Developed by Robert Kaplan and David Norton, the Balanced Scorecard is an extremely influential management tool that remains enduringly popular with companies around the world. At its most basic level, the Balanced Scorecard helps organisations to clarify their strategy and communicate the business’s top strategic priorities and objectives.
If you’ve ever seen the Balanced Scorecard in action, you’ll know it’s essentially a strategic framework, divided into four areas (called “perspectives”) that are critical to business success. In this article, we’ll look at each of the perspectives in more detail, and see how these perspectives can be tailored and tweaked to suit your company’s circumstances.
Let’s get started with the four perspectives…
The Financial perspective
For most for-profit organisations, money comes up tops. (We’ll get to non-profits later in the article.) Therefore, the very top perspective is all about financial objectives.
Essentially, any key objective that is related to the company’s financial health and performance may be included in this perspective. Revenue and profit are obvious objectives that most organisations list in this perspective. Other financial objectives might include:
- Cost savings and efficiencies (for example, a specific goal to reduce production costs by 10% by 2020)
- Profit Margins (increasing operating profit margins, for instance)
- Revenue sources (for example, adding new revenue channels)
The Customer perspective
This perspective focuses on performance objectives that are related to customers and the market. In other words, if you’re going to achieve your financial objectives, what exactly do you need to deliver in terms of your customers and market(s)?
Included in this perspective you might find objectives for:
- Customer service and satisfaction (increasing net promoter scores, or reducing call centre waiting times, for example)
- Market share (such as, growing market share in a certain segment or country)
- Brand awareness (for example, increasing interactions on social media)
The Internal Process perspective
What processes do you need to put in place to deliver your customer- and finance-related objectives? That’s the question this perspective aims to answer. Here you would set out any internal operational goals and objectives – or, in other words, what does the business need to have in place and what does the business need to do well in order to drive performance?
Examples of internal process objectives might include:
- Process improvements (for example, streamlining an internal approval process)
- Quality optimisation (such as, reducing manufacturing waste)
- Capacity utilisation (using technology to boost efficiency, for instance)
The Learning and Growth perspective
While the third perspective is about the concrete process side of things, this final perspective considers the more intangible drivers of performance. Because it covers such a broad spectrum, this perspective is often broken down into the following components:
- Human capital – skills, talent and knowledge (for example, skills assessments, performance management scores, training effectiveness)
- Information capital – databases, information systems, networks and technology infrastructure (such as, safety systems, data protection systems, infrastructure investments)
- Organisational capital – culture, leadership, employee alignment, teamwork and knowledge management (for example, staff engagement, employee net promoter score, corporate culture audits)
Different businesses, different Balanced Scorecards
While many businesses conform to these four exact perspectives, in the order set out above, others prefer to tweak the names and order of the perspectives. And that’s absolutely fine – the Balanced Scorecard is a flexible tool, not a straightjacket!
For example, if you’re a not-for-profit organisation, you might not need a separate Financial perspective (and even if you do, it’s unlikely to sit on top). If you didn’t want or need a separate Financial perspective, any financial objectives (managing costs, for example), could nestle in under the Internal Process perspective.
Even among traditional for-profit organisations, I’m seeing more and more leadership teams tweak the traditional Balanced Scorecard approach. For instance, many of the clients I work with like to put the Customer perspective up top, directly next to (and not beneath) the Finance perspective. I’m also seeing that some companies prefer to rename and restructure the Learning perspective to a People perspective, and move the tech-related objectives into a separate Technology perspective. It all depends on your company’s priorities.
Bottom line: you don’t need to stick rigidly to the four perspectives outlined above. If just having three perspectives works better for your business, that’s fine. Or, you might need more than four perspectives, say, if you wanted to highlight an additional area of performance that’s particularly important to your business. For example, a public sector body might want an additional perspective for Community, detailing objectives for community outreach. Alternative perspectives might include Health and Safety, Social Responsibility and Environmental Performance.
Understanding the relationships between perspectives
You’ve probably already guessed that each perspective has a close relationship with the others. After all, a strong financial performance, often the top perspective for most companies, is the result of strong performance in the other scorecard perspectives. You need to achieve your customer objectives to deliver good financial performance. Yet you need engaged staff to deliver great customer service … if you catch my drift.
It’s vital organisations understand the connection between the perspectives. They should not be seen in isolation, but as an integrated set of objectives that are interlinked and that support each other. The best way to emphasise this connection is to plot out the objectives on a strategy map.
Mapping out your objectives on one page
I’ve written before about the importance of mapping out your strategic objectives into a simple one-page plan. By creating a visual map of key strategic objectives, everyone in the company can understand the business’s key goals and priorities at a glance, and see how each objective supports the others.
The Balanced Scorecard perspectives can easily be mapped out into a one-page visual map. Or you can use a different (non-Balanced Scorecard) method if you prefer. The important thing is to stick to one easy-to-understand page. When I work with clients, I help them create what I call a plan-on-a-page, which contains similar sections to the Balanced Scorecard perspectives, but also includes the company’s overall purpose, plus key competition objectives.
Of course, it goes without saying that you’ll also need to follow through with initiatives that deliver on the goals, and KPIs or metrics that track your progress over time. But, as a starting point, this one-page strategy map approach lays the ideal groundwork for turning strategy and objectives into meaningful action.
Where to go from here
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