The Balanced Scorecard is a method for making strategy measurable and executable. Instead of steering on financial figures alone, you look at your organisation from four perspectives: financial, customer, internal processes, and learning and growth.
The Balanced Scorecard was first used at Analog Devices in 1987. Robert S. Kaplan and David P. Norton made it widely known five years later, with the article “The Balanced Scorecard: Measures that Drive Performance” in Harvard Business Review (1992). From then on it was used worldwide. Today you often see it combined with other methods, such as Obeya or OGSM.
Four perspectives for a broad view
You translate each perspective into objectives and KPIs, key performance indicators. Below you find the question behind each perspective, with examples.
1. Financial
How do our shareholders or funders see us? This perspective is about profitability, cost control and return, and so about the financial health of the organisation.
| Objective | KPIs | Example |
|---|---|---|
| Increase profitability | Profit margin, revenue growth, ROI | Profit margin up 5 percentage points within two years |
| Control costs | Cost per unit, inventory value | 10% lower costs by working more efficiently |
| Improve cash flow | Days sales outstanding | Customers pay within 30 days on average instead of 45 |
2. Customer
How do our customers see us? This perspective is about customer satisfaction, retention and market share: understanding what customers want and how to keep them.
| Objective | KPIs | Example |
|---|---|---|
| Increase customer satisfaction | Customer satisfaction, NPS | Customer satisfaction from 80% to 90% within a year |
| Retain customers | Churn, repeat purchases | 5% less churn through better customer service |
| Grow market share | Market share in the target group | 2 percentage points more market share in three years |
3. Internal processes
What must we excel at? This perspective is about internal processes: efficient, effective and at the right quality, without waste.
| Objective | KPIs | Example |
|---|---|---|
| Shorten lead time | Lead time | 20% shorter lead time from quote to delivery |
| Improve quality | Error rate, first time right | Error rate halved |
| Work more efficiently | Productivity, process costs | 10% higher productivity per employee |
4. Learning and growth
How do we keep improving? This perspective is about developing employees, innovation and culture. By investing in people and a culture of continuous improvement, the organisation can adapt to changing circumstances.
| Objective | KPIs | Example |
|---|---|---|
| Increase employee satisfaction | Employee satisfaction, staff turnover | Employee satisfaction from 75% to 85% within a year |
| Develop skills | Training hours, number of certified Green Belts | Every team has at least one Green Belt |
| Encourage an improvement culture | Number of improvement ideas implemented | Twice as many ideas implemented per year |
The perspectives are connected
The four perspectives do not stand alone. Kaplan and Norton later worked this out in the strategy map: investing in learning and growth enables better processes, better processes make customers more satisfied, and satisfied customers eventually deliver financial results.
This is one of the tools you learn to apply in the Green Belt training.
Why balance?
Combining the perspectives prevents one-sided management. A simple example: if you steer on customer satisfaction alone, you might keep prices so low that profits suffer. The reverse is also true: if you only steer on the numbers, you won’t notice customers or employees losing interest until it shows in revenue.
Implementing it in four steps
Kaplan and Norton described four steps for implementing the Balanced Scorecard:
- Make vision and strategy concrete. A vision sets the direction: where does the organisation want to be in three to five years? Vision and strategy are often abstract. By translating them into objectives and KPIs for each perspective, it becomes clear how you will achieve the strategy. A strategy map helps to make this visible. Some organisations put process KPIs at the top of the scorecard and improvement KPIs below: when a process KPI turns red, it is immediately clear which improvement is needed.
- Communicate and link. You can’t communicate about goals often enough. You cascade the objectives to departments, teams and individual performance, so every level works on them. This creates several scorecards, which you review regularly to see whether you are still on track.
- Plan and make it measurable. Goals come with concrete deliverables and deadlines, and those go into a plan. A realistic plan helps you adjust in time.
- Evaluate and learn. The Balanced Scorecard is not a spreadsheet set in stone. Vision and strategy change, and the first version of a scorecard is rarely right straight away. By reviewing and evaluating the scorecard regularly, you keep improving it. An Obeya can help with this.
Advantages and disadvantages
The main advantages of the Balanced Scorecard:
- more focus on strategy;
- better communication about goals and performance;
- balance between short and long term;
- attention for customers, processes and employees, not just money.
The main disadvantages:
- setting it up and maintaining it takes time;
- with too many KPIs the scorecard becomes complex and cluttered;
- it takes discipline to actually use it;
- people judged on a KPI may start steering on the number instead of the goal.
Tips for a successful implementation
- Make sure top management is fully committed.
- Keep the number of KPIs per perspective limited.
- Invest in training and coaching, so employees understand and use the scorecard.
- Review the scorecard at fixed moments and adjust it when the organisation changes.
Balanced Scorecard and Lean Six Sigma
The Balanced Scorecard and Lean Six Sigma complement each other. The scorecard sets the strategic goals and shows where a KPI is lagging. Lean Six Sigma provides the method and tools to improve the processes behind that KPI. That way you choose improvement projects that contribute to the strategy.
Want to get started? Use our free Balanced Scorecard tool to list your objectives and KPIs for each perspective. Want to know which training course covers this in depth? Contact us at [email protected] or +31 88 53 26 700.