The market environment of today is characerized by ever increasing speed and change. This causes new challenges for organizations that require well-thought through structures and practicable methods to cope with the heightened complexity and to make change measurable as well as understandable.
Such a structure and transparency is offered by diverse management tools that support the management to maintain an overview and decide for the right prioritization. For a successful implementation, a great amount of upfront knowledge about the available options as well as their differences and similarities is needed. This is a prerequisite for making a dedicated assessment of the suitability for the own organization. This article looks at two examplary models, which differentiation again and again causes confusion. We will investigate the differences between the agile framework OKRs and the more traditional model of the Balanced Scorecard. Moreover, this article describes in how far the two frameworks still possess some similarities.
The concept of the Balanced Scorecard already came up in the 90s thanks to a study by Harvard professor R.S. Kaplan together with the US consultancy Nolan Norton. The study aimed at fitting existing systems of key figures of organizations to the increasing complexity of the business world.
For this purpose the concept of the Balanced Scorecard adds three additional perspectives to the orientation of traditional financial key figures. A customer, an internal process as well as a learning and development perspective. This extension was made to help organizations make strategically more balanced and differentiated decisions instead of orienting oneself to short-term and very abstract, financial key figures as success factors. In the follwoing we will present the four perspectives that build up on each other briefly.
The financial perspective
This perspective shows if the implementation of a strategie contributes to the improvement of financial results in a measurable manner. A classical financial key figure e.g. is the return on equity that is used as measure for the profitability of organizations. The financial figures are the ultimate goal of all other figures of the Balanced Scorecard. This is because the organizational success and value is eventually always derived from the profit a firm makes.
The customer perspective
Key figures of the customer perspectives are supposed to measure how the organization performs with respect to customer and market segments it competes for. Here, key figures like the share of new products of the total revenue are measured.
The internal process perspective
The internal process perspective aims at making those processes measureable that are important to achieve the goals of the financial and customer perspective. Above all, the perspective answers the question in which actibities the organization has to excel to outdo their competition. An exemplary key indicator of the internal process perspective are e.g. the unit costs that are supposed to be kept low through efficient working processes.
The learning and development perspective
This perspective describes the infrastructure within the company needed to fulfill the goals of the finanical, customer and process level above. Through this perspective the necessity to invest in the company to secure ongoing success is emphasized. Oftentimes three categories are differentiated here. The qualification of employees, the productivity of information systems as well as the motivation and goal orientation of employees.
OKRs and Balanced Scorecard
Similar as with KPIs the differentiation between lead and lag measure also helps to differentiate OKRs and Balanced Scorecard. OKRs are about how you can achieve your goals and ergo can be put at one level with lead measures. OKRs suggest a goal setting approach with ambitious, qualitative Objectivves that are made measurable with the help of Key Results. On the other hand, the Balanced Scorecard looks at which goals should be achieved and measured. This places the Scorecard at the level of lag measures.
This shows that the two frameworks complement each other very well. The way to success of all four perspectives of the Balanced Scorecard can be structured and enabled through OKRs. Vice versa, the KPIs of the Balanced Scorecard give orientation for the choice of good and ambitious Objectives. Also, the philosophy of the two frameworks fits well.
Both frameworks emerged from the idea that one-sided and very rigid goal targets are not suited for the complexity of today´s organizations. They try to give employees and leaders a differentiated and at the same time handy and practicable approach for goal setting at hand. Moreover, they both stress the importance of employee development and motivation as foundation of organizational success. For the Balanced Scorecard this becomes clear in the learning and development perspective as one out of four central goal dimensions. The core of the OKR philosophy on the other hand is the promotion of intrinsic motivation through the goal setting process and employee development through the possibility of personal goals and measurability of goal completion.
Both frameworks, OKRs and Balanced Scorecard, are concerned with goal setting and performance management. While the Balanced Scorecard helps to choose the right goals through the establishment of a performance measurement system that goes beyon mere profit focus (lag measure), OKRs are dedicated with the process of goal achievement (lead measures). Due to their similiar philosophie and the complementation of lead and lag measures OKRs and Balanced Scorecards work together perfectly in the day-to-day business.
As an agile framework OKRs and the related process recommendations moreover focus much more on highly-frequented assessments, evaluations and reflection. And if applicable also on the iteration of goals and priorities among participating stakeholders. This supports the learning of the organization as well as the alignment and coordination among and across all teams. This makes OKRs oftentimes an activating communication framework for employees and a transformation program for an agile way of working.