5 Tips When Using a Balanced Scorecard
What is a Balanced Scorecard?
It is a performance metric used to identify, improve and control a business's various functions. The original concept was introduced in 1992 by David Norton and Robert Kaplan. The idea behind it was to take previous metrics for measuring performance and adapt them so that they include non-financial information as well.
Sound sensible, but how does it work?
A BSC involves measuring four main aspects of any company: Learning & growth (how much changes are happening), Business processes (what tasks are performed), Customers (who we serve) and Finance (performance).
Why do a need tips from a blog about this?
Because it’s easy to get this wrong. The BSC can be a transformative tool, enabling growth, alignment and empowering a workforce. Or it can be another set of KPIs to fill in.
What are the pitfalls to watch out for?
The main pitfall is to measure what you want to measure and miss out on the opportunity to let the BSC guide you through a new way of thinking. Here are my 5 top tips when implementing a BSC.
1. Don’t jump in
It’s easy to think that you already know your business, that you know what needs measuring and that the BSC will be a great way to get people interested and focussed on the ‘main’ KPIs.
But the Balanced Scorecard offers an opportunity to rethink what you should measure and why. There is a thought process to follow.
a) The BSC approach suggest that you should write down your future financial objectives. Also jot down where you are now, financial. The difference is the gap.
b) Next consider what your prospects and existing customers will need to receive and experience in order to exchange money with you and bridge your financial gap.
c) Only then, think about the things that your organisation must do, to satisfy your customers and sway them to bridge the financial gap for you.
d) Finally, consider how you will enable your organisation to do the things that will satisfy your customers so they bridge the financial gap for you.
Follow this 4-step process and you will have a map of sorts. Here's an example.
We have created a hierarchy. This hierarchy ensures that the qualifying initiatives and tactics are going to feed up and help to realise the financial goal. All roads lead to Rome. This is where the value lies, and we haven't mentioned one metric or KPI as yet.
Skip this step and you you've missed a huge opportunity.
2. Get in your prospects head
Thinking about metrics from your customers perspective is hard. And there's another pitfall here. Measuring what your existing customers want has two fundamental problems.
a) They are already your customers. This is not a customer retention scorecard. This is a measurement program that is going to develop your organisation, not preserve it. You need to know about the wants and needs of the people that are yet to be your customers, your prospects. You also need to be concerned about the potential for additional value exchange with your existing customer base.
b) People don't always say what they want. This doesn't mean that feedback from your existing customers is all lies. But if you are to ask your customers what they want from you, I think we can all agree that 'reduced prices' and 'improved performance' would likely come up in conversation. This isn't usually the route to growth.
Dwelling on this section is where the BSC will either be a hero or a zero.
Consider what problems you solve in your industry. Are you visible enough? Is your offer and brand credible enough? What is your differentiator? What will your industry need in 5 years? Porter's forces, Ansoff matrix etc. will all become your friends at this stage. Let this strategic thinking guide you through this process.
3. Measure seeds planted
Why do we measure anything? Let's cut to chase. We measure things to influence behaviours. These behaviours result in actions, actions that improve performance.
If you are measuring for any other reason, you can stop reading here.
Let's talk about outputs vs inputs. When you measure an output, such as last week's sales, you are informed about past yields. In my experience, when sales are on the up, your sales force will be able to clearly articulate how and why their behaviours have impacted exceptional results.
However, when sales are tanking, the same people suddenly turn into economists and explain exactly why the cause relates to external forces beyond their control.
Here lies the problem with measuring outputs. The measurement of outputs is better known as trailing measures. Wherever possible (with the exception of the financial results) we are best to focus on measuring inputs. Measurable inputs are known as leading measures.
If your business were a farm, you would be better to focus on the seeds planted, rather than the crops harvested. Using the leading measure of seeds planted means you can influence the behaviour of those who handle your inputs. Increase your chances and leave the weather do as it will.
4. Take everyone with you
If you are wanting to create an exclusive club or inner circle that will cause division and friction across your business, the balance scorecard could be ideal, but you would have to misuse it.
There are a number of reasons as to why wider inclusion should be considered when adopting the BSC. Reasons that go beyond basic social desires of humans.
A buy into the thinking process is likely to result in less training and explanation at the roll out stage. And less resistance at the delivery stage.
Furthermore, the wisdom of the crowd may well come into play. When I have been involved in adopting the BSC my ideas were either verified, enhanced or replaced with better ones. A no-lose situation. The more minds in play, the more likely that the invisible hand of reason is going to guide you in the right direction.
A by-product of this engagement is likely to create greater alignment and unity in your organisation, as well as an increased focus on purpose.
5. Use a professional
An experienced outsider is likely to be able to help you adopt the BSC successfully.
They will understand the process and pain points. Implementing the BSC is not something that should be taken lightly, not something you should do more than once and not something that you want to miss out on.
Those who have walked this path before will not only guide you through the process behind your strategic mapping and metric setting, but they will also be able to challenge your thinking. Putting you are your team through a robust examination to test your critical thinking, logic and evidence is likely to result in a constructive BSC.
A professional will also be able to call on useful tried and tested tools to help you through the strategic thinking work.
Once you get passed the strategic mapping, setting leading metrics that influence the right behaviours can be tricky. Time can be saved, and trial and error periods can be avoided when an expert is on board.
Download our free balanced scorecard template here: Everpro Balanced Scorecard Template