Introduction to the Balanced Scorecard
Leadership challenges are more complicated then ever and successful businesses focus on more than just financial results. An introduction to the Balanced Scorecard approach.
The balanced scorecard system is like the "nerve centre" of an organization
In the 1990s the term Balanced Scorecard was introduced by Robert S Kaplan and David P Norton as a way of measuring both financial and strategic goals of a business. In the following years the concept was developed to make it much more than simply a measurement tool.
According to the Balanced Scorecard Institute, the concept is now "a management system ... that enables organisations to clarify their vision and strategy and translate them into action."
"When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve centre of an enterprise."
How the Balanced Scorecard Views an Organisation
Under the balanced scorecard system an organisation is seen from four perspectives; learning and growth, business process, customer and financial.
The learning and growth perspective addresses the need for workers within a knowledge based economy to constantly be updating their skills and understanding. This does not just cover training in new areas, but rather encompasses all aspects of learning, such as how easy staff find it to get their problems dealt with.
Viewing the organisation from the business process perspective allows managers to ensure their products and services are continuing to meet and adapt to changing customer requirements. As no two organisations at the same, the metrics used to measure this must also be unique and "be carefully designed by those who know these processes most intimately," according to the Balanced Scorecard Institute.
The customer perspective can only be assessed by data collected from outside an organisation and essentially measures how satisfied customers are with the products and services they receive – an important part of business success.
Once again these metrics must be carefully aligned with what the company hopes to achieve, different customers accessing different products or services have different expectations.
The financial perspective is perhaps the one businesses are most familiar with, however this is a measure of past performance rather than future possibilities. Under the balanced scorecard system, the financial perspective is still seen as being an important measure, but a clearer view of how this fits in with more strategic goals is provided.
Creating a successful balanced scorecard
Once a clear perspective on the organisation has been achieved, the next stage involves creating and implementing the balanced scorecard.
The Balanced Scorecard Institute has developed a nine step plan for this. Steps one to seven – assessment, strategy, objective, strategy map, performance measures, initiatives and automation – relate to the initial building of the scorecard and implementation of the metrics.
Step eight – cascading – is where the success of a strong balanced scorecard could falter. Cascading involves aligning the scorecard across the entire organisation to provide a clear and consistent focus at all levels.
This allows problems within one area to be identified before they go on to have a detrimental effect on others and ensures departments are not working towards conflicting objectives.
"To be successful, you'll need a deep understanding of linked objectives, leading and lagging measures, and processes for creating strategic alignment," Active Strategy, which develops software for balanced scorecards, explained.
Once this has been achieved, a culture of evaluation must be established to ensure the strategies are reaping rewards and the balanced scorecard is keeping up with the evolving needs of an organisation.
The balanced scorecard is a system which can be applied across both businesses and not for profit organisations. Among its advocates is Karen Ponce, chief executive of Shat-R-Shield, which implemented a balanced scorecard in 2010.
"Executives get so caught up in the day-to-day running of the business that they don't work ON the business.
"Implementing a cascaded and aligned balanced scorecard strategic planning and management system is time well spent working ON the business because it gives clear direction and guidance to those I entrust and empower to work IN the business," she told the Balanced Scorecard Institute.