Guide: Balanced Scorecard
- Last Updated: July 22, 2023
The Balanced Scorecard, a transformative framework developed by Dr. Robert Kaplan and Dr. David Norton in 1992, revolutionized how organizations measure and manage performance. Beyond the traditional financial metrics, this approach offers a multidimensional view, intertwining financial health with customer satisfaction, internal processes, and learning and growth.
By converting high-level strategy into actionable objectives, the Balanced Scorecard serves as a crucial bridge between an organization’s long-term vision and its day-to-day operations. Its comprehensive nature not only tracks financial outcomes but also fosters sustainable growth through a focus on non-financial drivers.
Table of Contents
What is a Balanced Scorecard?
The Balanced Scorecard, also known as the Kaplan and Norton Scorecard, is a concept developed by Dr. Robert Kaplan and Dr. David Norton in 1992. You can read the original post that launched the concept in Harvard Business Review, where Kaplan states, “The balanced scorecard allows managers to look at the business from four important perspectives.” The method is useful in business due to its ability to transform an organization’s vision and strategy into a logical and actionable framework.
Image by Kaplan and Norton on HBR
Traditionally, organizations focus on financial indicators for measuring business performance. However, Kaplan and Norton realized that only focusing on financial outcomes was ineffective for sustainable growth and performance in the long term.
The Balanced Scorecard addresses this by providing a more rounded view of organizational performance that incorporates non-financial aspects, which are critical drivers of future financial success.
The Balanced Scorecard acts as a bridge between an organization’s strategy and its operational activities. By converting abstract strategic goals into concrete objectives and measures, it helps in aligning the organization’s short-term actions with its long-term strategy.
The Four Perspectives of the Balanced Scorecard
The core of the Balanced Scorecard lies in its four perspectives, which collectively ensure a balanced approach to strategy and performance measurement.
Financial Perspective
The financial perspective focuses on traditional financial accounting measures and addresses questions like how shareholders view the organization and what the financial goals are. This perspective is crucial, as ultimately, companies need to deliver financial returns to survive and grow.
Key metrics for this perspective
- Return on Investment (ROI): A measure of the profitability relative to the capital invested.
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Provides insight into the operational effectiveness without the impact of financial and accounting decisions.
- Revenue Growth: Measures the rate at which the company’s top-line income is increasing.
- Cash Flow: A critical measure of financial health, focusing on the company’s ability to generate cash.
Customer Perspective
The Customer Perspective emphasizes the importance of customer satisfaction, loyalty, and market share in specific segments. This perspective answers the question of how customers view the organization and what the objectives should be to attract and retain customers.
Key metrics for this perspective
- Customer Satisfaction Scores: Surveys and feedback mechanisms to gauge customer satisfaction.
- Net Promoter Scores (NPS): A metric that assesses customer loyalty by measuring the likelihood of customers to recommend the company’s products or services.
- Customer Retention Rates: The percentage of customers that continue to buy from the company.
- Market Share: The company’s portion of sales in the total market.
Internal Business Process Perspective
This perspective looks at the internal processes critical for satisfying customer and shareholder expectations. It focuses on identifying and improving processes that deliver value to customers, thus impacting financial success.
Key metrics for this perspective
- Cycle Time: The time needed to complete a certain process or activity.
- Quality: Measures of defect rates, accuracy, or other quality standards.
- Employee Productivity: Output per employee or team.
- Cost Management: Effectiveness in controlling costs.
Learning and Growth Perspective
Learning and Growth focus on the intangible drivers of future success, like human capital, information capital, and organizational culture. It addresses the question of how the organization must learn, improve, and innovate to meet its objectives.
Key metrics for this perspective
- Employee Satisfaction and Retention Rates: Indicators of employee morale and talent retention.
- Training Completion Rates: The percentage of employees completing key training programs.
- Skill Sets: The availability of essential skills and competencies within the organization.
- Technological Capability: The effectiveness and advancement of technological resources.
Integrating the Perspectives
The real power of the Balanced Scorecard lies in the combination
of these perspectives, creating a holistic view of the organization. The perspectives are not silos but are dynamically interlinked. For instance, investment in Learning and Growth (like employee training) can enhance Internal Business Processes (improving quality and efficiency), which then can lead to better Customer satisfaction and ultimately drive improved Financial results.
This integration ensures that short-term financial gains are not pursued at the expense of customer satisfaction, employee development, or process improvement. Each perspective supports and influences the others, leading to balanced and sustainable organizational growth. The Balanced Scorecard thus serves as a strategic management and measurement system that aligns business activities with the vision and strategy of the organization, improving internal and external communications, and monitoring organization performance against strategic goals.
Implementing the Balanced Score Card
Implementing the Balanced Scorecard is a comprehensive process that follows a systematic approach to ensure that an organization’s strategic objectives are effectively translated into actionable plans. Let’s delve into each step of this implementation process in more detail.
Step 1: Clarifying and Translating Vision and Strategy
In the first step, we need to achieve three things, defining the vision and mission, developing strategic objectives, and linking objectives to the four perspectives:
Defining Vision and Mission: It begins with a clear articulation of the organization’s vision and mission. The vision statement provides a long-term perspective of what the organization aspires to become, while the mission statement outlines the purpose of the organization and its primary objectives.
Developing Strategic Objectives: Once the vision and mission are established, the next step is to develop strategic objectives. These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART) and should cover all aspects of the organization’s strategy.
Linking Objectives to the Four Perspectives: Each strategic objective is then mapped to one of the four perspectives of the balanced score card – Financial, Customer, Internal Business Processes, Learning and Growth. This ensures a balanced approach and alignment with the overall strategy.
Step 2: Communicating and Linking
Next is effective communication within the organization. This involves disseminating the clarified vision, strategy, and objectives to all levels of the organization. Every employee should understand how their work contributes to the strategic objectives. This may involve setting individual performance goals that are aligned with the strategic objectives. The organization’s culture must support the strategy and objectives. This could mean reinforcing values that promote customer satisfaction, innovation, or operational excellence.
Step 3: Business Planning
For each strategic objective, specific performance targets are set. These targets should be challenging yet achievable and linked to the metrics defined under each perspective of the balanced scorecard. Strategic initiatives or projects that will help achieve these targets are identified and prioritized. This involves ensuring that resources are allocated to the most critical projects. The financial implications of the strategic plan are considered, and resources are allocated accordingly. This includes budgeting for projects, technology, and human resources.
Step 4: Feedback and Learning
Regular monitoring of performance against the set targets is essential. This involves collecting data, tracking progress, and conducting performance reviews.
Mechanisms for feedback, both from within and outside the organization, are established. This includes employee feedback, customer surveys, and performance reviews. Based on the feedback and performance data, the strategy and objectives may be adjusted. This step is crucial for ensuring the organization remains agile and can adapt to changes in the external environment or internal performance issues.
Conclusion
Implementing the Balanced Scorecard is a strategic journey, demanding clarity in vision, effective communication, meticulous business planning, and continuous feedback. This system transcends traditional performance measurement, interweaving financial, customer, internal process, and learning perspectives into a cohesive strategy.
Its real strength lies in integrating these perspectives, ensuring that organizational growth is balanced and sustainable. By aligning business activities with strategic vision, enhancing communication, and adaptively monitoring performance, the Balanced Scorecard stands as an indispensable tool for organizations aiming to achieve long-term success and resilience in an ever-evolving business landscape.
References
- Kaplan, R.S., 2009. Conceptual foundations of the balanced scorecard. Handbooks of management accounting research, 3, pp.1253-1269.
- Chavan, M., 2009. The balanced scorecard: a new challenge. Journal of management development, 28(5), pp.393-406.
- Kaplan, R.S. and Norton, D.P., 2009. Putting the balanced scorecard to work. In The economic impact of knowledge (pp. 315-324). Routledge.
- Kaplan, R.S. and Norton, D.P., 1992. The Balanced Scorecard—Measures that Drive Performance. [online] Harvard Business Review. Available at: https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2 [Accessed 9 December 2023].
Q: What is a Balanced Scorecard?
A: The Balanced Scorecard is a strategic management framework that helps organizations measure and track their performance across various perspectives. It goes beyond traditional financial metrics and incorporates key areas like customer satisfaction, internal processes, and learning & growth. It provides a comprehensive view of an organization’s progress towards its strategic objectives.
Q: Why is the Balanced Scorecard important for my organization?
A: The Balanced Scorecard is crucial as it aligns your organization’s activities with its strategic goals, fostering better decision-making and resource allocation. It promotes a balanced approach to performance evaluation, ensuring that improvements are made across multiple dimensions, not just financially.
Q: How do I create a Balanced Scorecard?
A: To create a Balanced Scorecard, begin by defining your mission, vision, and strategic objectives. Identify key performance indicators (KPIs) for each perspective, set specific targets, and develop action plans to achieve those targets. You can use spreadsheets or specialized software to design and implement the Scorecard.
Q: What are the main perspectives in a Balanced Scorecard?
A: The Balanced Scorecard typically comprises four perspectives:
- Financial: Focusing on financial performance, such as revenue, profit, and return on investment.
- Customer: Measuring customer satisfaction, loyalty, and other indicators of customer value.
- Internal Processes: Assessing the efficiency and effectiveness of internal operations and processes.
- Learning & Growth: Evaluating the organization’s ability to develop employee skills and foster innovation.
Q: How often should we update the Balanced Scorecard?
A: Regular updates are essential for an effective Balanced Scorecard. Depending on your organization’s needs, you can update it monthly, quarterly, or annually. More frequent updates allow for timely course corrections, while less frequent updates provide a broader perspective of performance.
Q: How can I analyze the data in the Balanced Scorecard?
A: Analyzing the data involves reviewing trends, identifying areas of strength, and pinpointing opportunities for improvement. Utilize data visualization tools like graphs and charts to gain clearer insights. Regular strategy review meetings with your team will help in interpreting the data and adjusting action plans as needed.
Q: What are the benefits of using the Balanced Scorecard?
A: The Balanced Scorecard offers several benefits, including improved strategic alignment, better performance measurement, enhanced decision-making, increased employee engagement, and increased accountability throughout the organization.
Q: Can the Balanced Scorecard be used in different types of organizations?
A: Yes, the Balanced Scorecard is versatile and can be applied to various organizations, regardless of their size or industry. It is commonly used in businesses, non-profit organizations, government agencies, and educational institutions to drive success and achieve strategic goals.
Author
Daniel Croft
Daniel Croft is a seasoned continuous improvement manager with a Black Belt in Lean Six Sigma. With over 10 years of real-world application experience across diverse sectors, Daniel has a passion for optimizing processes and fostering a culture of efficiency. He's not just a practitioner but also an avid learner, constantly seeking to expand his knowledge. Outside of his professional life, Daniel has a keen Investing, statistics and knowledge-sharing, which led him to create the website learnleansigma.com, a platform dedicated to Lean Six Sigma and process improvement insights.
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