The Balanced Scorecard and Business Excellence Frameworks

The Balanced Scorecard is not the only performance management framework that busy executives can use to drive continuous improvement. Nor is it the only one to capture the intricacies of how non-financial enablers lead to financial outcomes.

While some ‘balanced’ frameworks, such as the Value Creation Map are inspired by and follow Kaplan and Norton’s model, others, most notably the Malcolm Baldrige Framework pre-date the 1992 launch of the Balanced Scorecard.

And as with the scorecard, the Baldrige model is the parent of a raft of children that share much of its DNA The European Foundation for Quality Management (EFQM) Excellence Model (born at the same time as the Balanced Scorecard), the Australian Business Excellence Framework and the Singapore Quality Model, and many other national/regional frameworks all exist because of the success of Baldrige.

However, many executives ask the question. “Which framework should I use to steer my organization – Baldrige (or derivative) or the Balanced Scorecard?” The answer, as we shall explain, is simple - both. But first a description.

The Malcolm Baldrige Framework

The Malcolm Baldrige National Quality Award was launched by President Reagan in 1987 to encourage the commitment to quality within US organizations and to disseminate best practice within those companies (all winners must present their case studies at a series of conferences). The award is given annually to organizations that demonstrate excellence against the Malcolm Baldrige Framework (Figure 1). Past winners include Boeing Aerospace and divisions of Motorola and Caterpillar. There are also separate awards for organizations in health care and education. Note too that Malcolm Baldrige has created international criteria. Used for example in New Zealand a 2006 winner was Christchurch City Council.

Organizations that apply for the Baldrige Award are assessed against seven criteria, each with sub-criteria and allocated points (note that most organizations assess to the model without applying for the award, using it purely for continuous improvement). A key function of the points allocation is that it enables direct comparison with other companies across industries and sectors.

Figure 1: Malcolm Baldrige Framework

The Malcolm Baldrige Model contains non-financial performance dimensions and a financial results sub-category. It also has a key focus on strategy formulation and deployment.

The EFQM Business Excellence Model 

The EFQM Business Excellence Model, which is proving enduringly popular throughout Europe, comprises nine criteria areas, categorized as enablers and results. As with Baldrige, each has a points allocation. The enablers are leadership, people, policy and strategy, partnerships and resources and people. The results are customers, people, society and key results. The model helps companies to assess and leverage performance in the enabler section to deliver success in the results section. Also akin to Baldrige, and indeed all similar models worldwide, an annual award is presented to organizations assessed through the points system as exemplary users of the EFQM Model. Past winners include Nokia Mobiles Phones, Europe and Africa, DHL Portugal and BMW Chassis and Driveline Systems Production, Germany.

Hybrid Models

In the early to mid 1990s as many organizations were demonstrating successes by using frameworks such as Baldrige others began reporting stunning benefits through the implementation of the Balanced Scorecard. Not surprisingly therefore by the late 1990s hybrid models began to emerge that combined the two. It became usual, for instance, to find organizations creating a Balanced Scorecard that comprised the four perspectives of customers, people, society and key results (the results criteria of the EFQM model).

One example was the UK-based steel manufacturer Corus Colors. Essentially they created a ‘scorecard’ comprising key performance indicators (KPIs) and targets for the four ‘results criteria’ perspectives. Results from an annual assessment to the EFQM model were compared to the targets on the scorecard. Based on this, the action plans for the business, functions and teams were updated. The action plans set out to improve performance to the five enablers of the EFQM model and deliver results in the four areas of the scorecard.

However, there were many who questioned the validity of amalgamation. A jointly authored article by Gaelle Lamotte of the Balanced Scorecard Collaborative and Geoff Carter of EFQM stated: (1)

“Given the distinct purpose and benefit each model is designed to engender, we believe that amalgamating the two models tends to confuse the end goal and dilutes the total benefits which can be gained by using the two as they were designed. It runs the risk of creating an unnecessarily cumbersome process not quite fit for the purpose.”

Using the Scorecard and Excellence Frameworks Together

This is an argument we essentially agree with. Most of the EFQM-based Balanced Scorecards are a collection of results measures. While they do an excellent job in showing how well the company is performing to the EFQM assessment, they cannot effectively perform the role of a strategy implementation model, and rarely can such an amalgamated model describe the organization’s strategy. For instance, while the four perspectives of the Balanced Scorecard can reasonably be applied equally within any industry, this is not true of an “EFQM Scorecard”. Impact on society, for instance, might be of huge importance to an oil company or a steel manufacturer such as Corus Colors, but it will be of minimal strategic relevance to most service-based companies.

So how do business excellence frameworks and the Balanced Scorecard work together? We would suggest that organizations use Baldrige, EFQM or similar models to gain a broad understanding of strengths and weaknesses at the process level. The models provide invaluable insights into performance to all the areas that are important to organization – such as leadership, employee development, etc. This assessment provides an understanding of where the company needs to improve significantly.

However, the organization should not then attempt to close the performance gap between itself and best-in-class performers against each area where there are clear improvement opportunities. Rather, it should then map this performance gap to the objectives on the scorecard. In short, the Balanced Scorecard can be used at this point to provide the strategic focus needed to prioritize action and allocate resources.

As a case illustration, Michael Whipps, director, quality improvement and innovation, Boeing Australia, a 2003 winner of the Australian

Quality Award states:

“Considered as a cycle, the scorecard shows that which we have decided we must achieve in order to succeed against our vision, such as the customer objective to ‘improve customer satisfaction and loyalty’. The Australian Business Excellence Framework provides an assessment to identify any gaps between present state and best practice. Such gaps can then be addresses through strategic initiatives, and these tracked through the Balanced Scorecard.”

Conclusion

In short, therefore, business excellence models provide a comprehensive assessment of organizational performance. This then provides the raw data for launching, and resourcing, the strategic initiatives that drive success against the critical few strategic objectives found on the organization’s Strategy Map. In many cases, performance to the annual Baldrige/EFQM assessment can be used at the measure and target on the scorecard.

By understanding the strengths and roles of both a business excellence model and a Balanced Scorecard, organizations can create a truly powerful performance management process, as many companies have found.

Reference:

• Gaelle Lamotte, Geoff Carter: Are the Balanced Scorecard and the EFQM Excellence Mode Mutually Exclusive or do they Work Together to Bring Value to the Company? EFQM, 2000.