BP1 - Week 2 - Using Performance Measures

Traditionally, business performance is measured only by financial results, such as return on investment (ROI) or earnings per share (EPS). These measurements however have many drawbacks. For example, your vice-president has informed you that a promotion is possible if revenue is increased by 10%. In order to be promoted, you may extend your working hours, improve customer service or learn new skills. On the other hand, you may use cheaper raw material, cut the outlay of development and research for new product, or lay off employees, any tactic though will likely have negative consequences for the business in the long run. This situation was changed by a new management system – balanced scorecard.

Balanced scorecard is a multi-dimensional measurement tool for organizational performance. It was developed in the early 1990’s by Drs. Robert Kaplan and David Norton. It was called “balanced” because it balances the financial perspective with the learning and growth perspective, the business process perspective and the customer perspective. The steps to applying balanced scorecard is from top to bottom: the leaders set up the strategy while senior- level management identifies scorecard measures for the organization and this flows down to departments and individual employees.

The major benefit of implementing a balanced scorecard is that the business objective is shared through the entire organization from top management to individual employees. Meanwhile, by setting up a target and rewarding the individual(s) who meet the target, this motivates employees to make full use of their energies, abilities and specific knowledge toward achieving objectives. I think this is the most powerful part about balanced scorecard. It can help management accomplish business goals through managing people. After all, people are most important element. Regardless of how powerful the software and equipment are, they are useless without poeple. For expample, in a large manufacture company, there are maybe over 50 or 100 employees working for one department, I wonder how many of them know whether their supervisors are satisfied with their performance, how many of them really think their work matter to the company’s objective, and how many of them receive the guidance from their manager on their personal career development. So the implementation of balanced scorecard will push management communicate timely and effectively with employees, change employees' attitude, improve their performance, and promote good practices. Since the measurements affect employees’ performance and behaviour, management has to be careful when they set up the criteria.

There are other business performance measurement tools including activity based costing (ABC) and Six Sigma. ABC evaluates costs based on business products or services. For example, it allocates manufacture overhead into accounts such as “machine set up”, “running machines”, “inspection” based on the process activities, while traditional cost accounting allocates overhead to cost objects based on product volume. ABC provides more accurate cost management by making those indirect expenses direct. ABC's cost objects are activities and the resources consumed by those activities. The company with high overhead and diverse products will benefit most from ABC. Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects (driving towards six standard deviations between the mean and the nearest specification limit) in any process from manufacturing to transactional and from product to service. (From “what is six sigma”, http://www.isixsigma.com/sixsigma/six_sigma.asp) The relation between those measurements is that the balanced scorecard concept builds on the idea of ABC while Six Sigma is the product of the balanced scorecard. (From “An Introduction to Balanced Scorecard”, http://www.cio.com/article/123750/ABC_An_Introduction_to_Balanced_Scorecard)