Strategy Align

Balanced Scorecard

The balanced scorecard turns a strategy into measures across finance, customers, internal process, and learning and growth.

The questionIf our strategy is right, what should we see changing in finance, customers, internal processes, and capability, and are we measuring it?

Model · Robert Kaplan and David Norton, 1992

FinancialResults owners care about
CustomerWhat target customers must experience
Internal processThe few processes that must excel
Learning and growthSkills, systems and climate

Schematic of the four perspectives that the strategy is translated into measures for.

When to use it

A client has a strategy document and a dashboard, and no visible link between them.
Executives report green on financial measures while customer or delivery problems build up, and nobody has a place where those show up.
A merger or reorganization needs one shared statement of what each unit is expected to change, expressed in measures.
Business units track dozens of KPIs and cannot say which of them matter to the strategy.

When to avoid it

The client has no strategy yet. A scorecard needs strategic objectives to measure, and without them it will quietly become the strategy, and a poor one. Do the strategy work first.
The organization is small enough that the leader sees every relevant number each week. A short list of metrics is enough.
The aim is to rate individuals or set pay. Tying measures to pay before they are tested changes how people report, and it is a separate decision.
The real problem is deployment, such as carrying agreed goals down to daily work with regular review. Hoshin Kanri is built for that and the scorecard is not.

Overview

The balanced scorecard describes a strategy as a set of objectives across four perspectives, finance, customers, internal processes, and learning and growth, and attaches one or two measures to each. It supports aligning an executive team on what the strategy is meant to change and how they will know whether it is working. The links between objectives matter more than the measures themselves.

The common misuse is a KPI list sorted into four boxes, which describes activity and not strategy. Build the scorecard after the strategy is stated, not in place of it. The four perspectives are the original design, and other organizations, especially public and nonprofit ones, have adapted them. Critics also note that the original articles did not validate the perspectives or the assumed links.

The four perspectives

Financial

How the strategy shows up in the results owners care about, such as growth, margin, return, or cost. These are lagging results. The other three perspectives are meant to explain why they should move.

Customer

What the target customers must experience for the financial results to follow, such as share in chosen segments, retention, or time to deliver. Choosing which customers is the strategic decision here, and the measures only follow from it.

Internal process

The few processes that must be excellent to deliver what the customer proposition promises, such as order-to-delivery, product development, or after-sales support. Some may be new processes the firm does not run yet.

Learning and growth

The skills, systems, and climate needed to run those processes. This is the hardest perspective to measure and the one most often left thin.

Strategy map

A later addition from the mid-1990s. The objectives are placed in the four perspectives and linked by arrows that state the assumed cause and effect, from capability up to financial results. One or two measures are then chosen for each objective.

What it is not

A KPI list sorted into four boxes. The measures should come from strategic objectives and the stated links among them. Without that, it is a dashboard with a theme.
A pay system. Its aim is to describe and test a strategy. Linking it to bonuses is a separate decision that changes how people report and what they report.
A validated model. Critics have pointed out that the original articles gave no formal validation for the choice of four perspectives or for the assumed cause-and-effect links. The links are hypotheses, and each should be tested in use.

The steps

State the strategy in a sentence

Write down who the target customers are and why they would choose you, in a sentence the executive team can repeat. If the team cannot agree on one, stop. A scorecard built without it measures activity.
Draft objectives in each perspective

Write one to three objectives per perspective, and keep the total under about twenty so the picture fits on a page. Phrase them as things the strategy needs to change, not as measures.
Link them in a strategy map

Draw arrows from capability up through process and customer to financial results. Each arrow is a claim, such as "faster turnaround leads to more lists," that you can test. Weak links, and objectives with no arrows, are the findings of this step.
Choose measures, targets, and owners

Pick one or two measures per objective, with a baseline, a target, an owner, and the initiative expected to move it. Mix leading and lagging measures. Prefer measures the firm can already collect, and write down where a measure is a poor proxy.
Cascade where it is needed

Translate to business-unit or team level only where the unit makes its own contribution to an objective. Remove existing measures that connect to no objective.
Review the logic, not just the numbers

Meet on a regular cycle and ask whether the leading measures moved and whether the lagging ones followed. When a link fails, revise the map. This is how the scorecard tests the strategy.

In practice

Eighteen months into a regional hospital group's strategy, the board pack still carried the same twelve financial measures. The strategy was to grow day surgery for referring general practitioners. The team wrote a one-sentence version, then drew a chain of objectives: recruit and train day-surgery nurses, which shortens theater turnaround, which lets surgeons book more lists, which shortens the wait for a first appointment, which raises referrals, which improves margin per theater day.

Two of the existing twelve measures belonged to no objective and were dropped. No measure existed for the first link, so the team added one. After two quarters turnaround time had fallen and referrals had not risen. The scorecard had done its job. Interviews with referrers showed they cared more about reports back to the practice than about waiting time, so the team redrew the middle of the chain.

What you leave with

A one-sentence strategy statement agreed by the executive team.
A strategy map of about twenty or fewer objectives, linked by stated cause-and-effect claims.
One or two measures per objective, each with a baseline, target, owner, and initiative.
A list of existing measures dropped because they link to no objective.
A review calendar for testing the links, not only reporting the numbers.

Failure points

A KPI list in four boxes

There is no strategy behind it. Each function submits its usual measures, and every one fits some box. Because no cause-and-effect links were drawn, nothing can show that the strategy is wrong.

Too many measures

Each executive adds a favorite, and the scorecard grows to forty items. Nobody can say which ones matter, and the debate about priorities never takes place. The count is a symptom of that avoided debate.

Pay linked too early

Bonuses are tied to measures before the measures have been tested. People manage the number, data quality falls, and the scorecard stops showing the strategy.

No review of the logic

The numbers are reported each month and nobody asks whether the leading measures predict the lagging ones. The links in the map stay untested assumptions, and the strategy cannot be corrected.

Perspectives copied without thought

A public or nonprofit client takes the commercial wording, and the customer perspective lists satisfaction scores while the strategy depends on donors or regulators. Adjust the perspectives to the stakeholders the strategy actually depends on.

The failures above are usually Synthesis & Story: the work was done, but it never became one clear message a client could act on.

Origin

Robert S. Kaplan and David P. Norton published "The Balanced Scorecard: Measures That Drive Performance" in Harvard Business Review in January-February 1992. The article reportedly drew on an earlier scorecard design by Arthur Schneiderman at Analog Devices, which came to Kaplan's attention through a research study in 1990. Their 1996 book, The Balanced Scorecard: Translating Strategy into Action, moved the idea from a set of measures toward a description of strategy. From the mid-1990s, designs were built around a strategy map that links objectives across the perspectives by cause and effect. Later versions adapt the four perspectives for public and nonprofit organizations.

The name is widely used as a general term. Palladium Group, which grew out of Kaplan and Norton's own consulting vehicle, holds trademark registrations on some related names, such as Balanced Scorecard Hall of Fame. Check before using a related name commercially. This note describes the method in its own words.