The Basics of the Balanced Scorecard
Organizational approaches to planning and execution vary wildly from one organization to the next. Even among similar organizations and like-minded individuals, approaches can be night and day.
While this is true of the planning process, the structure of the plan itself follows a similar path. Some organizations have tried-and-true methodologies. Others elect for the flavor of the week/month/year that was presented at the latest industry conference.
While many of these methodologies come and go, one that has remained consistent is the Balanced Scorecard.
Use of the Balanced Scorecard method spans across nearly every industry by both small and large organizations. A study by Bain & Co suggests that almost half of all organizations in North America use it as the focal point to determine strategic initiatives.
According to a 2GC Balanced Scorecard survey, 73% of companies reported the use of the Balanced Scorecard to be either “extremely helpful” or “very helpful.”
If you play any role in strategic planning for your organization, you’ve likely heard about it at some point already.
So, what is the Balanced Scorecard?
The Balanced Scorecard was established by Dr. Robert Kaplan of Harvard University and Dr. David Norton. Their goal? To measure organizational performance using a more balanced set of performance metrics.
Historically, companies focused on short-term financial performance as the most important indicators of success. The “balanced scorecard” focuses on important, non-financial strategic metrics. This approach ensures that strategies are developed to stimulate long-term success within companies.
In very simple, effective language, an article in the Harvard Business Review provided an excellent explanation of how you can think of the Balanced Scorecard:
“Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying an airplane, pilots need detailed information about many aspects of the flight. They need information on fuel, air speed, altitude, bearing, destination, and other indicators that summarize the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.”
The key pillars of a Balanced Scorecard
The Balanced Scorecard advises analyzing an organization from 4 different perspectives. These perspectives develop strategic plans that give indicators of the current and predicted environment:
- Financial Perspective: analyzes financial performance and the use of financial resources. A few metrics in this perspective include revenue growth, value of assets, and ROI.
- Customer/Stakeholder Perspective: analyzes performance from the perspective of the customer. A few metrics in this perspective include customer satisfaction, customer retention, and new customer acquisition.
- Internal Process Perspective: analyzes the quality and efficiency of performance related to the product, services, or other key business processes. A few metrics in this perspective include production time and implementation time.
- Organizational Capacity (or Learning & Growth): analyzes human resources, technology, culture, and other capacities that are key to breakthrough performance. A few key metrics in this perspective include employee satisfaction and employee retention.
What are the Advantages of the Balanced Scorecard?
With so many organizations adopting the Balanced Scorecard, it’s clear that there are advantages. Here are a few:
- It provides structure and direction for strategic planning, and it does so in a balanced way. It’s a starting point for strategic planners to develop objectives, strategies, KPIs, and the tactics that support them.
- It establishes clear alignment. The top-level strategy, starting with those 4 perspectives, can cascade throughout the organization. Departments and business units have the ability to develop their own strategic scorecards that align with the organization’s higher-level strategies. Proper alignment has been proven to strengthen buy-in and adoption.
What should I consider if I’m thinking about using the Balanced Scorecard?
- Poor adoption can get in the way of results. Even if your Balanced Scorecard is well-built, key stakeholders at every level within the organization must commit to adopting the Balanced Scorecard. Otherwise, execution will decline.
- You must have an effective performance tracking mechanism in place. This will be important so that employees know that their hard work is not futile. Without a method to track performance, it’s likely that momentum will slow, engagement will decline, and results will be lost.
The Balanced Scorecard has proven as a successful way for many organizations to structure and measure organizational performance. While there are several benefits of using this methodology, be sure to avoid common pitfalls that could jeopardize your success.
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