“A good balanced scorecard should tell the story of your strategy”
– David Norton and Robert Kaplan, Creators of the Balanced Scorecard
A balanced scorecard reflects the most important high-level KPIs in the execution of an organization’s strategic vision. Organized into four categories, customer, financial, internal processes, and organizational capacity, these KPIs enable an understanding of execution and the tracking of progress towards the important goals tied to the organization’s strategy.
In the 1990s, the balanced scorecard was popularized by Robert Kaplan and David Norton, who introduced it to better align strategy with execution. If the KPIs of a balanced scorecard are moving in the right direction, then an organization’s strategy is also being achieved. Typically, a balanced scorecard covers both short-term (quarterly or annual) and long-term (annual, 3 or 5 years) goals, along with actual performance.
Most companies I’ve worked with have a balanced scorecard or something similar. It provides the leadership team with a broad understanding of the health of their strategy and the organization. There is no one metric which tells a team that their strategy is moving in the right direction. Let’s cover the elements of a balanced scorecard in a bit more detail.
What are those financial KPIs that tell you if you are winning or not? They can cover revenues, costs, inventory, capital efficiency, stock price, EBITDA, and cash flow. The key is to understand how the strategy should impact these KPIs over time.
What are the most important KPIs that demonstrate positive progress with customers and the market(s)? A balanced scorecard could have KPIs covering customer acquisition & loyalty, customer value, market share, net promoter score, customer service, product and service review ratings vs. competitors, new products and services as a percent of revenues, social engagement, among many other potential KPIs. Similar to the financial KPIs on a balanced scorecard, the key is to understand which metrics are important to drive given the particular strategic initiatives you have in place.
As I’ve stated before, in an organization, everything everyone does is a process and should be focused on developing and delivering the customer value proposition & journey. Changes in strategy and vision inevitably necessitate changes and improvements to internal processes. Creating goals for those changes and improvements, abstracting them as Key Performance Indicators (KPIs), and measuring and monitoring progress are critical components to a balanced scorecard.
Typically, management teams pick the KPIs tied to important processes within the core competencies or critical functions that necessitate change and improvement for a strategy to be executed. For your organization’s strategy, are those important processes and functions part of sales, marketing, operations, product development, finance, HR or other functions? Another way to think about internal process KPIs is to think through the output of the important processes, whether they be around productivity, project status and completion, new products and services, patents, sales pipeline, etc.
Often, with strategic change, creating the right goals and KPIs for internal processes can be a challenge, since they might not be consistently measured. If, the first step is to actually create the capabilities to measure, put that on the balanced scorecard as a short-term goal and KPI.
As the capacity of an organization increases so does the ability to create value. Organizational capacity is an important element to the balanced scorecard, yet figuring out the right KPIs can be challenging. Some of the most prevalent KPIs include employee engagement scores, employee retention, open positions, number of employees, revenue per employee, knowledge creation & sharing, skills, and training.
What are the best practices to implementing a balanced scorecard?
While a balanced scorecard can be extremely helpful, it can also be a big headache to develop. It is hard work to distill a strategy and vision into a handful of core KPIs. So, here are the best practices for developing and implementing a balanced scorecard:
Figure out your strategy and vision first
I’ve seen too many times where a CEO or management team desperately wants a balanced scorecard, and they dive right into creating one, only to miserably fail since they don’t have a strategy. Figure out your strategy and vision before you start creating your balanced scorecard. Your strategy and vision will encompass your big and clear goals and initiatives, which flows to your balanced scorecard.
Have SMART long-term and short-term goals
Make sure the key performance indicators have SMART (Specific, Measurable, Achievable, Reasonable, Time-bound) long-term and short-term goals.
Don’t go overboard
Focus on the high-level most important KPIs to put on your balanced scorecard. Typically balanced scorecards have about a dozen KPIs, or 2-5 for each category (i.e., financial performance, customer, internal processes, and organizational capacity) of the balanced scorecard.
Focus on those KPIs that can be consistently measured
I’ve seen a lot of balanced scorecards with KPIs that are only measured once a year. It is hard to understand if you are making progress if you only update the KPIs of a balanced scorecard once a year. So, focus on those KPIs that you update at least quarterly, in some cases every six months. Though, those KPIs, which can be updated at least weekly or monthly, typically are more informative and actionable.
Cascade KPIs down through the organization
Strategic leaders are good at aligning all efforts and resources in achieving the core goals of a team or organization. Use a balanced scorecard to align every level of an organization by cascading the KPIs, which means having every team create their own set of KPIs that are tied to and contribute to realizing the KPIs on a balanced scorecard. This is much easier said than done, but once it is done, it will ensure alignment across an organization.
Tie the balanced scorecard to compensation
If you want people to focus on KPIs, you should create incentives to focus them. Allocating some of the bonus criteria to achieving balanced scorecard KPIs can go a long way to providing motivation and alignment to drive the execution of a strategy.
DOWNLOAD THE BALANCED SCORECARD POWERPOINT WORKSHEET
To get you going on improving profit tree, download the free Balanced Scorecard PowerPoint Worksheet.