Measuring performance is critical to the efficient management of any business providing, of course, that the correct performance metrics are being measured. Information relating to the performance of the organisation is, therefore, a key management tool for many areas of the business, including planning, resource management and strategy implementation (see our article entitled “Prescriptive Vs Emergent Strategies”, for example).
Historically the focus of performance measurement has tended to be primarily on financial measures, such as profit, turnover, ROI, actual vs budgeted expenditure, cost ratios, etc. The main reason for this is that there are legal obligations to report some of these measures and also investors tend to want to know how the company is doing from a financial perspective. These measurements tend to be historic and, therefore, backward looking – telling how the organisation has done in the past.
On their own, these measures are inadequate since they fail to measure how the organisation is performing in terms of its medium-term and long-term strategic goals. Consequently, an effective performance measurement system needs to include forward looking elements that are directly linked to the organisation’s strategic plan in order to provide the information that will help the organisation gauge the outcomes of the strategic activities and their impact on the organisation’s ability to attain its strategic goals.
Effective performance measurement cannot, therefore, take place in isolation. It must relate directly to the overall strategic objectives and goals that have been set as well as to the key initiatives or actions taken to achieve these goals. The measurement system needs to be able to track overall performance so that managers are able to gauge what progress they are making in achieving these goals. The Balanced Scorecard provides such a system.
The Balanced Scorecard
The Balanced Scorecard is measurement system developed Kaplan and Norton to provide managers with a comprehensive and timely view of an organisation’s performance that is linked to the organisations its long-term objectives and goals.
It does this by first identifying the key activities (projects, actions, etc.) that are critical to the attainment of the organisations goals. It then measures the outcomes of these activates in order to measure their effectiveness and the degree to which they are helping the organisation attain its vision. Equally they can provide an early warning system that tells management that some of the activities are not producing the expected results. This allows management to examine the reasoning and/or assumptions on which the activities are based and take corrective action before the situation becomes untenable.
Originally the Balanced Scorecard established measures across four inter-related perspectives: the customer, internal business processes, continuous improvement and financial performance. Additional perspectives could be introduced depending on the specific needs and situation of the organisation. Examples of additional perspective may include a people perspective, an environmental perspective, etc. I tend not to get too caught up with the idea of perspectives – a perspective is just a name given to a grouping of related measurements.
A Balanced Scorecard approach is thus intended to supplement traditional financial measures of performance with measures that assess performance from the additional perspectives that are aligned with attaining your strategic objectives and goals. Only by developing a comprehensive set of performance measures across, and between, these different perspectives will an organisation be able to monitor properly its overall strategic performance.
I think that if you try to follow the idea of having pre-defined perspective too strictly, you can end up trying to force square pegs in to round holes. The important point is, therefore, not what perspective you use but rather how you identify the perspectives and the measurements that relate to them for your organisation and more specifically for your strategic plan.
It is important to realise that the Balanced Scorecard should not be restricted to use at the organisational level. It can be adapted for use at different levels in the organisation as well as individual parts of the organisation, although these individual scorecards should be linked to each other using the strategic plan as the glue that binds them.