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What Is A Balanced Scorecard? (A Definition)
Every single thing you’ve ever wondered about the Balanced Scorecard in one complete article? Check. (You’re welcome!)
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
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
If you build a Balanced Scorecard, you’re going to hear the words “objective,” “measure,” “initiative (or project),” and “action item” frequently. 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
Throughout the process of creating the BSC, Norton and Kaplan realized an organization must first begin with goals that can be broken down into four distinct perspectives that are uniquely connected:
- Financial goals—“What financial goals do we have that will impact our organization?”
- Customer goals—“What things are important to our customers, which will in turn impact our financial standing?”
- Process goals—“What do we need to do well internally, in order to meet our customer goals, that will impact our financial standing?”
- 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. If you want some examples in your industry, download one of our free ebooks:
- For-Profit Sample Strategy Maps
- Nonprofit Sample Strategy Maps
- Medical & Healthcare Sample Strategy Maps
Chapter 5: How is the Balanced Scorecard typically put to use?
A Balanced Scorecard is most often used in three ways:
- To bring an organization’s strategy to life. Those in the company can then use this strategy to make decisions company-wide.
- 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.
- 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: 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, making decisions around it, measuring it, and implementing it. If you want to get started quickly, take a look at the Strategy Execution Toolkit. It’s a free 42-page guide that walks you through how to write a purpose statement, build a change agenda, create a strategy map, and more.
Chapter 6: Options For Tracking Your Scorecard
We’ve seen everything from pen and paper, Excel, PowerPoint, numerous scorecard-specific applications, and business intelligence tools used to 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)
- 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.
- 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.
A Scorecard-Specific Application
- 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.
- 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!) can be as customized as much as—or more than—your PowerPoint or Excel scorecard.
See Also: The 6-Part Scorecard Software Checklist
A Business Intelligence (BI) Solution
- 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.
- 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 7: How To Read A Scorecard
Take a look at this sample strategy map:
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 8: Common Questions
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:
- Financial Perspective
- Customer Perspective
- Internal (Process) Perspective
- 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:
- To execute the strategic plan, aligning the company’s efforts and decisions with the strategy.
- To communicate the strategy across the organization (such as with the strategy map).
- To track strategic performance (typically via reports).
- To align the organization’s divisions and departments around a common strategy.
- 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:
- Create a purpose statement (outward view).
- Design a change agenda (inward view).
- Draw a strategy map with strategic objectives.
- Choose measures to help drive the strategy.
- Align initiatives or key projects to the strategy.
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.
Download Now: Sample Balanced Scorecard In Excel
If you are just getting started with the Balanced Scorecard, this Excel template can help get you started immediately. You may find sooner than later that you’ve outgrown this template and you need to look at scorecard-specific applications to manage your strategy—but this free template will get you headed in the right direction.