What is the Balanced Scorecard?

A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan and David Norton. They named this system the 'balanced scorecard'. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective.

The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"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 balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

The balanced scorecard methodology builds on some key concepts of previous management ideas such as Total Quality Management (TQM), including customer-defined quality, continuous improvement, employee empowerment, and -- primarily -- measurement-based management and feedback.

Double-Loop Feedback
In traditional industrial activity, "quality control" and "zero defects" were the watchwords. In order to shield the customer from receiving poor quality products, aggressive efforts were focused on inspection and testing at the end of the production line. The problem with this approach -- as pointed out by Deming -- is that the true causes of defects could never be identified, and there would always be inefficiencies due to the rejection of defects. What Deming saw was that variation is created at every step in a production process, and the causes of variation need to be identified and fixed. If this can be done, then there is a way to reduce the defects and improve product quality indefinitely. To establish such a process, Deming emphasized that all business processes should be part of a system with feedback loops. The feedback data should be examined by managers to determine the causes of variation, what are the processes with significant problems, and then they can focus attention on fixing that subset of processes.

The balanced scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomesof business strategies. This creates a "double-loop feedback" process in the balanced scorecard.

Outcome Metrics
You can't improve what you can't measure. So metrics must be developed based on the priorities of the strategic plan, which provides the key business drivers and criteria for metrics that managers most desire to watch. Processes are then designed to collect information relevant to these metrics and reduce it to numerical form for storage, display, and analysis. Decision makers examine the outcomes of various measured processes and strategies and track the results to guide the company and provide feedback.

So the value of metrics is in their ability to provide a factual basis for defining:
• Strategic feedback to show the present status of the organization from many perspectives for decision makers
• Diagnostic feedback into various processes to guide improvements on a continuous basis
• Trends in performance over time as the metrics are tracked
• Feedback around the measurement methods themselves, and which metrics should be tracked
• Quantitative inputs to forecasting methods and models for decision support systems

Does the Balanced Scorecard replace a quality system?
Effective and objective measurements are a vital part of communication, incentivizing and tracking progress towards excellence and the organization goals. Most organizations utilize the traditional financial system of measurements, which focuses upon the past and encourages short-term thinking. The concept of the Balanced Scorecard, to drive organizational performance, has achieved widespread acceptance as a strategic, tactical and operational measurement tool because it aims to translate the organization vision and strategy into a means of measuring performance against those established goals.

The requirements of the ISO series of standards for a comprehensive process of measurement are making this approach an even more attractive aid. The mechanics of the Balanced Scorecard, which reflects the strategy of an organization, and the intention of the ISO standard, are mutually supportive.