Balanced Scorecard

Best practice in use of scorecards is the ‘Balanced Scorecard’, introduced by Kaplan & Norton of Harvard Business School[i] . It was introduced to offset a short term view of organisations, where maximizing short term financial results could jeopardize a company’s long term future.

The balanced scorecard can also be considered a layered approach (compare with the continuous loop of the overview page), where each layer is supported by the layer below, summarized in this diagram.

The crucial point about the balanced scorecard is the ‘balanced’ part. The organisation develops its vision and strategy, which determines overall direction. This vision and strategy is then translated into a financial perspective – the shareholders view of the organisation. The precise measures will vary between organisations but multiple measures, up to dozens, are designed and incorporated. Financial measures will include the classic financial measures such as revenue, profit, RONA, ROE and so on.

 
Source: Developed from ‘The Strategy Focused Organisation’

The next logical perspective is the customer. For our financial metrics to be achieved our customers need to buy from us. So how must I look to my customers to achieve this? Again a set of metrics are designed that reflect the requirements of our customer perspective.

To service our customers we need a set of robust internal processes. So to achieve our customer objectives we need to identify the key internal processes and design further metrics which will enable us to monitor and improve those processes.

The final perspective – learning and growth – focuses on developing the people within the organisation, and the strength of the organisation itself. It would incorporate such areas as staff recruitment and retention, training and the process of knowledge management – turning tacit knowledge into explicit information. Plans and actual results flow up and down the perspectives as measures, but it is also important to understand that discoveries and experience at each point can influence the other areas around, giving both a top down and bottom up approach to the development of strategy and vision.

It is likely that many of the indicators used within an organisation currently can be recycled within a scorecard. New measures may need to be designed to support the alignment of the business with the strategy, but this will be a minority.

A scorecard will look something like this:

The Balanced Scorecards will cascade through an organisation. Divisions and regions will likely adopt similar frameworks to the head office, whereas departments and support areas will need their own specially designed. The user will need to be able to drill down from the top level of the organisation to understand performance at different levels, and also to supporting detail behind the measures. It is important, though, to retain the principle of ‘balance’ as you move through the scorecard hierarchy.

The Balanced Scorecard is a powerful framework for performance management, it requires a lot of effort to implement and execute, and it can deliver outstanding results. The Balanced Scorecard is one approach that is supported within the Business Intelligence Lifecycle delivered by Altimus.

To find out more about the balanced scorecard and how it can benefit you, call Altimus and speak to one of our experts, or contact us using the Information Request link.