An Introduction to the Balanced Scorecard Framework and Its Benefits
The Balanced Scorecard Framework is a strategy-execution management system that offers great organizational benefit. In fact, studies have found that 70% of companies that have such a system outperform their peers. Learn how you too can guide your company to be a leader in its industry.
Many managers base their decisions on traditional financial indicators. These measures however, represent the results of a company’s past actions, and therefore fail to capture the true picture of the company’s value proposition or the current state of the company’s operations and processes.
This situation can be alleviated by implementing the Balanced Scorecard (Balanced Scorecard), a tool developed by Harvard professors Robert S. Kaplan and David P. Norton. It provides leaders with a more accurate measurement of the organization’s capabilities to create long-term value by identifying and displaying the key drivers for this value. Once identified, it prompts executives to develop objectives and indicators for these drivers that can be directly tied to the firm’s strategy.
The Balanced Scorecard provides a framework for translating the company’s strategic objectives into an array of coherent performance measures. These define the company’s long-term objectives, as well as the mechanics for achieving them.
The Balanced Scorecard should include both outcome indicators and performance drivers. Without performance drivers, the Scorecard would not communicate how results expect to be achieved. Similarly, without outcome measures, it would not be clear if the process improvements expanded business or boosted financial performance.
The Four Perspectives
The Balanced Scorecard organizes measures into four perspectives: Financial, Customers, Internal Processes, and Innovation and Learning. Both the Financial and Customer perspectives can be considered as outcome measures as they are the results of actions taken in the Internal Processes and Innovation and Learning perspectives.
- The Financial perspective measures the value that investors perceive in the company and whether its processes and operations are being profitable. Some examples are: ROE, Cash Flow, Economic-Value Added and Sales Growth.
- The Customer perspective reflects the company’s key differentiators and value added as perceived by the customer. These can be segmented according to the company’s distinct customer groups. They may include measures such as: Customer Satisfaction, Market Share and Customer Profitability.
- The Internal Processes perspective focuses on the most critical business processes that have the greatest impact on customer satisfaction, and therefore, on financial results. They should also measure the competencies and processes the firm needs to maintain market leadership.
- Finally, the Innovation and Learning perspective refers to the firm’s ability to innovate, improve and learn continuously to increase the company’s value. Some examples of these indicators are: Employee Training, Employee Satisfaction, and Rate Incentive Alignment with Strategic Objectives.
Executives must be careful to not make their Balanced Scorecard a collection of unrelated indicators. Their development should be centered on reflecting the organization’s strategy for creating competitive advantage. A good Balanced Scorecard will help executives focus on the most fundamental requisites for the company’s success, as well as clarify the strategy and help break it down into operational terms. By doing so, executives will avoid creating an excess of information that hinders the decision-making process rather than facilitates it.
Implementing this methodology can help articulate and communicate the company’s strategy throughout the organization and should reflect how the company intends to attain breakthrough performance. It can help align individual and organizational objectives and initiatives towards a common goal. It can also help the organization focus its efforts and resources on pursuing (and continuously testing) its long-term strategy for competitive success by providing constant feedback on the company’s situation. It can, therefore, help transform the organization into a Strategy-Focused Organization.
Executives can convert their Balanced Scorecard from a measurement structure to a leadership system by implementing the five principles of Strategy-Focused Organizations. These are:
1. Mobilize change through executive leadership.
2. Translate the strategy to operational terms.
3. Align the organization to the strategy.
4. Make strategy everyone’s job.
5. Make the strategy a continual process.
Satisfied Employees equal Satisfied Customers
A recent study performed by Rockwater discovered that customers in the top quintile of satisfaction were served by employees in the top quintile of satisfaction as well. The Balanced Scorecard allow employees to better visualize how their actions contribute to the firm’s success and encourages them to innovate constantly.
In conclusion, by implementing the Balanced Scorecard as a leadership system within their companies, executives can align the whole organization towards a common goal and allocate resources where they produce the greatest impact, therefore making the most of the company’s potential.
At TRISSA we have worked hand in hand with the developers of these best practices and have adapted them to fit our clients’ needs.
We provide our customers the tools and expertise needed to help them clarify their strategy, translate it into operational terms and monitor it to ensure it is implemented effectively.
Author: Trissa Strategy Consulting
Source: M3 Planning. "Balanced Scorecard Summary." Balanced Scorecard Summary (2011): 1-5. Online journal.