Balanced scorecard explained for small and mid-size firms

A balanced scorecard is a short set of measures that shows how your firm is doing from four angles, not just profit. It helps a small team see what drives results before the money numbers move. This guide explains the idea and gives a light way to start.

Where the balanced scorecard came from

Robert Kaplan and David Norton described the method in the Harvard Business Review in January and February 1992, in an article called "The Balanced Scorecard: Measures That Drive Performance." Their starting point was simple. Money measures such as return on investment and earnings per share look backward. They can mislead a firm that is trying to improve and innovate.

Kaplan and Norton wrote a book in 1996, The Balanced Scorecard: Translating Strategy into Action. In 1993 they followed up in the Harvard Business Review with a piece on putting the scorecard to work. The core idea stayed the same. Pair money results with the things that cause them.

Sources: Harvard Business Review, "The Balanced Scorecard: Measures That Drive Performance" (1992); Wikipedia, "Balanced scorecard" (the 1993 article and the 1996 book).

The four views

The original design has four views. Each one asks a plain question.

• Financial: how do we look to shareholders or owners?
• Customer: what matters most to the people we serve?
• Internal processes: what must we do especially well?
• Learning and growth: how do we keep improving and create value?

The four views work like a chain. Skilled, well-trained people run better processes. Better processes please customers. Pleased customers bring the financial results. If you only watch the last link, you learn about problems late.

Sources: Wikipedia, "Balanced scorecard" (the four views and their guiding questions).

Why it suits a small or mid-size firm

You may think this is a tool for large companies. It does not have to be. A small firm has less data, but it also has fewer people to align. One page is enough. The value is in the conversation: what do we really care about, and how will we know?

A scorecard also stops one view from crowding out the rest. A firm that cuts training to save cash may look good this quarter. The learning view will show the cost later. A firm that chases every customer request may hurt its processes. The process view will show that strain.

This section is the editors' own practical judgment, built on the idea in the 1992 article.

A lightweight way to build one

Follow these steps in one meeting of about two hours.

1. Write your goal for the next 12 months in one sentence.
2. For each of the four views, write one or two objectives that help you reach that goal.
3. Pick one measure for each objective. Choose a number you can already get, such as repeat orders, on-time delivery or training hours.
4. Set a target and an owner for each measure.
5. Review the page once a month for 30 minutes.

Aim for no more than 8 to 12 measures in all. A long list hides what matters. If a measure never changes a decision, drop it.

Here is a small example for a 25-person trading firm. Financial: gross margin. Customer: share of customers who order again within 90 days. Internal processes: share of orders shipped on time. Learning and growth: hours of staff training per person. Each number is easy to pull from your own records.

The steps and the example are the editors' own illustration of the four views, not a template from the original authors.

Common mistakes to avoid

Do not track too much. A scorecard with 40 measures is a report, not a tool. Do not pick measures only because they are easy. Ask whether a change in the number would change what you do.

Do not use it to blame people. Use it to learn. If a measure goes red, ask what is behind it. Finally, do not file it away. A scorecard only works when the team looks at it on a regular rhythm and acts on what it shows.

A later idea from Kaplan and Norton, the strategy map, draws the cause-and-effect links between objectives on one page. You do not need it to begin. A simple scorecard is a good first step, and you can add more later.

Sources: Wikipedia, "Balanced scorecard" (strategy map, introduced in their 2000 book, The Strategy-Focused Organization). The advice on mistakes is the editors' own judgment.

Sources

• Kaplan, R. and Norton, D., "The Balanced Scorecard: Measures That Drive Performance," Harvard Business Review, 1992: https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2
• Wikipedia, "Balanced scorecard": https://en.wikipedia.org/wiki/Balanced_scorecard