7 Minute Read – Don’t Forget About the 5th Perspective in Your Balanced Scorecard
Are you tracking the right key performance indicators for your organization? We’re all familiar with the Balanced Scorecard introduced by Kaplan and Norton in the 90’s for tracking objectives. It is simply a tool used to evaluate, define, track and improve core business metrics over time, like a doctor who will measure blood pressure, temperature, reflex and symptoms before diving deeper into diagnosis. It’s gone through several generational refinements over time to include a strategy mapping exercise which seeks to understand causal relationships between interconnected processes and then objective tracking for feedback and iterative improvement. While the core of the balanced scorecard has stood the test of time for providing performance visibility vertically and horizontally through the organization there may be more to consider than the traditional four perspective approach.
Boxing your Approach
When creating a balanced scorecard for your organization one of the first things to do is define time boxed objectives. By what percentage do we want to increase our gross revenue this quarter compared to last quarter? What is our customer churn rate year to date compared to the same period last year? As you might guess both of these examples are probably directly related to our primary objectives for the organization and in many cases overlap, either by department, process or initiative. The important part is that your objectives are translated into operation goals. Another factor to designing a robust balanced scorecard is horizontal adoption across the organization with each department’s processes and metrics tied directly to the objectives and also vertically to the individual contributor level. Once the blueprint for the business processes are mapped then you begin to measure the speed and efficiency of the wheels turning the engine. As time goes on, you are then able to make iterative improvements to the engine, apply some oil here, change a spark plug there or even better, and determine which parts are moving effectively.
This brings us to the four perspectives of the traditional balanced scorecard; financial, customer, internal business processes and training and growth. Just as the whole organization will have key performance indicators that reside in these four quadrants so might each department, and may overlap both horizontally and vertically. The financial perspective is just as you might think, all about revenue, expenses, growth and profitability. These are mostly lagging indicators, those that measure past events since by the time they hit the balance sheet it’s too late to do anything about them. Our customer perspective is all about our relationship with who buys the products, how they rate us and in some cases how we rate them perhaps in terms of risk or opportunity. Internal business processes can be measured in terms of how a department accomplishes their performance objectives such as completing projects or on time delivery but also how they interact with other departments and enabling their efficiency. Training and growth is at an organizational and individual level where we ask ourselves, how are seeking out new opportunities, are we continuing to innovate in our industry?
The Fifth Perspective
Which brings us to the fifth perspective. What makes you personally choose a BMW or a Lexus, a Tag Heuer or a Rolex? It’s something in the brand that draws you to identify with the product or service. If you are a business owner you probably think a lot about competitive differentiation and how it aligns with your target customer and how to strengthen your position in the niche. But are you actually measuring this somewhat intangible asset? For example, BMW’s mission statement is “The BMW brand stands for one thing: sheer driving pleasure. Sporting and dynamic performance combined with superb design and exclusive quality.” Are there ways to quantify and measure “driving pleasure”, “superb design” and “exclusive quality”? You bet there is and if I’m smart as an executive I’ll be looking at competitive intelligence and 3rd party data to measure, compare and improve upon these qualities to reinforce my brand. For Tag Heuer their mission statement is, “Excellence, precision and elegance are the exacting standards and impassioned commitments engendering the fabulous TAG Heuer Swiss luxury watch collection.” If I am the CEO I would be looking for ways to measure the more abstract terms such as “elegance”, “impassioned commitments” or “engendering” and these would drive performance in the processes in the other four perspectives. In many ways the first four perspectives are very similar from business to business in an industry but measuring and improving the fifth perspective, which is in essence is your corporate mission statement, will reinforce the ability for your business to continue to be distinct and profitable with your target customers.