The Balanced Scorecard is a relatively new performance measurement tool which provides management with a method to align the organization’s strategic plan with its operating budget and ongoing measurement program (variance analysis).
In the traditional planning process, the starting point is the Strategic plan which provides the basis for the Annual Operating Budget. Ongoing comparison of actual results to the budget using periodic variance analysis (usually monthly), provides management with the feedback needed to make adjustments to operations if the results are out of line with the budget.
The missing pieces are often as follows; 1) comparison back to the strategic objectives throughout the year– this can be lost in the frantic pace that is reality for most businesses, and 2) including non-financial performance measures which are at the core of each business and largely are what the business is all about and will dictate its success or failure.
In response to this, many companies have begun using what is known as a Balanced Scorecard, which essentially blends the strategic objectives into the ongoing performance measurement process, and includes financial and non-financial elements of the operations. In this way, management can have a comprehensive view of the business and adjust to changes which affect both strategic and operating objectives throughout the year.
When implementing a Balanced Scorecard, it is important for companies to follow some basics:
• The company should have a robust strategic plan and operating plan in place to guide their long-term and short-term objectives.
• Key Performance metrics from all major aspects of the business should be carefully reviewed. Select those that are measureable and visible, and personnel within those areas have actual control of the results.
• Don’t overcrowd the scorecard – reduce it to a manageable amount that ideally can be viewed on one page. Remember that it is time consuming to gather this information ongoing, so the benefit has to exceed the cost.
• Tailor the scorecard to the company’s strategy – there is no “cookie cutter” method – companies within the same industries will often have different strategies.
• Ongoing measurement is extremely important – companies need to make sure that there is reliable, relevant feedback on each of the performance measures to adjustment behaviour as required. View this as dynamic, not static.
A powerful offshoot of the Balanced Scorecard is that it can be used as a basis for Variable Compensation plans. In other words, link the employee’s bonus with the Balanced Scorecard (which would include strategic and short-term objectives and financial and non-financial components). In this way, the entire organization is aligned with the objectives, and everyone feels that they can make an impact and has visibility on results. A fantastic way to exceed for a company to exceed their targets and be successful!
A high level example of a Balanced Scorecard is depicted below. Remember, this will vary for each company. In each of these areas, there would be specific objectives that are measured ongoing. The feedback from measurement will allow management to adjust and react to changing business conditions.