Balanced scorecard is a management system that enables organizations to translate vision and strategy into action. This system provides feedback on internal business processes and external outcomes to continually improve organizational performance and results. Robert Kaplan and David Norton created the balanced scorecard approach in the early 1990s.
Most traditional management systems focus on the financial performance of an organization. According to those who support the balanced scorecard, the financial approach is unbalanced and has major limitations:
- Financial data typically reflect an organization’s past performance. Therefore, they may not accurately represent the current state of the organization or what is likely to happen to the organization in the future.
- It is not uncommon for the current market value of an organization to exceed the market value of its assets. There are financial ratios that reflect the value of a company’s assets relative to its market value. The difference between the market value of an organization and the current market value of the organization’s assets is often referred to as intangible assets. Traditional financial measures do not cover these intangible assets.
The balanced scorecard suggests that organizations should be viewed and measured from four different perspectives. These perspectives are as follows:
- The business process perspective—the internal business processes that are often classified as mission oriented and support oriented. Examples of this perspective include the length of time spent prospecting and the amount of rework required.
- The customer perspective—the level of customer focus and customer satisfaction. Examples of this perspective include the amount of time spent on customer calls and customer survey data.
- The financial perspective—the financial aspects of the organization. Examples of this perspective include financial ratios and various cash flow measures.
- The learning and growth perspective—includes employee training and organizational attitudes related to both employee and organizational improvement. Examples of this perspective include the amount of revenue that comes from new ideas and measures of the types and length of time spent training staff.
Using the balanced scorecard, companies create their own unique measures of these four aspects of the business. The specific measures that a company develops should reflect the specific drivers and strategy of the business.
Kaplan and Norton recommend a nine-step process for creating and implementing the balanced scorecard in an organization.
- Perform an overall organizational assessment.
- Identify strategic themes.
- Define perspectives and strategic objectives.
- Develop a strategy map.
- Drive performance metrics.
- Refine and prioritize strategic initiatives.
- Automate and communicate.
- Implement the balanced scorecard throughout the organization.
- Collect data, evaluate, and revise.
There are many benefits and challenges to the balanced scorecard. The primary benefit is that it helps organizations translate strategy into action. By defining and communicating performance metrics related to the overall strategy of the company, the balanced scorecard makes the strategy come alive. It also enables employees at all levels of the organization to focus on important business drivers.
The main challenge of this system is that it can be difficult and time-consuming to implement. Kaplan and Norton originally estimated that it would take an organization a little more than 2 years to fully implement the system throughout the organization. Some organizations implement in less time and some require more time. The bottom line is that the balanced score-card requires a sustained, long-term commitment at all levels in the organization for it to be effective.
- Kaplan, R. S., & Norton, D. P. (1993, September). Putting the balanced scorecard to work. Harvard Business Review, 71, 134-147.
- Kaplan, R. S., & Norton, D. P. (1996, January). Using the balanced scorecard as a strategic management system. Harvard Business Review, 74, 75-85.
- Kaplan, R. S., & Norton, D. P. (2000, September). Having trouble with your strategy? Then map it. Harvard Business Review, 78, 167-176.
- Kaplan, R. S., & Norton, D. P. (2004, February). Measuring the strategic readiness of intangible assets. Harvard Business Review, 82, 52-63.
- Niven, P. R. (2002). Balanced scorecard step-by-step: Maximizing performance and maintaining results. New York: Wiley.
- Ulrich, D., Zenger, J., &Smallwood, N. (1999). Results-based leadership. Boston: Harvard Business School Press.