The balanced score card is a concept for planning and implementing the strategy of a company. With this concept you can uncover strategic goals and key performance indicators.
Key performance indicators are constructed to support the performance and objective in critical regions of the strategy. Therefore, the balanced score card is a management system, derivated from vision and strategy. 1)
Leading and Lagging Indicators
Used indexes can show the early or late effects of measures and decisions. In this connection, you can distinguish between early and late indicators. When developing a Balanced Scorecard, it is recommended to use a combination of Leading and Lagging Indicators.
Leading indicators are those that are more immediately measurable, lagging indicators are those that are a result of implementing and continuously monitoring the activities which impact leading indicators. 2)
Lagging Indicators without Leading Indicators wont tell you about how the outcomes will be achieved, nor can you have any early warnings about being on track to achieve your strategic goals. In addition, Leading Indicators without Lagging Indicators may enable you to focus on short-term performance, but you wont be able to confirm the achieved outcomes. Leading Indicators should enable you to take pre-emptive actions to improve your chances of achieving strategic goals. 3)
An example for a lagging indicator is the measure for the increase of the customer's satisfaction. If the key perfomance indicator „profit“ is used to scale the measure, it will take some time to determine whether the measure was effective or not. A leading example would be the index „customer complaints“. It will show immediatly, if the measure is effective or not. 4)
The Balanced Scorecard focuses not only on the financial outcomes of a firm, but also the marketing, developmental and operational inputs which influence these outcomes. Therefore, a Balanced Scorecard represents a more comprehensive view of an organization and thus helps it to develop a strategy which better represents its long-term interests. The four perspectives are the financial, customer, learning and growth and business processes perspective. 6)
The financial perspective focuses on financial perfomance of an organisation. This perspective includes measures such as operating income, return on capital employed, and economic value added.Financial performance is usually the result of good performance in the other three scorecard perspectives. 7)
The customer perspective focuses on performance targets as they relate to customers and the market. Customer focus and customer satisfaction are leading indicators, if customers aren‘t satisfied, they will eventually find other suppliers that will meet their needs. 8)
The business process perspective refers to internal business processes. It focuses on internal operational goals and covers objectives as they relate to the key processes necessary to deliver the customer objectives. This perspective includes measures such as cost, throughput and quality. 9)
The Learning & Growth Perspective focuses on the intangible assets of an organization, mainly on the internal skills and capabilities of the employees that are required to support the value-creating internal processes. The perspective is often broken down into three components: human capital, information capital and organisation capital. 10)