Application of Balanced Scorecard in Portfolio Management

Abstract

In this article the application of Balanced Scorecard (BSC) will be investigated in relation to Project Portfolio Management (PPM). BSC is a strategic planning tool, which addresses the strategic objectives and often measures them in form of Key Performance Indicators which is evaluated, reported and incorporated into a strategic feedback-loop. Each executed project within a portfolio should be aligned with the strategic objectives in the organisation. To ensure the linkage between each project and the strategic objectives, balanced scorecard can be applied and provide the PPM with a set of initiatives and measures, which would indicate if the outcomes from a given project provides the expected returns or growth to the portfolio and organisation.

To facilitate the merge between strategic management and portfolio management this article will present an argumentation of why BSC benefits PPM, including a definition of both PPM and BSC, the direct linkages in between and a reasoning for application based on theory. This will be followed by how the application of BSC in PPM should be initiated and an identification of the strength and weaknesses. Also the limitations and risks derived from the application of BSC will be identified and elaborated. To inspire further reading an annotated bibliography will be conducted, to enhance the understanding of the tool and core literature.

Definitions

In this section all theories and definitions will be outlined and discussed. The purpose is to give the reader an enhanced understanding of the BSC and the linkage to PPM.

Balanced Scorecard

BSC is a framework and tool which enable the opportunity for a company to describe its intangible and tangible assets. It does not try to valuate the intangible assets but to provide measures to evaluate these. Furthermore, BSC differentiate from traditional balance sheets, through its describtion of intangible assets and not only tangible assets, such as materials, lands, equipment etc.

The definition of BSC by Kaplan and Norton (2001) together with the definition by Abernethy et al. (2005) used as the baseline of reasoning to application into PPM:

1) "The Balanced Scorecard describes how intangible assets get mobilized and combined with intangible and tangible assets to create differentiating customer-value propositions and superior financial outcomes."

2) "...it [balanced score card] articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities"

Strategy Maps

Figure 1: Strategy map example from Kaplan and Norton (2001)

The article by Tharp (2007), she addresses some of the current weaknesses which is identified in the executive management. One of the major weaknesses she identify is: "Many companies fail to distinguish between operational effectiveness and strategy." This distinguish is very important to ensure a future perspective and to achieve an excellent, effective and efficient operational culture.

In relation to BSC, it is very important that the strategy defined by the executive management is perceived and translated into operational targets and measures. Also BSC is an excellent framework to realize this and closing the gap that often exists. BSC contain both a high level strategic view and works as an enablers to translate the strategy into measures and targets, which directly relates to PPM and initiatives

A highly recommended approach to ensure that the strategy is sufficient developed and transparent is to apply the framework of the "Strategy Maps". Strategy maps is a a logical and comprehensive architecture to describe the strategy, through all its elements and linkages to the organizational strategy. An example of the framework can be seen in Figure 1. The strategy maps in interplay with the BSC provide a common and understandable reference point of the strategy for all organisational units and employees. Which will help to minimize the "Vision Barrier" which result in 95% of the workforce not understanding the strategy and their contribution to it, resultingt in an ineffective and inefficient project management across the entire portfolio.

With a well defined and transparent strategy, the PPM will be able to define actions to accomplish the strategy and objective goals, while manageging the all programmes and projects. Which will result in increase in value creation and production capabilities.

The Four Perspectives

Both the BSC and the strategy maps framework is based on the four perspectives in which strategic objectives can be organized.

The Financial Perspective concern the aspects of the strategy which directly impact the shareholder value. Its a critical perspective in business which operate to increase value and generate value to the shareholders. Also it measures the very bottom-line of the company. It is an easy perspective to measure, but the perspective is very limited, in the horizon and is only able to look backwards and therefore is more likely to determine short term strategic decisions. In relation to PPM, measures in this perspective could be profitability, growth, shareholder value and budgets.

The Customer Perspective address the very core of any business strategy which is the customer value proposition. It differentiates a company from it competitors in attracting, retaining and deepening customer relationship. Many of the market leaders have only chosen one discipline and excels within it, the disciplines is: Operational excellence, Product leadership and Customer intimacy. Lastly its important, that this perspective do not solely consists of customer surveys, but should include measurable like response time, customer acquisition and customer loyalty.

The Internal Process Perspective address organizational and operational measures in which a company when excels is providing good financial performance and excellent value proposition to reach the customers. It consist of four high-level processes: 1. build the franchise, 2. Increase customer value, 3. achieve operational excellence and 4. Become a good cooperate citizen. Measures in this perspective when considering PPM could include operational availability, reliability and post-sale processes.

The very last perspective is the Learning and Growth Perspective, this perspective is the enabler of the three previous. It is the foundation for the BSC, since it concerns the employees and informative systems, which let you reach ambitious results and achieve a leading market position. During the identification of the other measures, it is mostly certain that significant gaps will be identified during development of this perspective, these would likely concern the human, informational and organizational capitals. Measures in relation to PPM could be planning accuracy, employee development and availability of information. When this as the last perspective have been developed, then the strategy map is complete across all four perspectives of the strategy.

Key Performance Indicator Balanced Scorecard

In relation to BSC, Kaplan and Norton (2001) has identified, during 200 consultancy projects, two main types of BSC. The first one is the Key Performance Indicator BSC (KPI-BSC) and the second is the Stakeholder BSC (S-BSC). In this section the KPI-BSC will be discussed, while the S-BSC will follow in next section.

The KPI-BSC is one of the major BSC types. KPI-BSC is typically straight forward to implement, since it is often based on already existing KPIs within the organization. The identified KPIs need to be classified into the four above stated perspectives to ensure that they address the entire project portfolio and all the aspects. It is important that the KPI-BSC do reflect the entire strategy of the organization and not only parts, which is often the case. By looking solely at the KPI-BSC a person should be able to tell what the organizational strategy is, since it should based upon that. Also the linkages between a specific KPI and its contribution to strategic objectives should be clarified and have a common acceptance.

Stakeholder Balanced Scorecard

The second main type of BSC is the S-BSC. In this type the organization identifies all it stakeholders, including shareholders, employees, customer, suppliers and their point of contact with the community in which they engage. Then the organization develop goals for all these stakeholders and follow this by a set of measures and indicators. The S-BSC described, is not fulfilling the definition of the BSC, but by adjusting measures and indicators to also concern the aspect about how the organization is going to achieve this, while concerning the overall organizational strategy and their internal processes, then the S-BSC would be sufficient in the definition of a BSC.

Either of the KPI-BSC nor the S-BSC is sufficient on their own, but in either a cooperation or an inspired conceptualization based on the four perspectives, both can fulfill the definition of a BSC. Each PPM is different and the design of the BSC framework should carefully be considered and changed to match the strategy of the organization.

Project Portfolio Management

Figure 2: Strategic road map from processes to projects

The PPM definition in this article follow the standards of PPM from the Project Management Institute (PPM-Standard):

"Portfolio management is the centralized management of one or more portfolios to achieve strategic objectives. It is the application of portfolio management principles to align the portfolio and its components with the organizational strategy. Portfolio management can also be viewed as a dynamic activity through which an organization invests its resources to achieve its strategic objectives by identifying, categorizing, monitoring, evaluating, integrating, selecting, prioritizing, optimizing, balancing, authorizing, transitioning, controlling, and terminating portfolio components."

Linkage between BSC and Project Portfolio Management

When considering PPM one of the critical actions or features is to carefully monitor, evaluate, controlling, balancing and optimizing portfolio components. A framework which support these portfolio components is the BSC. BSC give a structure, a strategy map and measures to manage, which when performed correctly will help to achieve an excellent PPM performance within the highlighted components.

Furthermore, the PPM-Standard also emphasize the importance of a direct link between the PPM and the organizational strategic objectives.

"A portfolio is a collection of projects, programs, subsidiary portfolios, and operations managed as a group to achieve strategic objectives. The portfolio components, such as programs and projects within the portfolio, are quantifiable. ...At any given time, a portfolio represents a collection of its selected portfolio components and reflects one or more organizational strategies and objectives for that point in time. Therefore, a functioning portfolio should be a representation of an organization’s intent, direction, and progress at any given moment."

This facilitation can BSC ensure if properly designed and modified to the given organization. Also see Figure 2, for visualization of the linkage in between BSC, appurtenant Strategy Map and PPM.

Identification of Need

Its not all organizations which need to implement the BSC. It is very important to underline, that it takes a lot of work to initiate and implement. Therefore, organizations which already has an excellent performance measurement discipline, should not use the resources to implement the BSC, due to small return on investment if any.

To identify if an organization could benefit from the implementation of a BSC system a questionnaire have been conducted as an subjective assessment tool for implementation of BSC. When answering the assessment you assign each statement a score from 1 to 5. The more you agree the higher a score you should assign to the statement. It is important to emphasize that the assessment is most aimed at an entire organization and that each project portfolio manager, program manager and project manager should answer this short questionnaire to see if the current performance measurement system need to be reviewed or an new one should be implemented.

No.	Statement	Score (1-5)
1	In our organization we have invested in Total Quality Management (TQM) and other improvement initiatives, but we have not seen a corresponding increase in financial or customer results.
2	If we did not produce our current performance reports for a month nobody would notice.
3	We create significant value from intangible assets such as employee knowledge and innovation, customer relationships, and a strong culture.
4	We have a strategy (or have had strategies in the past) but have a hard time implementing them successfully.
5	We rarely review our performance measures and make suggestions for new and innovative indicators.
6	Our senior management team spends the majority of its time together discussing variances from plan and other operational issues.
7	Budgeting at in our organization is political and based largely on historical trends.
8	Our employees do not have a solid understanding of our mission, vision, and strategy.
9	Our employees do not know how their day-to-day actions contribute to the organizational strategic objectives.
10	Nobody owns the performance measurement process at our project portfolio.
11	We have numerous initiatives taking place at our organization, and it’s possible that not all are truly strategic in nature.
12	There is little accountability in our project portfolio/program for the things we agree as a group to do.
13	The information and communication flow between projects and programs is not clarified, and as a result, we have little collaboration among projects and programs.
14	Our employees have difficulty accessing the critical information they need to perform their tasks or solve problems.
15	Priorities in our programs and project portfolios are often dictated by current necessity or “firefighting”.
16	The environment in which we operate is changing, and in order to succeed we too must change.
17	We face increased pressure from stakeholders to demonstrate results.
18	We do not have clearly defined performance targets for both financial and non-financial indicators.
19	We cannot clearly articulate our strategy in a one-page document or “map”.
20	We sometimes make decisions that are beneficial in the short term but may harm long-term value creation.
-	Total sum of all the scores

Based on the averaged scores of the questionnaire following recommendations is given:

Score range	Recommendation
0-30	If your score fell in this range you most likely have a strong performance measurement discipline in place. The program has been cascaded throughout your organization to ensure all employees are contributing to your success and is linked to key management processes.
31-60	You may have a performance measurement system in place but are not experiencing the benefits you anticipated or need to succeed. Using the Balanced Scorecard as a strategic management system would be of benefit to you.
61-100	Scores in this range suggest difficulty in executing your strategy successfully and meeting the needs of your customers and other stakeholders. A Balanced Scorecard system is strongly recommended to help you focus on the implementation of strategy and align your project portfolios in your organization with overall strategic goals.

This assessment is inspired by Niven (2002) and adapted to PPM, Source: Niven, P.R. (2002) Balanced Scorecard Step-by-Step New York, NY: John Wiley & Sons

Implementation

This chapter will propose a framework on how to apply BSC in a project portfolio. It is mainly based on chapter 2 in the book from Niven (2002) and the article Hoffman (2004).

It is important to emphasize that the outcome from the implementation of a strategic BSC into project portfolio management is mainly providing linkage and a feedback system in relation to strategic objectives and project performance. As Hoffman (2004) quotes:

"The tool establishes a limited set of key measures... channeled through a continuous feedback process toward strategic goals."

Before initiating the implementation project (IP) responsible should carefully consider and plan the following four topics:

Guidance Rationale It is almost a necessity to ensure the guiding rationale behind the IP of BSC. It is important that the guiding rationale explains why the decisions have been made and what benefits it will provide, it should be very specific. From time to time the IP will lose momentum and in these situations, a guiding rationale will provide the IP team with reasoning and an objective of the IP. Also, the guiding rationale is an excellent tool to communicate with all employees about the goals of the implementation of BSC into the project portfolio.

Executive Sponsorship One of the most important topics to have covered before launching the IP is to have sufficient executive commitment. Many IP of BSC fails due to a lack of executive attention. The senior management has several qualities which are a necessity to implement a good BSC into a project portfolio. The first is knowledge and understanding of the strategy in the company. The senior management has an in-depth knowledge of the strategy and has the abilities to articulate this in the given project portfolio. Also, senior management has the decision-making power to take relevant decisions during the IP in relation to strategic goals and objectives. The last quality that senior management provides the IP is the commitment. Programmes and project, which have the emotional commitment from senior management are more successful than projects without.

Implementation Project Team The IP Team is crucial and an IP can hardly be successful if only driven by one person, since one person doesn't have all the knowledge needed. It should mainly be the executive sponsor, which ensures and allocate sufficient resources, both human and financial resources. It is very important that the person which is selected to be in the IP Team can see the opportunities and value during the changes necessary to implement the BSC in the project portfolio. One of the members should be chosen as the IP Manager and together with the executive sponsor will drive the project.

Implementation Plan When implementing the BSC the IP team needs to have a roadmap of where and when the BSC should be implemented. Therefore, an project portfolio, programme or project should be chosen. A good first candidate would be one of the project portfolios, programmes or projects which had a high score in the assessment conducted in the Identification of Need chapter. The higher score has a more urgent need of implementation of a BSC. The IP team can beneficially follow the scoring from the assessment from high to low when implementing BSC into the project portfolio.

Step Framework

When the planning phase has been carried out carefully, then the IP can be initiated. Since every project portfolio is different, generic implementation guidance cannot be provided. But in this paper, a set of steps have been proposed, but they should be adjusted and modified to fit the given case in the project portfolio. The Step Framework proposed in this article follows the structure of Hoffman (2004) but is further developed based on the implementation framework provided by Niven (2002) . The Step Framework consists of seven steps:

1. Background Material The first step to do, as the IP Team, is to collect and gather all sufficient background material on what the companies vision, mission, values, and strategy is and how its objectives relate to the project portfolio. Material for this can be earlier press releases, analyst reports, and annual reports.

2. Education and Strategy Map Development This Step consists of two actions, which favorably could be facilitated through one or several workshops with relevant participants.

1. The first action would be to educate senior management, this would be to gap any holes that exist in the reasoning of the IP of BSC into the project portfolio. A good approach would be to use the Guidance Rationale developed in the planning phase together with the Implementation Plan. This would allow you to communicate why this is highly relevant and how it should be done.
2. The second action would be to conduct a Strategy Map. This need to be based on the first step as well as the first action in the second step. It should be developed either based on executives interviews or/and within a workshop with the IP Team and the executives. This action is absolutely critical in the success of the IP.

3. Develop Performance Measures and Linkage to the Strategy Map After the Strategy Map have been conducted, then each objective in the map should be translated into corresponding performance measures, which would give insight into how each project, programme or project portfolio meet and develop towards the strategy. By doing this the linkage between each measure and the executed strategy will be easy to track.

4. Establish Targets and Prioritize In this step, each performance measure will be provided with 'flesh' in form of identification and definition of relevant targets and initiatives to support each measure. As Niven (2002) says:

setting targets may be among the most challenging aspects of your entire implementation. Many organizations have little actual practice in or techniques for establishing meaningful performance targets.

5. Conduct the First Balanced Scorecard Report

Limitations

Risks

The article is not finalized yet due to time limitations caused by personal circumstances. The rest of the article will be based on following litterature:

Tharp, J. (2007). Align project management with organizational strategy. Paper presented at PMI® Global Congress 2007—Asia Pacific, Hong Kong, People's Republic of China. Newtown Square, PA: Project Management Institute.

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Niven, P.R. (2002) Balanced Scorecard Step-by-Step New York, NY: John Wiley & Sons

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Hoffman, W. (2004). The view from 50,000 feet. PM Network, 18(7), 26–33.

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Project Management Institute. (2018). The standard for portfolio management.

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Kaplan, R. S., & Norton, D. P. (2001). Transforming the Balanced Scorecard from Performance Measurement to Strategic Management : Part I, 15(1), 87–104.

Annotated Bibliography

Project Management Institute. (2018). The standard for portfolio management.

Toledo, R. (2011). From the balanced scorecard to the project portfolio. Paper presented at PMI® Global Congress 2011—North America, Dallas, TX. Newtown Square, PA: Project Management Institute.

Kaplan, R. S., & Norton, D. P. (2001). Transforming the Balanced Scorecard from Performance Measurement to Strategic Management : Part I, 15(1), 87–104.