I increasingly see organizations struggling to build and maintain a balanced balanced scorecard. What do I mean by “balanced”? Let’s take a closer look.
The first element of balance in the balanced scorecard is in its framework or perspectives. Recall that the balanced scorecard was originally created to respond to the problems associated with the one dimensional, backward-looking financial-only view of business performance. The magic of the balanced scorecard was (is) that it takes a multi-layered approach to business performance measurement and management. That is, it evaluates and helps actively manage the key strategic elements (known as strategic objectives), and cause and effect relationships, that combine to deliver the desired business/financial results. As you know, over time, these strategic elements have come to be grouped under one of the four classic balanced scorecard perspectives: financial, customer/stakeholder, internal process, and learning and growth/organizational capabilities. Experience over thousands of balanced scorecard organizations has shown that using this four perspective approach to the balanced scorecard framework is best for building a strong, balanced foundation for any balanced scorecard.
Needless to say, balance problems can begin when organizations customize their balanced scorecard perspectives in an unbalanced way. One such example is the stakeholder-based scorecard. In this scenario, the organization allots their balanced scorecard perspectives to their various stakeholder groups – such as customers, patients and their families, employees, partners and suppliers, the community, etc. One difficulty with this approach is that most organizations have a long list of stakeholders – which results in either more than four balanced scorecard perspectives (difficult to manage) or a focus on certain key stakeholders only (admirable but risky unless you don’t mind alienating and/or under servicing some of your stakeholders). However, the primary concern with the stakeholder scorecard is that, in exploding out the customer/stakeholder balanced scorecard perspective, the elements of the business that produce the desired stakeholder results are not reliably measured and managed (sounds a bit like the old, financial-based view of performance approach, doesn’t it?). Essentially, the stakeholder scorecard forms an unbalanced foundation for an organization’s balanced scorecard. This is just one example.
The best advice to ensure that your balanced scorecard is built on a balanced foundation is to begin with the traditional balanced scorecard framework/perspectives and to only customize with caution (always keeping an eye on optimizing a balance in the selected perspectives).
The other source of balance in a balanced scorecard is the indicators included on it. While some balanced scorecard proponents will say that your balanced scorecard should only include outcome indicators, you should be wary of following this advice. Outcome indicators are often readily available in our organizations, making them accessible and, hopefully, reliable. However, outcome indicators are measures of past performance, making them largely backward-looking (sound like those old financial measures of business performance?). Using just outcome indicators on your balanced scorecard effectively knocks your balanced scorecard off balance – something you want to avoid over the long term.
In the past, we often talked about leading and lagging indicators – with the thinking being that to achieve balance, a balanced scorecard needs to include both types of indicators. More recently, we have maintained this concept but moved beyond the terms leading and lagging – instead we talk about predictive indicators and indicators of past performance. The key to selecting good balanced scorecard indicators is to look at measures of the performance of the business processes that support the various strategic objectives in your organizations’ business strategy. Predictive indicators often come from measures of process inputs and in-process activities. Indicators of past performance can usually be found from process outcomes and outputs. While the goal for indicator balance is to include both predictive indicators and indicators of past performance on your balanced scorecard, this can be a difficult challenge for early balanced scorecards – this is largely due to the usual organizational focus on outcome measures of performance. As your balanced scorecard use matures, your goal is to move towards greater balance in the types of indicators used.
It is important to constantly strive for balance in your balanced scorecard. Key points of balance are in your balanced scorecard perspectives and your indicators. It is important to step back and assess the balance in your balanced scorecard periodically. When an opportunity to enhance balance is identified, it is important to create, and implement, a plan to either achieve or restore balance to your balanced scorecard.
How balanced is your balanced scorecard? Why not take the time today to assess the level of balance in your organization’s balanced scorecard?