Academic journal article Management International Review

Prioritizing Performance Measures within the Balanced Scorecard Framework

Academic journal article Management International Review

Prioritizing Performance Measures within the Balanced Scorecard Framework

Article excerpt

Abstract

* The balanced scorecard framework (Kaplan/Norton 1996) has received a great deal of attention as a means to translate the strategy of an organization into a balanced set of interrelated financial and non financial measures.

* However, it is precisely this variety of measures that may create an element of confusion for managers. In various situations, managers may need to know when to emphasize particular metrics.

Key Results

* We propose the analytic hierarchy process as a mechanism to prioritize the measures of a balanced scorecard for an organization. This article illustrates an application of the methodology for a European services firm.

The balanced scorecard framework (Kaplan/Norton 1996) for measuring organizational performance integrates both financial and non financial metrics across four dimensions of focus for an organization: financial, customer, internal business processes, and learning and growth. This methodology evolved partly as a reaction to an overabundance of aggregate financial-based performance indicators that provided little direction to managers on operational issues as related to the implementation of strategy. Although the balanced scorecard framework has the potential to remove the traditional singular focus on financial metrics and encourage a more balanced set of measures, there are arguments that the numerous measures created for the scorecard may unnecessarily complicate the decision making and performance evaluation process.

Since a typical scorecard may have 20-25 measures (Kaplan/Norton 1996), managers employing the balanced scorecard (BSC) might benefit from a way to prioritize the measures. Or, it may be necessary to reduce a large initial set of measures to a group of 20-25 by a means of prioritization. The use of priorities will enable managers to focus on strategic initiatives that offer the most promising avenues for improving performance. The objective of this paper is to propose a methodology for applying weights to the various measures within the balanced scorecard framework.

The Rationale to Prioritize Measures of Performance

Kaplan and Norton caution that the scorecard framework "should be used as a communication, informing, and learning system, not a controlling system" (1996, p. 25). It is precisely the multifunctional aspects of the BSC that may present a conflict for users of the framework. When managers are confronted with a variety of measures, they are receiving a signal that all of the measures are important (Simons 1990). The measures are important and are interrelated. However, with the average scorecard consisting of four to seven measures for each of the four perspectives (Kaplan/Norton 1996, p. 162), the final scorecard could consist of as many as 28 measures in total. Kaplan and Norton assert that the number of measures should not be an issue since they are all interrelated and focused on achieving the same core strategy (1996, p. 162).

Although theoretically the notion of numerous interrelated measures has a tremendous amount of appeal, operationally, it may be more difficult to appreciate. Studies in information processing and decision making indicate that it is difficult for a person to process a large amount of information (Baddeley 1994). If the BSC provides a framework that distills a multitude of measures into four groups with a few measures for each group, then the scorecard process is filtering the many measures into what is most important. Without any information to the contrary, managers might likely assume that since the measures are related and have the same primary objective, then they should be equally important. However, the BSC format is only a template, and this interpretation may not be correct for managers of all types of companies and strategy situations. Furthermore, if the measures are most important in total and in pursuit of one single strategy, can we thus assume that all are equally important at all points in time? …

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