The Balanced Scorecard (5 mins)

Dec 18, 2009

Erica Olsen explains the basic concept of the balanced scorecard and how businesses use it to monitor and guide their performance. Briefly, the Balanced Scorecard, popularized by Robert Kaplan and David Norton, is a method for monitoring whether a company is meeting or will meet its strategic objectives. Key Performance Indicators (both lagging and leading) are broken into 4 areas of focus: Financial, Customers, Operational and People. These indicators are monitored on a regular basis and organized as a Scorecard for determining current company status.

For more resources on building your strategic plan, view our Essentials Guide to Strategic Planning.

Video Transcript

Hi. My name is Erica Olsen. In this whiteboard session, we’ll be explaining the fundamentals of the balanced scorecard. If you’ve seen our other whiteboard sessions, the strategic objectives talks a little bit about it as well, and this follows up on a key performance indicator whiteboard session, so check those out too. This one goes over the high points of the balanced being one component, and the scorecard being the other component. What do we mean by balanced? The structure of the balanced scorecard is a way to think about your organization holistically. The Balanced Scorecard was developed by two guys out of Harvard, Robert Kaplan and Dr. Norton. And they said, “Let’s look the organization in four different ways, not in silos of departments, but actually holistically.” And what is that look like? Let’s see what we mean by that.

One perspective we need to look at is the financial perspective, which says, “How are we looking to our shareholders.” Driving down then into a customer perspective is what value do we need to provide to our customers or our constituents in order to achieve our financial goals. That’s the second perspective of the Scorecard. The third one, internal. If we are going to achieve our financial goals and provide value to our customers to achieve as financial goals, what internal processes must we excel at in order to provide the value to achieve the financial targets for seeking? And the fourth perspective is the people perspective, which is what skills and capabilities must we have in our organization to drive the internal process and as to provide value to our customers to reach our financial target. Again, you can think about this as a strategy framework to make sure that our strategic plan is effective and integrated and holistic, but also a way to kind of think about the organization, again, not structurally but holistically or in this case, balanced.

This is a very high level look at what might be called the strategy map. So that’s one of several tools used in the Balanced Scorecard. That’s the part about the balanced, let’s move to the card about the scorecard. The Scorecard is as you might imagine it, it looks like a scorecard. And it is really about the monitoring and measuring of your strategic plan. How is it broken down? It is pretty simple. It should be broken down to your four categories. We just have one example here but certainly you would expect to see all of the goals in your plan. Again they’re balanced on your scorecard. We have our Goal statement, it is the first item on the Scorecard, and in this case our example is, “Improve customer satisfaction and loyalty by 20%.” We have a measure associated with that goal. I have a couple of them here, so one is your customer satisfaction survey score. Perhaps we said we want to increase it by 20%, so the measure is what are we measuring, and the target is what’s our increase.

Another measure that we might look at is delivery time. Maybe in this example, customers’ value of getting their stuff on time. And so delivery time might be a measure of customer satisfaction and the target might be in less than four days, maybe we’re a retail, online retailer. These two different measures are pretty interesting and this is also part of the scorecard. We don’t need to get too confused about this but just think about it. The delivery time is what we would call a leading indicator. It’s a driver. It’s telling us how we’re doing before we actually get that customer satisfaction survey back. And this might be your lag. As it’s already happened, the customers are either satisfied or not satisfied, and we learned about that in the survey’s score. But the delivery time would actually be leading to let us know how people are maybe thinking about how we’re doing as an organization and how we’re satisfying our customer.

Leading, aligning indicators, cutting them in next level thing with the scorecard but broken down pretty simply here. All of the goals in your strategic plan are on the scorecard with your measures and your targets. That’s a scorecard. The visual representation of these measures is what we call a dashboard, so just making sure we’re clear about the tools in the Balanced Scorecard. We have strategy maps, we have scorecards, and we have dashboards, which are the visual representation of your measures and targets. With that, that’s your Balanced Scorecard fundamentals.”




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