Mastering the Balanced Scorecard

The “balanced scorecard” has been a corporate management buzzword for about a decade. Like many management movements before it, the balanced scorecard is migrating from corporate management into the offices of nonprofit management and development staffing.

Historically, organizations have measured performance primarily with measures derived from financial data. In the 1990s, a group of researchers and consultants from the Nolan Norton Institute began to study commonly used organizational performance measures. Its hypothesis was that organizations were being hindered by these measurement practices because the measurement focus was too narrow.

After working with a number of ideas, the researchers suggested that companies ought to balance self-assessment by looking at more than simply financial performance. For the best single summary of this research, get a copy of “The Balanced Scorecard: Translating Strategy Into Action” by Robert S. Kaplan and David P. Norton (Boston: Harvard Business School Press, 1996).

The original balanced-scorecard formulation, which has been carried forward formulaically by most companies that use it today, was organized around four perspectives: financial, customer, internal, and innovation and learning. To reinforce the idea of balance, the authors also promoted the use of lagging and leading indicators, and performance measures that were external as well as internal.

Another innovative idea emerging from this work was to tie performance measures closely to a company’s strategic plan. In short, start with planning; then create a measurement process to gauge how well you are executing against your plan. By doing this, the measures graduated from simply providing descriptive data to being the basis for a management tool.

Potential pitfalls
Rather than understanding what a balanced scorecard is supposed to accomplish, why and how, many managers simply implement a balanced scorecard as if it were a recipe. While the technique described in professional literature accumulates the wisdom and experience of many people and represents a form of best practice, it should not be copied blindly under the assumption that one size fits all. In particular, the four major dimensions (financial, customer, internal, and innovation and learning) should be modified to fit a specific organization — particularly when the organization is a nonprofit.