Balanced Scorecard has developed from a tool for organising measures to a strategic management mechanism. It has evolved in terms of design characteristics, processes and usage patterns into what is now referred to as 3rd Generation Balanced Scorecard. In this FAQ, we outline the evolution and highlight the characteristics of best practice Balanced Scorecards.
The Balanced Scorecard is a performance management framework that was first introduced in the early 1990s through the work of Robert Kaplan and David Norton of the Harvard Business School. It was originally developed to encourage and facilitate the use of non-financial measures (in addition to financial measures), to deliver improved and more relevant information to managers about the activities they were responsible for managing. Through an increased understanding of the underlying management processes the Balanced Scorecard has changed considerably since its introduction. It has grown from being a tool for organising measures into a strategic management tool. The Balanced Scorecard has evolved in terms of design characteristics, utility and design processes and the current ‘state of the art’ is referring to the 3rd Generation Balanced Scorecard.
The 3rd Generation Balanced Scorecard is based on refinement of two earlier generations of Balanced Scorecard design, with features intended to give improved functionality and strategic relevance. 3rd Generation Balanced Scorecard is now a solid methodology for managing and measuring performance in the pursuance of strategic goals. The approach was built on years of practical and academic experience to overcome the shortcomings of the original design process. The 3rd Generation Balanced Scorecard addresses directly several acknowledged failure modes inherent in these earlier approaches: lack of management ownership, reversion to financial measures (alone) and the lack of capability to evolve the management system.
The 3rd Generation Balanced Scorecard approach is underpinned by five key concepts:
- Relevance: measures that inform management intervention are linked to strategic outcomes and the activities intended to achieve them,
- Causality: that there is a clear understanding of the actions required to deliver strategic outcomes,
- Learning: using feedback and intervention is used to identify ways of improving performance,
- Ownership: ensuring consensus so that everyone is clear on what needs to be done, is fully involved in the process and there is clear accountability to deliver results,
- Communication: providing clear and unambiguous information on strategic goals and priorities.
The 3rd Generation Balanced Scorecard approach makes these concepts operational using several design components:
- a clearly articulated description of the ‘desired state’ or strategic destination of the organisation at some future date;
- measurable medium-term priorities or strategic objectives broken down into activities and outcomes (and then into the standard Kaplan & Norton perspectives if necessary);
- detailed descriptions of the strategic objectives;
- a model of the linkages amongst various strategic objectives to illustrate and test causal relationships;
- identification of and consensus on key measures to monitor achievement of strategic objectives, and;
- targets for key measures selected.
The content of, and principles used in the 3rd Generation Balanced Scorecard approach are derived from 2GC’s extensive experience in helping organisations in public and private sector organisations worldwide. What is different in the 3rd Generation approach is that the Balanced Scorecard is created with the full and active participation of the management team that will eventually use it. The 3rd Generation Balanced Scorecard ensures efficient use of management time, but at the same time builds high levels of engagement and ‘ownership’. To achieve this 2GC deploys its techniques in highly structured facilitated workshops. The method relies on the management team to establish the content, with 2GC as the facilitator.
The potential benefits of a Balanced Scorecard are dependent on how it is used to drive improved performance. At its core, the Balanced Scorecard is a tool to support the control of organisations and it can be seen to support two distinct management applications: Management Control and Strategic Control. To be effective, the Balanced Scorecard needs to reflect in its design the issues that underlie each of these two management applications.
3rd Generation Balanced Scorecard - key design components
Two design components developed in the 3rd Generation design process are particularly important, the Destination Statement and the Strategic Linkage Model.
- The Destination Statement is a clearly articulated and quantifiable, long-term description of the desired state of the organisation at a particular future point in time.
- Typically this is focused on how the organisation will look after 3-5 years (the example overleaf was prepared with the client in 2009 and is dated four years ahead of that in 2013)
- The document describes what the future looks like, rather than how the organisation will get to the future.
- It is a backward looking description of the organisation if strategy has been implemented successfully.
A Strategic Linkage Model
- The measurable strategic objectives organised in a cause and effect diagram to capture management thinking on the relationships amongst medium term activities and outcomes.
- The objectives can later be organised based on Kaplan and Norton’s standard four perspectives if this is needed, but many organisations use other labels. 2GC prefers to identify simply two: ‘Activities’ and ‘Outcomes’.
A more complete discussion of Balanced Scorecard evolution can be found in our research papers - in particular we recommend you look at:
- Evolution of the 3rd Generation Balanced Scorecard