Introduction to the Balanced Scorecard

Underlying Principles - Why the scorecard works

The Balanced Scorecard has been designed and implemented in many different ways. Whilst the design and use may vary, an effective Scorecard will be based on the following 4 underlying principles.

1. Cause and effect

The principle of Cause and Effect can be seen everywhere. Sometimes there are obvious causes we can choose to elicit a desired effect. e.g. To satisfy our hunger, we eat. Causal relationships are often not always as obvious, or there may be a number of paths to choose from which will lead to the same destination.

Therefore we often make differing assumptions about how we will achieve a desired outcome. Unless cause and effect thinking is explicitly stated, people can have different ideas about how to achieve a strategic goal, which clearly creates conflict and pulling in different directions.

As an example, one customer we worked with had begun to recognise that their most profitable customer segment was small to medium enterprises (SME's), and not the larger institutional customers they had previously been focussed on. In discussing an objective of `Acquire new accounts', people had very different interpretations about how they would go about achieving this. Some saw a complete shift of focus, others envisioned balancing their effort between the large and small customers, whilst others still imagined most of their time would be spent as it had been, predominantly on the large accounts.

The Balanced Scorecard forces groups to agree on explicit cause and effect relationships. This clarifies and aligns the thinking of how key outcomes and strategies will be achieved.

2. Balance of Perspectives

Whilst financial objectives and measures are imperative, they do not provide a balanced and total view of business.

It seems pretty obvious that in order to achieve financial outcomes, we must do a bunch of other stuff within our business, with our staff and most importantly with our customers.

It therefore follows that when we develop plans, when we determine measures to track our progress, and when we review our progress, it is useful for us to consider a range of perspectives. Kaplan and Norton initially proposed the use of 4 perspectives from which to plan and measure our organisations, namely Financial or Shareholder, Customer, Internal process, and Learning & Innovation.

The thinking behind this is that in order to achieve financial objectives, we must consider what we should achieve from the customer's perspective. In order to satisfy our customer objectives, we must focus on achieving excellence in the internal processes that will make the most difference. To excel in our chosen internal processes, we must consider what capabilities and infrastructure we need to develop, in order to sustain our improvement.

This thinking isn't new of course. Anybody who has developed marketing, business or strategic plans will recognise the breadth of their considerations.

However, often the measurement of progress against these plans is where a gap is seen in the application of this common sense.

Because it is harder to measure non financial performance, historically the indicators of success of these plans remained largely financial, even though most of the plan itself focused on these other activities.

By sustaining a balance of perspectives through to our measures of performance, this helps us to keep our plans and activities in view at all times. When we review our progress against our measures, we are also able to reevaluate whether our thinking about the relationships between these perspectives is sill valid

3. Measurement Focuses Behaviour

It is often said that "measurement focuses behaviour."

To reinforce this assumption, consider this.

Currently I am training to run the Sydney marathon. I go out most mornings for a run. At the moment, I am happy just to get out and run about 10 kms (6.2 miles) and get some miles under my feet. No real pressure. I'm enjoying it, but don't know whether I'm on track to achieve my objective. My goal is to run the 42 kms (26 miles) in under 4 hours, which means averaging 10.5 kms/ hr.
As I get closer to race day, I will need to measure my training runs. What impact will this have on me? Clearly it will tell me if I need to work harder, it will give me much greater feel for the race pace I need to stick at. It will focus my training much more than I am currently focused.

This presents us with both an opportunity and a challenge. If our measures are strategic, they will focus people on strategic behaviour that we want to encourage and move toward.

However if the measures we are collecting are remnants from the past, then we may actually be encouraging behaviour that we no longer consider strategic.

For example, an objective to increase cross selling through a telesales desk may be strategically measured through average products per sale per operator. However, an existing measure of call duration (which is linked to an automatic cue system) may continue to be seen as most important by the operators. Therefore, dealing with calls quickly will still be the common behaviour, whilst the time consuming process of cross selling will not be considered desirable.

The Scorecard encourages us to focus on the strategic activities we are trying to encourage. It enables us to choose strategic measures that will support that change in focus. So the above example requires a relegation of the old measure to the background whilst highlighting the new measure and emphasising this with the team.

In this way, a carefully chosen strategic measure will assist the change in behaviour.

4. Navigation involves regular review and response

An aeroplane using auto navigation systems spends 90% of its flight off course, but expends only 4% of total energy consumption correcting course.

Why is that?

Because the plane makes constant and rapid correction ensuring that it never strays far off the intended flight path.

Compare this to a typical business that checks its position and makes responses (against non-financial data) infrequently. The extended time between a thorough review of progress is plenty long enough for the business to drift dramatically off course. This then leads to more significant changes in direction (when a drift off course is discovered) that requires considerable energy and time to bring about.

The notion of navigation draws attention to the need for a regular and comprehensive check of progress against financial and non financial measures. This enables the organisation to make more timely responses to the feedback gained and helps to build a culture of learning and ongoing refinement.

The Balanced Scorecard facilitates regular tracking of progress and ongiong refinement of strategy. As discussed above, the balance of financial and non financial measures ensures a thorough analysis of current progress. The cause and effect linkage maps also provide a clear and simple visual plan of the intended direction, so any changes or refinements made can be readily made for discussion and agreement. This is a far easier way of agreeing on, and communicating changes than most other business planning and objective setting approaches, most of which are found in bottom drawers or top shelves, never to be seen or used again.

Go to Using the Balanced Scorecard.. See Case Studies..

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