Balanced Scorecard Basics - what is it, why do organisations use it, history and future developments
Keeping track of an organisation's strategic performance matters. Most organisations have a strategy, and use formal or informal methods to monitor how well their work to implement the strategy is going. In this work to monitor strategic performance, one framework has come to dominate: the Balanced Scorecard.
This page provides answers to common questions about the Balanced Scorecard. It draws upon 2GC's world-class expertise in designing and implementing modern Balanced Scorecards, and our continuing active contributions to management research on strategic performance management and its application.
Read on for 'one hundred word' summaries supported by in-depth answers for the following topics:
We really hope that you find this page useful. If you think we have missed something out, anything is unclear, or you have questions that are not answered, please let us know via our contact-us page. We value your feedback, and would look forward to addressing any un-answered questions directly with you.
What is a Balanced Scorecard?
The Balanced Scorecard is a concise summary of an organisation's performance against its strategic (and sometimes operational) goals, and is used by the organisation's managers to monitor the progress being made towards these goals.
A well designed Balanced Scorecard comprises fewer than 25 measures, of which about one third will be financial in nature. To be effective a Balanced Scorecard needs to be reported and reviewed at least four times a year. Usually each measure in the report is compared against a target value: it is the reaction to any performance anomalies observed in this way that improves strategic performance in future periods.
As the example illustration shows, most Balanced Scorecards are simple tables, and many are reported using simple office tools such as Excel. Use of red-yellow-green "traffic light" indicators to highlight measures reporting on either good or poor performance is common.
The close links between Balanced Scorecard reports and the strategic planning activities of an organisation have led to a blurring of the boundaries between the two - many modern versions of the Balanced Scorecard explicitly link the two within a single 'strategy execution' or 'strategy implementation' framework.
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What is Balanced Scorecard in more depth...
At its core, the Balanced Scorecard is simply a table with a few numbers recording features associated with an organisation matched to ‘target’ values for each. The table is reviewed periodically, and by comparing actual performance achieved against the ‘target’, managers can spot issues more easily and choose to intervene in the organisation to correct these issues before they become problems.
The challenge with Balanced Scorecard is not the concept, but rather the content. Balanced Scorecard is useful only when the measures and targets chosen are appropriate, but it is well known that working out what these appropriate measures and targets are (an activity Balanced Scorecard afficinados call the design process) is not easy: choosing the right design process is therefore critically important if a Balanced Scorecard is to be successful.
A research paper published by 2GC staff in 2004 was the first to note that the focus of development for Balanced Scorecard from its inception had been on improving the design process rather than changing the underlying concept (a trend that has continued, and has been noted in many subsequent Balanced Scorecard research papers). That paper identified three distinct types of design process, naming them as 1st, 2nd and 3rd Generation design methods.
A recent survey of Balanced Scorecard users found a strong association between which design method was used and the effectiveness of the resulting Balanced Scorecard - with more modern methods delivering designs that were considered to be more useful than earlier versions. The survey also showed that more than half of Balanced Scorecards in use have design elements consistent with the most modern - 3rd Generation - design variant.
According to the same survey, a Balanced Scorecard typically comprises a collection of about 25 measures, of which fewer than one third will be financial in nature. To aid in the selection of these measures most modern Balanced Scorecards (2nd and 3rd Generation designs) include an extra layer of information - typically called 'objectives'. These objectives highlight areas within the strategy that will be focused on in the near term. Our survey consistently reports organisations having less than 10 objectives (in 2018 the average was 8.8). Objectives help in the design process by helping managers work out what areas need to be measured: in our survey on average each objective was assigned two measures.
The objectives are often presented graphically, with arrows indicating causal flows between objectives. There is considerable debate as to what these arrows mean, and to help make these diagrams easier to understand the background area is often sub-divided into areas called perspectives. Perspectives attach context to the objectives they contain, and are either topic based (e.g. describing shared topic areas the objectives with related to - such as 'financial' or 'operations' etc.) or functionally based (e.g. separating objectives describing actions and from those describing the consequences of these actions).
In our survey we found that most Balanced Scorecard designs include four perspectives for legacy reasons - the earliest Balanced Scorecard designs with perspectives describe four topic based perspectives (Financial, Customer, Internal Process and Learning and Growth), and these remain the most popular. In the example illustration above, the managers chose just two functional perspectives - consistent with the most modern practices in Strategy Map design.
Most Balanced Scorecards are reviewed collectively by a management team about four times a year, and are focused on supporting the strategic management activities of the team concerned. To help the team spot anomalies in the performance being reported, usually each measure is compared against a target value.
It is the team's reaction to any performance anomalies that leads to changes in the focus and activity of the organisation.
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Why organisations choose to use the Balanced Scorecard?
It's simple. Organisations use the Balanced Scorecard partly because the managers in those organisations are familiar with the concept, and partly because they find it works.
How do we know this?
Awareness - Balanced Scorecard had a rapid rise to fame: within five years of its 'invention' (by someone called Art Schneiderman) articles advocating the approach were appearing in major management journals, and in 1992 one in the Harvard Business Review caught corporate imagination and rapidly became a talking point. That paper ("The Balanced Scorecard, Measures that Drive Performance" by Robert Kaplan and David Norton) went on to become one of the most reprinted papers ever published by the Harvard Business Review, and the start of dozens of management consultancy pitches. On the back of this huge shift in public awareness, the term Balanced Scorecard began to feature in other management texts, and the framework itself began to be adopted. Balanced Scorecard has featured consistently in the top 10 management tools reported in an annual survey of management tools conducted by Bain (a management consultancy) since it first appeared in the early 1990s. This popularity reveals strong and sustained awareness of the concept within the executive managers who participate in the survey, and hints at the large number of organisations that use the framework. A few years ago, one survey suggested that more than 2/3 of US organisations have implemented some version of the framework.
Effectiveness - 2GC's own survey of Balanced Scorecard usage are consistent with these findings regarding awareness, but also suggests that the large majority of managers see the framework as providing value to the organisation (see diagram). The argument for effectiveness is bolstered by Balanced Scorecard's longevity - for it to persist in the Bain survey for 25 years cannot be attributed to the effects of its early success in HBR: the Bain survey indicates not only that the tool is known about, but also that it is still being used. 2GC argued in its 2004 research that part of the reason for this longevity is the distinct evolution in design that has occurred - a modern Balanced Scorecard is a much more advanced (and effective) tool than the one first proposed in 1992: this ability to change for the better is unusual in management tools, and has contributed to its success.
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Why organisations choose to use the Balanced Scorecard?
What is perhaps more surprising is that in the time since it was first introduced, few rivals or alternative frameworks have been developed, and none that have has achieved the awareness levels or user engagement that has been realised by Balanced Scorecard.
Perhaps the most likely to have succeeded was the Performance Prism: a close copy of what is now known as a '2nd Generation' Balanced Scorecard design which was introduced in 2000 by academics with excellent credibility and with the backing of a major international management consultancy. Yet the Performance Prism never really caught on (and was long ago dropped by the consultancy who promoted it).
Another alternative approach that has been more successful is Results Based Management - a framework developed within the UN system specifically to support strategy implementation within transnational NGOs, and a hybrid of Balanced Scorecard and a popular NGO / development framework called Logical Framework. Results Based Management has many similarities with 3rd Generation Balanced Scorecard, a point noted in two 2GC research papers.
There are other simpler alternatives - such as OKRs and KPIs - but these are more like cut-down / cherry picked parts of a Balanced Scorecard rather than true alternatives.
It may be that the Balanced Scorecard has succeeded simply because the management process it formalises is both essential and fundamentally simple: not many organisations would assert the importance of having a strategy but then not try to monitor its execution - nor are there many alternatives to choosing some things to measure and set targets for if you are going to do that monitoring. Each year dozens of academic papers highlight the difficulty of doing these two things - and concurrently organisations demonstrate the utility and effectiveness of the most modern methods that have been built up to implement Balanced Scorecard.
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Why use 2GC to help you with your Balanced Scorecard?
We are true experts: 2GC's mission since 1999 has been "to understand and solve strategic and operational Performance Management issues for private, public, non-profit and NGO sector organisations". Along the way we have established ourselves as thought leaders in the field - contributing over 20 academic papers on topics relating to strategic performance management, and gaining recognition from academics and other management consultancies for our innovative and open approach to improving public understanding of strategic performance management best-practices. Along the way we have worked on strategic performance management issues for client organisations across over 50 countries, and participated in some of the most advanced and complex Balanced Scorecard design projects.
We focus on working with you, not for you: To ensure that the Balanced Scorecard reports contains the right information, and that any management team reaction to performance anomalies is well directed, we think it is essential that Balanced Scorecards are designed with the active participation of the team that will eventually review it, and that that team comprises a broadly based mix of involved people. It certainly is not the easiest approach - finding the time for whole management team meetings to discuss and debate how an organisation's strategy will be implemented is difficult - but we are not convinced the alternatives are better. Further we have spent the last 20 years developing and honing design practices that are specifically designed to make the very best and most efficient use of management team time: it is a precious resource and we use it sparingly and well. Active participation has many direct benefits - including massively increasing the quality of measures and targets that eventually get incorporated into the Balanced Scorecard report.
This is what we do: We help organisations to design and implement Balanced Scorecard solutions. Our design methods represents the state-of-the-art in modern Balanced Scorecard design. Our approach has been applied in organisations from commercial, governmental, non-profit, NGO sectors, and from very small through to large multi-national organisation types, and is at the heart of the services offered by 2GC.
Trust us - specialist strategy implementation / strategic performance management consultancies are rare. Lots of firms will work in this field, but very few earn their living doing this kind of work. The question is, when things get difficult, do you want to be working with someone who would much rather be working on your IT, your TQM system, your Financial Processes, your HR policies... or someone who knows more about how to get strategic performance management systems to work than is perhaps healthy? Pick 2GC - we're committed!
Where did the Balanced Scorecard come from?
It was all about improving the design methods
Balanced Scorecard is useful only when the measures and targets chosen are appropriate. Working out what these measures and targets are is not easy. The method of choosing which measures and targets to use is critically important for Balanced Scorecard to be successful. Since 1992, huge effort has gone into developing and refining methods to make this design process easier to undertake and more reliable.
This development effort was necessary, because the design methods proposed in the earliest articles and books on Balanced Scorecard simply did not work very well. Management literature is full of thoughtful articles saying over and again that the use of "1st Generation" of Balanced Scorecard design methods led to the design of Balanced Scorecards with serious flaws. These flaws have been found to undermine the utility of the approach by leading to the design of Balanced Scorecards that contain the wrong measures and targets, and Balanced Scorecard designs that those who have to use them do not understand.
The good news is that the development work was successful, and the latest 3rd Generation Balanced Scorecard design methods are robust, well liked, and effective.
We discuss specifics of the 3rd Generation design approach elsewhere on this page, and in our research area, but click the link below to dig a bit deeper on how the evolution in design methods happened.
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Where did the Balanced Scorecard come from? in more depth
1st Generation: 20 Measures and Targets in a Table
The earliest Balanced Scorecards were simply tables containing a concise mix of Financial and Non-Financial measures, each measure having one or more targets associated with it. In the original articles written by Robert Kaplan and David Norton designers were encouraged to choose a small number of measures and to link these directly to the organisation's Mission, Vision and Strategy. Choosing what measures to use though was hard because at that point no one had come up with a reliable 'design process' to use - and so the resulting Balanced Scorecards often had strange and inappropriate measures within them; partly for this reason the majority of these early Balanced Scorecards failed. 1st Generation designs are still being created today, but there is no good reason for this: most new designs use one of the later Balanced Scorecard designs (which work better).
2nd Generation: Strategy Maps, Objectives and Linkage Models
Soon after the initial Kaplan and Norton papers were published it became clear that badly designed Balanced Scorecards were both common and not very useful. The issue was quickly identified to be poor measure selection, and a design process that was hard for managers to participate in. Rapidly (within a few years) an improved design approach emerged that added a second element to the Balanced Scorecard design - a graphic illustration of the strategic objectives that made up the organisation's strategy showing a small number of 'strategic objectives' and some simple causal linkages to show inter-dependencies between them. Building this diagram helped managers to validate that the strategy reflected in the Balanced Scorecard was the right one, and gave strong clues about which measures to include in the actual measure / target table. Hugely better than the 1st Generation, the introduction of this new design approach triggered a new wave of Balanced Scorecard development - and a cohort of Balanced Scorecards that (in the main) actually did some good!
3rd Generation: For Speed, Alignment, Quality
The huge success of 2nd Generation design methods, and the many Balanced Scorecard designs that were created using them, highlighted some deeper issues with the framework. Many 2nd Generation designs were not being used effectively because people found agreeing targets for the measures hard, and it was almost impossible to effectively deploy this kind of Balanced Scorecard in organisations with many units / divisions. The issue in both cases was found to be a lack of consensus within the management team about what the 'end point' of the strategy would look like. Without a good understanding of the end-point, units had difficulty working out what they could or should do to contribute to achieving the strategy, and knowing if they had 'done enough' of it. The solution was to introduce a third element to the framework - the "Destination Statement" - a concise agreed quantified description of the hoped for effect of implementing the strategy. This extra device made Balanced Scorecard design faster, massively helped deployment in multi-unit organisations, and improved the quality of measure and target selection. Today it remains the gold standard design approach to use.
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Future Balanced Scorecard developments
Perhaps the most common question that 2GC people get asked at conferences and in fora is some version of "What is next for Balanced Scorecard? Will there be a 4th Generation?" It is a good question, and we periodically attempt to answer it.
In general we do not think there will be a significant change in Balanced Scorecard itself - it has remained largely unchanged since about 2002 (when the first versions of the 3rd Generation design methods began to emerge), so it would be odd for it to start changing now.
However, we do think there will be increasing integration of Balanced Scorecard into more general 'strategy implementation' frameworks (such as 2GC's ACME framework), and the role of stakeholder validation frameworks such as 2GC's ERIC toolkit will become more important.
Our survey has shown for the last 10 years that the main purpose of a Balanced Scorecard is to manage the implementation of a strategy, and so further strengthening of the link between strategy formation and monitoring seems unavoidable. it also seems likely that for the foreseeable future the shift away from 'pure capitalism' that has been evident since the financial crash of 2008 will continue - and organisations will increasingly held accountable for non-financial outcomes by non-financial (but nonetheless powerful) stakeholders - such as regulators, political groups and local communities. Better tools to reconcile the potentially confliciting requirements will be needed - a process kickstarted by the 2GC ERIC toolkit!
Find out more
Balancd Scorecard fits into a standard progression of performance management tools:
- Measures - simply collecting information on an activity or outcome within an organisation
- Measures and Targets - adding information about what level of activity or outcome is required / expected, and usually a time when the required performance should be delivered by
- KPIs - a small number of Measures and Targets that are communicated widely within an organisation as 'priority' performance goals to be considered
- OKRs - KPIs linked to a clear outcome that is the reason why the KPI has been selected
- Balanced Scorecard - a collection of KPIs / OKRs that are linked thematically or causally to provide a more complete picture of the outcomes required for an organisation
- Strategy Execution framework - advanced Balanced Scorecard style measurement systems linked to a clear longer term view of the future state required for an organisation and a set of management behaviours that focuses upon the communication and monitoring of a programme of strategic change - examples include 3rd Generation Balanced Scorecard and Results Based Management systems.
By providing a richer landscape for KPI and OKR type information - via causal links between and by providing greater background context through the Destination Statement and other supporting documents - Balanced Scorecard makes it easier to communicate organisation priorities, to monitor progress and intervene to improve performance as required, and to define the most appropriate underlying measures and targets.
To dig deeper
There is a wikipedia entry on Balanced Scorecard, many books that discuss Balanced Scorecard and quite a few websites with at least some information about the topic.
A good place to start is the resources section of this website - which contains a number of relevant FAQs, case studies and research papers. The resources section also contains a curated list of recommended reading materials.