HR Management Information & Reference

In recent years there has been a renewed interest in “human resources” and “collaboration” under the term “knowledge management“. In another white paper, the meaning of knowledge management is explored in more detail. Here, the focus is on the relationship between the balanced scorecard and knowledge management.

In their book The Balanced Scorecard, Kaplan and Norton set forth a hypothesis about the chain of cause and effect that leads to strategic success. This cause-and-effect hypothesis is fundamental to understanding the metrics that the balanced scorecard prescribes.

There are four stages to this chain of cause and effect, outlined as follows:

1. The foundation, or fundamental cause for strategic success has to do with people. Decades ago Peter Drucker recognized that innovation from creative people provides the only assured source of long-term success and competitiveness, because every other aspect of an organization can be duplicated by others. The right people must be hired, properly trained and mentored, and the learning process should become continuous and endless. Peter Senge, in his very influential book The Learning Organization, described a healthy organization as one in which a learning culture prevails, fostered both by formal and informal learning and by abundant internal communication in all media.

2. In a learning and growing organization, where the culture encourages people make suggestions and question the status quo, a steady flow of new ideas arises from the rank-and-file employees. These ideas are vital to the future of the organization, because they come from the experts – the people who are involved with the business processes on a daily basis. This insight about employees traces back to Deming, who saw the vital need for managers and shop-floor supervisors to listen to workers’ complaints and empower them to make suggestions and improvements. Conversely, an organization that stifles or ignores new ideas from its employees is probably doomed. The balanced scorecard, using efforts such as employee surveys and analysis of training data, is able to measure the degree of learning and growth, allowing leaders to assess the potential for long-term success.

3. Improved business processes lead to improved products and services. For example, if an improved process saves time, this results directly in a shorter delivery time to the customer something that any customer will appreciate. In the government context, cost reduction is also always of importance to the customer, because the customer is the sponsor of the whole organization’s budget direct and overhead. The balanced scorecard measures customer satisfaction, but improving processes produces it.

4. Finally, improved customer satisfaction leads to loyal customers and increased market share, which directly affect the bottom line whether that line equals profit, ROI (return on investment) or ROCE (return on capital employed) in the private sector, or NOR (net operating result) or IOH (overhead) in the public sector.

Note that the four steps in the causal chain are also the four perspectives of the balanced

scorecard in its original formulation. This shows the basic reason why the perspectives (and their underlying metrics) are defined as they are. Any modifications to the metrics should take into account the hypothesis that is being proposed as the cause of long-term strategic success.

Tags: Balance Score Card

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