A Balanced Scorecard brings together, in a single management report, many of the seemingly disparate elements of a company’s competitive agenda: becoming customer oriented, shortening response time, improving quality, emphasizing teamwork, reducing new product launch times, and managing for the long term.
“What you measure is what you get.” —Kaplan & Norton
What’s more, a Balanced Scorecard guards against focusing on just one measure to improve—which, in turn hurts the other measures. By forcing senior managers to consider all the important operational measures together, the Balanced Scorecard lets leaders see whether improvement in one area may have been achieved at the expense of another. Even the best objective can be achieved badly.
While giving senior managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. Companies rarely suffer from having too few measures.
“When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.” —T.S. Monson
Most of us have seen the dashboard of instruments on a modern jet cockpit. Very complex. It can be overwhelming for an untrained person to even start to understand.
However, to a trained flight crew, the dashboard provides all the information and feedback they need to fly that jet almost anywhere in the world. They would say that the dashboard provides just the right amount of information needed—not too few screens and gauges, and not too many.
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 just one instrument can be fatal.
Just like flying a jet, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously. And, just like a jet pilot, you can’t rely on one set of measures to the exclusion of the others. No single measure can provide a clear performance target. You need a “dashboard” that provides a balanced presentation of both financial and operational measures.
The most effective dashboard for organizations is called the Balanced Scorecard.
What is a Balanced Scorecard?
The Balanced Scorecard is not just a scorecard, it is a methodology. It starts by identifying a small number of financial and non-financial objectives related to strategic priorities.
It then looks at measures, setting targets for the measures, and finally strategic projects (often called initiatives). It forces an organization to think about how objectives can be measured and only then identifies projects to drive the objectives. This avoids creating costly projects that have no impact on the strategy.
The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance. A balanced scorecard focuses on both high-level strategy and low-level measures. It takes your big, fuzzy strategic vision and breaks it down into specific, actionable steps.
The Balanced Scorecard Sees Your Organization from Four Perspectives
Balance is brought about by a focus on financial and non-financial objectives that are attributed to four areas of an organization—called perspectives. There is a causal relationship between the perspectives. Changes in Culture / Learning and Growth will drive changes in Internal Business Processes that will impact Customers and improve Financial results.
Culture / Learning and Growth
The learning and growth perspective looks at your overall corporate culture.
- Are people aware of the latest industry trends?
- Is it easy for employees to collaborate and share knowledge, or is your company a mess of tangled bureaucracy?
- Does everyone have access to training and continuing education opportunities?
Technology also plays a major role in learning and growth.
- Are people able to use the latest devices and software, or are your archaic systems stuck running yesterday’s tech?
- What are you doing to make sure your organization is staying ahead of your competition?
Internal Business Processes
The internal business processes perspective looks at how smoothly your business is running. Efficiency is important here. It’s all about reducing waste, speeding things up, and doing more with less.
- Are there unneeded obstacles standing between new ideas and execution?
- How quickly can you adapt to changing business conditions?
This perspective also encourages you to take a step back and get a little philosophical about your company.
- Are you providing what your customers actually want?
- What should you be best at?
The customer perspective focuses on the people who actually buy your products and services.
- Are you winning new business?
- How about keeping your existing customers happy?
- How are you viewed in your industry compared to your competitors?
Customer satisfaction is a great forward-looking indicator of success. The way you treat your customers today directly impacts how much money you’ll make tomorrow.
Just because we’re taking a balanced look at your organization doesn’t mean that we want to ignore traditional financial measures. Quite the contrary, the financial perspective is a major focus of the balanced scorecard.
- Are you making money?
- Are your shareholders happy?
The financial health of your organization may be a lagging indicator showing the result of past decisions, but it’s still incredibly important. Money keeps companies alive, and the financial perspective focuses solely on that.
Measure outcomes, not activities
The Balanced Scorecard is key for improving performance. It’s a way of looking at your organization that focuses on your big-picture strategic goals. It also helps you choose the right things to measure so that you can reach those goals. It links a vision to strategic objectives, measures, targets, and initiatives. It balances financial measures with performance measures and objectives related to all other parts of the organization. It’s a vital business performance management tool.
See how you can create a balanced scorecard with KPI Fire