What is a Balanced Scorecard?

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 1). 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However, this four box model has now been superseded by a Strategy Map (see Figure 2 for the generic template), which is the heart of modern Balanced Scorecards.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.


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. For 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.

About 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 study by Bain & Co finds that about 44% of organisations in North America use the BSC and a study in Germany, Switzerland, and Austria finds that 26% of firms use BSCs. The widest use of the BSC approach can be found in the US, the UK, Northern Europe and Japan.

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:

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'.

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 (see Figure 3).
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.
•  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 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 see the case study section or the book ‘Managing and Delivering Performance: How government, public sector and not-for-profit organisations 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.

The API resources library includes many examples and best practice case studies of 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.