Going digital with the balanced scorecard?

The potential of the all-time classic for the smart factory. Thumbs up or thumbs down?

Giddy up or whoa! When it comes to digitalization, one thing is clear: There is essentially ONE factor that determines success on the road to the "smart factory" – having or not having a digitalization strategy. This is confirmed by numerous business studies on the subject. But it is precisely this task – the development and implementation of a digitalization strategy – that causes companies to fail. Which raises the question: How can this risk of failure be avoided? The answer: Two factors seem to be the most relevant, (1) motivated employees with appropriate skills, and (2) the use of a performance management system. The best known of these performance measurement systems is the balanced scorecard (BSC). Developed in the 1990s, however, it is questionable whether the "BSC" will also prove to be a suitable tool under the conditions of change in the course of the so-called 4th industrial revolution. It pays to take a closer look!

 

In 1990, several US companies jointly commissioned a study. The aim of this study was to expand existing performance measurement systems – which were increasingly perceived as inadequate – by also taking non-monetary indicators into account. The project was led by two scientists, David P. Norton and Robert S. Kaplan. As part of the project, representatives from twelve companies (including big names such as Apple, General Electric, and Hewlett-Packard) met every two months to develop this new concept for measuring company performance.

 

During the course of their work, the group came across an approach from the Analog Devices company. Analog Devices had already been using a performance management system since 1987 that also included non-monetary KPIs. The company's vice president was invited to attend one of the project group's meetings – and the groundwork for the scorecard was laid.

 

The second decisive step followed by focusing on the balance of the KPIs: Just as financial and non-financial KPIs were to be included in the system, so were long-term and short-term, internal and external KPIs – and thus the balanced scorecard was born.

 

When summaries of the completed study were published (in the Harvard Business Review, among others), the concept quickly gained traction. It was considered simple and easy to understand as well as flexible to use in a wide variety of industries, company levels, and divisions. As a result, the concept soon emancipated itself from a pure key performance indicator system to become an instrument for corporate management and planning, also suitable as a tool for reporting and communication. Not only was the biased financial focus overcome, but also the historical focus of earlier concepts.

 

Having looked back at how the balanced scorecard came to be, let's now focus on today and the challenges that digitalization poses for corporate management, planning, and communication – and hence for its management tools.

Know what you want. And do what it takes

In general, a balanced scorecard helps transform strategic variables into operational variables. However, in doing so, the tool also forces decision-makers to provide clarity to the company's vision. After all, a compass is only helpful to those who know where their journey is taking them.

 

A standard balanced scorecard takes a look at four perspectives (= areas):

• Finances
• Customers
• Internal processes
• Learning & growth (also called potential perspective or employee perspective)

 

If a company works with the balanced scorecard tool, it dedicates itself to the following tasks:

(1) For each of the perspectives, several (three – according to the recommendations – to a maximum of eight) tangible objectives are defined.

(2) For each objective, a KPI is determined that can be used to measure the progress towards achieving the objective.

(3) Each of the objectives is given a target for the "speed" at which the objective is to be achieved. The defined KPI is used to map this target.

(4) For each of the objectives, the measure by which this target is to be achieved is specified.

 

Here’s an example:

From the customer perspective, the following question arises: How should we present ourselves to our customers in order to be successful? One answer – and thus an entry in the scorecard – could be:

 

Objective	Kpi	Target	measure
Increase Productivity	OEE	+10 %	Asses KPI and take regulatory action

 

Here's another example: From the internal process perspective, the following question arises: In which processes do we need to be the best in order to retain our customers and gain new ones? One possible answer:

 

Objective	Kpi	Target	measure
Develop new products	Percentage of sales accounted for by new products	+15 %	Set up working group

 

As these examples show, the use of the tool forces a company to ...

• Define what the company wants to achieve – and express this vision in target definitions
• Understand the criteria it uses to assess whether it is on the right track
• Consider what is a good/workable pace for achieving the objective in question
• Decide which actions can and should help to move forward in accordance with the objectives set

 

One of the great advantages of the balanced scorecard is that the system can be adapted in many different ways. As a result, each company can design its own model to suit the specific situation of its industry and environment. Each of the four "classic" perspectives (finances, customers, internal processes, and learning & growth) can be replaced by other perspectives of your own choice. It is also possible to add other perspectives – and this is where the considerations for the "Industry 4.0 compliant" balanced scorecard come in.

Causes and effects

Researchers Matthias von Entreß-Fürsteneck, Johannes Karl, and Nils Urbach suggest adding the "Future and Technology" perspective to the scorecard. They believe that a company's sensitivity to technologies that will be relevant in the future is a key success factor. Only if a company is highly innovative in the key topics of the 4th industrial revolution can these capabilities prove to be real drivers of corporate success. Companies must therefore focus on achieving a high level of integration with digital technologies on their factory floors. The way forward is with an Industry 4.0 balanced scorecard.

 

A study conducted by the Lucerne University of Applied Sciences and Arts (Wolfgang Becker, Felix Schuhknecht 2019) shows that companies operating primarily in a competitive environment, which is highly time- and innovation-intensive, are always much more successful and have significantly higher growth potential when they pursue a digitalization strategy. Becker and Schuhknecht also conclude that a suitably adapted balanced scorecard proves to be a suitable tool for developing, formulating, and implementing this essential digitalization strategy.

 

One basic principle of the scorecard plays a special role here: The objectives in the scorecard, which are implemented on the basis of indicators, are organized according to their cause-and-effect relationship (and not – as in a computer system – according to their mathematical relationship). To map this cause-and-effect relationship, the "fathers" of the balanced scorecard, Kaplan and Norton, developed the "strategy map" in a further step in the early years. It had become apparent that companies – although fascinated by this new management tool – had considerable difficulties in using it in practice. There was no connection between the individual perspectives (finances, customers, internal processes, and learning & growth). This weakness was resolved by adding the strategy map to the tool.

Bottom up. Or vice versa.

Although developed after the scorecard, the strategy map is the prerequisite for creating a company-specific scorecard. In short, a company has two options when developing its strategy map: It creates it top down or bottom up.

 

(1) Top down: Top down starts with the top perspective – financial – and presents all the dependencies of the objectives formulated in the four perspectives based on this perspective. In other words, each of the objectives of the financial perspective is first examined individually to determine how it relates to the other objectives of the financial perspective, and then with the objectives of the other perspectives. Once the causes and effects are identified, the most strategically important ones are clarified and selected (for the sake of clarity).

 

(2) Bottom up: In this case, the mapping of the relationships starts with the learning & growth perspective (or – in the case of an individually designed scorecard – with another perspective ranked below) and links the objectives from the bottom up to the financial perspective. The question that must always be answered is: "Do we want to achieve this objective in order to support the implementation of objective x?"

 

This brings us back to the balanced scorecard as a tool for the successful development and implementation (and subsequent controlling) of a digitalization strategy. According to Wolfgang Becker and Felix Schuhknecht, there is another advantage of the balanced scorecard, including the strategy map, besides the mapping of cause-and-effect relationships: Its fundamental potential to improve the strategic awareness of managers and help them evaluate and review strategies. It would also enhance the ability of decision-makers to evaluate the relevance of external information (from the perspective of the specific company situation).

"It's the KPIs, stupid"

When asked about the need to further develop the balanced scorecard for the digital world, management consultant Ralf Strehlau identifies a unanimous opinion – both from a scientific and a practical point of view: The basic concept with its four perspectives and cause-and-effect analysis is still valid, he says. Nevertheless, further action is needed. The KPIs would have to be adapted to the new reality.

 

The financial perspective would require the least adjustment. Profitability, cash flow, margins, etc. continue to be relevant. In the three other perspectives, however, there is a need for further development. Strehlau cites a few examples to illustrate this:

 

Due to the fact that the digital world has significantly changed the way customers acquire information and make purchasing decisions – B2B and B2C alike – online visibility is becoming a key performance indicator. A company that cannot be found on the Internet, or is much less visible than its competitors, has to expect relevance problems. In the context of internal processes, for example, the percentage of digitally processed orders proves to be a relevant KPI. At the learning & growth level, it is the number of training days used for digital topics or the number of employees already using new technologies.

 

Robert Obermaier and Markus Grottke consider the possibilities of the balanced scorecard from the perspective of production companies. In doing so, they emphasize that Industry 4.0 means flexibility first and foremost. They therefore present a system of key performance indicators that focuses on production-related flexibility indicators. At the same time, Obermaier and Grottke recommend: "When designing your Industry 4.0 scorecard, focus on the KPIs that are most meaningful for your company." Here, too, the recommendation is: a maximum of eight per perspective.

 

Flexibility dimensions	Sample KPI's
Systems	Tools that can be used per system Ratio of CAD/CRM-compatible systems
Processing	Number of manufacturing properties per material or product part
Expansion	Average duration of personnel recruitment Percentage surface reserve
Market	Required start-up time Ratio of production steps that can be influenced by the market Response time of production program planning to customer orders
Material Provision	Critical provision time
Product	Average number of robot axes Proportion of product parts with multiple uses
Production	Number of product variants that can be produced by the existing manufacturing system
Program	Proportion of automated maintenance processes Average fully autonomous production time
Process	Number of product variants that can be processed per system
Routing	Number of different production paths for the manufacture of a product
Volume	Average time required for personnel planning Overtime per employee Sensitivity of the production program to deviations in planned volume Break-even quantity

Source: Robert Obermaier, Markus Grottke 2017, page 59

 

Conclusion

The balanced scorecard tool still exists in the age of digitalization. However, like all systems that want to do justice to reality, this tool requires adaptation. It can be adapted to the current requirements in two ways: (1) The classic perspectives are retained, while at the same time Industry 4.0 compliant targets and KPIs are included, (2) The classic perspectives are adapted to the business models changed by digitalization, i.e., (partly) replaced or supplemented. If either of these is done prudently, the balanced scorecard still proves to be an ideally suited performance management system. And that is not all. The adapted balanced scorecard proves to be the perfect tool for developing and implementing the digitalization strategy that is indispensable for success on the road to the smart factory.

 

It's thumbs up! The scorecard is not consigned to the scrap heap – it is proving to be something of an evergreen.

 

How we approach this issue: As machine connectivity experts, we support you with your digitalization project. We ensure that KPIs can be digitally recorded on all machines and systems – even where this was previously not possible due to heterogeneous systems, manufacturers, and generations. We also make sure that the KPIs are valid, meaningfully sorted, and optimally prepared. In short: We solve your connectivity problem and enable end-to-end collection, storage, and analysis of your meaningful data. If we can support you in any way, just let us know. We are always happy to help.

 

Recommended reading (German only):

• Matthias von Entreß-Fürsteneck, Johannes Karl, Nils Urbach: Performance Measurement im Zeitalter der Digitalisierung: Eine Balanced Scorecard für die Industrie 4.0 in: Anwendungsorientierte Beiträge zum Industriellen Management, Flexibilisierung der Fabrik im Kontext von 4.0 (Volume 6), Logos Verlag, Berlin, 2017
• Ralf Strehlau: Balanced Scorecard in der digitalen Welt www.anxo-consulting.com/fachartikel/balanced-scorecard-digital (accessed on 18.04.2021)
• Wolfgang Becker, Felix Schuhknecht: Digitalisierungsscorecard – ein Performance Management Tool in der digitalen Welt, CARF conference proceedings of Lucerne University of Applied Sciences and Art, 2019
• Robert Obermaier, Markus Grottke: Controlling in einer Industrie 4.0 – Neue Möglichkeiten und neue Grenzen für die Steuerung von Unternehmen, in: Mischa Seiter, Lars Grünert,
• Sebastian Berlin: Betriebswirtschaftliche Aspekte von Industrie 4.0, Springer trade journals Wiesbaden, 2017