The Balanced Scorecard is a management framework that combines traditional financial metrics with strategic measures to give managers a more complete view of business performance. The approach rests on the premise that many business measurement schemes are weighted too heavily toward financial performance and ignore other strategically important, but often more challenging to measure, priorities. The Scorecard is "Balanced" because it considers other non-financial factors. The Balanced Scorecard assumes a cause-and-effect link between learning, internal efficiencies, business processes, customers, and financial results.
This post will explore the origins, methodology, and benefits of the balanced scorecard approach to business management
What Is a Balanced Scorecard (BSC)?
Around the turn of the 20th century, British scientist Lord Kelvin said, "I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind. If you cannot measure it, you cannot improve it."
Harvard doctors Robert Kaplan and David Norton believed that managers in a strategy-focused organization need measurement as much as scientists. So they applied this principle to business and 1992 introduced the "Balanced Scorecard" measurement framework in a Harvard Business Review article.
The balanced scorecard aims to broaden the scope of performance measurement by incorporating non-financial factors crucial for long-term success. It recognizes that financial metrics alone are insufficient to capture all the essential elements contributing to an organization's overall health and sustainability.
By incorporating multiple perspectives, the balanced scorecard gives management teams a more well-rounded assessment of an organization's performance. It encourages a strategic approach that aligns various aspects of the business, ensuring that actions in one area contribute to overall success. This approach is particularly valuable in today's complex business environment, where success requires balancing financial results, customer satisfaction, internal processes, and organizational learning and growth.
Who Uses the Balanced Scorecard (BSC)?
Organizations of different sizes, including both for-profit and non-profit entities, can benefit from implementing a balanced scorecard.
Large corporations and businesses in various industries use balanced scorecards to align their strategic objectives with key performance indicators (KPIs) from different perspectives. This helps ensure that financial goals are balanced with customer satisfaction, internal processes, and organizational learning.
Hospitals and healthcare organizations use balanced scorecards to track various metrics, including patient satisfaction, quality of care, operational efficiency, and financial performance. This approach helps them balance providing excellent patient care and maintaining economic viability.
Companies involved in manufacturing can use a balanced scorecard to monitor financial performance and factors related to production efficiency, quality control, and supply chain management.
Businesses in service-oriented industries, such as consulting firms, banks, and insurance companies, can benefit from the balanced scorecard to measure customer satisfaction, internal process efficiency, and employee development alongside financial metrics.
A balanced scorecard is a versatile tool that can be adapted to many organizations' specific needs and objectives, making it a widely adopted framework for strategic performance management.
What Are Balanced Scorecard Perspectives?
Kaplan and Norton suggested that performance measures should be viewed from several perspectives to generate a holistic view of the company's health. Therefore, the balanced scorecard system incorporates four perspectives.
Kaplan and Norton recognized that the financial perspective is still an essential management aspect, focusing on traditional financial measures such as revenue growth, profitability, and return on investment. However, financial measures are just one component of a more holistic approach. Metrics in this area are related to shareholder value.
This perspective examines how the organization is perceived by its customers. It considers factors such as customer satisfaction, loyalty, and market share, recognizing that satisfied and loyal customers contribute to long-term financial success. Measurements include customer satisfaction scores, churn, customer-reported defects, and market share.
Internal business processes
This perspective assesses the efficiency and effectiveness of the organization's internal processes. It identifies critical processes and aims to improve them to enhance overall performance and customer satisfaction. Example metrics include defect rates, cycle times, and unit cost.
Organizational capacity perspective
This perspective focuses on the organization's capacity for innovation, learning, and growth. It includes metrics related to employee training, skill development, and the ability to adapt to change. Measurements in this perspective answer the question, "Are we developing our intangible assets?"
Lean and SQDCM
In Lean management, the balanced scorecard is often categorized as Safety, Quality, Delivery, Cost, and Morale — as part of their Strategy Deployment (Hoshin Kanri) methodology. This can be combined with the Kaplan and Norton categories or you can use a hybrid that makes sense for you and your organization.
How a Balanced Scorecard Works in driving business improvement
The balanced scorecard framework is a strategic management tool that drives business improvement by providing a comprehensive framework for setting, aligning, and monitoring organizational goals across different perspectives.
Cascading objectives and metrics
The Balanced Scorecard concept facilitates cascading objectives and metrics by breaking down high-level strategic goals into specific, actionable objectives for different organizational levels. It ensures alignment by translating the overall strategy into measurable targets for departments, teams, and individuals, fostering a cohesive and unified approach. This cascading process helps create a clear line of sight between individual performance and achieving broader organizational goals, promoting accountability and a shared understanding of strategic priorities at every level.
The cause-and-effect relationship between perspectives
The Balanced Scorecard defines the cause-and-effect relationship between perspectives by emphasizing how improvements or deficiencies in one perspective can impact others, creating a chain of cause-and-effect relationships that drive overall organizational performance. For example, it recognizes that enhancing internal business processes can lead to improved customer satisfaction, which, in turn, positively influences financial outcomes. This interconnectedness encourages a holistic understanding of organizational dynamics, promoting strategic actions considering the interdependencies between financial, customer, internal processes, and learning/growth perspectives to achieve comprehensive and sustainable success.
Aligning activities with strategic goals
Once the objectives are established, the Balanced Scorecard helps align various organizational activities and initiatives. It ensures that day-to-day activities and projects are directly linked to the strategic goals. Each perspective has its key performance indicators that act as measurable targets. This alignment ensures that efforts throughout the organization contribute to strategic success.
Benefits of Using a Balanced Scorecard
Using a Balanced Scorecard offers several benefits for organizations:
Improved strategic planning and execution
The Balanced Scorecard approach helps align organizational activities with strategic objectives by translating high-level goals into specific, measurable targets for various departments and teams. This alignment ensures that everyone is working toward the same strategic priorities.
Enhanced communication and alignment
The Balanced Scorecard enhances communication by clearly articulating strategic objectives and performance metrics. This shared understanding fosters a common language and vision throughout the organization, promoting unity and cooperation.
Better decision-making based on real-time data
Based on real-time performance data, organizations can make informed and focused decisions. The Balanced Scorecard highlights areas of success and those needing improvement, allowing for targeted interventions and resource allocation.
Continuous performance improvement
The balanced scorecard facilitates the implementation of strategic initiatives by guiding organizations to develop targeted actions based on performance insights beyond financial performance. This promotes a culture of continuous improvement and adaptability to changing circumstances.
Examples of a Balanced Scorecard (BSC)
Organizations across various industries have successfully implemented the Balanced Scorecard methodology to enhance their strategic management and performance measurement.
Successful implementations of Balanced Scorecards
AT&T used the balanced scorecard to align its business units and improve overall performance. The company focused on key metrics for customer satisfaction, network quality, financial performance, and employee engagement. This strategic management approach helped AT&T adapt to the dynamic telecommunications industry and maintain a customer-centric focus.
Walmart used the balanced scorecard to integrate its strategic objectives across different departments and locations. The company focused on customer satisfaction, employee productivity, supply chain efficiency, and financial performance metrics. Walmart's use of the balanced scorecard contributed to its success in the highly competitive retail industry.
FedEx implemented the Balanced Scorecard to align its strategic objectives with the complexities of the logistics industry. The company focused on customer satisfaction, on-time delivery, employee engagement, and financial performance. This approach helped FedEx optimize its supply chain and improve service quality.
Positive impact on business performance
Robert Kaplan and David Norton have highlighted several case studies in their books. One notable example is the case of FMC Corporation, a diversified chemical company. FMC used the Balanced Scorecard to align its divisions and improve both financial and non-financial performance metrics.
These examples illustrate the versatility of the Balanced Scorecard in different industries and organizational settings. Organizations have adopted this framework to enhance strategic alignment, improve communication, and achieve better overall performance by considering a balanced set of metrics across various perspectives.
The Balanced Scorecard framework is a powerful and versatile tool that has transformed the landscape of strategic management for organizations worldwide. Its ability to transcend traditional financial metrics and embrace a holistic approach, encompassing customer perspectives, internal processes, and learning and growth, has proven instrumental in steering businesses toward sustained success. By fostering strategic alignment, promoting informed decision-making, and instilling a culture of continuous improvement, the Balanced Scorecard has become more than a measurement system—it is a guiding philosophy that empowers organizations to navigate the complexities of today's dynamic business environment.
How KaiNexus Can Help
Visualization is an integral part of the balanced scorecard approach. Many businesses use automated tools like KaiNexus to create visuals that communicate performance.
Strategy mapping is an integral part of the balanced scorecard methodology. A strategy map places the four perspectives in relation to each other to show how the objectives support each other. The strategy map reveals cause and effect by demonstrating that success in one perspective, financial, for example, can only be achieved by tangible results in the other perspectives, such as customer satisfaction. The strategy map, therefore, reveals what the organization wants to accomplish and how it will do it.
Administrators of the KaiNexus platform can define balanced scorecard strategy maps (called "true north" objectives in "strategy deployment" or "hoshin kanri"), which are visible to the entire organization and customizable at the organizational and department levels. When opportunities for improvement are identified and entered into the system, they can be linked to one or more objectives. Leaders can generate lists of opportunities for improvement that address each objective, showing the progress and impact of the opportunities.
As industries evolve and challenges persist, the balanced scorecard remains a beacon for those seeking a balanced and strategic approach to achieving their organizational objectives. If you'd like to learn more about how the balanced scorecard framework could benefit your organization, our team is standing by to help.