In an era in which law firm performance is increasingly public – and a determining factor for where the best lawyers decide to practice – it seems clear that firm management would want to adopt tools that are proven to improve performance.
An increasing number of firms are now adopting this long-established tool and there is growing evidence that firms that employ balanced scorecards to drive strategy implementation have significantly improved shareholder returns.
We going to focus on what a balanced scorecard is and why it is important for a law firm.
- What is a Balanced Scorecard?
- How many companies use the Balanced Scorecard?
- Characteristics of the Balanced Scorecard Model
- How can a Balanced Scorecard Help an Organization?
- A Balanced Scorecard in the Law Firm
- What are the Benefits of Balanced Scorecard in a Company?
- What are the Pros and Cons of Balanced Scorecard?
- What is The Most Common Problem Organisations Encounter When Using The Balanced Scorecard?
- Why do Companies Use Balanced Scorecard?
- Why is it Important For Management to Use a Balanced Scorecard?
- Why Does Balanced Scorecard Differ From Company From Company?
- Why Are The Perspectives of The Balanced Scorecard Important For Managing a Company’s Performance
- What I Balanced Scorecard Example?
- What Are The Objectives of Balanced Scorecard?
- What Are The Key Components of a Balanced Scorecard?
- How Can You Improve Your Balanced Scorecard?
- What Companies Use a Balanced Scorecard?
- How do You Create a Balanced Scorecard?
- What is a Balanced Scorecard in Healthcare?
- Does Apple Use Balanced Scorecard?
- What is Balanced Scorecard in HR
- What is The Difference Between KPI And Balanced Scorecard?
- How do you Implement a Balanced Scorecard?
What is a Balanced Scorecard?
A balanced scorecard is a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Balanced scorecards are used to measure and provide feedback to organizations.
Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information and use it to make better decisions for the organization.
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton first introduced the balanced scorecard. The Harvard Business Review first published it in the 1992 article “The Balanced Scorecard—Measures That Drive Performance.”
Both Kaplan and Norton took previous metric performance measures and adapted them to include nonfinancial information.
The balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve learning and growth, business processes, customers, and finance.
The balanced scorecard is used to attain objectives, measurements, initiatives, and goals that result from these four primary functions of a business. Companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards.
The balanced scorecard can provide information about the company as a whole when viewing company objectives. An organization may use the balanced scorecard model to implement strategy mapping to see where value is added within an organization. A company also uses a balanced scorecard to develop strategic initiatives and strategic objectives.
How many companies use the Balanced Scorecard?
About half of major companies in the US, Europe and Asia are using Balanced Scorecard Approaches. The exact figures vary slightly but the Gartner Group suggests that over 50% of large US firms had adopted the BSC by the end of 2000.
A study by Bain & Co finds that about 44% of organisations in North America use the Balanced Scorecard and a study in Germany, Switzerland, and Austria finds that 26% of firms use Balanced Scorecards. The widest use of the Balanced Scorecard approach can be found in the US, the UK, Northern Europe and Japan.
Characteristics of the Balanced Scorecard Model
Information is collected and analyzed from four aspects of a business:
- Learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use the information to convert it to a competitive advantage over the industry.
- Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
- Customer perspectives are collected to gauge customer satisfaction with quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
- Financial data, such as sales, expenditures, and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected. The balanced scorecard is thus often referred to as a management tool rather than a measurement tool.
How can a Balanced Scorecard Help an Organization?
Businesses establish a balanced scorecard to align all their company activities. This type of performance management framework adds non-financial measures to traditional financial metrics and gives company leaders a more balanced view of how things are going.
By tracking non-financial measures, you can ensure you properly evaluate your relationships with employees, customers and suppliers — and your ability to maintain a sustainable business.
Clarifies Strategic Goals
A balanced scorecard helps in drafting organizational strategy by defining what is important to the company. Reporting production, program operations and service delivery metrics helps your company evaluate how well it is doing and where it needs to pay more attention, based on the company’s vision and mission.
For example, if customer satisfaction is a top priority, strategies to improve and maintain high levels become imperative.
Communicates Mission and Vision
A balanced scorecard helps managers communicate the same mission and vision throughout the company, at every level. Decision making and prioritization become easier because the scorecard establishes criteria for applicable programs.
For example, if internal business processes take too long, process improvement initiatives may take priority over other work, such as requiring employees to complete training courses on improving presentations skills.
Refines Measures and Metrics
Reviewing a balanced scorecard as part of the strategic management process may reveal you’re tracking the wrong things to really guide your company’s future plans. For example, if your balanced scorecard reports only the number of training hours completed by your employees, that may not reflect how many employees are ready to move into leadership roles.
If succession planning is important to your company, modifying your metric to reflect the business impact of training courses, such as individual contributors ready to take on management roles, makes more sense.
Enables Performance Analysis
Doing the right things at the right time with the right people takes experience and skill. Building a balanced scorecard helps you monitor how well your employees are executing on current plans. By then applying a SWOT analysis, you can identify the strengths to expand upon and the opportunities to exploit.
It may also reveal your weaknesses and potential threats. Developing a scorecard and aligning all activities to it can be transformation. It reflects and connects your company’s mission, vision and values.
Governs Operational Activities
The balanced scorecard helps to define key strategies and expected results. These main focus areas help employees understand what they have to take action on today and what they need to put aside until market conditions all for additional activities.
Without the automated data collection and reporting processes that are associated with scorecard generation, each department might follow their own strategy. A balanced scorecard unifies and governs the company’s operations.
A Balanced Scorecard in the Law Firm
There is more to a successful law firm than simply the financials. Surely the client warrants a mention? And perhaps the employees?
The Balanced Scorecard has four main categories of performance which are measured, and these are then fed in (possibly on a weighted basis) to the overall scorecard. The four dimensions are as follows:
- Financial performance – what is important for the partners (as the effective “shareholders” of the business)?
- Client performance – what is important for the firm’s clients?
- Internal process performance – how do our processes perform in delivering results for clients and partners?
- Learning and growth performance – how innovative are we and are we managing, developing and retaining human capital?
For the financial perspective, there is no shortage of common measures among law firms, but how many firms vary their metrics depending on the overall firm strategy, or departmental objectives?
For example, in recent years controlling operating costs might have been a key firm-wide objective. However, if a particular team is charged with penetrating a new market, or demonstrating a tangible return on some investment, metrics like sales growth or pipeline growth may in fact be more valuable.
When looking at client metrics, client satisfaction is a measure which is only just starting to take hold in the law firm world, but to my mind is absolutely critical.
Not only does it give some very clear feedback at face value, but the collection process can throw up some incredibly valuable insight that can be used to strengthen relationships and also present sales opportunities.
Another metric in this category that is common in the corporate world is NPS, or net promoter score, which essentially asks clients how likely they are to recommend the law firm to a friend.
While there is a bunch of research behind this theory, for lawyers that have grown up being told of the importance of “word of mouth” marketing, investigating the use of NPS should seem like a logical step.
When assessing business processes, we believe there are plenty of opportunities for firms to sharpen up their operational efficiency through better processes.
There are lots of different ways to assess processes and measure improvements too – take a particular process (say drafting a consultancy services agreement), aspects that can be measured (and improved) could include the time the process takes (which doesn’t have to translate to the price!), the number of defects (which might not be the same as complaints – defects might get picked up by an internal review), the number of steps in the process or perhaps the level of qualification/skill required to conduct various parts of the process.
Finally, learning and growth. Again, regular readers will know I’ve written quite a bit about the need for innovation in law firms, and it’s never been more important than in the current, highly competitive environment. New products and services, changes in operating models, adoption of new technology are all good examples of performance that can be measured by metrics that will support innovation.
Knowledge management is another critical area to investigate and could theoretically sit in either the business process category or here within learning and growth. The latter seems to me to be a better fit, but wherever it sits, it should be measured and form part of the performance management infrastructure at both a firm and an individual level given that law firms are knowledge businesses.
The other dimension to learning and growth is of course the development of human capital. Employee satisfaction and retention metrics might be a good place to start, but what about training (received and delivered) and subsequent productivity improvements? How about aligning training with strategy – for example are there new competencies the firm (or a team) needs to develop? If so, can attainment be measured and rewarded?
Ultimately, for these measures to be meaningful, they need to flow down to the individual level. In the corporate world it’s common to have a corporate scorecard that flows down to a business unit, which in turn flows down to a department, a team then an individual. The idea being that each of these levels “rolls up” to contribute to the scorecard of their parent unit.
In my experience of law firms this process happens, but only in terms of the financial data. Chargeable hours and utilisation rates roll up, but training targets and client metrics stay with the teams (if they exist at all).
This is a time when many firms are examining their strategy, their organization and their operating model. Taking a broader perspective to performance management can provide the data to support making changes, but critically can support the introduction of changes by driving the behavior that’s needed for successful implementation. It’s a cliche, but “if it’s not measured, it doesn’t matter”.
What are the Benefits of Balanced Scorecard in a Company?
Research has shown that organisations that use Leading Software for Balanced Scorecard Management tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include:
1. Better Strategic Planning
The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which helps managers to think about cause-and-effect relationships between the different strategic objectives.
The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy.
2. Improved Strategy Communication & Execution
Having a one-page picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words.
This ‘plan on a page’ facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy which they don’t fully understand.
3. Better Alignment of Projects and Initiatives
The Balanced Scorecard help organisations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.
4. Better Management Information
The Balanced Scorecard approach helps organisations design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.
5. Improved Performance Reporting
The Balanced Scorecard can be used to guide the design of performance reports and dashboards. This ensures that the management reporting focuses on the most important strategic issues and helps companies monitor the execution of their plan.
6. Better Organisational Alignment
The Balanced Scorecard enables companies to better align their organisational structure with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business units and support functions are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations.
7. Better Process Alignment
Well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.
What are the Pros and Cons of Balanced Scorecard?
Now that we’ve covered the basics surrounding balanced scorecards, let’s go over the pros and cons of using this performance measurement method for your organization.
Overall, a balanced scorecard helps companies focus on performance measurement in more than one area. It takes into account items that can sometimes get overlooked in a company such as internal processes and current customer satisfaction. Here are some of the biggest advantages of using this method in your business:
1. Brings structure to business strategy
Different departments within an organization may have their own way of measuring performance and what they consider to be important in terms of metrics. With a balanced scorecard, different leaders and departments can still individualize their performance measurement, but it all falls within a set structure that can be understood across the organization. It gives a common place to everyone in the company to measure success.
2. Makes communication easier
Communication across team members and departments becomes easier when everyone is speaking the same language. In other words, having a streamlined performance measurement system means that it’s easier to talk about strategy and progress within the organization.
3. Facilitates better alignment
With a balanced scorecard, members of the organization can easily link their objectives and goals at different levels of the company. It takes the guesswork out of trying to understand everyone’s responsibilities and it gets teams and departments synced up under one structure. This also leads to having a much clearer picture over projects and initiatives, which hopefully turns into a shorter turnaround time with more optimal results.
4. Connects the individual worker to organizational goals
A balanced scorecard helps employees “keep their eyes on the prize” so-to-speak in terms of goals. Individual workers may find it helps their own performance when they can see the greater purpose behind the goals and objectives they’re aiming to hit. It also has the added benefit of helping employees find purpose in the organization, thus keeping them engaged in their work.
While there are so many advantages to implementing a balanced scorecard system into your workplace, there are also potential roadblocks and disadvantages to balanced scorecards.
1. It must be tailored to the organization
A balanced scorecard is supposed to provide a framework from which to work from, however, it will still need to be customized to every organization using this system. This can take up a lot of time, and while examples are helpful, they can’t be copied exactly due to the unique needs of every business.
2. It needs buy-in from leadership to be successful
For the balanced scorecard system to be fully effective, it must be implemented from the bottom all the way to the top of the organization. This means getting buy-in from leaders, which can sometimes take some convincing, not to mention the learning curve involved with getting the whole organization to use the new system.
3. It can get complicated
The framework itself of balanced scorecards takes some time and dedication to understand. There are countless resources and case studies to read from and it’s easy to get bogged down with the many different ways of using this method.
4. It requires a lot of data
Most of the time balanced scorecards require managers and team members to report information, which means logging data. Many don’t like this because they find it tedious and also, it can get in the way of doing the work required to meet objectives.
What is The Most Common Problem Organisations Encounter When Using The Balanced Scorecard?
Here are some of the common issue we have seen over the past several years that can cause a Balanced Scorecard initiative to fail:
Poorly Defined Metrics
Metrics need to be relevant and clear. They should be depicted with visual indicators that are easily understood. In addition, metrics need to be collected at the ideal frequency for making decisions, and defined in such a way that the measurement can be consistently applied across the firm, even if their targets of performance differ (and they should).
A system that has sloppy or inconsistently defined metrics will be vulnerable to criticism by people who want to avoid accountability for results.
Lack of Efficient Data Collection and Reporting
A primary reason that companies overemphasize financial metrics at the expense of other important operating variables is the simple fact that systems already exist for collecting and reporting financial measures. Companies that deliberately plan to define the vital few metrics and commit the resources to automate data collection and subsequent reporting tend to achieve good results.
Unfortunately, in most organizations, if collecting metrics data consumes too much time and energy, they will not be captured. That is why it is important to prioritize key performance indicators so you can be confident that your investment in metrics is spent on the information that will be most relevant to improving organizational performance.
Lack of a Formal Review Structure
Scorecards work best when they are reviewed frequently enough to make a difference. If a metric value changes on a daily basis and the variables within the control of management can be affected on a daily basis, then the metric should be reviewed on a daily basis.
Additionally, metrics review meetings should follow a standard agenda, with clearly defined roles for all attendees and an expectation that follow through on any agreed upon actions will be monitored at each meeting.
Finally, review of metrics is ideally cross-functional, including peer groups who have a shared responsibility for process results. It is important to begin these meetings as early as possible in the deployment of a new metrics system.
Do not wait until all of the metrics are defined, automated and deployed. Start with the metrics you already have defined and with manual data collection, if necessary. This is an important behavior change, which is essential for the success of your metrics program.
No Process Improvement Methodology
The value of Balance Scorecard systems relies on the premise that once performance problems are identified, there is an efficient and effective method for diagnosing and addressing root causes. Solutions can then be developed and performance gaps can be closed.
If the organization does not have standard methodologies and toolkits for addressing process problems, the amount of effort required to derive a problem solving approach for each new performance gap could eventually damage the performance improvement program as it will be seen as taking too many resources away from daily operations.
When this happens, there can be no adaptation and performance will continue to deteriorate. Using time-tested process improvement methodologies, perhaps in combination with problem solving methodologies (e.g. Six Sigma) can greatly alleviate this problem.
Too Much Internal Focus
One major criticism of the Balanced Scorecard is that it encourages an internal focus. This is not as much an indictment of the principle as it is the way companies put the principle into practice. To help overcome this problem, you should ALWAYS start with an external focus – the view of your organization’s SuperSystem.
The goal is to achieve a balance of enterprise level metrics as you assess the organization’s market, shareholders, competitors, employees and stakeholders. Executives will use data about their SuperSystem to assess Strengths, Weaknesses, Opportunities and Threats (SWOT).
This will then guide them to gaps in their enterprise level metrics. Then, all other levels of metrics are tested for alignment with the enterprise level metrics, thereby ensuring that even internal metrics link to external performance drivers.
Why do Companies Use Balanced Scorecard?
While financial measures tell part of the story, the Balanced Scorecard offers an overarching view a business’s strategic plan from the executive perspective. This, in turn, provides a framework for the entire organization in terms of guiding performance. Specific reasons that a company would use a Balanced Scorecard might include:
- Communicate the business vision and strategy.
- Share objectives that support the business’s vision and strategy
- Show how these strategic objectives impact long-term goals and budgets.
- Create goal-based budgeting, tracking, and reward systems.
- Facilitate organizational changes at the operational level.
- Compare performance among diverse business units.
- Tighten up gaps in terms of strategy and performance.
- Take action to close unfavorable gaps.
Why is it Important For Management to Use a Balanced Scorecard?
If you are looking at different management frameworks for your large organization, here are four critical benefits that highlight the importance of the Balanced Scorecard (BSC) in strategic management.
1. The Balanced Scorecard can tie your long-term strategy into a short-term set of goals.
It’s much easier to look out a year in advance than it is to look out five or 10 years in advance—but large organizations know that it’s critical to do scenario planning for well into the future.
For instance, companies may determine how they would react if the economy were to shrink by 5% or grow by 3%—and how every scenario would impact their strategy. They also may run environmental scans to look at what would happen in the event of major changes in their business environment. For example, what if two of their competitors merged?
These techniques allow large firms to implement long-term strategic views—and using the Balanced Scorecard as a management framework allows such organizations to interact with long-term “what if” scenarios alongside their shorter-term strategic plans. Your strategic plan in your Balanced Scorecard would take into consideration some of these long term views.
2. The Balanced Scorecard is a “framework of frameworks.”
The Balanced Scorecard is unique in that it’s a management framework that is flexible enough to manage multiple other frameworks.
For example, many large corporations have sophisticated approaches to finances, customer relations, or human resources. To help organize these systems, they may rely on any number of frameworks (for instance, Six Sigma Black Belt or Total Quality Management).
The beauty of the BSC is that it can act as the organization system for all other management frameworks and help employees throughout the company see the connection between their departmental approaches and put them into context.
3. The Balanced Scorecard can help manage diverse company units.
Big organizations tend to have very diverse units, divisions, and departments—and these groups are all ideally working toward the same strategy.
For example, a large municipality could have hundreds to thousands of individuals working in transportation, public safety, or parks and recreation—this combination of employees could be so diverse that, outside of the highest levels of leadership, they may not interact with each other at all.
The Balanced Scorecard allows you to ensure that every department sees and understands clear linkages between its own strategy and the strategy of the organization as a whole. This gives employees a clean line of sight into how their role is translatable across the organization and where the commonalities between departments lie.
Note: The BSC can also be deployed independently in a single division or department without interfering elsewhere. This isn’t necessarily recommended, but it can be done if the circumstances don’t allow for company-wide strategic alignment.
4. You can use the Balanced Scorecard to manage numerous data sources.
One of the major challenges in large organizations is managing the hundreds of sources for data. Since the BSC relies on strategic measures across the organization, bringing them all into one common place can be a huge challenge.
In fact, we’ve seen large companies with strategy teams of 3-5 people working full time on gathering data in order to create their scorecard or most recent report—and, of course, this kind of overhead can quickly kill a strategy.
When using a robust Balanced Scorecard software, you can automatically upload data from a variety of sources or accept as many individuals as you’d like to input data sources. This makes reporting far easier and helps large companies get a handle on both organizational and departmental strategies.
Why Does Balanced Scorecard Differ From Company From Company?
The Balanced Scorecard (BSC) framework might not really differ from company to company. This is because the ‘BSC framework’ or the ‘BSC system’ (e.g. the Kaplan-Norton BSC framework, also known as the XPP – Execution Premium Process) is a collection of guiding concepts, tools and best practices that can be applied to all types and sizes of companies, in all geographies and industries.
However, the detailed Strategy of every company is different from others, in the same way as human body’s detailed characteristics are different from one person to another. The Balanced Scorecard system helps us implement/execute the Strategy.
In consequence, the details of the Strategic Plan and of its ‘organizational alignment’ and ‘operational integration’ are different from one company to another, as well.
It is commonly considered that the ‘strategic model’, or’ BSC model’ (all the detailed components of the Strategy and of the aligned, integrated Strategic Plan and the relationships between them) is specific to each company.
Furthermore, since the situation of every company differs along the time, this model is different, for the same company, even from one year to another.
In conclusion, the details of the Balanced Scorecard model (not the Balanced Scorecard framework/system) is different from one company to another and even different, for the same company, from one annual or multi-annual interval to another.
Why Are The Perspectives of The Balanced Scorecard Important For Managing a Company’s Performance
The following are the key areas that a balanced scorecard focuses on:
1. Financial perspective
Under the financial perspective, the goal of a company is to ensure that it earns a return on the investments made and manages key risks involved in running the business. The goals can be achieved by satisfying the needs of all players involved with the business, such as the shareholders, customers, and suppliers.
The shareholders are an integral part of the business since they are the providers of capital; they should be happy when the company achieves financial success. They want to be sure that the company is continually generating revenues and that the organization meets goals such as improving profitability and developing new revenue sources.
Steps taken to achieve such goals may include introducing new products and services, improving the company’s value proposition, and cutting down on the costs of doing business.
2. Customer perspective
The customer perspective monitors how the entity is providing value to its customers and determines the level of customer satisfaction with the company’s products or services. Customer satisfaction is an indicator of the company’s success. How well a company treats its customers can obviously affect its profitability.
The balanced scorecard considers the company’s reputation versus its competitors. How do customers see your company vis-à-vis your competitors? It enables the organization to step out of its comfort zone to view itself from the customer’s point of view rather than just from an internal perspective.
Some of the strategies that a company can focus on to improve its reputation among customers include improving product quality, enhancing the customer shopping experience, and adjusting the prices of its main products and services.
3. Internal business processes perspective
A business’ internal processes determine how well the entity runs. A balanced scorecard puts into perspective the measures and objectives that can help the business run more effectively.
Also, the scorecard helps evaluate the company’s products or services and determine whether they conform to the standards that customers desire. A key part of this perspective is aiming to answer the question, “What are we good at?”
The answer to that question can help the company formulate marketing strategies and pursue innovations that lead to the creation of new and improved ways of meeting the needs of customers.
4. Organizational capacity perspective
Organizational capacity is important in optimizing goals and objectives with favorable results. The personnel in the organization’s departments are required to demonstrate high performance in terms of leadership, the entity’s culture, application of knowledge, and skill sets.
Proper infrastructure is required for the organization to deliver according to the expectations of management. For example, the organization should use the latest technology to automate activities and ensure a smooth flow of activities.
What I Balanced Scorecard Example?
What we would like to present now are 3 examples of strategic maps that are generated during the development of Balanced Scorecard projects, which summarize all of the work for the organization, including objectives, targets, indicators, and also the actions and initiatives that should be implemented.
1. Balanced Scorecard example: Strategic map for a Craft Brewery
2. Balanced Scorecard example: Strategic map for a Jewelry store
3. Balanced Scorecard example: Strategic map for an E-Commerce Business
The examples of Balanced Scorecards presented are entirely hypothetical and rather schematic. Usually, they may contain more initiatives for each objective, as well as more goals. The important thing is to understand the concept and how to use it correctly in your particular business.
What Are The Objectives of Balanced Scorecard?
To ensure long-term flexibility and survival, an organization needs to prepare for the future. The balanced scorecard managing system “maps an organization’s strategic objectives into performance metrics in four perspectives: financial, internal processes, customers and learning and growth,” reports NetMBA.
It offers an approach to deciding where your small business is heading, what you need to get there, and what you need to measure and control to achieve your goals.
According to Advance Performance Institute, “organizations that use a balanced scorecard approach tend to outperform organizations without a formal approach to strategic performance management.”
Balanced scorecard methods offers better strategic planning, improved strategy communication and execution, and better management information. Companies using a balanced scoreboard, or BSC, produce better performance reports, and better align their organizational processes with strategic goals.
Each BSC perspective has its own objectives. The customer perspective covers customer satisfaction, market share goals, and the attributes of products and services. The internal process perspective outlines the processes necessary to deliver on customer objectives as well as internal operational goals.
The financial perspective allows managers to track shareholder value as well as financial success and the financial objectives of the organization. The “intangible drivers of future success, such as human capital, organizational capital and informational capital” belong under the learning and growth perspective, reports API.
“Strategy maps are communication tools used to tell a story of how value is created for the organization,” says Balanced Scorecard Institute. They use a cause and effect chain to show the logical connections between strategic objectives.
Objectives in the learning and growth perspective are on the bottom row, next is the internal process perspective, followed by the customer and financial perspectives in the top two rows. Generally, improving performance in a given row leads to improved performance in the rows above.
After you determine your organization’s objectives, you need to identify measures to determine if you are on track to reach each objective. These measures are key performance indicators, or KPIs. Focus is important, so make sure to pick only one to three KPIs for each objective that are the best indicators of achievement for that particular goal.
Assume that your small business wants to become the largest maker of widgets in the country. One of the company’s main strategies to accomplish this is to increase turnover. From a financial perspective, you want an increase turnover by 17 percent compared with last year, defining the financial objectives.
Customers provide that turnover, so they need to receive their deliveries on time, which is the customer objective. The internal process objectives answer the question: What has to be done to ensure customers receive their orders on time?
Finally, your innovation objectives include whatever infrastructure changes are required to accomplish your strategy; for instance, install new production machinery or rearranging office space for team building.
What Are The Key Components of a Balanced Scorecard?
The financial component of the balanced scorecard includes how well the company is doing financially with revenue and expenses. Financial considerations include salaries, cost of benefits, training, travel expenses, equipment, supplies, rent and taxes. This information can assist HR in determining ways to cut costs in certain areas.
For example, HR may decide that benefits are a major portion of revenue and research more economical alternatives. Also, a change in travel policy may result in less air travel expense.
The customer component of the balanced scorecard includes such areas as customer satisfaction, delivery of product and quick response to customer issues. Customer concerns can include the quality of the product and the costs incurred for packing and shipping a product.
HR can send out surveys to customers to determine their levels of satisfaction and concerns. The company can then give attention to those areas and make immediate improvements if necessary.
The processes component of the balanced scorecard relates to the internal processes the company uses to get the work done. Such areas as information technology hardware and software may be considered to determine efficiency in time and cost.
Also, the company needs to detail and report accounting functions according to accounting rules. HR also can identify if the processes, including recruiting, staffing, orientation and maintaining employees, are providing the desired business results.
Learning and Growth Component
The learning and growth component of the balanced scorecard refers to how much the company has learned and improved during the years of operation. In reviewing this area, employee satisfaction and morale are two critical factors. Other areas include continuous improvement and change.
HR can work to improve weaker areas by developing strong performance improvement and training programs. Establishing award and recognition programs may be another HR strategy practice identified by the scorecard.
How Can You Improve Your Balanced Scorecard?
If you want your Balanced Scorecard report to be really impactful, there are a few elements that we highly suggest you take into consideration beforehand.
1. Report elements should be agreed upon beforehand.
If your organization’s departments are, for example, using different measures to examine revenue growth, that may become a sticking point in the meeting. In other words, if one department is focused on increased income and another is adamant on lowering overhead costs, that discussion may dominate your meeting time.
To avoid this situation and stay focused on what matters, make sure all departments have agreed upon the report elements beforehand.
2. The report should flow logically.
Your report shouldn’t jump around without any rhyme or reason. Instead, walk through the elements of your Balanced Scorecard in a logical manner:
- First, your strategy map should be at the top.
- Second, objectives are contained in the strategy map and should be examined in greater detail.
- Next, measures provide you with a hard indicator of the progress you’ve made toward your objectives. In other words, they are the hard values that show you how you’re actually doing.
- Finally, projects are put in place to improve measure performance, and should be the last thing discussed.
If you keep the agenda at the map and objective level, then the measures and projects can support the objectives as appropriate to the discussion.
3. Be sure to color-code.
Assigning red, amber, and green (RAG) statuses provides a quick and easy way to see how a particular element of your report is performing. For example, if you see that two of your objectives are green, you likely don’t need to have a lengthy conversation about them. Everyone in the meeting can immediately see this and place more focus on the yellow and red areas.
That being said, don’t forget to celebrate some green success every now and then. You might even have additional resources in these areas that you can apply to help move another part of your strategy from amber to green for the next quarter.
4. Include commentary in the report.
While assigning RAG statuses is important, simply saying “this objective is yellow” is insufficient. Everyone in the meeting wants to understand why your report elements are the way they are and how that may impact future performance—and additional commentary is a good way to keep everyone informed on this. This goes for every element of your report, from objectives, to measures, to projects.
Some organizations think that creating pretty dashboards should be enough to drive a meeting, but the devil is in the details.
Having every person accountable for an element in the report write some analysis ahead of time will have a big impact on the quality of the meeting. Make sure that your reporting software or supporting mechanisms for your scorecard can accommodate this analysis in an easy-to-view way.
5. Create a uniform look.
If you want to create a Balanced Scorecard report that helps drive great decisions, make sure it’s easy to pull information out of it! For example, your charts should have consistent colors and branding. This helps attendees spend more time on decision-making and less time scratching their heads over what the bars, lines, or colors you’ve used actually mean.
If you are using Excel and PowerPoint, you may find ‘look and feel’ is easy to maintain initially—but as people start making updates, you will find that uniformity quickly spirals out of control. If you are struggling in this area, now might be a good time to look at software as an option for managing your scorecard.
What Companies Use a Balanced Scorecard?
- Ford Motor Company
- Wells Fargo
- TD Canada Trust
- Mobil North America Marketing and Refining (NAM&R)
- Veolia Water
- Philips Electronics
- Sunnybrook Health Sciences Centre at the University of Toronto Hospital
- FMC Corporation
- Microsoft Latin America
- Local Government:
- City of Charlotte, NC
- U.S. Government:
- Defence Logistics Agency
- Federal Bureau of Investigations (FBI)
- Higher Education:
- University of Virginia
How do You Create a Balanced Scorecard?
Lucidchart is a diagramming solution that helps executive leaders, managers, and employees create powerful visuals for their businesses. Use Lucidchart to create a custom balanced scorecard that elegantly communicates your strategic goals and keeps everyone on track to meet performance benchmarks.
Whether you customize a pre-made template or start your own diagram from scratch, you can create beautiful visualizations at the click of a button in Lucidchart.
Data linking lets you import data directly to your document so you can get real-time updates and see all your information at a glance. Plus, conditional formatting lets you build visual cues right into the design so you can quickly see progress on goals or identify metrics that need the most attention.
The beauty of the balanced scorecard is in its simplicity and flexibility. With the help of Lucidchart, you can quickly structure a strategic management system that works across the entire organization.
What is a Balanced Scorecard in Healthcare?
Healthcare professionals and administrators work hard to meet their organizational goals, but it’s not always easy.
The goals created by a healthcare group are more organized and clear when using the four perspectives—customer, internal processes, financial, and learning/growth—detailed in the Balanced Scorecard.
These categories complement each other and make it possible for both large healthcare networks and small community hospitals to meet and exceed their strategic goals. Stakes are high in the healthcare industry—achieving goals can literally be the difference between life and death.
Does Apple Use Balanced Scorecard?
Apple Inc’s senior management came to a point when they needed to focus on a strategy that would help improve their gross margin and return on equity (net income divided by shareholder’s equity). The balanced scorecard measurements they developed to address ongoing business issues were in four categories, and each KPI was designed to improve those categories.
Financially, the leadership focused on shareholders. For the customer, they measured increases in their market share and customer satisfaction levels. For employees, leadership focused on building core competencies and conducted surveys to understand how well employees understood company strategy.
Except for shareholder value, Apple used horizontal and vertical strategic objectives in every balanced scorecard category. Leadership understood the value of breaking down the parts in order to make the whole organization function better.
Most of all, the balanced scorecards helped Apple develop measurable outputs for launching and growing new products.
What is Balanced Scorecard in HR
Balanced Scorecards for human resources (HR) have a lot in common with enterprise-level Balanced Scorecards, but they also have a lot of differences.
What do they have in common?
- They both have objectives, measures, initiatives, and action items.
- They both often use strategy maps.
- They both have four perspectives: financial, customer, internal, and learning & growth.
- They are used to describe a specific strategy and execute it.
How are they different?
- While for-profit, organization-wide scorecards traditionally place the financial perspective at the top of the strategy map, an HR scorecard usually does not. The HR department’s primary goal isn’t to make money; it’s to support its “customers” (more on those below). Many HR scorecards put their customer and financial perspectives side by side to indicate a balance between what they spend and how they help their customers, but place their mission or vision at the top.
- HR “customers” are typically internal to the business. While a traditional scorecard uses the customer perspective to refer to people who purchase from the company, HR customers are both (A) business partners or business units within the organization and (B) employees of the organization. (Many HR departments will call out both sets of customers in their scorecard.)
- The internal perspective themes in an HR scorecard are unique from traditional scorecards. Michael Treacy and Fred Wiersema, who have written extensively on the topic, explain that, in a traditional scorecard, business processes are often divided into three areas: innovation, customer intimacy, and operational excellence. But a Balanced Scorecard in HR is more likely to have an internal perspective that revolves around key strategic areas in which the department operates—like recruiting and retaining talent or building a high-performance culture.
What is The Difference Between KPI And Balanced Scorecard?
People are often talking about different ways of business measurement and control. The most popular approaches are KPI (Key Performance Indicators) and Balanced Scorecard. While both concepts refer to the business performance management, there is still a significant difference.
Actually, we can think about KPI as a part of Balanced Scorecard. Balanced Scorecard measures business using several (usually 4 or 5) basic groups. Each group has indicators inside. What indicators should be there” Correct! Key Performance Indicators.
Is Balanced Scorecard a better approach” Actually, yes. It gives more flexibility. For instance, you’re able to specify relative importance of indicators, e.g. balance them. When KPI will do its job better than Balanced Scorecard” When you are not interested in global view over the performance problems (this is what Balanced Scorecard provides), but need to focus on a very tight niche, more over on some certain aspect of this niche, for instance, “Finances”.
Let’s give some samples. Scorecard for HR will include various viewpoints on HR process, including financial aspect, management and educational aspects. All Balanced Scorecard groups will include several indicators that will help to measure business.
HR KPI will focus only on some certain aspects of HR. For instance, it may cover the most valuable (with bigger weights) indicators from scorecard. Or will have only indicators from certain group.
Is there any other value with Balanced Scorecard” Again, I”m happy to answer YES! The Balanced Scorecard concept suggests representing information about business performance in a four perspectives ” Finance, Customer Relations, Education and Internal Processes. It is important as in this way you are able to cover all your business or all aspects of some business unit.
Finally, both approaches deal with metrics, e.g. some way to measure non-numeric values. For instance, to tell how good your customer support service is (non-numeric value), you will be able to specify several metrics, that will cover various aspects of customer support service. These metrics will give an estimation about response quality so that the final result will be a performance in percents.
How do you Implement a Balanced Scorecard?
Phase 1: Corporate Scorecard
Step One: Organisational Assessment
Step One of the scorecard building process is about a number of things: to finalise the Balanced Scorecard Plan which will detail, among others, all the teams that will be involved in the designing of the scorecard and the training they will require.
Secondly, Step One involves conducting the organisation assessment of the strategic elements: the mission and vision, SWOT and organisation values.
Thirdly, Step One is also about preparing a change management plan for the organisation, which will entail conducting a change readiness review to determine how ready the organisation is in embarking on such a journey and what needs to be put in place to make it ready, as well as defining communications strategy which will identify the target audience, key messages, media channels, timing, and messengers of the communication. The change management activities will take place throughout each step.
Step Two: Strategy
Step Two (Strategy) is about determining the strategic themes, including strategic results, strategic themes, and perspectives, which are developed to focus attention on the customer needs and their value proposition.
The most important element of this step is to ensure that you have unpacked what your customers are looking for from your organisation in terms of function, relationship and image to determine whether you are providing value to your customers.
Step Three: Objectives
Step Three (Objectives) is about determining your organisation’s objectives – that is your organisation’s continuous improvement activities, which should link to your strategic themes, perspectives and strategic results.
Step Four: Strategy Maps
The objectives designed in Step Three are linked in cause-effect relationships to produce a strategy map for each strategic theme. The theme strategy maps are then merged into an overall corporate strategy map that shows how the organisation creates value for its customers and stakeholders.
Step Five: Performance Measures
In Step Five, the performance measures are developed for strategic objectives. Performance measures should be defined clearly, differentiating the outcome and output measures, as well as the leading measures (future expected performance) and lagging measures (past performance history).
In this step, you will also design your performance targets. This might be perceived as the most difficult and confusing step, so it is important that a bit of time is apportioned so that the performance measures will be meaningful.
Step Six: Strategic Initiatives
In Step Six, the strategic initiatives are developed that support the strategic objectives. This is where the projects that have to be undertaken to ensure the success of the organisation (the extent to which the organisation fulfills its mandate or vision) are drafted and assigned.
To build accountability throughout the organization, performance measures and strategic initiatives are assigned to owners and documented in data definition tables.
Step Seven: Software and Automation
Step Seven (Software and Automation) involves automating the Balanced Scorecard system, and consists of analysing software options and user requirements to make the most cost-effective software choice for today and to meet enterprise performance information requirements in the future.
Automation is purposely put as Step 7 on the 9-step framework, to make sure that the proper emphasis is placed on strategic thinking and strategy development before “software seduction” sets in.
Purchasing software too early limits creative strategic thinking, and purchasing software late makes it difficult to sustain the momentum of the new system, as performance information reporting utilisation is clearly an early benefit to be captured from the process of building the scorecard system.
Phase 2: Business Unit or Departmental and Individual Scorecards
Step Eight: Cascading
Following the development of the corporate scorecard, Step Eight (Cascading) involves cascading the corporate scorecard throughout the organisation to business and support units. Then team and individual scorecards are developed to link day-to-day work with departmental goals and corporate vision.
Cascading is the key to organisation alignment around strategy. Optionally, objectives for customer-facing processes can be integrated into the alignment process to produce linked outcomes and responsibilities throughout the organisation. Performance measures are developed for all objectives at all organisation levels.
As the scorecard management system is cascaded down through the organisation, objectives become more operational and tactical, as do the performance measures.
Accountability follows the objectives and measures, as ownership is defined at each level. An emphasis on results and the strategies needed to produce results is communicated throughout the organisation.
Step 9: Evaluation
Step 9 (Evaluation) involves evaluating the success of chosen business strategies. The key question asked is: Were the expected results achieved?
The evaluation step includes the following:
- Ensuring that organisational learning and knowledge building are incorporated into planning
- Making adjustments to existing service programmes
- Adding new programmes if they are more cost effective
- Eliminating programmes that are not delivering cost effective services or meeting customer needs
- Linking planning to budgeting
Sustaining the Balanced Scorecard
There is a misconception that once a Balanced Scorecard System has been built and implemented, there will be automatic transformation and buy-in. For the Balanced Scorecard to be successful and for change to occur, the scorecard must be embedded in the management systems.
The scorecard must be understood to be a strategic management system as opposed to only a measurement tool. However, to ensure that the implementation of the Balanced Scorecard System will minimise resistance, certain things need to be in place…
- Firstly, the Balanced Scorecard is a transformation journey and change initiative, not a once-off project. Treat as such. Ensure that you have designed a Change Management plan which should run parallel to the Balanced Scorecard. The Change Management plan should address, among others, employee resistance and employee critical questions, i.e. “WIFM” – “What’s in it for me?”
- Maintain a committed and engaged leadership. After all, the change should be driven from the top
- Develop an organisational culture based on results by establishing a strategy management office
- Focus the organisation on strategy by holding review meetings organised around strategy
- Enhance individual accountability for results through objective ownership
- Align the organisation, systems and employee performance around strategy through a rewards and recognition programme
- Create a performance, results oriented culture
- Link budget formation, cost accounting and performance results
- Emphasise continual improvement – in process, in employee learning and skills development, and in understanding customer needs and satisfaction, and in ensuring employee satisfaction
- Link key organisation initiatives to the balanced scorecard development process
While a balanced scorecard is definitely a tried and true method with many potential advantages, it’s important to take into consideration the way that your company operates and whether a balanced scorecard system will be worth the investment.