balanced-scorecard

Balanced Scorecard


What is it?

The Balanced Scorecard concept, popularised by Drs Robert Kaplan and David Norton, is a performance management tool that encompasses the financial measures of an organisation and key non-financial measures relating to customers or clients, internal processes, and organisational learning and growth needs. It places these into a concise ‘scorecard’ that can be used to monitor performance.

Early implementations of the Balanced Scorecard tended to focus on including a balance of measures in the four domains or perspectives rather than on execution of strategy. But over time it has become a widely used strategic management tool. The Balanced Scorecard process attempts to identify important links between financial performance and the underlying customer, internal processes and organisational metrics. This creates a mechanism for translating the strategic vision into concrete actions necessary to achieve success.

This characteristic of the Balanced Scorecard places strategy at the core of management. When implemented properly, it can be used to align measures, actions and rewards to create a proper focus on the execution of strategic initiatives and achievement of strategic objectives, rather than a sole focus on the annual budget.

The widespread adoption of the Balanced Scorecard is due in part to its flexibility. Many companies have implemented their own variations to suit their strategic purposes. The Tesco ‘Steering Wheel’ for example, includes five perspectives, capturing their commitment to the community in addition to their financial, customer, operations and people aspects.

The Balanced Scorecard has also been successfully adapted for use by not-for-profit and public sector organisations. While the top line financial objectives of for-profit organisations are replaced by mission-related objectives, the process of identifying relevant stakeholder, internal process, and resource measures serves much the same purpose.

Balanced scorecard

What benefits does the Balanced Scorecard provide?

The Balance Scorecard provides a means to clarify, articulate and communicate strategy. It is a shorthand way of putting all key measures into a ‘dashboard’ that can be used to monitor results. By including nonfinancial measures, it can be used to show how the non-financial aspects of performance such as customer satisfaction drive financial performance. The Balanced Scorecard is a useful tool for motivating employees and focusing their attention on factors that are deemed to be critical to longterm performance rather than simply short-term financial results.

Questions to consider when implementing a Balanced Scorecard?

  • Do we have sufficient buy-in from top management?
  • Are we willing to engage in a more participatory strategy and performance management process?
  • Are we committed to the organisational change effort necessary for successful implementation?
  • To what extent will our current management information systems be able to support implementation? What are the costs and benefits of making these changes?
  • What are we already doing that we can incorporate into our scorecard? What do we need to modify or stop doing?
  • Are we prepared to focus our reporting around the scorecard?

 

Actions to take / Dos Actions to Avoid / Don'ts
  • Involve a broad senior management team.
  • Engage everyone in the scorecard process
  • Use the scorecard to set ambitious goals
  • Use the scorecard to make strategy a continual process
  • Start with objectives, follow with measures, then initiatives – for example, increase sales by x%, introduce y new products in next 12 months, launch new product development and marketing initiative
  • Create measures that link to strategic success and long-term performance
  • Use the scorecard to find the best KPIs
  • Keep it to four to five KPIs for each perspective
  • Create a mix of leading, lagging, input and output measures - customer satisfaction is a leading indicator of sales; the number and quality of customer calls handled are output measures of the customer service process
  • Cascade the scorecard to business unit and functional teams
  • Each business unit’s scorecard should be informed by corporate goals but not dictated by them
  • Use the scorecard to drive action plans
  • Link to compensation
  • Use the scorecard to empower teams and make strategy everyone’s job
  • Do not use the scorecard as another tool of command and control, or annual target setting process
  • Don’t withdraw support for the scorecard at the first sign of missed financial targets
  • Too many measures can spoil the scorecard - don’t go ‘KPI crazy’
  • Failing to identify and validate causal links undermines credibility of measures
  • Failing to cascade the scorecard and create links to compensation undermines success
  • Avoid attempting to create business unit or functional scorecards that can be aggregated upwards

“We learned early that the BSC was much more than just a better performance measurement system;; it can become the basis for a new strategy management system.”

– Strategy execution and the Balanced Scorecard. Harvard Business School (HBS), Aug 2008

“We learned early that the BSC was much more than just a better performance measurement system;; it can become the basis for a new strategy management system.”

Strategy execution and the Balanced Scorecard, Harvard Business School (HBS), Aug 2008

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Further resources

    IN PRACTICE

    Implementation of the balanced scorecard and an alternative costing system at the Royal Botanic Garden Edinburgh.

    Download case study