What is a Balanced Scorecard?

The Balanced Scorecard

The Balanced Scorecard is a strategic performance management framework that has been designed to help an organisation monitor its performance and manage the execution of its strategy. In a recent world-wide study on management tool usage, the Balanced Scorecard was found to be the sixth most widely used management tool across the globe which also had one of the highest overall satisfaction ratings. In its simplest form the Balanced Scorecard breaks performance monitoring into four interconnected perspectives: Financial, Customer, Internal Processes and Learning & Growth.

Balanced Scorecard Perspectives

Here are the definition for the four Balanced Scorecard perspectives:

  • The Financial Perspective covers the financial objectives of an organisation and allows managers to track financial success and shareholder value.
  • The Customer Perspective covers the customer objectives such as customer satisfaction, market share goals as well as product and service attributes.
  • The Internal Process Perspective covers internal operational goals and outlines the key processes necessary to deliver the customer objectives.
  • The Learning and Growth Perspective covers the intangible drivers of future success such as human capital, organisational capital and information capital including skills, training, organisational culture, leadership, systems and databases.

From Measurement Dashboards to Strategy Maps

When it was first introduced the Balanced Scorecard perspectives were presented in a four-box model (see Figure above). Early adopters created Balanced Scorecards that were primarily used as improved performance measurement systems and many organisations produced management dashboards to provide a more comprehensive at a glance view of key performance indicators in these four perspectives.

However, this four box model has now been superseded by a Strategy Map (see Figure below for the generic template), which is at the heart of modern Balanced Scorecards. A Strategy Map places the four perspectives in relation to each other to show that the objectives support each other. For more information see also our white papers 'What is a modern Balanced Scorecard' and 'How to create a strategy map'

Cause-and-Effect Logic

A Strategy Map highlights that delivering the right performance in the one perspective (e.g. financial success) can only be achieved by delivering the objectives in the other perspectives (e.g. delivering what customers want). You basically create a map of interlinked objectives. For example:

  • The objectives in the Learning and Growth Perspective (e.g. developing the right competencies) underpin the objectives in the Internal Process Perspective (e.g. delivering high quality business processes).
  • The objectives in the Internal Process Perspective (e.g. delivering high quality business processes) underpin the objectives in the Customer Perspectives (e.g. gaining market share and repeat business).
  • Delivering the customer objectives should then lead to the achievement of the financial objectives in the Financial Perspective.

Strategy maps therefore outline what an organisations wants to accomplish (financial and customer objectives) and how it plans to accomplish it (internal process and learning and growth objectives). This cause-and-effect logic is one of the most important elements of best-practice Balanced Scorecards. It allows companies to create a truly integrated set of strategic objectives on a single page. For a large number of real-world best practice examples please visit our case study section
The danger with the initial four-box model was that companies can easily create a number of objectives and measures for each perspective without ever linking them. This can lead to silo activities as well as a strategy that is not cohesive or integrated.

How many companies use the Balanced Scorecard?

More than half of major companies in the US, Europe and Asia are using Balanced Scorecard approaches. The official figures vary slightly but the Gartner Group suggests that over 50% of large US firms have adopted the BSC. A recent global study by Bain & Co finds that the Balanced Scorecard is one of the top-ten most widely used management tools around the world. The widest use of the BSC approach has traditionally been in the US, the UK and Northern Europe, but there is very strong growth in Balanced Scorecard adoption in South America, the Middle East and Asia.

What are the Key Benefits of using Balanced Scorecards?

Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include (see Figure below):

  1. Better Strategic Planning - The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy.
  2. Improved Strategy Communication & Execution - The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This 'plan on a page' facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody.
  3. Better Management Information - The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making.
  4. Improved Performance Reporting - companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally.
  5. Better Strategic Alignment - organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations.
  6. Better Organisational Alignment - well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

These are compelling benefits; however, they won't be realised if the Balanced Scorecard is implemented half-heartedly or if too many short cuts are taken during the implementation. For a more in-depth discussion of the main pitfalls please read the API white paper 'What is a Balanced Scorecard'.

 

Government and Not-for-Profit Balanced Scorecards

While the Balanced Scorecard was initially designed for commercial companies, the framework has found wide-spread use in the public and not-for-profit sector. However, it is important to make a few changes to the strategy map template in order to make it suitable to government, public sector and not-for-profit organisations:

  • Move the Financial Perspective from top spot on the strategy map template. The overall objective of most public sector, government and not-for-profit organisations is not to make money, maximise profits or deliver shareholder return. While finance is important, it is usually not the overall reason why the organisation exists.
  • Instead, the main objective of public sector, government and not-for-profit organisations is to deliver services to their key stakeholders, which can be the public, central government bodies or certain communities. This perspective usually sits at the top of the template to highlight the key stakeholder deliverables and outcomes.
  • A decision that needs to be made is where to put the financial perspective? Here organisations have basically a number of options:
    1. Put the financial perspective at the bottom of the template. Here, money and infrastructure are seen as important resources that have to be managed as effectively and efficiently as possible to enable the delivery of the strategic output and outcome objectives.
    2. Put the financial perspective in second place underneath the stakeholder perspective. Here, making money is still seen as an important accomplishment of the organisation but delivering services to the beneficiary stakeholders is still the primary reason for its existence. The problem with this option is that it breaks the cause-and-effect logic and can therefore cause unnecessary confusion about the strategy.
    3. Put financial perspective next to the stakeholder perspective. Here, the strategy map indicates that these two perspectives are equally as important. For example, an organisation has to cover its costs to continue to operate and deliver benefits to its stakeholders.
    4. Run the financial perspective alongside the other perspectives. This is probably the most popular and sensible option as it indicates the organisational logic on the left but highlights the importance of finance across all objectives. (see the Figure below for the options a, b and d)
  •  Strategy maps have to represent the strategy of the organisation. Since the strategies of public and not-for-profit organisations differ widely, there are no right or wrong answers as to where the financial perspectives should go. For example, the American Diabetes Association has embedded the financial perspective within its stakeholder perspective while others have embedded it into their internal process perspective (e.g. delivering value for money processes).
  • The two remaining perspectives will largely stay as they are. Any  public sector, government and not-for-profit organisations needs to build the necessary human, information and organisational capital to deliver its key processes to support its overall objectives of serving its stakeholders.

For a more in-depth information of how government, public sector and not-for profit organisations have put scorecards into practice please read our white paper 'How to create a public sector scorecard, our report 'Balanced Scorecard for the Public Sector' or browse the many case studies featured in our knowledge hub. For a complete overview read our books "More with Less: Maximizing Value in the Public Sector" or "Managing and Delivering Performance: How Government, Public Sector and Not-for-Profit Organizations can measure and manage what really matters".

 

Conclusion

The idea of the Balanced Scorecard is simple but extremely powerful if implemented well. As long as you use the key ideas of the BSC to (a) create a unique strategy and visualise it in a cause-and-effect map, (b) align the organisation and its processes to the objectives identified in the strategic map, (c) design meaningful key performance indicators and (d) use them to facilitate learning and improved decision making you will end up with a powerful tool that should lead to better performance.

Practical Balanced Scorecard Examples

The API Knowledge Hub includes many examples, white papers, research reports and best practice case studies on how organisations have put the Balanced Scorecard concept into practice. Explore the white papers, case studies and articles for more in-depth information on this fascinating subject.