What Is A Balanced Scorecard? A Definition & User’s Guide

Everything you’ve ever wondered about the Balanced Scorecard in one complete article
What Is A Balanced Scorecard? A Definition & User’s Guide
Everything you’ve ever wondered about the Balanced Scorecard in one complete article

Table of Contents

Chapter 1: What is a Balanced Scorecard?

Chapter 1: What is a Balanced Scorecard?


There’s a lot that goes into explaining this topic, but let’s begin with the Balanced Scorecard definition and basics:

The Balanced Scorecard (BSC) is a business framework used for tracking and managing an organization’s strategy.

The BSC framework is based on the balance between leading and lagging indicators, which can respectively be thought of as the drivers and outcomes of your company goals. When used in the Balanced Scorecard framework, these key indicators tell you whether or not you’re accomplishing your goals and whether you’re on the right track to accomplish future goals.

With a Balanced Scorecard, you have the capability to:

  • Describe your strategy.
  • Measure your strategy.
  • Track the actions you’re taking to improve upon your results.

Chapter 2: The Origin Of The Balanced Scorecard

Chapter 2: The Origin Of The Balanced Scorecard


In 1992, Drs. David P. Norton and Robert S. Kaplan started a working group to examine the challenge of reporting only on financial measures. In for-profit organizations, financial measures provided a lagging report (i.e. they told you what happened last month, quarter, or year), but they were not able to look forward. Norton and Kaplan wanted to specifically look at what measures that look forward in time and act as leading indicators might look like and how that could affect an organization’s strategy.

Chapter 3: Scorecard Lingo 101

Chapter 3: Scorecard Lingo 101


There are other Balanced Scorecard-related definitions you’ll need to know if you decide to implement it, such as “objective,” “measure,” “initiative (or project),” and “action item.” Here’s a quick cheat sheet to explain what they all mean.

  • You have a high-level goal in mind, which is your objective.
  • The measures say, “How will I know that I’m achieving the objective?” (In other words, they allow you to see if you’re meeting your goals.)
  • The initiatives are put in place to answer the question, “What actions am I taking to accomplish the objective?” In theory, these are the places you’re spending money or putting forth effort to improve your performance.
  • Action items help delegate out small jobs that will allow you to complete your initiatives.

Keep in mind, you may have multiple initiatives focused on improving your measures and achieving your objective. And if your projects are not helping you improve in these areas, you may need to rethink your overall strategy.

Chapter 4: A Simple Breakdown Of The Balanced Scorecard Framework

Chapter 4: A Simple Breakdown Of The Balanced Scorecard Framework


Throughout the process of creating the BSC, Norton and Kaplan realized an organization must first begin with goals that can break down into four distinct perspectives that are uniquely connected:

  1. Financial goals—“What financial goals do we have that will impact our organization?”
  2. Customer goals—“What things are important to our customers, which will in turn impact our financial standing?”
  3. Process goals—“What do we need to do well internally, in order to meet our customer goals, that will impact our financial standing?”
  4. People (or learning and growth) goals—“What skills, culture, and capabilities do we need to have in our organization in order to execute on the process that would make our customers happy and ultimately impact our financial standing?”

Over time, the concept of a strategy map was created. A Balanced Scorecard strategy map is a one-page visual depiction of an organization’s scorecard. It has the ability to show the connections between all four perspectives in a one-page picture.

Chapter 5: How To Read A Scorecard

Chapter 5 - How to read a scorecard


Take a look at this sample strategy map:

How To Read A Balanced Scorecard


Here’s how you can “read” this map:

This company—a chain of fruit stands called “Kosmo’s”—will invest in culture and build an employee training program in order to partner with local and organic produce suppliers to “find the new kale.” This will help match their offerings to hipsters’ needs and attract the hipster crowd. They’ll also invest in emerging neighborhoods and create a dynamic pricing system that will drive revenue. By carefully managing costs, they’ll drive overall profitability.

Sample Measure & Project

As stated previously, an objective says, “What are we doing?” A measure says, “What are we doing well?” And a project says, “How will we close the gap?”

One of Kosmo’s objectives in the “Process” perspective is to partner with local and organic produce suppliers. So, a corresponding measure may look at “The number of organic farmers signed up.” And a corresponding project (also called an initiative) may be using the Local Hudson Valley outreach program.

To learn more about measures and projects, check out A Full & Complete Balanced Scorecard Example.

Chapter 6: How is the Balanced Scorecard typically put to use?

Chapter 6 - How is the balanced scorecard put to use?


A Balanced Scorecard is most often used in three ways:

  1. To bring an organization’s strategy to life. Those in the company can then use this strategy to make decisions company-wide.
  2. To communicate the strategy across the organization. This is where the strategy map is critical. Organizations print it and include it in interoffice communications, put it on their intranet, communicate it with business partners, publish it on their website, and more.
  3. To track strategic performance. That’s typically done through monthly, quarterly, and annual reports.

Who should use the BSC?

The Balanced Scorecard has been proven to be applicable in all industries—for-profit, nonprofit, government, healthcare, and more—and for organizations of all sizes.

Typically it’s used by leadership teams either at the executive level of the organization or at the division or department level. One of the keys to an effective scorecard is having leadership buy-in. That might seem obvious at first glance, but it’s easy to get enthusiastic about the scorecarding concept, see that it is relatively simple to implement, and move forward without the true buy-in and understanding from the leadership team you need.

The reason this can be such a struggle is because in order to make the BSC work in your organization, you have to change the way you’re currently managing. You will have to stop the weekly KPI reports or weekly leadership meetings and integrate any strategic management tactics into your scorecard. Of course, if your leadership team doesn’t buy into this concept, they’re not going to be obliged to change the way they handle their strategy and management.

Note that the Balanced Scorecard has made it very easy to communicate the way you talk about your strategy—but having a strategy and discussing it is only one piece of the puzzle. For your scorecard to be effective, you need to be able to execute your strategy—which includes managing it, measuring it, and making decisions around it.

Chapter 7: Options For Managing Your Scorecard

Chapter 7 - Options for managing your scorecard


We’ve seen organizations use pen and paper, Excel, PowerPoint, various scorecard-specific applications, and business intelligence tools to manage and track Balanced Scorecards. Aside from pen and paper (which we do not recommend for obvious reasons), there are pros and cons to each:

A Microsoft Office Application (Excel Or PowerPoint)

Positives:

  • It can be easily managed by individuals.
  • It can be customized to meet the nuanced needs of your executive team.
  • Each element can be done entirely to your specifications.

Considerations:

  • It is very difficult to manage from one reporting period to the next.
  • It is very hard to keep track of versions, so different executives might be seeing different numbers in their report if they do not have the most up to date version.

See Also: How To Create A Balanced Scorecard In Excel

A Scorecard-Specific Application

Positives:

  • It is typically very adept at managing the Balanced Scorecard and can do so out of the box.
  • It can handle multiple users.
  • It can create the reports you want.

Considerations:

  • Sometimes you may have trouble linking to other applications.
  • It requires a learning curve.
  • It can be expensive.
  • Some are not flexible.*

*The caveat here is that scorecard-specific applications are evolving at a rapid pace. Many of them (including ClearPoint!) be customized as much as—or more than—your PowerPoint or Excel scorecard. We may be biased, but we believe the best option for managing your scorecard is ClearPoint, so we’ll walk through what your process would look like in the next chapter.

See Also: The 6-Part Scorecard Software Checklist

A Business Intelligence (BI) Solution

Positives:

  • It’s typically connected to your data warehouses or your information analytics systems.
  • You can store a lot of your data and information in one place.

Considerations:

  • It is very hard for your typical business user to use, and you’ll likely need an IT team to be involved with the integration.
  • It is very hard to generate your executive-team reports.
  • It is hard to include qualitative information with your project information.
  • It can be cost-prohibitive.

Chapter 8: How To Manage Your Scorecard In ClearPoint

Chapter 8 - How to manage your scorecard in ClearPoint


The advantages of a Balanced Scorecard are many, but you’ll only experience them if it’s properly managed. The data collection and reporting associated with the Balanced Scorecard can be challenging and time consuming. ClearPoint was built explicitly to save teams time and effort with regard to scorecard management. The system can also be customized to handle any scorecard approach.

To understand how scorecard management works in ClearPoint, take a look through the images below. They illustrate how easy it is to get started, as well as how simple it is to manage the reporting process going forward.

To get started, you simply add and name a scorecard. The scorecard’s name should either be the organization itself (if it’s for the entire company) or the specific entity it applies to. As you grow your scorecard process, you’ll likely end up with a hierarchy of scorecards.

Manage balanced scorecards - ClearPoint Strategy


Add the Balanced Scorecard perspectives or categories.

Balanced scorecard categories - ClearPoint Strategy


Not everyone uses traditional scorecard terminology; some may refer to “objectives” as “goals,” while others call “measures'' “KPIs.” You can easily customize element names in ClearPoint without involving the IT team.

Balanced scorecard fields - ClearPoint Strategy


Add your goals and link them to the associated categories. In less than five minutes, you’ve customized the system—and you’re almost done setting up the scorecard!

Balanced scorecard category goals - ClearPoint Strategy


Add your measures to finalize the setup of the entire framework.

Balanced scorecard goal measurements - ClearPoint Strategy


Upload your strategy map (the one you likely created in PowerPoint) into ClearPoint. You can add status icons to different goals that you can use to drill down for more details. They’ll always reflect the current status of each goal (red/yellow/green).

Balanced scorecard strategy map example - ClearPoint Strategy


Loop in your organization’s data specialists and give them access to ClearPoint. At the outset, they’ll bring their data into ClearPoint from Excel. Going forward, they can take advantage of the Data Loader to automate periodic data uploads.

Balanced scorecard schedule - ClearPoint Strategy


ClearPoint uses red, yellow, and green status indicators to help you quickly and expertly evaluate whether your goals are being met. It takes just a few minutes to set up these automatic evaluations comparing actual results to target results—no more human error.

Balanced scorecard automatic evaluations - ClearPoint Strategy


Your Balanced Scorecard-based approach may require some additional reporting fields. There’s no need to contact IT or the ClearPoint Support Team for this additional configuration; you can easily create the new fields yourself.

Balanced scorecard custom fields - ClearPoint Strategy


Customize the layout of each page, depending on what is most important to view—that’s up to you and your end-users.

Balanced scorecard page layout customization - ClearPoint Strategy


With your first scorecard built, you can now add more users to help create scorecards for each department. Everyone can log in online and there is no need for IT support.

Balanced scorecard permissions - ClearPoint Strategy


Departments can add their specific goals and KPIs in their own scorecards. Anything that’s important at the top level of the organization can be rolled up via linking or through simple calculations. Thanks to ClearPoint’s ability to create linkages and pull data from anywhere, hierarchical relationships are clearly demonstrated.

Balanced scorecard data linking - ClearPoint Strategy


You’ll now have people from around the organization using ClearPoint and contributing to strategy reporting.

Balanced scorecard user management - ClearPoint Strategy


Schedule emails within ClearPoint to automatically go out to people who have not made timely updates. ClearPoint even sends users a list of what they need to update. They can click through each element to be taken right to the field that needs fresh data. It’s a built-in checklist.

Balanced scorecard task list - ClearPoint Strategy


Easily create a Briefing Book template that includes everything you need to report for monthly strategy meetings.

ClearPoint automatically produces a PDF document you can send to meeting participants as a pre-read. All the links in the PDF are live, so readers can easily click through and navigate the document.

Balanced scorecard PDF - ClearPoint Strategy


That’s how easy it is to manage your Balanced Scorecard with ClearPoint! All your data lives in one place, and much of the process is automated. That means you can focus on strategy—not on the manual work of chasing data and structuring reports.

Chapter 9: What does the future hold for the Balanced Scorecard?

Chapter 9 - What does the future hold for the balanced scorecard?


Over the last 30 years, the Balanced Scorecard has gone from a “nice to have” to a “must have,” and is now essentially the chart of accounts for strategy. While not everyone uses the exact name, all major management systems currently in play are based on the Balanced Scorecard approach—namely, they integrate objectives, measures, and projects. The majority of organizations are linking goals together in a holistic system (not always using four perspectives, necessarily), measuring performance, and linking performance to activities and their budget.

Now that some variation of a Balanced Scorecard is the standard, everyone is trying to optimize around that standard. The scorecard only works if you implement and manage it correctly. As a result, organizations in every industry need to figure out the best ways to:

  • Integrate the scorecard with the executive management team. The BSC cannot be a separate activity; it must be integrated with the activities of the executive team. But that’s easier said than done. How will you ensure that all strategy meeting discussions are directly related to the framework? Your executive team needs to be consistently focused on your stated objectives or their associated measures. If not, then your framework is off—or perhaps someone is cherry-picking measures in an effort to change the strategy, which will derail your efforts.
  • Integrate data for better visibility. Strategic data will always live in multiple places—sales and customer data lives in a CRM, financial data in a financial management system, and process data perhaps in an ERP. Leadership teams won’t (and shouldn’t have to) log into four different systems; nor is such a splintered view of data helpful. Getting all your strategy-related data into one place is critical for better visibility and therefore decision-making.
  • Make sure all departments are working in tandem. In the past, it was common for different departments to have different strategies. Now, we're seeing more companies develop a single strategy map for the organization, with departments linking to it and even individuals setting goals based on it (using the OKR framework). Everyone should be working toward a common set of objectives, as outlined in the Balanced Scorecard. It’s a simple concept, but one that’s not always implemented successfully.

Reduce the time it takes to manage the scorecard. Managing your performance within the scope of this framework takes time. It requires chasing down data from multiple sources, updating databases, creating reports, and more. Organizations are increasingly looking for ways to automate the process and, at the same time, keep the team working as a well-oiled machine. Less time spent on process-related tasks means more time for strategy discussions—and making the key decisions that will impact the future of your organization.

Common Questions About The Balanced Scorecard

This Q&A section is built to provide easy, quick answers to the most-asked questions about the Balanced Scorecard. For more in-depth responses, scroll up to the preceding article or click on the links within each answer below.

What are the four perspectives of the Balanced Scorecard?

The Balanced Scorecard perspectives mimic the priorities of a traditional for-profit organization. The four perspectives are:

  1. Financial Perspective
  2. Customer Perspective
  3. Internal (Process) Perspective
  4. People (Or “Learning And Growth”) Perspective

If you’re not a for-profit organization, your perspectives may change to reflect the priorities of your organization.

The perspectives should also link together in a logical way, demonstrating the need to have the right people, doing the right things that will make your customers happy and lead to positive financial results.

What is the Balanced Scorecard approach?

The Balanced Scorecard (BSC) offers organizations a useful framework for tracking and managing their strategies. The approach identifies leading (driver) and lagging (outcome) indicators that are essentially barometers of success—these indicators will signal whether you’re accomplishing your goals.

Why would you use a Balanced Scorecard?

An organization uses a Balanced Scorecard for five main reasons:

  1. To execute the strategic plan, aligning the company’s efforts and decisions with the strategy.
  2. To communicate the strategy across the organization (such as with the strategy map).
  3. To track strategic performance (typically via reports).
  4. To align the organization’s divisions and departments around a common strategy.
  5. To link individuals to the strategy, showing how they contribute to the organization’s goals.

How do you create a Balanced Scorecard?

Take these five proven steps to build your scorecard:

  1. Create a purpose statement (outward view).
  2. Design a change agenda (inward view).
  3. Draw a strategy map with strategic objectives.
  4. Choose measures to help drive the strategy.
  5. Align initiatives or key projects to the strategy.

What is a strategy map?

A strategy map is a visual tool designed to clearly communicate a strategic plan. It’s important because employees need to understand what they are responsible for and why it’s important to the overall success of the organization.

Who invented the Balanced Scorecard?

The Balanced Scorecard was originally developed by Dr. Robert Kaplan and Dr. David Norton. Their framework measures organizational performance using both “lagging” indicators of financial performance and customer outcomes, and “leading” indicators of internal processes, skills, and culture.

Linking the leading and lagging indicators was revolutionary at the time of their first article and book. It’s a standard practice of strategy management today.

When was the Balanced Scorecard developed?

Dr. Kaplan and Dr. Norton first published their concept of the Balanced Scorecard in 1992 in the Harvard Business Review, and their first book followed in 1996.

How do you measure key performance indicators?

KPIs are the key strategic measures for your strategy. The data that informs your KPIs is likely found in specialized systems, like financial, marketing, operations, or HR software. Tracking or measuring KPIs can be tricky as teams interpret data in different ways. When getting started, these templates can help you standardize your reporting process.

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What Is A Balanced Scorecard? A Definition & User’s Guide

Ted Jackson

Co-Founder & Alabama Native

Ted is a Founder and Managing Partner of ClearPoint Strategy and leads the sales and marketing teams.