What is a Balanced Scorecard?
The two management authors, Robert S. Kaplan and David Norton introduced the balanced scorecard in the early 1990’s as a method for measuring a company’s activities in terms of its vision and strategies. The system they developed therefore sought to give managers a comprehensive view of the performance of a business from more than simply a financial perspective. In fact, Kaplan and Norton argued that if any organization focused reasonable attention on the three other areas (out of the four identified) better financial performance would be a consequence.
The Balanced Scorecard model is a strategic management system which seeks to force managers to focus on the important performance metrics that drive organizational success. It balances a financial perspective with customer, internal process, and learning & growth perspectives.
Kaplan and Norton’s main aim in using four independent but inter-related measures in this way was simple to redress a perceived bias towards utilizing mainly financial measures of performance such as overall profitability, the cost to income ratio and return on investment etc. While these are important, too much focus on this category at the expense of the other three would lead to organizational sub-optimization.
These four measures used by Kaplan and Norton are shown in the diagram below:
Let’s look at these four areas in a little more detail.
Customer perspective – These are typically measures having a direct impact on customers. For example, this might be the time taken to answer a phone or deal with a query, the time take from order to delivery (often called the cycle time), the results of customer surveys, the overall number of complaints or competitive market rankings.
Business process perspective – These are typically measures reflecting the performance of key business processes. For example, this might be the time spent sales prospecting, the time to fulfill an order, the number of units that require rework, delivery quality or timeliness or even overall process costs.
Learning and growth perspective – These are typically measures describing the organization’s people learning curve and the extent to which individuals have enough knowledge to achieve the goals of the enterprise. For example, this might be the number of employee suggestions, improvement projects underway at any one time or total hours spent on staff training or coaching.
Financial perspective – these are typically measures reflecting financial performance. For instance, this may be the number of debtors, average invoice days outstanding, cash flow or return on capital employed. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. However, according to Kaplan and Norton’s model, financial figures suffer from two major drawbacks.
- They are historical. Whilst they tell us what has happened to the organization they may not tell us what is currently happening, or be a good indicator of future performance.
- It is common for the current market value of an organization to exceed the market value of its assets. The excess value can be thought of as intangible assets. These figures are not measured by normal financial reporting.
How should balanced scorecard measures be developed?
The specific measures (or what are often called key performance indicators or KPI’s) within each of the four perspectives are usually chosen by each organization to reflect the drivers of the particular enterprise. The method can facilitate the separation of strategic policy-development from the implementation, so that organizational goals and strategies can be broken into specific tactical statements and task-oriented objectives which can be managed by organizational staff at all levels. It can also help detect whether there is proper coordination between activities. For example, we might find that the internal business objective of implementing a new telephone system can help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business.
When Robert Kaplan and David Norton originally developed the Balanced Scorecard approach, their aim was simply to help organizations of all kinds to focus their efforts on the four key areas of customers, process, people and finance. They deliberately nominated finance to be the last of the areas because it is seen to be dominant in most organizations, but it is often an outcome of better performance in the other three.
The Balanced Scorecard approach, as it is mainly used today in slightly adapted form, aims to help organizations to translate their vision into action or implementation. It is critical for the execution of the Balanced Scorecard system to be carried out in a disciplined way. In other words, many organizations fail to adopt appropriate discipline or rigor to this process and consequently fail in their efforts to measure their progress towards objectives in a balanced fashion.