The balanced scorecard is a strategic management tool used by organizations to translate business strategies into actionable objectives and measures. It provides a holistic view of organizational performance across key areas
In this comprehensive guide, we’ll explain what a balanced scorecard is, its benefits, perspectives, and the step-by-step process for developing an effective balanced scorecard tailored to your business.
What is a Balanced Scorecard?
A balanced scorecard is a strategic framework for measuring organizational performance across four balanced perspectives
- Financial
- Customer
- Internal Business Processes
- Learning and Growth
It was originated in the early 1990s by Drs. Robert Kaplan and David Norton as a new performance measurement approach supplementing traditional financial metrics with a more balanced set of indicators across key success factors.
The balanced scorecard turns your business strategy into a coherent set of performance measures and objectives that drive business growth and improvement. It aligns operations with strategy.
Benefits of Using a Balanced Scorecard
Adopting a balanced scorecard provides many benefits, including:
-
Translate strategy into action – It converts high-level strategy into defined objectives and measures for execution.
-
Holistic assessment – It examines organizational performance across a balanced mix of financial and non-financial metrics.
-
Improve strategic focus – The scorecard keeps teams focused on the organization’s strategic priorities and goals.
-
Enhance communication – It helps communicate business objectives and priorities to all employees.
-
Identify performance gaps – The scorecard highlights areas where performance is lagging.
-
Support strategic planning – The data it provides guides more informed strategic analysis and decision-making.
-
Boost organizational alignment – It aligns all departments and teams to work towards common strategic goals.
The balanced scorecard is a pivotal management tool for transforming strategy into results.
Four Perspectives of the Balanced Scorecard
The balanced scorecard examines organizational performance through four perspectives:
1. Financial Perspective
Financial metrics are key indicators of the results of strategies, so they are retained in the balanced scorecard. Typical financial measures include:
- Revenue growth
- Operating income
- Return on investment
- Cash flow
2. Customer Perspective
This perspective captures the ability to provide quality goods and services, effective customer service, and overall customer satisfaction. Sample metrics include:
- Customer satisfaction
- Customer retention
- New customer acquisition
- Market share
3. Internal Business Processes Perspective
This focuses on the key business processes, competencies, and activities required for executing organizational strategies. Possible measures include:
- Production/service quality
- Innovation rate
- Process improvement
- Operational efficiency
4. Learning and Growth Perspective
This perspective focuses on employee capabilities, morale, skills, and information systems needed to drive business growth. Sample measures are:
- Employee satisfaction
- Employee turnover
- Employee training participation
- Technology ROI
Examining performance across these four balanced perspectives provides a comprehensive assessment of overall organizational health and capabilities.
How to Develop a Balanced Scorecard
Follow this seven-step process to create an effective balanced scorecard:
Step 1: Outline Your Purpose
Begin by outlining the reasons your organization wants to implement a balanced scorecard. Clearly define what you want to accomplish. Example goals may be:
- Communicate business strategy
- Identify performance gaps
- Align strategic initiatives
- Evaluate progress
This guides your scorecard design and use.
Step 2: Create Specific Objectives and Measures
Next, develop 3-5 strategic objectives you want to achieve under each of the four perspectives. Objectives should be specific, measurable, achievable, relevant, and time-bound (SMART).
Define 1-2 performance measures for each objective that will indicate progress made. KPIs should also be SMART.
For example:
Objective: Increase customer retention rate by 10%
Measure: Annual customer retention rate percentage
Step 3: Strategically Map Each Perspective
Visually map objectives and measures for each perspective onto a strategy map showing their alignment and causal relationships.
Financial objectives are typically placed at the top. Customer objectives that influence those sit below, and so on through the perspectives cascading down the map.
Step 4: Analyze Performance
Once your balanced scorecard is developed, use it to routinely measure and analyze performance. Assess both:
- Current level of each KPI
- Progress made over past period on each measure
This identifies achievement gaps. Regularly update the scorecard with new data.
Step 5: Share and Communicate Results
Share balanced scorecard performance results with all employees. Help them understand objectives they influence and see how their work aligns strategically.
Promote transparency around both successes and areas needing improvement.
Step 6: Develop Strategic Initiatives
Use insights from the balanced scorecard to identify initiatives and actions needed to reach lagging objectives. Develop clear, resourced plans for achieving strategic goals.
Step 7: Implement the Changes
Deploy the resources, budget, and management focus required to execute initiatives and improvements. Leverage the balanced scorecard to drive ongoing strategic progress.
Example Balanced Scorecard
Here is an example balanced scorecard for a retail company:
| Perspective | Strategic Objective | Performance Measure |
|
The Nine Steps to Success™ Program Plan
Below details each step of the Nine Steps to Success™ framework.
The program is launched by project champion(s) and key stakeholders (working on their own or with BSI consultants). Existing strategic material and results are examined, a strategic gap analysis is completed, key stakeholders are interviewed, and other assessment activities are completed to customize workshops to incorporate work done to date.
It is critical that before an organization maps out its future there is some consensus around where things currently stand. During the Assessment step, an analysis of the current internal and external environments is completed. As part of this step, organization develops or re-validates high-level strategic elements (e.g., mission, vision, values, market assessments, enablers & challenges, primary and secondary customer / stakeholder needs analysis and others) needed for context in strategy formulation.
Building on the assessment, organizations formulate/clarify strategy in the Strategy step. The development of the strategy includes developing or clarifying your customer value proposition, visualizing strategy using a Strategy Profile and decomposing the high-level strategic direction into three to four Strategic Themes (or goals). Strategic Themes are those focus areas in which the organization must excel in order to fulfill its mission and achieve its vision, given the enablers it can leverage, the challenges it must overcome, and the customer value proposition it must deliver upon.
Additionally, organizations are viewed, internally and externally, though lenses, or Perspectives which frame the organization as a system of defined elements and capabilities that work together. One of the signature components of the original Balanced Scorecard, the names of the four perspectives will vary slightly (depending on the type of organization) from the original design: Financial, Customer/Stakeholder, Internal Process and Organizational Capacity (or Learning and Growth). The perspectives work together in a series of cause and effect (or drivers and results), creating value from the internal to the external. When combined, the Strategic Themes and Perspectives frame and define an integrated strategy.
Step 3: Strategic Objectives
In the Strategic Objectives step, the building blocks of strategy are developed. Strategic Objectives are the linchpins of a successful strategic planning and management system and are the key to implementing strategy. Objectives are qualitative, continuous improvement actions (outcomes) critical to strategy success. Objectives are developed on the strategic theme level first and then merged together to form organization-level Objectives.
In the Strategy Mapping step, cause-and-effect links are developed between the Strategic Objectives, creating a “value chain” of how customers and stakeholders are satisfied by the organization’s products and services. Strategy Maps are developed for each theme to ensure a complete strategy to achieve each strategic result and then those are merged into a final organizational Strategy Map. A Strategy Map is a graphic that shows the cause-and-effect relationships of objectives across the four perspectives, telling the story of how the organization will achieve the results desired.
Performance Measures (KPIs) are critical to tracking progress of an organization’s strategy. The below shows the inter-connectivity relationships among different types of performance measures. Operational measures focus on the use of resources, processes and production (output). These measures “drive” the outcomes a business desires, with some outcomes being more intermediate than other, more final, outcomes. Our process gets at these relationships, so you can identify the most meaningful outcome measures to determine if your actions are leading to the strategic results you desire.
Performance measures are developed for each of the objectives on the strategy map. The emphasis in this step is on helping you develop the critical leading and lagging measures needed to manage strategy execution.
In the Strategic Initiatives step, the projects that are critical to success of the strategy, are developed, prioritized, and implemented. Initiatives help close performance gaps in performance to hit targets. It is important to focus the organization on the execution of the most prioritized strategic projects versus creating a long list of potential actions and projects. Without this disciplined focus, organizations struggle to execute their strategy.
Once Step 6 is complete, the organization-level scorecard system is ready to be rolled out to employees. The goal of this part of the process is to create more internal fans and build a coalition of employees to start thinking more strategically and using the system to better inform decision making. The Balanced Scorecard Graphic, shown below, is a key deliverable and brings all the strategic elements of strategy formulation and planning together in one simple to understand graphic that becomes the heart of the process of communicating the organization’s strategy to all employees. It’s a one-page document that tells the value creation story by summarizing the organization’s strategy in a simple, easy-to-use format.
In the Performance Analysis step, data is transformed into evidence-based knowledge and understanding. Effective analysis helps people make better decisions that will drive improved strategic outcomes. This step focuses on measuring and evaluating performance to identify what works well and what doesn’t, taking corrective action and becoming a high-performance organization.
Step 8: Alignment
In the Alignment step, strategy is transformed from something only executives worry about to something everyone supports by cascading high-level enterprise strategy to first business and support units and then to individual employees. The Alignment step produces scorecards for business and support units, and individual scorecards for each employee or team.
Cascading communicates how organization level strategy (Tier 1) is supported by department/unit strategy (Tier 2), and then ultimately how employees or teams (Tier 3) contributes to the strategy with specific actions, projects and tasks.
Evaluation is an opportunity to review and refresh. During this step, leaders and mangers evaluate how well the organization has accomplished desired results and how well the strategic management system improves communications, alignment and performance. It ensures that the strategic planning and management system is dynamic and incorporates continuous improvement into day-to-day operations and management.
Check out our Balanced Scorecard Professional Certification Program to learn more about the Nine Step methodology or Contact Us with questions about the Balanced Scorecard.
How to Create a Balanced Scorecard: Nine Steps to SuccessTM
BSI’s award-winning framework for strategic planning and management, Nine Steps to Success™, is a disciplined, practical, and tested approach to developing a strategic planning and management system based on the balanced scorecard. It gives organizations a way to ‘connect the dots’ between the various components of strategic planning, budgeting, operations and management; meaning there will be a visible connection between day-to-day operations, the measurements being used to track success, the strategic objectives the organization is trying to accomplish, and the mission, vision and strategy of the organization.
This approach is more about engaging hearts and minds to transform an organization to higher performance than it is about just measuring performance. Ultimately, managers and executives can use the BSI-developed scorecard system to help define strategy, rally the organization around that strategy and achieve what the organization wants to achieve.
Balanced Scorecard in 2 Minutes
What is a balanced scorecard?
“The balanced scorecard combines the traditional financial perspective with additional perspectives that focus on customers, internal business processes, and learning and development,” Simons says in Strategy Execution. “These additional perspectives help businesses measure all the activities essential to creating value.”
How do you create a balanced scorecard?
Before creating your balanced scorecard, you must craft a strategy map to base it on. Start by listing the scorecard’s four perspectives in this order: “Learning and growth” will be the foundation, so position it at the bottom of your strategy map. Next, list your goals in each category using action verbs.
Where should you implement a balanced scorecard?
One of the most effective places to implement the Balanced Scorecard is in your strategic planning process. As the first and most crucial step in implementing a Balanced Scorecard methodology, this will lay the foundation for everything your organization will do in the future.
What is a balanced scorecard implementation methodology?
This Balanced Scorecard implementation methodology involves orienting your whole strategic plan around the Balanced Scorecard. You will set each perspective as a strategic Focus Area and then align Objectives, Projects, and KPIs directly underneath it. You’ll end up with a strategic plan that looks something like this: