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What is the balanced scorecard?

Mar 31st, 2009 10:40
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The Balanced scorecard: solving the Outdated State of Today’s
Measurement Systems
Measurement is a critical component of any management system. Most
managers recognize its vital role in communicating, incenting, and
tracking the achievement of an organization’s strategy. Despite this
recognition, however, most organizations do not operate with a
measurement system that adequately fills all of these roles. Because
they consist of mainly financial indicators, today’s measurement 
focus organizations on past performance and encourage a short-term view
of strategy, failing to provide the long-term strategic management
capabilities that today’s organizations need.
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The Balanced Scorecard is a proven approach to strategic management 
imbeds the long-term strategy into the management system through the
mechanism of measurement. It translates vision and strategy into a tool
that effectively communicates strategic intent and motivates and tracks
performance against the established goals.
A vision describes the ultimate goal - to be the best. A strategy is a
shared understanding about how that goal is to be reached. The Balanced
Scorecard provides a medium to translate the vision into a clear set of
objectives. These objectives are then further translated into a system
of performance measurements that effectively communicate a powerful,
forward-looking, strategic focus to the entire organization.
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In contrast to traditional, financially based measurement systems, the
Balanced Scorecard solidifies an organization’s focus on future success
by setting objectives and measuring performance from four distinct
perspectives. The Learning & Growth perspective directs attention to 
basis of all future success - the organization’s people and
infrastructure. Adequate investment in these areas is critical to all
long term success. The development of a true learning organization
supports success in the next perspective, the Internal perspective. The
Internal perspective focuses attention on the performance of the key
internal processes which drive the business. Improvement in internal
processes now is a key lead indicator of financial success in the
future. However, in order to translate superior processes into 
success, companies must first please their customers. The Customer
perspective considers the business through the eyes of a customer, so
that the organization retains a careful focus on customer needs and
satisfaction. Finally, the Financial perspective measures the ultimate
results that the business provides to its shareholders. Together, these
four perspectives provide a balanced view of the present and future
performance of the business.
Recognizing a “Good” Balanced Scorecard
The Balanced Scorecard has been quickly accepted by the business world;
it is easy to see the value of a focused set of performance
measurements. However, an effective scorecard is more than a limited
list of measures gathered into four categories. A good Balanced
Scorecard should tell the story of your strategy. Three criteria help
determine if the performance measures do, in fact, tell the story of
your strategy:
    * Cause and Effect Relationships. Every measure selected should be
part of a chain of cause and effect relationships that represent the
    * Performance Drivers. Measures common to most Companies within an
industry are known as “lag indicators.” Examples include market share 
customer retention. The drivers of performance (”lead indicators”) tend
to be unique because they reflect what is different about the strategy.
A good Balanced Scorecard should have a mix of lead and lag indicators.
    * Linked To Financials. With the proliferation of change programs
underway in most organizations today, it is easy to become preoccupied
with a goal such as quality, customer satisfaction or innovation. While
these goals are frequently strategic, they also must translate into
measures that are ultimately linked to financial indicators.
Since initial publication in the Harvard Business Review in January of
1993, the concept of the Balanced Scorecard has been interpreted in 
different ways. While some people have chosen to view the it simply as 
focused set of financial and non-financial measures, others have seen
the dangers of such a simplistic interpretation - in execution, the
measurement system may not reflect the strategy of the organization,
mistakenly guiding an organization in directions that are not aligned
with the strategy.
The Art of Building
The design of a Balanced Scorecard should not be underestimated. There
are two essential ingredients to the successful design:
    * An architect who has a framework, philosophy, and a methodology
for designing and developing the new management system;
    * A client who will be totally engaged and assume ultimate 
of the project, understanding that he or she must live with the results
long after the architect leaves.
The client in this analogy is the Executive Team of the business. The
Balanced Scorecard and the Management System which will be built around
it are, ultimately, the responsibility of the Executive Team. Without
their active sponsorship and participation, a project should not be
attempted, because it is doomed to failure.
Applying a Proven Methodology
The architects of the measurement system employ a four phased approach
in designing a measurement system:
Step 1: Define the Measurement Architecture
Because the scorecard should reflect the strategy, an organization must
develop a distinct strategy. A business strategy and a Balanced
Scorecard that describes it are not random. We have found that the
architecture has several dimensions which must be incorporated into
Scorecard design. A good design process will recognize these dimensions
and provide frameworks to guide the architect and the Executive Team in
their thinking about the strategy. There are frameworks that describe
the strategy and represent the foundation on which a complex design is
based. For example, in the financial perspective of the balanced
scorecard, one could frame discussions about the three primary
components of a financial strategy: (1) revenue growth/mix, (2)
productivity, and (3) asset utilization. Whether operating a growing,
mature, or harvest-oriented business, Executive Teams use this 
to anchor their financial objectives for the balanced scorecard. 
frameworks for the Customer, Internal, and Learning perspectives give
both the architect and clients a common ground from which to consider
the setting of strategic objectives.
Step 2: Build Consensus Around Strategic Objectives
In our experience with the design of Balanced Scorecards, we have never
encountered a Management Team that had full consensus on the relative
importance of its strategic objectives. In general, these are 
management groups in well managed organizations, but the lack of a
shared understanding about the overall strategy and the relative roles
of different groups within the organization keeps the team from 
on priorities. The second step of the development process is designed 
build consensus among the members of the Executive Team around the
long-term strategic priorities of the organization.
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To achieve this goal, each Executive Team member is interviewed
individually to capture his or her implicit and explicit strategies for
the business. These personal visions are then synthesized into feedback
that is reviewed at an executive workshop. During this session, the
Executive Team learns about where there is and is not consensus about
their strategy and discusses unresolved issues. Ultimately, a coherent
group vision for the organization emerges in the form of 10 top 
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Step 3: Select and Design Measures for the balanced scorecard
With the prioritized strategic objectives agreed upon by the Executive
Team, the next step is the selection of measures to track the
achievement of these objectives. Sub-team working sessions focus on the
development of measures for a subset of the objectives, finalizing the
wording of objectives and searching for measures appropriate for
tracking each objective. At the end of this step, the sub-teams
synthesize their recommendations into a united “strategic story.” With
agreement on the strategic objectives and measures, the measurement
system design is complete.
Step 4: Develop the Implementation Plan
For a Balanced Scorecard measurement system to create value, it must be
integrated into the management system of the organization. The final
step of the process entails three primary tasks: (1) identifying the
current practices in various management processes, (2) evaluating
opportunities for integrating the Balanced Scorecard into the 
process, and (3) developing an implementation plan. This step typically
reviews the client’s approach to data reporting and review, management
meetings and decision-making, strategic learning, strategic
communication, personal objective setting and planning and budgeting.
Unlocking the Strategic Payoff of the balanced scorecard
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