The financial performance of an organization is essential for the success of the organization. Traditional financial reporting systems provide some indication of how the organization has performed in the past, but offer little information about how it might perform in the future. The Balanced Scorecard is a performance metric that uses strategic measurements that enable organizations to clarify their vision and business strategies, taking into account the non-financial aspects of corporate performance, to create a complete picture of how the company is likely to perform in the future.
The Balanced Scorecard system provides a more comprehensive view to the managers of a firm by complementing financial measures with additional metrics that gauge performance in areas such as Customer Satisfaction and Learning & Growth.
What is Balanced Scorecard?
A strategic planning and management system, which is used to align business activities to the vision statement of the organization, is called Balanced Scorecard.
In the Industrial age, as most of the assets of an organization were in property, plant and equipment, the financial accounting system worked perfectly in valuing those assets. But in the Information age, much of the value of the organization is embedded in innovative processes, customer relationships and human resources. So, focusing strictly on financial measures will limit the growth of the organization. Non-financial aspects are equally important for performance and organizational sustainability.
A Balanced Scorecard Template, as published by Kaplan and Norton in 1996:
The Balanced Scorecard goes beyond the orthodox financial measures to include customer perspective, the internal business perspective and the learning and growth perspective.
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Balanced Scorecard Approach
Balanced Scorecard is a system, designed to divide a company’s mission statement into small but well-defined goals. It helps the company in monitoring the performance, with respect to overall goal and objectives that are set in the mission statement.
An example of a basic Balanced Scorecard Approach:
The Balanced Scorecard includes the following four perspectives in its approach:
I. Financial Perspective
The traditional need of financial data is never discarded by the Balanced Scorecard. Timely and accurate financial data can be centralized and automated in this corporate database.
Examples: Cash flow, sales growth, operating income, return of equity, etc.
II. Customer Perspective
In the Information age, there is an increase in focus on customer satisfaction. If customers are not satisfied, they will eventually find other suppliers to meet their needs. This makes Customer Perspective a leading indicator.
Examples: percentage of sales from new products, on time delivery, share of important customers’ purchases, ranking by important customers, etc.
III. Business Process Perspective
This perspective refers to internal business processes. Measurements on this sector tells the company about itself i.e. how well the business is running or whether its products and services are catering to the customer requirements properly. These metrics should be designed carefully by those who know the process intimately.
Examples: cycle time, unit cost, yield, new product introductions, etc.
IV. Learning and Growth Perspective
This perspective blends employee training along with corporate cultural attitude, thereby focusing on the self-improvement of both the individual and the corporate. Under rapid technological and economical changes, knowledgeable workers need to learn continuously.
Examples: time to develop new generation of products, life cycle to product maturity, market versus competition, etc.
These four perspectives are not independent of each other but share a logical connection between them. Learning and growth leads to better business processes, which in turn leads to customer satisfaction which finally leads to financial progress of the organization.
Why Balanced Scorecard is Used?
The Balanced Scorecard allows managers of a company to analyze the aspects of the business they need to monitor more closely and highlight the areas they need improvement upon.
It is used for the following purposes:
- To improve organizational performance by measuring what matters.
- To increase focus on strategy and results
- To align organization strategies with workers on a daily basis.
- To focus on the leading indicators that hold the key to future performance
- To improve communication between the Vision and Strategy of the Organization.
- To prioritize projects or initiatives.
The Balanced Scorecard is used to attain objectives, measurements, initiatives and goals that result in the growth and development of the company as a whole.
Main Challenges to Implementing a Balanced Scorecard
There are some typical problems that a company’s strategist faces when implementing a Balanced Scorecard. Implementing a balanced metrics system is an evolutionary process and not a one-time task. If managers do not recognize this, the organization will get disappointing result.
The three main challenges are:
I. Lack of Efficient Data Collection and Reporting
One of the primary reasons that companies overemphasize on financial metrics at the expense of other important operating variables is the fact that a system already exists for collecting and reporting financial measures. In most companies, if collection of metrics data takes too much time and energy, it is conveniently avoided. This compels the managers to look for quick short-term fixes which results in inefficient data collection and production of a report that doesn’t convey the real story.
How to overcome this?
Companies need a well chalked-out plan that defines vital few metrics and they need to commit resources that focuses only on collection of automated data. They need to prioritize key performance indicators based on information that is most relevant to improving organizational performance.
II. Too Much Internal Focus
One of the major criticism of Balanced Scorecard is that it encourages too much focus on the internal aspects of the company, overlooking the prominent external factors. This also happens as companies often make the mistake of looking at a Balanced Scorecard as a tool to judge only the satisfaction of their employees and customer.
How to Overcome this?
Companies should always start with an external factor—view of organization’s SuperSystem. Assessment of the organization’s market, competitors, customers, shareholders, employees and stakeholders along with Strengths, Weaknesses, Opportunities and Threats (SWOT), all go into the building of the SuperSystem. This will ensure the connectivity between the internal links of the company to the external performance drivers.
III. Getting Lost in the Mechanics of Tracking
The absence of automation to record and initiate results early in the implementation process can derail the strategist team into the mechanics of recording actuals versus targets. This will get magnified when the team tries to build sophisticated formulas to roll-up an overall result by objective or department, across the four perspectives of Balanced Scorecard.
How to Overcome this?
The remedy to this is pretty simple. Remind the strategist team that the spirit of using a Balanced Scorecard is to steer the ship, that is the organization, into the right direction and not to get 100% accurate results.
What are the next steps?
Almost 25 years have passed since Dr. Kaplan and Dr. Norton revolutionized management science with the introduction of Balanced Scorecard. Since that time, it has developed from a balanced measurement system to a full-fledged strategy management framework.
But, what’s next for the Balanced Scorecard?
I. Refocusing the Strategy Map
Strategy Map emerged when early adopters of the Balanced Scorecard realized that added incentives can be extracted out of the framework when financial and non-financial objectives are laid out on a map, describing the casual relationship between both the objectives.
II. Centerpiece for Strategy Analysis
The Strategy Map will become the centerpiece for strategy analysis. Looking at the data, organizations will be able to shape their performance indicators at a much faster speed than hitherto possible.
III. Rethinking Key Performance Indicators (KPI)
Organizations will let go off their obsession of finding perfect strategic enabler measures and be more interested in analyzing and acting on the data that informs what is driving the outcomes (finance and customers). There will be KPIs but will be used much more as guides to performance conversations rather than being used as absolute measures of progress.
IV. Real Time Reviews (KPI)
Classic quarterly strategy-review needs to be replaced with the availability of more real-time information. This will lead to immediate analysis, reporting and action.
V. Changing the Alignment Model
One of the greatest strength of the classic Balanced Scorecard is its application as an alignment tool. Through cascade maps and scorecards all parts of the organization could be linked to the key strategic objectives of the enterprise. But in today’s fast-moving world, by the time a suite of scorecards has been created, the market, customers and the competitors have already moved on. In the next Scorecard evolution, Alignment will be much lighter and a more bottom-up tool, so that adjustments and changes can be made easily taking less amount of time.
Today, Balanced Scorecard is being used by a lot of corporate, government and even non-profit organizations in all economically leading countries. To get an Overview, check my video at:
Amid profound business evolution, organizations are continuously making changes in how they think and behave. There are ample amount of influences and variables at play and we are yet to figure what exactly future organizations will look like. Balanced Scorecard System will surely remain as a powerful guide in managing strategy for the organizations in their way forward to sustainable growth and development. Only how we think about it and apply it will change fundamentally.
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