Balanced score card is a new dimension in the field of performance appraisal. It is a comprehensive, top down view of the organizational performance with a strong focus on vision (i.e. goals) and strategy (i.e. performance measures). The balanced score card has become the pre-eminent strategic tool for the management. The success of its implementation is attributable to its focus on strategy and the future. By the help of this the managers are able to translate broad mission statements into tactical action plans. It paves the way for the managers to exploit the firm’s information resources and ultimately produce economic results while directing the firm towards the achievements of its goals.
Key words:- balance score card, dimension, performance appraisal, perspectives INTRODUCTION:-
Balanced score card is a new dimension in the field of performance appraisal. Performance means the efforts extended to achieve the targets efficiently and effectively. The achievement of target involves the integrated use of human, financial and natural resources. Appraisal refers to a critical review with a view to improve performance. It evaluate the actual performance in the light of predetermined targets, measures deviation in between actual and targets, locate alternatives and suggests remedial action.
Thus, the term “performance appraisal” can be defined as a critical assessment or evaluation of various activities in different areas of operations of an organization. It is known that to keep an individual healthy doctors advice periodical check-up and examination of body. Similarly to safeguard the interests of the shareholders, outsiders, creditors etc. every concern should have a proper appraisal of its performance in different sphere viz. Customer satisfaction, value addition in share price, human resource development index etc.
Drucker has argued that “performance can be measured in terms of two concepts viz. efficiency and effectiveness.” Efficiency means “doing things right” and effectiveness means “doing the right things”. Efficiency refers to the ability to get things done in the correct manner. It is the degree to which inputs are used in relation to a given level of outputs. A manager is regarded efficient when “he achieves results or outputs that measures up to the inputs (i.e. labor, materials and time) used to achieve them. Managers who are able to minimize the cost of the resources are able to attain their goals efficiently. Effectiveness is concerned with the effect of work on people, with the appropriateness of goals, with long term results and with humanistic and idealistic values.”
MEANING OF BALANCED SCORE CARD:-
Balanced score card is a performance appraisal and reporting system that strike a balance between financial and non-financial measures, links, performance to rewards, and gives explicit recognition to the diversity of organizational goals. The balanced score card gets its name from the attempt to balance financial and non-financial performance measures to evaluate both short run and long run performance in a single report. Paul Arveson describes balanced score card as “an approach which provides information to the management and assist them in formulation of organization’s mission and strategy. The main purpose of balanced score card is to provide the user with a set of information which reveals all relevant areas of performance in an objective and unbiased manner.
OBJECTIVE OF BALANCED SCORE CARD:-
The prime objective of balanced score card is to provide a platform for translating a firm’s strategic objectives into a coherent set of performance measures. Kaplan and Norton recommended that “an organization should articulate the major goals for each of the four perspectives and then translate these goals into specific performance measures.” Basically three to five performance measures are set for each goal.
MAJOR CONTENTS OF A BALANCED SCORE CARD:-
The contents of balanced score card vary from business to business. However, a well designed balanced scorecard combines financial measures of past performance with measures of firm’s drivers of future performances. The vision and strategy of the firm is the pivots around which the contents of a balanced score card revolve. Generally, a balanced score card has the following four perspectives from which a company’s activity can be evaluated.
1. Customer perspective:-
Today, the customer is regarded as the king of the market. The success of an organization depends upon the customer perspective i.e. how customers see it. In order to achieve organizational success customer\clients must be happy with the service they receive. To make the picture clearer, consider the example of banking companies. A multinational banking company is considered superior as compared to a nationalized bank as it provides more satisfaction to customers on account of speed, accuracy, faith and facilities. The customer perspectives consider the business through the eyes of the customers measuring and reflecting upon customer satisfactions.
2. Internal business perspective:-
This perspective focuses attention on the performance of the key internal processes which drive the business. Hence, it gives answer to the question what must we excel at? Since, the natures of the processes are dependent on the nature of the organization. Hence, the score card is not a “fully cooked” solution; it must be adjusted according to circumstances of each organization.
3. Learning and growth perspective:-
This perspective is a measure of potential future performance. It directs attention to the basis of all future success. It is concerned with the organization’s people and infrastructure. Adequate investment in these areas is critical to all long term success.
4. Financial perspective:-
Finally, the financial perspective measures the results that the organization delivers to its stakeholders for measuring the goal of sales; the performance measure used should be revenue and profit growth. The financial perspective focuses on how much of operating income and return on capital employed results from reducing costs and selling more units of the products.
PROCESS OF CREATING A BALANCED SCORE CARD:-
Step-1Identification of a vision i.e. where an organization wants to go. Step-2To identify organization’s strategies i.e. how an organization is planning to go there. Step-3To define critical success factors and perspective i.e. what we have to do well in each perspective. Step-4To identify measures which will ensure that everything is going in the expected way? Step-5Evaluation of balanced score card i.e. ensuring what we are measuring is right. Step-6To create action plans and plan reporting of the balanced score card. Step-7Follow up and manage i.e. which person should have reports and what reports should look like.
ADVANTAGES OF BALANCED SCORE CARD:-
The balanced score card is a management system that enables the organization to clarify their vision and strategy and convert them into performance driving activities. It provides a mechanism for implementing the strategy of a business unit into a comprehensive system of performance measurement. As Robert Kaplan and David Norton state “The balanced score card is more than a tactical or an operational measurement system. Innovative companies are using the score card as a strategic management system to manage their strategy over the long run. They are using the measurement focus of the score card to accomplish critical management processes.” The balanced score card provides strategic feedback and learning, it guards against subordination. It assists the managers to consider all significant performance measures together and lets them to see whether an improvement in one area may have been achieved at the expense of another. The methodology of balanced score card facilitate communication and understanding of business goals and strategies at all levels of an organization.
VALUE BALANCED SCORE CARD:-
The theme of “value balanced score card” is highly appropriate to the present business scenario. The term ‘value’ is related with utility and satisfaction. Utility may be defined as the power of a commodity or service to satisfy a human want. Satisfaction here means the ‘realized satisfaction’ i.e. the satisfaction secured after consumption of commodity. Anything that has utility and provides satisfaction to an individual is regarded to have value for him. Value addition can be both monetary and non-monetary.
1. Monetary value added:-
When the value added can be measured in terms of money, it is regarded as monetary value added. The following are the main categories of monetary value added:
$ Accounting value added
Accounting value added is the surplus of sales revenue plus other incomes from goods and services over the cost of bought in goods and services from outsides. $ Economic value added
Economic value added attempts to measure a corporation’s true economic profit as it compares company’s actual rate of return as against the required rate of return.
$ Market value added
Market value added is the difference between market value of invested capital and book value of invested capital at a given point of time. The market value of debt is not readily available as debts are not generally traded. Thus, the definition of MVA can be modified as, MVA= market capitalization less net worth.
2. Non-monetary value added:-
The non-monetary value added relates to the attributes and social factors. Non-monetary value added can be classifies in the following two ways:
$ Human resource value added
The human resources of an organization are also known as ‘personnel’ or ‘people at work’ and they include all employees engaged in the productive activities of the organization. In the words of Harbison, “Human resources are the energies, skills, talent and knowledge of people which are, or which potentially can, or should be, applied to the production of goods or the rendering of useful services”. It is the human resource that can co-ordinate the best of machines, money and even men to the optimum advantage of the organization. Human resource is also regarded as an important corporate asset, and the economic performance of companies depends upon the extent to which they are effectively utilized. Therefore, the management should try to increase the value of this asset.
$ Intellectual value added
Intellectual capital consists of intangible and knowledge based items controlled by an organization which are expected to produce a future stream of benefits for it. With the shift from resources and manufacturing to knowledge and services as the prime drivers of modern economies, many business organizations are now paying more attention towards value addition in intellectual capital.
Realizing the key role that intellectual capital plays in the success of an organization, a large number of organizations have experimented with measuring and managing intellectual capital. To measure value addition in intellectual capital, the difference between the market value of the organization and the replacement cost of its net tangible assets is taken. The logic underlying this approach is that if the market is prepared to pay a certain sum for the organization as a whole which is in excess of the replacement cost of its net tangible assets, the difference represents the value that the market attributes to its intellectual capital.
HOW TO PREPARE VALUE BALENCED SCORE CARD:-
The preparation of a value balanced score card involves the following steps:
Step-1The first step is to determine the maximum scores which can be achieved for both monetary and non-monetary perspectives of value balanced score card. These scores are generally determined on the basis of business strategy, prevalent market condition and past record of the company. Once these score are determined, there are least chances that they can be changed. Step-2The next step is to determine the expectation i.e. probability of achieving the score. Step-3On the basis of maximum score and expectation, the expected score is determined. Hence, Expected score = Maximum score x Expectation Step-4Determination of actual score
To summarize, the balanced score card is a comprehensive, top down view of organizational performance with a strong focus on vision (i.e. goals) and strategy (i.e. performance measures). To achieve an effective score card the first step is to set up a strong vision. After this, while keeping organizations structure in mind, managers must decide which strategies will contribute towards successful goal attainment? This strategy is translated into specific tactical performance driving activities. The balanced score card has become the pre-eminent strategic tool for the management. The success of its implementation is attributable to its focus on strategy and the future. By the help of this the managers are able to translate broad mission statements into tactical action plans. The balanced score card paves the way for the managers to exploits the firm’s information resources and ultimately produce economic results while directing the firm towards the achievement of its goals.
1. Kaplan and Norton, “Linking the balance score card to strategy”. 2. Kaplan and Norton, “Putting the balanced score card to work”. 3. Paul Arveson (1998), “What is balanced score card?” 4. www.balancedscorecard.org\bscl.html
5. Peter F. Drucker, “Behind Japan’s success”.