The Balanced Scorecard (BSC) is a strategy performance management tool - a semi-standard structured report, supported by proven design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. It is perhaps the best known of several such frameworks (it is the most widely adopted performance management framework reported in the annual survey of management tools undertaken by Bain & Company, and has been widely adopted in English-speaking western countries and Scandinavia in the early 1990s). Since 2000, use of the Balanced Scorecard, its derivatives (e.g., Performance Prism), and other similar tools (e.g., Results Based Management) has also become common in the Middle East, Asia and Spanish-speaking countries.
The characteristic of the Balanced Scorecard and its derivatives is the presentation of a mixture of financial and non-financial measures each compared to a 'target' value within a single concise report. The report is not meant to be a replacement for traditional financial or operational reports but a succinct summary that captures the information most relevant to those reading it. It is the method by which this 'most relevant' information is determined (i.e., the design processes used to select the content) that most differentiates the various versions of the tool in circulation.(The Balanced Scorecard also gives light to the company's vision and mission. These two elements must always be referred to when preparing a balance scorecard).
As a model of performance, the Balanced Scorecard is effective in that "it articulates the links between leading inputs (human and physical), processes, and lagging outcomes and focuses on the importance of managing these components to achieve the organization's strategic priorities."
The first versions of Balanced Scorecard asserted that relevance should derive from the corporate strategy, and proposed design methods that focused on choosing measures and targets associated with the main activities required to implement the strategy. As the initial audience for this were the readers of the Harvard Business Review, the proposal was translated into a form that made sense to a typical reader of that journal - one relevant to a mid-sized US business. Accordingly, initial designs were encouraged to measure three categories of non-financial measure in addition to financial outputs - those of "Customer," "Internal Business Processes" and "Learning and Growth." Clearly these categories were not so relevant to non-profits or units within complex organizations (which might have high degrees of internal specialization), and much of the early literature on Balanced Scorecard focused on suggestions of alternative 'perspectives' that might have more relevance to these groups.
Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in the late 1980s and early 1990s, and the modern performance management tools including Balanced Scorecard are significantly improved - being more flexible (to suit a wider range of organisational types) and more effective (as design methods have evolved to make them easier to design, and use).
Design of a Balanced Scorecard ultimately is about the identification of a small number of financial and non-financial measures and attaching targets to them, so that when they are reviewed it is possible to determine whether current performance 'meets expectations'. The idea behind this is that by alerting managers to areas where performance deviates from expectations, they can be encouraged to focus their attention on these areas, and hopefully as a result trigger improved performance within the part of the organization they lead.
The original thinking behind a Balanced Scorecard was for it to be focused on information relating to the implementation of a strategy, and, perhaps unsurprisingly, over time there has been a blurring of the boundaries between conventional strategic planning and control activities and those required to design a Balanced Scorecard. This is illustrated well by the four steps required to design a Balanced Scorecard included in Kaplan & Norton's writing on the subject in the late 1990s, where they assert four steps as being part of the Balanced Scorecard design process:
- Translating the vision into operational goals;
- Communicating the vision and link it to individual performance;
- Business planning; index setting
- Feedback and learning, and adjusting the strategy accordingly.
These steps go far beyond the simple task of identifying a small number of financial and non-financial measures, but illustrate the requirement for whatever design process is used to fit within broader thinking about how the resulting Balanced Scorecard will integrate with the wider business management process. This is also illustrated by books and articles referring to Balanced Scorecards confusing the design process elements and the Balanced Scorecard itself. In particular, it is common for people to refer to a "strategic linkage model" or "strategy map" as being a Balanced Scorecard.
Although it helps focus managers' attention on strategic issues and the management of the implementation of strategy, it is important to remember that the Balanced Scorecard itself has no role in the formation of strategy. In fact, Balanced Scorecards can comfortably co-exist with strategic planning systems and other tools.
The Balanced Scorecard is ultimately about choosing measures and targets. The various design methods proposed are intended to help in the identification of these measures and targets, usually by a process of abstraction that narrows the search space for a measure (e.g. find a measure to inform about a particular 'objective' within the Customer perspective, rather than simply finding a measure for 'Customer'). Although lists of general and industry-specific measure definitions can be found in the case studies and methodological articles and books presented in the references section. In general measure catalogues and suggestions from books are only helpful 'after the event' - in the same way that a Dictionary can help you confirm the spelling (and usage) of a word, but only once you have decided to use it proficiently.
Managing Balanced Scorecard
enior executives in organizations that have successfully implemented the Balanced Scorecard achieved success by integrating the roles of leadership and management. We now realize that the success of the Balanced Scorecard lies in its ability to provide a formal, systematic approach for simultaneous leadership and management. The Strategy-Focused Organization (SFO) framework describes five principles for achieving breakthrough performance with the Balanced Scorecard.
1. Translate strategy into operational terms. Leadership and management themes are central in creating a strategy map and Balanced Scorecard (BSC). Leaders use the BSC to communicate the strategy. Typically, the environment is changing, and the company must adopt a new strategy to succeed. Strategy is about choice. Companies can’t meet the expectations of all their possible customers. Strategy determines which customers the company decides to serve and the value proposition that it offers to win the loyalty of customers.
Describing the strategy via strategy maps and BSC helps leaders develop choices and fresh approaches to problems. Executives introduce new approaches and ideas to cope with change. The process shapes moods and ideas, and sets new directions.
The financial perspective features two strategic themes. The Revenue Growth theme requires leadership to identify the new products and services, new markets, and enhanced value proposition that broadens and deepens customer relationships. The Productivity theme features the management activities that improve the efficiency of existing resources and processes.
2. Align organization to strategy. Cascading the strategy down to decentralized divisions, business units and support functions, seems to be primarily a management function. It’s the task of translating a high-level strategy into aligned and integrated strategies at lower-level units. The alignment and cascading, however, allows for leadership to occur much deeper. Rather than dictating the company-level measures down to the operating units, the cascading process encourages each operating unit to define its own strategy— based on local market conditions, competition, operating technologies, and resources—to deliver on strategic goals. The most remarkable transformation occurs in support functions and shared services, such as HR, IT, finance and purchasing. The cascading process transforms support departments from functionally-oriented cost centers into strategic partners of line operating units and the company. By giving support departments the ability to articulate a clear strategy for how they add value, the heads of these units become leaders. They develop a mission and a strategy for their department, rather than just manage to a cost budget.
3. Make strategy everyone’s job. In this principle, three processes must be accomplished: 1) communicate; 2) align personal objectives; and 3) link variable pay to scorecard performance.
Communication is clearly a leadership role. Executives use the strategy map and scorecard to communicate the vision, mission, and strategy. Some executives tell us, “You can not overcommunicate; you need to find multiple ways to get the message out. You need to communicate seven times, seven different ways.” Effective, visionary communication helps leaders align and motivate their people. With a clear vision and strategy, everybody learns what the organization is trying to accomplish and how they can contribute. This generates intrinsic motivation. Employees come to work with more energy, creativity and initiative.
Setting personal goals and rewarding individuals for achieving them fall within the management responsibility. The flow naturally occurs from leadership to management. The SFO process enables executives to achieve a seamless integration of their leadership and management roles and align every individual to higher objectives.
4. Make strategy a continual process. This requires executives to: 1) integrate strategy with planning and budgeting; 2) introduce new reporting systems; and 3) lead a new meeting.
- In the new integrated planning and budgeting process, the executive team through shareholder, customer and competitive analysis—sets stretch performance targets for the strategic measures, screens strategic initiatives for achieving stretch target performance, and links its strategy to operational improvement programs. These practices help executives deliver on their management responsibilities.
- Introducing new information systems for data collection and data reporting also is a central part of managing and implementing new strategies.
- Leading a new management meeting means reviewing performance against plan (scorecard measures, not just financial ones); identifying shortfalls (the indicators in the RED zone); and devising solutions to rectify shortfalls. The new leadership processes in the management meeting are the questioning about the strategy, the search for inter-departmental solutions to fundamental problems, and adaptation and evolution of the strategy.
The most effective management meetings use double-loop learning in which executives examine and question assumptions on which their beliefs and strategy are based.
5. Mobilize change through executive leadership. Executive leaders play three different roles: 1) Mobilization: they communicate the need for change and create the coalition at the top to develop and deploy the strategy via strategy maps and Balanced Scorecards; 2) Governance: they establish the new systems for planning, budgeting, resource allocation, reporting, and the management meeting to reinforce the strategic message and keep the organization focused with adequate resources to achieve strategic objectives; and 3) Strategic Management: the executive reinforces the strategic message at every opportunity, asking “why, whatif, suppose that . . . " to emphasize learning and team problem-solving.
Key Performance Indicator (KPI)
Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), help an organization define and measure progress toward organizational goals.
Once an organization has analyzed its mission, identified all its stakeholders, and defined its goals, it needs a way to measure progress toward those goals. Key Performance Indicators are those measurements.
Key Performance Indicators are quantifiable measurements, agreed to beforehand, that reflect the critical success factors of an organization. They will differ depending on the organization.
- A business may have as one of its Key Performance Indicators the percentage of its income that comes from return customers.
- A school may focus its Key Performance Indicators on graduation rates of its students.
- A Customer Service Department may have as one of its Key Performance Indicators, in line with overall company KPIs, percentage of customer calls answered in the first minute.
- A Key Performance Indicator for a social service organization might be number of clients assisted during the year.
Whatever Key Performance Indicators are selected, they must reflect the organization's goals, they must be key to its success,and they must be quantifiable (measurable). Key Performance Indicators usually are long-term considerations. The definition of what they are and how they are measured do not change often. The goals for a particular Key Performance Indicator may change as the organization's goals change, or as it gets closer to achieving a goal.
Key Performance Indicators (KPIs) make some entrepreneurs shudder and remember exactly why they never want to work in a corporate. But scary acronym or not, KPIs can be an effective way of finetuning your business model and driving profits. This guide looks at what KPIs offer and how to use them:
- What KPIs are and how they work
- Why KPIs are important
- Choosing KPIs
- Using your KPIs
What KPIs are and how they work
KPIs provide a metric by which to measure and analyse a business function using a number rather than some sort of written assessment. So if call centre staff are taking 100 calls a day in June, compared with 95 in May, you can see at a glance they are being more productive.
- A numerical metric for a business function
Why KPIs are important
As your business grows it's important to know which elements are performing most effectively or badly and to know what trends, changes, peaks and troughs relate to. KPIs enable you to measure performance against targets objectively. KPIs are able to measure productivity beyond just finances.
- Track productivity and effectiveness of business functions
- Measure performance against targets
- Measure productivity beyond finances
It's important to choose KPIs that are worth measuring, ie they directly contribute to overall output and which you can influence. Typical KPIs include gross profit margin, return on capital, absence rates, sales figures, enquiries handled in a day, numbers of complaints, repeat orders.
- Choose KPIs according to relevancy
- Apply KPIs where you can affect change
Using your KPIs
KPIs aren't targets to make and hit. Set targets for performance, then use KPIs to monitor that progress. As a result, ensure staff don't view KPI assessment negatively and communicate they're just as likely to highlight strong performance as poor. Set targets in sensible time intervals but review KPIs more frequently to assess if those targets are being met and integrate into your daily / weekly reporting for full effect.
- Use targets and KPIs - but don't confuse them
- Communicate KPIs positively to staff
- Assess frequently