”change programme.

The internal perspective can be used to select the most important areas of process for reengineering based on the impact they will have elsewhere – both on customer requirements and wider financial performance. Change never takes place in a vacuum, and the Scorecard provides a way of ensuring the process change is directly related to wider strategic objectives.

The third area in which the Balanced Scorecard sets out a framework for measurement is that of innovation and learning. This is essentially the “looking forward” part of the Scorecard. One drawback of purely financial measures is that they tend to be historical, concentrating on how an organisation has performed in the past, by which time it is already too late to take any corrective action.

The innovation and learning perspective forces attention on those aspects of the business which are important for the future. It seeks to identify measures which reflect how well the organisation learns or innovates.

This is perhaps the hardest of the four areas to measure. Metrics are required which focus on the response to change and the ability to deliver new ways of working, such as how quickly new products can be developed or how successful they are when they are brought to market. In this case, one of the measures might be to look at what contribution the new products developed within a certain period make to overall sales.

The final component of the Scorecard is the financial perspective. This incorporates the more traditional financial measures usually already established within an organisation, tracking figures such as earnings, growth and value. The main difference is that such measures no longer exist in isolation and are no longer the sole criteria in making decisions.

The Balanced Scorecard has already been successfully used by a number of major corporations in the US, where the technique has its origins, as well as in the UK.

Probably its greatest strength is its breadth. The complexity of any organisation, and the mass of interrelations which exist within it means that no major changes can be made in isolation. A change in one place has knock-on effects elsewhere. Nowhere is this more true than in considering relationships with customers. While there may be an obsession for customer service and meeting customer needs, that view comes with certain costs.

The perception of the customer has to be balanced by other considerations – how much it costs to service those needs, what is required to support such transactions and ultimately what the contribution of such relationships is to the overall objectives of the organisation.

Measurement is primarily a tool for management in making decisions, so it must provide as much relevant information as possible. Whereas traditional, established financial measures have tended to form the mainstay of such quantitative information, often to the exclusion of all else, the Scorecard maintains a much more holistic view. By taking into account both customer perspectives and the operational and potential future viability of the business, the Scorecard forces a much wider view to be maintained. The overlapping elements within any business or organisation – long term and short term, cost versus quality, now versus future, mean that few decisions can be taken in isolation without impact elsewhere. For decisions at both a strategic level and an operational level it is possible to consider what that impact will be across a number of areas rather than just one.

As with any tool or technique, it is the ability to make it work in practice which is most important. Several characteristics of the Scorecard have an impact on its practicality in use, and the way in which it can be applied:

One of its most refreshing aspects is that it is pragmatic – it has no pretensions about imposing itself as the new panacea. It makes no attempt to replace existing financial measures – only to complement them with a more rounded view. The Scorecard provides a framework on which to build, rather than a whole new way of doing things. In doing so, it brings into focus two of the most important areas of thinking which management are already trying to address – how to understand what the customer wants and how to then build the capability (processes) to serve the customer in that way. By putting both of these concepts in a wider context the tool can only serve to help management get the best from them.

Secondly, it is important to consider the importance of information in the application of the Scorecard. There are two implications; measures are likely to be information-intensive, and significant effort may be required to put in place suitable reporting systems to ensure information can be collected and summarised to allow the measurements to be made.

In addition, there will always be a need to explore the figures (and implications) which underlie them. Both these requirements are likely to place further demands on already overstretched IT systems and IT development resources.

But the final caveat must be directed towards implementation. If the Balanced Scorecard is a powerful model in theory, its true test is in practical use. Ultimately its viability will depend on the ability of an organisation to integrate it with existing tools and techniques, and refine and improve it. This is the overriding challenge, and will ensure that managers as well as consultants will be around for a long time to come.

Colin Bainbridge is a freelance journalist.