Organization leaders generally have a pretty clear picture of the direction they want their company to go. However, research shows that just 5% of the workforce understands their company’s strategy, and only 25% of managers have incentives linked to that strategy (Kaplan).
To help remedy this, Doctors Robert S. Kaplan and David P. Norton of Harvard Business School introduced the Balanced Scorecard in 1991. It has gained wide acceptance as an effective strategic management system, a performance measurement system, and a communication tool.
Simply put, the Balanced Scorecard enables organization leaders to convert mission, vision and strategy into specific and measurable goals, with action plans to achieve those goals. And it's actually quite easy to do.
The scorecard is described as “balanced” for the following reasons:
- It recognizes the need to balance financial indicators of success such as sales with non-financial indicators such as customer satisfaction (business measures).
- It balances internal requirements of employees and processes, with the external requirements of customers and shareholders.
- It looks at past performance (lagging indicators) such as financial statements as well as current performance (leading indicators) such as the measurement of daily business systems and processes.
- Finally, it provides a balance between short-term and long-term objectives.
A completed Balanced Scorecard will not only link your business strategy to measurable company goals, but it aligns employee efforts and business processes to those objectives. It is the foundation for creating a culture of continuous improvement!
The Four Perspectives of Balanced Scorecard Goals
When setting Balanced Scorecard goals, you will look at your business strategy from four different perspectives.
- The Financial Perspective promotes strategies for growth, profitability, cash flow, return on investment, and mitigation of risk, as viewed by an owner or shareholder.
- The Customer Perspective promotes strategies for creating product value, market differentiation, and customer loyalty.
- The Internal Processes Perspective promotes strategies for developing high-performance business systems and processes—operational excellence.
- The Learning and Growth Perspective promotes strategies that create a culture of continuous learning, innovation, and the personal growth and retention of valued people.
While a Balanced Scorecard may seem like a tool for big-business, it is simply a form divided into four sections, one for each of the four perspectives. In column one, you write several objectives within each perspective. In column two, indicate a unit of measure such as numbers, dollars or percent. In column three, express the target goal in that unit of measure. In column four, briefly indicate your plan of action to achieve the target goal.
Below is an example of an abbreviated Balanced Scorecard developed by a home builder.
Financial Perspective (How can we increase growth, profitability, cash flow, and return on investment?)
|Increase Sales growth
||Number of new housing
starts per month
|10 new starts||Expand geographic market / open new office|
|Improve profitability||Percent income from operations||10% profit margin||Reduce construction cycle time and unit costs|
Customer Perspective (How can we create product value, market differentiation, "killer customer care," and raving fans?)
|High-quality homes||Points / quality rating of subcontractors||Subcontractor must maintain 90 point average of 100 possible||Create a “quality” score sheet for each sub and provide them job feedback|
||Average days to complete||30 days from building permit to close||Intense scheduling system / reduce delay|
Internal Processes Perspective (What systems can we create or elevate to achieve operational excellence?)
|Fast Start—Minimize time from contract to building permit||Days in-process||Submit application to city within 5 days of customer contract||Reduce upfront interface and preparation time with customer|
|Effectively schedule sub-contractors||Percent of work started at scheduled time||75% of jobs started within 1 day of schedule||Purchase BuildStar management software|
Learning and Growth Perspective (How can we promote learning, innovation, and the personal growth and retention of valued people?)
|Subcontractor certification||Number of subs that are certified||75% of subs are certified||Create subcontractor certification program|
|Improve staff building-process skills||Number of skill sets times number of people||80% skill competency||Create a staff training program|
For instance, let's say from the financial perspective you want to increase sales by 20% next year. Your unit of measure is dollars. Your target goal is $1,000,000, and your plan of action is to spend 20% more money on lead-generation advertising.
In another example, from an internal processes perspective, your goal is to reduce product defects. Your unit of measure is percent. Your target goal is 99% yield, or expressed as 1% waste. Your action plan is to apply Six Sigma analysis to the manufacturing process and dramatically reduce production errors.
The Systems Thinker also aligns goals at the system level with the major Balanced Scorecard objectives of the company as described above.
Let's take a closer look. A company Balanced Scorecard has an objective of 10% sales growth in the coming year. The action plan is to add six more sales per week. Based on sales conversion rate in this example, the marketing department must receive twenty-four additional leads per week. To achieve this, their action plan for this System Scorecard objective is to increase the weekly advertising mailers by 1500. Likewise, the production department must increase its target to manufacture six more units per week. Every department plays a role in accomplishing the high-level company goals.
By cascading the strategy and objectives down through all levels of the organization, every employee and internal process is engaged in achieving a common set of goals. People throughout the organization ask, “Which company objectives or measures are we in the best position to influence?” and “What can we do at our level to help the organization achieve its goals?”
Strategy is everyone's job in a Balanced Scorecard environment. It is a top-down responsibility to communicate strategy and unite the workforce, and a bottom-up responsibility to internalize and execute the strategy.
In one page, your Balanced Scorecard tells the whole story—everything important—about your organization's current strategy and targeted objectives!
I have prepared several worksheets to help you determine your unique business strategy and create a company Balanced Scorecard. You can get them in the Zone.