Defined and Differentiated Strategy

Balanced Scorecard
Balanced Scorecard

The concept of the Balanced Scorecard (BSC) was originally published by Dr Robert Kaplan and Dr David Norton as a paper in 1992. In the intervening years, the methodology has become accepted by some of the world’s largest organizations for its ability to gather information, make decisions, and implement strategies.

The BSC is based around the concept that most companies are too focused on financial measures in order to measure their success. This methodology analyzes an organization across four “Perspectives.”

The four Perspectives are designed to show a causal relationship between investment and financial outcome, allowing for a holistic view of the company so that goals can be defined, measured (through KPIs), and managed. Starting from the bottom, the Perspectives are:

Innovation and Learning

These are objectives and measurements around people: how well they perform, their skills and training, company culture, leadership, and knowledge base. This Perspective also includes infrastructure and technology. This Perspective is where the most amount of investment takes place. It answers the question “how can we create and improve value?”

Internal Business Processes

These objectives and measurements analyze how well a business is running and whether the products or services are truly serving the customers. This answers the question “what is the company best at?” Often, big cost items can be reduced by creating efficiencies and streamlining internal processes. This is the best area for focusing on creative new ideas.

Customer

These objectives and measurements are directly related to the business’ customers, especially their overall satisfaction. This answers the question “How do customers see the business?” It’s important to understand what customers want from the company and not necessarily what you can do for them.

Financial

This answers the question “How do we look to our stakeholders?” Stakeholders can include investors, shareholders, owners, and management. These financial objectives and measurements are generally easy to define and measure. However, these are usually lagging indicators. For example, a financial objective like “Improve Profit” does little to show us how to achieve the actual objective. Instead, by linking objectives from the previous Perspectives, we can see how to define projects and where to make investments.

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Each of these perspectives is informed by and, in turn, informs the company’s Vision and Strategy. Like many management methodologies, the BSC starts by identifying a small number of financial and non-financial objects related to strategic priorities. It then looks at measurements, sets targets for those measurements, and finally creates strategic projects to help reach those targets.

Where the BSC differs is in the latter stage, where it forces the business to think about how objectives can be measured. Only then does it identify projects to drive those objectives, avoiding creating costly projects that have little or no impact on the strategy.

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‘Balance’ is created by focusing on financial and non-financial objects that fall within the four Perspectives. You will often see a BSC presented as a strategy map, as presented below.

From the bottom up, the Perspectives are organized in a specific order and contain strategic objectives that are part of the company’s MVV. Those objects are linked so that one affects the other from the bottom up. This shows how investment at the bottom can improve financial results at the time.

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Strategic Objectives

Strategic Objectives are the actions we take every day in order to see improvement in our strategies. They are effective at breaking down abstract concepts like mission, vision, and values into quantifiable, actionable goals.

These are often referred to as the DNA of the BSC. They are the building blocks of good strategy, giving clear guidance to the business as to what is important.

A common mistake that businesses make when creating Strategic Objectives is that they describe activities rather than objectives. For example, creating a new website and roll it out might be a strategic imperative but it is not a Strategic Objective. The Strategic Objective that could include this project might be something like “Improve customer service through new technology.”

These strategic objectives apply to all levels of an organization, though they may differ in nature depending on what level. However, their impact remains the same. For example, corporate-level strategic objectives are more broad. Something like “Improve Customer Satisfaction.”

The departmental level, on the other hand, would be more specific. Something along the lines of “Improve customer satisfaction by improving customer contact.”

At the individual level, strategic objectives are even more specific. For example, “Improve customer satisfaction by spending 30% more time on the customer section of the website.”

In the above example, there has been an assumption that spending more time on the customer section of the website will lead to improvements and bolster customer satisfaction. While this may be a valid assumption, it does raise the question of how you might measure success in this case. There must be a relationship between spending time on the website and improved customer satisfaction. But how do you measure that? In order to do that you need to create meaningful Key Performance Indicators.

Key Performance Indicators

Once the scorecard has been created, input into the card comes in the form of Performance Measures. At Snowball (and in many other places) we refer to these as Key Performance Indicators, or KPIs.

If the business was an airplane, the KPIs would be the dials in the cockpit. They provide the information that the business requires to know whether it is on track and performing well.

One mistake that many organizations make is in confusing KPIs with operational measures. That’s because many companies believe that everything should be analyzed, measured, and reported on. However, a KPI is a KEY performance indicator. That is, one of a small number of measurements designed to reduce organizational complexity and turn it into something that can be easily understood and acted upon quickly.

When creating KPIs, there should be relatively few and they should focus on a small number of things. That allows for a structure to be put in place to influence behaviors and outcomes and avoids creating a scenario of diminishing returns.

“If your strategy has 3 objectives you will succeed in all 3, if it has 4-10 objectives you will succeed in 1-2, if it contains more than 10 objectives you will succeed in none.”

- Business strategy consultant Franklin Covey

It’s important that KPIs contain both leading and lagging measures. Most strategic plans concentrate on lagging measures because they are usually accurate and easy to implement. If your cat is fat, before you can help them lose weight you have to put them on a scale. But the scale is a lagging indicator. A leading indicator would be to look at the nutrients they’re getting from their food and how much exercise they’re getting.

Leading indicators are harder to identify but they are usually the only measurements that can be influenced before their impact is felt.

Creating And Connecting To The Scorecard

The Balanced Scorecard is a framework that manages strategy by linking the company’s MVV to strategic priorities, objectives, measurements, and initiatives. Financial measures are informed by other objectives and KPIs related to customers, internal business processes, and innovation and learning (sometimes called capacity). The BSC provides companies with an overall view of their performance.

It is a framework that takes time to implement though many businesses find it useful to begin with a rapid implementation approach. This view sees the Scorecard as an iterative process and ensures that projects maintain momentum.

The ultimate goal is to connect all employees to the company’s Strateigic Objectives through individual or group measures. This almost always requires a software tool to engage employees efficiently.

Implementing The Balanced Scorecard

The simplest way to begin implement the BSC methodology is through specific focus areas. This involves basing your entire strategic plan around the Balanced Scorecard, with each of the four Perspectives as one strategic Focus Area.

In the document below, you will notice the four Perspectives listed along the side. Along the top are objectives, Begin by listing the four Perspectives, then add objectives, projects, KPIs, and initiatives along the top.

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The benefit of this implementation method is that it states clearly that the company’s strategy is defined around the BSC methodology and it helps create understanding of the methodology throughout your organization.

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Balanced ScorecardBalanced Scorecard

Strategic Objectives

Key Performance Indicators

Implementing The Balanced Scorecard

Balanced Scorecard
Balanced Scorecard