The Balanced Scorecard

Understanding the Theory of the Balanced Scorecard

Developed in the early 1990s by Robert Kaplan from the Harvard Business School and David Norton, the founder of an IT consulting firm, this management system has been applied to many organizations and across many industries with great success.

The original article in the Harvard Business Review ("The Balanced Scorecard - Measures that Drive Performance", Harvard Business Review, Jan/Feb 1992) starts with the adage we quoted at the start of this article, "What you measure is what you get". The whole system is based on this premise.

Elaborating on what we've already said, companies have historically used financial measurements to gauge their success. The problem with this narrow approach is that not all business processes or operations contribute directly to bottom line financial measures like Return on Investment (ROI) or Earnings Per Share (EPS).

For example, if you have an objective to decrease operating expenses by 5%, you may set a goal to limit customer support calls to five minutes or less - this is designed to increase efficiency and directly cut cost. However, customer satisfaction may decline as a result, which would lead to lost customers, lost revenue, and so on. This means that this well-meaning financial objective actually damaged the company's overall performance.

When you achieve a goal in one area at the expense of operating performance in other areas, the results can be devastating.

Measurement Reinforcing Your Vision

The Balance Scorecard helps you set goals that give appropriate weight to financial and non-financial measures. It does this by starting with the vision and strategy that drives the business. From this, it identifies the drivers of success for that vision, and then develops targets that measure progress towards that success.

And because well-motivated, well-managed people will work to achieve these targets, this means that, by focusing on these targets, your team will adjust its efforts to focus on the successful delivery of your vision.

Not Getting "Bogged Down"

Now, it's easy to get bogged down in performance measurement using this approach. This is where the Balanced Scorecard approach limits measurement to the four critical areas of financial performance, customer service improvement, internal business processes streamlining and innovation and learning.

By identifying the key factors that contribute to organizational success - known as Critical Success Factors - the Balanced Scorecard limits measurement to the things that really matter.

And what really matters is that your company, department or team remains competitive. Both financial and non-financial measures are needed to achieve this, even if these non-financial activities have a less direct effect on the bottom line.