Balanced Scorecard
Managing Your Business
You have a great market, thoughtfully created products and services. You are as busy as ever.
Is your business doing any good?
Business guidance can be challenging to any organization. You track the P&L each month, the numbers look good and it appears the business is operating to plan. Financial reports do not tell the entire story; there are aspects of guiding your business that go beyond those found in a spreadsheet. There are tools available to define and measure the effectiveness of your organization to grow your business.
One tool to provide structured guidance for several key aspects of your business is the Balanced Scorecard. This tool uses the concept of ”Metric-Target-Initiative” to each section of the Balanced Scorecard to track your business plan and progress. The four parts of the Balanced Scorecard are: 1. Customer; 2. Employee; 3. Operations; and, 4. Finance.
The goal with any measurement is to drive action and activity. Examining the Balanced Scorecard on a monthly basis keeps you focused on the important items and make appropriate course corrections. I encourage sharing the results with your staff and employees; it is the reward for the efforts put forward. The Balanced Scorecard also provides a concise, equitable tool have discussions which may be difficult – a discussion you may need to have with yourself.
Metric-Target-Initiative
Metric – the measure you use for items within each of the four sections. Keep the Metric simple to obtain; having a simple process will encourage the required discipline to maintain the Balanced Scorecard. The Metrics could be raw numbers, growth rates, ratios, or comparisons to industry standards.
Target – is the desired goal for each Metric to meet your objectives and plan. The Target could be a range or specified number. You could be looking to grow sales or manage expenses - every item in the Balanced Scorecard will have a Target. Each month compare the Metric with the Target.
Initiative – projects or programs in place which drive the business. The results of Initiatives are measured within a single segment of the Balanced Scorecard, but generally impact the whole organization. A sales training program may be measured under the Employee section and will also impact the Financial reports.
Customer
We know there is no business without the Customer, so here is where we start. In the early stages of the business or when a significant redifinition of the company is occuring this section may be defining the target market and how they can be reached. Measures for customer satisfaction, speed of service, cross-selling ratios, or other measures can be included for the monthly review.
Employee
I am intentional about placing the Employee section in the second position, just after Customer. Business reports often lead with the Financial results; comments about Employees appear as an after-thought. In this section, review training programs, staffing plans, or performance review statistics.
Operations
“The immediate pushes out the important.” The tasks of running a business can overwhelm the long-term view; setting aside time each month to review the Operations ensure actions and activities are driving the business toward the objectives. In this section review efficiency, process controls, quality, and other indicators of process.
Finance
The bottom line is still the bottom line. This is true of not-for-profit organizations as well. The key to understanding the profit and loss is defining which components require additional examination. Units sold and to which demographic, or which channels favor certain products are areas to include when measuring the Financial results.
Discipline
There are no short-cuts, success takes work. I am a big believer in Incremental Improvement – the first pass at creating the Balanced Scorecard may not be elegant, but it is a start. Begin with at least one simple to measure item for each of the four Balanced Scorecard sections. Track the results each month, and the results will guide the definition of the future Metric-Target-Initiative.
Interested in developing a Balanced Scorecard for your business? There are many resources available. The Balanced Scorecard Institute can help: www.balancedscorecard.org. You can contact me if you are interested in personalized assistance.
Hi there, a good introductory article to the Balanced Scorecard, thanks. Could I add that the key is to ensure that you start in the right place, i.e. with a Strategy and Vision, then build a set of objectives for your company, then ensure you have a set of metrics (KPIs) to measure your success against the objectives and therefore against the Strategy and Vision. All too often we find our customers starting with a set of initiatives that seem like a good idea at the time but have no bearing on the strategy, have no associated metrics or objectives and have been created to “put out fires”. I would advocate using software to manage the Balanced Scorecard approach, there are a few out there but the software recommended by the Balanced Scorecard institute, QuickScore, is the one we use this with our customers and I have to say it is an excellent package.
Iconax – thank you for the comment…I agree there are fundamentals to address prior to the implementation of the Balanced Scorecard. In an earlier post I wrote about ensuring your organization has a clear Purpose.
Good to have a recommendation for a software tool…worth using when the business is more complicated.
Scott, I couldn’t help but associate many of the comments you made about driving business behaviors toward meeting goals and objectives with thoughts from the series of books by Peter Lencioni. “Death by Meeting” ( http://amzn.to/Joez ) is just one in the series…they are great books and a very fast read, using story telling and easily adaptable to your own business environment.
Lean Six Sigma and Balanced Scorecard strategies to bring discipline to business processes to guide management of the business by fact instead of feeling are great! However, it does require “invested leadership” to hold fast to the habits and business paradigm changes necessary to use these principles with consistency.
Do you have any first-hand examples (success stories) of business small corporations that have implemented these principles after having been in business for years that have shown marked improvement on the quarterly earnings reports ~ P&L statements after implementing Balanced Scorecard?
Ed – Thank you for the comment. In keeping this post focused on the topic of the Balanced Scorecard, I do not go into any expamples like I have in other posts. Perhaps I should edit this and add my personal experience.
I used the Balanced Scorecard to manage my group within HP; I also applied Lean Principles to the operation. You can read some of the results in my LinkedIn profile. Bottom line from that experience: although I did not manage a P&L, I did have an annual budget of $15 million and was accountable for each dollar. Choosing the right items to monitor, the correct measures, and proper initiatives took time (and trial/error). As they developed, I could more easily determine how we were doing relative to Purpose & Goals. When I needed to report to senior management, I generally did not need to make many changes – the material was mostly self-contained & did not require significant verbal explanations.
The process was again successful at a small manufacturing company (again – LinkedIn and my experience at Gibson Holders). In that instance, I was responsible for a P&L. The company had declining sales and been losing money for the prior three years. The Balance Scorecard was a monitoring tool; Lean was a method to change the operations. Together the company had substantial sales increases, reached new markets & customers, and became profitable. At that point the company became an attractive investment and was sold. This company had been in business since 1962 and was operated by the third generation family owners.
The intention of all my posts are to be practical ways any person can apply the principles; whether as a small business owner, startup, manager within a corporation, or even a front line employee – the principles can apply to the benefit of the organization as well as the individual.
Time allowing, I intend to put up posts on some of the principles & tools – SIPOC, DMAIC, RACI, and others as they can be applied from Lean. I hope to share other tools from my personal box – like I did with Opinions and Management/Leadership. Look for Cultural Scarcity and Relational 18′s (still working on the title).
It’s a wonderful post.The emplemented principal helps us.Thank you very much for the post.
Dear Scott
thank for your advaice, could you let me know wich are this many resources available
thay you inform
Mario –
Glad to help!
Resources: you can find help at balancedscorecard.org and additional references at http://www.bain.com/publications/articles/management-tools-2011-balanced-scorecard.aspx.
have fun,
Scott