Just When You Thought You Were Done with Report Cards…
Typically, organizations judge their performance using financial key performance indicators (KPIs) like revenue and profit. While financial performance is definitely an indicator of how a business is doing, it doesn’t really give the full picture of how all parts are performing. Consider employee satisfaction, for example. Though we’d assume that high profit means happy employees—ya know, because happy employees work more efficiently—we really can’t use a financial measure to gauge it. So, how do you actually measure how all parts of an organization are performing?
Bring in the Balanced Scorecard!
The balanced scorecard was developed in 1992 by Robert S. Kaplan, an accounting academic, and David P. Norton, a management consultant. They felt that an organization’s performance shouldn’t solely be measured by financial indicators. The balanced scorecard takes into consideration the four perspectives that apply to any business and seeks to use each perspective to answer a strategic question:
- The Financial Perspective – How do we look to shareholders?
- The Client Perspective – How do customers see us?
- The Internal Perspective – What must we excel at?
- The Learning & Growth Perspective – Can we continue to improve and create value?
Within each of these perspectives, objectives are established and corresponding measures are selected. The idea is that each perspective complements one another and gives managers a high-level view of how a business is doing, without relying on a single number to make that judgment.
This tool is also extremely helpful in allowing managers to see the trade-offs that have happened as a result of past decision-making (e.g. how does a financial decision made in the previous quarter impact the score of the client perspective?)
Back to School
Does the idea of using performance within multiple areas to develop an understanding of overall performance sound familiar? That’s because it is! The balanced scorecard is very much like the report cards we used to get in school to gauge overall performance in different areas. Think of it this way: each perspective is like a subject in school (math, English, science, and history, for example); each subject aims to answer a different question about the world:
- Math – Can we use numbers to structure and measure our world?
- English – Can we use or comprehend language to describe something or convince others?
- Science – Can we use the scientific method and understand laws of the universe?
- History – Are we aware of the events and patterns of the past?
Each subject has a set of learning objectives with corresponding assignments (think of these as the measures) that come together to give us our grade within that subject (this is the perspective score). Our grades within each subject are then compiled to give us our GPA, which allows our teachers to gauge how we’re performing in the classroom.
Because each decision you make within your organization has an impact, it’s important to periodically review your scorecard and see how each perspective is affected. Stakeholders should actively review the scorecard and identify areas to make strategic improvements. They should also review objectives and measures; an objective that was relevant when a scorecard was established may not be relevant three years later after an organization has seen a large growth period.
So, What’s My Grade?
This is the beauty of the tool. While it provides a standardized approach to measuring performance, it does so in a way that is totally customizable for each organization. There’s no predefined set of measures that all organizations need to use within each objective, so it allows managers to select KPIs that are relevant to their business. That said, there are some steps that are essential to creating an effective scorecard:
- Define your organization’s mission, vision, and strategy – These are essential as you begin to identify the objectives that your organization will focus on.
- Establish actionable objectives – Choose objectives that you know will be measurable within your organization (think S.M.A.R.T. goals.)
- Create your strategy map – This is used to give a single view of your organization’s overall strategy and identify how each objective within the four perspectives affects one another.