The Balanced Scorecard (BSC)

Abstract

The Balanced Scorecard was first introduced by Robert S. Kaplan in 1992 . Kaplan observed that managers mainly focused on performances that were measurable and had a financial aspect connected to them. They failed to take into account the value created by an organization's intangible assets. To counter this Kaplan developed The Balanced Scorecard. The Balanced Scorecard is a strategic planning and management system that organizations and managers can use to connect the strategic objective: mission, values, and vision of the organization with the operational elements such as objectives, targets, and measures.

The Balanced Scorecard helps managers to expand their view and review performance not only from a measurable financial aspect, but to a more holistic approach consisting of four different perspectives: Financial perspective, Customer perspective, Internal Process perspective, and Learning and Growth perspective.

The Balanced Scorecard is a key tool Project Portfolio Managers can use to connect the strategy of the organization to the Project Portfolio they manage. This article will give an insight into the Balance Scorecard approach by explaining the four perspectives (Financial, Customer, Internal Process, and Learning and growth), the four performance measurements (Objectives, Measures, Targets, and Initiatives), and provide a nine steps implementation framework on how to apply the Balanced Scorecard in PPM.

The Balanced Scorecard approach

The Balanced Scorecard is a strategic planning and management system. Managers and organizations use the balanced scorecard to communicate what they are trying to accomplish, align the day-to-day work that everyone is doing with strategy, prioritizing projects, products and services, and measure and monitor progress towards strategic targets. The thought behind the Balanced Scorecard comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more balanced view of performance . Today, the tool has evolved into a comprehensive system for managing strategy, extending beyond the use of different perspectives. By adopting a disciplined framework, Managers can establish clear connections between the components of strategic planning and management. This helps to ensure that there is a visible connection between the projects and programs being undertaken and chosen, the measurement being used to track success (KIPs), the strategic objectives the organization is trying to accomplish, and the vision, mission, and strategy of the organization. The Balanced Scorecard approach examines an organization's vision and translate it into performance measurements (KPIs) viewed from four different perspectives: Financial, customer, internal processes, learning and growth .

The four perspectives

The financial perspective: Focus on the financial objectives of the organization and help managers track financial success. Cash flow, return on investment, and shareholder value are examples of variables which can be used in this perspective. The attention is on how the organization should appear from a stakeholder holder standpoint.

Customer perspective: Focus on the customer side and help managers look at customer objectives. Customer satisfaction surveys, customer retention rates, and market share are examples of variables which can be used in this perspective. The attention is on how the organization should appear from a customer perspective.

Internal processes perspective: Focus the attention on the key operational goals and the processes needed to satisfy the shareholders and deliver the customer objectives. The inventory, quality control, and product lead time are examples of variables that can be used in this perspective.

Learning and growth perspective: Focus on the intangible drivers of future success with attention to people, systems, and organizational procedures. Training, leadership, database, skills, and organizational culture are examples of variables which can be used in this perspective.

These four perspectives of the scorecard permit a balance between short and long-term objectives, between outcomes desired and the performance drivers of those outcomes, and between hard objectives measure and softer, more subjective measures. Every perspective also has four key performance measurements .

The Key Performance Measurements (KPM)

Objectives: Are short- and long-term tangible strategic objectives derived from an organization’s vision and strategy. For example, an on-time delivery objective on the business unit scorecard can be translated into an objective to reduce setup times at a specific machine, or to a local goal for rapid transfer of orders from one process to the next.

Measures: When formulating customer objectives, it will become clear that each executive have a different definition as to what, for example “superior service to targeted customers” represents and who were the targeted customers. The process of developing operational measures for the scorecard brings consensus among the executives. The measures are financial and nonfinancial and are balanced between the “outcome measures (lag indicators)” the final result from past efforts: Return on equity, customer retention, new product revenue and so on, and the “performance drivers (lead indicators)” that drive future performance: satisfaction survey, production development cycle, revenue mix and so on.

Targets: Targets refer to the scorecard measures that, if achieved, will transform the company. The target should represent a discontinuity in business unit performance. For example, doubling the return on invested capital, or a 150% increase in sales during the next five years.

Initiatives: Initiatives are the actions (projects) an organization puts in place in the attempt to transform themselves to compete successfully in the future, these initiatives must be aligned with what stated in the BSC .

Fig.1 The Balanced Scorecard model

Connection between Project Portfolio management and the Balanced Scorecard

The Role of the Project Portfolio Management (PPM)

Unlike a project, which has defined end goals and deliverables, a portfolio represents a more strategic planning commitment to continuously optimizing the allocation, prioritization and scheduling of resources across many projects. The role of the Project Portfolio Manager is to oversee the management of the project’s portfolio. This includes approving and rejecting projects and program ideas. The key responsibility of the PPM is getting a return on investment and meeting the goals and objectives of their organization .

Strategic planning

Strategic planning is the process where an organization’s mission, vision and the approach to achieve them are established by the upper management. The process continues with the establishment of the goals and strategic objectives, which are the intended achievements of the organization in terms of business results, based on the financial, customer, products, services, or cultural outcomes. The goals provide the measure by which the objectives are reached or not. This information is then set into a strategic document called a “Strategic plan.” .

The role of BSC

From a Project Portfolio Management standpoint, the Balanced Scorecard serves as a valuable tool for documenting the strategic initiatives that are essential to achieve the organization’s mission and vision. This helps the Project Portfolio Manager in prioritizing which project and program ideas to follow and which to reject. By utilizing the BSC, Project Portfolio Managers can analyze, evaluate, prioritize, plan, and potentially execute projects and programs that will transform the organization’s mission and vision into concrete results. In Figure 2, the process of how to achieve a strategic leap can be seen. The organization’s mission and vision are influenced by various sources, including processes, which offer guidance in identifying the strategic initiatives that are most likely to achieve these goals. These initiatives are then transformed into specific projects and programs, typically organized within a project portfolio. Effective management of the portfolio is essential for ensuring successful performance and delivery of desired results .

Fig.2 The Process of the Strategic Leap.

In short, The Balanced Scorecard is an effective tool to integrate strategic planning with Project Portfolio Management creating a system where projects and program are a direct output of the strategic direction.

Application of the Balance Scorecard in PPM

Below is described the nine steps implementation framework for BSC. It is based on the framework described by the Balanced Scorecard Institute .

Step 1: Assessment

Before an organization can plan for its future, it is necessary to establish a common understanding of its current situation. This involves evaluating the external and internal environment, As part of this assessment, the organization should create or review critical strategic elements, such as its mission, vision, values, market analysis, challenges, enablers, and assessments of the stakeholder's needs These strategic elements provide the necessary context for formulating a successful strategy.

Step 2: Strategy

Once the organization has completed the assessment, the next step is to formulate or clarify its strategy. This involves refining the customer value proposition, creating a Strategy Profile, and breaking down the strategic direction into four Strategic Themes. These themes represent the key areas where the organization must excel to fulfill its mission and vision, taking into account the enablers it can leverage, the challenges it faces, and the value it must deliver to its customers. Furthermore, the organization is viewed both internally and externally through different perspectives, which portray it as a system with specific elements and capabilities that operate together. These perspectives - Financial, Customer/Stakeholder, Internal Process, and Organizational Capacity/Learning and Growth - interact in a series of cause-and-effect relationships, driving value creation from the internal to the external. By combining the Strategic Themes and Perspectives, the organization can define and execute an integrated strategy.

Step 3: Strategic Objectives

The next step in the strategic planning process is the development of Strategic Objectives, these are the fundamental building blocks of the strategy. The objectives are essential to a successful strategic planning and management system and are crucial to implementing strategy. They are made of qualitative, continuous improvement actions or outcomes that are vital to the success of the strategy. Strategic Objectives are initially developed on the strategic theme level and then consolidated to form organization-level objectives. This process ensures that the objectives are aligned with the organization's overall strategy and are focused on achieving the desired outcomes.

Step 4: Strategy Mapping The Strategy Mappin stage involves looking into the cause-and-effect relationship between the Strategic Objectives to establish a "value-chain" that illustrates how the organization's products and services fulfill the requirements of its stakeholders and customers. For each strategic theme, a Strategy Map is developed to make sure there is a comprehensive strategy for achieving the desired results. All the maps are then put together into a final organizational Strategy Map. The Strategy Map represents how the organization intends to achieve its intended outcomes and gives a clear picture of how each objective contributes to the overall strategy. It gives a visual representation of the strategy and shows the key cause-and-effect connections and how they affect the different four perspectives.

Step 5: Performance Measures:

To track the progress of an organization's strategy, it is important to have Performance Measures, also known as Key Performance Indicators (KPIs). Performance measures are developed for each of the objectives on the strategy map. The objective of this step is to help you develop the critical leading and lagging measures needed to manage strategy execution. This ensures that progress toward achieving the desired outcomes is effectively monitored and evaluated.

Step 6: Strategic initiatives

The Strategic Initiatives step involves developing, prioritizing, and implementing projects important to the success of the strategy. These initiatives are looking into closing the performance gaps to achieve the desired targets. It is key to prioritize and focus the organization on executing the most critical strategic projects rather than generating an extensive list of potential actions and projects. In the absence of this crucial focus, organizations may struggle to effectively carry out its strategy.

Scorecard Rollout: Integrating Steps 1 through 6

After the completion of Step 6, the organization-level scorecard system is ready to be rolled out to employees. The aim of this phase is to generate more internal support and build a coalition of employees who think strategically and use the system to make informed decisions.

An important milestone in this step is the making of the Balanced Scorecard Graphic. It combines the strategic components of planning and formulation into a single comprehensible illustration. It serves as the core of the process of communicating the organization's strategy to all the employees. The Balanced Scorecard Graphic is a one page document that explains the value creation story by summarizing the organization's strategery in a straightforward format. The objective of this step is to create a shared understanding of the organization's strategy among employees and encourage them to actively participate in its execution. By doing so, the organization can increase its chances of successfully implementing its strategy and achieving its desired outcomes. An example of The Balanced Scorecard Graphic can be seen in Figures 3 and 4.

Step 7: Performances analysis

The Performance Analysis stage is where data is transformed into evidence based knowledge and understanding. By making an effective analysis, organizations can make informed decisions that drive improved strategic outcomes. This stage involves evaluation and measuring performance to determine what is effective and what isn't, taking corrective action where necessary, and priming the overall efficiency of the organization.

Step 8: Alignment

The Algiment stage transforms strategy from a top-down directive to a shared vision among all employees. It incorporates cascading enterprise strategy down to support units and business, and individual scorecards for each team or employee. It ensures that everybody understands their role in supporting the organization's strategy. Cascading communicates how organization-level strategy (Tier 1) is supported by department/unit strategy (Tier 2), and then ultimately how employees or teams (Tier 3) contribute to the strategy with specific actions, projects, and tasks.

Step 9: Evaluation

The Evaluation stage is a chance for managers and leaders to reflect on the organization's progress and make adjustments. It assesses how effectively the organization achieved its desired outcomes and how well the strategic management system has improved communication, alignment, and performance. This stage makes sure that the strategic planning and management system remains adaptable and incorporates ongoing improvement into day-to-day operations and management.

These nine steps are just a framework and can be customized and adapted to suit the specific needs and context of an organization. It gives a structured approach to strategic planning and management, incorporating the balanced scorecard concept, which helps organizations align their strategy with their operations and drive performance improvement.

Example in the context of PMM

A recommended approach for Project Portfolio Managers to implement the Balanced Scorecard is by utilizing it in the following manner.

Step 1: Assessment

Defining the mission, values, and strategic objectives: As a Project Portfolio Manager you can make sure that your portfolio is aligned with the organization's mission, values, and strategic objectives. This requires an understanding of the overall strategic direction of the organization and selecting the projects that contribute most to its goals .

Step 2: Strategy

Making a SWOT analysis: One way to help identify areas of improvement and opportunities for growth is through a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. A SWOT can help you analyze the internal and external factors which can impact the success of your portfolio and as such can help inform you in the decision-making process when choosing and prioritizing projects .

Step 3: Strategic Objectives

Put up strategic objectives: Based on the SWOT analysis, you can establish strategic objectives for your portfolio that are aligned with the organization's overall strategy . These objectives should be detailed, measurable, achievable, relevant, and time-bound to ensure clarity and effectivenes in guiding project selection and prioritization decisions.

Step 4: Strategy Mapping

Develop performance measures: You can define performance measures or key performance indicators (KPIs) that align with the strategic objectives of your portfolio. These measures should be used to monitor the progress and success of your projects and programs and enable data-driven decision-making in managing the portfolio

Step 5: Performance Measures:

Conduct gap analysis: You can conduct a gap analysis to identify the gaps between the current performance and the desired performance of your portfolio in relation to the strategic objectives and performance measures. This analysis can help you identify areas that require improvement and develop strategies to address them .

Step 6: Strategic initiatives

Develop initiatives and action plans: Based on the strategic objectives, KPIs, and the gap analysis, you can develop initiatives and action plans for your portfolio. These initiatives can be specific projects or programs that are designed to close the performance gaps and achieve the strategic objectives. You can also define the resources, technologies, and processes required to implement these initiatives effectively .

Step 7: Performances analysis

As a Project Portfolio Manager, you have multiple tools and metrics available to analyze the performance of projects. Metrics such as Return on Investment or Cost of Quality are examples of metrics that can be used to analyze performance .

Step 8: Alignment

Monitor and report progress: You can regularly monitor the progress of the initiatives in your portfolio and report the results to relevant stakeholders. This involves tracking the performance measures, comparing the actual results with the targets, and identifying any deviations or issues that may require corrective action. You can also communicate the progress and outcomes of the initiatives to the organization's leadership and other stakeholders (Tier 1-3) to ensure transparency and accountability .

Step 9: Evaluation

Review and improve: As a Project Portfolio Manager, you can conduct regular reviews of your portfolio performance, including the outcomes of the initiatives, and use the feedback to continuously improve the portfolio management practices. This involves identifying areas of success and areas that need improvement, and updating the strategic objectives, performance measures, initiatives, and action plans.

Example cases from organizations:

Fig.3 Not-for-Profit One-Page Balanced Strategic Plan

Limitations

Kaplan and Norton describe the most common failures and limitations are:

Complexity: The Balanced Scorecard can be complex and resource intensive when trying to implement. It requires a huge amount of effort to define and track multiple metrics across different departments and functions. This can be challenging for an organization with for example limited resources.

Risk of wasting resources: The Balanced Scorecard requires significant commitment and coordination from different departments and stakeholders. If the leadership is lacking or the vision is unclear, it can result in becoming an administrative process that does not provide any meaningful change or improve performance.

Annotated bibliography

'The Balanced Scorecard, Robert S. Kaplan and David P. Norton (1996), Harvard Business School Press'

For more information about the Balance Scorecard, it is advised to look into "Robert S. Kaplan and David P. Norton (1996), Harvard Business School Press". This is the original book written by Kaplan and Norton. In this, the authors fully described and explain the Balance scorecard approach everything from its origin to its application.

'www.balancedscorecard.org'

The www.balancedscorecard.org is the official site of the Balanced Scorecard Institute (BSI). They provide consulting and information regarding the BSC approach and how to apply it in different organizational contexts.

'Using the Balanced Scorecard as a Strategic Management System', Robert S. Kaplan and David P. Norton (2007), Harvard Business Review'

An article by Norton and Kaplan explains how to use the Balance scorecard in a strategic management system. How to link a company's long-term strategy with its short-term financial goals. How managers can help build consensus concerning a company's strategy and express it in terms that can guide action.

'www.pmi.org'

The https://www.pmi.org/ is The Project Management Institute. They are a professional organization that aims to promote the practice of project management worldwide and offers a range of products and services, including certifications programs, education courses, research, and publication related to project management.

'SWOT analysis: a theoretical review, GURL, E. (2017)'

Is a literature review on SWOT that examines it from a historical, theoretical, and time frame perspective, as an effective situation analysis technique that plays an important role in the fields of marketing, public relations, advertising, and in any fields requiring strategic planning.

'Conceptual foundations of the balanced scorecard. Handbooks of management accounting research', Kaplan, R. S. (2009)'

Is a book chapter written by Robert S. Kaplan and David P. Norton, which goes more in-depth about the conceptual foundations of the balanced scorecard (BSC). It provides an overview of its key components, such as its strategic objectives, performance measures, targets, and initiatives.

'The theory and practice of change management', Hayes, J. (2022). Bloomsbury Publishing.' Is a book by John Hayes and provides an overview of the theory and practice of change management in organizations. It is known for its practical approach to change management by providing case studies and real-life examples to illustrate the key concepts and principles of change management.