A balanced scorecard is a collection of measures used by executives to get a comprehensive view of a business. The scorecard takes into account four aspects namely: financial, customers, internal business operations, and innovation, learning and growth.
In this article, we will examine these concepts in depth to understand what they entail and why the balanced scorecard is important for performance management.
Components of a balanced scorecard
Performance management is the compass that executives use to determine whether they are on track or not, otherwise they would be running failing businesses. Businesses are unique and when they are measured using common metrics, there is a likelihood of losing focus and trying to follow a common route to fit in thus losing the competitive advantage.
As per the customers’ perspective, the main question that companies should ask themselves is how they look to customers. A balanced scorecard should consider the factors that customers value such as quality, time, cost, performance and others and use the findings to set goals and standards. If one is unable to articulate a customer-centric approach, there is always an option of hiring third parties to conduct surveys or benchmarking the top performers in the same industry or a different one.
In the financial perspective, the leading question is the appearance of the company to stakeholders. Financial measures indicate the impact of a company’s strategy, implementation, and execution of activities to the ultimate goal of sustainable growth. Here, executives should consider the profits and rate of growth.
In terms of internal business perspective, companies should be guided by: which areas should we excel in? Performance is the result of decisions, actions, and processes taking place in all sectors of an organization. While designing the balanced scorecard, the measures should be derived from the processes that have generated the greatest impact on customer satisfaction. They include but are not limited to productivity, skills of employees, time of delivery, and quality of products or services.
Lastly, looking at innovation, learning, and growth, leaders in companies should ask themselves whether they can improve and continue to make value. We are in an age where everything is changing; from the nature of products and services to nature of workers to mode of delivery of both products and services, etc. In consequence, a company’s ability to innovate and learn has a direct impact on its value. Only companies that are able to improve their products and/or services to appeal to customers or meet new needs, make operations more efficient and create more value are able to maintain and even enlarge their market shares and increase revenues.
Facts about a balanced scorecard
- It can be created for any business
- It can be used in any level of a business; departmental, regional, etc.
- It should be specific to the organization
- It should be implemented from the bottom to the top
- The variables in each category should be measurable
- The measures can be qualitative or quantitative or both and for long or short durations or both
- The measures should be informative
How to design a balanced scorecard
- Define the strategic goals
- Organize them into four main areas as: customer perspective, financial perspective, internal operations perspective, and learning and growth
- Rephrase the goals depending on the level in which you want to implement the scorecard
- Define the measures for each category
Benefits of a balanced scorecard
1.Prompts orderliness in business
Excellence of a business depends on many factors. As soon as you embark on this journey of designing a balanced scorecard, you are challenged to not only look into all aspects of business, but also ensure that they are in order.
2. Better management
Every department in a company has its way of measuring performance. Before a balanced scorecard, it is very likely for managers may become independent and assume that their actions, although they are well-intentioned, have minimal impact on others. They may also start working against each other or rejecting propositions when it looks like some actions are about to sabotage their performance.
A balanced scorecard allows managers to see the effect of their actions to other departments and the company and act accordingly and also individualize their performance. They can therefore be challenged to consider each other’s opinions when making decisions. In addition, collaboration becomes easier and intentional since everyone will be seeing the vision.
Lastly, since the management report will be one and comprehensive, it becomes easy to understand, critique, get feedback and execute.
3. Strategic planning
A balanced scorecard shows what actually matters. Through the clear picture of the cause and effect, managers are challenged to take more time to think through their plans, execution, and the people designated in different positions to ensure excellence.
A balanced scorecard simplifies the dynamics of a business, but the benefits can only be reaped if it is implemented.