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Performance Measurement

Balanced Scorecard As A Performance Measurement System

The Balanced Scorecard is the most famous of the performance measurement systems that can be used to implement and monitor a new strategy or group.

What Is The Balanced Scorecard

The Balanced Scorecard is a short summary report of the key performance measures of a business, both financial and non-financial.

It tells the story of what the business is trying to achieve through its business strategy and how well it is succeeding in its implementation.

The Origins Of The Balanced Scorecard

Like many others who were using a broad mixture of measures to monitor performance in business in the late eighties and early nineties to overcome the shortcomings of traditional financial performance reporting (like driving by looking through the rear view mirror) I was astonished by how the idea of the balanced Scorecard caught fire as a bold, new concept.

Wikipedia reports that the first balanced scorecard was created by Art Schneiderman (an independent consultant specialising in the management of processes) in 1987 at Analog Devices, a semi-conductor company in the USA.

He shared his ideas with Robert Kaplan and David Norton and it became the basis for two popular articles in the Harvard Business Review and then a successful book.

  • “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, Feb. 1992
  • “Putting the Balanced Scorecard to Work”, Harvard Business Review, Sept. 1993
  • “The Balanced Scorecard: Translating Strategy into Action”  (1996)

Since then, Kaplan and Norton have extended the balance scorecard system with more books

  • The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment (2000)
  • Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004)
  • Alignment: How to Apply the Balanced Scorecard to Corporate Strategy (2006)

Before I go deeper into the Balanced Scorecard, let’s just step back and think about performance measurement as a general topic.

Introduction To Performance Measurement

“What gets measured gets done” may be a cliché but given the problems of implementing strategies it highlights the need to link performance measures with the developed strategy.

A performance measure has three key aspects:

  • It communicates to staff that performance in the chosen area is important.
  • It indicates the level of performance being achieved.
  • It provides a benchmark and target for improvement efforts.

Establishing a measure allows the four basic performance management questions to be asked:

  • What has happened?
  • Why has it happened?
  • Is it going to continue?
  • What can we do about it?

Traditional Performance Measures

Financial performance measurements often dominate the formal reporting in a business with the monthly management accounts and performance weekly or daily financial summaries.

But these are essentially looking backwards at the effects of past decisions rather than looking at whether the business is building the necessary capabilities for future success.

Financial forecasts of the future help because they focus attention on what may happen, but they are not the full answer for an effective performance measurement system.

Other non-financial information may be produced and distributed in the business but often there is little link between the different performance areas and the overall financial position of the business.

Sometimes there is a proliferation of measures with the inevitable confusion. Here the problem is not having performance measures but having too many.

The Balanced Scorecard

The concept of the scorecard developed by Kaplan and Norton has been heavily publicised and promoted and it became another management fad to use and abuse. That undermines the contribution that a well-designed balanced scorecard can have in a business.

The Four Perspectives In The Balanced Scorecard

The idea of the balanced scorecard is to look at a limited number of measures that are balanced across four perspectives.

  • Financial – how does the company look to its shareholders?
  • Customer – how does the company look to the customer?
  • Internal Process – is the company developing its internal processes to deliver the necessary performance for shareholders and customers?
  • Learning and growth – is the company developing a capacity to develop the future?

Balanced Scorecard Performance Measurement System

The key aspect is that the measures in each of the perspectives must be linked by the business strategy in a unique series of cause and effect relationships. For example;

  • We will make a profit because customers will buy sufficient quantity at a fair price and margin.
  • Targeted customers will buy because the value we provide exceeds the price and the relative value offered from competitors.
  • We are able to deliver that value because we excel at the necessary efficient internal processes.
  • We will survive any attempts by our competitors to copy our advantage by continuing to innovate.

The scoreboard effectively tells the story of the strategy and its implementation. I like this Theory Z scorecard example from the old Halifax Bank in the UK.

After allowing for time-lags, performance in the balanced scorecard indicates whether the strategy is valid.

Different Measures For Different Functions And Levels

The scorecard is intended to give a top-level picture of the company’s current and intended performance across each of the four perspectives but it is essential that the objectives built in to the scorecard are cascaded down through the business.

The ultimate aim is for each person or team to have a series of objectives and measures that encourage everyone to act in a way consistent with the overall business strategy.

More Information About The Balanced Scorecard

At some stage I will be reviewing the books I’ve read on the balanced scorecard and the other performance measurement systems.

Have You Used A Balanced Scorecard?

If your business has developed a balanced scorecard or another performance measurement system to help you to implement your strategy I’m very interested to hear about your experiences.

Please leave a comment.

in 1 – Your KPI, 3 – Your Strategic Positioning

The full title of this short book is

The Mindset Warrior Summary Guide: The 4 Disciplines of Execution: Achieving Your Wildly Important Goals by Chris McChesney, Sean Covey and Jim Huling: Key Concepts, Main Lessons & Theories

In my review posted on Amazon.co.uk, I gave it 4 Stars. This means it is Good and Well Worth Reading.

Here is my review.

Very helpful reminder of the main points of 4DX

The full book of the 4 Disciplines of Execution is quite repetitive. When it first outlined the 4DX approach, I thought it was going to be a brilliant expose of how to get very important things done effectively by a team. Unfortunately, I found it a frustrating read and I wouldn’t be surprised if it’s a book often started but not finished. [continue reading…]

in Best Business Books

The full title of this book by Chris McChesney, Sean Covey and Jim Huling is

The 4 Disciplines of Execution: Achieving Your Wildly Important Goals

In my review posted on Amazon.co.uk, I gave the book 4 Stars. This means it is Good and Well Worth Reading.

Here is my book review.

Great concepts for achieving excellence in virtually any situation

This book is about creating change, getting people to implement a new strategy by changing what they do through commitment rather than compliance.

Many business books are based on looking at successful companies and finding common factors in what they do. Other times, academics will develop their theory and then go out looking for evidence it works. This book is different. [continue reading…]

in Best Business Books

Why Focus On Performance Measures

Having an effective performance measurement system is the key ingredient to knowing your business is under control and producing the results it should do.

Or if something goes out of kilter, you get to know about it quickly and you can bring it back under control by taking whatever actions are necessary.

Measures Are Essential For Independence From Your Business [continue reading…]

in 1 – Your KPI

Welcome to Pillar 1 of the Eight Pillars of Business Prosperity, my system for helping any type of business to increase profits.

The focus of Pillar 1 is on your Key Numbers, Measures and Performance Indicators.

Where You Are [continue reading…]

in 1 – Your KPI

Pillar 1 Your Key Numbers – What’s It All About?

Pillar 1 Your Key Numbers – What’s It All About?

Pillar 1 “Your Key Numbers”  is concerned with establishing where you are in your business, both now and at every stage through your improvement process.

Why Performance Measurement Is Important

In the performance measurement world there are two popular phrases which will help you think about this essential area which is not done well by many of the small businesses I encounter. [continue reading…]

in 1 – Your KPI

How To Measure Marketing Activities

Marketing is a critical activity for any business that is not in a monopoly supply position or operating in a marketing where demand overwhelms the ability to supply. But how can you measure marketing and know if it is working?

“Half the money I spend on advertising is wasted. The trouble is I don’t know which half” is a famous quote from John Wanamaker, a department store entrepreneur in the late 1800s and early 1900s.

One hundred years later, it’s still a sentiment that many business owners and senior managers can relate to.

The Two Types Of Marketing

I normally talk about the two types of marketing being the difference between search marketing and outreach marketing:

  • Search marketing – making sure your business is found when a customer or prospective customer is looking for suppliers.
  • Outreach marketing – reaching out to target potential customers to encourage them to take action to contact you before they begin searching more generally.

Today I want to refer to a different two types of marketing activities:

  • Brand building – promotional activities to increase the awareness of a brand name and (hopefully) the brand positioning, i.e. what the brand stands for and means.
  • Direct response marketing – actions taken to encourage a customer to make contact with you immediately.

There is some crossover since direct response advertising can also help to build brand awareness depending on the extent to which the business name and any slogan is emphasised in the promotions. [continue reading…]

in 1 – Your KPI, 4 – Lead Generation

The full title of this book by Robert Kaplan and David Norton is

The Balanced Scorecard: Translating Strategy into Action

In my review posted on Amazon.co.uk, I gave it Three Stars.

Here is my review.

Sensible idea backed by brilliant marketing.

Back in the early 1990s I was thinking a lot about performance measurement in a manufacturing business and I wanted to reflect more non-financial factors that provided a more balanced view and cascaded our main business objectives down the organisation.

When I read the book I found that the authors shared many of the same ideas as I did. This was no surprise when much of it is common sense when you take the time and trouble to think about it. The problem at that time was few people were really thinking beyond financial measures and a few productivity based volume metrics.

What they did, that I didn’t, was 1) come up with a catchy name and 2) swing a brilliant marketing campaign behind it.

The strength is that when this is explained, it all seems so logical. Of course you need to link KPI to your strategic objectives with a good balance of leading measures that predict future performance with the all important, but lagging, financial numbers.

The weakness is that it’s much harder to do in practice. There’s a cost involved in measuring and reporting anything and the value of monitoring has to come from corrective and supporting actions.

The balanced scorecard has gone on to be extremely popular with big companies and the logic of a balanced set of performance metrics needs to be rippled down into the independently owned SMEs. While this book began it all, there are better books that update the ideas and give you a clearer idea of how to implement eg Paul Niven’s book “Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results“.

There are many thousand of business books, you can see the full list of my reviews at Business Books Reviews by Paul Simister (Please click). I've also narrowed these down to a list of the 12 Best Business Books For Business Owners & Entrepreneurs (Please click).

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in Other Business Books

In my review of

Developing Meaningful Key Performance Indicators

by Clive Keyte posted on Amazon.co.uk, I gave it Three Stars.

Here is my review.

A useful introduction without going into too much detail

Key performance indicators are important but it’s a hard subject to make interesting when you’re writing about it.

The author provides a seven step methodology for creating a set of KPIs for a business based on its objectives. Overall for a low cost book, I thought that it was good effort with plenty of sensible advice which starts with setting objectives. [continue reading…]

in Other Business Books

The full title of this book by Donald Gusfa, Kenneth Gusfra and Daniel Stanley is

The Balanced Scorecard: A Practical Primer To Enhance Your Performance Through Strategic Goals

In my review posted on Amazon.co.uk, I gave it Two Stars.

Here is my review.

Disappointing

I firmly believe in the idea of encouraging small businesses to develop a well balanced set of performances linked to their strategic objectives.

The balanced scored, as developed by Robert Kaplan and David Norton, is such an approach. [continue reading…]

in Other Business Books