The Balanced Scorecard

One of the most seen problems in today’s business organizations are the fact that though a lot of effort is put into creating a strategy there are still a big gap between this strategy and what gets done in the company. Behind the strategy and strategy plan lies a lot of effort analyzing the company’s competencies, customers, stakeholders, competitors and strategic options. But why is it that all that effort a lot of times just ends up in a nice report that does not change the mind of the employees to change in the new direction that management wants.

The phrase “What you measure is what you get” is very well known and from experience is also a true fact. You can communicate a new strategy and direction as much as you want but people will really first change direction when they get measured on it. The classical measurement is the financial results but will only make the organization focus on short term results and not focus on the long term strategy.

The Balanced Scorecard is a great tool to help organizations, departments or teams to improve performance taken the integrated organization and strategy plan into account. It links together the strategy, vision and the daily operations.

 

The theory behind Balanced Scorecard

Robert S. Kaplan and David P. Norton described the concept of the Balanced Scorecard in a 1992 article. This article was very popular and resulted in the famous book “The Balanced Scorecard” that was published in 1996.

The definition of the Balanced Scorecard is:

“Balanced scorecard methodology is a management tool designed to translate an organization's mission statement and overall business strategy into specific, quantifiable goals and to monitor the organization's performance in terms of achieving these goals.”

The basic idea behind is that you take the organizations strategy and mapping it to measures and then cascading it down in the organization. The KPIs or measures are divided into four “perspectives” as proposed by Kaplan and Norton.

The Balanced Scorecard

  • Financial: Encourages the identification of a few relevant high-level financial measures. Should answer the question “How do we look to shareholders?”
  • Customer: Encourages the identification of measure that answers the question “How do our customers see us?”
  • Internal business processes: Encourages the identification of measures that answer the question “What must we excel at?”
  • Employee learning and growth: Encourages the identification of measure that answers the question “How can we continue to improve and create value?”

Why should you implement The Balanced Scorecard?

There are a number of signs that you may need a new performance measurement system as presented by Vitale and Mavrinac:

  • Performance is acceptable on all dimensions except profit: A focus on quality and other measures has led to improvements in isolated areas, but not profits.
  • Customers don’t buy even when prices are competitive: The problem may lie in your relative performance to competitors.
  • No one notices when performance measurement reports aren’t produced: Data in the reports no longer contains meaningful information for decision makers.
  • Managers spend significant time debating the meaning of the measures: Measures must be clearly linked to strategic objectives.
  • Share price is lethargic despite solid financial performance: Wall street needs to learn that you are investing in long-term value creating activities.
  • You haven’t changed your measures in a long time: Performance measures should be dynamic based on the organization’s strategic direction.
  • You have recently changed your corporate strategy: All measures should link back to your strategy.

Today a number of software tools are available to help organizations implement The Balanced Scorecard. A lot of these are focused around Business Intelligence software.X