The Balance Scorecard

The Balance Scorecard: A BSC is a strategy execution tool that, at the most basic level, helps companies to:

Clarify strategy: Articulate and communicate their business priorities and objectives

Monitor progress: Measure to what extent the priorities and strategic objectives are being delivered

Define and manage action plans to ensure activities and initiatives are in place to deliver the priorities and strategic objectives.

Developed by Robert Kaplan and David Norton, the Balanced Scorecard is an extremely influential management tool that remains enduringly popular with companies around the world. At its most basic level, the Balanced Scorecard helps organizations to clarify their strategy and communicate the business’s top strategic priorities and objectives.

If you’ve ever seen the Balanced Scorecard in action, you’ll know it’s essentially a strategic framework, divided into four areas (called “perspectives”) that are critical to business success. In this article, we’ll look at each of the perspectives in more detail, and see how these perspectives can be tailored and tweaked to suit your company’s circumstances.

The Financial perspective

For most for-profit organisations, money comes up top. (We’ll get to non-profits later in the article.) Therefore, the very top perspective is all about financial objectives.

Essentially, any key objective that is related to the company’s financial health and performance may be included in this perspective. Revenue and profit are obvious objectives that most organizations list in this perspective. Other financial objectives might include:

Cost savings and efficiencies (for example, a specific goal to reduce production costs by 10% by 2020)

Profit Margins (increasing operating profit margins, for instance)

Revenue sources (for example, adding new revenue channels)

The Customer perspective

This perspective focuses on performance objectives that are related to customers and the market. In other words, if you’re going to achieve your financial objectives, what exactly do you need to deliver in terms of your customers and market(s)?

Included in this perspective you might find objectives for:

Customer service and satisfaction (increasing net promoter scores, or reducing call center waiting times, for example)

Market share (such as, growing market share in a certain segment or country)

Brand awareness (for example, increasing interactions on social media)

The Internal Process perspective

What processes do you need to put in place to deliver your customer and finance-related objectives? That’s the question this perspective aims to answer. Here you would set out any internal operational goals and objectives – or, in other words, what does the business need to have in place and what does the business need to do well in order to drive performance?

Examples of internal process objectives might include:

Process improvements (for example, streamlining an internal approval process)

Quality optimization (such as, reducing manufacturing waste)

Capacity utilization (using technology to boost efficiency, for instance)

The Learning and Growth perspective

While the third perspective is about the concrete process side of things, this final perspective considers the more intangible drivers of performance. Because it covers such a broad spectrum, this perspective is often broken down into the following components:

Human capital: skills, talent, and knowledge (for example, skills assessments, performance management scores, training effectiveness)

Information capital: databases, information systems, networks, and technology infrastructure (such as safety systems, data protection systems, and infrastructure investments)

Organizational capital culture, leadership, employee alignment, teamwork and knowledge management (for example, staff engagement, employee net promoter score, corporate culture audits)

7 benefits of balanced scorecard

1. Better Strategic Planning

The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualized in a Strategy Map which helps managers to think about cause-and-effect relationships between the different strategic objectives. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes, as well as key enablers or drivers of future performance, are identified to create a complete picture of the strategy.

2. Improved Strategy Communication & Execution

Having a one-page picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This ‘plan on a page’ facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to remember is that it is difficult for people to help execute a strategy that they don’t fully understand.

3. Better Alignment of Projects and Initiatives

The Balanced Scorecard help organizations map their projects and initiatives to the different strategic objectives, which in turn ensures that the projects and initiatives are tightly focused on delivering the most strategic objectives.

4. Better Management Information

The Balanced Scorecard approach helps organizations design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision-making.

5. Improved Performance Reporting

The Balanced Scorecard can be used to guide the design of performance reports and dashboards. This ensures that the management reporting focuses on the most important strategic issues and helps companies monitor the execution of their plan.

6. Better Organisational Alignment

The Balanced Scorecard enables companies to better align their organizational structure with the strategic objectives. In order to execute a plan well, organizations need to ensure that all business units and support functions are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations.

7. Better Process Alignment

Well-implemented Balanced Scorecards also help to align organizational processes such as budgeting, risk management, and analytics with the strategic priorities. This will help to create a truly strategy-focused organization.

Need for Balanced Scorecard

The balanced scorecard is used as strategic planning and management technique. This is widely used in many organizations, regardless of their scale, to align the organization’s performance to its vision and objectives.

The scorecard is also used as a tool, which improves the communication and feedback process between the employees and management and monitors the performance of the organizational objectives.

As the name depicts, the balanced scorecard concept was developed not only to evaluate the financial performance of a business organization, but also to address customer concerns, business process optimization, and enhancement of learning tools and mechanisms.

The Basics of Balanced Scorecard

Following is the simplest illustration of the concept of the balanced scorecard. The four boxes represent the main areas of consideration under the balanced scorecard. All four main areas of consideration are bound by the business organization’s vision and strategy.

The balanced scorecard is divided into four main areas and a successful organization is one that finds the right balance between these areas.

Each area (perspective) represents a different aspect of the business organization in order to operate at optimal capacity.

• Financial Perspective: This consists of costs or measurements involved, in terms of the rate of return on capital (ROI) employed and the operating income of the organization.
• Customer Perspective: Measures the level of customer satisfaction, customer retention, and the market share held by the organization.
• Business Process Perspective: This consists of measures such as cost and quality related to the business processes.
• Learning and Growth Perspective: Consists of measures such as employee satisfaction, employee retention, and knowledge management.

The four perspectives are interrelated. Therefore, they do not function independently. In real-world situations, organizations need one or more perspectives combined together to achieve its business objectives.

For example, a Customer Perspective is needed to determine the Financial Perspective, which in turn can be used to improve the Learning and Growth Perspective.

Features of Balanced Scorecard

From the above diagram, you will see that there are four perspectives on a balanced scorecard. Each of these four perspectives should be considered with respect to the following factors.

When it comes to defining and assessing the four perspectives, the following factors are used:

• Objectives: This reflects the organization’s objectives such as profitability or market share.
• Measures: Based on the objectives, measures will be put in place to gauge the progress of achieving objectives.
• TargetsThis could be department based or overall as a company. There will be specific targets that have been set to achieve the measures.
• Initiatives: These could be classified as actions that are taken to meet the objectives.

A Tool of Strategic Management

The objective of the balanced scorecard was to create a system, which could measure the performance of an organization and to improve any back lags that occur.

• The popularity of the balanced scorecard increased over time due to its logical process and methods. Hence, it became a management strategy, which could be used across various functions within an organization.
• The balanced scorecard helped the management to understand its objectives and roles in the bigger picture. It also helps the management team to measure the performance in terms of quantity.
• The balanced scorecard also plays a vital role when it comes to the communication of strategic objectives.
• One of the main reasons many organizations are unsuccessful is that they fail to understand and adhere to the objectives that have been set for the organization.
• The balanced scorecard provides a solution for this by breaking down objectives and making it easier for management and employees to understand.
• Planning, setting targets, and aligning strategy are two of the key areas where the balanced scorecard can contribute. Targets are set out for each of the four perspectives in terms of long-term objectives.

However, these targets are mostly achievable even in the short run. Measures are taken in alignment with achieving the targets.

Strategic feedback and learning is the next area, where the balanced scorecard plays a role. In strategic feedback and learning, the management gets up-to-date reviews regarding the success of the plan and the performance of the strategy.

The Need for a Balanced Scorecard

Following are some of the points that describe the need for implementing a balanced scorecard:

• Increases the focus on the business strategy and its outcomes.
• Leads to improvised organizational performance through measurements.
• Align the workforce to meet the organization’s strategy on a day-to-day basis.
• Targeting the key determinants or drivers of future performance.
• Improves the level of communication in relation to the organization’s strategy and vision.
• Helps to prioritize projects according to the timeframe and other priority factors.