Scorecards Series Part I: The Balanced Scorecard: An Overview 

 

Introduction

The balanced scorecard is a popular strategic management concept developed in 1992 by Drs. Robert S. Kaplan and David P. Norton of Harvard Business School. This management and measurement system enables organizations to clarify their vision and strategy and translate them into action. The goal is to tie business performance to organizational strategy by measuring results in four areas: financial performance, customer knowledge, internal business processes, and learning and growth. ¹

In recent years, variations of the balanced scorecard have been developed, focusing on different themes (e.g., the HR scorecard, leadership, diversity). Today, organizations increasingly utilize the basic scorecard design to create a scorecard that better fits their specific needs. Overall, the purpose of the balanced scorecard—as a management tool for strategic planning and measurement—continues to gain acceptance in the business community.

Purpose of the Balanced Scorecard

The balanced scorecard is a tool that enables organizations to clarify their vision, effectively measure performance and successfully implement strategy. While the traditional measurement of business has been finance, today’s scorecards include a wealth of information outside of finance that has an influence on the bottom line. The balanced scorecard approach has within it the unique concept of “balance” in three areas: ²

Thus, the organization’s historical information is linked to financial numbers along with drivers for future success. The framework that provides objectives, measures, targets and initiatives falls into four balanced perspectives (see Figure 1). ³

Key Factors: The Planning Phase

Laying the groundwork to develop the balanced scorecard requires careful planning. Six steps are essential: 1) develop the objectives for the scorecard; 2) determine the appropriate organizational unit; 3) gain executive sponsorship; 4) establish a scorecard team; 5) formulate the project plan; and 6) develop a communication plan. The development phase sets the stage for the success of the scorecard. In particular, the mission, values, vision and strategy are the backbone of the scorecard. To support these four key factors, the scorecard team gathers background material (e.g., annual report, reports on past performance). Objectives and measures for each of the balanced scorecard perspectives must be determined. Developing cause-and-effect linkages helps management discuss the scorecard in a way that brings these connections alive for employees. Finally, a communication plan to educate managers and employees about the scorecard is essential to build awareness of the scorecard throughout the organization, generate enthusiasm, garner feedback and encourage participation. ⁴

Variations on the Balanced Scorecard

As organizations develop their own balanced scorecards, the literature shows a number of types of scorecards being utilized. Part II of this Briefly Stated series will provide more detail on some of these scorecard variations. However, no matter the variation on the scorecard (i.e., balanced scorecard, HR scorecard, business scorecard, leadership scorecard, diversity scorecard), a number of key benefits are derived from implementing a scorecard system (see Figure 3).

Scorecard Metrics

The balanced scorecard uses metrics to develop priorities of the strategic plan. These metrics also provide the organization’s specific key business drivers and criteria that are carefully considered and tracked by managers. Specifically, metrics are valuable in that they provide a factual basis to define: ⁵

Enterprise Risk Management and the Balanced Scorecard

Enterprise risk management (ERM) is defined as the process of planning, organizing, leading and controlling the activities of an organization in order to minimize the effects of risk on an organization’s capital and earnings. In ERM, risk and strategy are aligned. A generic scorecard and ERM share a number of key factors: 1) focus on strategy; 2) holistic perspective; 3) emphasis on interrelationships; 4) top-down emphasis; 5) desire for consistency; 6) focus on accountabilities; and 7) continuous nature. Weaving balanced scorecards into ERM helps strengthen management’s scope of focus on a broader set of risks. Additionally, the combination of the balanced scorecard and ERM links risk management to strategic performance management. ⁶

Literature and Research

Breathing Life Into Business Strategy ⁷

To bring the tactical side of business strategy ‘alive’ for employees in a compelling way, a key challenge is to make strategy relevant and meaningful to them. This case study discusses how the corporate planning team at Medavie Blue Cross used communication—in the from of a CEO-hosted road show—as the vehicle to include its 1,200 employees, who were spread across six enormous Canadian provinces, as the first step in a cascade of business strategy for the newly merged and expanded organization. The company faced a number of geographic and language barrier challenges. In 2003, the corporate planning team began to use the balanced scorecard approach to align strategic organizational goals. To ensure that the presentation would be understood by all employees, the corporate communications director formed a focus group to analyze the presentation content. As a result of this focus group, a number of important issues surfaced. First, employees did not thoroughly understand the concept of key performance indicators. As a result, the information was simplified to four main categories. Second, terminology used in the presentation was also analyzed. For example, the focus group revealed that most employees understood the concept of “efficiency” differently from the management’s use of this measurement. Employees heard it as “downsizing,” whereas management meant “doing things better.” Finally, management learned that employees wanted to be thanked for sticking with the company through times of change. As a result, the final slide of the scorecard presentation thanked employees for their hard work.

Designing and Implementing an HR Scorecard ⁸

Based on the balanced scorecard model of Drs. Norton and Kaplan, Verizon HR designed and implemented a strategic management system. After merging with Verizon, the challenge of GTE’s HR leaders was to translate the new business strategies and targeted business results into human capital needs. To do this, HR conducted an inventory of the current abilities and skills required to provide value in the short and long terms. They also considered the critical people to develop that talent and increase value from the workforce. To achieve these results, the new HR strategy, developed to support the talent requirements for the business strategy, had five strategic factors: 1) talent (the talent pool, employee development and ensuring diversity); 2) leadership (a system to identify high-potential employees, provide development and coaching, and determine accountability and rewards for leadership behavior); 3) customer service and support (an environment that fosters employee engagement, increases business intelligence and offers solutions to retention issues); 4) organizational integration (development of improved knowledge management systems); and 5) HR capability (development of core HR competencies, investment in technology, identification of key talent for development and growth, investment in employee self-service). To educate HR and the business leaders, the company then set up a planning, measurement and analysis team to design, develop, implement and operate the HR measurement system. Ultimately, the HR scorecard was communicated across the HR organization and business. The emphasis was on the scorecard as a tool to communicate strategy and alignment to the business. It proved to be invaluable to help the newly merged company, Verizon, bring together two HR leadership teams. Today, the HR scorecard provides the forum for discussion around performance and future targets.

Bringing Human Resources to the Table: Utilization of an HR Balanced Scorecard at Mayo Clinic ⁹

Mayo Clinic is known for its world-class health care, and in 2001, the senior physician leadership of Mayo Clinic Arizona developed a strategic plan to become the premier academic medical center in the Southwest United States. This case study describes how the HR leaders of Mayo Clinic’s Division of Human Resources viewed this new plan as an opportunity to align HR with the company vision. They developed a balanced scorecard report with measures that supported the six objectives in the organization’s strategic plan. HR also utilized a strategy map for a not-for-profit, with questions based on the four quadrants of the balanced scorecard: 1) financial: “if we succeed, how will we look to our financial donors;” 2) customer: “to achieve our vision, how must we look to our customers;” 3) internal: “to satisfy our customers, financial donors and mission, what business processes must we excel at;” and 4) learning and growth: “to achieve our vision, how must our people learn, communicate and work together.” HR used the Saratoga Institute’s measures, which allowed it to benchmark comparisons to the health care industry. By utilizing the balanced scorecard as a management tool to demonstrate HR valued-added, HR has become an integral part of the strategic planning process at Mayo Clinic.

In Closing

As highlighted in several research studies, the balanced scorecard has become a standard of measure for many organizations. However, while the structure of the balanced scorecard provides a framework to work from, it is not intended to be a cookie-cutter approach. Rather, organizations will find this business performance and measurement tool most useful when the factors included in the scorecard capture what is most important to that particular company and industry. The most effective way to determine the best measures is to focus on the people and/or groups who will use them. Therefore, to best utilize the balanced scorecard, HR professionals must “measure relevant and specific things, keep the big picture in mind” and look at the inputs process and outputs. They should seek to identify ways to measure only the critical few factors that are relevant to the organization’s strategic goals and objectives. ¹⁰

Endnotes

¹ SHRM Glossary of Human Resources Terms, www.shrm.org/TemplatesTools/Glossaries/Pages/default.aspx.

² Niven, P. R. (2002). Balanced scorecard step-by-step: Maximizing performance and maintaining results. New York: John Wiley & Sons, Inc.

³ Ibid.

⁴ Ibid.

⁵ Arveson, P. (1998). What is the balanced scorecard? Retrieved May 1, 2006, from Balanced Scorecard Institute at www.balancedscoredcard.org .

⁶ Beasley, M., Chen, A., Nunez, K., & Wright, L. (2006, March). Working hand in hand: Balanced scorecards AND enterprise risk management. Strategic Finance, 87, 9, 49-56.

⁷ Thatcher, M. (2006, February/March). Breathing life into business strategy. Strategic Communication Management, 10, 2, 14-16.

⁸ Walker, G., & Randall MacDonald, J. (2001, Winter). Designing and implementing an HR scorecard. Human Resource Management, 40, 4, 365+.

⁹ Fottler, M. D., Erickson, E., & Rivers, P. (2006, January-March). Bringing human resources to the table: Utilization of an HR balanced scorecard at Mayo Clinic. Health Care Management Review, 31, 1, 64-72.

¹⁰ Denton, D. K. (2006, March). Measuring relevant things. Performance Improvement, 45, 3, 33-35.

Author: Nancy R. Lockwood, MA, SPHR, GPHR, SHRM Research Department

Also in the Briefly Stated Series on Scorecards:

Part II: The HR and Leadership Scorecards

This article is published by the Society for Human Resource Management (SHRM). All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.