A Balanced scorecard or BSC is a strategic management tool (strategic option) that measures the organization’s performance. BSC results are then used to measure and boost the financial, internal business processes, customer aspect, and learning.
The balanced scorecard is all about focusing on the big picture and aligning core values, mission, vision, focus areas, priorities, and other operational changes. It is a go-to tool for management because it also includes a range of non-financial measurements.
The management aims to make the business excel in all the segments in order to improve its overall performance. And this is where the balanced scorecard comes into play. What is essential here is that the strategy and tactics of the management should be in line with the information in the scorecard.
Dr. Robert Kaplan of Harvard University and Dr. David Norton is responsible for developing the BSC. It was first published by HBR (Harvard Business Review) in 1992. They came up with the BSC as a framework to evaluate a company’s performance using more balanced performance indicators.
Prior to BSC, the companies were using only short-term financial performance as an indicator of their success. However, BSC encouraged companies to use non-financial strategic measures to monitor and evaluate their long-term performance. Over the years, the concept of BSC has evolved, and the one that the companies are using now is a fully integrated strategic management system.
The concept of BSC is gaining popularity worldwide among private companies, government organizations, and nonprofit institutions as well. The tool is already very popular in the US, Europe, and Asia, and its use is growing in the Middle East and Africa as well. As per Bain & Co, it is the fifth most popular management tool globally, while HBR (Harvard Business Review) considers it the most influential business idea over the past 75 years or so.
Uses of BSC
Management uses the balanced scorecard to:
- Convey the vision and target that they are trying to attain.
- Keep a record and align every day’s work with the goals that the management is trying to achieve.
- Take a decision on which products, projects, and services they should take first.
- Measuring, as well as monitoring the progress of the strategic targets.
Benefits of Balanced Score Card
- Aligning the process in a better way.
- Better communication and execution of strategies.
- Better reporting of the performance.
- Monitor and measure the performance in accordance with the set goals.
- Managers rely on BSC to get information from all important perspectives.
Four Perspectives of Balanced Scorecard
The concept of a balanced scorecard assumes that a business must excel in four segments to boost its overall performance – Customer Perspective, Internal Business Perspective, Innovation and Learning, and Financial Perspective.
A balanced scorecard helps to change customers’ perspectives towards the brand or the organization in a positive way. Next, it also focuses on the internal perspective as to where the organization is lagging and where it should excel. Organizations go after innovation and learning perspectives by maintaining a balanced scorecard. This helps them to understand whether they can continue to improve and create value. Lastly, the scorecard also helps to keep an eye on what shareholders want and how well the company is focusing on creating value for them.
Let’s discuss these four perspectives in detail:
A company always needs to know how their customers think of them and their feedback as well. As per BSC, the management must convert their customer service mission statement into a separate objective that deals with factors crucial to the customers. A company can categorize the concerns of the customers into four main categories – Time, Performance and Cost, Quality, and Service.
Internal Business Perspective
Knowing customer’s expectations is beneficial for the company, but the company should also strive to improve internally. Positive customer feedback is the outcome of processes, actions, and decisions from within an organization. Managers should focus more on important and crucial operations that could help them fulfill customers’ needs. Therefore, having an internal perspective should be another major focus area for the company.
Innovation and Learning
A company might have one vision, but short-term goals and targets keep on changing. Every organization believes in changing the strategy as per the competition and what they want to achieve in the short term in order to meet their long-term goal. A company must make continuous changes in the products and services to ensure that the business remains ahead of the competition and stays relevant in the market. This is possible only if the company continuously innovates and learns internally.
This perspective measures the plans, strategies, and executions that add to the bottom line of the company. Every company aims to grow, be profitable and increase shareholder value. To survive, a company needs healthy cash flow, and to succeed; they need revenue growth. An increase in the market share of the company increases the return on equity (ROE) and, in turn, the shareholder’s value as well.
How Does it Works?
One must view BSC as a methodology and not just a scorecard. To construct a BSC for your organization, you first need to develop clear financial and non-financial objectives. These objectives must directly relate to the strategic priorities of your organization. After setting the objectives, the management needs to set targets and measures.
Now, the management must decide how to measure the objectives. After this, the management needs to identify the project to attain those objectives. This helps the management to avoid costly projects that may not contribute to the strategic priorities.
One of the many use cases of this strategy tool is that it brings down the excessive burden of data by limiting the number of measures. Too many measures do not always work in the best interest of the organizations. Instead, they overload management with too much data that simply does not add to productivity. On the other hand, a balanced scorecard ensures that the managers have few but effective measures to get them all the information they need.