Authors: Carolin Feck and Tavonga Shoko
The Balanced Scorecard continues to be a highly relevant strategic business performance management tool. This is despite being published in 1992, when yesterday’s economy was nowhere as dynamic as it is today. Why?
We believe the answer lies across four key factors:
- Evolution – The Balanced Scorecard has evolved from its original design to improve applicability to business
- Un-balancing – Organisations can “un-balance” the Scorecard to suit their specific industries, geographies and markets
- Navigation and Adjustment – Organisations use the Balanced Scorecard to consider long-term strategy while taking advantage of short-term opportunities
- Alignment and Communication – Organisations link the different perspectives of the Balanced Scorecard to create a shared understanding of how an organisation’s objectives and activities link to produce the intended outcomes
We anticipate that, in the context of the paradigm shifts occurring in the world due to the COVID-19 pandemic, many organisations are going to be searching for ways to reframe and manage their business strategies. A detailed exploration of these four factors illustrates the effectiveness of the Balanced Scorecard as a performance framework, particularly in context defined by multi-layered complexity.
The Balanced Scorecard’s Evolution
In a world of technologically enabled strategic execution, it is critical to have a Strategic Business Performance Management framework that maintains its integrity over time. Strategic Business Performance Management is a comprehensive and holistic approach that enables businesses to achieve their objectives by defining their strategic goals, cascading objectives down the organisation, and tracking and measuring performance across the business.
The Balanced Scorecard has shown its worth as a Strategic Performance Management tool since its introduction. The Balanced Scorecard has effectively withstood the test of time, evolving in response to the latest business thinking proving itself as a powerful management tool. It effectively measures short term objectives without losing sight of the long-term strategy driving the delivery of an organisation’s vision and mission.
This function complements Strategic Performance Management’s inherent focus on achieving long-term goals, driven by short term objectives. The challenge that business leaders face today is that their organisation’s strategy caters to a future that is much closer than they think.
At the operational level, the opposite challenge exists: how do you ensure your short-term objectives are far enough away so their impact can be accurately measured, and the result acted upon?
This is the paradox facing Strategic Performance Management. How do you adequately plan for the long term, using short-term inputs while ensuring those inputs are long-term enough to meaningfully impact organisational strategy?
The Balanced Scorecard has evolved to address this conundrum. Furthermore, it has demonstrated durability as more focussed tools have been developed and introduced to optimise specific business aspects, such as Lean Six Sigma, Agile Management, Customer Satisfaction Systems, and Digital Transformation.
The Balanced Scorecard was developed by Harvard Business School professor Dr Robert Kaplan and consultant Dr David Norton. Published in 1992 in the Harvard Business Review (HBR), the Balanced Scorecard is a strategy management framework that seeks to address both long and short-term business considerations. Since its publication, the Balanced Scorecard is today the largest category under Management within the HBR.
The Balanced Scorecard has gone through four major evolutions, detailed below:
It has stood the test of time and proven to be a highly effective tool to strategically manage long term business performance and organisational effectiveness using a top-down approach to define strategic objectives.
“Un-balancing” to suit an organisation’s specific needs
The widespread uptake of the Balanced Scorecard can be traced/linked to its effectiveness as a Strategic Performance Management Framework. It simplifies the individual complexities of long and short term business planning by weighing these elements against one another, requiring managers to make strategic trade-offs by selecting a limited number of critical indicators or metrics within four different perspectives. These perspectives are – with there being slight variations in nomenclature – Customers, Internal Processes, Financial Indicators, and People and Culture.
The metrics and associated weighting within each of the Four Perspectives are allocated according to what is most important to the business from a strategic perspective, within that specific perspective, such as Internal Processes, where different priorities will take precedence. To close the loop, an overall weighting is produced, based on the results in each perspective.
For example, in the People and Culture perspective, 65% can be assigned to short-term objectives, with the remaining 35% to long-term, strategic management. Whichever form these weightings take, the Balanced Scorecard always recognises that a business’s financial performance is invariably linked to Internal Processes, Customers, and People and Culture. It is critical to understand that “balanced” does not necessarily mean equal; it should be perceived as a layer of interconnected perspectives that all work towards the overall outcome of financial performance.
Consider the diagram below:
This flexibility and adaptability are key strengths of the Balanced Scorecard. Your metrics can be adjusted across time-horizons as a business’s goals and objectives change. They can be adjusted on a quarter-by-quarter basis if any gaps have been identified, or to take advantage of any long-term opportunities that present themselves.
The Balanced Scorecard is not a one-size-fits-all measurement tool but rather a framework that can be applied to an organisation’s unique circumstances, objectives and context. It couples structure with adequate flexibility to deploy it in the most beneficial, contextual way.
Navigation and adjustment for long-term strategy and short-term opportunities
It is understood that the Balanced Scorecard acts as a compass for an organisation’s long-term strategic direction, while accounting for tactical operational Objectives and Key Results (OKR). To ensure that the Balanced Scorecard’s short-term inputs are given in a way that complements its holistic picture, OKRs are assessed by bespoke frameworks.
The characteristics of an OKR include:
- A bottom-up/sideways approach so they can be defined
- Directly tied to the business vision and strategic direction but does not necessarily mirror the Balanced Scorecard’s Four Perspectives
- Objectives are aspirational, qualitative and time bound
- Key results are measurable, quantitative and difficult to achieve
- Allows for agile metric definition in clearly defined sprints
- Plugs in shorter performance feedback cycles which leads to faster, defined corrective action
OKR frameworks – as evidenced by their use within the Silicon Valley-based technology sector in the United States – provides tactical direction on key quarterly results that contribute to the overarching business strategy. Metrics between OKRs and the Balanced Scorecard must be strictly split based on strategic, tactical and operational focuses. If done correctly, OKRs will cascade and improve goal alignment across an organisation’s different levels. Given the fast-paced nature of today’s business environment, OKRs also equips a business with the performance tracking they need to account for market speed.
Achieving organisational Alignment and Communication through the Balanced Scorecard
As Kaplan and Norton note, the Balanced Scorecard can drive a company’s strategy and operations, and be the common language the business coalesces around. It very clearly and visually provides a roadmap for managers and employees to follow, where through referencing the scorecard, questions such as, “What are we doing?”, “Why are we doing this?”, “Where are our efforts ultimately making a difference?” can be answered quantitatively. It makes organisational progress relevant, accountable, relatable and allows for employees to take ownership of their contribution to the business’s overarching objectives.
It encourages managers and senior leaders in the business to consider all metrics holistically and systemically, instead of on a department or function basis. The value of a systems-thinking based approach, where considering all metrics holistically and how they relate to one another, cannot be underestimated. Doing so shows employees’ need to improve, what is performing well and how performance in one metric negatively or positively affects another.
To achieve this understanding and buy-in, the concept of a strategy map (shown below) was developed to demonstrate how the internal actions have a direct and profound impact on other departments and the achievement of the desired outcomes i.e. customer satisfaction and excellent financial performance.
As research has shown, the Balanced Scorecard is still in wide use due to these inherent strengths. However, it is not without its flaws.
The paradigm shift: organisations can strategic changes, using the Balanced Scorecard
The Balanced Scorecard is a tool that can be of exceptional use and utility to a business, but careful thought, deliberation and consensus must be reached internally on what is important to the business before its creation. It is not a trivial matter to design and implement the Balanced Scorecard, with many CEOs focusing on design, but overlooking application. Design cannot function without application and vice-a-versa.
We believe a paradigm shift is underway in how organisations and their leaders adapt to accelerated change within the marketplace. This is particularly applicable in uncertain times such as these, with this phenomenon possibly accelerating or self-iterating due to the unforeseen effects the historic COVID-19 emergency has placed upon the market.
The present offers an opportunity to business leaders to refresh their strategy and apply the Balanced Scorecard in their organisations to guide their journeys as they pursue long-term strategy and search for short-term opportunities. Letsema is experienced and skilled in the design and implementation of the Balanced Scorecard across different organisations and sectors. If your organisation requires deep and experienced expertise in this area, we are here to help.
If you want to design and implement a Balanced Scorecard to guide how you strategically manage your business, contact us at nextgen.operations@letsema.co.za, info@letsema.co.za or connect with Letsema via LinkedIn.
