The Balanced Scorecard is a management system for improving performance. It’s a way of looking at your organization that focuses on your big-picture strategic goals. It also helps you choose the right things to measure so that you can reach those goals.
Companies often judge their health by how much money they make. Financial measures are definitely important, but they only tell the short-term part of the story.
The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance.
A balanced scorecard focuses on both high-level strategy and low-level measures. It takes your big, fuzzy strategic vision and breaks it down into specific, actionable steps.
The learning and growth perspective looks at your overall corporate culture.
Technology also plays a major role in learning and growth.
The internal business processes perspective looks at how smoothly your business is running. Efficiency is important here. It’s all about reducing waste, speeding things up, and doing more with less.
This perspective also encourages you to take a step back and get a little philosophical about your company.
The customer perspective focuses on the people who actually buy your products and services.
Customer satisfaction is a great forward-looking indicator of success. The way you treat your customers today directly impacts how much money you’ll make tomorrow.
Just because we're taking a balanced look at your organization doesn’t mean that we want to ignore traditional financial measures. Quite the contrary, the financial perspective is a major focus of the balanced scorecard.
The financial health of your organization may be a lagging indicator showing the result of past decisions, but it’s still incredibly important. Money keeps companies alive, and the financial perspective focuses solely on that.
In the early years of the balanced scorecard, each of the four perspectives were shown as being independent of the others. Over time, however, people began to discover that these perspectives affect each other in surprising ways.
It turns out that the way we order them matters. Modern balanced scorecards show how each perspective builds on the previous one.
If you train your employees and build a culture of information sharing...
They'll make your company run more smoothly.
A better running business takes better care of its customers.
Happy customers buy more of what you’re selling.
The next step in creating a balanced scorecard is to choose several strategic objectives for each perspective. Up until now we’ve dealt with large, vague concepts. This is where things get concrete.
Choosing your strategic objectives is definitely more art than science. It’s also one of those things that you can’t just outsource to a consultant to figure out on their own. The people who know the intimate details of your organization are very important here, so get them involved early.
Fortunately, we have some helpful guidelines. Every organization will have different strategic objectives, but all good strategic objectives are alike in several ways.
All of your strategic objectives should begin with an action word. Improve, Reduce, Increase, Optimize, Maximize, Minimize. These are all great words that involve doing something.
We’re looking for strategic objectives that you’re going to care about for quite a while. This isn’t about one-time events or deadlines. It’s about consistent improvement. It’s “Improve Win Percentage” not “Win the 2020 Super Bowl.”
There’s no use focusing on something that you can’t affect. For example, a lower federal interest rate may help your business, but it’s not something you can control. If it’s not actionable, keep it off your balanced scorecard.
Some things are just too difficult to quantify. These things are bad candidates for strategic objectives. If you can’t do a brand recognition survey, don’t choose “Improve Brand Recognition” as a strategic objective.
If you already know a little about the balanced scorecard, that graphic showing your strategic objectives on top of the four perspectives may look familiar. It’s the start of something called a strategy map, and it’s a common way to show an organization’s strategy at a glance.
The final step in creating a strategy map is to draw arrows between your strategic objectives that show the cause and effect chain.
You can read your balanced scorecard’s strategic flow by starting at the bottom and following the paths to the top. Your strategy map tells the story of your organization’s strategy.
Strategy maps are so important, in fact, that we’ve created an entire article just for them. We’re not done with balanced scorecards just yet, though!
The final building blocks of a balanced scorecard are measures. Every strategic objective should have one or two things that you measure to determine how it’s performing. These measures need goals and should be measured on a regular schedule.
For example, if a strategic objective were “Increase Acquisitions,” a good measure might be “Number of New Acquisitions.” If the strategic objective were “Increase Employee Expertise,” a good measure might be “Total Departmental Training Hours.”
It’s important to choose a very small number of measures to track. By limiting each strategic objective to one or two measures, you’re able to focus on the things that matter most. Tracking too many measures often means that nothing improves.
Finally, notice how we waited until the end of building our balanced scorecard to choose measures. That’s because it’s very important to figure out your overall strategy first. If you choose measures earlier in the process, you’ll almost certainly end up measuring the wrong things.
Balanced scorecards are broken down into four Perspectives. Each of these perspectives focuses on a different side of your company, creating a balanced view of your organization.
A strategy map tells the story of an organization’s strategy. It’s a chart showing the relationships between strategic objectives. Start at the bottom and follow the paths to the top.
Each perspective has several Strategic Objectives. These objectives are different for every organization. They should be endless, actionable, measurable, and start with a verb.
Each strategic objective has one or two Measures. Measures need goals and regular value updates. Choose them at the end or you’ll end up measuring the wrong things.
This article is definitely not the only resource on the internet. If you're interested in further reading, we recommend checking out the Balanced Scorecard Institute's Balanced Scorecard Basics article. Wikipedia is a great resource too if you're more interested in the history of the balanced scorecard. Finally, if you want more of a deep dive, Amazon has some great books available.