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.
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 long-term 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?