Most businesses look at financial metrics when evaluating their performance, but that’s just one way to look at your organization. What can companies use to get a more holistic picture of their health to make sure they’re working toward their strategic goals?
The balanced scorecard (BSC) provides a solution. It’s a methodology that looks at your organization from other perspectives than just financial measures to show you a more “balanced” view of business performance. It enables organizations to take defined, actionable steps toward their larger vision, and encourages them to think about long-term growth in addition to how much money they’re making today.
The phrase “balanced scorecard” was first coined by Art Schneiderman, but became prominent following the publication of The Balanced Scorecard by Robert Kaplan and David Norton in the Harvard Business Review. Other organizations like the Balanced Scorecard Institute then built on the work of Kaplan and Norton, adding important innovations, and formalizing university-level certification programs. Learn more about the many benefits of a balanced scorecard and how it can help your business excel with strategy execution.
The Four Perspectives of a Balanced Scorecard
The balanced scorecard is a performance measurement system that looks at four aspects of a business, each focused on a different perspective of the organization. It considers the relationship between each perspective, and how they inform one another and your overall goals. The four perspectives of the balanced scorecard are:
Learning and Growth
This perspective assesses your organization’s culture, particularly your approach to training employees and sharing information. You’ll look at the effectiveness of training programs and how easy it is for employees to collaborate and share industry knowledge. Technology is a major factor in this perspective.
When you optimize learning and growth, internal business processes should go smoother. This perspective focuses on efficiency, detecting areas for improvement with internal processes and striving to do more with less. It also prompts you to take a step back and ask questions about whether you're providing the right products and services, and what you want to be best at.
With streamlined internal processes, your business is better equipped to serve customers. The customer perspective considers your target audience. Are you securing new customers and focusing on existing customer satisfaction? This perspective also allows you to see how you stack up against competitors. Is your overall market share growing?
If customers are happy, you can expect better financial performance. Although the balanced scorecard looks beyond just financial metrics, it definitely doesn’t exclude this crucial piece. Profit keeps businesses running, and the financial perspective ensures that you continue evaluating your organization’s finances.
10 Benefits of a Balanced Scorecard for Businesses
Since the balanced scorecard takes such a comprehensive view of a organization’s health, it has been widely implemented across industries and geographies to improve performance and help companies maintain a competitive advantage. Organizations that use this management tool will find numerous benefits, including:
1. Break strategy into things you can measure
When your strategic plans are backed by real data, you can track how you're doing over time and identify areas for improvement. The BSC breaks each of your four perspectives into several smaller objectives, and then creates measures for each of those objectives. By measuring real performance in all four perspectives, your organization will have a better understanding of how to turn your vague, high-level strategy into concrete measures you can improve.
2. See a balanced view of your organization
It’s in the name; the balanced scorecard approach gives you more accurate insights into the state of your business by looking at your organization from four perspectives: financial, customer, internal process, and learning and growth. Most companies are already tracking things in the financial perspective like how much money they make and whether they're spending within their budgets. These three additional perspectives help to provide a fuller and more long-term picture of the organization.
3. Improve strategic communication
The BSC provides a tool to communicate your strategy — the strategy map. A strategy map is a diagram that shows your organization's strategy on a single page. It’s like a dashboard that visualizes your strategy, making it easier to share big-picture objectives with the whole organization and ensure all team members are on the same page. It also facilitates better communication about strategy to external stakeholders, such as board members for companies, donors for nonprofits, and citizens for government.
4. Visualize strategic cause and effect
Order matters with the four balanced scorecard perspectives, and many strategy maps have arrows between their objectives to show the cause and effect relationships. By following the arrows’ paths, you can see how the objectives in the lower perspectives drive the success of the higher ones. These causal relationships are central to the idea of the balanced scorecard.
5. Improve organizational alignment
It can be challenging to ensure that people in the different levels in your organization are all working toward your big-picture goals. As the creators of your business strategy, your management team will know these objectives well, but what about everyone else?
The balanced scorecard communicates your strategy so everyone knows where you want to go and how they can help your organization get there. Strategic alignment means every department, team, and even individual employee are all working towards common organizational performance goals.
6. Drive accountability
With the BSC methodology, every objective is owned by a single employee or team. When something goes wrong, you'll know who to call. When something goes right, it's obvious who should get credit. Because of this, balanced scorecards not only boost accountability but also efficiency when addressing concerns.
7. Show employees see how they contribute
Every business unit in your organization is working on something different, and each employee has their own daily tasks. It's natural for people to only focus on short-term objectives, and they may not always understand how their duties relate to the overall organizational strategy.
The BSC addresses this problem by helping every person see how they affect your organization's performance, and by encouraging them to align their goals with your big-picture strategy. When employees can see how their efforts impact the broader organizational strategy, they clearly see the vital role they play in your business.
8. Support decision-making
Every objective in a balanced scorecard has real measures and concrete goals. Rather than relying on hunches or gut feelings, employees at every level of your organization can act decisively based on objective facts. Decision-making becomes decentralized and scalable. Decision makers are able to move forward with confidence.
Your most important measures are your key performance indicators (KPIs). These metrics are the handful of things you care about most in your organization. All KPIs are measures, not all measures are KPIs.
9. Improve poor performance
The BSC isn't only about measuring and communicating strategy, it's also about continuous improvement. When an objective starts to perform poorly, the balanced scorecard methodology encourages you to put a strategic initiative in place to fix its performance. Initiatives are short-term (about 18 months) with a start and end date.
This is where balanced scorecard software can be helpful. Spider Impact can help you manage your initiatives, predicting whether they'll finish on time and under budget. More importantly, it tells you whether your initiative is actually affecting your strategic objective's performance.
10. Adapt to changes
It's not common, but there are definitely times when shifting market conditions or black swan events will require rapid, aggressive changes to your business strategy. If you have a strategic management system like the BSC in place, you'll have guard rails that prevent your new strategy from becoming unbalanced. The balanced scorecard gives you the confidence to quickly make changes, knowing that you're not ignoring other areas of your business.
Kickstart the Benefits of a Balanced Scorecard Today
If you're struggling with a way to measure your organization's overall health, the balanced scorecard may be your missing piece. Similarly, if you have an existing BSC on paper but you aren’t getting the results you’re looking for, now is a great time to take your balanced scorecard to the next level.
For a complete performance management system that enables you to get the most out of your BSC, consider balanced scorecard software from Spider Strategies. Spider Impact brings your balanced scorecard to life, and we have the case studies to prove it. Sign up today for a live demo or free test drive.