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There’s a lot that goes into explaining this topic, but let’s begin with the Balanced Scorecard definition:
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:
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.
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.
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.
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:
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:
A Balanced Scorecard is most often used in three ways:
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.
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:
*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
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.
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.
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.
The Balanced Scorecard perspectives mimic the priorities of a traditional for-profit organization. The four perspectives are:
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.
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.
An organization uses a Balanced Scorecard for five main reasons:
Take these five proven steps to build your scorecard:
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.
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.
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.
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.
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. [hs_action id="7299"]
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