Balanced Scorecard for Financial Institutions

The concept of Balanced Scorecard (BSC) is not new. It has been developed in the early ‘90s by the Robert S. Kaplan and David P. Norton. In the beginning it was more of a temporary fashion. Meanwhile it has evolved into a business standard that more and more companies adopted as their strategic management tool. That is also true for financial institutions, especially in Europe.

Every department within the company has to take – especially now in the current economic situation – an even more economic focused approach to their daily work, i.e. they need to define targets and objectives and have to specify the key indicators for managing their department profitably. And that is exactly where the balanced scorecard comes into play.

With the help of a BSC
• You will find a common bottom line; common goals for all employees
• You will identify current strengths & weaknesses within your organization and derive actions for the future
• You will make binding agreements for the future
• You will control agreements key performance indicators (KPIs) in the sense of self-control
Due to the simplicity and completeness the BSC is the right tool to model your goals and indicators.

However, a company can change their methods and organizations easily – but not always successful. If you really want to change yourselves you need to involve all employees to change their behavior and attitude. It is a longer but more successful process. The employees need to own the scorecards; they will be measured on the KPIs compared against the corresponding targets.

The traditional view of a company is backward oriented, purely focused on financial results. While they are very important and necessary to understand the performance of the company, the financial indicators are typically lagging indicators. The main achievement of a BSC is that it takes also other perspectives that are forward looking (with leading indicators) into account, making the scorecard “balanced”. The BSC also describes the interdependencies between the various KPIs, their cause & effect relationship.

The four standard perspectives according to Norton/Kaplan are
· Financial Perspective
· Customer Perspective
· Internal Processes
· Learning & Growth

For most companies these four perspectives may be sufficient. In order to keep the BSC manageable and efficient the key is to define only a very small number of truly important KPIs per perspective (typically 4 to 5 KPIs). For a financial institution this is usually too restrictive. What I have seen at my customers are 5 to 6 perspectives. In addition to the ones mentioned above, two other perspectives are more and more common in the financial industry:
· Risk Perspective
· Image
(In the manufacturing or retail industry the “supplier” perspective is often used)

The process of a BSC is clearly defined and nowadays an integral part of business intelligence. It is the combination of an easy to use BSC framework that supports the functional users in defining their perspectives, objectives, and KPIs on the one hand and sophisticated reporting / dashboard functionality to visualize the scorecard results and trends on the other hand, that gives your balanced scorecard initiative the edge. With the ability to manage and distribute your scorecards via the web to all required users the sustainability and adoption of management by balanced scorecard is much easier to achieve.