The Everything Guide to Business Scorecards: Balanced Scorecards
This post is part of a series for HR professionals and workplace leaders on business scorecards. Here, we’ll talk about the balanced scorecard and share some resources at the end of the post.
What is a Balanced Scorecard?
A balanced scorecard is a strategic management performance metric that helps companies identify and improve their internal operations to help their external outcomes. It measures past performance data and provides organizations with feedback on how to make better decisions in the future.
The premise of the balanced scorecard approach is that the financial accounting metrics companies traditionally follow to monitor strategic goals are insufficient to keep them on track. Financial results shed light on what has happened in the past, not on where the business is or should be headed. The balanced scorecard system can offer a more comprehensive view to stakeholders by augmenting financial measures with additional metrics that gauge performance in areas like customer satisfaction and product innovation.
The balanced scorecard framework was described in a 1992 article published in the Harvard Business Review by Robert S. Kaplan and David P. Norton, who are widely credited with having developed the balanced scorecard system. In the HBR article, The Balanced Scorecard—Measures that Drive Performance, Kaplan and Norton describe the purpose for the framework:
Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying an airplane, pilots need detailed information about many aspects of the flight. They need information on fuel, air speed, altitude, bearing, destination, and other indicators that summarize the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.
The Foundation of a Balanced Scorecard
There are four concepts that make up the foundation for a balanced scorecard approach that focuses on serving multiple stakeholders:
Economic Value-Add: These are financial numbers expected of the executive.
Customer Value-Add: CVA is defined as meeting customer-service goals.
People Value-Add: These are defined as meeting employee expectations.
Innovation & Learning Value-Add: These are defined as skilling employees.
The balanced scorecard minimizes information overload by limiting the number of measures used while giving senior managers information from these four different perspectives.
These are key in determining what your HR department should be reporting. And because each company is different, your HR team’s mission and analytics should fit into the picture of your entire organization’s goals as well as company culture.
What Does a Balanced Scorecard Look Like?
This is the example that Kaplan and Norton used to accompany their 1992 HBR article:
[source: The Balanced Scorecard—Measures that Drive Performance, HBR, 1992]
Balanced Scorecard Use Case
In their 1993 book, Putting the Balanced Scorecard to Work, Kaplan and Norton offered examples of how several companies applied the balanced scorecard, including one from what was then known as Apple Computer (now we just call them “Apple”).
According to the authors, Apple developed a balanced scorecard to expand the focus of senior management beyond metrics such as gross margin, return on equity and market share.
A small steering committee, versed in the strategic thinking of executive management, chose to include all four scorecard categories and develop measurements within each category.
– From the financial perspective of the scorecard, Apple emphasized shareholder value.
– For the customer perspective, it emphasized market share and customer satisfaction.
– For internal processes, it emphasized core competencies.
– For the innovation and improvement category, it stressed employee attitudes.
The highlights of Apple’s balanced scorecard planning:
– Apple wanted to shift its classification from a technology and product-focused company to a customer-centric company. Recognizing that it had a diverse customer base, Apple decided to go beyond the standard customer satisfaction metrics available at the time and develop its own independent surveys that tracked key market segments around the world.
– Apple executives wanted employees to focus deeply on a few key competencies, including user-friendly interfaces, powerful software architectures and effective distribution systems.
– Apple wanted to measure employee commitment and alignment with the strategic goals. The company deployed comprehensive employee surveys — as well as more frequent, small surveys of employees selected randomly — in order to measure how well employees understood the company’s strategy and whether or not the results they were asked to deliver by managers were consistent with it.
– Market share was important to senior management, not only for sales growth but also as a factor in attracting and retaining top software developers.
Apple also included shareholder value as a key performance indicator (KPI), even though this measure is a result, not a driver of strategic performance, Kaplan and Norton wrote.
Apple intended its emphasis on shareholder value to offset the previous emphasis on such short-term metrics as gross margin and sales growth, with a focus on investments that could impact future performance.
How to Develop a Balanced Scorecard
In Putting the Balanced Scorecard to Work, Kaplan and Norton offered guidance on how to build a balanced scorecard. The process they discussed applies to business units and describes what they refer to as “a typical project profile” for developing balanced scorecards. In brief, here are the eight actionable steps they list.
1. Preparation. The organization identifies the business unit for which a top-level scorecard is appropriate. Broadly defined, this is a business unit that has its own customers, distribution channels, production facilities and financial goals.
2. The first round of interviews. A balanced scorecard facilitator interviews senior managers for about 90 minutes each to obtain input on strategic goals and performance measures.
3. First executive workshop. Top management convenes with the facilitator to start developing the scorecard by reaching a consensus on the mission and strategy and linking the measurements to them. This can include video interviews with shareholders and customers.
4. The second round of interviews. The facilitator reviews, consolidates and documents input from the executive workshop and interviews each senior executive to form a tentative balanced scorecard.
5. Second executive workshop. Senior management, their subordinates and a larger number of middle managers debate the vision, strategy and the tentative scorecard. Working in groups, they discuss the measures, start to develop an implementation plan and formulate “stretch objectives for each of the proposed measures.”
6. Third executive workshop. Senior executives reach a consensus on the vision, objectives and measurements hashed out in the prior two workshops and develop stretch performance targets for each measure. Once this is complete, the team agrees on an implementation plan.
7. Implementation. A newly formed team implements a plan that aims to link performance measures to databases and IT systems, to communicate the balanced scorecard throughout the organization and to encourage the development of second-level metrics for decentralized units.
8. Periodic reviews. A quarterly or monthly “blue book” on the balanced scorecard measures is prepared and viewed by managers. The balanced scorecard metrics are revisited annually as a part of the strategic planning process.
The balanced scorecard is essentially a tool for monitoring the strategic decisions taken by the company based on indicators previously established and that should permeate through at least four aspects – financial, customer, internal processes and learning & growth.
DOWNLOAD: Balanced Scorecard Template (PDF)