What is a Balanced Scorecard?
A balanced scorecard is a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Balanced scorecards are used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information and use it to make better decisions for the organization.
A balanced scorecard is one of the best known strategy frameworks ever created. It’s been used by thousands of organizations since the 1980s, when it was originally devised by Robert Kaplan and David Norton. It’s also one of the first things you’ll learn about on a business or management degree. But despite its popularity, a balanced scorecard is often misrepresented or poorly implemented. In this guide, we’ll walk you through how to implement the Balanced Scorecard (and report against it) in a way that drives real business value to your organization.
Understanding Balanced Scorecards
A balanced scorecard — often abbreviated as “BSC” — is a strategy management framework that includes four perspectives of your strategy: Financial, Customer, Internal Process, and Learning and Growth.
A balanced scorecard defines an organization’s performance and measures whether management is achieving desired results. A balanced scorecard translates Mission and Vision Statements of an organization into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures typically include the following categories of performance:
- Financial performance (revenues, earnings, return on capital, cash flow)
- Customer value performance (market share, customer satisfaction measures, customer loyalty)
- Internal business process performance (productivity rates, quality measures, timeliness)
- Innovation performance (percentage of revenue from new products, employee suggestions, rate of improvement index)
- Employee performance (morale, knowledge, turnover, use of best demonstrated practices)
Organizations use BSCs to:
- Communicate what they are trying to accomplish
- Align the day-to-day work that everyone is doing with strategy
- Prioritize projects, products, and services
- Measure and monitor progress towards strategic targets
- Clarify or update a business’s strategy
- Link strategic objectives to long-term targets and annual budgets
- Track the key elements of the business strategy
- Incorporate strategic objectives into resource allocation processes
- Facilitate organizational change
- Compare performance of geographically diverse business units
- Increase companywide understanding of the corporate vision and strategy
The name “balanced scorecard” comes from the idea of looking at strategic measures in addition to traditional financial measures to get a more “balanced” view of performance. The concept of balanced scorecard has evolved beyond the simple use of perspectives and it is now a holistic system for managing strategy. A key benefit of using a disciplined framework is that it gives organizations a way to “connect the dots” between the various components of strategic planning and management, meaning that there will be a visible connection between the projects and programs that people are working on, the measurements being used to track success (KPIs), the strategic objectives the organization is trying to accomplish, and the mission, vision, and strategy of the organization.
Who Uses a Balanced Scorecard (BSC)?
Balanced scorecard was initially proposed as a general purpose performance management system. Subsequently, it was promoted specifically as an approach to strategic performance management. Balanced scorecard has more recently become a key component of structured approaches corporate strategic management.
Two of the ideas that underpin modern balanced scorecard designs concern making it easier to select which data to observe, and ensuring that the choice of data is consistent with the ability of the observer to intervene.
BSCs are used extensively in business and industry, government, and nonprofit organizations worldwide. More than half of major companies in the US, Europe, and Asia are using the BSC, with use growing in those areas as well as in the Middle East and Africa. A recent global study by Bain & Co listed balanced scorecard fifth on its top ten most widely used management tools around the world. BSC has also been selected by the editors of Harvard Business Review as one of the most influential business ideas of the past 75 years.
How a Balanced Scorecard Works
To construct and implement a balanced scorecard, managers should:
- Articulate the business’s vision and strategy
- Identify the performance categories that best link the business’s vision and strategy to its results (such as financial performance, operations, innovation, employee performance)
- Establish objectives that support the business’s vision and strategy
- Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets
- Ensure companywide acceptance of the measures
- Create appropriate budgeting, tracking, communication and reward systems
- Collect and analyze performance data and compare actual results with desired performance
- Take action to close unfavorable gaps
Characteristics of the Balanced Scorecard Model
Information is collected and analyzed from four aspects of a business:
- Learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use the information to convert it to a competitive advantage over the industry.
- Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
- Customer perspectives are collected to gauge customer satisfaction with quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
- Financial data, such as sales, expenditures, and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected. The balanced scorecard is thus often referred to as a management tool rather than a measurement tool.
How is a Balanced Scorecard Typically Put to Use?
A Balanced Scorecard is most often used in three ways:
- To bring an organization’s strategy to life. Those in the company can then use this strategy to make decisions company-wide.
- To communicate the strategy across the organization. This is where the strategy map is critical. Organizations print it and include it in interoffice communications, put it on their intranet, communicate it with business partners, publish it on their website, and more.
- To track strategic performance. That’s typically done through monthly, quarterly, and annual reports.
Main Benefits of Using a Balanced Scorecard
- Helps companies focus on what has to be done in order to create a breakthrough performance
- Acts as an integrating device for a variety of corporate programmes
- Makes strategy operational by translating it into performance measures and targets
- Helps break down corporate level measures so that local managers and employees can see what they need to do well if they want to improve organisational effectiveness
- Provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments
What are the Problems with Implementing a Balanced Scorecard?
As with any popular strategic framework, a balanced scorecard has picked up its fair share of critics over the years. The main criticisms of a balanced scorecard are that:
- It takes too much time to set up across your organization.
- People never fully understand it and therefore fail to benefit from it.
- It’s too rigid and doesn’t account for changes in the business landscape. Specifically that it’s too focused on financial measures above all else.
- It’s too internally focused, almost completely ignoring macro-economic or competitive aspects of running a business.
The truth is that the Balanced Scorecard is an excellent tool that when properly implemented, and will likely benefit most organizations. Many of the problems with implementing the Balanced Scorecard come from the fact that it is so often viewed as a mere reporting framework rather than a true way of managing your business.