In the 90s, companies began to question the wisdom of relying solely on data from the financial statements to measure success. In 1992, Robert Kaplan and David Norton proposed a new system called the “Balanced Scorecard” to measure the key intangibles that contribute to company success that aren’t shown on the financial statements. Here’s an overview of how the Balanced Scorecard works and how to implement it at your company.
The Balanced Scorecard
The Balanced Scorecard captures the soft, quantifiable operational measures that measure company performance from the customer’s perspective. It shifts the perspective from the bird’s eye to the worm’s eye view.
Internal measurements, or metrics, determine the areas in which the company must excel to remain competitive. A final set of measurements enables management to pinpoint areas of improvement and learn how and where to add value to its products, services, operations and departments such as safety and/or quality. In this way, the Balanced Scorecard helps management focus on the important indicators of success rather than simply on short term financial gain.
There are 5 things a company must do to implement a Balanced Scorecard system.
Step 1: Deciding What to Measure
When setting out to implement a Balanced Score Card Initiative, a company must make a crucial decision: What do we want to measure? The “Balance” in the Balanced Scorecard is derived in part from the fact that it forces companies to measure performance from 4 different perspectives:
The Shareholders’ Perspective: Generally, the chief concern of shareholders is financial performance measured by data from traditional financial statements. Specifically, the shareholders’ perspective focuses on profitability and growth during the reporting period. Did the company meet specific goals? If not, what measures must it take to achieve the goals over the next reporting period?
The Customers’ Perspective: This perspective concentrates on the company’s success in acquiring new customers and retaining existing ones. The former involves measuring market share. The retention aspect measures customer loyalty, customer service, customer complaints, customers lost, etc. Targets are set reflecting success in both aspects, such as 20% increase in market share, and 10% decrease in customer complaints through improved customer service training.
The Internal Perspective: The Internal Perspective considers the efficiency of various phases of a company’s operations. Again, goals are set based on what the company wants to accomplish—for example, improve core competencies, streamline the process, enhance the use of technology and raise morale. Management must then decide on specific measures to achieve those goals. For example, if the goal is to improve the quality of operating processes and increase sales per worker, management may opt for a combination of measures such as the adoption of internal audit standards, the promotion of more employee suggestions and training improvements that make it easier for workers to use technology.
The Innovation and Learning Perspective: This perspective measures a company’s success in creating a climate that supports innovation and growth. Continuous improvement, new product development and improved employee training are examples of goals that could be set in this area. Measuring indicators would include things like the number of new products, percentage of sales from new products and alignment of personal goals with the scorecard.
Step 2: Winning Senior Management Commitment
Implementing a Balanced Scorecard isn’t like flicking on a light switch. It has a long-term impact on how the company defines and measures objectives, management systems and corporate performance. Consequently, putting a system into place can take a long time—three to four years, in some cases.
Needless to say, this change must be not only supported but driven by senior management. The corporate decision makers aren’t passive onlookers. They must be prepared to mobilize the organization to effect the change.
Step 3: Planning & Process
The metrics from the 4 different perspectives yield the data used to formulate the creation of a plan. Now, the emphasis shifts to implementation. Again, senior management will play the leading role. But don’t overlook the importance of participation of middle management and employees. It’s not easy to get people within an organization to embrace change. To overcome resistance, you must get everybody involved and create a sense of ownership across the entire organization, even to the point of establishing personal goals, measures and scorecards for individuals.
Step 4: Analysis
Balanced Scorecards generate data on a daily, weekly, monthly and annual basis. The data must be captured and analyzed and the results disseminated and absorbed by the appropriately affected employees at each level of the organization. Distribution of information on a need to know basis is critical to the success of a Balanced Scorecard.
Step 5: Feedback & Adjustment
As you put the Balanced Scorecard into action, the feedback systems generate and report actual results. The data enable you to test your hypotheses to determine if your strategy is working. Adjustments are made actively and immediately in response to findings, much like an aircraft navigating its way to a destination makes changes in altitude, course and speed in response to cockpit readings. This process is also akin to Deming’s: Plan, Do, Check cycle.
Being able to change “on the fly,” if you will, is thus crucial to Balanced Scorecard success. Organizations must be prepared to adjust quickly. In this sense, smaller companies have the advantage over larger ones. Still, with the active participation of senior management, even larger companies can act nimbly.
That’s the Balanced Scorecard in a nutshell. Although it’s an overall business strategy, the principles of the Balanced Scorecard can be incorporated in microcosm at different levels of a company’s operations. Thus, occupational health and safety professionals can apply their own version of the initiative to drive down injuries and illnesses. Of equal importance, the Balanced Scorecard imposes on health and safety leaders a discipline that many CEOs and upper managers demand: the ability to define success and relate performance—both in terms of safety and overall economic performance--to specific, pre-defined metrics.