What is the Balanced Scorecard?
The Balanced Scorecard, referred to as the BSC, is a framework to implement and manage strategy. It links a vision to strategic objectives, measures, targets, and initiatives. It balances financial measures with performance measures and objectives related to all other parts of the organization. It is a business-performance management tool.
It was originally published by Dr. Robert Kaplan and Dr. David Norton as a paper in 1992. And then formally as a book in 1996. Both the paper and the book led to its widespread success. It is interesting to note that although Kaplan and Norton published the first paper, they were anomalously referenced in a work by Art Schneiderman who is believed to be the balanced scorecard creator.
The major difference that Kaplan and Norton introduced into this methodology is the ‘balance’ across all organizational functions. The problem back then, and still today, is that most companies focus on financial measures. For example, revenue growth and profitability. By looking at an organization across four ‘Perspectives’ a causal relationship between investment and the financial outcome can be defined, measured, and managed.
The BSC is not just a scorecard, it is a methodology. It starts by identifying a small number of financial and non-financial objectives related to strategic priorities. It then looks at measures, setting targets for the measures, and finally strategic projects (often called initiatives). It is in this latter stage where the approach differs from other strategic methodologies. It forces an organization to think about how objectives can be measured and only then identifies projects to drive the objectives. This avoids creating costly projects that have no impact on the strategy.
The ‘balance’ is brought about by a focus on financial and non-financial objectives that are attributed to four areas of an organization. These are the Perspectives. They are Financial, Customer, Internal Processes, and Organisational Capacity.
The Four Perspectives
Questions often arise about the four Perspectives described in the methodology. Why should we only look at Financial, Customer, Business Process, and Organisational Capacity? Why not include Health and Safety? The answer is, of course, there is nothing stopping us. The four perspectives are simply a framework. However, over decades of use, it has become clear that they work.
More importantly, there is a causal relationship between the perspectives. Working from the bottom to the top: Changes in Organisational Capacity will drive changes in Business Processes that will impact Customers and improve Financial results. The causal relationship may not be guaranteed if a new perspective is added. The result might be a useful scorecard, but it would not, by definition, be a balanced scorecard.
In brief, the four scorecard perspectives are:
The high-level financial objectives and financial measures of the organization that help answer the question – How do we look to our shareholders? Financial objectives are usually the easiest to define and measure. However, creating a financial objective, for example, Improve Profit, rarely provides a clue as to how to achieve the objective. by linking objectives from the lower levels in the model, we begin to see exactly where to define projects and make investments.
Objectives and measures that are directly related to the organization’s customers, focusing on customer satisfaction. To answer the question: How do our customers see us? It is always important to take a step outside and view your company or organization from your customer’s viewpoint. You need to understand what they want from you, not necessarily, what you can do for them.
(3) Internal Processes
Objectives and measures that determine how well the business is running and whether the products or services conform to what is required by the customers, in other words, what should we be best at? Some of the biggest cost items can be reduced by streamlining internal processes. This is also the best area to focus on new and creative ideas.
(4) Organizational Capacity
Objectives and measures concerning how well our people perform, their skills, training, company culture, leadership, and knowledge base. This area also includes infrastructure and technology. Organizational Capacity tends to be the area where most investment takes place. It answers the question: How can we improve and create value?
The real value of the Perspective approach is that it provides a framework to describe a business strategy. It focuses on objectives and measures that both inform us about progress and allow us to influence activities to achieve the strategy.
Organizations often begin the scorecard process by reading one of the many books on the topic, attending a seminar, or doing web research. There are many resources for introductory education and training. Once an organization has committed to the balanced scorecard model, a third-party facilitator can be brought in to manage a strategy workshop and bring an unbiased view to the scorecard development process. Scorecard development can be very rapid (a few weeks), or as long as a year, depending on the scope and complexity of the scorecard and organization.
Many organizations elect to go with a rapid or intermediate approach, which ensures project momentum and recognize score-carding is an iterative process. It is often better to make and correct mistakes early while an organization is still excited about the methodology. Initial scorecard work is typically done with Microsoft Excel, PowerPoint, or Word. As the scorecard matures, the methodology is rolled out to the rest of the organization. The goal is to connect all employees to the organization’s strategic objectives by using individual or group measures. A software tool will be required to do this efficiently.
Sustaining the Scorecard
The premise of the methodology is to provide an on-going, living framework that is communicated to the whole organization. The scorecard needs to be sustainable and easy to roll-out. Scorecards should leverage technology to provide automation as far as possible. Ultimately, the scorecard should become part of the organization’s culture and employees’ work experience. An easy to deploy web-based system will allow for rapid roll-out and a sustainable scorecard.
Culture and Connection
Once the scorecard is developed, it is important to cascade it into the organization. This will help link groups and individuals to the strategy. Everyone needs to understand the cause-and-effect relationship and how it connects to the organization’s overall performance. The goal is to translate the strategy into the staff’s “everyday language” and identify measures of success that link to the overall strategic direction.