The Balanced Scorecard Approach to CSR Strategy

The Balanced Scorecard Approach to CSR Strategy

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Traditionally, performance measurement systems relied almost exclusively on management and cost accounting principles, often resulting in an emphasis on short-term results and efficient management of tangible resources (i.e., fixed assets and inventory), which were easier to measure using financial metrics, and failed to pay appropriate attention to non-financial intangible activities (e.g., nurturing of customer relationships, development of innovative products and services and implementation of high-quality and responsive operating processes) that contributed to the creation of long-term value for the organization. The “balanced scorecard”, or “BSC”, perspective was first advanced by Kaplan in the 1980s and is based on the premise that measurement of organizational performance should take into factors that are not purely financial and that organizations should use a management system that is better suited to communicating what they are trying to accomplish; aligning the day-to-day work that everyone is doing with strategy; prioritizing projects, products, and services; and measuring and monitoring progress towards strategic targets. Specifically, the BSC framework is a multi-disciplinary view of organizational performance that includes measures such as market share, changes in intangible assets such as patents or human resources skills and abilities (e.g., employee learning and other aspects of so-called “organizational capacity”), customer satisfaction, product innovation, internal business processes (e.g., productivity and quality), stakeholder performance and potential value of future opportunities that have been created but which have yet to be realized financially.

Proponents of the BSC stress that the term “balanced” is not intended to imply equivalence among the various measures that are used in the framework but rather has been selected to ensure that users of the framework understand that not all key performance metrics are financial and that non-financial measures should be considered when looking for ways to improve long-term organizational performance and define and implement the organization’s vision, strategy, structure, reporting processes and training and rewards programs. Not surprisingly, the BSC has been promoted as particularly useful for implementation of corporate social responsibility (“CSR”) initiatives given that the BSC framework explicitly incorporates and balances shareholder, customer and employee perspectives and can be readily deployed using measurements along three dimensions of performance: economic, social and environmental. Commentators have suggested that combining the BSC with CSR can and should begin with traditional financial measures and both expand the concept of financial to include CSR-driven market forces (e.g., “green” consumers and energy crunch) and broaden the performance dashboard to include the non-financial perspectives associated with the BSC and measured using qualitative and quantitative indicators and targets borrowed from the Global Reporting Initiative’s Sustainability Guidelines. This type of approach facilitates identification of new strategic opportunities that also score well in terms of CSR: insisting on supplier performance related to environmental and social commitments can not only improve quality of inputs but also attract and retain new customers that base their buying decisions on trust in the responsible business practices of vendors.

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The “balanced scorecard”, or “BSC”, perspective, first advanced by Kaplan in the 1980s, is based on the premise that measurement of organizational performance should take into factors that are not purely financial in nature since many of the financial indicators that are generally used are based on operational performance.[1] The balanced scorecard has become on the best-known examples of a strategic performance measurement system that organizations should implement as a means for developing strategic plans and evaluating the fulfillment of organizational objectives.[2] The Balanced Scorecard Institute has described the balanced scorecard as a management system that organizations can use to communicate what they are trying to accomplish; align the day-to-day work that everyone is doing with strategy; prioritize projects, products, and services; and measure and monitor progress towards strategic targets.[3]

The balanced scorecard framework, which is depicted above, is a multi-disciplinary view of organizational performance that includes measures such as market share, changes in intangible assets such as patents or human resources skills and abilities, customer satisfaction, product innovation, productivity, quality, and stakeholder performance.[6] The balanced scorecard is a focused set of key financial and non-financial indicators that includes both leading and lagging measures. The balanced scorecard does not ignore past financial performance, recognizing that it usually a good indicator of future results and critical to success of the scorecard. However, the balanced scorecard is based on the reality that there are limitations to the financial measurement of business performance, particularly due to the fact that financial measurement is not forward looking and fails to take into account non-financial measures that need to be incorporated in order to get a fuller and more balanced picture of the business. Kaplan and Norton describe the innovation of the balanced scorecard as follows:

“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”[7]

The balanced scorecard takes into account the potential value of opportunities for the future that have been created but which have yet to be realized financially, an aspect that is outside of generally accepted accounting principles. The balanced scorecard includes, and attempts to “balance”, financial and non-financial measures and seeks to include customer, internal business process and employee learning and growth perspectives along with financial perspective measures that are used to track how well improvements in the other three perspectives are working.[8] It cannot be stressed enough that the use of the term “balanced” does not imply equivalence among the various measures that are used in the framework but rather is intended to ensure that users of the framework understand that not all key performance metrics are financial and that non-financial measures should be considered when looking for ways to improve long-term organizational performance.

The graphic of the balanced scorecard framework above highlights the four perspectives for viewing the organization, each of which are to be referred to when developing strategic objectives, measures of performance, targets and initiatives. The Balanced Scorecard Initiative described each of these perspectives as follows[9]:

Financial:Often renamed Stewardship or other more appropriate name in the public sector, this perspective views organizational financial performance and the use of financial resources.
Customer/Stakeholder:This perspective views organizational performance from the point of view the customer or other key stakeholders that the organization is designed to serve and focuses on customer value and customer satisfaction and/or retention.
Internal Process:Views organizational performance through the lenses of the quality and efficiency related to our product or services or other key business processes.
Learning and Growth (often called Organizational Capacity):Views organizational performance through the lenses of human capital, infrastructure, technology, culture and other capacities that are keys to breakthrough performance.

Sitting in the middle of the framework and influencing each of the perspectives is the organization’s overall “vision and strategy”. Managers can use the four perspectives of the balanced scorecard to develop and communicate the organization’s strategy for improving overall financial performance that incorporates activities, goals and metrics from all of the perspectives and provides opportunities for stakeholders other than shareholders to derive value and benefits from their relationships with the organization. For example, implementing plans in the “learning and growth” perspective to increase the level of training for employees will improve their skills and make them more motivated to perform on behalf of the company. The higher skill level of employees should then lead to stronger internal business processes and operational performance, which is the focus of the “internal” perspective of the balanced scorecard framework. Improvements from internal processes can be deployed in the “customer” perspective to increase customer satisfaction by providing them with either improved delivery time and/or lower prices. If the organization is success with increasing customer satisfaction, it can expect better performance in the financial perspective. Better financial performance generates profits that can be used to satisfy shareholders and re-invested in employees, customer relationships and the pursuit of environmental and social causes.

Proponents of the balanced scorecard approach point to the introduction of a broad array of non-financial indicators that can be used to improve decision making and selection and implementation of strategies. According to the Balanced Scorecard Institute, business and industry, government, and nonprofit organizations worldwide have embraced the balanced scorecard, with studies by the Gartner Group and others suggesting that more than half of major companies in the US, Europe, and Asia are using the scorecard and that use in growing in those areas as well as in the Middle East and Africa.[10] A global study conducted by Bain & Co placed the scorecard fifth on a list of the top ten most widely used management tools around the world—strategic planning was first—and the scorecard has also been recognized by the editors of the Harvard Business Review as being one of the most influential business ideas of the past 75 years.

Implementing a Balanced Scorecard Management System

While the implementation and effectiveness of the balanced scorecard approach is tied to various measures of performance, Kaplan and Norton made it very clear that they conceived of the scorecard as a management, and not a measurement, tool. They explained: “This distinction between a measurement and a management system is subtle but crucial. The measurement system should be only a means to achieve an even more important goal—a strategic management system that executives can use to implement, and gain feedback about, their strategy.”[11] Kaplan and Norton suggested several guiding principles that should be followed in implementing the balanced scorecard:

The balanced scorecard measures must be linked to the company’s strategy using three core principles: cause-and-effect relationships, performance drivers and linkage to financials. These principles must be considered together in order to be effective. For example, while steps may be taken to improve a performance driver, the effort is not really meaningful unless improvement in financial performance also occurs.
The structure and strategy of an organization must be reflected in the balanced scorecard and in many cases it is appropriate and useful for each of the strategic business units of the company to have their own scorecard and for executive leadership to focus on identifying and disseminating a common theme or strategy that covers all of the business units and monitoring the individual scorecards to ensure that they are effective in progressing toward achievement of the common strategy.
As mentioned above, effective implementation of the balance scorecard requires empowering employees by educating them about the organization’s strategy and the methods that have been selected to achieve it. Similar education efforts should be launched with key outside constituents and organizations should support the scorecard through communication and education programs, goal setting programs and reward systems.
The balanced scorecard is part of a larger long-range strategic plan and operational budget process that is achieved by following four steps: setting ambitious “stretch” targets for all performance measures that are understood and accepted by employees; identify and rationalize strategic initiatives and make sure they are aligned with the scorecard objectives; identify critical cross-business objectives on the scorecard and make sure that initiatives of different business units or the corporate parent are aligned to achieve those objectives; and linking the three to five year plan to budgetary performance in order to compare the performance to the strategic plan.
The balanced scorecard should be subjected to rigorous and ongoing feedback with the overall goal of maintaining continuous improvement. Everyone in the organization, particularly employees, should be empowered to implement or suggest changes and contribute to the development of new ideas that can be incorporated into the organizational strategy. In this way, the balanced scorecard provides a roadmap for everyone in the organization to work together toward a common goal and performance of the organization can be measured by reference to the strength and effectiveness of its strategic management system.

The Balanced Scorecard Institute noted and explained how the balanced scorecard framework and elements could be effectively used in a process called “strategy mapping”, which the Institute described as a tool for visualizing and communicating how value is created by the organization and for clearly illustrating a logical “cause and effect” connection between the strategic objectives established for each of the four perspectives in the framework.[12] Developing a strategy map begins with assessing the organization’s overall environment and taking all the steps necessary to develop an appropriate strategy for the organization, hopefully one that is aligned with the organization’s mission and vision. They next step is to break down implementation of the strategy into actionable steps, which are referred to as “objectives” in the balanced scorecard framework. There should be objectives for each of the four perspectives, such as “increasing revenue”, “improving the customer or stakeholder experience” or “improving the cost-effectiveness of the organization’s programs”.

The strategy map itself begins with four rows on what may be referred to as a “mapping grid”, one for each of the perspectives in the balanced scorecard. The ordering of the rows depends upon the priorities of the organization. For example, the ordering for a “for-profit” organization that needs to prioritize financial performance might have “learning and growth” at the bottom, internal process above it, customers above it and, finally, financial as the top row. In contrast, a non-profit organization might have reverse the top two rows so that the customers who are the main beneficiaries of the organization’s mission and activities are on the top row and financial is on the second row. Regardless of ordering, each row includes a box for each of the strategic objectives, which are continuous improvement activities, chosen for that perspective. For each objective there will be one or more “initiatives”, which are the programs that they organization has decided to implement in order to achieve its objectives. The mapping process is arrows between the various boxes that lays out the path that the organization can follow based on objectives from each of the perspectives.

Kaplan and Norton made it very clear that although the balanced scorecard was based on four perspectives, the strategy map should be designed to identify a clear causal path among the perspectives that leads to the most important overall strategic objective for the organization. It is no accident that the financial perspective is at the top of the grid for for-profit organizations since financial outcomes, such as sales growth, return-on-capital employed or economic value added are the key strategic outcomes for those types of organizations. Kaplan and Norton noted that many managers embrace isolated improvement programs such as total quality management and employee empowerment, but fail to link those programs to specific targets for improving customer satisfaction and financial performance. The result, in most cases, is that managers become disillusioned about the initiatives because they fail to deliver tangible “bottom line” results. Done correctly, the business scorecard framework ensures that the objectives and initiatives for each perspective are not implemented until they are part of the cause-and-effect path leading to improved financial performance (or, in the case of “non-profits”, improved delivery of services to the organization’s intended beneficiaries).[13]

In order for an objective to be meaningful and to know whether the associated initiatives are appropriate and successful, there must be a way to measure progress toward the desired outcome (i.e., level of performance), which is referred to as the “target”. The Balanced Scorecard Institute referred to these measures as “Key Performance Indicators”, or “KPIs”, and explained that they should be used to monitor the implementation and effectiveness of an organization’s strategies, determine the gap between actual and targeted performance, and determine organization effectiveness and operational efficiency. According to the Institute, good KPIs provide an objective way to see if strategy is working, offer a comparison that gauges the degree of performance change over time, focus employees’ attention on what matters most to success, allow measurement of accomplishments, not just of the work that is performed, provide a common language for communication and help reduce intangible uncertainty.

Ordering, objectives, metrics, targets and initiatives are the building blocks of the balanced scorecard strategy mapping process. The Balanced Scorecard Institute noted that organizations often begin by focusing on improving performance related to objectives found in the bottom two rows (i.e., “learning and growth” and “internal processes”) and then move forward to leverage gains in those perspectives to achieve more desirable results with respect to customer satisfaction and/or financial performance. A strategy map is an important tool for communicating with employees and other stakeholders how the actions taken in connection with initiatives from one perspective will ultimately influence performance on other perspectives. For example, employees can and should be motivated to engage in improving their knowledge and skills when they understand that this will increase process efficiency that will eventually allow the organization to reduce costs and/or improve the quality of customer interactions. As with any other managerial process, implementation of strategic mapping should be accompanied by appropriate training and continuous evaluation to determine whether there is correct alignment. If performance is not meeting the established targets, changes should be made and the entire process should be re-launched.

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Strategic Mapping Using the Balanced Scorecard Framework

One of the most valuable byproducts of implementing the balanced scorecard framework is the ability to create dynamic “strategy maps”, which organizational leaders can use as a tool for visualizing and communicating how value is created by the organization and for clearly illustrating a logical “cause and effect” connection between the strategic objectives established for each of the four perspectives in the framework. The Balanced Scorecard Institute provided two illustrations of how an organization might develop a strategy map that incorporates each of the four perspectives of the balanced scorecard framework, and the summary below should be read in conjunction with the description of the mapping process and the various elements included in the main text of this Guide.

The first illustration assumed a “for-profit” organization and ordered the four perspectives from top to bottom as follows on a “mapping grid”: financial, customer, internal process and organizational capacity. The map proceeded through the following objectives, from start to finish:

Starting with the learning and growth, or organizational capacity, perspective, the organization focused on improving knowledge and skills among its workforce and improving the tools and technology that they worked with.
Leveraging the improvements in organizational capacity, the organization moved to the internal process perspective and concentrated on increasing process efficiency in order to lower cycle times.
The lower cycle times achieved through investments in the internal process allowed the organization to lower wait times for its customers, thus improving overall customer satisfaction.
Ultimately, improved customer satisfaction translated into increased revenues at the financial perspective. At the same time, the increased process efficiency lowered costs, which improved the “bottom line”. The combination of increased revenues and lowered costs meant that the organization had been successful in achieving the key financial strategic objective of increased profitability.

Each of the strategic objectives discussed above associated with the various perspectives were pursued by specific initiatives, all of which had their own performance metrics and performance targets that could be included in the balanced scorecard framework for the organization. For example, the efficacy of employee training and improving employee skills should be measured against a detailed index of the specific skills that employees should be expected to have in order for the organization to be successful in its competitive environment. Improvements in the capabilities of information systems, which provide the tools and technology to enable employees to do their jobs more effectively, can be measured by reviewing real-time availability of accurate customer and internal process information to front-line customers.

Also important to note is the “cause and effect” connection between the organization’s overall “vision and strategy” and objectives and related activities undertaken in connection with each of the four perspectives. Kaplan and Norton emphasized that a strategy is really a set of hypotheses about cause and effect that are expressed on the strategy map as a sequence of “if-then” statement that create a path throughout the four perspectives and tell the story of the organization’s strategy. For example, every organization wants to achieve higher profitability; however, the strategy map shows how improving sales training of employees can eventually lead to increased profitability: more training leads to a sales team that is more knowledgeable about the organization’s products, which leads to improved sales effectiveness, and ultimately causes average sales margins of the products to increase.

The second illustration assumed a “non-profit” organization and ordered the four perspectives from top to bottom as follows on a “mapping grid”: customer, financial, internal process and organizational capacity. In this instance, the central strategic objective of the organization could be identified from the customer perspective (i.e., the principal beneficiaries of the organization’s activities); however, financial objectives remained of paramount importance since the organization necessarily needed to ensure it had sufficient capital to fulfill its obligations to its customers and that it was able to continue attracting financial support from its donors. The map proceeded through the following objectives, from start to finish:

As is common with the learning and growth, or “organizational capacity” perspective, the objectives were to improve knowledge, skills and abilities of employees, which also increased employee innovation, and improve the use of technology.
With a more knowledgeable and motivated group of employees, the organization was able to focus on internal processes that enhanced stakeholder relationships. At the same time, the organization used its improved technology profile to improve customer communications and the efficiency and reliability of its services. Another objective pursued at this perspective was developing more value added services.
The combination of objectives successfully undertaken at the internal business process perspective led to an expansion of the customer base and improved financial performance.
Finally, improved financial performance along with the expanded range of services allowed the organization to achieve its key objective of enhancing the organization’s value in the eyes of its customers.

Sources: Balanced Scorecard Institute’s “Balanced Scorecard Basics”, which is available at http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard. See also the two case studies provided as illustrations of translating strategic objectives into balanced scorecard performance measures in R. Kaplan and D. Norton, “Linking the Balanced Scorecard to Strategy”, California Management Review, 39(1) (Fall 1996), 53, 69-77.

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Balanced Scorecard and Corporate Social Responsibility

Crawford and Scaletta argued that because the balanced scorecard had become a recognized and established management tool, it was well positioned to support a knowledge-building effort to help organizations make their values and vision a reality.[14] In addition, they believed that the balanced scorecard was an effective way to help executives, managers and employees make day-to-day decisions based upon values and metrics that could be designed to support an organization’s CSR initiatives. The balanced scorecard also allows organizational leadership to articulate its CSR strategy, communicate the details of the strategy throughout the organization, motivates the members of the organization to execute the plans associated with the CSR strategy, and enables leaders to monitor results using both financing and non-financial metrics.

The balanced scorecard is well suited to CSR given that the scorecard framework explicitly incorporates and balances shareholder, customer and employee perspectives. The balanced scorecard can be used to improve the way in which organizations meet the expectations of their stakeholders with respect to reporting on their economic, social and environmental performance and impacts. CSR reporting is a crucial aspect of the transparency demanded by stakeholders such as employees, regulators, investors and non-governmental organizations, and more and more organizations have committed to disclosing CSR-related information in addition to their traditional annual financial reports. CSR reporting generally tracks the “triple bottom line” (“TBL”), which includes measurements along three dimensions of performance: economic, social and environmental. The leading standard for TBL reporting is the Global Reporting Initiative (“GRI”), which has championed the development of the GRI Sustainability Guidelines that include both qualitative and quantitative indicators.

Crawford and Scaletta argued that the balanced scorecard could be an effective format for reporting TBL indicators since the scorecard illustrated the cause-and-effect relationship between being a good corporate citizen and being a successful business.[15] They specifically recommended that organizations should adapt or introduce a balanced scorecard that specifically included and integrated key market forces driving CSR and the indicators of CSR performance and impact taken from the GRI Sustainability Guidelines.[16] The market forces would be “objectives” in the balanced scorecard framework and success or failure toward achieving the specified targets (i.e., the level of performance or rate of improvement required) would be tracked through measures taken from the GRI Sustainability Guidelines.

Crawford and Scaletta suggested that using the balanced scorecard framework to introduce and explain CSR initiatives can overcome resistance to such initiatives among managers, employees and shareholders who may be skeptical of deviating too much from the traditional financial focus of organizational strategy and decision making. For example, the balanced scorecard makes it easier to see the path that an organization might take to creating a competitive advantage based on cost leadership: investing in new technology and more effective and efficient processes that lead to improved ecological protection and better risk management that allows the organization to lower its cost of capital. Similarly, a differentiation-based strategy can be pursued through community building activities that improve organizational reputation and brand equity such that customer satisfaction and demand for the organization’s products and services is enhanced such that the organization is able to increase sales.

Alan S. Gutterman is the Founding Director of the Sustainable Entrepreneurship Project. This article is an excerpt from Alan’s book Strategic Planning for Sustainability. For more information and tools on the subject, see here.

Notes

[1] R. Kaplan, “Yesterday’s accounting undermines production”, Harvard Business Review, (July/August, 1984), 95. See also R. Kaplan and D. Norton, “The balanced scorecard – Measures that drive performance”, Harvard Business Review, (Jan-Feb, 1992), 71.

[2] C. Ittner and D. Larcker, “Innovations in Performance Measurement: trends and research implications”, Journal of Management Accounting Research, 10 (1998), 205.

[3] http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard [accessed June 6, 2017]

[4] R. Kaplan, and D. Norton, The Strategy-focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston, MA: Harvard Business School Press, 2001).

[5] I. Abu-Jarad, N. Yusof and D. Nikbin, “A Review Paper on Organizational Culture and Organizational Performance”, International Journal of Business and Social Science, 1(3) (December 2010), 26, 31 (citing R. Chenhall, “Integrative Strategic Performance Measurement System, Strategic Alignment of Manufacturing, Learning and Strategic outcomes: an exploratory study”, Accounting, Organizations and Society, 30(5) (2005), 395).

[6] R. Carton, Measuring Organizational Performance: An Exploratory Study (Athens, GA: University of Georgia Doctoral Dissertation, 2004), 48.

[7] R. Kaplan and D. Norton, “Using the Balanced Scorecard as a Strategic Management System”, Harvard Business Review (January-February 1996), 76.

[8] Id. at 34 (citing R. Kaplan and D. Norton, “The Balanced Scorecard: measures that drive performance”, Harvard Business Review, 70(1) (1992), 71; R. Kaplan and D. Norton, “Using the Balanced Scorecard as a Strategic Management System”, Harvard Business Review, 74(1) (January-February 1996), 75; R. Kaplan and D. Norton, Transforming Strategy into Actions: The Balanced Scorecard (Boston, MA: Harvard Business School Press, 1996); R. Kaplan and D. Norton, “Linking the balanced scorecard to strategy”, California Management Review, 39(1) (1996), 53; and R. Kaplan, and D. Norton, The Strategy-focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (Boston, MA: Harvard Business School Press, 2001)). The discussion of the various perspectives of the balanced scorecard perspective is based on R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996) and the summary of that work available at http://www.maaw.info/ArticleSummaries/ArtSumKaplanNorton1996Book.htm, which also includes an extensive bibliography of books and articles covering various aspects of the balanced scorecard framework.

[9] http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard

[10] http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard

[11] R. Kaplan and D. Norton, The Balanced Scorecard: Translating Strategy into Action (Boston: Harvard Business School Press, 1996), 272.

[12] The discussion in this section on “strategy mapping” is adapted from the Balanced Scorecard Institute’s “Balanced Scorecard Basics”, which is available at http://www.balancedscorecard.org/BSC-Basics/About-the-Balanced-Scorecard

[13] R. Kaplan and D. Norton, “Linking the Balanced Scorecard to Strategy”, California Management Review, 39(1) (Fall 1996), 53, 67.

[14] D. Crawford and T. Scaletta, “The Balanced Scorecard and Corporate Social Responsibility: Aligning Values for Profit”, CMA Management (October 2005).

[15] Id.

[16] For the key market forces driving CSR, Crawford and Scaletta relied on Willard, who argued that attention to CSR was driven during the early 2000s by a combination of mega-issues (i.e., climate change, pollution/health, globalization backlash, the “energy crunch” and erosion of trust) and demands from emerging stakeholder groups including “green” consumers, activist shareholders, civil society/non-governmental organizations (“NGOs”), governments and regulators and the financial sector. See B. Willard, The Next Sustainability Wave (Gabriola Island, British Columbia CN: New Society Publishers, 2005).

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