What is a Balanced Scorecard?

This is our short and simple guide to the balanced scorecard. It's updated for 2017, and tells you all the basics in plain English.

Overview

The Balanced Scorecard is a management system. It’s a way of looking at your organization that focuses on your big-picture strategic goals. It also helps you choose the right things to measure so that you can reach those goals.

Traditionally, companies have judged their health by how much money they make. Financial measures are definitely important, but they only give you part of the picture. They focus on the short-term, and you’re trying to build an organization to stand the test of time. The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance.

It’s this focus on both high-level strategy and low-level measures that sets the balanced scorecard apart from other performance management methodologies. It takes your big, fuzzy strategic vision and breaks it down into specific, actionable steps to take on a day-to-day basis.

diagram of a balanced scorecard

Perspectives

A balanced scorecard looks at your organization from four different perspectives to measure its health. Each of these perspectives focuses on a different side of your company, creating a balanced view of your organization.

Learning and Growth

The learning and growth perspective looks at your overall corporate culture. Are people aware of the latest industry trends? Is it easy for employees to collaborate and share knowledge, or is your company a mess of tangled bureaucracy? Does everyone have access to training and continuing education opportunities?

Technology plays a major role in learning and growth. Are people able to use the latest devices and software, or are your archaic systems stuck running yesterday’s tech? What are you doing to make sure your organization is staying ahead of your competition?

Internal Business Processes

The internal business processes perspective looks at how smoothly your business is running. Efficiency is important here. It’s all about reducing waste, speeding things up, and doing more with less. Are there unneeded obstacles standing between new ideas and execution? How quickly can you adapt to changing business conditions?

This perspective also encourages you to take a step back and get a little philosophical about your company. Are you providing what your customers actually want? What should you be best at?

Customer

The customer perspective focuses on the people who actually buy your products and services. Are you winning new business? How about keeping your existing customers happy? How are you viewed in your industry compared to your competitors?

Customer satisfaction is a great forward-looking indicator of success. The way you treat your customers today directly impacts how much money you’ll make tomorrow.

Financial

Just because we’re taking a balanced look at your organization doesn’t mean that we want to ignore traditional financial measures. Quite the contrary, the financial perspective is a major focus of the balanced scorecard.

Are you making money? Are your shareholders happy? The financial health of your organization may be a lagging indicator showing the result of past decisions, but it’s still incredibly important. Money keeps companies alive, and the financial perspective focuses solely on that.

Stacking the Perspectives

In the early years of the balanced scorecard, each of the four perspectives were shown as being independent of the others. Over time, however, people began to discover that these perspectives affect each other in surprising ways. It turns out that the way we order them matters.

Modern balanced scorecards show how each perspective builds on the previous one. If you train your employees and build a culture of information sharing (Learning and Growth), they’ll make your company run more smoothly (Internal Business Processes). A better running business takes better care of its customers (Customer), and happy customers buy more of what you’re selling (Financial).

Financial
Customer
Internal Business Processes
Learning and Growth

Strategic Objectives

The next step in creating a balanced scorecard is choosing several strategic objectives for each perspective. Up until now we’ve dealt with large, vague concepts. This is where things get concrete. Some example strategic objectives might be:

  • Reduce Injuries
  • Improve Call Times
  • Increase Profits

Choosing your strategic objectives is definitely more art than science. It’s also one of those things that you can’t just outsource to a consultant to figure out on their own. The people who know the intimate details of your organization are very important here, so get them involved early.

Fortunately, we have some helpful guidelines. Every organization will have different strategic objectives, but all good strategic objectives are alike in several ways.

Starts with a Verb

All of your strategic objectives should begin with an action word. Improve, Reduce, Increase, Optimize, Maximize, Minimize. These are all great words that involve doing something.

Endless

We’re looking for strategic objectives that you’re going to care about for quite a while. This isn’t about one-time events or deadlines. It’s about consistent improvement. It’s “Improve Win Percentage” not “Win the 2017 Super Bowl.”

Actionable

There’s no use focusing on something that you can’t affect. For example, a lower federal interest rate may help your business, but it’s not something you can control. If it’s not actionable, keep it off your balanced scorecard.

Measureable

Some things are just too difficult to quantify. These things are bad candidates for strategic objectives. If you can’t do a brand recognition survey, don’t choose “Improve Brand Recognition” as a strategic objective.

Putting it together

After you’ve chosen several strategic objectives for each perspective, you can layer them on top of the perspectives like this.

For the first time, we can begin to see how an organization’s overall strategy is laid out.

diagram of strategic objectives on the four perspectives Click to enlarge image

Strategy Map

If you already know a little about the balanced scorecard, that graphic showing your strategic objectives on top of the four perspectives may look familiar. It’s the start of something called a strategy map, and it’s a common way to show an organization’s strategy at a glance.

The final step in creating a strategy map is to draw arrows between your strategic objectives that show the cause and effect chain.

You can read your balanced scorecard’s strategic flow by starting at the bottom and following the paths to the top. Your strategy map tells the story of your organization’s strategy.

Strategy maps are so important, in fact, that we’ve created an entire article just for them. We’re not done with balanced scorecards just yet, though!

a finished strategy map

Measures

The final building blocks of a balanced scorecard are measures. Every strategic objective should have one or two things that you measure to determine how it’s performing. These measures need goals and should be measured on a regular schedule.

For example, if a strategic objective were “Increase Acquisitions,” a good measure might be “Number of New Acquisitions.” If the strategic objective were “Increase Employee Expertise,” a good measure might be “Total Departmental Training Hours.”

It’s important to choose a very small number of measures to track. By limiting each strategic objective to one or two measures, you’re able to focus on the things that matter most. Tracking too many measures often means that nothing improves.

Finally, notice how we waited until the very end of building our balanced scorecard to choose measures. That’s because it’s very important to figure out your overall strategy first. If you choose measures earlier in the process, you’ll almost certainly end up measuring the wrong things.

Summary

Balanced scorecards can seem a little confusing at first, but they’re really not that complicated. To summarize:
  • Perspectives
    A balanced scorecard is broken down into four Perspectives.
  • Strategic Objectives
    Each perspective has several Strategic Objectives.
  • Strategy Map
    A chart showing the relationships between strategic objectives is called a Strategy Map.
  • Measures
    Each strategic objective has one or two Measures.

What's Next

This article is definitely not the only resource on the internet. If you’re interested in further reading, we recommend checking out the Balanced Scorecard Institute’s “What is the Balanced Scorecard?” article. Wikipedia is a great resource too if you’re more interested the history of the balanced scorecard. Finally, if you want more of a deep dive, Amazon has some great books available.

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