Balanced Scorecard

When strategic planning becomes mundane, taken for granted, and not regularly reviewed, it is time to implement some changes so the plan can be fresh and be useful. Utilizing what is known as a “balanced scorecard” is a strategic planning and management system widely used in business, industry, government, and nonprofit organizations.

The purpose of using the balanced scorecard along with livening up the strategic plan is to make sense of the plan. While many organizations intend on matching the plan’s goals to everyday goals for employees, vendors, and clients, the goals sometimes get lost in the shuffle.

Introduced in 1992 the Balanced Scorecard concept is a powerful tool for developing and managing organizational strategy. Harvard Business School Professor Robert Kaplan and Dr. David Norton originated the system. Their plan adds non-financial performance measures to traditional financial metrics to create a balanced view of organizational performance.

Effective use of the Balanced Scorecard approach requires effective strategy for measuring and managing all organizational drivers such as financial, customer, operational, and organizational development performances.

The main advantage of using the Balanced Scorecard approach is developing performance management system that takes into account not only the financial side but also the non-financial side of the business. The bottomline is that balancing your performance system with different perspectives will give you a better strategic insight into your business.

The purpose of the balanced scorecard is:

• To match strategic goals to business activities
• To improve organizational communications
• To monitor organization performance against strategic goals

The balanced scorecard provides a clear plan as to what a company should measure in order to “balance” and keep balanced the financial perspective. It is a management system; that is, the plan is continually utilized and not simply used to arrive at a solution like a metric would. With the balanced scorecard, the hope is that businesses can clarify their vision and mission and translate day-to-day activities into action steps that can meet the overall goals.

Using a balanced scorecard system should yield the following results:

The balanced scorecard system matches the following four units to ensure the business foci meet financial goals, and also customer service, process, and internal goals.

This includes developing competences, knowledge, continuous training and corporate and individual cultural attitudes.

Focusing on improvement within the human resources perspective creates a knowledge organization in which people are the main resource because of their knowledge. Continuous training and learning are encouraged and made mandatory. Measures can be put into place to guide managers in focusing training where it is most needed or where the functions or tasks are priorities.

As Kaplan and Norton emphasized, “learning” is more than “training”, as it includes internal mentors and tutors and communication between and among co-workers that helps provide a problem-solving pattern.

This perspective refers to internal business processes. Metrics, when placed and monitored correctly, allow managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes the best, that is, internal employees and managers and not consultants.

Read the article on Balanced Scorecard Internal Business Process Perspective

Customer focus and satisfaction is key in any business regardless of its function. If customers are dissatisfied, they will seek products and services elsewhere. In developing metrics for satisfaction, customers should be surveyed and interviewed to determine where quality assurance might be failing. Determining red flags for the future also is important, as developing a scorecard is for strategic, that is, future, purposes, not just for today.

More on Balanced Scorecard Customer Perspective

Kaplan and Norton feel traditional financial data is indeed essential. Practically, all businesses should make a profit and create timely products or services. The hope in the scorecard system is to take the financial focus one step further: to monitor it as a system along with the other balanced scorecard perspectives. Additional financial-related data, such as risk assessment and cost-benefit data, should be considered here.

Learn more about Balanced Scorecard Financial Perspective

“Strategy mapping” is the process of determining true strategic objectives and the means of obtaining them. Strategy maps go hand-in-hand with balanced scorecard initiatives. The balanced scorecard approach of ensuring company strategic planning success states that strategic plans sometimes are not followed because they are not understood, are forgotten, or its goals are unclear as to the applicability to day-to-day activities.

The problem is that following the strategic plan is equal to success, and this cannot occur if it is not understood. It is up to the organization’s key players to provide clarity about the strategic plan to its employees.

A strategy map is a one-page visual representation of the organization’s strategy showing connections between objectives and daily operations. It illustrates how the organization plans to achieve its mission and vision within a chain of continuous improvements. The strategy map tool is used to demonstrate how value is created. It indicates step-by-step connections between strategic objectives and daily functions.

Once created, the strategy map is a powerful tool enabling all employees to understand the strategy and to glean from it steps they themselves can undertake to create organizational success.

A strategy map also provides structure for meetings, as it shows managers which aspects of their strategy are successful, and where help is required. Strategy maps demonstrate for managers the causal relationships between actions and goals. The map should serve as a communication tool within and without the organization, for use in presentations, candidate selection, investor and financing, and client relations.

A strategy map is useful to large or small businesses. Strategy maps visually illustrate the implementation of the four basic principles of the balanced scorecard system: Learning and growth; business process; customer service/satisfaction; financial aspect. Strategy maps include linkages to intangible assets. The strategy map allows management to align investments in people, technology and organizational capital for the finest impact and highest level of success.

Developing a strategy map begins with developing a scorecard system and gathering as much data about the organization as possible, via files, research, interviews, surveys, reports, press, and of course, the strategic plan and its addendums (any marketing, sales, or production plans). The strategy map should include basic information, be understandable on all levels within the organization, and be succinct and short enough to fit on one page.

It serves as a “snapshot” of the organization’s strategy in language everyone can understand, with information all employees can feel comfortable utilizing.

Create your strategy map in Excel: Strategy Map and Balanced Scorecard Templates

1. Review the existing strategy for completeness and focus

2. Identify different perspectives and interpretations of the business strategy

3. Identify different ideas of the causal links among different strategic components

4. Review existing data or information pertinent to resolving the differences identified in numbers 2 and 3

5. Work with the organizational leaders to resolve the differences

6. Validate the map with key stakeholders and develop ways to roll out and evaluate its implementation successfully

7. Establish guidelines and mechanisms for using the strategy map to guide strategy execution

Using the balanced scorecard and strategy map techniques yields many positive results.

Utilization of the strategy map provides:

• Implementation of one strategy among the organization’s key personnel
• Communication of the strategy to employees
• Identification of major indicators of strategic success
• Validation and test assumptions about what core capabilities drive bottom-line performance
• Structure and a core set of strategic performance metrics

The process of setting organization wide objectives, targets, and continuously tracking organizational performances has been a big challenge for many organizations. Financial reporting alone is a complex issue. The real challenge with developing organizational strategy and balanced scorecard methodology begins when you add the non-financial measures and you start working between departments.

How do you incorporate all these metrics? What kind of reports you need? How many? The overall goal of our approach to Balanced Scorecard reporting is to develop simple and effective reporting system and help clients focus on their business. We have succeeded to develop a reporting system which integrates different perspectives, incorporates the metrics, and gives a powerful insight to overall organizational performances.]]>