A compelling case study analysis of microfinance reveals that while institutions in Gulu District utilize Balanced Scorecard principles, significant gaps in learning and innovation hinder optimal performance. Discover how these findings challenge traditional metrics and reshape our understanding of microfinance effectiveness.
2.3 – Balanced Scorecard & Performance Measurement
Recent years have seen an upsurge in the approaches and contributions to the field of performance measurement (Paranjape, et al, 2006).
The traditional performance measurement systems based on financial metrics alone have been deemed inadequate and more attention is being paid to non-financial metrics. Several broader performance measurement systems have been designed, of which BSC (Kaplan and Norton, 1996) has been the least criticized and most widely accepted.
BSC which was developed initially in 1992 by Robert Kaplan and David Norton took an innovative approach to performance measurement, which appealed to many people. The founders argued that financial measures tell the story of past events and hence are inadequate for information age companies.
By measuring organizational performance across four balanced perspectives, the balanced scorecard complements traditional financial indicators with measures for customers, internal processes, and innovation and improvement activities (Kaplan and Norton 1996) – which in turn must all be linked to the organization’s strategic vision. BSC analysis method is constituted as four perspectives as shown in Figure 2.
Figure 2 – Four Perspectives of Balanced Scorecard
Financial Perspective
Are we meeting the expectation of our shareholders?
Customer Perspective
Are we delighting (or at least satisfying) our customers?
Internal Process Perspective
Are we doing the right things and doing things right?
Learning and Growth Perspective
Are we prepared for the future?
Source: Kaplan and Norton, 1996
In each perspective, strategy/vision is translated into specific objectives, goals, and measures. The objectives and goals along with the designed performance measures are communicated throughout the organisation.
Targets are planned and set to align with strategic initiatives and strategic feedback and learning is enhanced (Paranjape, et al, 2006).
The BSC acts as a change catalyst within an organization. It promotes innovation, encourages alignment throughout the enterprise, and changes the way the organization behaves towards accomplishing strategic goals and objectives (ESCC, 2006).
It translates an organization’s mission and strategy into a balanced set of integrated performance measures. It also mixes outcome measures (the lagging indicator), with performance drivers (the leading indicator), because « outcome measures without performance drivers do not communicate how the outcomes are to be achieved » (Kaplan and Norton 1996, p. 150).
By selecting appropriate performance drivers and outcome measures to fit in a chain of cause and effect relationship, the organization will have a better idea of how to achieve its potential competitive advantage (ESCC, 2006).
The balanced set of performance measures tells a concise yet complete story about the achievement and performance of the organization toward its mission and goals. It provides a holistic view of what is happening in the organization.
By tying these performance measures to rewards, BSC ensures that the employees will do what is best for the organization as a whole (ESCC, 2006).
2.4 – The Balanced Scorecard’s four strategic processes
As already mentioned, the BSC links a company’s vision and strategy to a number of measures, which together function as a framework for strategic measurement. Thereby, companies that use the scorecard do not have to rely on short-term financial measures as the sole indicators of the company’s performance.
Instead they have the opportunity to introduce four new management processes that contribute to linking long-term strategic objectives with short-term actions (Kaplan & Norton, 1996a). Figure 3 shows the four management processes, namely, translating the vision, communicating and learning, business planning, and feedback & learning.
Figure 3 – Managing Strategy – Four processes
Translating the vision
- Clarifying the vision
- Gaining consensus
Communicating and learning
- Communicating & Educating
- Setting goals
- Linking rewards to performance measures
Business planning
- Setting goals
- Aligning strategic initiatives
- Allocating resources
- Establishing milestones
Feedback & learning
- Articulating the shared vision
- Supplying strategic feedback
- Facilitating strategy review & learning
Balanced Scorecard
Source: Kaplan & Norton, 1996a
Translating the vision is the first process that helps managers build a consensus around the organisation’s vision and strategy. The difficulty of this process largely depends on how the strategy has been developed.
It is easier to translate a vision and strategy if it is shared among the employees in the company. The executives developing the strategy need input from people throughout the organisation to be able to develop a competitive strategy.
They need information from the experts within the company to help them take the right decisions. For example, the workers on the front line are the ones that really understand what customers want, and who can execute strategies in a way that will please the customer (Birchard, 1996).
Communicating and linking is the second very vital process. It aims at communicating the strategy and objectives throughout the organisation and linking the strategy and objectives to the departmental and individual goals.
This helps the employees to focus their efforts on a common goal and work in the same direction. Properly done, this should also increase flexibility in the organisation, since the BSC helps employees to understand the company’s core competencies and its values.
The BSC therefore gives managers a way of ensuring that all levels of the organisation understand the long-term strategy and that both departmental and individual goals are aligned with it (Kaplan & Norton, 1996b).
However, unless a company ties the balanced set of measures to the compensation system, it will not be able to use the scorecard as the central organising framework for its management systems (Kaplan & Norton, 1996).
Business Planning is the third process where the company should integrate its business plans with its financial plans. It includes aligning departmental business plans to the company strategy.
The BSC aims not at reducing the creative initiatives from different departments but tries to set balanced measures as the basis for allocating resources and setting priorities, so that the organisation and its subparts can co-ordinate and undertake the initiatives that move them toward their long-term strategic objectives.
Feedback and learning is the fourth process that gives the companies the capacity for strategic learning. The basis for this is that the company applying the BSC can monitor the results from the four perspectives and evaluate the strategy in the light of recent performance.
Thus, the scorecard enables the company to reflect over their situation and thereby provide opportunity to adapt or change strategies to fit the current situation.
In other words, the organisation needs the capacity for double loop learning. This is the kind of learning that occurs when managers question their assumptions and reflect on whether the basic values and ideas under which they were operating are still consistent with current evidence, observations and experience (Kaplan & Norton 1996, interpreting Argyris, 1982)
Frequently Asked Questions
What is the Balanced Scorecard framework in performance measurement?
The Balanced Scorecard (BSC) is a performance measurement framework that complements traditional financial indicators with measures for customers, internal processes, and innovation and improvement activities, linking them to the organization’s strategic vision.
How does the Balanced Scorecard improve organizational performance?
The BSC acts as a change catalyst within an organization, promoting innovation, encouraging alignment throughout the enterprise, and changing the way the organization behaves towards accomplishing strategic goals and objectives.
Which perspectives are included in the Balanced Scorecard?
The Balanced Scorecard includes four perspectives: Financial Perspective, Customer Perspective, Internal Process Perspective, and Learning and Growth Perspective.