The Balanced Scorecard

The term 'Balanced Scorecard', or 'BSC', refers to a new strategic management approach developed by Dr. Robert Kaplan and David Norton in the early 1990's as a means of enabling an organization to clarify its vision from different perspectives and create future value for the organization by concretizing the metrics and actions necessary for this vision to come true.

The Balanced Scorecard is basically a methodology that defines an organization's performance measurement system or metrics based on the organization's value drivers and strategy. Value drivers include everything that enhances the organization's value - customer service, innovation, operational efficiency, financial performance, etc. Once these metrics have been defined, they are rolled up into a 'scorecard', which the company uses to measure, record, and analyze its performance and determine if it is meeting its goals.

This measurement-based management approach not only considers feedback information from the organization's internal processes, but from various business outcomes as well to achieve continuous improvements in all aspects that drive the organization's over-all value. Using performance data from different aspects of the business (i.e., internal processes, financial performance, customer satisfaction, human resource development, etc.) allows the company to acquire a 'balanced' assessment of its needs and weaknesses and develop the appropriate strategy to come out with an improved and more balanced set of performance results.

A fully deployed Balanced Scorecard must cascade from the top levels of the company down to the lowest ranks. It goes without saying that the vision, mission, strategy, and objectives to which the Balanced Scorecard will be aligned must be set by no less than the company's top management. Without top management buy-in, any scorecard defined for the company will have difficulty getting the necessary support. It would also be a good idea to have a champion for the Balanced Scorecard within the company.

Equally important is the awareness of all company personnel of what the corporate goals are, how these will be measured by the company's Balanced Scorecard, and how each employee can contribute his or her own share towards the achievement of these goals. This is realized by having everybody in the company keep a personal scorecard in support of the company's Balanced Scorecard.  As a result, everyone will be driven by metrics and performance data that follow the same roadmap toward company success.

The balanced scorecard approach works because people are motivated if they know that they're being measured and they know how they're being measured. Experts say that this is true whether or not there's an incentive given for the achievement of the goal.

The Balanced Scorecard views an organization from four (4) perspectives: 1) the learning and growth perspective; 2) the business process perspective; 3) the customer perspective; and 4) the financial perspective.  A company must define metrics and collect and analyze data for each of these perspectives.

The 'learning and growth' perspective pertains to the development of the human resources of the company, and includes the following:  1) personnel training and improvement; 2) cultivation of corporate culture; 3) organizational development, including the nurturing of corporate experts, gurus, and mentors; 4) setting up of fast and efficient knowledge transfer infrastructure; and 5) opening up of communication lines among personnel. This perspective supports the concept that people are a company's main resource and most valuable asset, so metrics defined for this perspective must measure various aspects of employee improvement, growth, and satisfaction.

The business process perspective deals with the company's internal business processes. Every manager within the company must have his or her own set of metrics that determine whether his or her area of responsibility is performing business to expectations set by the company's over-all Balanced Scorecard.  These business metrics, which measure various aspects (efficiency, speed, quality, etc.) of how well the company's products and services are manufactured to match customer expectations, must be carefully defined by people who know the internal processes very well.

The customer perspective, as its name implies, focuses on customer satisfaction.  Keeping the customers satisfied, if not delighted, is the best way to keep them loyal to the company. Failure to satisfy the customers will prompt them to look for other suppliers who can deliver what they want. Customer satisfaction is not always easy to measure though, so ingenuity may be needed for the establishment of the appropriate metrics and data gathering system that will reflect the true sentiment of the customer.

Every company exists to make money. The financial perspective is about that - the company's ability to make money.  There is no need to emphasize the importance of collecting and analyzing financial data in a timely manner, since every company is doing this already anyway, whether under a BSC program or not.  The difference is that companies practicing the BSC concept do more than measure themselves solely in terms of their financial bottom lines, which is what most traditional companies do. The BSC concept changes that traditional outlook - it ensures that other non-financial but nonetheless just as important perspectives influence how a company must be valuated. 

The Balanced Scorecard relies heavily on proper definition of the company's metrics. Choosing the wrong metrics will not produce the desired results, no matter how diligently the data are collected and analyzed.  It is for this reason that metrics need to be chosen by people who really know how they'll impact the company's goals and vision.

Good metrics will:  1) reflect the true present status of the company from many different perspectives, allowing decision-makers to make their best moves; 2) provide constructive feedbacks to various company processes, leading to continuous improvement; 3) show trends in company performance over time, facilitating adjustments to changes; and 4) quantify many things, making analyses more accurate and solutions more effective.

Once the metrics have been defined and implemented, and scorecard data start pouring in, follow-through becomes imperative.  Movements in the metrics included in the balanced scorecards, whether positive or negative, must be analyzed diligently to identify their causes. Causes that produce positive changes must be sustained, if not enhanced.  On the other hand, causes that produce negative effects must be eliminated.

When tracing the causes of movements in the BSC's metrics, one must be aware of their possible sources. Sources that affect the metrics may come from: 1)  the environment (government regulations, economic cycles, politics, natural calamities, etc.); 2)  the organization itself (company strategy, company policies, employee compensation, systems/processes/procedures, etc.); 3) a department or group of individuals (work loads and processes, group relationships, group morale, etc.); and 4) an individual (personality, management style, skills, attitude, etc.).  Knowing the causes of performance data movements and their sources will make it easier for them to be put under control.

According to Kaplan and Norton, organizations that are successful in implementing the balanced scorecard approach follow five (5) principles to be able to focus on their strategy and deliver the breakthrough results:  1) mobilization of change through executive leadership; 2) translation of the company strategy into operational terms; 3) alignment of the organization to the strategy; 4) making the strategy everyone's job; and 5) making the strategy a continual process.

Lastly, here's how Kaplan and Norton described their 'Balanced Scorecard' concept (source:www.balancedscorecard.org): "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

See Also:   TPM / TQM;  Kaizen;  6-Sigma;  Poka-Yoke;  5S Process

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