Mar 16, 2010

Building Blocks of the Balanced Scorecard

The Balanced Scorecard (BSC) concept was created by Doctors Robert Kaplan and David Norton in 1992, and has been implemented by thousands of corporations, non-profit organizations, and government agencies worldwide. The Balanced Scorecard is a framework that describes and measures the strategy of an organization across four perspectives: financial, customer, internal processes and learning and growth. It has grown from a measurement system (that reports on past operating performance and the drivers of future performance) to powerful communication tool and to transformative strategic management system.

The Building Blocks of the Balanced Scorecard are:

Vision: A concise statement that defines the mid- to long-term (three to ten year) goals of the organization. The vision should be external and market-oriented and should express how the organization wants to be perceived by the world.

Mission: A concise internally focussed statement of the reason for the organization’s existence, the basic purpose toward which its activities are directed, and the values that guide employee’s activities. The mission should also describe how the organization expects to compete and deliver value to the customers.

Strategy: Strategy is about selecting the set of activities in which organization will excel to create a sustainable difference in the market place. The sustainable difference can be to deliver greater value to the customers than competitors, or to provide comparable value but at lower cost than competitors.

Perspectives: The basic premise behind the Balanced Scorecard is that Financial measures are important, but they must be supplemented with other indicators that predict future financial success. The Balanced Scorecard suggests that we view the organization from four perspectives, and develop metrics, collect data and analyze it relative to each of these perspectives. The four perspectives are: financial, customer, internal processes and learning and growth. The key questions asked in each of these perspectives are:

  • Financial: To succeed financially, how should we appear to our shareholders?
  • Customer: To achieve our vision, how should we appear to our customers?
  • Internal Business Process: To satisfy our shareholders and customers, what business processes must we excel at?
  • Learning and Growth: To achieve our vision, how will we sustain our ability to change and improve?
Key Objectives: At the center of the Balanced Scorecard framework is “vision” and “strategy.” The articulated vision and strategy are translated in to performance objectives and measures that can be tracked and used for the successful implementation of vision and strategy. We will arrive at strategic objectives under each of the perspectives by asking several questions and brain-storming. For example, under Customer perspective, we may ask questions such as “Who are our target customers?”, “What is our value proposition in serving them?”.

Measures: Key Performance Indicators (KPIs) are identified for each strategic objective. KPI is a measure of performance and measures progress toward organizational long-term goals. A Balanced Scorecard will contain a mix of KPIs and its associated lead indicators (also called performance drivers). These measures are not isolated; every measure selected should be an element in a chain of cause-and-effect relationships that communicates the strategy to the organization.

Targets: Targets for the measures identified. These are normally stretch targets that will allow breakthrough performance.

Initiatives: These are strategic initiatives identified to close the gap between the targets set and the current performance.

Strategy Map: A one-page graphical representation of what you must do well to execute your strategy. It is done in a plain and simple manner that is easily understood by every employee from top to bottom. It is a powerful communication tool to convey to all stakeholders what the organization is attempting to accomplish in a simple, coherent package (sample).

Scorecard/Dashboard: Scorecard gives performance measurement against targets and the measures are developed using a methodology such as Balanced Scorecard. Dashboard is normally an IT application that displays process measures and is rich in visual displays. A general dashboard need not display measures always against a target. It can have drill downs to analytical reports. There are several applications such as the one from Corporater that can be used to implement Balanced Scorecard System (a sample dashboard screen-shot from Corporater).

What makes the Balanced Scorecard so powerful? Let us explore this next week.

For more info on the Balanced Scorecard, refer Resources in CXO Dashboards. For regular updates on business performance measurement, please subscribe CXO Insights.

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