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Most organizations manage strategy poorly and, not surprisingly, fail in its implementation. For successful strategy implementation, organizations require a framework or tool that helps manage business performance, linking corporate vision to strategic objectives, organizational targets, measurement metrics, and planned actions. The balanced scorecard is one such business performance management tool.
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What Is A Balanced Scorecard?
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Who Can Use The Balanced Scorecard?
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Balanced Scorecard Model: The Four Perspectives
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Benefits Of A Balanced Scorecard
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What Are Strategic Objectives?
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The Role Of Key Performance Indicators (KPIs)
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Implementing The Balanced Scorecard
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Balanced Scorecard: An Illustrative Example
What Is A Balanced Scorecard?
The balanced scorecard system for strategy management was devised by David Norton and Robert Kaplan in 1992.
The term balanced scorecard is based on the idea that for arriving at a truly ‘balanced’ picture of an organization’s performance, it’s necessary to stop looking only at the traditionally used financial metrics. You must also pay attention to the non-financial strategic metrics.
The balanced scorecard, therefore, provides a framework for strategic planning and performance management through the tracking of financial and non-financial indicators to measure organizational effectiveness.
The balanced scorecard in strategic management is a system for strategic planning and management that organizations can employ to:
- Communicate organizational goals
- Achieve alignment between ongoing activities and organizational strategy
- Define priorities of the products, projects and services
- Measure progress and monitor attainment of set strategic targets
The balanced scorecard approach to measure organizational performance is a holistic methodology for managing strategy. The principal advantage of employing a balanced scorecard framework is that it provides firms with an organized process for integrating the different interrelated components of strategic planning and management.
The balanced scorecard methodology helps organizations ensure coherence between the activities that people in the organization are engaged in, the metrics used to monitor performance and the laid-down strategic objectives of the organization.
The balanced scorecard provides feedback to improve organizational performance. In the balanced scorecard approach, collecting relevant performance data (also known as Key Performance Indicators or KPIs) is vital for managers to derive actionable insights for performance improvement. The balanced scorecard combines financial performance and service/quality standards in a single report to provide a holistic picture of the organization’s performance.
Who Can Use The Balanced Scorecard?
The balanced scorecard can be used by small/large enterprises, research institutes, universities and government organizations. The balanced scorecard model combines the management of business performance and performance measurement.
Balanced Scorecard Model: The Four Perspectives
The balanced scorecard model uses four characteristics or perspectives to monitor organizational performance:
- Financial: The finances of a firm are a key measure of its performance. The most common parameters used to assess the financial health of for-profit organizations are revenue growth, operating income and return on equity
- Customer: This perspective compares the service provided by the organization to the service provided by its competitors. The metrics vary by industry, but the most commonly used metrics, across industries, are customer satisfaction and organizational responsiveness. The industry-specific metrics may include on-time delivery for e-commerce firms. On the other hand, consumer goods firms may monitor the percentage of repeat customers.
- Internal Processes: This perspective enables the firm to assess the efficiency of its internal processes. For example, a manufacturing organization could track set-up time or cycle time to measure the efficiency of its processes.
- Organizational Capacity: This perspective, also called ‘Learning and Growth’, measures the extent to which the organization can adapt to change. Typical metrics include employee satisfaction and employee engagement.
Benefits Of A Balanced Scorecard
Using the balanced scorecard in strategic management provides firms with many benefits:
- The balanced scorecard allows firms to combine, in a single report, all the information and data required for assessing performance
- Balanced scorecards provide an organization’s managers with data on its financial and non-financial performance metrics. Managers can then glean actionable insights from the data to improve performance and set strategic goals for the future
- The balanced scorecard facilitates business planning through metrics, which helps the organization rank its projects and products in order of importance
- The balanced scorecard framework assists the organization to monitor progress in the attainment of its strategic objectives
- The balanced scorecard allows organizations to eliminate inefficiencies in their internal processes. Inefficiencies cause lowered productivity, increased costs, reduced revenue and damage the organization’s brand value
What Are Strategic Objectives?
Strategic objectives break down abstract concepts of the firm’s mission and vision into clear activities required to be performed. Strategy mapping is a key tool used in the balanced scorecard approach to help visualize and communicate value creation in the organization. The strategy map graphically shows a logical cause-and-effect relation between strategic objectives.
Strategic objectives are applicable across all levels of the organization. For example, the strategic objective at the organizational level could be abstract, such as ‘to enhance customer satisfaction’. It’s more actionable at the departmental level, such as ‘to enhance customer satisfaction by reducing product return’. At the individual level, it will be even more specific, such as ‘to enhance customer satisfaction by reducing returns to less than 10%’.
The Role Of Key Performance Indicators (KPIs)
KPIs are the performance measures used as inputs to the balanced scorecard. KPIs indicate the efficiency of an organization’s performance. Just as doctors use weight and blood pressure to assess overall health, KPIs determine organizational health.
However, firms often make the mistake of mixing operational measures and KPIs. KPIs should include only a small set of the most important measures that break down the complexity of organizational performance into simple, easy-to-understand actionable points.
The balanced scorecard framework must therefore adopt a balanced approach to organizational performance. Strategic objectives for the four perspectives must be defined carefully, along with the relevant KPIs.
The KPIs must include both leading and lagging measures. For example, if an individual wants to lose weight, a lagging measure would be recording weight. Although it indicates if the individual has lost weight, it doesn’t help attain success in losing weight. For that, leading measures, such as frequency of exercise and a diet plan, must be defined. In a balanced scorecard, leading measures are concrete actions that can be implemented and monitored.
Implementing The Balanced Scorecard
Depending on the size of the organization and the complexity of its processes, the balanced scorecard can either take up to a year, or be implemented quickly, even within a week. The implementation can be done using in-house resources and expertise or with the help of a third-party facilitator.
The best approach to implementing the balanced scorecard in strategic management is to start small (for example, at the departmental level), and follow an iterative process. As familiarity with the process matures, an organization-wide rollout can be executed. An iterative process should be followed to fully understand the answer: “What is a balanced scorecard?” This is because even in cases where the balanced scorecard implementation is good, some changes will be necessitated based on the lessons learned, the competitive environment and the emergence of new competition. A system of periodic feedback helps the organization observe, learn, change and improve.
Alternatively, services can now be availed of ERP software firms that provide balanced scorecard software for easier and faster implementation.
Once you’ve decided to use the balanced scorecard in strategic management, it’s important to sustain its continued use. For this, design the balanced scorecard well, making it easy to use by incorporating technology. Technology helps in enabling automation of the balanced scorecard, so that it gets embedded in the organization’s work processes and work culture. For embedding the balanced scorecard in the organization’s culture, it is important to articulate the strategy in jargon-free, easily understandable language. Finally, the managers need to ensure that everyone understands how it impacts overall organizational performance.
Balanced Scorecard: An Illustrative Example
Studying examples of some simple balanced scorecards will help you understand its concepts and their workings. To use an everyday example, banks contact their customers to conduct surveys for customer ratings of the bank’s services. The survey requests the customers to rate the bank on their experience with wait times, quality of interactions with the bank’s personnel, quality of information on banking products and services, suggestions on areas of improvement, etc. The bank then collates the information received to identify areas of weakness and decides on corrective staff training, changes in processes or the introduction of new banking products/services.
Firms can hire external agencies to conduct the survey and provide them with a balanced scorecard report. The external agency designs the survey questionnaire, collates received data, extracts insights and provides corrective advisory.
As part of the Managing Teamwork series of courses, Harappa trains individuals and enterprises on using the balanced scorecard. The course will help you develop competencies to identify issues with an organization’s internal work processes and design solutions to resolve them. With this specialized training, organizations save on implementation time, improve communication and increase profitability.
