Integrating the Balanced Scorecard with Operating and Capital Budgets

Organizations using a Balanced Scorecard framework to deploy their annual strategic business plans find that with each new fiscal year, the scorecards get better and better, accountability grows in the organization with recurring monthly scorecard reviews, and the scorecards are deployed deeper and deeper into the organization.

But most organizations continue to struggle with how to fully integrate Scorecards with budgets, as well as how to handle having too many non-priority initiatives.

The two issues are closely related.The integration of the budgets is largely a sequence and timing issue, as many organizations are “upside down.”

If an organization’s fiscal year and calendar year are the same, then the budgets will be completed usually by November or early December. In many organizations that haven’t integrated scorecards with the budgets, the scorecards may not even be completed for the next fiscal  year by that time.

So, a re-sequencing must occur over time, as follows:

• Strategy Session – May
• Top level scorecard and key measure targets finalized – June or July
• Deploy scorecards (Department or Business Unit Heads) – August and September
• P & L (or budget) targets set by top management - October
   
• Prioritize Initiatives (Department or Business Unit Heads) – October
• Preliminary Budget requests from Department Heads – October
• Re-prioritize initiatives and adjust targets (to meet P & L targets) – November

The other activity that must be managed to properly integrate the budgets and the scorecards has already been alluded to, and that is the proper prioritization of initiatives. The key here is to ensure that the initiatives are targeted at the most important strategic performance gaps, are maximizing the budget dollars that will be spent (ROI), and will truly make a difference in the current performance of whatever it is they are targeting.

Comments

[Michael Brazukas]

Hi Ken,

For financial metrics in the public sector, always look first to your financial objectives. What is important to your strategy from a financial perspective?

Sure, you can always measure expenses vs. budget or other common financial indicators as routine monitoring devices.

However, in a strategy execution context, I often see measures like the following:

- % of Budget aligned to Strategy Initiatives (this is a yearly measure coinciding with the budgeting cycle)
- # of In-Year Budget Shifts due to Emergent Needs (this is a monthly measure of nimbleness)

Your strategy may include capital projects, so I would monitor 'spend vs. plan'.

Also, don't forget to look at the cost of human resources in the context of your financial measures.

At the end of the day, the answer lies in your strategy.

[Ken Masuda]

What kinds of financial KPIs would you suggest be included in department scorecards for public sector organizations?

[Ted Jackson]

In some Norton/Kaplan presentations, they call the Strategy budget STRATEX. Like CAPEX, they argue that there needs to be a line item in the budgeting process.

Good stuff in this blog, thanks.

--Ted