What is a balanced scorecard?
Imagine a pilot flying his plane with no idea where he’s headed. Or an athlete trying to break a world record without knowing the time she’s trying to beat. They might stumble upon success, but it’s going to be a lot harder.
You cannot get where you’re going without setting goals. And you can’t know if you’re achieving your goals without measurements. To create a strategy and achieve their objectives, businesses must track metrics – but the question many business owners have is what to measure.
The balanced scorecard approach offers one way of answering this question.
The balanced scorecard approach provides guidance on where to look, rather than specifically what to measure, so it’s flexible enough to work for both small business development and large organizations. Businesses from tech startups to Fortune 500s like Wells Fargo, Apple and UPS use this method to create and align their strategy. But what is the balanced scorecard approach – and is it right for you?
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What is the balanced scorecard approach?
The balanced scorecard approach is a strategic management system. It looks at business metrics from four different perspectives – financial, customer, growth and efficiency – to identify areas for improvement. Every department is then given strategic objectives that fall into one of these categories and asked to provide quantifiable measures.
The balanced scorecard is intended to provide a “balanced” view of an organization that goes beyond financials. Using this approach, businesses are better able to assess numbers, prioritize projects, monitor progress and align day-to-day work with the organization’s vision and mission. This gives employees clarity on their goals, fosters teamwork and ultimately inspires them to create value for the company.
How to use a balanced scorecard
Like a business map, the balanced scorecard approach is a highly visual method that helps businesses organize their strategy and “connect the dots” between various departments. You’ll create a scorecard that you’ll then use to prioritize your goals.
The four perspectives
What is the balanced scorecard approach? It’s all about the four perspectives. These are the foundation of the approach and you’ll choose metrics that fall into each of these categories. Think of each perspective as a question:
1. Financial: How do we increase profits and market share?
2. Customer: How do we keep customers happy?
3. Growth: How can we continue to learn and innovate?
4. Efficiency: Howcan we eliminate internal obstacles?
The strategic objectives
You’ll now come up with a few concrete objectives you’d like to achieve in each category. To fit with the balanced scorecard approach, these goals are actionable, long-term and measurable, such as:
1. Financial: Maximize revenue in target markets. Increase market share.
2. Customer: Improve Net Promoter Score. Reduce complaints. Increase on-time delivery.
3. Efficiency: Reduce time to market. Maximize production output. Increase product margins.
4. Growth: Increase employee expertise. Improve thought leadership. Invest in infrastructure.
Connecting the dots
Once you’ve written your strategic objectives next to each of the four perspectives, you’ll probably start to see connections between them. Start at the bottom with Growth and connect those objectives to each other and to the ones above (Efficiency). Keep moving up the chart until everything is connected. You’ll have a visual representation of how all of your goals ladder up to the ultimate business goal: financial success.
Determining your measures
The business metrics – the actual events or items you’re measuring – are determined at the very end of the balanced scorecard approach. You must have a solid idea of your overall strategy first. Here, you’ll start at the top (Financial) and determine your metrics for that before moving down to Customer and so on. Limit each strategic objective to one or two measures. The main benefit of this approach is that it allows you to focus resources where they are most needed.
Pros and cons of the balanced scorecard approach
The balanced scorecard approach is a useful way to bring together seemingly disparate parts of a company and observe how they interact with one another. When the balanced scorecard is completely mapped out, an organization can see if improvement in one area came at another’s expense. Did an improvement in operational efficiency come at the expense of customer satisfaction? Or has improved customer satisfaction slowed growth and innovation?
By relating metrics back to the company’s core values and overarching strategy, the balanced scorecard approach also helps businesses focus on the goals that really matter to them. It encourages companies to look beyond financial statements and take a more holistic view. It connects the organization’s high-level mission and vision with its day-to-day operations in a measurable way.
There are some disadvantages to the balanced scorecard approach. It requires a significant resource investment to train employees on how to use the scorecards. It also requires buy-in throughout the organization, which can be challenging. But the most important challenge is to avoid becoming too internally focused.
Learning how to use a balanced scorecard is just one element of a well-rounded management approach. While metrics are essential, finding your X factor – the thing your company has that no one else does – is still the best predictor of success. Continue to keep the focus on providing more value than anyone else and creating raving fan customers, and you’ll set yourself apart in both metrics and branding.