How to Use Balanced Scorecards for Performance Management

A performance management system acts as your roadmap to success. Some companies operate under a “business-as-usual” mentality and only tackle one day at a time. A performance management system lets you plan where you’re going by helping you uncover where you have been.

Outlined goals and steps to achieve those goals give you more control over your organization’s success. That said, you need a great performance management system to do it.

The trouble is, there are many ways to do performance management, which can make it difficult to figure out where to get started.

Looking for a simple way to outline and achieve your company's goals? Consider using a balanced scorecard for performance management.

What is a Balanced Scorecard in Performance Management?

A balanced scorecard outlines strategic goals in four key areas. It gives stakeholders a view of where the company has been, where it’s going, and where it’s at.

The balanced scorecard was first developed by Robert S. Kaplan and David P. Norton. It encourages management to focus on objectives, measures, targets, and initiatives. Stakeholders in the organization can focus on more than just financials when setting their sights on success.

That’s what the four performance measures in a balanced scorecard are all about.

The Four Performance Measures in a Balanced Scorecard

A balanced scorecard is all in its name.

Using a balanced scorecard in strategic management measures four key areas of your business. It provides you with a balanced look at your organization’s performance.

The key areas encourage you to take a:

• Financial perspective
• Customer perspective
• Internal process perspective
• Learning and growth perspective

Financial perspective

It’s important to consider financial perspectives when it comes to performance management. The numbers can highlight important information. Revenue is an obvious one, as it’s tied to the overall success of your business. That said, it isn’t the only financial metric you should pay attention to.

You’ll want to consider costs so you can determine profitability while uncovering cost control measures. It can help you reduce expenses by making budget management part of the balanced scorecard you create for your business.

Customer perspective

At the end of the day, it’s your customers that keep you in business, so measuring their satisfaction and loyalty is important.

A balanced scorecard should include ways to measure customer satisfaction and loyalty. That could include surveys, customer interviews and repeat customers.

Based on this information, you can uncover ways to encourage customers to return to your brand. Alternatively, you can develop ways to attract new customers.

Internal process perspective

By taking the time to focus on internal processes, you can take a mindful approach to efficiency. Focusing on internal processes allows you to achieve outcomes aligned with organizational objectives. You can focus on delivering more value to customers or you increase efficiency among employees. Either way, this portion of the balanced scorecard is all about ensuring you pay attention to internal processes.

Learning and growth perspective

Every business focuses on financials. Most businesses spend time considering customer and internal process perspectives. Fewer businesses consider the learning and growth of their employees, but the ones that do are more likely to achieve success. That’s why learning and growth are included on the balanced scorecard.

It’s all about employee learning, skill development, and fostering a culture of innovation. By focusing on employee development and their contribution to innovation, you can create an engaged workforce. This workforce will have skills and passion to drive success in your organization.

Implementing a Balanced Scorecard for Performance Management

Once you’ve decided to add the balanced scorecard to your performance management system, you’ll need to know how to do it.

Step-by-step Guide to Developing a Balanced Scorecard

Developing a balanced scorecard is broken down into three steps that include:

1. Identifying strategic objectives and goals
2. Defining performance measures and targets
3. Aligning scorecard measures with organizational strategy

1. Identifying strategic objectives and goals 

Start by creating strategic objectives for your company. These objectives should outline what's important to your company. Take inspiration from each of the four measures of a balanced scorecard. This is the perfect time to dream big about your business, so feel free to list any objectives that come to mind.

After brainstorming, narrow down your objectives and align them with organizational goals. They might pertain to existing goals, but you may also discover that you need new goals to cover all of your strategic objectives.

2. Defining performance measures and targets 

Goals can only be achieved through strategic objectives that are specific and measurable. That way you know if you’re on the right track and you can course correct if you aren’t.

Because they focus on numbers, measuring finances is easy, but that doesn't mean you can't find ways to measure the other items on your scorecard.

For example, you might measure how many repeat customers you have, or you might start tracking the time it takes to secure a deal with a new client. The trick is to select the measurements that are appropriate to your goals so you can set targets for improvement.

Don’t forget to include timelines in your measurements! That way you’ve got a built-in time frame for revisiting goals. This increases your likelihood of reaching them, but it also has the benefit of keeping important goals top-of-mind

3. Aligning scorecard measures with organizational strategy 

All of these goals and performance measures should serve your organizational strategy.

It's important to understand exactly how your business is currently allocating its resources. You have to be willing to change resource allocation based on what you uncover through the objectives in your scorecard.

Make sure your scorecard makes sense within your overall organizational strategy. If something isn’t properly aligned, you can adjust or scrap it. Do so before employees and managers waste their time trying to achieve what turns out to be an ineffective goal.

Cascading the balanced scorecard across the organization

Once you’ve got your balanced scorecard outlined and it’s ready to go, you have to implement it. The best way to do that is to cascade it across your organization by including it in the performance appraisal process.

When it is part of a performance management system, it can drive accountability and performance improvement. It also involves employees in the process and encourages communication. 

For example, employees may create their own goals that align with one or more of the company’s goals on the scorecard. Information could also be captured that pertains to data from the scorecard so it can be discussed at the next review meeting.

The PerformYard platform can integrate a balanced scorecard into any performance management process. Cascading it through your organization is intuitive and easy.

What are the 7 Main Elements of the Balanced Scorecard?

Understanding the balanced scorecard is crucial for any organization aiming to achieve its strategic objectives. While traditionally composed of four perspectives, a thorough and nuanced view includes seven main elements. These elements help ensure that the balanced scorecard not only captures a snapshot of the organization's performance but also drives continuous improvement.

1. Financial Performance

Financial performance remains a core element in the balanced scorecard. It encompasses metrics such as revenue, profit margins, cost control, and return on investment. These metrics provide a vital indication of the company’s growth and sustainability. By closely monitoring these financials, organizations can make timely adjustments to their economic strategies.

2. Customer Satisfaction

Customer satisfaction includes metrics like Net Promoter Score (NPS), customer retention rates, and feedback scores. This perspective ensures the organization stays customer-centric, focusing on meeting and exceeding customer expectations, which in turn drives loyalty and long-term success.

3. Internal Processes

Internal processes relate to the efficiency and effectiveness of organizational operations. This can involve process turnaround times, quality control measures, and other operational efficiencies. By optimizing internal processes, companies can increase performance and profitability.

4. Learning and Growth

Learning and growth focus on the development of the workforce and the organizational culture. It includes metrics like employee engagement scores, skill development rates, and innovation indices. This element fosters a culture of continuous improvement and knowledge-sharing, adding long-term value to the organization.

5. Strategy and Vision Alignment

Strategy and vision alignment ensures that the scorecard activities and objectives directly support the overarching goals of the organization. This involves aligning day-to-day tasks with strategic objectives, ensuring that every action taken is a step towards the vision.

6. Governance and Accountability

Governance and accountability ensure that there are clear lines of responsibility and governance within the organization. This includes tracking compliance with industry standards, ensuring ethical practices, and clear accountability structures. Effective governance and accountability drive transparency and trust within the organization and among stakeholders.

7. Communication and Feedback Mechanisms

Communication and feedback mechanisms are crucial for ensuring that information flows effectively throughout the organization. This involves regular performance reviews, open channels for feedback, and effective internal communication strategies. Such mechanisms allow for timely interventions and continuous improvement.

Incorporating these seven elements into a balanced scorecard transforms it from a simple performance tracking tool into a comprehensive strategic management system. This approach ensures that all facets of the organization are aligned and working harmoniously towards the common goals.

Best Practices for Effective Use of a Balanced Scorecard

The purpose of a balanced scorecard is to create alignment among organizational objectives. It also creates clarity between organizational goals and individual goals, and vice versa. This ensures that employee goals align with organizational goals.

Implementing a balanced scorecard also means committing to performance monitoring and tracking. That way you can see if you’re on the right track to reach important goals and if not, you can course correct.

Finally, the scorecard should be a tool for communication and decision-making. Important stakeholders should know the details in the scorecard. Employees should be aware of elements in the scorecard as well. That way everyone is aligned with the larger goals of the company, but it also means everyone has the opportunity to talk deeply about those goals. The more involved all members of your team are, the more likely your organization and everyone in it is likely to achieve success.