The Balanced Scorecard: a Framework to Drive Corporate Performance in 2023

Harvard Business School professor Robert S. Kaplan, with his colleague Dr. David P. Norton, invented the Balanced Scorecard so organizations could execute their strategy better by translating their business mission and strategy into tangible objectives and performance metrics in 1992. The Balanced Scorecard is a management system that provides feedback on internal business processes and external outcomes to improve strategic performance and results continuously.

The Balance Scorecard empowers employees in their day-to-day activities aligning to their organization's strategic objectives, and to adapt and change in the face of uncertain, volatile external conditions.

This blog offers an overview of the Balance Scorecard framework and introduces Kyligence Zen, a user-friendly tool to manage Balance Scorecard metrics. So, people who are new to the Balance Scorecard can start right away, and more experienced people can use Zen to simplify their current process of managing their Balance Scorecard metrics.

Why do we need the Balanced Scorecard?

Traditional measures of financial performance might have worked well in the last century, but they don't match the competencies and skills that businesses are trying to master today.

Business leaders must understand that traditional financial accounting measures such as return on investment and earnings per share can give false signals about continuous improvement and innovation that today's competitive environment demands.

A lack of understanding of the impacts of only focusing on financial metrics might have led many organizations to pursue growth strategy at any cost and over-hire employees, then lay off their employees as soon as they realized they could not execute their growth strategy.

Academic researchers and managers have attempted to address the shortcomings of traditional performance measurement systems. Some have started looking at relationships between operational and financial metrics. For example, by improving operational metrics such as cycle times and failure rates, financial results will follow.But managers do not need to choose between financial and operating metrics.

They recognize that no single metric can provide clear performance goals or draw attention to critical areas of the business. Managers shall use a balanced presentation of financial and operating metrics.

During a year-long research project with twelve companies that are at the forefront of measuring performance, Robert S. Kaplan and David P. Norton designed a ‘‘Balanced Scorecard‘‘, a set of metrics that offers senior executives a quick but comprehensive view of the company.

The Balanced Scorecard includes financial metrics that show the results of the actions that have been taken. In addition, the complexity of managing an organization today requires that managers be able to view performance in multiple areas at once.

The Balanced Scorecard allows managers to view the business from five important perspectives. The original Balance Scorecard consists of four perspectives. The fifth perspective is added to address Environmental, Social, and Governance (ESG) requirements.

1. How do customers see us? (customer perspective)
2. What must we excel at? (internal perspective)
3. Can we continue to improve and create value? (innovation and learning perspective)
4. How do we look to shareholders? (financial perspective)
5. How can we grow sustainably? (sustainability perspective)

How to create Balanced Scorecard metrics and goals.

First, we have to designate one or more persons who are responsible for each perspective. Ideally one person or team leader is accountable for each perspective. Each team leader shall collaborate with one or more teams to define strategic metrics from each of the five perspectives. Working with their management or leadership team, team leaders shall set the goals or business outcomes for the metrics they own. The following are sample metrics broken down by perspectives: 

1. Customer Perspective: Some sample metrics include customer satisfaction through surveys, the rates of complaints or suggestions, response times, and more; the total number of customers (active customers and new customer acquisition) that you measure through indicators like market share and the percentage of earnings coming from new customers. Additionally, customer loyalty metrics such as purchase frequency or the average time it takes to retain users and reduce measurable delivery times that you can measure through the time you spend on them. 

2. Internal Business Perspective: Reduction in production costs, individual production costs, business process improvements, and how many, process performance, the total number of defects, and full-cycle times, among others.

3. Innovation and Learning Perspective: Talent, skills, know-how, and abilities that you measure through personnel selection and training metrics. It can also include information capital such as value creation, strategy-building, and time and cost metrics. Finally, organizational capital metrics such as leadership, culture, and teamwork. 

4. Financial Perspective: Value creation through indicators, future growth rates at an individual level along with those of the industry on a global level, business rate, profitability measured through indicators, costs, financial structure, and lastly, liquidity.  

5. Sustainability Perspective:

Environmental: Energy consumption in kWh / year, % Energy saved due to process improvements, % CO2 emissions reduction.

Social: % of Management Trained in Safety, % of Employee Trained in Safety.

Governance: % of suppliers reviewed in the context of sustainability, % of suppliers that comply with established sustainability strategy.

Tools to manage the Balanced Scorecard.

Kyligence Zen offers an alternative to these tools. It is very easy to use. Businesses or end users can load their own data (CSV or Excel saved as CSV files) as shown in the next picture and create metrics for Balanced Scorecard quickly.

The following pictures shows simple Balanced Scorecard created using Zen. In the near future, another blog will be written to explained detailed step by step to create various Balanced Scorecard using Zen including the one with more complicated metrics.

Another version of the same Balanced Scorecard by Quarter:

To find out more about Kyligence Zen and how it can benefit your organization, visit kyligence.io/zen or try it for free at zen.kyligence.io/en/user/register.

References:

1. The Balanced Scorecard: Translating Strategy into Action by Robert Kaplan and David Norton.
2. Past consulting projects (Accenture, Cap Gemini)