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The Balanced Scorecard

Looking Beyond Financials to Achieve Organizational Success

The Balanced Scorecard - Looking Beyond Financials to Achieve Organizational Success

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What you measure is what you get.

How do you measure the performance of your organization? Is it all about the bottom line? Or do you take into consideration other metrics, such as employee well-being, innovation, customer service, and engagement?

While financials are obviously important, organizations that focus solely on these kinds of measures to benchmark their performance can often miss out on opportunities for innovation and improvement.

This is where the "Balanced Business Scorecard" can help. It's a tool you can use to improve the performance of your whole organization right through from large departments to small teams.

In this article, we'll look at how the Balanced Scorecard (or Weighted Scorecard) can benefit your organization and how you can use it to effectively measure performance throughout your organization.

What Is the Balanced Scorecard?

The Balanced Scorecard was originally devised by Dr. Robert Kaplan from the Harvard Business School and IT consultant and expert, David Norton during the 1990s, in response to changing business models. They argued that, organizations needed to look beyond their financial performance in order to remain competitive. [1]

According to Kaplan and Norton, "What you measure is what you get." In other words, companies that focus solely on financial output, risk restricting themselves to a narrow view of their performance. Not all business processes or operations contribute directly to bottom line financial measures like Return on Investment (ROI) or Earnings Per Share (EPS), but they are still important to the success of t

For example, if one of your objectives is to decrease operating expenses by five percent, you may set a goal to limit customer support calls to five minutes or less to increase efficiency and directly cut costs. However, customer satisfaction may decline as a result, which would lead to lost customers, lost revenue, and so on. This means that your well-meaning financial objective actually damages the company's overall performance.

When you achieve a goal in one area at the expense of operating performance in other areas, the results can be devastating.

Benefits of the Balanced Scorecard

The Balance Scorecard enables organizations to gain a quick and comprehensive view of their operations, by looking at both financial and non-financial measures of success.

It includes financial measures, which reveal the success of actions already taken, as well as operational measures which are just as important to success – for example, customer satisfaction, innovation, employee engagement, and internal business processes.

Using the Balanced Scorecard enables organizations to gain a rounded perspective of their performance, and build up a picture of the different activities and skills that they need to achieve their vision and mission. It can also be used to identify areas of the business where improvement or investment is required, and create and implement a more targeted strategy.

Most of it all, it can be a very effective tool for managing change. It allows organizations to align their wider strategic goals to departmental or personal objectives, so that everyone is clear on what they need to do to achieve success and how their job feeds into the success of the wider organization.

How to Use the Balanced Scorecard

You can implement the Balanced Scorecard in your organization by following these six steps:

Step 1: Start With Strategy

Start by looking over the current strategy of your organization. Take some time to make sure that it is well thought out, researched and tested (this will often take a lot of analysis and careful consideration), and that it aligns appropriately with your vision and mission.

Step 2: Develop Performance Measurements

According to Kaplan and Norton, the Balanced Scorecard should focus on four key areas which are tied to your main strategy and vision (shown in figure 1, below). These include:

  • Financial.
  • Customer.
  • Process.
  • Innovation and learning.

These can be split into two sections. The first section is Financial and the second is Operational, which includes customer activities, processes, and innovation and learning.

Figure 1. The Balanced Scorecard: Four Key Measures That Drive Performance

Balanced Scorecard Diagram

Reprinted by permission of Harvard Business Review. From "The Balanced Scorecard: Measures That Drive Performance," by Robert S. Kaplan and David P. Norton, July 2005. Copyright © 2005 by the Harvard Business School Publishing Corporation; all rights reserved.

Now, let's look at the four key areas of the Balanced Scorecard in more detail:

  • The Financial Perspective. These include traditional financial indicators such as sales and revenue, asset utilization, and cost management. These should measure your progress toward your strategic goals, and provide shareholders with the information they need to make informed investment decisions.
  • The Customer Perspective. Kaplan and Norton suggest that organizations need to first think hard about what market segment they aim to supply and then set specific goals that relate to their customer operations. These could focus on customer retention, customer service, customer acquisition, and customer profitability (for example, total profit per customer or total cost per customer).
  • The Process Perspective. Here you look at your business processes, and specifically what can be done to improve them and make them as efficient as possibly. These might include things like production, logistics or sales and goals that you set may relate to quality, time/efficiency and cost reduction.
  • The Innovation and Learning Perspective. One of the best ways to create value in your organization is to invest and develop your people. Doing this creates a solid foundation for innovation and continuous improvement. So, here you can look at setting goals relating to employee development, retention and training.

Think through each of the four areas of the Scorecard and how they relate to your strategy and vision. A great way to do this is by writing down key goals and measures under each of the four headings.

Step 3: Communicate Scorecards Throughout Your Organization

To achieve the goals you've set will require "buy in" from everyone in your organization, from the "bottom up" to the "top down." And it will likely require very different actions to be taken by different groups of people and individuals.

You'll likely need to develop subtly different scorecards for each department. Each department in turn will need to then create individual scorecards for team members. In this way, Scorecards can "ripple down" through your organization, enabling everyone to work together toward achieving your organization's key goals.

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Step 4: Develop Performance Measurement Systems

Once you've set your goals using the Balanced Scorecard, you'll also need to measure and closely monitor your progress toward them. So, it's vital that you put in place performance measurement systems that enable you to do this accurately, and that you delegate responsibility for collection of this data as well.

This can be one of the more time-consuming parts of the process, so make sure that you give yourself plenty of time to put everything into practice.

Step 5: Plan Initiatives

Next plan some initiatives and actions that will help people across your organization to achieve your goals. Make these easy and clear for your team members to follow, so that they know exactly what they need to do to succeed and show them how their work impacts the wider organization's performance.

Step 6: Follow-up and Evaluate

Chances are, the first time you use the Balanced Scorecard, some strange behaviors may emerge. Perhaps some measures get misinterpreted, or mistakes get made as people try to implement this new system.

Keep a close eye on the way you are measuring and collecting data. If some of the results seem strange, it could be that the process your using to monitor performance is not working and needs to be changed or that the goals you've set aren't quite right. Be alert to these issues and correct your Scorecard if necessary.

Use feedback and review sessions to gain insight into how things are going as well. Traditionally such feedback sessions would have focused on whether financial targets had been met or not. But with the Balanced Scorecard approach, there's a broader opportunity to discover how your people are progressing and performing, and what they need to achieve success.

Key Points

The Balanced Scorecard is a strategic performance measurement system organizations can use to monitor their progress toward achieving their key objectives.

It was originally devised by Dr. Robert Kaplan and David Norton and was borne out of a need for a performance measurement system that looked beyond purely financial metrics toward other areas. According to Kaplan and Norton, organizations can achieve this by looking at their business from four key perspectives:

  • Financial.
  • Customer.
  • Processes.
  • Innovation and learning.

The Balanced Scorecard can be beneficial to organizations in a number of ways. It enables organizations to gain a comprehensive view of its activities and performance, set clearer and more sensible goals, and deliver strategical change effectively.

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