Balanced Scorecard: translate strategy into objectives, measures and a strategy map
Revenue tells you how last quarter went; a scorecard tells you how next year will go.
In this topic: Execution and control 7
Revenue tells you how last quarter went. A scorecard tells you how next year will go.
The Balanced Scorecard by Kaplan and Norton links financial goals to customers, processes and people. With the four perspectives, a strategy map, the main criticism and a worked scorecard.
Steering on what drives tomorrow's profit
In February, the management team of a testing laboratory sees that its fourth-quarter margin has dropped. The causes started months earlier. Turnaround times crept up, two food producers moved their urgent samples to a competitor, and the lab filled the gap with small one-off jobs that earned little. The monthly report showed revenue, margin and cash, and all three describe the past. A Balanced Scorecard is designed to show such a problem months earlier.
Robert Kaplan and David Norton built their scorecard around exactly this problem. Financial measures report the results of earlier decisions; they do not show whether the business is building the capabilities, processes and customer relationships that produce future results. The scorecard adds those measures and links them to the strategy, so you can act before the margin drops.
What is the Balanced Scorecard? From measurement tool to management system
| Year | Publication | Core idea |
|---|---|---|
| 1992 | The Balanced Scorecard: Measures That Drive Performance (Harvard Business Review) | Four perspectives, each with its own question, so managers see financial and operational measures side by side |
| 1996 | Using the Balanced Scorecard as a Strategic Management System (Harvard Business Review) | The scorecard as a way of managing strategy, not just measuring it |
| 2000 | Having Trouble with Your Strategy? Then Map It (Harvard Business Review) | The strategy map: cause and effect across the perspectives |
| 2004 | Strategy Maps (Harvard Business School Press) | How intangible assets such as skills and systems turn into tangible outcomes |
The 1996 article describes four management processes that make the scorecard more than a report:
- Translating the vision: managers agree what the strategy means in concrete objectives and measures.
- Communicating and linking: the strategy is explained at every level and tied to the goals of departments and people.
- Business planning: budgets and business plans are aligned with the strategic objectives.
- Feedback and learning: management checks whether the strategy works and adjusts it, which Kaplan and Norton call strategic learning.
The four perspectives of the Balanced Scorecard
| Perspective | Question | Typical measures | In a small business |
|---|---|---|---|
| Financial | How do we look to shareholders? | Margin, return on capital, cash flow, revenue growth | What the business delivers to the owner and the lenders |
| Customer | How do customers see us? | Delivery reliability, retention, share of the target segment | The few customer groups that matter most |
| Internal processes | What must we excel at? | Lead time, quality, cost per unit | Only the processes that deliver the customer promise |
| Learning and growth | Can we keep improving and creating value? | Skills, key roles filled, information systems | Often the bottleneck: one key person leaving can stall everything |
In the 1992 article the fourth perspective was called innovation and learning; "learning and growth" came later. In a non-profit or public body, the customer or mission perspective usually moves to the top, because financial results are a condition rather than the goal.
Cause and effect: leading and lagging measures
The perspectives form a chain. Skilled people and good systems make better processes possible; better processes keep customers; loyal customers produce the financial results. Measures at the end of the chain, such as margin or retention, are lagging: they confirm what happened. Measures earlier in the chain, such as training or turnaround time, are leading: they move first. A good scorecard mixes both.
On-time delivery is an outcome for the team that does the work, but a driver of renewals and margin for the company. Record for each measure which objective it is supposed to predict. More on choosing indicators in KPIs and dashboard.
How to draw a strategy map
A strategy map puts the objectives of the four perspectives on one page and draws the arrows between them, from learning and growth at the bottom to financial at the top. Kaplan and Norton introduced it to show how intangible assets, such as skills, data and culture, become customer value and financial results. Two rules keep the map honest: two to four objectives per perspective, and every objective must contribute to one above it. An objective without an arrow does not belong on the map.
Example: the strategy map of a testing laboratory
| Perspective | Objectives | Contributes to |
|---|---|---|
| Financial | Higher operating margin; more predictable revenue from contracts | The end result |
| Customer | Results on time, every time; easy to work with | Contract renewals and margin |
| Internal processes | Short turnaround; digital sample intake; right first time | On-time results and lower cost per sample |
| Learning and growth | Multi-skilled technicians; real-time sample status; account management skills | Turnaround, right first time and contract sales |
Fictitious Firmfocus example: Kestrel Analytical, a testing laboratory with 85 staff that is moving from one-off tests to monitoring contracts with food producers.
Balanced Scorecard example: a worked scorecard
| Perspective | Objective | Measure (type) | Now | Target, year three | Initiative |
|---|---|---|---|---|---|
| Financial | Higher margin | Operating margin (lagging) | 7% | 9.5% | Price floor per test family |
| Financial | Predictable revenue | Contract revenue as share of total (lagging) | 25% | 45% | Monitoring packages and two account managers |
| Customer | On time, every time | Results within agreed turnaround (lagging) | 88% | 95% | Daily capacity planning |
| Customer | Easy to work with | Contract renewal rate (lagging) | No data | At least 90% | Quarterly review meeting with each contract client |
| Processes | Short turnaround | Average working days, standard microbiology (leading) | 4.0 | 2.5 | Extended shift and second analyser |
| Processes | Digital intake | Samples registered through the portal (leading) | 20% | 80% | Barcode kits for contract clients |
| Processes | Right first time | Re-tests caused by lab errors, share of samples (leading) | 1.5% | 0.5% | Second check on manual data entry |
| Learning and growth | Multi-skilled technicians | Technicians qualified for two or more test families (leading) | 30% | 60% | Training matrix and internal trainers |
| Learning and growth | Real-time sample status | Samples with live status in the lab information system (leading) | 40% | 100% | Link analysers to the lab information system |
The financial targets follow from the plan: if revenue reaches €10.6 million in year three, a 9.5% margin gives an operating profit of about €1.0 million (€10.6 million x 9.5% = €1,007,000), against €630,000 now (€9.0 million x 7%). Contract revenue would then be 45% x €10.6 million = €4.77 million.
Fictitious Firmfocus example. Amounts in euro; the logic works in any currency.
Criticism of the Balanced Scorecard: logical is not causal
- Logical rather than causal links: Hanne Nørreklit argued that the relationships between the perspectives are logical rather than causal (Management Accounting Research, 2000). Satisfied customers make good financial results more likely, not certain.
- Time lags: training may take a year to show in turnaround, and turnaround another year to show in renewals. A monthly scorecard puts cause and effect side by side as if they happen together.
- Top-down design: a scorecard designed at head office tends to produce compliance rather than commitment.
- No overall verdict: a list of measures without weights does not say whether the period as a whole went well, which causes disputes once pay is linked to it.
The practical answer: treat each arrow on the map as a hypothesis, check after a year whether the leading measures predicted the lagging ones, note how long each effect takes, and let teams propose their own measures within the company objectives.
How to build a Balanced Scorecard in six steps
- 01
Start from the chosen strategy
The scorecard measures a strategy; it does not create one. Begin with the choices in your strategic plan.
- 02
Draw the strategy map
Two to four objectives per perspective, with the arrows between them.
- 03
Choose one measure per objective
Mix leading and lagging measures, and fix for each one a definition, a data source and an owner.
- 04
Set targets and fund the initiatives
An initiative without money or people is a wish. Check targets against your industry with benchmarking.
- 05
Translate to departments
Each department states which objectives it contributes to and proposes its own measures for them.
- 06
Review, learn and adjust
Measures monthly, initiatives quarterly, the map itself once a year.
Balanced Scorecard, OGSM and OKR compared
| Method | Core question | Strong at |
|---|---|---|
| Balanced Scorecard | Is the strategy working, seen from four perspectives? | Showing how drivers lead to results |
| OGSM | What do we want to achieve, with which strategies and actions? | A multi-year direction on one page |
| OKR | Where do we focus in the coming quarter? | Focus and ambition in teams |
Balanced Scorecard pitfalls
- Too many measures: forty indicators hide the strategy. Eight to twelve is plenty for most firms.
- Measuring what is easy: data that already exists is not necessarily what predicts your results.
- No owner or definition: two departments reporting different figures for the same measure end every meeting in a debate.
- Targets without initiatives: a target that nobody funds will not move.
- A map that never changes: if a driver does not predict the result after a year, replace it.
Balanced Scorecard in a small business and a larger organisation
Small business
One page with eight to twelve measures, taken from the bookkeeping, the planning and the customer system, discussed monthly. Pay most attention to learning and growth, where one key person can carry half the chain. A start-up still searching for a working business model is better served by shorter cycles such as OKRs.
Larger organisation
A group map plus a map for each business unit that connects to it. Let units choose their own drivers within the group objectives. Linking the scorecard to budgets and pay is the hardest part, so agree the weighting before the year starts.
The Balanced Scorecard is the measuring building block of execution and control. For the direction it measures, see the OGSM model; for the initiatives behind the targets, see strategy implementation. All topics are in the strategy overview.
What are the four perspectives of the Balanced Scorecard?
Is the Balanced Scorecard suitable for a small business?
What is the difference between the Balanced Scorecard and OKRs?
Sources
- Harvard Business Review: Kaplan and Norton, The Balanced Scorecard: Measures That Drive Performance (January 1992)
- Harvard Business Review: Kaplan and Norton, Using the Balanced Scorecard as a Strategic Management System (January 1996, reprinted July 2007)
- Harvard Business Review: Kaplan and Norton, Having Trouble with Your Strategy? Then Map It (September 2000)
- Harvard Business School Press: Kaplan and Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes (February 2004)
- Management Accounting Research: Nørreklit, The balance on the balanced scorecard: a critical analysis of some of its assumptions (2000)
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