What is the Balanced Scorecard?

the Balanced Scorecard enables organizations to bridge the gap between strategy and actions, engage a broader range of users in organizational planning, reflects the most important aspects of the business, and respond immediately to progress, feedback and changing business conditions.

the Balanced Scorecard can be a great help used as a strategic tool, a management methodology or / and a measurement system.

the Balanced Scorecard provides organizations with the ability to clarify vision and strategy and translate them into action. By focusing on future potential success it becomes a dynamic management system that is able to reinforce, implement and drive corporate strategy forward.

It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.

The concept of the Balanced Scorecard has achieved increasing popularity in the business world. Many businesses had previously built their objectives around financial targets and goals of little relevance to a long-term strategic vision, thus typically leaving a gap between strategy development and implementation.

For this purpose the Balanced Scorecard holds four different perspectives from which a company's activity can be evaluated:

  • Financial perspective
    - return on investment, shareholder value
  • Customer perspective
    - customer satisfaction, our coorporate image?
  • Process perspective
    - in what processes should we excel to succeed?
  • Innovation perspective
    - how will we go on from lessons learned and
      sustain our ability to change and improve?

By this the Balanced Scorecard provides a more 'balanced view' by looking at not just financial concerns, but also customers, internal business processes, and learning and growth. Where are we going? The vision: "We will open new markets…" How? By focusing on cost efficiency, high quality and by investing in new technologies? In which perspectives should we excel at what?

the Balanced Scorecard is based on performance measurement and derives its objectives from vision and strategy. It enables shared understanding of the links between strategy, critical success factors and actions while establishing accountability

The Balanced Scorecard focuses on creating and communicating a total comprehensive picture to all members of the organization from the top down, taking a long-term view of what the company's strategic objectives really are, making good use of knowledge gained through experience and maintaining the required flexibility of such a system to cope with the fast-changing business environment.

Why Measure?
Creating your winning strategy is only the first part of your Balanced Scorecard implementation. The next part is measuring the success (or "failure") of your strategy.

Besides the Balanced Scorecard, performance measurement systems have mainly focused on lagging financial indicators. Although non-financial measures have existed for long, their link to strategy and financial results has been vague at best. On the contrary, the Balanced Scorecard provides predictive, foreward-looking views of the overall business that go beyond a focus on short-term bottom-line results.

Measuring your strategy enables you to confirm or set aside the assumed causes and effects you have based your strategy on. This is vital information. Your strategy is based on what you believe influences the perspectives the most. Keeping track of the right measures and communicating the success or failure to achieve the target values of such measures helps everyone focus on the issues that matters most.

If this doesn't happen, then the assumption on which our strategy is based may be wrong and we may have to rewrite our strategy. Getting this kind of information to your desk fast may save you from total embarrassment. Confirm or disprove your ability to achieve what you have planned to achieve. Have you been able to recruit the kind of personnel you needed? Have you succeeded in your effort to acquire new parking space or implement your new logistics system? Have these changes had the desired effect on your ability to deliver internal processes end objectives?

Measure What?
Many Balanced Scorecard implementations go wrong, because managers are reluctant to introduce new data gathering routines. The Balanced Scorecard measuring is, in those cases, primarily based on data already available in other systems and not the measures most relevant to the strategic objective.

The scorecard gets too crowded. If you exceed a total of 25 measures, the picture gets just too dense. A high number of measures are usually a sign of strategic focus being sacrificed for internal organizational reasons, i.e. legitimating the existence of a particular unit, process or project. You should simply start with the really important stuff and gradually increase if necessary.

The scorecard gets out of balance. No more than a fifth of your measures should be financial, a little more than a fourth should be customer oriented, approx. a third should be covering the processes perspective and about a quarter should cover innovation. An out of balance scorecard is often a consequence of internal organizational politics, a fad-oriented implementation or a combination of the two.

The scorecard has too few leading indicators. Leading indicators are measures that may be used to predict future outcomes of lagging indicators (measures of stated facts). Number of catalogues distributed may be used as a leading indicator of number of future shop visitors. Relative price ratio to competitors may be used the same way. Please observe that the terms leading and lagging only make sense relative to one particular strategic objective. A lagging measure for one objective may therefore be used as a leading indicator for an objective further up the cause-and-effect chain.

To find the best measures you should brainstorm about 50 or 60 measures free from any reality constraints. Out of these measures you should focus on about 25-35 measures that will measure on target because they…

  • actually do measure the success or failure of your objective (lagging)
  • measure real influence on your objective (leading)
  • measure only the success or failure (or likelihood of such) of your objective (lagging or leading)
  • will yield approx. the same result if measured by two different people

Take extreme care when you choose the wording of your measure. Make sure that the measure will be correctly understood if presented out of its strategic context, i.e. if being used on its own by local managers in a daily or weekly briefing. Never underestimate the power of your metrics. Off target measures or interpretation of the measures are dangerous.

Focus your corporate energy in order to be aligned with your strategy. This effect can be strengthened if you communicate the whole picture first and then let your employees see exactly where their measure(s) tie in.

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the Balanced Scorecard
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