Balanced Scorecard - Background Information

A few months ago I wrote a blog post arguing that the Balanced Scorecard (performance management system) was a great complement to improvement science.  I argued that the Balanced Scorecard, when implemented correctly, (1) describes the organization and (2) is used for action.  However, the post only listed the key attributes and did not describe these in detail.  Over the next few blog posts I will describe in more detail the balanced scorecard. 

The concept of the balanced scorecard (BSC) was first introduced in a widely cited Harvard Business Review article, “The Balanced Scorecard—Measures that Drive Performance (1992).”  In this article Harvard Business professors Robert Kaplan and David Norton argued that financial results do not accurately describe the health of the organization.  Financial measures are lagging indicators and, as such, are not effective in identifying the drivers or activities that affect financial results.  The problem was that companies used too many indicators and focused on a narrow slice of their organization, which meant they lacked tools to understand the trajectory of the organization.  Leaders within these organizations were often overwhelmed by too much information that came too late for them to make mid-course corrections.   Kaplan and Norton argued that measurement is an effective way to focus organizations, but that most measurement systems ignored the intangible parts of the system that drive the most value.  Companies had been collecting data for a long time, but Kaplan and Norton made two important contributions that vastly improved the effectiveness of performance management.  First, they developed a consistent framework for data collection.  Kaplan and Norton argued that organizations should collect data from four perspectives.

  • The financial perspective. Measures in this perspective should focus on whether the organization is generating financial value for shareholders.
  • The customer perspective.  Measures in this perspective should focus on whether customers perceive that their needs are being met.   
  • Internal processes perspective.  Measures in this perspective should focus on the behaviors that the organization must be great at to be successful.   
  • Learning and growth perspective.  These measures in this perspective should focus on efforts to improve. 

The data collected for performance management should not be a random set of measures, but should be carefully selected to represent each of the four perspectives. 

Second, the BSC is designed to communicate and monitor strategy.  Organizations that develop a BSC must be clear about the cause-effect relationships that make up organizational strategy.  In fact, prior to selecting measures and managing with the BSC a strategy map (a visual tool that displays the cause-effect strategy – example below) must be developed.  Once the strategy is clearly mapped a balanced set of measures is selected to monitor strategy execution. 

The purpose of the BSC is to track a broader range of measures that indicate how the organization is doing with respect to targets (e.g. financial measures) and whether the organization is achieving necessary growth in areas that will result in future performance (e.g. is the organization meeting customer targets). The BSC enables leaders to monitor and adjust the implementation of organizational strategy more regularly than just once per year.  The use of the BSC in nonprofits and government sectors requires that the customer perspective be the focus since value creation for customers is key (as opposed to shareholders or owners).  Thus, the financial perspective is seen as supporting the mission and vision of the organization rather than a central measure of success.

In education the BSC is almost always implemented as an accountability tool.  School districts publish annual scorecards with measures of student achievement (e.g. percent of students proficient of state tests), attendance (e.g. proportion of students absent), or parent engagement (e.g. proportion of parents attending conferences).  School districts set targets and color-code the scorecards based on whether they met the annual targets.  In several future blog posts I will explain why this is the least effective way to use the BSC (and may not even qualify as a BSC).