The Balanced Scorecard is a strategic planning and management system that organizations use to align business activities with the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.
While the phrase Balanced Scorecard was coined in the early 1990s, the roots of this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950s and the work of French process engineers (who created the Tableau de Bord – literally, a "dashboard" of performance measures) in the early part of the 20th century.
The Balanced Scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives. These four perspectives are: Financial, Customer, Internal Process, and Learning and Growth.
Each of these perspectives provides a different view of what is important to the organization. Together, they provide a more holistic view of the organization's performance. The Balanced Scorecard helps managers to look at the business from the important perspectives and to focus on a small number of key things that must be done well.
The financial perspective addresses the question of how shareholders view the firm and which financial goals are desired from the shareholder’s perspective. The financial performance of an organization is fundamental to its success. Without satisfactory financial performance, all other aspects of the organization may be academic.
Financial objectives typically relate to profitability, growth, and shareholder value. The specific measures used may be somewhat industry dependent. Common financial metrics include measures such as net income, return on investment, return on assets, and revenue growth.
The customer perspective addresses the question of how the firm appears to its customers and how well the firm is serving its targeted customers in order to meet the financial objectives. Usually, customer concerns tend to fall into four categories: time, quality, performance and service, and cost.
These categories can be effectively used to ensure a balanced view of the organization from the customer's perspective. A balanced scorecard of strategic performance measures will therefore include both outcome measures and the performance drivers of those outcomes.
The implementation of the Balanced Scorecard involves identifying key performance indicators (KPIs) for each perspective, setting targets for each KPI, and then monitoring performance. This is a continuous process that involves a lot of communication and employee involvement.
The Balanced Scorecard is not a template that can be applied to businesses in general or even industry-wide. The specific measures that are relevant to a particular company will differ based on the company's strategy, industry, and other factors. Therefore, each company must develop its own Balanced Scorecard tailored to its unique requirements.
Key Performance Indicators (KPIs) are the quantifiable measures that are used to gauge or compare performance in terms of meeting strategic and operational goals. KPIs provide the most important performance information that enables organizations or their stakeholders to understand whether the organization is on track or not.
While the general categories of the Balanced Scorecard (financial, customer, internal process, learning and growth) are relevant to any organization, the specific KPIs within those categories will be unique to each organization. The process of identifying the most relevant KPIs is a strategic exercise that needs to involve senior management.
Once the KPIs have been identified, the next step is to set targets for each KPI. These targets should be challenging, but achievable. They should also be aligned with the organization's strategic objectives. The targets provide a clear and measurable objective against which performance can be assessed.
Setting targets is not a one-time exercise. As the organization evolves, and as the external environment changes, the targets may need to be revised. Therefore, it is important to have a process in place for regularly reviewing and updating the targets.
The Balanced Scorecard provides a number of benefits to organizations that use it as part of their strategic management system. These benefits include improved strategic planning, improved communication and understanding of business goals, better alignment of projects and initiatives with strategy, improved performance reporting, and more.
By providing a clear prescription as to what companies should measure in order to 'balance' the financial perspective, the Balanced Scorecard is transforming the entire nature of management and changing the way that organizations compete. Indeed, the Balanced Scorecard effectively provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company's competitive, market and technological environments.
The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualized in such a way that it shows cause-and-effect relationships between the different components of the strategy. This helps to ensure that all aspects of the strategy are covered in a balanced way.
By using the Balanced Scorecard, organizations can ensure that their strategic planning process is tied to the organization's mission and vision, and that the strategy is communicated and understood throughout the organization. This increases the likelihood of successful implementation of the strategy.
One of the key benefits of the Balanced Scorecard is that it helps to ensure that all projects and initiatives are aligned with the organization's strategy. This means that resources are focused on the projects and initiatives that are most likely to deliver strategic objectives.
By using the Balanced Scorecard to align projects and initiatives with strategy, organizations can ensure that they are not wasting resources on projects that do not contribute to strategic objectives. This can lead to significant cost savings and improved strategic focus.
While the Balanced Scorecard is a powerful management tool, its implementation is not without challenges. These challenges can include difficulties in identifying the right measures, resistance to change, lack of skills and understanding, and more.
However, with careful planning and execution, these challenges can be overcome. The key is to understand that implementing a Balanced Scorecard is not just a technical exercise, but a change management exercise that requires strong leadership, clear communication, and ongoing commitment.
One of the key challenges in implementing a Balanced Scorecard is identifying the right measures. The measures need to be relevant to the organization's strategy, and they need to be measurable. This can be a complex task, as it requires a deep understanding of the organization's strategy and the factors that drive performance.
It is also important to ensure that the measures are balanced – that is, they cover all aspects of the organization's performance, and not just the financial aspects. This requires a holistic view of the organization and its performance.
Implementing a Balanced Scorecard often involves significant changes in the way the organization operates and measures performance. This can lead to resistance from employees, particularly if they do not understand the reasons for the change or if they are not involved in the process.
Overcoming this resistance requires strong leadership, clear communication, and involvement of employees in the process. It is important to communicate the benefits of the Balanced Scorecard, and to provide training and support to help employees understand and use the new system.
The Balanced Scorecard is a powerful tool for strategic management. It provides a balanced view of organizational performance, and helps to align business activities with the organization's vision and strategy. By using the Balanced Scorecard, organizations can improve strategic planning, communication, and performance reporting, and ensure that all projects and initiatives are aligned with strategy.
However, implementing a Balanced Scorecard is not without challenges. It requires a deep understanding of the organization's strategy, the ability to identify the right measures, and the ability to manage change. With careful planning and execution, these challenges can be overcome, and the benefits of the Balanced Scorecard can be realized.
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