The Balanced Scorecard
Monday, November 25, 2013
You'll most likely have heard the saying "What you measure is what
you get."
This is something that's true across many areas of
management – if you set people targets, and reward them when they
meet these targets, they'll often do all they can to achieve them.
This is great in principle, but can be disastrous in practice: One
problem is that it's much easier to measure financial results than
it is to measure progress in other essential areas (such as staff
satisfaction). This leads to an over-reliance on financial
measurement. A second issue is that people will, quite rightly,
drop other activities to meet challenging goals – this is part of
why stretch goals are set.
Taken together, this means that organizations often focus their
efforts on short term financial results, at the same time that the
underpinnings of their business wither away, neglected.
This is where the idea of the "Balanced Business Scorecard" is
important – as a tool for improving the performance of a whole
organization, a large department or a small team. The Balanced
Scorecard or Weighted Scorecard helps you measure and improve
performance in an integrated way.
Understanding the Theory
Developed in the early 1990s by Robert Kaplan from the Harvard
Business School and David Norton, the founder of an IT consulting
firm, this management system has been applied to many
organizations and across many industries with great success.
The original article in the Harvard Business Review ("The Balanced
Scorecard – Measures that Drive Performance", Harvard Business
Review, Jan/Feb 1992) starts with the adage we quoted at the start
of this article, "What you measure is what you get". The whole
system is based on this premise.
Elaborating on what we've already said, companies have
historically used financial measurements to gauge their success.
The problem with this narrow approach is that not all business
processes or operations contribute directly to bottom line
financial measures like Return on Investment (ROI) or Earnings Per
Share (EPS).
For example, if you have an objective to decrease operating
expenses by 5%, you may set a goal to limit customer support calls
to five minutes or less – this is designed to increase efficiency
and directly cut cost. However, customer satisfaction may decline
as a result, which would lead to lost customers, lost revenue, and
so on. This means that this well-meaning financial objective
actually damaged 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.
Measurement Reinforcing Your Vision
The Balance Scorecard helps you set goals that give appropriate
weight to financial and non-financial measures. It does this by
starting with the vision and strategy that drives the business.
From this, it identifies the drivers of success for that vision,
and then develops targets that measure progress towards that
success.
And because well-motivated, well-managed people will work to
achieve these targets, this means that, by focusing on these
targets, your team will adjust its efforts to focus on the
successful delivery of your vision.
Not Getting "Bogged Down"
Now, it's easy to get bogged down in performance measurement using
this approach. This is where the Balanced Scorecard approach
limits measurement to the four critical areas of financial
performance, customer service improvement, internal business
processes streamlining and innovation and learning.
By identifying the key factors that contribute to organizational success – known as Critical Success Factors – the Balanced Scorecard limits measurement to the things that really matter.
And what really matters is that your company, department or team
remains competitive. Both financial and non-financial measures are
needed to achieve this, even if these non-financial activities
have a less direct effect on the bottom line.
How to Use the Tool
The Balanced Scorecard works from the top down. The entire
framework hinges on aligning performance with strategy, and
strategy comes from the top: It comes from you, as the leader of
the company, department or team.
The steps that follow are addressed to you as leader of your
organizational unit, the one who sets the strategy and vision.
From there, the Balanced Scorecard can be implemented as follows:
Step 1: Lead the implementation
Start with your strategy for your organization. Take the time
needed to make sure that it is as well-thought-through, researched
and tested as it can be (this will often take a lot of analysis
and careful consideration). Everything else rests on this strategy
being sound and well-considered.
Step 2: Prepare for Change
Once you've decided to use the Balanced Scorecard approach, you'll
need to set a plan in place to prepare the team and communicate
the process for implementing the Balanced Scorecard – this will
take a lot of work from managers at all levels.
More than this, you'll need a measurement "machinery" to be in
place, if you're going to successfully measure people's
performance. This needs to be implemented as well, with all of the
issues associated with this.
Step 3: Develop Performance Measurements
Using your overall strategy as your guide, determine the critical success factors in each performance area, set related goals and then identify ways to measure results.
The Performance Areas are:
The Financial Perspective:
This includes those traditional financial indicators which measure
progress towards the achievement of your strategy, and which give
your shareholders the information they need.
The Customer Perspective:
Here, you set goals which relate to your customers' perception of
your business. These could include measures like customer
satisfaction levels, numbers of customer referrals, or target
market penetration.
The Internal Business Processes Perspective:
Here you look at your main business processes like production,
logistics or sales and then set goals related to such things as
quality, time/efficiency, and cost reduction. Here, you explore
ways of improving your internal systems and functions.
The Innovation and Learning Perspective:
In this area, you examine measures relating to employee
development, retention, and skills improvement. You also look at
measures for research and development. The focus here is on
continuous improvement and value creation, by using your people
resources most effectively.
Step 4:
Make Sure Measures Are Transmitted Throughout Your Organization
Achievement of your vision needs different actions from different
groups of people and individuals. This means that you need to
develop subtly different scorecards for each of your reports, and
each of your reports needs to develop scorecards for the people
who report to him or her. Scorecards need to "ripple down" through
your organization if everyone is to work to achieve your vision,
in their own particular ways.
More than this, you'll need to implement the systems needed to
collect performance information.
All of this is time-consuming: Make sure that you leave plenty of
time for it to happen, and that you keep an eagle eye on this
strategy transmission process.
Step 5: Plan Initiatives
Once you have specific goals and targets in place, you plan the
initiatives and actions needed to achieve them. Make these easy
for your team to understand so they can follow the plan to
completion.
Step 6: Follow-up and Evaluate
The chances are, the first time you use the balanced scorecard,
some strange behaviors may emerge. Perhaps particular measures are
misinterpreted, or errors develop as ideas are transmitted down
through layers of management.
More than this, the measurement processes may fail or give
spurious results.
Be alert to these issues, and monitor and correct performance
closely. And where the scorecard itself is misleading, adjust it
appropriately.
Key Points
The idea of the "Balanced Business Scorecard" is an important one
for managing people to deliver the goals of your business.
"Balance" comes from the alignment of financial performance
measures with those related to customers, internal business
processes, and innovation and learning: Financial measures alone
will not ensure success nor will any of the other performance
measures taken in isolation.
The Balanced Scorecard is just that: Balanced. And while it will
not measure the "correctness" of your strategy, it will help you
monitor and measure the progress you are making to achieve that
strategy across all areas of operations.
This correctness of strategy is a key part of leadership – after
all, it's often said that "management is about doing things right,
while leadership is about doing the right things." Leadership and
management are different (but complementary.)
The Balanced Scorecard is about managing the transmission of
strategy, while leadership is about motivating people to give
their best to achieve a worthwhile goal: These two different
approaches work together in high performance organizations.
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you get."
This is something that's true across many areas of
management – if you set people targets, and reward them when they
meet these targets, they'll often do all they can to achieve them.
This is great in principle, but can be disastrous in practice: One
problem is that it's much easier to measure financial results than
it is to measure progress in other essential areas (such as staff
satisfaction). This leads to an over-reliance on financial
measurement. A second issue is that people will, quite rightly,
drop other activities to meet challenging goals – this is part of
why stretch goals are set.
Taken together, this means that organizations often focus their
efforts on short term financial results, at the same time that the
underpinnings of their business wither away, neglected.
This is where the idea of the "Balanced Business Scorecard" is
important – as a tool for improving the performance of a whole
organization, a large department or a small team. The Balanced
Scorecard or Weighted Scorecard helps you measure and improve
performance in an integrated way.
Understanding the Theory
Developed in the early 1990s by Robert Kaplan from the Harvard
Business School and David Norton, the founder of an IT consulting
firm, this management system has been applied to many
organizations and across many industries with great success.
The original article in the Harvard Business Review ("The Balanced
Scorecard – Measures that Drive Performance", Harvard Business
Review, Jan/Feb 1992) starts with the adage we quoted at the start
of this article, "What you measure is what you get". The whole
system is based on this premise.
Elaborating on what we've already said, companies have
historically used financial measurements to gauge their success.
The problem with this narrow approach is that not all business
processes or operations contribute directly to bottom line
financial measures like Return on Investment (ROI) or Earnings Per
Share (EPS).
For example, if you have an objective to decrease operating
expenses by 5%, you may set a goal to limit customer support calls
to five minutes or less – this is designed to increase efficiency
and directly cut cost. However, customer satisfaction may decline
as a result, which would lead to lost customers, lost revenue, and
so on. This means that this well-meaning financial objective
actually damaged 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.
Measurement Reinforcing Your Vision
The Balance Scorecard helps you set goals that give appropriate
weight to financial and non-financial measures. It does this by
starting with the vision and strategy that drives the business.
From this, it identifies the drivers of success for that vision,
and then develops targets that measure progress towards that
success.
And because well-motivated, well-managed people will work to
achieve these targets, this means that, by focusing on these
targets, your team will adjust its efforts to focus on the
successful delivery of your vision.
Not Getting "Bogged Down"
Now, it's easy to get bogged down in performance measurement using
this approach. This is where the Balanced Scorecard approach
limits measurement to the four critical areas of financial
performance, customer service improvement, internal business
processes streamlining and innovation and learning.
By identifying the key factors that contribute to organizational success – known as Critical Success Factors – the Balanced Scorecard limits measurement to the things that really matter.
And what really matters is that your company, department or team
remains competitive. Both financial and non-financial measures are
needed to achieve this, even if these non-financial activities
have a less direct effect on the bottom line.
How to Use the Tool
The Balanced Scorecard works from the top down. The entire
framework hinges on aligning performance with strategy, and
strategy comes from the top: It comes from you, as the leader of
the company, department or team.
The steps that follow are addressed to you as leader of your
organizational unit, the one who sets the strategy and vision.
From there, the Balanced Scorecard can be implemented as follows:
Step 1: Lead the implementation
Start with your strategy for your organization. Take the time
needed to make sure that it is as well-thought-through, researched
and tested as it can be (this will often take a lot of analysis
and careful consideration). Everything else rests on this strategy
being sound and well-considered.
Step 2: Prepare for Change
Once you've decided to use the Balanced Scorecard approach, you'll
need to set a plan in place to prepare the team and communicate
the process for implementing the Balanced Scorecard – this will
take a lot of work from managers at all levels.
More than this, you'll need a measurement "machinery" to be in
place, if you're going to successfully measure people's
performance. This needs to be implemented as well, with all of the
issues associated with this.
Step 3: Develop Performance Measurements
Using your overall strategy as your guide, determine the critical success factors in each performance area, set related goals and then identify ways to measure results.
The Performance Areas are:
The Financial Perspective:
This includes those traditional financial indicators which measure
progress towards the achievement of your strategy, and which give
your shareholders the information they need.
The Customer Perspective:
Here, you set goals which relate to your customers' perception of
your business. These could include measures like customer
satisfaction levels, numbers of customer referrals, or target
market penetration.
The Internal Business Processes Perspective:
Here you look at your main business processes like production,
logistics or sales and then set goals related to such things as
quality, time/efficiency, and cost reduction. Here, you explore
ways of improving your internal systems and functions.
The Innovation and Learning Perspective:
In this area, you examine measures relating to employee
development, retention, and skills improvement. You also look at
measures for research and development. The focus here is on
continuous improvement and value creation, by using your people
resources most effectively.
Step 4:
Make Sure Measures Are Transmitted Throughout Your Organization
Achievement of your vision needs different actions from different
groups of people and individuals. This means that you need to
develop subtly different scorecards for each of your reports, and
each of your reports needs to develop scorecards for the people
who report to him or her. Scorecards need to "ripple down" through
your organization if everyone is to work to achieve your vision,
in their own particular ways.
More than this, you'll need to implement the systems needed to
collect performance information.
All of this is time-consuming: Make sure that you leave plenty of
time for it to happen, and that you keep an eagle eye on this
strategy transmission process.
Step 5: Plan Initiatives
Once you have specific goals and targets in place, you plan the
initiatives and actions needed to achieve them. Make these easy
for your team to understand so they can follow the plan to
completion.
Step 6: Follow-up and Evaluate
The chances are, the first time you use the balanced scorecard,
some strange behaviors may emerge. Perhaps particular measures are
misinterpreted, or errors develop as ideas are transmitted down
through layers of management.
More than this, the measurement processes may fail or give
spurious results.
Be alert to these issues, and monitor and correct performance
closely. And where the scorecard itself is misleading, adjust it
appropriately.
Key Points
The idea of the "Balanced Business Scorecard" is an important one
for managing people to deliver the goals of your business.
"Balance" comes from the alignment of financial performance
measures with those related to customers, internal business
processes, and innovation and learning: Financial measures alone
will not ensure success nor will any of the other performance
measures taken in isolation.
The Balanced Scorecard is just that: Balanced. And while it will
not measure the "correctness" of your strategy, it will help you
monitor and measure the progress you are making to achieve that
strategy across all areas of operations.
This correctness of strategy is a key part of leadership – after
all, it's often said that "management is about doing things right,
while leadership is about doing the right things." Leadership and
management are different (but complementary.)
The Balanced Scorecard is about managing the transmission of
strategy, while leadership is about motivating people to give
their best to achieve a worthwhile goal: These two different
approaches work together in high performance organizations.
