The balanced scorecard greatly improves traditional financial reporting because it focuses on three thing which lead to growth: customer satisfaction, operational efficiency, and future growth opportunities. The fourth quadrant is cashflow or traditional financial measures.
It fits on one page, is relevant to any business and says a lot about what the priorities are, and how the business wants to grow or improve results.
These three points are each awesome. A one page report is easy to read and discsuss. It shows focus. The choice of what to measure tells everyone in the business what is important, much more effectively than visions and missions. And who can argue that customers, operational efficiency and innovation are the sustainable path to growth. So why not measure them?
These are four very big ticks for any reporting system. The balance scorecard is the forerunner of IT tools like "dashboards". However, dashboard reporting becomes almost obsessed with measures which change daily. Some important KPIs only make sense to measure every month or every three months.
The GrowthPath approach to growth calls for focus and agility. The Balanced Scorecard is a powerful tool for achieving focus: partly because it forces a selection of priority KPIs, partly because it forces a selection of leading indicators, and partly because it communicates these priorities to the entire business on a report that can be understood in a couple of minutes.
I concede that the Balanced Scorecard spurned a consulting industry, and things went over the top. It's not really complicated. Below, there is a simple checklist to see if you will succeed.
Spending a lot of money on balanced scorecard consultants may succeed because it shows commitment, but the commitment is much more important than the expensive consulting.
Reporting heaven: a one page report
The Balanced Score Card is a one page report. So it's quickly read and understood. The Balanced Scorecard I recommend uses graphical elements, which makes it even easier to read.
A small number of KPIs
The four areas of a balanced score card are
- Enabling Future Growth (or Innovation, but often called "Learning and Growth")
- Operational Efficiency (often called "Internal Business Processes")
- Cashflow (often called "Finance")
These are my names. I think they express better what each part of the scorecard measures.
And in each area, a good scorecard has only four KPIs. This is an incredible information diet: restrict yourself to just 16 lines. Compare that with the number of lines of information in the profit and loss + balance sheet.
If triple-bottom-line reporting is important, it can be a fifth area, or be recognised via an innovation KPI.
Even if nothing else grabs your attention, note that the Balanced Scorecard gives traditional financial indicators only 25% of the space. I respect financial reporting as much as the next accountant: the numbers are fact based and traced to source documents, and financial reports come with ancient conventions and interpretations. But financial numbers are a picture of what happened, not what's going to happen, and the Balanced Scorecard recognises that.
A focus on leading indicators: Future Growth and Customer
The balanced score card explicitly forces leading indicators to be measured. These can be difficult to establish and difficult to measure, but anyone with any common sense and growth ambition for the company will agree that there are things which drive future performance, we know what they are and we can have some idea on how to at least broadly measure progress.
Are you ready for a successful Balanced Scorecard? A small checklist
This is the checklist of what's required for a balanced score card to work:
- Management/ owners see strong advantages to sharing key information widely in the business
- You can think of at least four leading indicators
- The CEO or MD will mandate that members of the management team take ownership of reporting KPIs (don't leave the KPIs up to your finance team)
- The management team recognises that many of these KPIs will be difficult to measure since they are not currently supported by any reporting systems
How to implement Balanced Scorecards: some key tips
- Use Excel. Not fancy software
- The CEO chooses the KPIs after a submissions of proposals (finalisation of KPIs needs a benevolent dictator)
- If you deploy Balanced Scorecards to different levels of the organisation, don't attempt to consolidate them into a next-level scorecard. Call us to find out why.
- Call on someone who's done it before, because that way you're much more likely to get it right before momentum dissipates.
How GrowthPath can help
I dislike management fads but I'm big fan of the balanced scorecard. Why? Because they work. I've used them in factories and retail organisations around the world. Sometimes I've seen them fail. In German and Polish factories, I've seen enthusiasm so great that even manufacturing departments, down to shift teams, make their own derived scorecards on their own initiative.