Pitfalls of the Balanced Scorecard

Topics: Management, Balanced scorecard, Strategic management Pages: 6 (2107 words) Published: April 20, 2011
The Balanced Scorecard (BSC) is an important tool for employees, managers, and owners alike to take a closer look at their roles and assimilate them to be in line with the corporate strategy in order to increase profits. While the Balanced Scorecard offers many opportunities to increase profitability and growth and align the mission and vision of the company with the roles of those who are responsible for achieving it, there are also several pitfalls to be weary of. The BSC is a unique tool, but like everything else, it must be used with caution. Benefits of the Balanced Scorecard

The Balanced Scorecard can help align the mission and vision of the company across different levels of management to ensure everyone is working towards a common goal. In Robert Kaplan and David Norton’s article Using the Balanced Scorecard as a Strategic Management System, they discuss in the example of the executives at Metro Bank, “While formulating the measures for the customer-perspective portion of their Balanced Scorecard, however, it became apparent that although the 25 senior executives agreed on the words of the strategy, each one had a different definition of superior service and a different image of the targeted customers.”. The BSC helps to clarify the strategy of a given company and therefore achieve higher profits. The BSC can also be used to gauge employee performance and encourage them to exceed expectations in their roles. Employees can use the balance scorecard as a tool to ensure they are performing their role to the best of their ability and helps keep them accountable. Kaplan and Norton continue, “This practice permits substantial incentive compensation to be paid if the business unit overachieves on a few objectives even if it falls far short on others. A better approach would be to establish minimum threshold levels”. The BSC forces employees to be accountable to the goals set for them by the organization, but also to themselves to continually put their best efforts forward. While these factors would create the perception that the BSC is a great tool for managers and employees, there are other factors and considerations which could prove to be detrimental to the business. Measuring Intangible Assets

In order for companies to be more successful they must be able to accurately measure their intangible assets. Measuring the value of intangible assets may be tied to how closely aligned those assets are with the company’s strategy. In Article 9.5 “Measuring the Strategic Readiness of Intangible Assets”, Robert Kaplan makes the assertion that because intangible assets are considered more subjective than financial measures, managers often ignore intangible assets or improperly manage them. However, in order to successfully implement a Balanced Scorecard, it is essential that an organization properly measures their intangible assets. The BSC is able to balance financial measures of success with non-financial measures. Article 9.5 breaks up three categories of intangible assets that are essential for implementing any strategy. The three categories are human capital which inherits the skills, talents, and knowledge that a company’s employees possess, information capital which inherits the company’s databases, information systems, networks, and technology infrastructure, and finally the organization capital which encompasses the company’s culture, its leadership, how aligned its people are with its strategic goals, and employees’ ability to share knowledge. A tool called a strategy map is used to link these intangible assets to a company’s strategy and performance. Kaplan’s Article 9.5 further goes on to state that “even if the measures are imprecise, the simple act of attempting to gauge the capabilities of employees, information systems, and organization capital communicates the importance of these drivers for value creation”. This may be seen as a flaw to the BSC due to the fact that there is a large amount of subjectivity on...
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