You probably have come across the term balanced scorecard. So, what is a balanced score card? Before getting to that, you need to understand the origin. Traditionally, companies would judge the firm’s performance through financial accounting measures such as earning-per-share and return of investment. They concentrated on how much money the company made and did not have to worry about factors such as annual assessments, targets, and metric-driven incentives. Things were quite simple back then. However, though measuring financial aspects of a firm is necessary, financial measures only gave part of the picture.
In 1992, to build organizations that not only stay ahead of the competition but also stand the test of time, two doctors namely David P. Norton and Robert S. Kaplan decided to think out of the box. They found out that financial measures depended on the past and hence provided a lagging report. To curb this problem, Norton and Kaplan decided to focus on measures that look forward in time and came up with their balanced scorecard system.
What Is a Balanced Scorecard?
As soon as executives start to notice the inadequacies of traditional performance measurement systems, they start asking questions such as:
- What is a balanced score card?
- What are the benefits of a balanced scorecard?
- How does it drive performance?
The definition of a balanced scorecard that is often quoted as:
A performance measurement system used to align company activities to the objectives statement of a firm.
In simple terms, it attempts to connect dots between different high-level strategy measures such as the company’s vision, mission, and low-level measures.
What Are the Benefits of a Balanced Scorecard?
- It provides you with a balanced view of your firm’s overall performance. It also highlights activities that require improvement.
- Assists your business in clarifying its strategies and vision and avails a means to transform these into action.
- Allows the company to identify and focus on areas that promote performance.
A BSC provides a comprehensive report.
- It helps the organization to enhance its information system. This way, staff members and managers can know what they need to do to meet targets.
Implementing a Balanced Scorecard
Knowing what is a balanced scorecard does not necessarily mean that you know how to implement one. Putting a balanced scorecard to use can be challenging for a novice. Some of the options available for implementing and tracking your BSC include Excel, PowerPoint, Business intelligent tools and scorecard-specific applications.
An effective BSC implementation option should be:
- Easy to update and understand;
- Accessible to everyone;
- Compliant with your firm’s current technology platform.
However, since there are pros and cons to each option, pick one that suits your company best.
What Is a Balanced Scorecard? 4 Key Perspectives
The BSC allows managers to view the organization from four important perspectives to develop targets, objectives, and initiatives relative to these uniquely connected points of view. Each perspective focuses on different elements of the firm hence creating a balanced view of your company. The four perspectives include:
1. Learning and Growth Perspective
This perspective concentrates on the overall company culture.
- Are staff members up to date with the latest industry trends?
- How is the flow of information in the organization?
- Can employees make decisions?
- Is it easy for managers and staff to collaborate and share knowledge?
- Does the company provide continuing training and education opportunities to the staff?
- Do employees know what is a balanced scorecard?
- What about job satisfaction and employee turnover?
Due to intense global competition, targets of success must change. Therefore, the organization must ensure continual improvement. A firm’s ability to improve, grow, innovate and learn directly affects the company’s performance. Technology plays a significant role in this perspective.
2. Customer Perspective
This perspective focuses on viewing the firm’s performance from the client’s point of view. Many businesses today even set up departments solely meant to focus on customers.
- How do customers see your company compared to your competitors?
- What are the things that are important to your clients?
- Are you keeping and winning new customers?
A balanced scorecard demands that customers’ views and concerns be taken seriously. Customer satisfaction is a great future-looking indicator of success. You can measure customer satisfaction by considering the following: time, service, quality, performance, and cost. The way your company treats your clients today directly affects how much you’ll make in the future.
3. Financial Perspective
When learning what is a balanced scorecard, it is important not to ignore financial measures. Just because the BSC is using a different approach compared to traditional measures, it doesn’t mean that financial measures are rendered useless. In fact, the financial perspective is a major focus of the BSC. It helps indicate whether common company strategies are contributing to the overall improvement of the organization. Financial goals include shareholder value, profitability, and growth. It also focuses on cash flow, return on investment, financial results and return on capital employed.
- Is the company making money?
- Does the organization achieve its financial goal?
- Are the shareholders happy?
Remember, money keeps your firm alive.
4. Internal Perspective
All perspectives are equally important. However, they must be translated into what the firm must do internally to meet financial goals and customers’ expectations. This perspective covers areas such as process automation, duplicate activities across different functions, process alignment and activities per function. It also looks at how smoothly the company is running. Efficiency is everything in this perspective. Are there any factors slowing things down or interfering with new ideas and execution? How quickly does the business adapt to changes? At the end of the day, all internal activities should be tailored towards providing what the customers need.
4 Key Performance Indicators You Need to Tick
Before you get to the measures, you must have different strategic objectives for each perspective. Each strategic objective should then have at least one key performance indicator. Measures help show the progress of different company departments toward the desired outcome. Proper measures:
- Offer comparison to help see the degree of performance improvement or decline;
- Reduce intangible uncertainty;
- Focus everyone’s attention on what matters to achieve success;
- Allow measurement and of accomplishments.
The balanced scorecard is consistent with several initiatives underway in many organizations. It also helps keep businesses moving forward.
Did you learn what is a balanced scorecard? Leave us a comment below with your opinion!
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