There are normally no problems with defining objectives for the financial perspective of the Balanced Scorecard for profit-oriented organizations. Any business has financial goals, and is accustomed to using financial metrics. For most businesses the challenges are to shift a focus from financial perspective only to the Customer, Internal, and Learning & Growth perspectives.
The “financial” word in the name of the perspective might sound confusing for non-profit organizations. They are not targeting financial outcomes, but some social, cultural, political… goals. Still, non-profit organizations have stakeholders that might be the members of communities that founded the organization, and in this case financial perspective is actually a “Stakeholder Interests” perspective or “Success” perspective.
The financial perspective is on the top of the Balanced Scorecard strategy map, which is acceptable by for-profit organizations. Non-profits tend to put it below other perspectives or in a separate resource part. This might be the case. But let’s have a look at a simple example: “funds raised” metric, it is a financial metric, but it is not a resource one, it is an outcome. So we still need a “Success / Stakeholders Interests” perspective on the top, which will reflect designed outcomes (not necessary financial ones).
- To define objectives from “Stakeholders Interest,” it is good idea for formulate the question: “How does your department define their success?”
Framework for Finance Perspective
Let’s have a look at the 3 generic strategies:
- Product Leadership Strategy.
- Customer Value Strategy.
- Operational Excellence Strategy.
One of the interpretations is to project these strategies on Revenue Growth and Productivity objectives:
- Revenue Growth objective can be achieved by:
- Developing new revenue sources (creating new products and services). This is primarily a projection of Product Leadership strategy.
- Improving current profitability (working on customer value proposition). This is primarily a projection of Customer Value strategy.
- Productivity objective incorporates the projection of Operation Excellence strategy:
- Decreasing costs.
- Resource optimization.
Depending on the scale of the business these objectives can be formulated in various ways:
- Small businesses might want to find and employee a new technology that would allow to decrease costs;
- Large companies might achieve resource optimization by sharing resources and technologies between departments, or achieving economic outcome by scaling production;
Balance inside the Financial perspective
As it was mentioned before, a typical balanced scorecard problem is that is not balanced and too much attention is paid to the financial perspective. At the same time, another imbalance is often seen inside financial perspective itself, where managers tend to focus on what can give faster results (Productivity objectives), and tend to ignore long term opportunities provided by Revenue Growth objectives. Make sure that this is not the case in your business scorecard.
Let’s perform a cascading exercise for some objective from a finance perspective. For this example let’s take “Operational Excellence” generic strategy and its projection on Finance perspective, particularly a “Decreasing costs” objective.
Objective: Decrease Costs
Lagging measure: Achieved costs reduction, %
Leading measure: Time invested in the analysis of the problem.
Initiative: Build development and marketing costs map
R&D department level
Objective: Decrease production costs
Lagging measure: Achieved production costs reduction, %
Leading measure: The number of experts interviewed about the problem.
Initiative: Build production costs map; Determine possible improvement opportunities;
Senior engineer level
Objective: Decrease product testing costs
Lagging measure: Achieved testing costs reduction, %
Leading measure: The number of tested solutions.
Initiative: Find and implement test automation tool.
As you can see, the leading metrics are generic ones.
Focus on objectives, not metrics
Sometimes strategists are trying to be more specific with leading and lagging metrics, or even take them from 3rd party lists. I would recommend being really careful about this. In the early stage in the most cases it is impossible to come up with indicators (especially leading ones) that will reflect the strategy properly. Those indicators give a mock control over the performance.
My recommendation is to start with some generic indicators or metrics according to the expert opinion. You are not trying to build a KPI scorecard, but a Strategy scorecard. It is more important to have correct objectives, than metrics.
Here is a short summary of what we have discussed so far about Financial Perspective.
- One needs to formulate on these perspective “success” goals.
- For-product companies define success in terms of shareholders interest;
- Non-profits define it in terms of stakeholders interest;
- Generic strategies can be projected on a finance perspective as:
- Revenue Growth goal with two sub-goals;
- Productivity Goals with two sub-goals;
- Avoid focusing too much on financial perspective, and financial metrics
Other perspectives of the Balanced Scorecard
What do you think about Financial Perspective? Do you use similar or distinct financial objectives on your strategy map? Feel free to share your thoughts in the comments.