Balanced Scorecard fundamentals - the key to measuring and managing business performance

The emphasis in business today is on performance management (PM). Contrary to popular belief, PM is not solely dependant on the implementation of a business intelligence solution, however. A balanced scorecard is key to create measurements which organisations can use to evaluate and maximise their performance.

Another popular misconception is that merely identifying key performance indicators (KPIs) and being able to see them on demand will allow businesses to measure and manage performance. This is not necessarily so. Access to current KPIs will assist companies to measure performance, not manage it. To manage an organisation, a system needs to be put in place to bridge the gap between long-term strategies and day-to-day actions.

The Balanced Scorecard, introduced in 1993 by Kaplan and Norton, today still serves as the foundation for the performance management systems in many organisations. It provides senior executives and managers with the ability to track performance against established strategic and operational goals.

This approach relies on the monitoring of critical business-strategy-oriented metrics, such as quality, customer satisfaction, innovation and market share - measurements that can often reflect a company`s economic conditions and growth prospects better than its reported earnings.

The Balanced Scorecard methodology is more than a set of metrics, however. It is a system of linked objectives, measurements, targets and initiatives that collectively communicate and measure an organisation`s business strategy. Implemented effectively, it can help a company face both internal and external challenges - such as responding to increased competition and more demanding customers, translating vision into measurable objectives, prioritising initiatives and allocating resources, and communicating business strategies.

Whether implemented as a company-wide or project-specific initiative, a balanced scorecard initially makes use of existing strategies, plans, goals and budgets. Strategic clarification and focus is then required. Organisations need to create a balanced scorecard vision, mission and identify key values, objectives and priorities.

The scorecard development then proceeds with the creation of measures, targets and actuals that the organisation can use to determine its success. The final step is strategy deployment, where projects, tactics and timelines are synchronised. So, for example, financial targets will be aligned with sales and marketing endeavours, human resources will ensure adequate skills are available to staff key initiatives, and all activities and projects will be prioritised to meet larger organisational objectives.

Change management underpins the success of a scorecarding system as `buy-in` from users must be achieved for the system to work. As with any important business systems, it`s critical that staff see the value of the initiative and adopt the new scorecarding system in order to achieve benefits.

Another requirement for scorecarding is to allow executive and divisional leadership within organisations adjust scorecard measures and priorities to meet market changes. Take a CD and DVD manufacturer, for example. As new technology formats such as Blu-Ray and High Definition DVD emerge, these manufacturers must look towards aligning their operations with the new technology, be aware of its likely impact on the markets, and the drivers behind general adoption. In this scenario, scorecard targets for sales staff, production and R&D, among others, are all likely to change.

In the transition period to implementing and developing a Balanced Scorecard for the organisation, accountability, a broad base of information and consistent discipline are necessary. A number of best practice business management methods assist in the creation of a solid strategy. These include capital funds or capital planning; business planning; SWOT analysis; environmental, political and regulatory scans; and the development of human resource, technology and process improvement plans.

The development of a balanced scorecard will entail looking at various aspects of the business. Improving communication with customers, for example, may offer significant benefits but these need to be measured and to implement change benchmarks have to be set. Measures and goals can be created by identifying, among others: the amount of time spent problem-solving, the number of communication efforts per customer and the effectiveness of a focus group or customer engagement programs.

The scorecard can be thought of as a `basket` that holds together all the critical issues for assessment and communication. It creates measures for the customer, the process and employees, getting everyone involved in running the business. In essence, it`s the foundation that allows organisations to not only review performance but action change.