What the Balanced Scorecard Actually is

Originally Posted on November 23 2011

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In a previous post, I said that the performance management model should not be treated as a school report because some KPIs combinations can lead to unstable results.

When a company builds a performance management model, chances are that it will create a Balanced Scorecard. BS is something that is often talked about but hardly thoroughly understood.

The Balanced Scorecard is a schema to arrange logically your key performance indicators. 

The idea was born at the beginning of the ‘90s but it was formalized and gained world popularity in 1992 with a paper written by R.S. Kaplan and D.P. Norton.

 

The BS doesn’t tell which the KPIs to monitor are; it just tells that KPIs have to span four areas:

 

  • Financials
  • Internal Processes
  • Customer
  • Learning and Growth

 

This is the core of the BS system. If a performance management model does not explicitly implement these four areas, it can’t be dubbed a BS So, from the BI professional point of view, be prepared to classify your existing KPIs in four areas, because there’s no Balanced Scorecard if no indicators are in place.

 

Financial indicators may be the indicators we are used to, like ROI, ROE, various margins types, the added value etc.

Internal Process indicators may or may not be of economic nature and they target how efficiently operations are performed. These indicators are well known too.

Customer indicators measure the impact of the company on the customer. Satisfaction, claims, brand knowledge; all refer to this area.

Learning and Growth encompass indicators on the quality of the people who actually operate for the company. Culture and innovation should be treated as key topics, at the same level as financials

 

The new point made by Kaplan and Norton is that all these areas must be equally traced and balanced if the company has to stay on the market. This is not everything, of course, but this is the key point.

 There’s much more to say about the level at which the BS may be implemented and the process behind defining a sensible BS and aligning it with company strategy; but it will be the subject of another post.

Stay Tuned!