The Balanced Scorecard
What a BSC is
The Balanced Scorecard (BSC) was introduced in 1992 by Robert Kaplan and David Norton in an article in Harvard Business Review. Today it is one of the most widely used international references for turning strategy into objectives and managing a business against them.
So what is a Balanced Scorecard? Kaplan and Norton proposed it as a management system that looks beyond the financial view executives have traditionally used to judge their companies. Their argument was that by looking only at the numbers, companies ignore the intangible assets they are built on, such as customer relationships, the skills and abilities of their people, or innovative products and services. As a result, they miss important opportunities to create value.
With that in mind, we can define the Balanced Scorecard as:
A management model that translates a company’s strategy into a set of linked objectives, each measured through indicators and tied to specific action plans, so that what people across the organization do is aligned with what it is really trying to achieve.
Put simply, it is a way for a company to create value over the long term.
The first step in applying a balanced scorecard properly is to define the organization’s mission, vision and values. Strategy only holds together if these are clearly thought through.
- The mission is the organization’s reason for being. It steers what everyone does by giving a common basis for decisions.
- The vision is how the organization sees itself in the future, and it sets the direction it wants to take.
- The values are the foundation of the company and its people: the beliefs, ideals and ethics the organization stands for.
Once these are defined, the company builds its strategy, which can be shown as a strategy map. A strategy map is simply a visual representation of the organization’s strategy. It is made up of strategic objectives that describe where the organization wants to go and that are logically connected to one another.
These objectives should support the mission and become the means to achieve it, stating clearly what the organization is aiming for. The hard part is choosing the right objectives, and for that they need to be specific, measurable, achievable, realistic and time-bound.
Examples of objectives could be retaining profitable customers, improving the company’s image or raising service quality.
The balanced scorecard model then spreads the strategic objectives across four perspectives, so that the mission and vision are worked on from every angle:
- Financial perspective: what must the organization do to meet its shareholders’ expectations?
- Customer perspective: what must it do to meet its customers’ needs?
- Internal process perspective: which processes must it excel at to meet those needs?
- Learning and growth perspective: what does it need in order to sustain that level of excellence?
An example makes it easier to see. This is a cut-down strategy map for a services company, with one objective per perspective. Read it from the bottom up: each level drives the one above it.
If the team is not trained, issues take longer to fix; if they take longer, fewer customers renew; and if fewer renew, recurring revenue does not grow. That is why a financial indicator going the wrong way usually has its cause in one of the perspectives below it, and the map helps you find it.
The next step in rolling out the Balanced Scorecard is choosing the indicators, one of the most important stages of the process. Indicators are how the organization sees whether it is meeting the strategic objectives it set. They can be quantitative or qualitative, and they measure how far each objective has been achieved.
Indicators are based on metrics, which measure the organization’s activities. Each metric is compared with threshold values that show how well the indicator is performing.
Each objective will usually have several indicators, and together they show how far it has been met.
Implementing a scorecard brings a number of benefits, including:
- A clear picture of where the organization stands.
- A way to turn the mission, vision and values into concrete actions.
- Information from different areas brought together and aligned with the strategic objectives, so that everyone’s effort points towards the company’s vision and internal communication improves as a result.
The level of detail the Balanced Scorecard provides also gives managers a much better basis for analysis.
GlobalSuite® balanced scorecard software includes a module for managing balanced scorecards, used by organizations that want to manage, monitor and continuously improve their strategic objectives. GlobalSuite® also lets you build the strategy map visually and comes with ongoing reports.
