The Balanced Scorecard Approach

The Balanced Scorecard approach is a system of measurement, that when implemented properly is brilliant in its simplicity.  Below we discuss the four standard perspectives of the Balanced Scorecard approach, and how you can implement it in your organization or department.

About the Balanced Scorecard Approach

The Balanced Scorecard approach was created by Robert Kaplan and David Norton in the early 90s.  Kaplan was a professor at Harvard with a background in accounting and finance, and Norton was a consultant that worked primarily in the Information Technology field.

The original article on the Balanced Scorecard approach, “The Balanced Scorecard – Measures that Drive Performance” was published by Harvard Business Review in 1992, and was voted one of the ten most influential articles of all time.  Several more articles and books followed entrenching the Balanced Scorecard approach into standard business lexicon.

The Four Standard Perspectives of the Balanced Scorecard Approach

There are four standard perspectives to the Balanced Scorecard approach:

1. Financial Perspective:  How do we look to shareholders?
2. Customer Perspective:  How do customers see us?
3. Internal Business Perspective:  What must we excel at?
4. Innovation and Learning Perspective:  Can we continue to improve and create value?

Examples of Each of the Four Perspectives of the Balanced Scorecard Approach

The Financial Perspective of the Balanced Scorecard Approach

• Financial perspective does a lot with profitability, growth, and shareholder value
• Tends to look “backwards”
• Shareholder Value Analysis is an attempt to help financials look forward
• Such things as:
  • Return on capital
  • Cash flow
  • Profitability
  • Reliability
  • Sales
  • Return on equity

The Customer Perspective of the Balanced Scorecard Approach

• A complete blend of time, quality, performance and service, which are of more concern to the customer
• Benchmarking is sometimes used for industry comparison
• Ensures your business is not excelling at something that has no value to the customer
• Such things as:
  • Quality
  • Service levels
  • Timeliness
  • “Walletshare” of key customers
  • % of sales from new products (proprietary products, etc.)

The Internal Business Perspective of the Balanced Scorecard Approach

• Business processes that have greatest impact on customer satisfaction
• Often measures are “deconstructed” to a local level
• This is where information systems and tracking become critical
• Such things as:
  • Cycle time
  • Unit cost
  • Yield
  • Efficiency measures
  • Schedule versus plan
  • Safety
  • Risk Management
  • Loss control

The Innovation/Learning Perspective of the Balanced Scorecard Approach

• Incorporates notion of continuous improvement
• Setting targets for improvement and continual learning
• Measures company’s ability to innovate, learn, and improve
• Such things as:
  • Time to innovate next product
  • Time to market
  • Employee retention
  • Employee satisfaction
  • Employee skill levels

Implementing a Balanced Scorecard Approach

Organizations make a few critical mistakes when they first attempt a Balanced Scorecard approach:

1. Don’t make it more complicated than it needs to be.  Start with the data you have on hand, and refine it as you go along.  If you are spending more time measuring your work, than you are doing your work, you’ve got it wrong.  The Balanced Scorecard approach is most effective when it is clear and simple.
2. Adjust the perspective to meet the needs of your department or organization.  The Balanced Scorecard approach should be tailored to your situation, however the standard perspectives are an excellent starting point.
3. Don’t forget about “leading” indicators.  When implementing the Balanced Scorecard approach, many organizations have no problem with the financial, and service measures, but when they get down to the innovation and learning perspective, it becomes much more difficult for them.  Do your best to find predictive indicators as well as lagging indicators.

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