BALANCE SCORE CARDChapter 2: Balanced Scorecard as an Enduring Management Tool

Presented By : Rabia M. Hassan

Syeda Atika Fatima Saira JabeenHamza Iqbal

Zaid Imad

THE RISING PROMINENCE OF HUMAN CAPITALBusiness and investment communities are placing ever-increasing emphasis on nonfinancial indicators of performance

A 1999 Ernst and Young study found that “even for large cap, mature companies, nonfinancial performance counts

Before terms like human capital, intellectual capital, and intangible assets entered the business lexicon, there was another metaphor sweeping across organizations—the employee as asset

By recognizing the value individuals bring to the firm, this metaphor represented a great improvement over the “employee as a cost object” philosophy that lay at the heart of the downsizing movement of the early 1990s

THE RISING PROMINENCE OF HUMAN CAPITALFuture financial performance: customer satisfaction and loyalty, continuous innovation, and organizational learning

Thomas Davenport cogently describes this new paradigm: “People possess innate abilities, behaviors, personal energy and time. These elements make up human capital—the currency people bring to invest in their jobs. Workers, not organizations, own this human capital . . . and decide when, how, and where they will contribute it.Peter Drucker labeled these investors knowledge workers, and suggest they hold the key to value creation in the new economy. For the first time in business history, the workers, not the organization, own the means of production—the knowledge and capabilities they possess—and they decide how and where to apply it

CREATING VALUE IN THE NEW ECONOMY

“If you just look at the physical assets of the companies, the things that you can measure with ordinary accounting techniques, these things now account for less than one fourth of the value of the corporate sector. Another way of putting this is that something like 75 percent of the sources of value inside corporations is not being measured or reported on their books.”

CREATING VALUE IN THE NEW ECONOMY

David M. Walker, Comptroller General of the United States, said in his February 2001 testimony to the U.S. senate that “human capital management is a pervasive challenge in the federal government. At many agencies human capital shortfalls have contributed to serious problems and risks.”

“Even the Coca-Colas and Disney’s of the world are actually creating most of their value from assets that don’t appear on their Balance Sheets.” - Richard Boulton Co – chair of New Economy Value Research Lab (MIT)

USING THE BALANCED SCORECARD TO MEASURE VALUE IN THE NEW ECONOMY

Intangible assets are not physical in nature. Corporate intellectual property items (such as patents, trademarks, copyrights, business methodologies), goodwill, employee trainings and brand recognition are all common intangible assets in today's marketplace.

Balanced Scorecard architects Kaplan and Norton have suggested a number of differentiating factors between the intangible and physical assets.

TANGIBLE VS INTANGIBLE ASSETS

Tangible versus Intangible Assets

Tangible Assets Intangible Assets

Rigorously quantified Difficult to quantify

Part of the Balance Sheet Not tracked through Accounting

Investment produces known returns

Can be easily duplicated Cannot be bought or imitated

Depreciates with use Appreciates with purposeful use

Best managed with “scarcity” mentality Best managed with “abundance” mentality

Best leveraged through control Best leveraged through alignment

The value derived from intangibles is very different from that created by purely physical assets.

INTANGIBLE ASSET IMPACTIntangible assets may not have a direct impact on financial results.

It is difficult to assess the impact of intangible investment on financial position of an organization.

An investment in the intangible assets like (employees training) would impact the quality of service provided to customer and in turn increase the loyalty and ultimately financial returns.

But it is not an easy task to find out the individual impact on financial health of an organization.

An investment in the intangible asset may have a second or third order impact on financial success.

INTANGIBLE POTENTIAL

Intangible assets are more challenging as compare to tangible assets.

Technology, employees skills and empowering cultures must be transformed from raw, they represent to value creating opportunities.

In industrial economy we could easily estimate the impact of investment on profits and financial position but a bit challenging in case on intangible assets.

INTERDEPENDENCE FOR SUCCESSIsolated investments in intangible asset may provide little value to the organization.

Intangible assets must be bundled together to take advantage of their individual strengths.

A firm’s leadership style, culture, skills etc should be forged together in order to increase the potential of organization.

CONCLUSION

The characteristics discussed above shows that in order to extract real value from these assets, they must be transformed and linked together, creating a strong and coherent description of your strategy.

The Scorecard development process forces us to critically examine our strategy and describe that an investment in employee skills (in the Learning and Growth perspective) will affect business processes, customer issues, and, finally, financial performance.

NEW APPLICATIONS ARE DRIVING CONTINUED GROWTH OF THE BALANCED SCORECARD

The first groups to embrace this new idea were for-profit organizations seeking to execute their strategies and ultimately deliver value to shareholders.

The series of interconnected performance measures on the Balanced Scorecards allowed profit-seeking organizations to effectively monitor the achievement of their strategies

Popularity and applicability in other organizational forms

NEW APPLICATIONS ARE DRIVING CONTINUED GROWTH OF THE BALANCED SCORECARD…. CONT.

The Social Enterprise Program at Harvard University found that executives and board members of nonprofits consistently rated performance measurement as one of their top three management concerns

Passage of the Government Performance and Results Act in 1993 mandated that all federal departments start measuring results, and at the state and local level performance measures may soon be a requirement of the Governmental Accounting Standards Board

While many such institutions had strategy and mission statements before the Balanced Scorecard arrived, few had performance measurement systems to reveal whether the strategy was succeeding

THE EVOLUTION OF POWERFUL BALANCE SCORECARD SOFTWARESIn 1990s Nova Scotia Power Inc developed a Balanced Score Card made it as a cornerstone of management system by linking it to key processes to which discussions were held on how new and powerful strategic information would be reported to executive team.

Few mostly new and unproven vendors offering software solutions let the company to develop their own tool with help of IT consulting firm to which they settled on using combination of paper reporting and company’s intranet to get result out to the organization. New robut reporting engines were required

Fortunately, with succeeding generation new tools were introduced with perfunctory task of reporting results, mapping strategies, displaying complex cause-and-effect linkages, and performing sophisticated “What if” scenario planning.

Survey conducted have found that “nearly half the respondents stated that they expect to use commercially available Balanced Scorecard applications to report their results” – possibly they look to software providers for the tools they need to maximize the effectiveness of their efforts instead that Balance scorecard effectively translate strategic objectives.

The evolution of the Balanced Scorecard methodology and the accompanying power of technology will enable and escalate those innovations that will continue to propel the Evolution of powerful Balanced Score card Software

NEW APPLICATIONS ARE DRIVING CONTINUED GROWTH OF THE BALANCED SCORECARD…. CONT.

Implementing the Balanced Scorecard in public and not-for-profit sectors is not without challenge

The city of Charlotte uses the Balanced Scorecard system to translate five key strategic themes into performance measures across the four perspectives of the Scorecard

BALANCED SCORECARD GETS RESULTS

This chapter was written for that purpose, and outlines a number of reasons why the Balanced Scorecard is here to stay.

Balance Scorecard gets results, plain and simple!!!

It has provided results to for-profit, non-profit, large, small, and every type of organization.