Using the Balanced Scorecard

Developing the value of your business

About the Balanced Scorecard

Robert Kaplan and David Norton, in their best-selling book The Balanced Scorecard, highlighted several ways in which business decision-makers can increase the long-term value of the business. Their approach applies the concept of shareholder value analysis, and is based on the premise that the traditional measures used by managers to see how well their organizations are performing, such as business ratios, productivity, unit costs, growth and profitability, are only a part of the picture. These measures are seen as providing a narrowly focused snapshot of how an organization performed in the past, and give little indication of likely future performance. In contrast, the Balanced Scorecard offers a measurement and management system that links strategic objectives to comprehensive performance indicators.

The success of the balanced scorecard approach lies in its ability to unify and integrate a set of indicators that measure the performance of key activities and processes at the core of the organization’s operations. This is seen as being valuable because it presents a balanced picture of overall performance, and highlights specific activities that need to be completed. Furthermore, the Balanced Scorecard takes into account four essential areas of activity, of which the traditional ‘hard’ financial measures are only one part. The three ‘soft’, quantifiable operational measures include:

• Customer perspective – how an organization is perceived by its customers
• Internal perspective – those issues in which the organization must excel
• Innovation and learning perspective – those areas where an organization must continue to improve and add value

Perspective	Goals	Measures
Financial	Increased profitability Share price performance Increased return on assets	Cash flows Cost reduction Gross margins Return on capital / equity / investments / sales
Customers	New customer acquisition Customer retention Customer satisfaction Cross-sales volumes	Market share Customer service and satisfaction Number of complaints Customer profitability Delivery times Units sold Number of customers
Internal processes	Improved core competencies Improved critical technologies Steamlined processes Improved employee morale	Efficiency improvements Improved lead times Reduced lead times Reduced waste Improved sourcing / supplier delivery Greater employee morale and satisfaction, and reduced staff turnover Internal audit standards Sales per employee
Innovation and learning processes	New product development Continuous improvement Employees' training and skills	Number of new products Sales of new products Number of employees receiving training Output from employees' training Training hours per employee Number and scope of skills learned

Implementing the Balanced Scorecard

The type, size and structure of an organization will determine the detail of the implementation process; however, the main stages involved include: Preparing and defining the strategy – the first requirement is to clearly define and communicate the strategy, ensuring that people have an understanding of the strategic objectives or goals, and the three or four critical success factors that are fundamental to achieving each major objective or goal. Deciding what to measure – goals and measures should be determined for each of the four perspectives (finance, customers, internal processes, and innovation and learning). Finalising and implementing the plan – invariably, further discussions are necessary to agree the detail of the goals and activities to be measured, and what precise measures should be used. those measures should be. Each measure needs an action to make it happen, and this is where the real value in the approach lies: deciding what action to take to achieve the goal. Once finalised, the plan needs to be communicated and implemented, with Balanced Scorecards being delegated throughout the organization (a v

ariation on the old theme of managing by objectives, which then spread through the organizational hierarchy). Publicising and using the results – while everyone should understand the overall objectives, deciding who should receive specific information, why and how often, are also important. Too much detail can lead to paralysis by analysis; too little and the benefits are lost, with too little action too late. The bottom line is to use the information to guide decisions, strengthening areas that need further action and using the process dynamically. Interestingly, evidence from businesses that have used this approach suggests that being seen to act can be as important as the action itself. Reviewing and revising the system – as with any management process, a final stage of review and revision is welcome, as this allows wrinkles to be smoothed out and new challenges to be set.

Some typical goals and measures are listed below:

Essentially, the Balanced Scorecard approach generates objectives in four business areas and then developing action plans for them to be achieved, with progress being regularly assessed.

One of the major criticisms of the approach is that it is overly prescriptive and scientific – concerned with measurement and quantitative rather than qualitative issues. The counter to this is two-fold: first, it does provide a structure, which can be adapted, for making decisions that are concerned with the long-term value of an organization. Second, it allows for qualitative measures to be included, and recognises that the four perspectives interrelate. However, as with any management tool or technique, the level of success achieved depends entirely on the quality of the inputs, and the way in which the system is implemented.