Balanced Scorecard in Project Portfolio Management

Abstract

The Balanced Scorecard (BSC) is a strategic planning and management system that organizations use to connect the strategy elements such as vision, mission and core values with more operational elements such as objectives, measures and targets.

It was introduced by Robert S. Kaplan in 1992 (“The Balanced Scorecard – Measures that drive performance”, Harvard Business Review) after observing that managers focused their attention only on aspects of performance that were measurable, with the primary measurement system in most organizations being based on financial accounting. In their view, these financial reporting systems fail to measure or provide a basis for managing the value created by the organization’s intangible assets.

In order to connect the daily work practices with the strategic goals of a company, the Scorecard approach enables managers to review performance from four different perspectives: Financial perspective, Customer perspective, Internal Process perspective, and Learning and Growth perspective.

Nowadays, BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. BSC has been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years and was listed fifth among the top ten most widely used management tools around the world in a recent global study by Bain & Co.

The Idea behind the Method

Robert S. Kaplan observed that, as companies around the world transform themselves for competition that is based on information, their ability to exploit intangible assets has become far more decisive than their ability to invest in and manage physical aspects.

Based on this observation, Kaplan introduced the Balanced Scorecard. The latter augments traditional financial measures with benchmarks for performance in three key nonfinancial areas: a company’s relationship with its clients, its key internal processes, and its learning and growing. “When performance measures for these areas are added to the financial metrics, the result is not only a broader perspective on the company’s health and activities, it is a powerful, organizing framework. A sophisticated instrument panel for coordinating and fine-tuning a company’s operations and businesses, so that all activities are aligned with its strategy.”(1, Using the Balanced Scorecard as a Strategic Management System)

Therefore, BSC enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth. In other words, it is not a replacement for financial measures but rather their complement.

Translating Vision and Strategy into Four Perspectives

The BSC translates an organization’s vision into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth.

The financial perspective Focuses on financial performance of an organization and it mainly covers the revenue and profit targets as well as the budget and cost-saving targets. It is important to note that financial performance is usually the result of good performance in the other three scorecard perspectives.

The customer perspective Focuses on performance targets as they relate to customers and the market. It usually covers customer growth and service targets as well as market share and branding objectives. Typical measures and KPIs in this perspective include customer satisfaction, service levels, net promoter scores, market share and brand awareness.

The internal process perspective Focuses on internal operational goals and covers objectives as they relate to the key processes necessary to deliver the customer objectives. At this perspective, companies outline the internal business processes goals and the activities the organization has to do really well internally in order to push performance. Typical example measures and KPIs include process improvements, quality optimization and capacity utilization.

The learning and growth perspective Focuses on the intangible drivers of future and is often broken down into the following components: • Human Capital (skills, talent, and knowledge) • Information Capital (databases, information systems, networks, and technology infrastructure) • Organization Capital (culture, leadership, employee alignment, teamwork and knowledge management).

The Balanced Scorecard in practice

The Scorecard let the managers introduce four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions (1). The four processes which have to be implemented in order to put the method in practice are: 1. Translating the vision 2. Communicating and Linking 3. Business Planning 4. Feedback and Learning

First Process: Translating the vision At first level, the managers of a company need to build a consensus around the organization’s vision and strategy. It is essential to translate the vision into operational terms that will provide useful guides to action at the local level. For people to act on the words in vision and strategy statements, those statements should be expressed as an integrated set of objectives and measures, agreed upon by all senior executives, that describe the long-term drivers of success.

Second Process: Communicating and Linking

In the second step, the managers need to communicate their strategy up and down the organization and link it to departmental and individual objectives. At this process, it is important that all levels of the organization understand the long-term strategy and both departmental and individual objectives are aligned with. In order to align employees’ individual performances with the overall strategy, scorecard users engage in three activities: 1. Communicating and educating, so as to promote commitment and accountability to the business long-term strategy. 2. Setting goals, so as the organization’s high-level strategic objectives and measures will be translated into objectives and measures for operating units and individuals. 3. Linking rewards to performance measures

Third Step: Business Planning In the Business Planning step, the BSC suggests that companies should integrate their strategic planning and budgeting processes and therefore helps to ensure that their budgets support their strategies. Scorecard users select measures of progress from all four scorecard perspectives and set targets for each of them. Then they determine which actions will drive them toward their targets, identify the measures they will apply to those drivers from the four perspectives, and establish the short-term milestones that will mark their progress along the strategic paths they have selected. In this way, building a scorecard enables the company to link the financial budgets with its strategic goals.

Fourth Step: Feedback and Learning Based on the BSC Method, the first three management processes together form a single-loop-learning process that is vital for implementing strategy, but since most companies today operate in a competitive environment with complex strategies, it is not sufficient. In this kind of environment, where new opportunities and challenges constantly are developed, it is important that companies will become capable of a double-loop-learning process. The BSC supplies three elements that are essential to strategic learning. Firstly, it communicates a holistic model that links individual efforts to business unit objectives. Secondly, it supplies strategic feedback that tests and modifies the short-term goals in the business units’ strategy, which have been developed by the managers based on forecasting. Finally, the BSC with its specification of the causal relationships between performance drivers and objectives, allows corporate and business units’ executives to use periodic review sessions to evaluate the validity of the units’ strategy and quality of execution.