Using a Balanced Scorecard

“The performance culture really is in deep conflict with the learning culture. It’s an unusual executive who can balance these.” Paul J. H. Schoemaker

Robert Kaplan and David Norton developed a performance measurement framework, that added strategic non-financial performance measures to traditional financial metrics, to give managers and executives a more ‘balanced’ view of organizational performance. In their point of view companies who only use financial metrics as the sole determining factor of how a business is performing, miss out on several key components which drive the business as a whole. Non financial metrics are being increasingly integrated into company evaluations throughout the world. CEO’s and CFO’s alike, are beginning to rely on these measures even without documented frameworks to accurately assess them. My experience as an entrepreneur tells me that meeting financial expectations alone will not lead to success. I have used the balance scorecard framework to evaluate and advise many businesses I am a part of. The framework includes 4 components:

1. Customer Perspective: Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost. As managers we need to develop metrics pertaining to our business model which have the ability to effectively measure these categories. How fast are we getting the product/service to market? What is the perceived quality of our product/service? How do we compare with our competitors on performance and service? How do we compare with our competitors on price? We have to develop metrics which provide us with a dashboard view from the customer’s perspective so as to continuously stay on top of the game and deliver superior value to customers.

2. Internal Business Processes: To achieve customer based metrics we have to develop internal business processes which support them. One cannot expect to launch products/services on time, without adequate internal metrics tracking their development. Quality of products/services need to be evaluated through frameworks such as six sigma to ensure that we match expectations. Identify core areas where your business holds competitive advantages, and continue to refine and develop those processes to ensure that a lead is held over the competition. Without substantial controls on internal business processes one will face difficulty reaching broader business objectives.

3. Learning & Growth: In today’s world we have to be continuously equipping ourselves with knowledge pertaining to current trends and developments. An organization needs to focus on continuously innovating and pushing itself to achieve greatness. This component of the framework focuses on the environment that is created within an organization. Important factors such as employee’s access to training opportunities, career development through mentors and advisors, as well as access to latest technological development are measured within this component. Without a workforce which is always growing, an organization will begin to stagnate and lead to several structural problems.

4. Financial: This component was discussed in great detail last week in the series (5 Key Financial Business Metrics). Financial measures are important indicators of the health of a business. Used together with the components listed above, one is able to identify the close relationship they have with each other. If customer satisfaction levels are falling, this will impact directly on turnover growth. As mentioned in the prior series, it is important that financial metrics be aligned with broader strategies to provide freedom for a business to grow. Limiting ourselves to numbers and achieving x% growth or profitability in a quarter is short sighted and will not lead to long term growth.

With sound understanding of the balance scorecard, one can use it to develop metrics in each quadrant in line with broader strategies. It enables a business to clarify vision and strategy and translate them into action. In this week’s series I will go through five broad based non financial metrics which can be used by most businesses. I look forward to your comments and feedback.

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