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Introduction

The Balanced Scorecard is a strategic management performance methodology used to ensure that there is a ‘balance’ between four major activities within a business or organisation. These activities are referred to as Perspectives. The perspectives look at the financial situation, customer interaction, internal business processes and the organisational capacity required to achieve a strategy or set of business goals. They are commonly referred to as Financial, Customer, Internal Processes and Organisational Capacity. The Balanced Scorecard methodology differs from other methodologies in that it provides an integrated strategic management system that is entirely inclusive of other analysis, analytics and reporting systems.

The standard behind the methodology is maintained by the Balanced Scorecard Institute (BSI). Since its inception over 25 years ago, the methodology has changed to accommodate new thinking and specifically new technologies that have dramatically increased the speed of change within businesses and organisations. The methodology now consists of nine steps starting at assessment and leading to management review. The BSI has also recognised the need for software to manage the systems rather than relying on spreadsheets, documents and presentations. To that end, an Automation step is included. QuickScore, a business performance management package, has been recommended as the best software to manage this end-to-end process.

Balanced Scorecard

What is the Balanced Scorecard?

The Balanced Scorecard is a framework to implement and manage strategy by linking a vision and mission to strategic priorities, objectives, measures, and initiatives. It integrates financial measures with other objectives and key performance indicators related to customers, internal business processes, and capacity. It provides a view of an organisation’s overall performance.

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 anomalously referenced work by Art Schneiderman who is believed to be the creator.

It is not just a scorecard, it is a methodology that identifies 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 initiatives (often called projects). It is in this latter stage where the approach differs from other strategic methodologies. It forces an organisation to think about how objectives can be measured first and then what initiatives can be put in place to satisfy the objectives. This avoids creating costly initiatives or 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 organisation and described as Perspectives. They are: Financial, Customer, Internal Processes and Organisational Capacity.

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. If a new perspective were added, the causal relationship may not be maintained. The result might be a useful scorecard, but it would not, by definition, be a Balanced Scorecard.

In brief, the four perspectives are:

Financial

The high-level financial objectives and financial measures of the organisation that help answer the question – How do we look to our shareholders?

Customer

Objectives and measures that are directly related to the organisation’s customers, focusing on customer satisfaction. To answer the question: How do our customers see us?

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?

Organisational 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. Organisational 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.

Strategy Map

The framework is often presented in the form of a Strategy Map, as shown above. The four perspectives are in a specific order and contain strategic objectives that contribute to a Vision and Mission. The objectives are linked in a causal way from the bottom to the top. The Strategy Map provides a very powerful tool allowing the user to talk about the causal impact of investment at the bottom to improved financial results at the top. What is interesting here is that the diagram has been created by a software tool. Software is not required, but it helps. Furthermore, good software tools will allow a user to ‘drill down’ to the underlying data should the need arise to question a specific activity, objective or performance measure.

Key Performance Indicators

Key Performance Indicators (KPIs)

Once created, input to a Scorecard comes in the form of Performance Measures, often referred to as Key Performance Indicators (KPIs). A KPI provides information an organisation requires to determine whether it is performing well or not. Unfortunately, in some organisations, KPIs have often become indistinguishable from operational measures. Organisations frequently take the view that everything should be measured and reported on. A KPI is a Key performance indicator. It is one of a small number of measures that are designed to reduce the complex nature of organisational performance and turn it into something that can be understood easily and acted upon quickly. Much in the same way as a doctor or nurse will monitor pulse rate and temperature to determine the overall health of an individual, managers can monitor KPIs to determine the health of an organisation.

Where to start is entirely dependent on the strategy an organisation is deploying at the time. There must be a direct relationship between what an organisation is trying to achieve (the strategic objectives) and what is being measured to determine progress towards the objective. Clearly, there will be a lot of operational measures and some of these may contribute data to the Key Performance Indicators, but operational measures should be considered as ‘housekeeping’ and ‘good practice’ and should not be confused with KPIs.

The approach gives us the framework to take a ‘balanced’ view across an organisation and define strategic objectives in the four perspective areas together with the associated KPIs. We must be careful not to define too many strategic objectives.

It is better to focus on a small number of things where a structure can be put in place to influence behaviours and outcomes rather than to spread the workload so thinly that nothing gets achieved at all. Business strategy consultants Franklin Covey put it very well:

If your strategy has 3 objectives you will succeed in all 3, if it has 4-10 objectives you will succeed in 1-2, if it contains more than 10 objectives you will succeed in none.

A simple case of the law of diminishing returns.

Finally, KPIs must contain both leading and lagging measures. Most strategic plans concentrate on lagging measures. Why? Because they are easy to measure and they are accurate. If I want to lose weight, I get on the scales. This gives me proof positive if I have succeeded or not. It does not give me any help to succeed. If I measure how many times I go for a run and how much I have eaten (and plan for this) then I have put in place two leading measures that will help me succeed. Leading measures are harder to identify but they are the only measures that can be influenced and therefore make a difference. We must not underestimate the importance of leading measures when creating a Scorecard, defining our strategic objectives and choosing our Key Performance Indicators.