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Developing and Using Balanced Scorecard Performance Systems

Private and public organizations find themselves continually trying to do more with less. As I visit business and government managers around the world, I am reminded of Stephen Covey's quote: "People and their managers are working so hard to be sure things are done right, that they hardly have time to decide if they are doing the right things."

Doing the right things and doing things right is a balancing act, and requires the development of good business strategies and efficient operations to deliver the products and services required to implement the strategies. Competitive pressures on private businesses, and performance improvement and reform pressures on public sector organizations, mandate that organizations continually worry about executing good strategy well, at the same time that they worry about running business operations efficiently. Today's organizations need to be both strategically and operationally excellent to survive and meet tomorrow's challenges. One framework that helps achieve the required balance between strategy and operations is the Balanced Scorecard.

The Balanced Scorecard is a Performance Management system that can be used in any size organization to align vision and mission with customer requirements and day-to-day work, manage and evaluate business strategy, monitor operation efficiency improvements, build organization capacity, and communicate progress to all employees. The scorecard allows us to measure financial and customer results, operations, and organization capacity.

This article discusses how to develop a Balanced Scorecard performance system, explores issues that organizations face in building and implementing scorecard systems, and shares lessons learned from organizations that have taken the Balanced Scorecard journey.

Originally developed as a framework to measure private industry non-financial performance, Balanced Scorecard systems are equally applicable to public sector organizations, but only after changes are made to account for the government mission and mandates, not profitability, that are unique to almost all public sector entities. (Some public organizations generate and use revenues to offset expenses and minimize the need for annual Congressional appropriations; their operations are more like a business than a government entity, and they could use the private sector scorecard model).

Originally developed in the early 1990s, the Balanced Scorecard has migrated over time to become a full Performance Management system applicable to both private sector and public (and not-for-profit) organizations.¹ Emphasis has shifted from just the measurement of financial and nonfinancial performance, to the management (and execution) of business strategy.

Figure 1. Balanced Scorecard Performance Management System

Balanced Scorecard systems give us the ability to view three different dimensions of organizational performance: Results (financial and customer), Operations, and Capacity, as shown in Figure 1 above. The figure also shows the components of a fully developed scorecard system: Business Foundations, including vision, mission, and values; Plans, including communications, implementation, automation, and evaluation plans, to build employee buy-in and communicate results; Business Strategies and Strategic Maps, to chart the course and define the logical decomposition of strategies into activities that people work on each day; Performance Measures, to track actual performance against expectations; New Initiatives, to test strategic assumptions; Budgets, including the resources needed for new initiatives and current operations; Business and Support Unit Scorecards, to translate the corporate vision into actionable activities for departments and offices; and Leadership and Individual Development, to ensure that employee knowledge, skills and abilities are enhanced to meet future job requirements and competition. We'll explore each of these components in more depth in this article and a follow-up article, in the next issue of Perform Magazine. In this first article, we'll concentrate  on how to build a scorecard.

In Balanced Scorecard language, vision, mission, and strategy at the corporate level are decomposed into different views, or perspectives, as seen through the eyes of business owners, customers and other stakeholders, managers and process owners, and employees. The owners of the business are represented by the Financial perspective; customers and stakeholders (customers are a subset of the larger universe of stakeholders) are represented by the Customer perspective; managers and process owners by the Internal Business Processes perspective; and employees and infrastructure (Capacity) by the Learning and Growth perspective.

Figure 2. Basic Design of a Balanced Scorecard Performance System

Figure 2 shows an integrated relationship among the key parts of a scorecard system -- Vision, Strategy, and Perspectives. Balance is achieved through the four perspectives, through the decomposition of an organization's vision into business strategy and then into operations, and through the translation of strategy into the contribution each member of the organization must make to successfully meet its goals.

Variations in the basic design are common. Typical changes include changes in the categorization of perspectives (Innovation and Learning, or Employees, in place of Learning and Growth, for example) and the number of perspectives (adding Stakeholders as a separate, fifth perspective, for example).

When the Balanced Scorecard framework is applied to a public organization, such as a Federal agency, a military unit, or a state and local government organization, the framework must be changed to capture the mission-driven nature of public organizations (in contrast to the profit-driven motivation of private businesses). Also, government reform initiatives at all levels of government are placing more emphasis on accountability and results to meet citizen expectations for public services and products. The desired outcome for a private organization is a growing, profitable, competitive enterprise; for a public organization, desired outcomes center on the delivery of necessary, cost-effective services for citizens or members (for not-for-profits).

Figure 3. Public-Sector Balanced Scorecard

Figure 3 shows the basic design of a public sector scorecard system. Note the changed emphasis on Mission (the key driver of a public sector organization), the change in the Customer perspective to Customers & Stakeholders (mission driven customer requirements, subject to government mandates and limitations), and the changed positions of Financial and Customer perspectives. We like to use the term Employees and Organizational Capacity for the final perspective, to reflect the importance of the human system and of capacity building through trained and knowledgeable employees and efficient information technology systems. Also, sometimes a Budget perspective is used in place of the Financial perspective, to reflect the budget formulation and execution processes associated with public accountability of funds.

For public organizations, the broader universe of all stakeholders becomes important as Balanced Scorecard teams account for the impacts of public programs on directly affected citizens, regulators and other oversight bodies, businesses, and the public at large. These changes are much more than cosmetic -- they represent a fundamental shift in the logic of building and implementing a scorecard performance system. But at the heart of the public scorecard system, just like for the private sector, is business strategy.

Strategy is the approach used to accomplish the mission and implement an organization's vision. Strategy exists at different levels within an organization, such as overall organizational strategy to, for example, address certain business markets and eliminate others, or to aggressively pursue research and development internally as a way of developing new products.

Organizations usually have more than one macro business strategy; typically, several common strategic themes or focus areas show up repeatedly across different businesses -- Build the Business, Improve Operational Efficiency (or Effectiveness), and Improve Product Competitiveness, for example. The same pattern is true for public sector organizations, where examples include: Meet Citizen Needs, Enhance Technology Applications, Improve Operational Effectiveness, and Enhance Community Safety and Well-Being. Each of the above strategic themes may contain one or more business strategies that determine what people do on a day-to-day basis.

At the next lower level of strategy, sometimes called management (or department) strategy, managers develop the strategies for their business units that support overall organizational strategy and help propel an organization to reach its goals. But before we know which strategies are successful and which are not, they must be treated as hypotheses to be analyzed and tested as data becomes available from the scorecard management system. We need a framework to develop and manage strategy, and align the work we do with the goals of the organization.

The decision to undertake development of a Balanced Scorecard is a decision to undertake a journey, not work on a project. While there are discreet start and stop points along the way, one should not miss the point that the real value of a scorecard system comes from the continuous self-inquiry and in-depth analysis that is at the heart of all successful strategic planning and Performance Management systems. Start your Balanced Scorecard with the idea that you are in it for the long term, and that changing behavior is at least as important as measuring performance. Start your Balanced Scorecard with the idea that you are in it for the long term, and that changing behavior is at least as important as measuring performance.

The scorecard journey has two phases: Building The Scorecard and Implementing  The Scorecard.

We use a six-step framework to build an organization's Balanced Scorecard, and an additional three steps to implement the scorecard system throughout all levels of an organization. The steps and their sequence are shown in Figure 4. At the end of the first six steps, the high-level corporate scorecard is developed and it forms the basis for subsequent scorecard development. (Sometimes a scorecard journey begins in a strategic business unit or support unit, in which case the unit scorecard is built first and becomes the basis for subsequent unit and corporate scorecards.)

Figure 4.

End Notes

¹ See the description of the original study in Kaplan &  Norton. The Balanced Scorecard.

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Howard Rohm is Vice-President of the Balanced Scorecard Institute, president of Howard Rohm Consultants, LLC and an international trainer, consultant, and facilitator. He has over 25 years of government and private industry strategic planning, Balanced Scorecard, Performance Measurement, and information technology experience. To learn more about the Balanced Scorecard Institute, visit their Web site at www.balancedscorecard.org.