What is internal process in balanced scorecard?
The perspectives of the Balanced Scorecard help to establish a cause-and-effect logic for the strategy map. Learn how to properly map business goals into the Finance, Customer, Internal Processes, and Learning and Growth perspectives. Show
Part 1: Understanding Balanced Scorecard Why these four perspectives? What do we map inside? How to come up with the relevant goals? Part 1 >
Part 2: Four Perspectives of the Balanced Scorecard The difference between perspectives. Examples of the goals and indicators for each perspective. Part 2 > Part 1: Understanding Balanced ScorecardWhat is a Balanced Scorecard?It is a strategy execution framework developed by Robert Kaplan and David Norton. In this article, we will be talking mostly about its four perspectives.
Three Principles to Follow When Mapping Goals into PerspectivesHere are the general principles to follow when building a strategy scorecard with four perspectives. 1. Follow Cause-and-Effect Logic Between PerspectivesThe perspectives of the Balanced Scorecard are not just the visual containers for the goals – they help to explain the cause-and-effect logic of the strategy. The logic flows from bottom to up: goals from the lower perspectives contribute to the goals from a higher perspective. Source: Four Perspectives Example. Providing customers with what they need ( Customer perspective) results in the financial outcomes ( Finance Perspective), not vice versa. 2. Map Business Goals – The Educated HypothesisWe map business goals or rather “educated hypothesis.”
All goals are the hypothesis that we need to confirm. 3. It Is NOT About Indicators: Start with Goals, Align KPIs LaterMany “balanced” scorecards are just a set of independent indicators sorted into the four perspectives. Those are KPI Scorecards. They help to measure many aspects of the business but don’t shed light on what strategy is and how it will be executed.
Business goals should dominate it. How to Come Up with the GoalsWe map business goals into the four perspectives of the Balanced Scorecard. How do organizations come up with these goals? Here are some suggestions. Project Three Generic StrategiesThe three generic strategies of Balanced Scorecard (or similar Porter’s generic strategies) are:
One way to formulate a goal is to project one of the generic strategies on your current business challenges. In the article below, we will be using this technique often. Map Value Chain, Cost Centers, and Key ProcessesThe Balanced Scorecard is normally created for an existing business.It is a good idea to understand beforehand:
For example, we followed this approach when designing the Balanced Scorecard for customer service. We started by mapping key processes, costs, and main growth points. There is a video tutorial that explains the details. The Perspectives Are for the Strategic GoalsIt sounds like a truism, but on the Strategy Scorecard, we are supposed to map strategic goals. We discussed before the difference between strategic and operational goals. My short recommendation would be to focus on the goals that would impact the performance of the organization long-term. Good Goals Starts with Analysis of the Challenges
Therefore, to come up with a good goal, we have to analyze the challenge behind it:
That’s a short version of the strategy journey approach that we discussed before. Why Do We Have These Four Perspectives?The need to use four perspectives and specifically these very perspectives can be proved in practice. Check out the workshop example that we discussed in the “CEO Scorecard” article. Are there some alternative approaches?Let’s start with the variations of the original Balanced Scorecard framework. For example, some companies add a “Resources” perspective or rename the perspectives. If the cause-and-effect logic remains untouched, we can say that we are still talking about Balanced Scorecard. For sure, there are some experiments that have little to do with a K&N Balanced Scorecard like for example, Tesco´s scorecard or a scorecard with 12 perspectives. To have a full picture about the viable alternatives, we asked independent Balanced Scorecard consultant James Creelman:
Obviously, the Balanced Scorecard is not the only framework that addressed the problem of strategy execution:
What’s the Benefit of Having a Strategy Map?The key benefit of using these four perspectives and the Balanced Scorecard strategy map is that we can describe a strategy effectively. Strategy “dump” term is also getting popular, especially in the IT companies. Once there is a “dump” of strategy on a strategy map with four perspectives, it is much easier to discuss and share this strategy. Below, you will find a detailed analysis of the four perspectives of the Balanced Scorecard. An example of Balanced Scorecard strategy map with four perspectives. Source: Four BSC Perspectives.Financial Perspective. How it’s supposed to work for non-profit organizations, how to cascade financial goals, not all finance-related metrics should be placed here. Customer Perspective. Internal and External Customers. Formulating a customer’s problem, not what the organization wants from the customers. Measuring perception. Internal Perspective. Analysis of strategic themes. Linking internal goals to what customers need. The danger or binary indicators. Learning and Growth. Improving skills and capabilities. Working on the culture. How to quantify and measure intangible goals like leadership training. We discuss typical challenges for the goals and performance indicators as well as ways to solve them. Financial Perspective or Stakeholders’ Interests PerspectiveMap here the goals related to the stakeholders´ interests. In other words:
Goals to Map in the Financial PerspectiveWhat are the typical financial goals of the for-profit organization?
By applying three generic strategies, we can also focus on:
Financial Perspective for Non-ProfitsThe “finance” word in the name of the perspective might sound confusing for non-profit organizations. They are not targeting financial outcomes. Still, non-profit organizations have stakeholders; for example, the members of the community that founded the organization.In this case, the financial perspective is actually a “Stakeholder Interests” perspective or “Success” perspective. Instead of mapping financial goals, we will map there some social, cultural or political objectives.
Cascading Financial Goals to Lower LevelsFinancial goals might make sense on the level of CEO scorecard. What about lower levels? How should we cascade financial goals there? Imagine the CEO of a software development company who decided to “Cut development costs by the end of the year by 15%.”
Here is what we actually have here:
How will, for example, software developers “see” this goal? The hypothesis might be that they can contribute to cost saving by increasing the effectiveness of software testing and, as a result, decrease the number of testers needed.The goal on their scorecard will be formulated as:
That’s a good question, so let’s analyze the options that we have: (a) Put it in the “Finance” perspective – it might be confusing as it has nothing to do with finance, at least software developers don’t perceive it in this way.(b) Rename the “Finance” perspective into “Stakeholders’ Interests” like we did for non-profit organizations and put the goal there. It makes more sense. (c) Put it into the “Customer” perspective as the CEO is one of the “internal” customers. (d) Put in into the “Internal” perspective. This won’t work for me. I would agree to map in Internal perspective something like “Implement automated tests” that supports “Decrease the number of testers” goal from the above standing perspectives.(e) Put it into the “Learning and Growth” perspective. As for the previous one, here we can map some supporting goals like “Research ways to optimize testing” but not the “Decrease the number of testers” goal itself. I believe options (b) and (c) are the most viable. The specific choice depends a lot on how organizations cascade their strategy. We have discussed 12 examples of cascading – there you can find an approach to cascading that will work for your organization. Map Goals to Establish PrioritiesWhy do we map financial goals? Aren’t they obvious? They are, but:
For example, there might be simply no grow points for the developing new revenue sources (your team doesn’t have resources for this, or stakeholders are willing to focus on the main product only). An organization should prioritize their strategy accordingly, and more importantly, the organization should explain those priorities to their employees. That’s why we design a strategy map. Not All Financial Goals Belong to the Finance PerspectiveWhat about other goals from the financial domain like “debt optimization”?Should it be on the Financial perspective or somewhere else? The financial nature of this goal is making this confusing.
My best guess is that the stakeholders want to see a financially stable business, but most likely they don’t care (and don’t have any control) about specific financial instruments. I would suggest mapping a goal like ¨dept optimization¨ somewhere in the Internal perspective, while the connection for this goal in the Finance perspective might be via some umbrella goal like “Improve financial stability.” Another example is the “Raise Funds” goals for a non-profit organization.Should it be on the stakeholder’s perspective or somewhere else? My logic, in this case, is that the funds raised are not the final desired outcome for the non-profit organization.While the goal looks like a financial one, it doesn’t belong to the Stakeholders’ Interests perspective, but to the Customer perspective (think about partners who will able to act when they have enough funds) or the Internal perspective. Customers PerspectiveAuthors of the Balanced Scorecard concept 1 formulate the question of the customer perspective in this way:
Looks simple right? According to what we see daily, the “Customer” is one of the most problematic perspectives of the Balanced Scorecard framework. Here are two typical errors:
Below I suggest discussing these two pitfalls in detail. Who are the Customers? Internal and External CustomersLet’s start with an obvious answer: customers are the end-users who pay for our products or services. That’s very close to the definition that, for example, Investopedia gives. What about potential customers? They are not paying for the product yet… It appears that:
What about partners? Let’s have a closer look at the relationship that an organization typically has with its partners:
Sound familiar?
What about departments that don’t deal with end-users? Let’s take an IT business unit as an example. They normally don’t interact with end-users directly, but still, they have many customers – internal ones.
Let’s summarize the ideas about customers. We can agree that there are:
Make sure you reflect (or imply) the goals for all customer types in the Customer perspective. Map What Customers Need – Not Want You Want from ThemThat’s crucial for the Customer perspective.
Let’s try this goal: “Increase market presence.” What is it all about? A company wants its products to be more visible in the market. Is it the customer’s aspiration? Not exactly; a customer would never formulate it in this way!
I’m a customer, and I’m looking for some good products to solve my challenges. I’m trying to find the product, but I’m not satisfied with the options I have. After a few hours of research, I’m happy to finally find the product that matched all my needs. I wish it could be easier to find such an excellent product! From the customer’s point of view, the same goal can be formulated as:
or
It’s the variation of the same goal, but now we have reformulated it in a way that customers actually perceive this goal. Off course, this is our hypothesis, and it’s better to support it with some studies. Compare two points of view:
This looks like a mental trick, but it works.
Phil Jones in his Excitant blog 2 illustrates this idea on the example with a Strategic Balanced Scorecard in Hospices:
A Template for the Goals of the Customer PerspectiveBased on three generic strategies, we can formulate three themes for the Customer perspective:
These themes can be applied to different stages of customer relationships with an organization:
To make things easier, we can present themes and stages of a relationship with customers in this table:
By matching the “theme” column and “stage” raw, we can focus on different strategies. Where should the focus of your organization be? It depends a lot on your business model and current market conditions. Tim O’Reilly shared a detailed analysis of startup strategies 3, including Blitzscaling. Take AirBnb as an example; they obviously focused on market share doing it before competitors would copy them in Europe.What is a good strategy for a more classical business model? Taking into account that customer acquisition costs 5-25 times more 4 than customer retention, I would suggest aiming to achieve excellence in customer retention first. How to Find Customer Goals for Your OrganizationStart with an analysis of your current challenges. Draw your business model:
Get back to the stages of the customer journey and analyze conversion rates between these stages:
The result of such analysis will be a hypothesis that you could formulate in the Customer perspective.For example, you might detect that your prospective users are not converting well into paying users. That’s how you see this challenge.
New customers want to have a “Flawless first-time product experience.” This can be a good goal for the Customer perspective. We will develop this example further in the Internal perspective below. KPIs for Customer Perspective: Quantify on PerceptionThe problem with the goals from the Customer perspective is that they are normally vague and hard to measure. Customers want:
– all these are good goals, but they are hard to quantify in the form they are presented now.
Let’s take the “Easy-to-use Product” goal as an example. We can come up with some objective criterion of user-friendliness, but that’s not what end-users need. The trick is to understand how customers perceive this goal. We have discussed some ways to approach this challenge when we were talking about complexity metrics.
When formulated in this way, the challenge of measurement starts getting more tangible.
In “The Strategy Focused Organization,” authors share an example of Charlotte City Council’s Strategy Map, where one of the objectives in Customer perspectives is formulated as “Increase the perception of safety.” It is “increase the perception of safety” not “increase safety”! Instead of focusing on the vague concept of safety, the priority was on understanding how inhabitants perceive safety and improve accordingly. Additional metrics, like the ones we discussed here, will obviously make the context of safety even more specific. Perception of Quality – Healthcare ExampleAnother typical example of how the service is perceived is customer satisfaction in healthcare 5.
The reason is obvious: patients are not able to recognize good service from a medical viewpoint, but they could recognize excellence in general care.The quality as perceived by the end-users is important. Also, we should remember other stakeholders. In the case of healthcare, those will be the doctors, the professional organizations, the regulators; their perception of the quality will be different. Some of these ideas were reflected on the scorecard a hospital. Internal Processes PerspectiveThis perspective explains how the company is going to satisfy customer needs and meet financial goals. The most important:
In other words, you are doing something inside your business not because you can, but because your best-educated guess is that it will lead to satisfying the needs of the customers. How can an organization satisfy the needs of the customers? It can do it by either:
or by
Again, three strategic themes will help to prepare a framework for brainstorming the goals for this perspective. Let’s review them one by one. Product Leadership Strategic ThemeAs the name of this strategic theme implies, the objectives are focused on:
Let’s have a closer look at these framework objectives, for example, “Innovating existing products.” I guess any organization wants to innovate, but aspiration to innovation doesn’t mean that the organization is ready to innovate. The challenge might be to find required resources, align innovations with the needs of the clients, or simply have enough new ideas to try. Decide what goal to map depending on where your business is now.
Customer Intimacy Strategic ThemeHave a look at your Customer perspective. Do you have some goals related to the customer service there? Here is a framework for addressing those goals: If most companies are listening to the customers, it doesn’t mean that you need to follow their strategy. Probably, your solution to solving the same challenge will be completely different. Roberto Verganti illustrated this idea in “Steve Jobs and Management by Meaning” 6:
How are you going to listen to your customers? Will you do it in Apple’s style? Operational Excellence Strategic ThemeThis strategic theme focuses on running a business efficiently. The questions to ask are:
An Example of the Goals for Internal PerspectiveLet’s get back to the example that we started discussing in the Customer perspective. After some analysis, we found out that the customers want to have a “Flawless first-time product experience.”
In our case, it was a real situation. One day, our team discussed this question. We found out that our challenge was somewhere between the interface of the product and effective customer support. We focused our internal goals on two challenges:
We focused on these goals because we saw how they contribute to the goals from the Customer perspective, and later we were able to confirm those improvements by the performance metrics. Shifting Focus from One Strategy to AnotherMichael Porter talked a lot about the need for the focus in the strategy. A classic example is the McDonalds Company with its focus on excellence in operations. They are doing well in terms of customer service or product, but they are definitely not a Michelin 5 star in terms of food quality. Should an organization’s strategy be focused on just one theme? Yes, but having this focus doesn’t mean that we forget about other challenges. The focus on certain strategic themes means that the organization does something very well (operations in McDonalds), and other themes should be on a good level accepted by the customers. KPIs for Internal Perspective: Avoid Binary IndicatorsThe most typical measurement error for the Internal Perspective is the use of binary or checklist-style indicators.
For example, the goal “Implement CRM” can be measured by a binary indicator. Did we implement CRM? The answer can be “yes” or “no.”The problem with binary indicators is that they don’t give us much control over what is happening. Their function is limited to informing the team about the fact that something has been accomplished or has not been started yet. The actual problem is with the goal! The indicator is a measurement tool for a goal. If we have a binary indicator, it means that its parent goal is not ambitious enough. Think wider and formulate a similar goal, like for example “Engage with Customers Effectively.” The specific tool (a CRM) will come and go while your intention to better interact with the customers will be developing.
Look at the new goal “Engage with Customers Effectively.” Does the binary metric “Implement CRM” make sense now? No, we need to focus on the engagement metric instead. The engagement metric will show how the new CRM improved customer behavior is used.What about “Implement CRM” – if it is not strategic enough to be on the Balanced Scorecard, where should we put it then? The answer is simple: in the supporting documentation or the initiatives aligned with the goal. Learning and Growth PerspectiveThe workshop exercise discussed above shows that CEOs agree on the importance of tracking the pulse of the industry and keep learning. To survive long-term, a company cannot make a bet on its tangible assets – the computers that we use now will be outdated soon, the technology that we use will be disrupted, even business real estate might change its role – think about more employees who prefer to work remotely, and more business meetings held online. In the Learning and Growth perspective, we focus on the intangible aspects of the business – skills of our team and our culture. The framing question for this perspective is:
The three themes for the Learning and Growth perspective are focused on:
Below, we discuss them in detail.
KPIs for Learning and Growth: How to Measure IntangibleFormulating bold goals for the Learning and Growth perspective is never an issue. Companies like to verbalize their aspirations about culture and leadership. Where is the problem then?
Very often, top managers are fooled by various performance metrics that do nothing but indicate that, for example, a company paid for another expensive training. Process metrics are input/output metrics for the goal that have little to do with success factors and expected outcomes. Measurement is easy if you did the mapping of the goals right: That’s a natural flow of the performance that we discussed in the Scorecard 101 article. Obviously, there could be more leading metrics on all levels that will provide additional views on the performance of the goals. Use CasesLearn from other users of BSC Designer.
Questions & Answers about the Balanced ScorecardHere is a compilation of the most frequently asked questions about Balanced Scorecard and KPIs; hopefully, my answers will help you to get on the right track with the framework.If you ask a business professional about the Balanced Scorecard, then in 95% of the cases, you will hear that it is about “balancing” Key Performance Indicators within 4 perspectives. With these misleading ideas, people start implementing the framework, fail to do so, and come to the conclusion that the Balanced Scorecard is not for them. What is a Balanced Scorecard?
Is it “Balanced Scorecard” or “balanced score card?”
Who are the authors of the Balanced Scorecard?
Who uses it?
Why do businesses use it?
Is it about Key Performance Indicators?
What are the key principles of the Balanced Scorecard?
What is the Balanced Scorecard process?
What if a company has a Balanced Scorecard with many KPIs, but without a strategy map?
Are there any approaches similar to the Balanced Scorecard?
Do I need software to work with the Balanced Scorecard?
What’s the biggest challenge about the Balanced Scorecard? How can you solve it?
How can you find the right KPIs for the scorecard?
What does Balanced Scorecard cascading mean?
How to use Balanced Scorecard for …?
Do you have more questions? Feel free to ask in the comments. Balanced Scorecard experts are welcome to add their thoughts in the comments. How to Create a Balanced ScorecardHere is a summary of how to create a professional Balanced Scorecard.
TakeawaysLet me summarize the key ideas of the article.
Comparative Table of Strategic Planning FrameworksIn the context of strategic planning there are two types of frameworks:
Check out the comparison table for the strategic planning frameworks. What is internal business process?An internal business process is all about how you can add value for your customers and their experiences. It is concerned with the steps you take to provide the experience your customers expect in the most cost-effective way. In other words, what goals need to be met in order to improve performance?
Is balanced scorecard internal or external?A balanced scorecard (BSC) is defined as a management system that provides feedback on both internal business processes and external outcomes to continuously improve strategic performance and results.
What are the 4 perspectives of a balanced scorecard?The balanced scorecard is anchored on four perspectives, which include financial, business process, customer, and organizational capacity.
What is a scorecard process?The balanced scorecard is a management system aimed at translating an organization's strategic goals into a set of organizational performance objectives that, in turn, are measured, monitored and changed if necessary to ensure that an organization's strategic goals are met.
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