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The BSC framework itself is based upon leading and lagging indicators. Leading
indicators are drivers - those that help you look ahead toward achieving your goal
- and should be predictive in nature. By contrast, lagging indicators are outcomes -
those that tell you what has already happened - and should confirm your long-term
trends. A good BSC has a healthy mix of leading and lagging indicators.
To measure outcomes, you’ll use key performance indicators (KPIs), the metrics
that show whether your company is achieving what it set out to do. Some
examples of leading indicators are the number of new innovations, the growth in
new markets, and the number of patents. Some examples of lagging indicators
are revenue growth, earnings before interest, tax, depreciation, and amortization
(EBITDA), and operating income growth. However, regardless of the indicators
you choose, there should only be a small number per scorecard so you can focus
your efforts.
Objectives: These are your high-level organizational goals. Taking into account
your already-developed company strategy, you should be able to come up with
10-15 strategic objectives that you are trying to accomplish. You can use a SWOT
analysis to define these objectives. (The SWOT is a review of your business’s
strengths and weaknesses, opportunities, and threats.) Your objectives should be
S.M.A.R.T.: specific, measureable, achievable, realistic, and time-specific.
Measures: After you define your business’ objectives, you need to focus on its
measures. The measures help you determine whether you are on track to
achieve your objectives (you can think of measures as KPIs). Each objective
should have no more than three KPIs that indicate whether you will achieve your
objective. Strong KPIs should be objective enough for you to determine whether
the strategy is working, use language that everyone in your company
understands, measure accomplishments, show success (not just a useless
metric), be able to show change over time, and reduce uncertainty.
Targets: You should write your targets so that they relate directly to each of
your KPIs. For each KPI, you should have an associated value. Your targets
should be ambitious but achievable.
Initiatives: In your BSC framework, your initiatives should be the action items
and projects that you need to help your company succeed with its strategy.
These projects have a start and end date. You should identify them when writing
your BSC and set them up when implementing your BSC. Your initiatives mean
the difference between your company’s reality and its stretch targets.
Your scorecards can take on many shapes and designs, so you have the leeway
to design a scorecard that reflects your unique company culture. You may also
want to amend it to address the specific population that you’re serving. For
example, a government organization serves customers, not citizens. You can
simply adjust your wording to customize your scorecard. In addition, you may want
to include your company logo and colors. A blank scorecard could look like this to
start:
Here is an example of what a scorecard for a research company might look like:
Some experts recommend that you design your strategy map before you
complete your scorecard. The ideal time to fill in the strategy map is after you have
determined your BSC objectives but before you’ve filled in the measures. The
same four balanced scorecard perspectives apply to the strategy map (financial,
customer, internal business processes, and learning and growth). The primary
difference here is that with a strategy map, you show the direction (causal
relationships). For example, we could expand a portion of our earlier balanced
scorecard for the research firm:
THE BALANCED SCORECARD IN A CLOSED-LOOP MANAGEMENT
SYSTEM
A closed-loop management system is a structure that uses feedback from the
ongoing operations to improve processes. This feedback could be information
from the same or from a different area of the value chain - either way, it helps to
improve processes earlier in the loop. The system includes six stages:
Strategy development
Strategy translation
Organizational alignment
Operational planning
Monitoring and learning
Robert S. Kaplan, co-creator of the balanced scorecard and Senior Fellow, Marvin
Bower Professor of Leadership Development, Emeritus at the Harvard Business
School, discuss using this closed-loop management system together with your
company’s strategic planning and operations execution as a complement to the
BSC. In other words, the closed-loop system constantly improves upon the
strategic plan and the operating plan. As the BSC is a part of the management
system, it continually improves upon that as well.
THE HISTORY OF THE BALANCED SCORECARD
Experts consider the concept of the BSC in professional organizations one of the
most significant management ideas of the past 75 years. First introduced in the
early 1990s by Kaplan and David P. Norton (also of the Harvard Business
School), professional organizations around the world use it today. The difference
between the scorecard and other tracking mechanisms is that it combines
financial and nonfinancial measures, where traditional measurers only track
financial measures.
The first generation of the BSC was a 4 box approach. The four boxes included the
same categories that they do now (financial, customer, internal business
processes, and learning and growth). However, instead of possessing four
components, this inaugural version of BSC simply recorded goals and measures
for each perspective. This first generation showed causality, but organizations did
not use the causality for any specific purpose. Many organizations still use first-
generation scorecards as their model.
Second-generation BSCs evolved because some professionals felt that the first-
generation BSC descriptions were too vague and the interpretations too liberal.
The changes were small but amounted to a new definition of a BSC. The authors
added a more process-oriented method to determine the key measures. From the
goals and measures recorded for each perspective, the authors added strategic
objectives to better align with businesses’ own strategies. Finally, the authors
added definite causal linkages between each perspective and component.
The third-generation BSC was developed in the late 1990s., and is distinguished
from the previous versions by its components and the design process. The new
components of the third-generation BSC include a vision statement, definitions for
the strategic objectives, targets for the measures, and the strategy map to go
along with it, and the design process requires involvement from the company
management. This is to ensure that the strategic objectives are cohesive and take
primacy.
Since the third generation was introduced, the concept has been expanded for
nonprofit and public-sector entities, strategy and operations have been linked in a
closed-loop management system, and strategy management has been
developed.
Ultimately, though, most of the experts say that the future of the BSC is based
upon the individual industries: as industries evolve, so will their scorecards. For
example, in the energy sector, the scorecards will look increasingly at more
sustainable objectives. In the technology industry, the objectives on the BSC will
include those more commonly seen in other industries. This will reflect the
convergence of multiple industries and the concept of technology convergence.
Financial: Design metrics that show how IT optimizes its efficiency and how it
enhances its impact on the business’ outcomes
Customer: Design metrics that show quality service and give the business
innovative solutions
IT Internal Business Processes: Design metrics that show how IT maintains
a reliable infrastructure, gives an effective support system, and offers and
delivers transformative applications
Learning and Growth: Design metrics that show how IT promotes a customer-
focused culture, enhances its staff experience, and develops the IT staff
competencies
HUMAN RESOURCES AND THE BALANCED SCORECARD
Human resources (HR) is another key department that you should align with the
overall company strategy. HR scorecards should focus on leading indicators. In
this way, you can bring in the staff you need and plan for the future of your
company. Your HR scorecard should also identify what is doable vs. what is
deliverable. The HR BSC follows much the same path as the overall company
BSC since HR is a higher-level function within any organization. It should also
utilize the same four perspectives:
Financial: The metrics for accounting should consider your firm’s objectives
and implement the tangible financial outcomes of your strategy. These may
include fee revenues, professional salaries, margins, and reduced receivables.
Customer: This perspective should illustrate the way that your firm would
satisfy its customers. Customers of accounting firms are generally looking for
short job turnaround time and work well done. Your metrics can convey the
status of these factors through the number of client complaints, referrals, and
contacts per period.
Internal Business Processes: Most of your accounting firm’s internal
processes are administrative. These may include metrics on the number of
profitable projects, the new software you’ve implemented, the bidding estimates
you’ve accepted, and utilization rates.
Learning and Growth: In accounting firms, your HR department is your
biggest asset in developing your workforce. It can help you develop workforce
plans to keep your staff up to date and competitive.
WHO DEVELOPS AND USES A BALANCED SCORECARD?
Nonprofit and government industries were not able to use the early iterations of
the BSC because those early versions were specific to customer-oriented
industries. Now, any industry of any size can and should use the BSC. Even
technology giant Apple, Inc. and the U.S. Government Office of Personnel
Management (OPM) use the balanced scorecard approach. According to
the Harvard Business Review, Apple’s five performance indicators are as follows:
Customer satisfaction
Core competencies
Market share
Shareholder value
There are some benefits to automating your BSC with Microsoft Office products,
such as Excel or PowerPoint. Most of your professional staff will already be
comfortable working with these programs, so they can easily customize the
software to the company’s needs. However, managing multiple documents from
one reporting period to another may take some creativity, as that particular feature
is not inherent in these programs. Furthermore, Microsoft products do not address
the issue of version control, so you may have multiple iterations of your
scorecards floating around between all of your users.
There are applications that cater specifically to the BSC, so you don’t need to
customize or program them. These apps can also manage multiple users,
providing version control and tracking updates. And, they can generate the BSC-
related reports and analytics that you need. Nevertheless, sometimes they are too
specific and cannot be linked with your other business applications. Also, not all of
these programs are intuitive, which can lead to the added expense of staff training.
This is, of course, in addition to the cost of the software.
You should build your BSCs in a cascading manner. This means that you are
translating your overall corporate scorecard down the line to lower levels. This
results in a clear strategy from top to bottom. As you descend the levels of your
organization, your BSCs will reflect more operational and tactical, and less
strategic, measures.
Building a BSC can be a challenging but worthwhile venture. You will start by
prepping all of your materials, including your current strategic plans, financial
plans, marketing plans, operating plans, annual reports, quality improvement
programs, and customer analyses. You should also interview your executive
management team repeatedly for their ideas (do this before you develop your
BSC and as you get closer to completing it). Other sources of information should
come from your industry’s competitive analyses, trend analyses, technology trend
analyses, and marketing trend analyses. Once your team has gathered all the
necessary information, they can follow the steps to design your BSC. We’ve
already covered most of the steps, but their sequence is outlined below:
1. Identify your company’s vision and mission.
7. Come up with a system to track your objectives and initiatives and report on
them.
The following are our expert’s tips for managers new to developing BSCs.
Robert Key, Senior Project Manager and Agile Coach, AMN Healthcare
Here’s what Key had to say about developing BSCs:
“My experience with the balanced scorecard comes from working as a project
manager and Agile coach and teaching at the University of Phoenix and the
University of San Diego. I have helped put together balanced scorecards for many
different teams and taught strategic management courses. The main industries
that I have focused on are education and healthcare recruiting.
“I often talk about a cartoon that I once saw. It was a CFO talking with a CEO. The
CEO asks, ‘But what happens if we train them and they leave?’ when discussing
their workforce. The sage CFO replies, ‘What happens if we don’t and they stay?’
To me this illustrates perfectly the importance of not ignoring the training and
education piece of the scorecard (the learning and growth perspective). Many in
management are fixated on the other quadrants, but managers, especially new
managers, need to learn the value of training and educating their people. This is a
cost center, but what happens when you remove training is that the morale
crumbles. In lean financial times, this is usually the first thing cut. However, this
defeats the purpose and does not save any money. This is the equivalent of
stabbing yourself in the foot. In particular, new personnel who come in do so at a
disadvantage, putting your whole organization at a disadvantage.
“If I had to advise managers new to the balanced scorecard, I would tell them to
use Six Sigma techniques during design as needed, especially when developing
the internal business process and customer sections. If you do the other three
right, the finance part should follow easily. Choose executives carefully: your CFO
and VP of Human Resources for your education section, your sales leaders and
high-level reps for your business processes, and even IT for the customer section.
Speak with anyone who faces and interacts with your customers, looking to get
different scenarios and input on how we can work better. Consider performing
surveys.
Regarding the finance piece of the equation, if you do everything else right,
finance should follow.
“I have really worked, even volunteered on my own time, to ensure that our
workforce learns what they need to in order to be successful. I love to teach, and
this comes out in all of the places that I work. It is because I have been so
fortunate: I had amazing teachers who taught me the value of giving back. I have
even hosted ‘lunch and learn’ sessions.
“Finally, you should not avoid any of the quadrants. You may not know the
answers, but, if that is the case, you should seek input from other departments or
resources. Don’t make it up on your own unless you know what you are doing and
avoid external consultants. Internal consultants, if available, are your best bet
because they know your business. If you must use an external consultant, use
them for benchmarking after your analysis is completed.”
The Balanced Scorecard: Translating Strategy into Action, Kaplan and Norton,
1996.
The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive
in the New Business Environment, Kaplan and Norton, 2000.
The Execution Premium: Linking Strategy to Operations for Competitive
Advantage, Kaplan and Norton, 2008.
Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Kaplan and
Norton, 2003.
For nonprofits and government agencies, check out the following book on the
BSC: Balanced Scorecard: Step-by-Step for Government and Nonprofit Agencies,
Niven, 2003.
USE SMARTSHEET TO GAIN ACTIONABLE BUSINESS INTELLIGENCE
Smartsheet is a cloud-based task and work management tool in a familiar
spreadsheet layout. Using Smartsheet Sights, you can create your own balanced
scorecard dashboard to gain unprecedented visibility into work being done.
Surface metrics, track KPIs, and align strategy to actions in a highly visual,
digestible platform. Sights is the perfect way for individuals, managers, and
executives to get a quick status of their top projects, see summary reports on
goals, view important deadlines, and follow links to key information — all in one,
customizable view.