Balanced scorecard is an important business management methodology. In this article, you’ll learn what it is, where it came from, and why it’s important. You’ll also learn a four-step process to implement the framework and improve your organization.
What is a Balanced Scorecard?
A balanced scorecard (BSC) can be defined as a business framework used for tracking and managing an organization’s strategy.
Most business leaders judge their company’s success by the amount of money it makes. And while financial gain is, without a doubt, an important indicator of organizational health, it’s not the only factor that should be tracked and analyzed.
As the name indicates, the balanced scorecard framework presents an opportunity to assess a business on multiple levels. This generally leads to a much more balanced idea of performance. A company that’s currently generating a lot of revenue might have significant issues lurking below the surface. These issues could potentially ruin a business down the road if they aren’t addressed.
A balanced scorecard looks at a business from four different perspectives to determine both the overall health of a company and its strategy moving forward.
These perspectives are education, processes, end users, and financials. We’ll discuss each of these in detail in a later section of this article.
Studies show that companies using the balanced scorecard approach tend to outperform those that don’t. Why is this? There are a few reasons.
- First, a balanced scorecard allows for better strategic planning. As you’ll see later in this article, this framework forces management to think in terms of cause and effect across multiple company objectives. This kind of thinking inevitably leads to better strategic decisions because multiple factors are always considered, not just revenue numbers.
- Second, the balanced scorecard framework is easy to map out on a single sheet of paper. This fact makes communicating strategy with other company leaders quite simple.
- Third, performance reports are much more useful when using a structured approach like the balanced scorecard. This is because management will always know exactly what to report on at all times. They’ll also be able to visualize performance in a powerful, intuitive way.
A Quick History Lesson
The balanced scorecard framework was first introduced by Doctors David P. Norton and Robert S. Kaplan in 1992.
Their aim was to address the challenges associated with only measuring a company’s financial performance.
They realized that analyzing a company’s financial outlook alone was insufficient. Mainly because this approach is only able to generate reports of the past — what happened last month, last quarter, last year.
The doctors wanted to look to the future so that company strategy could accurately be adjusted when needed. Thus, the balanced scorecard framework was born.
How to Create a Balanced Scorecard in 4 Steps
Now that you know what a balanced scorecard is, why it’s useful, and where it came from, let’s explore how your organization can start using this framework. There are four key steps you need to take. They are:
Step 1: Look at Your Business or Project from 4 Perspectives
We mentioned the four perspectives earlier in this article. When we say “perspectives” we mean the ways that a business should be looked at and assessed. Now, let’s dive deeper into each perspective and discuss why all four play a vital role in grading business health.
First, look at your business and assess whether or not your employees are learning.
Are they aware of the latest industry trends?
Do they have company sanctioned opportunities to increase their knowledge?
Are they able to easily share what they learn with other team members?
Technology is a major factor in the education perspective. It’s always changing, progressing. Which means your team needs to develop ways to stay current.
Technology also plays a role in sharing knowledge. Without the proper systems in place, knowledge gleaned by one person may never reach his or her colleagues as it should. Consider how your organization can become more “education friendly” and stay ahead of the curve. Then implement tools, tricks, and systems to make it a reality.
The processes perspective is all about assessing efficiency within a company. Ask yourself, “Is every department running smoothly?” and “Are there ways that we can reduce waste and downtime, or eliminate obstacles in our company systems?”
These questions and those like them will enable your company to increase productivity, save money, and improve its overall health.
3. End Users
Next, you need to look at your end users, your customers.
How satisfied are they?
Is your team able to bring in a steady stream of new buyers?
Are you able to encourage repeat purchases with increasing success?
How is your brand viewed in the general marketplace?
Is it above or below the competition in your target market’s eyes? It doesn’t matter what industry you’re in if you don’t have customers, you’re in trouble. Look for ways that your business can improve customer satisfaction, generate more leads, and reduce turnover rates.
Finally, we have the financial perspective. This perspective is obviously important. It’s just not the only lens a business should be viewed through.
Look at your company’s financials, and assess if the money spent is generating greater revenue for your company.
It should be noted that financials are what’s known as a lagging indicator. Meaning they can only tell you about what’s already happened in your business not what the future holds.
That’s why looking at your organization through the financial lens alone is so dangerous. But when all four perspectives are given equal credence, your business stands a much greater chance of succeeding.
Step 2: Choose Strategic Objectives
The next step is to choose strategic objectives for each perspective. Examples include increasing company profits and reducing waste during the manufacturing process. This is where the balanced scorecard approach really starts to pay dividends. We have a few tips for you in regards to how to choose the right objectives.
1. Get Your Team Involved
This step shouldn’t be outsourced to consultants or pawned off on entry-level employees. As a company leader, you need to spearhead this project yourself.
But that doesn’t mean you do it on your own. Include every person who has intimate knowledge of your company and can provide valuable insight.
2. Make Your Objectives Long-term, Actionable, and Measurable
You want to focus your objectives on long-term success, not short-term wins. For example, “increase close rate” is better than “double sales in April.”
You also want to make sure your organization’s goals are actionable and measurable. Focus on things that you can actually control like limiting injuries on the warehouse floor, not securing a lower Federal interest rate. You don’t decide what interest rates are, the government does. So securing a lower interest rate loan isn’t a great strategic objective for your balanced scorecard.
Finally, every goal you commit to should be measurable. If you’re not able to measure your progress toward a specific objective, we recommend removing it from your balanced scorecard.
3. State Your Objectives Properly
Lastly, all of your objectives should begin with a verb, a word that implies action.
Because the purpose of listing your company’s goals in your balanced scorecard is to accomplish them. Using words like “reduce,” “optimize,” and “maximize,” will remind you of this.
Step 3: Flesh Out Your Strategy Map
At this point, you’re ready to combine the four perspectives and your company objectives into a visual map that can be easily seen, understood, and shared. Quickscore has created a perfect example of what this strategy map might look like:
Notice how each perspective has its own goals and a clear strategy can now be illustrated. To do so, simply draw arrows between each objective to depict the cause and effect chain your business intends to follow. The arrows make it easy to see what leads where and how every strategic goal within your organization is connected. When you’re able to view your company from this perspective, you’ll be able to make more strategic decisions and move your company forward more efficiently.
Step 4: Measure Company Success
The final step is to measure your company’s progress and success.
Are you moving closer to your goals or farther away?
Are the changes you’ve begun implementing working at the level you hoped they would?
If you’re not seeing the results that you expected, adjust. Just remember to only track one or two metric per strategic objective.
For example, if your goal is to improve customer satisfaction rates, you may attempt to track your company’s NPS score.
But doing much more than that will inevitably lead to confusion. Also, we recommend choosing the way you’ll measure progress and success after determining company strategy. That way your judgment won’t be clouded and you’ll choose to measure the right things.
A Balanced Scorecard in Action
There you have it, a four-step system to creating a balanced scorecard for your company. Before we end this article and let you go about the rest of your day, we wanted to share an example of what this business framework would look like in a real-life scenario.
Ben is the head of marketing at a software startup company in Austin, TX. He is passionate about his job and wants to help his company grow. While researching ways to do that, he stumbles upon the balanced scorecard framework.
He hopes that the process will lead to increased department efficiency and higher company profits. First, Ben understands that he must look at his department from four different perspectives, education, processes, end users, and financials.
He’s used to just looking at the financial aspect of his department and can already see how the other perspectives will shed valuable light on how improvements can be made.
Next, Ben sits down with his team to choose strategic objectives. Starting with the education perspective, the marketing department decides to focus on increasing expertise by investing in training materials and seminars. They also commit to improving company thought leadership by seeking out guest blogging opportunities. The team then chooses strategic objectives for the other three perspectives as well.
Once their goals have been chosen, Ben creates a strategy map to see how each goal affects the others in his department.
For example, the increase in knowledge gained via the training courses should lead to better marketing collateral (a processes goal), which should lead to more customers (an end-users goal), which should lead to increased company profits (a financial goal).
Finally, Ben decides that his team will measure total department training hours, the time it takes to create specific marketing materials, the number of customers gained per week, and the boost in company revenue generated on a monthly basis. Each of these metric correlates to the department’s strategic objectives.
The balanced scorecard framework will give you the ability to look at and assess your company properly. By looking at all four perspectives mentioned in this article, you’ll be able to accurately gauge the health of your business.
To create a balanced scorecard, first, look at your company through the lenses of education, processes, end users, and financials.
Then choose the strategic objectives that are most important to your organization and map them out. Finally, choose specific metrics for each chosen objective to analyze and measure. Good luck!