Balanced Scorecard Methodology

The Origins

In 1992, Harvard professor Dr. Robert Kaplan and consultant David Norton introduced the world to a powerful new concept in a Harvard Business Review article entitled “The Balanced Scorecard—Measures that Drive Performance.” Over the following 15 years, that concept—which started out as an improved way to look at measuring corporate performance—evolved and matured into a powerful methodology for improving organizational alignment and strategy execution. The name “Balanced Scorecard” doesn’t do justice to the rich set of tools (like strategy maps) and techniques (like cross-functional Theme Teams) that have grown up around the initial measurement framework. At the core of the methodology is the still-valid belief that managing organizations using almost exclusively financial performance measures is far from ideal. The financial measures may be the ultimate measure of success for a for-profit corporation, but they are lagging indicators and exclusive focus on them can drive counter-productive behavior. Instead, Kaplan and Norton reasoned, organizations should manage based on a balanced set of leading and lagging performance indicators across four different perspectives. The perspectives, which remain widely used by corporations who use the Balanced Scorecard are:

• Financial
• Customer
• Internal Processes
• Learning and Growth (including workforce, technology, culture and infrastructure)

As successful BSC practitioners have learned, the power is not based on those specific perspectives, but rather on having the appropriate perspectives for each type of organization.

The Evolution

By the late 1990s, when Kaplan and Norton were working on their second book about the methodology, the emphasis on measurement had given way to an emphasis on strategy execution and alignment. The scorecard of balanced performance measures that had been the focus of the initial HBR article was now just one tool in a broadening methodology. The Strategy-Focused Organization introduced the strategy map as a critically-important tool for achieving the best results in creating a Balanced Scorecard. Over the years, the methodology was refined though experience of thousands of organizations and the work of a large number of consultants and authors. Specific practices—such as those in the Balanced Scorecard Institute’s Nine Steps to Success™ and Paul Niven’s “Balanced Scorecard Step-by-Step” approach—helped establish a rich methodology that added substance to the theory. Kaplan and Norton’s consulting group, The Balanced Scorecard Collaborative (now a Palladium company), continued to do extensive research and provided a steady stream of material built around their framework.

Even though the name “Balanced Scorecard” seems to emphasize the measurements, the main focus should not be on the measures. Dr. Kaplan advised a large audience at the 2005 annual conference for the Institute of Management Accountants, “Don’t go on a hunt for the right KPIs [Key Performance Indicators]. We didn’t understand that in 1992.” His position is clarified further in a 2004 presentation where Dr. Kaplan emphasized the proper understanding of the BSC by stating: “A successful Balanced Scorecard program starts with the recognition that its not a metrics project. It’s a CHANGE PROCESS.” This updated understanding of the BSC is reflected in the Balanced Scorecard Collaborative’s definition of the term:

The Balanced Scorecard is a framework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behaviour and performance.

The Fundamental Principles and Terms

The BSC framework, along with the tools and practices that make up the BSC methodology, help organizations of all sizes and types overcome many of the obstacles to strategy execution and performance improvement—such as organizational silos, stratification between executive leadership and front-line staff, poorly defined strategy, and a weak understanding of most employees on how they can best support the organizations strategy. Strategy Maps, which have become the flagship of the methodology, can take a strategy and translate it into a series of linked well-defined Strategy Objectives which clarify the choices and the drivers that lead to successful execution. The four perspectives give structure to the strategy map and force an organization to achieve a consensus and clearly communicate on how high-level goals like increasing profitability or growing market share are to be accomplished. What value needs to be delivered to the customers in order to achieve the financial results? What internal processes need to be changed or improved to deliver that customer value proposition? What workforce, infrastructure, or technology capabilities need to be enhanced to enable or sustain the operational changes or improvements that will allow the organization to deliver on the clearly-defined customer value proposition? The answers to these questions are depicted as ellipses linked together in chains that are connected by arrows, representing hypotheses about cause & effect relationships.

Once these questions are answered by defining clear Objectives in a top-level strategy map, the strategy is then “cascaded” down through the organization, as each sub-set of the organization defines their own Objectives and identifies how they will contribute to the objectives on the top-level strategy map. By identifying cross-functional dependencies and establishing ownership for the needed changes, the process helps prioritize and orchestrate the changes that are key to successful execution of the strategy. Carefully-selected measures and targets are then developed for each Objective to enable performance monitoring and corrective actions. Organizational performance management can then focus on a carefully-selected set of measures that are clearly linked to the organization’s strategy. Strategic Initiatives, or discretionary projects that are crucial to the strategy, can then be launched and monitored to close performance gaps in the drivers of the desired outcomes. A leader in one organization that was adopting the BSC commented, “The BSC helps identify the critical things that are important and makes them urgent by putting measurements and focus on them.”

Applying the Theory to Government and Non-Profit Organizations

In the late 1990s, many non-profit and government organizations learned that they could benefit greatly from the principles of the BSC methodology. It needed to be adjusted to better suit their situations—in which generating profits and financial returns for shareholder was not the ultimate goal—but the value of the principles and tools proved to be very valid. Cities like Charlotte, North Carolina, achieved breakthrough performance as a result of their BSC adoption and moved up to being rated the most livable city in the U.S. Federal Government Agencies like the Department of Commerce’s Economic Development Agency experienced dramatic turnarounds when the use of the BSC created focus, alignment and accountability around both strategic drivers and outcomes.

The Growing Popularity of the Methodology

Unlike many “flavor of the month” management fads, the Balanced Scorecard has stood the test of time. There are well over 30 books and countless articles focused exclusively on the topic, and it is increasingly being incorporated into leadership training at nearly all levels in business, non-profit and government sectors. With each passing year, the momentum is growing, not fading, and as the techniques continue to be refined and the case studies grow increasingly powerful, that momentum seems likely to continue. A Google search on “Balanced Scorecard” returns 1,580,000 results, many times more than the number of results for “Quality Circles” or “Management by Objective” or “Lean Management” and more than “Total Quality Management.”

A Common Language for Strategy and Strategy Execution

One of the main hindrances to strategy execution has been the lack of a common language. Accountants can move from company to company, and debits are still debits. An adjusting entry for pre-paid expenses is the same at Motorola and Cargill. There are Generally Accepted Accounting Principles that codify that common language. But when it comes to strategy and strategy execution, there has not traditionally been a standard language or model. What one company calls a goal, another calls and an objective. The variety of terms and the vague or constantly-changing definitions of those terms have historically hindered the advancement of the management science of strategy execution. As a result, most strategic plans sit on the shelf and have about as much impact as most people’s New Year’s Resolutions. In their place, discussions about budgets usually dominate management meetings even though budget-centered management is characterized by many of the short-comings that prompted Kaplan and Norton to introduce the BSC in the first place. Kaplan and Norton have provided the world with a carefully-thought-out framework for alignment and strategy execution. The introduction of that framework, and the widespread acceptance of it among so many people over the last 15 years, has resulted in major advances in the practices of strategic management.

Conclusion

The Harvard Business Review called the Balanced Scorecard methodology on of the most important management concepts of the last 75 years. Over the last 15 years, the methodology has matured and has proven itself in a wide range of applications—from small towns or non-profit organizations to the U.S. Army, large insurance companies and United Parcel Service. Yet, because of the name, the methodology is often misunderstood. Anyone who is involved with the development and execution of organizational strategy, or leaders who want the results that come from aligning their resources to execute strategy, should look carefully at this approach and gain a solid understanding of the power it can bring to helping organizations achieve their vision and succeed with their mission.

Additional Articles on the Balanced Scorecard Methodology

Creating a Customer-Centered Balanced Scorecard