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An Introduction to the Balanced Scorecard Management Framework

Description:

ActiveStrategy explains the importance and functions of the balanced scorecard within all types of organizations to improve productivity and performance.

Content:

The Balanced Scorecard – Origins in Total Quality Management

In the late 1980s, vast numbers of companies were rapidly adopting Total Quality Management (TQM) principles, yet many of these organizations found themselves struggling to tie TQM to their bottom-line results, because TQM efforts tended to focus on isolated improvement projects that too often were not directly linked to strategic goals.

Kaplan & Norton Studied Leading Organizations

Recognizing this problem, Doctors Robert S. Kaplan and David Norton studied many organizations that were overcoming this problem and successfully creating this strategic linkage to improvement. From these studies, The Balanced Scorecard (BSC) concept was born and described in a 1992 Harvard Business Review article and in subsequent books by Doctors Kaplan and Norton.



What is a Balanced Scorecard?

The Balanced Scorecard approach suggests that companies examine performance across a wide range of “balanced” indicators, rather than the more typical approach wherein executive management teams focus almost exclusively on high-level financial outcomes. This helps a company focus on broader aspects of its strategy and mission by exposing the causal relationships amongst all of an organization’s key “stakeholders,” which includes not only its financial stakeholders, but also its customers, employees, and other constituents.

Perspectives on Performance

A company’s critical stakeholders and most important strategic focus areas are represented on Balanced Scorecards within what are called perspectives. These groupings should show the cause and effect relationships between the company’s selected focus areas. Using the perspectives described by Kaplan and Norton, this would mean a Balanced Scorecard would be organized with the “Financial” perspective at the top, followed by the “Customer perspective,” then “Internal Processes,” and finally “Learning and Growth.”

Tailoring Perspectives to Other Organization Types

The Kaplan and Norton perspectives work well in for-profit companies since the fiscal outcomes are shown as most important. Other types of organizations, including not-for-profit associations, governmental organizations, and healthcare systems often select additional or alternative perspectives to more appropriately represent their mission. For example, “Clinical Outcomes” is a common top-level perspective among hospitals, whereas “Constituent Satisfaction” is a helpful perspective for many gove.

Objectives – What You Want to Achieve

Grouped under each perspective should be an organization's “critical few” objectives – ideally no more than 10 of the organization’s most important organizational goals. These should be written in short, verb-noun format (e.g., “Increase sales of core products”) and should reflect the current year’s strategic plan. Objectives should articulate the business needs of the organization, so it is critical to determine these before proceeding to the measures. Too many organizations jump straight to the measures without first framing the objectives, which can lead to measures that do not adequately address strategic opportunities.

Measures – Your Basis for Achievement

The next step is to identify measures that will best determine if the business is on track to achieve each objective. These are also called KPIs (Key Performance Indicators) or metrics. As with objectives, focus is key. Each objective should have at most three measures attached. These measures should be the best indicators of achievement for that strategic goal. Careful consideration should go into measure selection to ensure that the desired behaviors will be encouraged by each measure and that they will indeed indicate whether strategic needs are being met.

Stoplight Indicators – Are You On Track?

After selecting the most important measures, it’s critical to set performance goals or targets so that the measure owner and management will understand expectations. Based upon these goals, certain thresholds may be set, which will trigger a visual performance indicator to appear (most often a red, yellow, or green arrow). These allow the measure owner and others viewing the scorecard to quickly spot problem areas that require additional focus or resources.

Initiatives – Projects that Address Performance Gaps

Finally, an organization should identify initiatives that will address critical areas of underperformance. Initiatives are time-specific improvement projects (with identified start- and end-dates) that are aligned to strategic, yet underperforming measures or objectives. A quick look at the red and yellow stoplight indicators on a scorecard often provides a good first step for assigning new initiatives or for evaluating priorities for stretched improvement resources. Close attention should be paid to initiatives, since these should help close the gaps on your Balanced Scorecard (and turn yellow stoplight indicators into greens). If this is not happening, initiatives should be reevaluated to ensure they are addressing the root cause of the performance gap.

Key to Success: Creating a Balanced Scorecard Framework

A Balanced Scorecard should be thought of as more than a single scorecard; to get real business benefits, it must be deployed as a framework of linked, aligned scorecards that are tailored to each area of the company. A cascaded scorecard framework allows the organization to communicate its strategy from the top down, aligning employees throughout the business to specific, measurable actions that each contribute to the strategy.

Cascading Scorecards

To cascade scorecards down and across various business units, functional areas, and management groups, you must translate the objectives (the verb-noun goal statements) and the measures (indicators of achievement), making them relevant to that area’s business processes and outputs, while maintaining alignment to the strategic objective one level up. This type of linkage and alignment is what makes the Balanced Scorecard so powerful. When done correctly, organizations create a predictive, actionable performance framework that truly drives success. Expect that this will take some time and significant effort. Many large organizations cascade scorecards just one or two management levels at a time.

Getting a Scorecard Framework Started

To jump start the development of a Balanced Scorecard management system, it is often beneficial to select a qualified consulting vendor. This can be especially helpful for companies just learning about the concepts, so a solid foundation and understanding of cascading techniques and best practices may be developed. Executive and management coaching can also greatly help an organization’s leadership understand how to manage via the Balanced Scorecard.

Managing the Framework Long Term with Balanced Scorecard Software

To be successful, a Balanced Scorecard framework must be gradually integrated into existing business processes, such as strategic planning cycles, budgeting processes, and monthly business reviews. Organizations that are most successful at this full integration find that automating a Balanced Scorecard framework using software is essential to achieving long-term buy-in and focus.

Balanced Scorecard software helps ensure that content stays up-to-date and is reviewed regularly. It also makes the cause and effect linkages between layers of objectives and measures clear and dynamic, allowing users to click through levels of cascaded scorecards to get to root causes quickly and easily – before they’ve blossomed into high-level catastrophes. When properly deployed and with ongoing executive support, a Balanced Scorecard framework, automated in software effectively changes the way an organization behaves and thinks about performance by driving new levels of accountability, alignment, communication, and – undoubtedly – better business results.

Author: Activestrategy

About Author:

Jack Steele has worked with and consulted for some of the world's largest corporations, offering a wealth of knowledge in areas of Performance Excellence, Strategy Deployment, Balanced Scorecard Management, and Performance Improvement. Jack is a co-founder of ActiveStrategy, Inc., which was the first organization in the world dedicated to developing and deploying enterprise-wide software for corporations seeking to harness the power of strategy execution. Learn more at http://www.ActiveStrategy.com.

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