Balanced ScorecardsA balanced scorecard is a device that managers use to convey performance across a range of relevant strategic criteria.
Learning ObjectivesReview the four primary perspectives addressed by a balanced scorecard
- Criteria are generally a mix of financial and non-financial indicators: measures of success and failure differ according to the type of indicator.
- The balanced scorecard represents performance pictographically; its original design was a table broken up into sections, or perspectives, that generally included financial, customer, internal business processes, and learning and growth.
- A balanced scorecard aggregates performance within a single framework. It should convey performance to stakeholders simply and quickly.
- This visual tool gets each of the moving parts in an organization on the same page to ensure continuity and synergy between functional aspects.
- Key Performance Indicator: An industry term for a type of performance measurement; usually used by an organization to evaluate its success.
- strategic management: The art and science of formulating, implementing, and evaluating cross-functional decisions that will enable an organization to achieve its objectives.
Balanced Scorecards DefinedA balanced scorecard is a semi-standardized strategic management tool used to track, monitor, update, and improve key performance indicators (KPI) within an organization. These variables are generally a mix of financial and non-financial indicators that allow managers to better control strategic operational and financial commercial outcomes. The balanced scorecard is currently one of the most popular management tools used for tracking organizational performance.
Originally created in 1987 by Art Schneiderman, an executive at the semiconductor firm Analog Devices, the balanced scorecard is an adaptation of early performance measurement techniques that were developed in complex post-industrial corporations in the U.S. and Europe.
Balanced Scorecard PerspectivesThe balanced scorecard represents performance pictographically; its original design was a table broken up into sections, or perspectives, that generally included financial, customer, internal business processes, and learning and growth. Each perspective then included a set of five or six measures that could be compiled to inform the raw score for the corresponding perspective.
The four perspectives are:
- Financial: This section encourages the identification of a few relevant high-level financial measures that help companies to answer the question "How do we look to shareholders?"
- Customer: This section encourages the identification of measures that answer the question "How do customers perceive us?"
- Internal Business Processes: This section encourages the identification of measures that answer the question "What must we excel at?"
- Learning and Growth: This section encourages the identification of measures that answer the question "How can we continue to improve and create value?"
Managerial Use of the ScorecardAs organizational acceptance of performance management tools grew throughout the 1990s, the original design of the balanced scorecard evolved to include a host of other variables and considerations, most significantly at the intersection of performance and strategy.
Corporate strategic objectives were added to justify focusing on certain perspectives, effectively absorbing the original framework into a more comprehensive strategic planning exercise. Today, this second-generation balanced scorecard is often referred to as a "strategy map", but the vernacular "balanced scorecard" is still used to refer to anything consistent with a pictographic strategic management tool.
Managers generally use this tool to identify areas of the organization that need improved alignment and control with the broader organizational vision and strategy. The balanced scorecard gets each of the moving parts in an organization on the same page to ensure continuity and synergy between functional aspects.
Visual ScorecardsThe visual scorecard is a graphic analogy of the balanced scorecard framework and a key visual link between performance and strategy.
Learning ObjectivesProduce a visual representation of a balanced scorecard for communication and meetings
- If the balanced scorecard is the whole process of developing perspective, measures, and targets, then the visual scorecard is the graphic depiction of those interactions.
- Although classically depicted as major perspectives encircling the organization 's overall vision or strategy, there is no widely accepted format for the visual scorecard; any format that effectively communicates performance to stakeholders will work.
- Managers rely on the visual scorecard to quickly diagnose positive or negative performance throughout an organization.
- Strategy Mapping: An articulation of organizational perspectives and key goals.
Balanced Scorecard IllustratedA balanced scorecard is the sum of all relevant inputs; the visual scorecard is the graphic representation of findings or results. Think of the visual scorecard as a tool for presenting data to managers of board members at an organizational strategy meeting.
This image represents the classic visual scorecard, in which "perspectives" of strategic importance are organized around a higher-level vision or strategy. The visual scorecard does not always have to be in this format; it may appear as a matrix, or a series or matrices that cross-reference issues of strategic importance with objectives or measures within the major perspectives.
The cyclical visual scorecard with four components (financial, internal, innovation, and customer) is a very common design that successfully bridges performance and strategy. Recent design enhancements to visual scorecards include the use of red (danger), yellow (caution), and green (safe) color schemes to reflect various performance attributes. An abundance of red immediately sends a signal to managers that serious improvement is needed in order to satisfy organizational targets. Similarly, the presence of green indicates that the targets are being met or exceeded.
Why Use Visual Scorecards?A good visual scorecard is easily deciphered by all stakeholders, immediately conveying areas of strength, weakness, success, or deficiency. Visual scorecards make the data in balanced scorecards instantly readable.
When communicating business processes to stakeholders, managers are often tempted to rely on jargon and detail-oriented descriptions of strategy and process. The visual scorecard gives stakeholders a clear understanding that jargon and business-speak may not. It is primarily a communication tool.
Scorecard MeasurementBalanced scorecard measurements require extensive data collection and are essential in validating scorecard outputs.
Learning ObjectivesIndicate the value of measuring progress on objectives in effectively employing a score card in the workplace
- The balanced scorecard ultimately helps managers choose measures and targets. If these aspects of the scorecard are not well-selected then the results will be neither useful nor reliable.
- Scorecard design is also critical. If managers decide that a balanced scorecard should include performance measurements from the perspective of the "Customer", then an objective of success must be defined for the actual performance data to be effective.
- Gap analysis is a tool that helps companies compare actual performance with potential performance. At its core are two questions: "Where are we?" and "Where do we want to be?".
- Coupled with well-designed and well-thought out dimensions for the scorecard itself, gap analysis is very useful in assessing organizational health.
- ex-ante: Latin for "beforehand" or "in advance of."
- Gap Analysis: A tool that helps organizations compare actual performance with potential performance. It answers the question: "Where are we now and where do we want to be?"
- ex-post: Latin for "after the fact."
Scorecard Design and FeedbackThe balanced scorecard is ultimately about choosing measures and targets. Its various design methods are meant to help identify these measures and targets, usually by a process of abstraction that narrows the search space for a measure. For instance, a company can find a measure to inform about a particular objective within the Customer perspective rather than find a measure for customers in general. This gives the scorecard more practical value.
Useful measurement feedback from a balanced scorecard is also essential. This means that careful consideration is required when interpreting applicable measurements. For example, if managers decide that a balanced scorecard should include performance measurements from the perspective of the "Customer", then they must define particular objectives of success, such as customer retention longevity, repeat sales, or customer willingness to recommend a product or service. These concrete objectives allow the actual performance data to resonate and generate meaningful results.
Gap AnalysisGap analysis is a tool that helps companies compare actual performance with potential performance. At its core are two questions: "Where are we?" and "Where do we want to be?". If a company or organization does not make the best use of existing resources, or foregoes investment in capital or technology, it may produce or perform below its potential. Gap analysis can be conducted from the following perspectives:
- Business direction
- Business processes
- Information technology
Gap analysis lends itself to the measurement aspect of the balanced scorecard, ensuring that maximum value may be derived from the exercise. It enables management to look carefully at each objective through the lens of the four perspectives listed above and identify efficacy or room for improvement. Coupled with well-designed and well-thought out dimensions for the scorecard itself, gap analysis is very useful in assessing organizational health.
It is important to note that there are no hard-and-fast rules about defining measures and targets within a balanced scorecard. For example, financial measures can be defined as discrete values in the context of accounting ratios and continuous values in the context of dollar figures. What is important is that the data collected should be appropriately analyzed within the context of the targets and performance goals of the organization.