Introduced in 1991 by Drs. Robert S. Kaplan and David P. Norton as a management tool, balanced scorecards provide executives the ability to develop measures that accurately forecast the health and wealth of an organization. Ever since its introduction, it has seen a steady growth of acceptance in the corporate world. Organizations have recognized the power of balanced scorecards for converting vision and strategy into measurable targets and are adopting the use of this management tool.

Balanced Scorecard is a concept that helps translate strategy into action. It starts with the company vision and strategy and then critical success factors are defined. Measures are constructed that aid performance measurement in critical strategy areas. Hence, Balanced Scorecard is a performance measurement system, that:

• is derived from vision and strategy


• reflects the most important aspects of the business


• supports strategic planning and implementation


• aligns the actions of all parts of an organization around a common understanding of its goals


• facilitates the assessment and upgrade of strategy.

In an effort to provide information-age enterprises with efficient planning tools, Kaplan & Norton introduced the Balanced Scorecard consisting of four different perspectives from which a company's activity can be evaluated.

• Financial perspective - which describes what the company provides its shareholders



• Customer perspective - which describes how customers see the company



• Process/Internal perspective - which describes what actions need to be performed



• Learning and Growth perspective - which describes how a company can stay successful

Each perspective provides a company with a measurable goal to monitor. These goals are the real work of a balanced scorecard. The key to the whole exercise is that the balanced scorecard goes beyond mere measurement into actual change. It's a process of first gathering the scores from top to bottom in the organization and then changing the organization so that the scores improve next time they are measured. It's the rudder by which direction changes the company.

To create a Balanced Scorecard: 1. Identify a vision. Where is the organization going? By identifying strategies you learn about how you will get there. 2. Define critical success factors and perspectives, which means you have to ask what do we have to do well in each perspective. Thereafter, ask, "what do we measure to ensure that everything is going the expected way?" 3. Evaluate your Scorecard. Consider, "how do we ensure that we are measuring the right things?" 4. Create action plans and plan reporting and operation of the Scorecard. How do we manage the Scorecard? Which persons should have reports and what should the reports look like?

Norton and Kaplan say strategy is everyone's job in a balanced scorecard environment. It becomes a continuous process of perpetual market and performance target checking, not a one time shot at the target! But you can only get where you want to be if you know where you are already. Benchmarks must be established and then evaluated over time. For this reason, the scoring process has to be comprehensive. It must involve individual employees, as well as the chief executive's office. It's both a top down process, "sharing the strategy and aligning the workforce", and a bottom up process; "internalizing and executing the strategy" say Norton and Kaplan.

While seemingly simple, the process of creating the metrics behind the analysis can be daunting. And because it is a major exercise to undertake, there appears to be a danger of getting too worried about the "how" of doing it, rather than the "why". Certainly the how must inevitably involve automation. Fortunately there's a growth market in balanced scorecard software. There's a whole range of companies who have developed tailor-made balanced scorecard tools.

As with most management tools, for a company to get real benefit, leadership and staff must embrace the concept top to bottom and for the long term. It takes time to implement change. And if you want to improve your corporate health with a balanced scorecard, the work requires dedication, determination and perseverance.

If you are willing to apply the balanced scorecard approach you may be able to change your company from an event-driven, out-of-condition corporation into a coherent, targeted, strategy-focused organization capable of the fast-market-response and the sustained-growth necessary to thrive in today's marketplace.

In summary, the benefits of applying Balanced Scorecard are as follows:

• Balanced Scorecard helps align key performance measures with strategy at all levels of an organization.



• Balanced Scorecard provides management with a comprehensive picture of business operations.



• The methodology facilitates communication and understanding of business goals and strategies at all levels in the organization.



• The balanced scorecard concept provides strategic feedback and learning.

For more information on balanced scorecards, refer to The Balanced Scorecard: Translating Strategy into Action, by Drs. Kaplan and Norton (Harvard Business School Publishing, 1998). Information can also be found on the Missouri Small Business Development Centers web site on the Balanced Scorecard section.

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Authored by: Rick Sparks, Business Development Specialist, University of Missouri Extension
Source: Creating Quality Newsletter, Volume 10, Number 5, May 2001

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