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An overview of the balanced scorecard (English)
An overview of the balanced scorecard (Spanish)
David Chaudron, PhD
Management often deludes itself, thinking that the “bottom line” is everything. But as Polaroid’s millionaire inventor Edwin Land cautioned, “The ‘bottom line’ is in heaven!”
No manager can ignore the bottom line – a key indicator of what has happened (i.e. a “lagging indicator”). But you need a “balanced scorecard” to measure not just how you’ve been doing, but also how well you are doing (“current indicators”) and how well you can expect to do in the future (“leading indicators”). Only then you will have a clear picture of reality.
At Organized Change, our skill, expertise and experience help you zoom in on the indicators tied to your strategic objectives — indicators that clearly measure performance against those objectives. We’ll also help you set “smart targets” – specific, realistic, measurable, agreed-upon and time-bound – so that you get where you want to go.
Finally, you can count on us to stick with you as long as you need us at your side. Because in the end, persistence and effective allies count, too
Problems with just one measure of success
If you were to ask most anyone how they would measure company performance, they might give you a funny look and say, "How much money the company makes, of course! Isn't that obvious?"
To a certain extent, they are right. Profitability, gross revenues, return on capital, etc. are the critical, "bottom line" kind of results that companies must deliver in order to survive. However, if senior management only focuses on the financial health of the organization, several unfortunate consequences arise. One of these is that financial measures are "lagging indicators" of success; how high or low these numbers go depends on a wide variety of events that may have happened months or years before, ones that you have no immediate control of in the present. Being in a plane falling from the sky is a bad time to realize that you should have done routine maintenance, and maybe filled it with gasoline!
Another consequence of just focusing on financial measures is that they have nothing to do directly with the customers who use your organization's product or service. Decisions may be made which help your organization financially, but hurt the long-term relationships with one's customers, who may eventually reduce the purchases or leave you altogether. We all may have been in the spot of paying for car repairs that we needed, but we knew that we were paying too much and will never go back to that service station again.
Instead of such a short-sighted, after-the-fact view of company performance, we need a more comprehensive view, with an equal emphasis on outcome measures (the financial measures or lagging indicators), measures that will tell us how well the company is doing now (current indicators) and measures of how it might do in the future (leading indicators).
The balanced scorecard is just the remedy for this kind of problem. First of all, the balanced scorecard is a way of:
Measuring organizational, business unit or department success
Balancing long-term and short-term actions
Balancing different measures of success
Human Resource Systems & Development (learning and growth)
A way of tying strategy to measures to action
Under the balanced scorecard system, financial measures are the outcome, but do not give a good indication of what is or will be going on in the organization. Measures of customer satisfaction, growth and retention are current indicators of company performance, internal operations (efficiency, speed, reducing non-value added work, minimizing quality problems), human resource systems and development are leading indicators of company performance.
Just as financial measures have to be put in context, so does measurement itself. More importantly, without a tie to a company strategy as the measure of that company strategy, the balanced scorecard (or BSC) is useless. A mission, strategy and objectives must be defined, measures of that strategy (the BSC) must be agreed to and actions need to be performed for a measurement system to be fully effective. Otherwise- to use an American expression- the company is “all dressed up with nowhere to go.”
Once the company mission, strategy and measures have been defined and agreed upon, the next step is to understand fully the drivers (or causes) behind movement (both up and down) of your balanced scorecard. Without the specific knowledge of what drivers will affect your scorecard, your organization may spend much time, money and effort and achieve very little.
These drivers fall into four key categories:
Environmental - Factors outside the influence of your organization, such as governmental regulations, the economic cycle, local, national and global politics, etc.
Organizational - Systems within the organization such as company strategy, human resource systems, policies, procedures, organizational structure, pay, etc.
Group or departmental - Work processes, group relationships, work responsibilities, work assignments.
Individual - Personality, management style, skills, behaviors.
A good method of outlining the causes and effects among these drivers is with a flowchart or affinity diagram.
After a full understanding the relationships among and between the drivers and measures is reached, the next step is to create a SMART target or objective. A SMART target is:
In reality, though, a SMART target is not enough. A SMART project must be created as shown in the following example- describing not only the target, but the methods, timetables and resources needed to accomplish the task.
We will reduce the current cost-per-barrel by 20% by the end of April 2002 by:
Adding a 10% bonus to all employees’ salaries for every 10% drop of the cost-per-barrel.
Moving to a completely asset- or area-based organizational structure.
Creating a team to eliminate non-value-added steps from the administrative and operations functions, so that only critically essential functions are kept.
The implementation plans for these steps are attached, including personnel assignments, workloads, budget assignments, sequence of implementation, etc.