The Balanced Scorecard concept was developed in the 1990s by Robert Kaplan and David Norton as a way to better monitor operational performance and provide a means for companies to turn strategy into action. Previously, measurement systems were typically financially based and relied on accounting data to provide financial results at the end of a period. The problem with financial reporting is that it only provides information on past performance. Kaplan and Norton wanted to be able to develop management reports that provided information about drivers of future performance.
Four factors were discovered to be relevant in determining future performance:
• The Financial Perspective
• The Customer Perspective
• The Internal Business Process Perspective
• The Learning and Growth Perspective
These four factors provide a balanced view of a business. Financial measures are a measure of results of activities occurring in the past. In themselves, they are not enough to indicate how to improve business performance. They are still important in an overall measurement system however. It is critical to know how the company is performing financially, how the cash flow is being managed, how much is owed by debtors and owed to creditors and how much is available to shareholders.
Without customers, a business would not exist. It is vital to know how customers feel about your products and service, what influences their buying decisions and how they would be more likely to buy more of your products or services. Knowing how to satisfy your customers in the future is critical business information.
This need must be balanced by your internal capabilities to produce what your customers want and to do it in a way that provides a financial return. Knowing how effective and efficient your business processes are is important information in this respect. It is important to match your capabilities with your customers’ desires. This may mean some of the things you do in your business may be irrelevant from the customer perspective. When you know this, you can do something about it.
The other side to internal process is the ability to improve what you do and how you do it. This is where learning and growth are important. Your people need to keep improving knowledge and skills in regard to your customers and your business process methods and technologies to keep ahead of trends and competitors advances.
Strategy to Results
By using a balanced scorecard system, it is possible to develop strategies and link them to specific actions which can be measured to ensure you achieve the results you want. The balanced scorecard system uses the concept of lead indicators and lag indicators as useful measures. Lead indicators are measures of the critical success factors that drive performance in the direction of your strategic objectives. Lag indicators are measures of results after the event. For example, if your objective is to introduce a new product into the market as a result of market research that indicated a need for your product, the critical success factors may include:
• Speed to market
• Quantity sold
• Cost of production
• Quality or Defect Rate
For each of these factors, both lead and lag indicators can be developed.
|Factor||Lead Indicator||Lag Indicator|
|Speed to market||Target Launch Date||Actual Launch Date|
|Marketing Costs||Marketing Budget||Actual Cost of Marketing|
|Marketing Activities||Planned Campaigns||Campaign Results|
|Price||Target Price||Actual Price|
|Sales Activity||Number of Sales Calls||Conversion Rate|
|Quantity sold||Break Even Quantity||Actual Sales Quantity|
|Cost of production||Projected Product Cost||Actual Product Cost|
|Quality or Defect Rate||Target Defect Rate||Actual Defect Rate|
Lead indicators are useful in developing actions in relation to strategies. Strategies are implemented by activities. In many organizations, planned strategies are never implemented because there is no accountability for the implementation activities. When specific monitoring of these activities is brought into the picture, accountability for performing the activities is built into the process. When input activities are measured and compared to outputs or results, it is far easier to refine strategies or increase/decrease activities and costs of operation to generate the desired results. When there are only financial reports to rely on, there is no opportunity to identify what went right or what went wrong with the implementation of planned strategies.
The balanced scorecard provides an all round view of the business’ operations and performance levels that gives the ability for management to ensure that planned strategies are being implemented effectively and that the target results are being achieved. When developed on a company wide basis, it also provides a means for everyone involved in the implementation and performance of activities to be aware of what is required to affect the company’s strategy and how well they are performing towards achieving the goals.
The Balanced Scorecard is a major component in the process of putting your business on autopilot. Go here if you would like more assistance with this process.