This essay will try to explore the role of the Balanced Scorecard in today’s organisations, in particular in hospitality businesses. The research will start by exploring performance measurement and later will describe the basics of the Balanced Scorecard to finish with a practical example of the implications of not applying correctly a performance measurement system in a hospitality business. Performance measurement is described by Neely et al (1995) as the process of quantifying action, where measurement is the process of quantification and action leads to performance.
Therefore performance measure is the metric used to quantify the efficiency and effectiveness of an action. These actions refers in other words to the changes that an organisation experiment by achieving performance goals through allocating and prioritising resources. This valuable information is later used by managers to conform or modify their strategies in order to meet these goals. Performance measurement is crucial in today’s organisations because:
•It helps identifying and tracking progress against organisational goals •It helps comparing performance against both internal and external standards. Ensures customer requirements have been met •Helps setting sensible objectives and work towards them •Provides a physical scoreboard for employees to monitor their performance •Highlights quality problems and suggest areas for action (Kald and Nilsson 2000) Within this context, the Balanced Scorecard (BSC) can be described as a strategic performance management framework that integrates a coherent set of performance measures with the organisation’s strategic plan.
This allows organisations to define their strategic priorities and design indicators to monitor how well they are executing their strategy. Kaplan & Norton, 1992). The main innovation from this approach is that it provides a multifaceted view of the organisation’s performance and balances the traditionally observed financial measures with other operational non-financial measures. The architects of the Balanced Scorecard, professor Robert Kaplan and David Norton believed that traditional performance measures based on financial information alone provide a very partial and short-term view of the performance of an organisation as they measure past performance and offer very little to support organisations on their quality journey. Kaplan & Norton 1996).
In this aspect, other analysts have added that financial measurements alone are insufficient to provide relevant information about a company’s root problems (Malone & Sinnett, 2005), it overlooks the intangible enablers of the business (Norreklit, 2000) and disregards value creation (Bicheno, 2008). All this comes to demonstrate that financial measures are simply a consequence of operational activities and only by getting the fundamentals right, the organisation will be able to provide successful financial results.
Taking all this into account, Kaplan and Norton identified the most intuitive components of a company’s strategy and created a more robust and balanced set of measurements that go beyond the financials. It all starts with a vision or a strategic goal and from there managers articulate a set of objectives, measures and targets in four key perspectives. The first is the financial perspective or how do the company look to shareholders. Metrics like the return on investment and residual income provide still valuable information but as already mentioned, not enough to create future value.
In order to deliver any financial objectives, we need first to deliver to customers, which is the second perspective. In this perspective are articulated performance measures related to customer satisfaction and the key performance indicators should answer to the question, how customers see us?. In a similar way, in order to do well what the company does for the customers, it is necessary to identify what are the vital things the organisation needs to excel at in order to implement the strategy. This is the third perspective and Kaplan and Norton call it internal processes.
This approach measures aspects related to the core of the what the organisation does in order to generate profit. Finally the fourth perspective looks at the intangible enablers of the business or the learning and growth perspective. Aspects like retaining the right human capital and keeping them engaged, investing in a good IT infrastructure, or having the right organisation culture, will help the business to do the right things internally, which helps to deliver to the customer which ultimately helps to deliver the financial objectives.
A very important step is choosing the aspects the company will measure in order to achieve the strategic vision. These measures are known as key performance indicators (KPI’s). Choosing the appropriate KPI’s is a crucial as they will monitor the progress towards specific goals. According to Kaplan & Norton (1996), KPI’s should be meaningful, unambiguous and easy to understand by all the members of the organisation. They should collect relevant data embedded in the normal organisation’s procedures, they also need to be able to drive improvement and should be intrinsically linked to the critical goals and key drivers of the organisation.
In order to implement the Balanced Scorecard approach, Kaplan & Norton (1996) identified three levels of information. The first level sits at the very top of the organisation and is where the corporate objectives are defined, the second one translates the corporate targets into more specific targets for each business unit and the third is the team and individual level where specific objectives are articulated which means that everyone in the organisation is aligned with the top level objectives.
Since its creation in the 1990’s, the BSC has evolved from a simple dashboard of performance measures into a comprehensive management system that aims to channel the abilities and specific knowledge of each member of the organisation towards achieving long term strategic goals. Due to its simplicity, it is reported that it was the most widely adopted performance measurement framework in 2010. Over 50% of Fortune 1000 firms now use the BSC methodology and an estimate 85% have adopted some kind of performance measurement.
Also, the BSC was selected by a panel from the Harvard Business Review as one of the most influential management ideas of the past 75 years. (Harvard Business Review, 2013) However, the implementation of the BSC is not free of challenges and many authors find numerous flaws. Thomas (2004) for instance argue that the BSC simply provides a list of metric results and lacks recommendations and advice.
Besides there is little evidence that shows that the use of the BSC improves decision making as many companies seem to fail to act on its findings. Smith (2013) also highlights other important concerns when implementing the BSC: -There is a risk for unclear and poorly designed metrics. -There is a lack of efficient data collection and reporting, particularly non-financial metrics. -It has no process improvement methodology. -It is very inwardly focused.
If environmental factors such as threats and Opportunities are not considered, the BSC may not present a correct picture of the organisation in the market. Critical assessment of the application of the BSC in a hospitality business Although the BSC has been deployed widely amongst businesses, government organisations and even non-profit organisations, research show that it has been minimally applied within hospitality businesses (Gunasekaran et al. 2001).
In my own personal experience working for Premium Country Dining Group, part of Mitchells & Butlers, the leading operator of restaurants and pubs in the UK, I have struggled to perceive evidence of the implementation of the BSC or any other framework for performance measurement in the business. After 15 months working for the organisation I still don’t know what the company’s strategic objectives are in the short term and what specific contributions towards those goals are expected from me as an employee.
Is difficult to identify who is to blame for this, but the reality is that the strategic vision hasn’t permeated down the organisation. On the contrary, every day I see evidence that comes to show that the main source of comparative information used to measure performance and efficiency are still the traditional financial and accounting reports, which has been proven to provide a poor and inadequate view of the business in terms of helping decision making and provide strategic directions.
Financial ratios such as net operating profit, labour costs or average covers per day are commonly used in the business to evaluate performance and are the main factors considered when forecasting in terms of ordering of food and drink, preparation levels of food and staffing. These ratios along with good doses of intuition and past experience seem to be the main drivers to lead the company which in words of Kaplan and Norton (1996) is like trying to drive a car just by looking at the mirrors. Although the restaurant has the customer at its core.
Although both front and back of the house do their best in order to provide a quality product, quick service and the best customer experience possible and although the company’s motto: “Simply amazing pubs” may give a hint about the strategic direction of the company, all these are failing to materialize because of the lack of a solid strategic performance management framework and a good set of key performance indicators that could highlight where are we failing, why customers complain and why our business is buried down on the Tripadvisor rankings and there is no plans for action.
It is obvious that the company is disregarding the internal processes, as can be seen in the high staff turnover, lack of encouragement for employees to grow, and tight cost-control in maintenance which leads to difficulties in doing our job effectively. This consequently leads to long waiting times for customers and a poor service due to short staffing (customer perspective), and ultimately this poor service and unsatisfied customers affects the much regarded financial results.
Definitely a more organised approach to process design and the inclusion of non-financial performance dimensions would result in an increase of overall business effectiveness. Conclusion This research has found that the Balanced Scorecard or any other framework for measuring performance such as the performance pyramid, the performance matrix or the EFQM business excellence model, are effective tools in bringing together previously disparate measures into more coherent models.
In the case of the BSC, it has proven to be particularly successful in adding a much needed non-financial perspective to measuring performance and as Fitzgerald et al (1991) points, encouraging organisations to continually improve, innovate and expand their capabilities in order to gain competitive advantage, understand customer’s needs and adapt to the changing environment.