Creating a Balanced Scorecard

What is a balanced scorecard? According to Wikipedia, a balanced scorecard (BSC) is a “semi-standard structured report…used by managers to keep track of the execution of activities by staff within their control and to monitor the consequences arising from those actions.” The BSC is used to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals, according to the Balanced Scorecard Institute. Developed and published in the Harvard Business Review in 1992 by Dr. Robert Kaplan and Dr. David Norton, the concept behind the BSC is ensuring that a balanced approach is used to achieve the goals and objectives of an organization. By following a balanced approach, an organization can continually improve and create future value. To say it differently, investments in one particular aspect of the BSC should not be made at the expense or detriment of the others. Managing an organization must not be strictly based on financial gains or losses, but in following a balanced approach in achieving goals and objectives.

A well-defined BSC considers the strategy of the organization, then identifies and monitors a small number of data items (both financial and non-financial items) to measure progress against that strategy. The illustration below depicts the components of the BSC.

Creating the BSC first starts with an understanding or definition of the mission, vision, and strategy of the organization.  The mission is a statement of why the organization exisits. The vision represents the “to be” state of the organization, and the strategy is the plan for how the organization intends to achieve the vision. Knowing the mission, vision, and strategy is critical to understanding what is important to the organization and, therefore, provides guidance for determining the right measures to capture and represent within the BSC. Four quadrants make up the BSC.

• Financial. The financial quadrant answers the question “To succeed financially, how should we appear to our stakeholders?” It goes without saying that a business must be financially healthy in order to thrive. Understanding profit and loss, revenues, and expenses is critical. But what other indicators are important for the financial health of the organization? Are stakeholders realizing value on their investments in our organization? Do we have appropriate risk controls defined and in-place? How are business cases for new initiatives evaluated to ensure adequate financial returns?
• Customer. The customer quadrant seeks to answer the question “To achieve our vision, how should we appear to our customers?” Nearly all businesses recognize the need for customer focus and customer satisfaction at all levels of the organization. A decline in this quadrant may indicate future decline in the organization. The measures in this quadrant should reflect the answers to the following questions: What does your customer value? How do we know our customer is happy with the organization and will continue to be a customer?
• Internal Business Processes. This quadrant answers the question “To satisfy our shareholders and customers, what business processes must we excel at?” This quadrant should contain measures that reflect how well the business is running. Do our products and services meet customer requirements? How do we know our business is running at optimal levels?
• Learning and Growth. The learning and growth quadrant answers the question “To achieve our vision, how will we sustain our ability to change and improve?” In any organization, having a workforce not only with the necessary skills but the right attitudes is critical to long-term success. This quadrant should not only address training, but also learning, cultural awareness, and communications to ensure that employees are in a continual learning and self-improvement cycle. What investments are needed in training and certification? What outcomes should result from a trained workforce? What cultural barriers to achieving the vision and strategy exist within the organization? Are effective and efficient communication systems defined and in place? 

Determining the answers to these questions within the context of the vision and strategy of the organization provides guidance in identifying the measures that need to appear within the BSC.

Let’s consider developing a BSC for a neighborhood lemonade stand. First, we’ll start with the mission and vision of the lemonade stand. (Every business should have mission and vision statements!) The mission of the lemonade stand is “to promote a sense of community by providing refreshment to neighbors and visitors to the neighborhood in a convenient, low-cost way.” The lemonade stand vision is “to be one of the charming features of the neighborhood, while providing a safe environment for learning and entrepreneurialism for its younger residents.”  The strategy (or plan) is to set up a lemonade stand that is both near a street with a lot of cars driving by and close to Mom’s house.

Given this mission, vision, and strategy, what are some of the critical success factors and associated key performance indicators for the lemonade stand?

Use those measures that support the mission and vision of the organization.

Let’s assume that the audience for the lemonade stand BSC is the homeowners association leadership. What do we want them to know about our lemonade stand? Perhaps we want them to know about the customer experience, the owner experience, and the financial performance of the lemonade stand. 
Given this context and the mission and vision statements of the lemonade stand, let’s map the KPIs we identified above into the BSC. Note that not all KPIs may be mapped. We want to use those measures that support the mission and vision of the organization, the effectiveness of the strategy for achieving the vision, the audience of the BSC, and the context of the report.

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• Read your company mission and vision statements. Again, this is critical and cannot be overlooked or skipped. Ensure that you thoroughly understand the mission and vision of the organization.
• Don’t develop your BSC in a vacuum. Collaborate with your peers and your staff; you’re going to need a team effort to achieve the goals and objectives identified in the vision and strategy. By working together to define and agree on the BSC, you can build a better understanding not only of each other’s contributions to success, but also internal alignment and teamwork.
• Does your manager have a BSC? Ask to see it. Better yet, ask your manager to review the BSC with you and discuss how you can contribute to the success of the organization. Identify other opportunities for how you and your team can help achieve the vision and strategy.
• How does your team or department support the organization’s mission and vision? Define how to measure these activities and map those measures to the appropriate quadrant in the BSC.
• Keep it simple and concise. The beauty of the BSC is in its simplicity and conciseness. The BSC represents the critical goals and measures for achieving the vision and strategy of the organization. It is intended to be a dashboard of sorts for understanding performance and the impact of changes in one quadrant on the others. It is not used to depict the life story of an organization.
• Identify your audience and decide what story you’re trying to tell. Once you’ve decided that, use this as criteria for identifying the right metrics to include in the BSC quadrants.
• Periodically review and revise your BSC. Things do change over time. Periodically review your BSC to ensure that it is relevant, aligned with the vision and strategy of the organization, and telling the right story.
  

The BSC is not the end-all, be-all way to report organizational performance, but it is an effective way to quickly understand progress toward achievement of the vision and strategy of an organization.

Doug Tedder is a strategic, innovative, and solutions-driven IT service management professional with more than twenty years of progressive experience across a variety of industries. He’s a resourceful and hands-on leader with track record of success implementing ITSM and IT governance processes. Doug is a certified ITIL Expert and ISO/IEC 20000 Consultant Manager and holds many other industry certifications. In addition, Doug is an accredited ITIL Foundation trainer and HDI Support Center Analyst and Support Center Manager instructor. Follow Doug on Twitter and connect with him on LinkedIn.