Third-Generation Balanced Scorecard
In business performance management, a third-generation balanced scorecard is a version of the traditional balanced scorecard, a structured report, supported by proven design methods and automated tools, that can be used by managers to keep track of the execution of activities by the staff within their control, and to monitor the consequences arising from these actions. The third-generation version was developed in the late 1990s to address design problems inherent to earlier generations. It is distinguished by the components making up the balanced scorecard and the design process used to develop these components.
Components of a Third-generation Balanced Scorecard
Key components of a 3rd Generation Balanced Scorecard are:
- Destination statement: In order to make rational decisions about organizational activity and not least set targets for those activities, an enterprise should develop a clear idea about what the organization is trying to achieve (Senge 1990, Kotter 1995). A destination statement describes, ideally in some detail, what the organization is likely to look like at an agreed future date (Olve et al, 1999; Shulver et al, 2000). In many cases this exercise builds on existing plans and documents – but it is rare in practice to find a pre-existing document that offers the necessary clarity and certainty to fully serve this purpose within an enterprise.
- Strategic Objectives: The destination statement offers a clear and shared picture of an organization at some point in the future, but it does not provide a suitable focus for management attention between now and then. What needs to be done and achieved in the medium term for the organization to “reach” its destination on time is agreed upon in the form of objectives or priorities. By representing the selected objectives on a “strategic linkage model”, the design team is encouraged to apply “systems thinking” (Senge 1990; Senge et al. 1999) to identify cause-and-effect relationships between the selected objectives i.e. what do we need to do to achieve the results we expect. This approach also helps ensure the objectives chosen are mutually supportive and represent the combined thinking of the team’s high-level perception of the business model.
- Strategic Linkage Model and Perspectives: The chosen strategic objectives are spread across four zones or ‘perspectives’. The lower two perspectives contain objectives relating to the most important activities in terms of business processes, cycle time, productivity etc. (Internal Processes) and what needs to happen for these processes to be sustained and further developed in terms of people, product and process development (Learning & Growth). The two top perspectives house objectives relating to the desired results of the activities undertaken i.e. how we wish external stakeholders (e.g. the general public, partner agencies and organizations to perceive us (External Relations) and how this will ultimately translate into financial results and economic value (Financial).
- Measures and Initiatives: Once objectives have been agreed measures can be identified and constructed with the intention to support management’s ability to monitor the organization's progress towards achievement of its goals (Olve et al, 1999). Initiatives are special projects with a finite start and end date and are mapped to strategic objectives to give an indication of the projects or actions needed in order to realise the objectives (Niven, 2002).