As a business owner, you might be familiar with the struggle of executing your business strategy effectively. It’s not just about developing the strategy but also ensuring its execution.
The Balanced Scorecard is a strategic execution tool that converts your business plan into meaningful perspectives and action-based tasks.
In the video below, Partner and co-founder Darren Van Zyl explains what makes a Balanced Scorecard so effective in deriving business success.
What is the Balanced Scorecard?
The Balanced Scorecard (BSC) is a strategic execution tool that helps businesses analyse how the overarching business strategy should be translated into the core perspectives or areas of the business.
Many finance professionals and business owners focus purely on traditional financial metrics to assess whether the business is successful. However, this “top-down” approach is short-sighted as it focuses only on the financial metrics that reflect events that have already occurred.
The BSC takes a “bottom-up” approach that helps business owners assess the non-financial elements or leading indicators that drive the financial outcomes in the business. It has four perspectives, each of which is equally important and helps provide a balanced view of the business:
- The People Perspective
- The Process Perspective
- The Customer Perspective
- The Financial Perspective
The Four Perspectives of the Balanced Scorecard
The People Perspective focuses on the most important aspect of the business: your team. The success of strategic execution relies on whether you have a team of happy, engaged, and well-trained staff. Success in this perspective is a driver for success in the next perspective, which is the Process Perspective.
The Process Perspective focuses on the “how” in how you deliver your product, service, or value proposition to your customer. If you have a great team, they will likely be more aligned to standard processes, adapt to new technologies and deliver your product or service in full and on time.
If a business can achieve success in these two perspectives, this is the driver of success in what is called the customer perspective. The customer perspective focuses on the customer-centric outcomes that are needed to achieve business success. If you have a great team of people who deliver your product or service in full and on time, the customer will likely be satisfied with their purchase and may even become a brand advocate.
Achieving success in the People, Process, and Customer perspectives is the driver of success in the Financial perspective. In this perspective, the BSC focuses on the financial outcomes needed to ensure the business is financially healthy and sustainable. Suppose you don’t have a great team, who detract from the process and fail to deliver on the value proposition. In that case, the customer is unlikely to pay on time in full, and the business may need to consider discounting to remedy the experience.
How a Balanced Scorecard Leads to Business Success
The BSC uses objectives to define success in each of the four perspectives. The BSC process encourages business owners to assess each perspective and define what they must achieve to achieve success in that perspective. Once the objectives are set, the BSC cascades down to the action items that must be completed to complete an objective.
For example, let’s look at the People perspective. A common set of objectives for this perspective might be:
- Ensure that we have all key positions filled
- Ensure that we provide the highest level of training to our team
- Ensure that we have the right people in the right place!
If you wanted to fill all key positions, a business owner would need to consider the key roles they need to fill, by when, and who is responsible for driving that recruitment.
By critically analysing each perspective in this way, you are breaking the strategy into smaller, more manageable and achievable objectives that, when combined, equal the full achievement of your strategy.
Setting The Right KPIs For The Key Perspectives
Having a great business strategy that is broken up into four key perspectives with great objectives is less meaningful if you cannot measure success. That’s why the BSC incorporates the use of tailored Key Performance Indicators to measure whether a business is successful or not in each perspective. In general, at least three to four KPIs should be identified for each perspective of the Scorecard.
For example, KPIs relating to the people perspective could be measures such as Staff Turnover, the Number of Hours Spent on Training, or the Number of Unfilled Positions.
KPIs relating to the process perspective could be measures such as the Average Job Turnaround Times, Number of Returns, and Number of Jobs Completed in Full and on time.
For the Customer perspective, the KPI suite could consider the Number of Complaints, the Number of New Customers or even the Number of Lost Customers.
And finally, the measures for the financial perspective include the more traditional finance KPIs such as Revenue Growth, Gross Profit Margin and Profitability.
KPI’s need to be specific, measurable and realistic.
If you are currently working on your strategic plan for the next 12 months or further into the future, consider utilising the Balanced Scorecard as your execution tool to ensure the decisions you make today and tomorrow will bring you closer and closer to achieving your vision.
If you want advice on implementing your plan, our specialist advisory team can help construct a Balanced Scorecard to maximise your growth opportunities and business value.
Contact the Elements Advisory Group team today at admin@elementsag.com.au or call us on 07 3878 9181.
