How To Measure What Matters With the Balanced Scorecard Framework
A complete example of how to manage four key strategic objectives
The Balanced Scorecard is a professional framework for measuring performance. All organizations have strategic objectives, but very often these goals are lacking a clear and specific measuring system.
The need for a measuring system is simple: if you don’t know how you did yesterday, you’ll never know what you have to work on today.
A measuring system determines how the organization is progressing toward their desired outcome. Without a clear measurement target, it’s really hard to tell if you’re on the right track or if you’ve taken a wrong turn. Additionally, if you’re not measuring anything specific, it’s impossible to pinpoint what it was that worked or where you went wrong.
The Balanced Scorecard method, which was developed by Kaplan and Norton, is designed specifically to help organizations define clear goals for the company and outline customized target measurements for success.
Essentially, the Balanced Scorecard method looks like the model below:
There are four categories in the professional Balanced Scorecard model: Financial, Internal Processes, Internal Learning, and Customers.
The four categories each represent one of the major functions that most companies care about:
- How do we look to shareholders? (financial health perspective)
- What must we excel at? (internal processes perspective)
- How do customers see us? (customer perspective)
- Can we continue to improve and create value? (internal growth perspective)
It should be noted that there are no rules about the nature of each category — these four are just general guidelines because they fit most companies. If a company feels the need to adjust a category to meet the actual goals of their organization, it’s totally fine to edit them. For example, a nonprofit company is likely less focused on financial goals and more focused on “Mission” goals. And so, they would remove the financial category and replace it with a “Mission” category.
Each category in the Balanced Scorecard Model contains four sections: Objectives, Measures, Targets, and Initiatives.
These four categories are where the Balanced Scorecard model transitions from “big picture” to “micro-focus.”
Objectives: Specific Goals You Want to Track for Each Function
Usually, there are three to four objectives for each function.
Each objective starts with a verb because the point of outlining an objective is to take action on it. Common action words that are used in objective creation are: improve, reduce, increase, optimize, maximize, and minimize.
Each objective should be a strategic goal that’s ongoing because objectives are about consistent progress. For example, a good objective looks like: “reduce employee turnover.” A bad objective looks like: “keep all 50 employees that are currently in the company.” Why is the second example bad? Because it’s not a strategic objective, it’s a target — and targets have their own place in this system.
Objectives are meant to be goals to consistently work on.
Measures: Answer the Question, “How Will You Know if You’re Successful in Accomplishing Your Objectives?”
There are usually one to two measurements connected to each objective. These measures are specific to the outcome you’re looking for. I like to break it down by writing “Success = x and Failure = y” and then filling in the blanks.
For example: for an internal process objective like, “reduce employee turnover,” the organization simply asks the questions, “how do we know if we’re successful in doing this?” and “how will we know if we failed at this?”
The answer to the above question might be: “Success = fewer people leaving the company this quarter than left the company last quarter. Failure = more people leaving the company this quarter than last quarter.” If four people quit last quarter and only three people left the company this quarter, you were successful in making progress toward reducing employee turnover. If five people left the company this quarter, you were unsuccessful in achieving this objective.
Targets: Specific Metrics Defining Success in a Quantitative Way
It’s important to connect targets with each measurement. If you don’t set targets for measures, there will be no way to tell how far off-track you are or how much better you’re doing than you were doing before.
Referring to the employee turnover example from above, it’s not enough to define success as fewer employees leaving the company each quarter. You must define what target you’re shooting for so that you can monitor progress toward that objective.
For example, a target for the “reduce employee turnover” objective might be something like no more than two people transitioning out of the company per quarter. Success in this objective is now easy to measure: if less than two people transition out of the company per quarter, you’re successful that quarter. If more than two people transition out that quarter, you were unsuccessful.
Notice how the objective stays the same, but the measurement criteria can change. For example, your organization may grow 10-fold, in which case the company may decide that actually, having three people transition out per quarter is acceptable. The objective stays the same (“reduce employee turnover”), but the measurement changes to define success as: fewer than three people transitioning out of the company per quarter. Success = fewer than three people transitioning out per quarter, and failure = more than three people transitioning out per quarter.
Initiatives: Actions That Will Be Taken to Achieve Success
Kaplan and Norton defined the Initiatives of the scorecard model as “the engine that put the strategy into action.”
Initiatives have a clear start and end date because they’re actions to be taken. You take an action, and then you complete the task and move on. These are not ongoing like the objectives are.
For example, continuing to use the employee turnover reduction objective, the initiatives applied to that objective might be: “implement a training system,” “implement team bonding outings,” or “hire an HR resource for employees to turn to in times of stress.”
Each action is a step you plan to take toward success.
Putting It All Together
Just to recap:
- Categories are the major sectors of the business. Although they can be altered, these categories are usually Financial, Internal Processes, Internal Team Learning & Growth, and Customer. Each Category is connected to four sections: Objectives, Measures, Targets, and Initiatives.
- Objectives are long-term strategic goals (three to four per category) and they don’t change very often.
- Measures are a strategy for determining success for each objective, and they answer the following two questions: “How will we know if we have succeeded in achieving the objective we set?” and “How will we recognize that we have failed to achieve the objectives that we’ve set?”
- Targets quantify the measures. They define specific metrics about what success and failure look like.
- Initiatives are the specific actions that your organization will take to move toward success of the objective.
Now that you understand what the Balanced Scorecard method is and how to use the system to develop clear, actionable, and measurable goals, it’s your turn to try it out. All you need is a piece of paper to get started. For convenience, I’ve added a blank template of the four sections below.
Objective, Measure, Target, Initiative Blank Template
I’ll leave you with one of my all-time favorite sayings — a quote from the late great strategic thinker and management expert Peter Drucker:
“You can’t manage what you can’t measure.”