The Balanced Scorecard is a widely recognised reporting and management approach. The use of the Balanced Scorecard approach can provide enterprises with valuable insights into their performance and provides a platform for ongoing improvement.
What is a Balanced Scorecard?
The Balanced Scorecard links an enterprise’s strategy and vision with detailed operational actions and projects through a structured measurement and reporting process.
As the Balanced Scorecard includes both financial and non-financial objectives which contribute to overall strategy it is considered to be “balanced”.
The Balanced Scorecard method
The Balanced Scorecard uses a structured process to develop a “scorecard” and associated measurement metrics.
The 4 Perspectives
- The Balanced Scorecard measures an enterprise using 4 “Perspectives”. Each Perspective considers a different aspect of the business.
- Financial – financial performance and stewardship
- Customer – customer satisfaction, retention, customer lifetime value
- Processes – efficiency, effectiveness, timeliness
- Learning and Growth – culture, staff development, infrastructure, technology
- A number (there is no set number although 3 to 6 is recommended) of strategic objectives are selected for each Perspective. The objectives are specific, actionable goals associated with each Perspective. Strategic objectives must have the following characteristics;
- They must be action oriented – Strategic Objectives should start with an action such as Improve, Strengthen, Develop etc;
- They are not time bounded – Strategic Objectives are designed to drive continuous improvement, so do not have a target end date or decision point – they are embedded into the way in which the enterprise operates;
- They must be capable of being measured through metrics such as KPIs;
- They must be actionable and able to be influenced by the enterprise (i.e. not external factors).
- For example, Strategic Objectives associated with the Customer Perspective may be;
- Improve the customer lifetime value
- Improve customer retention
- Reduce customer complaints
The Strategy Map
The Strategy Map is developed once Strategic Objectives have been determined. The Strategy Map is a visual representation of the relationship between the Strategic Objectives, and how performance improvement in one aspect of the enterprise contributes to others. An example of the Strategy Mapping for the Finance and Customer Perspectives is given below;
This example shows that the Expense reduction and Improve Tax efficiency objectives directly contribute to the Increase Profit after Tax objective. In addition, a reduction in customer losses will also contribute to an increase in Profit.
- Measurement metrics are then assigned to each Strategic Objective to enable reporting and measure progress. There are usually 2 or 3 metrics used to measure each Strategic Objective. For example, for the Increase Net Profit after Tax objective, metrics may be;
- Increase of 20%
- Increase of $5m
Documenting and communicating
The Balanced Scorecard provides a medium for communicating strategy and associated actions throughout all levels of the enterprise. In larger organisations the Balanced Scorecard may be “cascaded” from the top level to a divisional level, and then further to an individual level. Many software packages are available which support the documentation and distribution of the scorecard.
Summarising the steps
- Determine 3 to 6 Strategic Objectives for each of the Perspectives – Financial, Customer, Processes, Learning and Growth
- Prepare the Strategy Map – map the relationships between the Strategic Objectives
- Assign 2 to 3 measurement metrics or KPIs to each Strategic Objective
- Document and communicate the Balanced Scorecard throughout the organisation
The Balanced Scorecard links high level strategy with operational actions, and thereby promotes effective continuous improvement. If you need help reach out to the seasoned team at Fullstack whom can help with outsourced CFO services.