Balanced Scorecard

The fundamental purpose of a balanced scorecard is to increase the organization's focus on execution and results by measuring those things that truly matter to the organization. However, some balanced scorecards become so crammed with data that they lose all meaning.

The balanced scorecard, as designed by Drs. Robert Kaplan and David Norton, has four categories: Finance, Internal Business Processes, Learning and Growth, and Customer. According to Kaplan and Norton:

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

The Financial category of the balanced scorecard encourages the identification of a few relevant high-level financial measures. In particular, you should choose measures that help answer the question, “How do we look to our stakeholders?”

Today, with such an emphasis on maintaining financial stability, it is easy to create an “unbalanced” situation with regard to the other perspectives. As such, it is easy for the Financial category to overwhelm the others, if you load it up with all sorts of irrelevant metrics. Choose your measures carefully and make certain that your Financial category in your balanced scorecard truly represents the top-level financial performance measures.

The Internal Business Processes category of the balanced scorecard is all about key performance indicators. A KPI is a metric associated with a key business process. For a KPI to be included in the balanced scorecard, it must help answer the question, “What must we excel at?” It is these KPIs in the Internal Business Processes category that lets you know that the company is running well.

The Learning and Growth category of the balanced scorecard focuses on the people in the organization and answers the question, "Can we continue to improve and create value?" Kaplan and Norton emphasize that "learning" is more than "training"; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems."

In a knowledge-worker organization, people are the main resource. In the current rate of rapid technological change, it is necessary for knowledge workers to be in a continuous learning mode. This category helps assess how well the organization is learning and growing collectively.

The Customer category of the balanced scorecard examines metrics related to customers. Specifically, this category answers the question, “How do customers see us?” For many companies, the Customer category has become the most important category in the balanced scorecard, particularly as it relates to attracting a sustainable base of new and repeat customers.

Nonetheless, successful organizations realize that it takes balance to achieve long-term positive results, which means they can't allow other balanced scorecard categories to take a back seat to the Customer category any more than the Customer category can take a back seat to the Finance category.

After all, the balanced scorecard is all about balance. Each of the four categories – no matter what you call them – is no more or less important than the others.

Examples

Finance

The Finance category of the balanced scorecard encourages the identification of a few relevant high-level finance measures. In particular, you should choose measures that help answer the question, "How do we look to our stakeholders?" In general, you should have no more than five Finance measures in your balanced scorecard.

Measures for this category might include:

  • Days of cash on hand
  • Days in accounts receivable
  • Return on capital
  • Net operating margin
  • Gross to net ratio
  • Bad debt

Today, with such an emphasis on maintaining finance stability, it is easy to create an "unbalanced" situation with regard to the other perspectives. Be careful that the Finance category doesn't overwhelm the others.

Internal Business

The Internal Business category of the balanced scorecard is all about key performance indicators. A KPI is a metric associated with a key internal business process. For a KPI to be included in the balanced scorecard, it must help answer the question, "What must we excel at?" In general, you should have no more than five internal internal business process measures in your balanced scorecard.

Measures for this category might include:

  • Cycle time
  • Defect rate
  • Billiing errors
  • Stock-out rate
  • Cost per unit
  • Distribution costs
  • Time to fill vacant positions

The Internal Business category lets you know that the business is running well.

Learning

The Learning category of the balanced scorecard focuses on the people in the organization and answers the question, "Can we continue to improve and create value?" In general, you should have no more than five learning in your balanced scorecard.

Measures for this category might include:

  • Employee turnover
  • Employee satisfaction
  • Premium labor costs
  • Training and learning opportunities
  • Internal promotion rate
  • Absenteeism

In a knowledge-worker organization, people are the main resource. In the current rate of rapid technological change, it is necessary for knowledge workers to be in a continuous learning mode. This category helps assess how well the organization is learning.

Customer

The Customer category of the balanced scorecard examines metrics related to customers. In a hospital, this could be patients, family members, and physicians. In a university, these could be students, athletic boosters, and donors. For a commercial enterprise, this could be customers, clients, or prospects. Specifically, this category answers the question, "How do customers see us?" In general, you should have no more than five customer measures in your balanced scorecard.

Measures for this category might include:

  • Customer satisfaction
  • Likelihood to recommend
  • Market share
  • Repeat sales

These are leading indicators; if customers are not satisfied, they will eventually find other providers to meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current finance picture may look good.

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