Balanced Scorecards: A Strategy Execution Tool
Source: Guidon Performance Solutions
By: Guidon Performance Solutions
Does your company struggle to produce results linked to your strategic priorities? Are competing metrics from different functional groups leaving you in a stalemate? Is it clear to leaders and contributors how performance is evaluated?
Establishing a Balanced Scorecard and then incorporating it into a regular business or operating review process can you help you solve those problems.
What is a Balanced Scorecard?
A Balanced Scorecard is a set of metrics carefully chosen to reflect performance on the key objectives most closely linked to your business strategy. In other words, the status or trend in the metrics will reflect how much progress you’ve made on executing your strategy.
The term “balanced” reflects the need for managers to look at multiple indicators to have a comprehensive understanding of their organization’s performance. For that reason, a Balanced Scorecard combines:
- Different data types: Include both outcome and process measures, financial and non-financial measures. (For example, cost per widget is important, but can give a skewed impression if not balanced by service, quality, risk, and other effectiveness measures.)
- Different time horizons: Have some metrics linked to short-term objectives and others to long-term objectives. Look at both lagging indicators that give you an accurate picture of your immediate past (what you’ve just done), and leading indicators that help you anticipate the future. The lagging indicators help you evaluate the effectiveness of actions you’ve taken to improve performance; leading indicators help you become more agile, able to sense and respond quickly to changes in your environment.
- Your customer’s perspective: Every scorecard should include one or more metrics that help you evaluate your performance as viewed by your customers. That typically means including data on end-to-end lead time (how long it takes a customer to have their request filled), quality of the product/service as delivered, ease of getting support, etc.
Benefits of Balanced Scorecards
- Provide “at a glance” ability for managers to gauge progress on important metrics and identify problems
- Keep everyone in the organization focused on what must be done (in execution) to drive progress on strategies
- Resolve competing interests and conflicts that are barriers to execution through regular review and discussion of business, functional, or individual performance
Developing a Balanced Scorecard For Your Company
Balanced Scorecards are one element in a system of communication and performance management mechanisms used to align the organization around the strategy.
They are most useful when they are developed as part of a strategic planning process. Once the senior leaders agree on the overall strategy and goals, they should ask themselves “what must we do to make this strategy a reality?” and “how can we measure how well we do those things?” Those discussions establish the link between execution and strategy, and create the foundation for the balanced scorecard.
In identifying measures linked to the strategies, you should divide the Balanced Scorecard into five sections, each capturing metrics related to the following viewpoints or perspectives:
- Financial goals: What financial numbers must you meet to deliver value for your shareholders? (Ex: return on investment, expense ratios, errors)
- Customer delivery: What is your customer’s experience of doing business with your company? (Ex: Request-to-delivery time, ease of ordering or scheduling)
- Customer quality: What is your customer’s perception of the quality of your product/service? (Ex: Errors or defects in the final outcome; actual functionality vs. what they expected)
- Internal business processes: Metrics related to the business processes that you must excel in to delight your customers and meet operational goals. The metric will depend on your industry. (Ex: risk; speed and effectiveness of new product development)
- Learning and growth of employees: What should you be doing today to help your employees get better at change and improvement? (Ex: measure progress in training/educating employees on key skills identified by your leadership as critical for future performance gains)
Thinking through these issues at each level of the organization lets leaders identify what measures need to be tracked and how they should be weighted for overall evaluation
Using a Balanced Scorecard
Once developed, the Balanced Scorecard should be reviewed at least monthly, and managers should take appropriate action based on their analysis. However the specific frequency of the review depends on the level at which the scorecard is being used:
- An operational or frontline scorecard being used to manage everyday work should be reviewed daily or weekly.
- A scorecard linked to efforts with a longer timeframe (major projects, initiatives) might be reviewed weekly or monthly.
- An executive-level scorecard that summarizes the status of operations or initiatives across multiple areas would most likely be reviewed monthly.
Balanced Scorecard Example
An airline company decided that a critical strategic priority was to improve operating efficiency. The leadership created the following execution linkages in looking at the objective from four critical perspectives:
- From a financial perspective, there must be more customers on fewer planes to improve profitability - seat utilization.
- How will they do that? Looking at the issue from the customer perspective, they need to attract targeted customer segments that value price and on-time arrivals.
- What must the internal focus be? Fast turn-around of planes on the ground.
- What will best enable employees to deliver on that objective? Educating and compensating ground crews regarding how they contribute to the company’s success, and using incentives like an employee stockholder program.
The answers to these questions shaped the content of the Balanced Scorecard, which would need to include measures on profitability (including number of planes vs. number of customers), on-time statistics and prices, turnaround time, and professional development and incentive participation among ground crews.
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