24.5 Integrate Balanced Scorecard Metrics with Budgeting and Variance Analysis
Linking BSC to Budgeting
Budgets provide financial targets; the balanced scorecard adds non-financial targets. Integrating both ensures that budgets support strategic objectives.
Integration Steps:
- Align budget line items with BSC objectives
- Allocate resources to initiatives supporting scorecard goals
- Set budget targets for each KPI (e.g., marketing spend for customer satisfaction)
- Include KPI targets in budget documents
Balanced Scorecard Variance Analysis
Traditional variance analysis focuses on financial metrics. Extend variance analysis to non-financial KPIs:
Example:
- Customer satisfaction target: 90%
- Actual: 85%
- Variance: -5% (unfavorable)
- Investigate causes (service issues, quality)
Scorecard-Based Performance Reviews
Include BSC metrics in monthly/quarterly performance reviews:
- Review financial variances
- Review customer/process/learning variances
- Discuss root causes and actions
- Align incentives with balanced metrics
Balanced Scorecard and Incentives
Link part of manager bonuses to BSC metrics:
- Financial: 40%
- Customer: 20%
- Internal process: 20%
- Learning & growth: 20%
Example: Le Petit Bistro Scorecard Dashboard
| Perspective | Objective | KPI | Target | Actual | Variance | Action |
|---|---|---|---|---|---|---|
| Financial | Increase profit | Net margin | 15% | 14% | -1% | Increase catering sales |
| Customer | Improve satisfaction | CSAT | 90% | 88% | -2% | Staff training |
| Internal | Reduce order time | Avg prep time | 15 min | 14 min | +1 min | Maintain |
| Learning | Staff development | Training hours | 10 hrs | 8 hrs | -2 hrs | Schedule training |
Balanced Scorecard Software
Use software or spreadsheets to track KPIs alongside budget data.
Luxembourg Compliance Note
Balanced scorecards can support reporting for EU directives (e.g., Corporate Sustainability Reporting Directive - CSRD) by incorporating ESG KPIs. Banks and investors increasingly request such metrics.
Think It Through
How can balanced scorecard metrics prevent "gaming" of financial targets? Why should incentives include non-financial measures?