The “Why” Behind the Balanced Scorecard

Posted on: 12/23/16

Written by: Jared Jamison P.E.

Topics: Financial Management

An intangible asset does not provide value in and of itself. Intangible assets can only create value through how they interact and link with other assets, resources, processes, and structure of a company. In other words, a company’s strategy is an essential component of how these intangible assets create value.

At Hankins & Anderson, we have been using the Balanced Scorecard as a strategic management system for several years. I have written a number of articles about the Balanced Scorecard for PSMJ and have spoken on this topic at the PSMJ’s Industry Summit. Since then, I have received several questions related to the theory behind the Balanced Scorecard and why it was developed. This article attempts to answer the “why.”

The Balanced Scorecard was developed by Dr. Robert Kaplan, a Harvard Business School professor, and David Norton, a management consultant, in the early 1990s. The concept continues to be refined to this day. The Balanced Scorecard was originally developed with the understanding that financial measures alone were no longer adequate to manage a business since financial measures are typically lagging indicators. Kaplan and Norton were looking for a way to develop leading indicators that would drive future financial performance and value creation for a company.

Why don’t financial measures tell the whole story? In the past when businesses primarily created value through tangible assets such as plants and equipment, financial measures were able to provide an indication of future success. This value could be captured on a company’s balance sheet with financial measures. Now that we live in an economy that is largely knowledge-based (particularly in the architecture and engineering professions), intangible assets such as people, knowledge, information, and reputation are the primary drivers of value and future success. We are no longer able to capture the true value of these intangible assets with financial measures on a balance sheet.

An intangible asset does not provide value in and of itself. Intangible assets can only create value through how they interact and link with other assets, resources, processes, and structure of a company. In other words, a company’s strategy is an essential component of how these intangible assets create value. The value of intangible assets is captured by identifying the most important strategic objectives and interactions that allow them to create value. These objectives are not all financial in nature.

The Balanced Scorecard provides a framework to capture the value of all of a company’s assets by viewing the strategy and performance of a company from four perspectives:

Learning & Growth—How must the business grow to achieve its vision? • Internal—What internal processes must the business be great at to achieve its vision?
Customer—How should the business appear to its customers to achieve its vision?
Financial—What does financial success look like to shareholders when the vision is achieved?

The Balanced Scorecard provides leading indicators of success when a company identifies strategic objectives for each perspective that, if achieved, will allow it to create value and achieve its vision.

By viewing the strategy and performance of a company from these four perspectives, the Balanced Scorecard also considers the performance of the company as a whole, recognizing that short term financial success should not be gained at the risk of reducing long term value. Kaplan and Norton succeeded in creating a tool to provide leading indicators of success and to better capture the holistic performance of a company with the Balanced Scorecard.

In addition to my previous articles, there are many resources available to learn more about the Balanced Scorecard and how you can implement it at your company. If you are interested in learning more, Kaplan and Norton have written many articles on the subject for Harvard Business Review that can be found at www.hbr.com.

About the Author: Jared Jamison, P.E. is a vice president and director of operations at H&A Architects & Engineers in Glen Allen, Virginia (www.ha-inc.com). He is also a VCU Executive MBA program adjunct. He can be reached at j.jamison@ha-inc.com.

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