Unlocking the Power of the Balanced Scorecard
by Tom Wright, on May 4, 2017 11:25:18 PM
The Balanced Scorecard is one of the most famous strategy frameworks ever created. The framework has been used by organizations since as early as the 1980's, when it was originally devised by Robert Kaplan and David Norton. It's also one of the first things you'll learn about on a business or management degree.
This is the second in a series of articles where we’ll be diving into different strategic frameworks. The series will explore which frameworks work best for different types of strategies, and the articles can be found below:
- Value Disciplines Model & Your Competitive Advantage
- The Benefits of Applying The Stakeholder Theory
- Maslow's Hierarchy As a Business Framework
- The Ansoff Matrix Helps Organizations To Grow
- Using the VRIO Framework to Create Sustained Competitive Advantage
- McKinsey's Three Horizons of Growth Can Help You to Innovate
For a detailed dive into The Balanced Scorecard – read on!
What is the Balanced Scorecard?
Essentially, it calls for organizations to create a set of internal metrics that will help them to assess their business performance in 4 key areas:
Typical scorecard metrics might include cash flow, sales performance, operating income or return on equity.
With scorecard metrics such as: % of sales from new products, on-time delivery, net promoter score or share of wallet.
Internal Business Processes
This would include measuring things such as: unit costs, cycle times, yield, error rates, etc.
Learning and Growth
Examples of metrics being: employee engagement scores, retention rates of high performing staff, skill increases of staff, etc.
The 4 perspectives serve a number of purposes. Firstly, they require organizations to 'balance' their activities between the main drivers of business success. They also force organizations to assign tangible metrics to each perspective, increasing accountability. They also serve as a framework for communicating the strategy of an organization to broader stakeholders. E.g. 'We are doing x because it helps us to succeed in the Customer perspective of our scorecard'.
One study showed that approximately 64% of organizations in the US were using the Balanced Scorecard to measure business performance. When we look at the thousands of clients with strategic plans in our own cloud system Cascade, we see a similar level of popularity. Interestingly, we often talk with clients about how they're using the Balanced Scorecard only to discover that they aren't even aware of the fact that they've implemented it. Instead, they've come to their own conclusion naturally that they need to focus their efforts and measures across roughly the same 4 perspectives that the Balanced Scorecard calls for.
As with any famous framework, it's picked up a fair few detractors along the way.
The main criticisms of the Balanced Scorecard are that:
- It takes too much time to set up across your organization.
- People never fully understand it and therefore fail to benefit from it.
- It's too rigid and doesn't account for changes in the business landscape. Specifically that it's too focused on financial measures above all else.
- It's too internally focused, almost completely ignoring macro-economic or competitive aspects of running a business.
Which leads us to the topic of today's post:
What does the Balanced Scorecard help me to achieve?
Before we answer that question, we need to look at one of the major reasons why organizations struggle with the Balanced Scorecard.
A lot of people look at the Balanced Scorecard as 4 simple perspectives that you simply slot your goals into. Often though, people only have a vague intention to drive a balance of focus between the 4 perspectives. They see it something like this:
4 simple perspectives that link together to give you a Balanced Scorecard of your business performance. Each perspective containing a list of goals and KPIs which you then go away and work on. The end goal being to try and maximize each perspective and therefore ensuring overall success.
But the problem is, it really isn't quite as simple as that. In reality, the Balanced Scorecard's a time-driven process whereby achieving 1 perspective unlocks your ability to progress to the next. It therefore should be viewed more like this:
If you follow the steps in the diagram, you'll see the ultimate end of the journey is to increase profitability. Indeed, this is one of the major criticisms of the Balanced Scorecard, that it essentially 'ends' at making more money. It's argued that the scorecard wouldn't suit organizations such as Google and Facebook who claim their objectives go beyond financial returns alone. That aside, the diagram does do something very well. That is to translate the Balanced Scorecard into logical, actionable steps to help your organization thrive, at least financially.
The premise is simple:
Your ability to learn and grow will directly dictate your ability to better manage your internal processes.In-turn, as your internal processes improve, this will have a positive impact on your customers as well as directly reducing your costs. The combined benefit of this lower cost/higher customer engagement in your product (essentially sales) will lead to your end goal, increased profit and financial return.
The Balanced Scorecard isn't really about perspectives, it's about the layers of a pyramid. The pyramid when built up in the right order, leads to success. When implemented in this way, the Balanced Scorecard can be immensely powerful in helping your organization to:
- Create a tangible road-map from the 'current state' to a more successful 'future state'.
- Identify major roadblocks and areas where you lack the critical competencies to proceed to the next stage.
- Articulate how your goals will directly help the organization to move upwards through the stages.
- Prioritize business activities in the order they need to be tackled to allow the most rapid progression through the stages.
Specifically, the main benefit of the Balanced Scorecard is likely to come less from the creation of the perspectives themselves (which are fairly natural and obvious categorizations for most businesses), but rather from the process of strategy mapping using the perspectives as stages.
How do I apply The Balanced Scorecard to my Business?
There are many ways to go about applying the Balanced Scorecard to your own organization. Ranging from light-touch to extremely deep and complex. For this article, we're going to outline a few simple steps that you can take to start reaping the benefits of the Balanced Scorecard, without implementing a complex change program.
Step 1: Customize the Balanced Scorecard to meet your needs
Whilst the core of the Balanced Scorecard shouldn't be changed, you might find the terminology doesn't align with your organizations. For example, rather than using the perspective 'Customers' a government organization might instead use the term 'Citizens'. But don't stop at customizing the perspectives - you also need to create your own version of the strategy map above.
For example, under the Customer perspective, we have the item 'Lower Wait Time'. That might be important if you're, say, a hospital, but is likely not as relevant if you're in the business of advertising. Instead, you might want to replace this with something else which is important to your customers such as 'Fewer Errors'.
Try to outline up to 3 critical components of success at each perspective that make sense for your specific business.
Step 2: Create KPIs for each perspective
A critical step in the roll-out of the Balanced Scorecard is to create numerical KPIs to measure your success in each of the perspectives. We have a few examples of those KPIs above; and this article has a load more examples to help you too.
Aim for at least 3 KPIs in each perspective and be sure that the KPIs you select are ones that you can actually measure to a reasonable degree of accuracy.
Step 3: Add Organizational Goals for each perspective
In addition to creating KPIs, start to categorize your existing goals or projects into the 4 perspectives. One of the most common findings for organizations is that they are way too focused on the upper perspectives. Organisations commonly lack enough goals helping them to achieve in the Learning & Development perspective. This is a critical mistake! Whilst it may be easy to, for example, cut costs in order to provide direct benefit to the Financial perspective. Cost cutting exercises are likely to be unsustainable without investment being made in Learning & Development to fuel Process Improvement. The Balanced Scorecard isn't about delivering against your Financial KPIs directly. Rather, the scorecard is about delivering against your Learning & Development, Process, and Customer KPIs to therefore deliver against your Financial KPIs. This is the secret to a sustainable future for your organization.
Step 4: Begin the process of cascading your goals
Once you've defined high level KPIs and Organizational Goals, start cascading this into the rest of your business. That means exposing your plan to leaders and middle-managers, and inviting them to contribute ideas for how their departments can help to achieve those goals. Organizations looking to ensure a deep and consistent implementation of their balanced score-card powered strategy, should repeat the cascading process right through to the front-line of the organization.
This is also the step where many organizations fail. Asking employees to merely categorize goals into the 4 perspectives, without explaining the context of the overall journey that the business is embarking on. We've written previously on the best way to communicate strategy to the organization.
Step 5: Implement regular strategy reviews
Requalr startegy reviews are critical, regardless of what strategy framework you employ for your organization. But you need to implement a regular process for reporting on and communicating the progress of the organization in each of the 4 perspectives. Whether you choose to do this through team meetings, dashboards, or a combination of both. Strategy reviews should keep things as simple as possible so that everyone in the organization understands the KPIs and how they contribute to them.
Other related articles:
- Strategy Evaluation: How To Do It Correctly
- Choosing The Right Strategy Tools
- Five Of The Best Strategy Frameworks For Your Organization
- Strategic Thinking: A definitive Guide For Business
If you're liking the sound of the Balanced Scorecard and want to give it a try for your business, start by going through the steps outlined above. You might also want to look at how a strategy execution platform like Cascade can help you to properly set up your strategy to work with the Balanced Scorecard. For extra reading, you can also check out some additional articles here and here, that expand on our approach above.