Use this framework to improve efficiency and profitability
This framework focuses on the measures and targets that are necessary to achieve a strategy or much improved performance for an organisation.
The model was developed by Robert Kaplan and David Norton and first published in the Harvard Business Review in 1992. The authors believed that improvements in a company's performance needed measurements built into management systems.
The balanced scorecard (BSC) is a strategic planning tool that joins up the vision and strategy of the company with the means by which it can be achieved. It forces managers to think about the initiatives that will be required and it introduces measures and targets to track the performance.
Companies have for ever used measures to run their business. It would be unthinkable if a company didn't know its revenue, profit, cash flow, bank balance and the like. Most businesses also want to compare these metrics with other organisations to see how they are performing. This is benchmarking and it is described in another part of this website.
The Balanced Scorecard framework makes use of these metrics. It is based on measures taken in four areas of a business:
Financial: the finances of a company are its pulse and blood pressure. They show its health. Typically they would include revenue, net profit, gross margin, fixed costs, variable costs, and cash in the bank.
Customers: these metrics show to what extent a company is performing well in the eyes of its customers. They include basic statistics such as numbers of customers, numbers of new customers, sales per customer as well as customer satisfaction scores, net promoter scores and the like.
Learning and growth: innovation is vital if a company is to grow. Knowledge is an asset which offers a competitive advantage. There are many measures here that can be tracked. These could include numbers of patents, amount spent on research and development, numbers of training days per employee, the skills of employees, productivity, and employee satisfaction.
Internal processes: these measures are a determination of the efficiency of a company in using its resources to maximum advantage and delivering value to customers. They could include numbers of complaints, deliveries on time and in full, inventory levels, speed of decision-making, the percentage of new products in the portfolio and so on.
As the name suggests, there has to be an optimum balance between these four areas that will result in a vision and strategy for the company.
The balanced scorecard is not simply an abacus. The measures in the four areas of business are chosen to ensure improved customer satisfaction, improved profits, improved internal processes, and innovations that will future proof the company.
The beauty of the balanced scorecard is that any measures can be built into it that are relevant for the vision and strategy of the company.
In one form or another most large organisations use the balanced scorecard. They have objectives that must be met and key performance indicators (KPIs) to keep track of them. The balanced scorecard framework has been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.
Some things to think about:
What is the overall objective for your company?
What measures will determine your ability to meet the overall objective - specifically financial measures, customer measures, learning and growth measures, and internal processes?
How easy is it to measure these different attributes?
With what frequency will the measures be made?
How can the measures be used to track and determine trends in performance?
How can the measures be used to analyse segments of threats and opportunities facing the company?