What is a balanced Scorecard? – Even-though it has been around for over twenty years, the Balanced Scorecard methodology is often not fully understood. One of the reasons for this is that the Balanced Scorecard, unlike other strategic management methodologies, is updated on a regular basis to reflect changes in business and the marketplace.
The Balanced Scorecard is a strategic planning and management method used to align business activities to a vision and strategy. It also provides a means to improve internal and external communications and monitor performance against strategic goals. It was originally published by Dr. Robert Kaplan and Dr. David Norton as a paper in 1992 and then formally as a book ‘The Balanced Scorecard’ in 1996. The design of Balanced Scorecard concerns itself with the identification of a small number of financial and non-financial measures. It sets targets for the measures and then monitors them on a regular basis to determine success or failure.
There are two aspects of this activity that need to be highlighted: 1. The scorecard measures financial and non-financial objectives. These measures are few in number and are critical to the business, often referred to as Key Performance Indicators (KPIs). They must include leading and lagging measures (see lead and lag indicators). 2. Measurement is only part of the activity. The measures should also have associated initiatives (that change the measure positively) and actions (to correct activities when things do not go to plan). The ‘balance’ that a Balanced Scorecard achieves is brought about by a focus on both financial and non-financial measures that can be attributed to four areas or Perspectives:
Financial Perspective – The high level financial objectives and measures that help answer the question – How do we look to our shareholders?
Customer Perspective – All measures that are directly related to customers, focusing on customer satisfaction. To answer the question – How do our customers see us?
Internal Process Perspective – The measures that determine how well things are running and whether products and services conform to what is required. In other words, what should we be best at?
Capacity, Learning and Growth Perspective – The measures concerning how well people perform, their skills, training, company culture, leadership and knowledge base and all aspects that lead to continuous improvement. Answering the question, how can we improve and create value?
There are no hard and fast rules about the number and names of the perspectives. Occasionally additional Perspectives are added, for example the Environment. In the public sector, the Customer Perspective is frequently called ‘Stakeholders’.
The key is to ensure there is a ‘balance’ between financial and non-financial objectives, objectives, measures and strategic initiatives. This strategic planning framework is by far the most comprehensive and well supported methodology around today. It is supported by the Balanced Scorecard Institute who offer George Washington University certification course.
