The Balanced Scorecard

The balanced scorecard has been heralded as one of the seventy five most influential business ideas of the twentieth century.

Many of us interested in performance measurement were using similar ideas before it became the next big thing for a while.

Developed by Robert Kaplan and David Norton, the idea is very simple.

The business should be managed for today and tomorrow across four perspectives with four or five key measures in each area:

  • The Finance Perspective – How the business looks to its shareholders and investors
  • The Customer Perspective – How the business looks to the customers
  • The Internal Business Process Perspective  – How is the business performing on its internal non-financial metrics?
  • The Learning & Growth Perspective – How well is the business managing for tomorrow by developing new products, markets and capabilities.

The Balanced Scorecard has evolved to provide a stronger link to business strategy but for our purposes I’m going to keep things simple and encourage you to think more widely about how you measure performance.

Balanced Scorecard

Financial Perspective

I’ve talked before about you trying to where at least two hats – you the shareholder holding you the chief executive accountable.

The finance measures provide information in their own right but also act as the reason for improving the measures in the other perspectives.

The first Balanced Scorecard book was written at a time when the Total Quality movement was getting a lot of attention and the argument was…

If you look after the customer… the customer will look after you.

A nice idea but there were quality award winners going bankrupt because… although the customers loved what they did… the business wasn’t making money.

Three general themes were suggested for the finance perspective

  • Revenue growth and mix… where the route to profit was seen to higher market share in a growing market.
  • Cost reduction and increased productivity… where markets offered little growth and increasing profits were available from cutting costs.
  • Asset utilisation and investment… focused on the “how is profit turning into cash” issues and whether the return on the money invested in the business was delivering the required return.

Slide 5 – Customer Perspective

This could have a combination of external measures, like the Net Promoter Score compared to internal measures for customer retention and profitability.

It could also include any statistics available on market share.

The customer perspective can also include major customer/product specific issues that make sure you quality and win business. We will be looking at those in Pillar 3 on your Strategic Market Position.

Business Processes

We will be having a look at process management in Pillar 8 Systemising Your Business.

This refers to how work gets done and is probably most commonly measured in manufacturing industries. It will include productivity, scrap rates and cost rates.

Business processes form the link to the next perspective Learning & Growth by looking at important processes concerned with current operations and  with developing the business of the future.

Learning & Growth

This area captures the improvements in people, systems and policies.

There is a danger of prioritising the present and neglecting the future developments of the business.

Balanced Between

I’ve taken you through the Balanced Scorecard because I want you to see there is much more to measuring performance than can be captured by your accounting system.

You need a measurement system which is balanced between:

  • Short term operational control and longer term strategic development
  • Outcome measures of the effects and performance drivers as the causes
  • Internal measures and external measures

I’ve reinforced the importance of understanding the performance drivers… what causes performance to be good or bad.

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