28 Oct The Balanced Scorecard – Turning Strategy into Reality
Whilst at university, I came across a concept I fell in love with. The Balanced Scorecard. I’ve always prided myself on not being a stereotypical accountant. I once wrote a paper for an Advanced Management Accounting class that went against the grain by stating “budgets are a waste of time”. Wait, what? A budget is full of numbers and accountants love numbers right? Not always. Clearly my powers of persuasion worked on the lecturer as I scored about 96% on the paper. But more fortuitously, he introduced me to the Balanced Scorecard which resonated with me to this day. I wish I could remember his name, I’d like to buy him a beer.
So what is this magical and mythical tool that has inspired a non-stereotypical accountant so much? And is it all it’s cracked up to be? The Harvard Business Review has called the Balanced Scorecard one of the most influential business ideas of the past 75 years, so a solid endorsement from such a revered publication would suggest it is.
Taking a Holistic Approach
The Balanced Scorecard comes from taking the long-term strategic vision of a business and measuring business performance against it, but in many ways beyond traditional financial metrics. Of course, it has the financial perspective, but it also includes a number of operational perspectives to create a holistic view of business performance. The idea being that this holistic approach considers all important operational measures together to gauge if improvements in one area may have been achieved at the expense of another. Almost like a game of whack-a-mole, you have to understand and expect your actions in one area will have consequences in other areas of your business. So you need to take steps for the greater good and success of the overall business to keep all the moles under control!
For many businesses, understanding and measuring their performance often means comparing numbers to their budget or the previous period’s results. Focus is put on financial measurement without giving any attention to other crucial aspects of business management such as:
- Customer satisfaction
- Employee happiness
- Productivity and efficiency
- Product innovation
Plotting Your Flightpath to Success
Consider a pilot sitting in a cockpit in front of flight instruments that provide critical information about the plane, such as airspeed, altitude, direction and fuel. Ignoring even one of these variables could prove fatal to the pilot and passengers on board.
The same principle applies to running a business – there’s so much more than just the numbers. Positive financial performance doesn’t always take into account the customer perception of your business and ask questions like:
- Are you delivering on time?
- Are customers coming back for repeat business?
- Is your service or product perceived as being good value for money?
Originally designed to drive performance in a way that would promote continuous improvement and innovation, the Balanced Scorecard is the business owner’s north star similar to a pilot’s flight instruments.
The philosophy of the Balanced Scorecard is to turn a company’s vision and strategy into specific goals and objectives that can be measured. It allows the company to then track its progress as it strives to achieve its overall strategic vision. The scorecard combines financial measures which provide the historic perspective of the business with operational measures which act as the drivers for future financial performance. Sounds technical, but is relatively simple. Here’s a breakdown.
The Historic View
Looking at a business’ profit and loss statement shows you revenue, profits and margins – but you would be looking at these measures retrospectively, and historic performance is not necessarily a reliable indicator of future results. These measures do show the impact of decisions and actions already taken, for example attributing increased revenue to an advertising campaign or decreased margins due to price reductions following a markdown.
As a business owner you’re concerned about the future and where your business is headed as you navigate the journey. Typically your business goals will be financially motivated. So whilst the future goal will likely be financial in nature, achieving it will be the result of operational factors such as:
- Customer satisfaction
- Internal processes
Decisions taken to improve and measure these functions will provide improved financial results and will ultimately increase the value of your business.
Building Your Scorecard
The Balanced Scorecard is designed to translate vision and strategy into objectives and measures across four balanced perspectives: financial, customers, internal business process and learning and growth. It gives a framework ensuring that the strategy is translated into a coherent set of performance measures.
Each impacts the other in different ways and by considering them, you adopt a 360 degree view of your business.
- The Customer Perspective: Tracking specific measures in relation to the customer around time, quality, performance, service and cost
- The Internal Process Perspective: What you do within your business to deliver your service or product to a customer directly impacts how satisfied they are
- Learning & Growth Perspective: The world doesn’t stand still, it keeps evolving. So do the industries all businesses operate in. Which is precisely why you need to constantly develop and improve your products and services
- The Financial Perspective: We’ve already established that operational aspects will lead to achieving future financial targets. A business’ financial results are the litmus test that the operational factors are working
The Customer Perspective
A customer cares about five things when purchasing a service or an item:
Put yourself in your customers’ shoes – and we mean always. They are the lifeblood of your business. Find out what’s important to them within each of those five categories. Do your expectations align with theirs? For example, if your customers have expectations for delivery in 2-3 days and you provide delivery within 10 working days you might be unknowingly creating a negative customer experience. Or driving them to the door of a competitor. So engage with them, understand their needs. Then have measurable goals that line up with achieving those customer expectations such as customer satisfaction rate, percentage of on time deliveries and average after sales response time.
The Internal Process Perspective
Linking your internal processes to what your customer values is critical. It ensures that the left hand and the right hand know what each other are doing. The result? Internal operations that are aligned with customer expectations.
A business that utilises its resources efficiently will perform far better financially. It will show through with improved productivity and put simply, you’ll be able to do more which can result in:
- Higher production volumes resulting in increased stock availability. Or simply put … more stock to sell!
- Improved gross margins with lower production time per product or service. Which means your cost per unit of product goes down, but your sale price can stay constant. Customers pay for outcome, not output (there’s a little nugget of gold you can use the next time a customer queries an invoice!)
Metrics that will help you monitor your internal processes include re-work time, overall equipment effectiveness and production cost per unit
The Financial Perspective
We’ve established that the overall goals of most businesses tend to typically be financial and this is of course a key aspect. Some of the most common financial measures that are incorporated in the financial perspective are revenue growth, costs, profit margins, cash flow, and net operating income and these will always form the backbone of a company’s performance. The overarching theme of the Financial Perspective is the focus on increasing shareholder wealth. Which simply means you’re wanting the value of the business to go up.
If you’ve got a great strategy, you understand what is important to your customer and you’ve worked hard to align your internal processes to what the customer wants, things should be running like clockwork to make your business “highly efficient” – great! But if you’ve found that your margins and profitability still haven’t moved – that’s not so great.
Efficiency sometimes looks different on paper than it does in real life. When you redesigned your processes and became “highly efficient”, redundancies probably weren’t one of the actions you thought you’d have to implement. But in the name of efficiency you may only need a percentage of the workforce you used to have to do the same amount of work. Time to sharpen the axe? No, definitely not. We’re about growth and increasing business value right?
Some would argue, that if you look after your people, customers and internal processes, the financials will take care of themselves. To take the company on a journey then penalise a motivated workforce who helped you meet your goals and Balanced Scorecard targets would be counter-productive. So what do you do instead? Help your team adapt, evolve and grow, leading us to…
The Learning/Growth Perspective
“Stand still and you’ll very quickly become out of date and irrelevant” (anyone remember Encyclopedia Britannica?). The world stops for nobody and that is especially true for the business world. A company’s ability to innovate, improve, and learn ties directly to the company’s value.
Launching new products, creating more value for customers, and improving operating efficiencies continually can help a company enter new markets and increase revenues and margins—in short, keep growing and ultimately increase shareholder value.
Remember that excess capacity which you had from internal processes being improved and customer feedback being taken on board? That same excess capacity may not translate to sustainable growth. So what do you do? You use that capacity and extend your business by:
- Increasing your sales to existing customers
- Acquiring new customer segments
- Increasing your product or service range
- Venturing into new geographic markets
To achieve the above you need to be clear about your long term vision and ensure you incorporate growth strategies such as the above into your business and marketing plan. Evolve your business to keep it relevant and you’ll always have customers.
The Full Circle
So let’s just quickly join all the dots shall we? Think of it as the business’ journey to success:
- Every business needs a plan and a strategic vision (Who are we? What do we want to be? Where are we going?)
- Your strategic vision should be broken up into smaller goals (How are we going to get there?)
- Those smaller goals and your progress to achieving them need to be measured (Are we there yet? How much further?)
- Think of the customer and what is important to them. What are your goals that relate? (Customers fuel your journey. Put in the wrong fuel or not enough fuel and you’re heading down a dead end)
- Are your internal processes aligned to what is important to the customer? (Is your vehicle using the fuel efficiently so that it runs smoothly and as fast as possible?)
- Have your decisions and actions shown up as improved financial results that are increasing the value of the company? (How are we tracking along our journey to success? Are we going in the right direction?)
- Are we continuing to evolve, develop and stay relevant to our customers including expanding our offerings and markets? (Have we upgraded our vehicle along the journey so that we don’t get overtaken by a competitor?)
You as the business owner need to take a holistic view of your entire business and to adopt long term business strategies for success. Putting in place a robust scorecard that you own and are accountable for will help give your business the structure it needs to get a strategic advantage. And if you monitor it via an interactive dashboard that harnesses your data, you’ll have the insights and tools at your fingertips to get ahead of the competition and propel your business forward.
At 5th Green, we not only love the Balanced Scorecard, we love implementing it along with other tools in our clients’ business plans and seeing it in action.
Get in touch today to discuss how 5th Green can put your business on a path to success – we’d love to chat!