Balanced Scorecard

The balanced scorecard was developed by Robert Kaplan and David Norton, who introduced it in the Harvard Business Review in 1992. Their argument was that financial measures alone give an incomplete and backward-looking view of performance. Profits and returns show the results of past decisions, but they say little about whether the organization is building the customer relationships, operational strengths and skills it will need to succeed in the future. The scorecard adds measures from three other perspectives so that leaders can see the drivers of future financial results as well as the results themselves.

Over time, the balanced scorecard evolved from a measurement tool into a broader system for managing strategy. Kaplan and Norton added the strategy map, which shows how objectives in each perspective cause improvements in the others, and described how organizations could use the scorecard to communicate strategy, set goals and review progress. It is widely used in companies, government agencies and nonprofits. For strategy and finance teams, it offers a structured way to connect financial targets to the operational and organizational changes needed to achieve them.

Definition of the Balanced Scorecard

The balanced scorecard is a framework that translates an organization's strategy into a coherent set of objectives, measures, targets and initiatives across four perspectives, balancing financial and non-financial, internal and external, and leading and lagging indicators.

It is closely related to other goal frameworks such as objectives and key results, though it focuses on a stable set of strategic measures rather than short-term goals for change.

The Four Perspectives

The financial perspective asks how the organization looks to shareholders or funders, using measures such as revenue growth, profitability, cost and return on capital. These are mostly lagging measures, showing the results of decisions made months or years earlier.

The customer perspective asks how customers see the organization, using measures such as satisfaction, retention, market share and customer profitability.

The internal process perspective asks which processes the organization must excel at to satisfy customers and meet financial goals, using measures such as quality, cycle time and productivity.

The learning and growth perspective asks how the organization will keep improving, using measures related to employee skills, information systems and culture. It is often the hardest perspective to measure, but it underpins the other three.

Public sector and nonprofit organizations often adapt the perspectives, for example placing mission or citizen outcomes at the top instead of financial results.

Elements of a Scorecard

Objectives state what the organization wants to achieve in each perspective, such as increasing customer loyalty or reducing process cost.

Measures define how progress toward each objective will be tracked, combining leading and lagging indicators.

Targets set the level of performance the organization aims to reach for each measure within a given time.

Initiatives are the programs and projects that will close the gap between current performance and the targets. Linking each initiative to an objective makes it easier to see which work supports the strategy and which does not.

Importance of the Balanced Scorecard in Strategic Planning

The balanced scorecard broadens the view of performance. Leaders see not only financial results but also the customer, process and capability drivers behind them.

It makes strategy concrete. Translating strategic priorities into objectives and measures across four perspectives forces leaders to define what success looks like in practical terms.

It also supports communication and alignment. A shared scorecard, cascaded to business units and teams, shows people how their work contributes to the strategy.

The Balanced Scorecard and Financial Management

The financial perspective keeps financial goals at the center of the strategy, while the other perspectives explain how those goals will be reached.

Linking initiatives to scorecard objectives helps leaders decide which projects to fund, since each initiative should move a measure that matters to the strategy.

Comparing investment in initiatives with movement in their related measures helps judge whether spending is producing results.

Many organizations use the scorecard in budget discussions, asking business units to show how their requested resources will improve scorecard measures.

Common Challenges

Scorecards often grow too large, with dozens of measures that make it hard to see what matters most.

Measures may be chosen because data is available rather than because they reflect the strategy. This produces a scorecard that is easy to fill in but says little about whether the strategy is working.

Without regular review and action, the scorecard becomes a reporting exercise rather than a management tool.