Tutorial

ABC: An Introduction to Balanced Scorecard

Most organizations can benefit from a balanced scorecard approach, which can raise the profile of key projects, increase functionality, and predict future performance—and it often leads to greater financial return.

What is a "balanced scorecard"?

The balanced scorecard methodology, an outgrowth of prior measurement and management methodologies like total quality management (TQM), has existed for decades, but it was formalized in the early 1990s by Robert Kaplan and David Norton. Kaplan and Norton not only gave it a formal name but also put structure around the way organizations can measure how well they are functioning and how to predict future performance. Basically, it's a way to map and translate complex business information into something that's understandable to everyone. The methodology starts with targets defined by the organization, followed by scorecard measures. These usually include both corporate targets and business unit targets, which are then honed into individual measures and targets. It's a very flexible approach, designed to be adapted to any organization's needs. And virtually anything can be measured.

What are the benefits of implementing a balanced scorecard?

Major benefits include increased structure and shared objectives; these often lead to greater financial return. It allows organizations to become more functional and enabled. For specific programs, a balanced scorecard can raise the profile of key projects, which can help with funding and internal support. It's also possible to use the strategic map that a balanced scorecard approach creates to help guide programs toward success. And it's catching on. According to Bain & Co., about 70 percent of organizations had at least partially implemented a balanced scorecard by 2006.

How is it different from other methodologies, such as Six Sigma, activity-based costing and IT governance?

Activity-based costing was a precursor to balanced scorecard; it evaluated the costs, rewards and benefits of specific activities. The balanced scorecard concept builds on this idea. Six Sigma is a product of the balanced scorecard, imposing even greater structure. The balanced scorecard is often part of the IT governance process and is generally used as a performance measurement to help determine how much is being spent and where IT is making a contribution in achieving business goals.

Does every organization need a balanced scorecard of some type?

Most, but not all, organizations can benefit from a balanced scorecard approach-both public and private. In general, the larger and more complex the organization, the more it will benefit. Companies that are heavily regulated also benefit, as well as companies in crisis. Both of these types of organizations can use the structured approach for more detailed reporting to those overseeing them. The amount of structure already in place is another factor. Depending on what types of teams are in existence, how they make decisions and the mechanisms in place for measuring individual performance, they may or may not benefit. Small organizations sometimes work fine without them; their entrepreneurial culture might be enough to sustain them. One example is Home Depot; as a small company, it had few measures in place until the current CEO came on board. During its early years, it was important for Home Depot to remain fluid, but as it grew, it needed more structure, which the CEO provided.