The Balanced scorecard is a tool for management to measure the total businesses performance. It covers not just today’s financial results but measure progress to tomorrow’s results.
“Running a business off the P&L is like driving a car by looking in the rear view mirror”
It is a key strategic tool to create and track clear metrics to monitor the implementation of your strategy.
Made popular by Kaplan, it recognizes that short term financial results are not a sufficient measure of business performance for most companies. It is based on an assumption of cause and effect: Financial results are caused by customer satisfaction, customer satisfaction is caused by how well the business can run internal processes, the quality of internal processes depends on how innovative and fast to learn the company is.
The scorecard has 4 components
- Financial measures (e.g. profitability, return on capital)
- Customer measures (e.g. customer satisfaction, market share, customer acquisition rate)
- Internal measures (e.g. quality, time-to-market, utilisation)
- “Learning” measures (e.g. employess turnover, employee satisfaction, innovation rate)
When is it useful?
Every organisation should have a balanced scorecard that tracks their strategic KPIs as a centre piece of monitoring the health of their business.
The Balanced Scorecard ensures that all dimensions of the business are included, covering leading and lagging indicators.
Creating a Balanced Scorecard is an excellent management team exercise, because it surfaces the assumptions on the cause and effect relationships in the business.
How do you do the analysis?
1) Get the top management of a business together and collectively think through the most important cause and effect relationships that operate in the business. Force them to drill to root causes, identifying the deep rooted organisational sources of success, not just the superficial lagging indicators like profit. Draw up a map of these linkages
2) Once these linkages have been agreed, identify specific measures that capture each item
3) Finally, targets can be set for each of these measures
4) The resulting targets and metrics should be embedded into the regular strategic management review process, updated every quarter or half year as appropriate. Use these numbers as an early warning system – when a number on the Balanced Scorecard is wavering, it is a red flag to dig deeper.
I want to know more
General discussion here
The master of Balanced Scorecard are Kaplan and Norton (original of many)
- Their original book on the subject, “The Balanced Scorecard: Translating Strategy into Action”
- Original HBR article