A beginner’s guide on Balanced Scorecard

Introduction

“I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.
If you cannot measure it, you cannot improve it.” – Lord Kelvin

Performance control has been thought-provoking topic which has been applied in many organizations around the globe. Due to the nature of all these different organizations, many types and forms of performance controls have been developed both by academics and practitioners.
Performance control or management systems are used by organizations to cater multidimensional roles:

  1. Communicate the company’s strategic objectives.
  2. Motivate employees to help the company achieve its strategic objectives.
  3. Evaluate the performance of managers, employees, and operating units.
  4. Help managers allocate resources to the most productive and profitable opportunities.
  5. Provide feedback on whether the company is making progress in improving processes and meeting the expectations of customers and shareholders.

Over the years, various frameworks have been proposed and implemented such as Balanced Scorecard, Total Quality Management, Shareholder value etc. Based on research by (Lawson, et al., 2008) balanced scorecard is the most popular and used among by 62% of organizations as a performance management system.

The Balanced Scorecard

(Kaplan & Norton, 1992) suggested what you measure is what you get. They introduced the balanced scorecard in 1992 and believed that measurement was as fundamental to managers as it was for scientists. If companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems. While formulating the balanced scored, they emphasized on the aspect that the Balanced Scorecard does not become a benchmarking exercise. They further acknowledged that even high-performing companies succeeded with strategies that were quite different from each other.

Figure 1: Balanced scorecard developed by Kaplan and Norton (1992)

The figure above shows the original structure for the Balanced Scorecard which retains financial metrics as the ultimate outcome measures for company success, but supplements these with metrics from three additional perspectives – customer, internal process, and learning and growth – that we proposed as the drivers for creating long-term shareholder value.
The balanced scorecard allows the organizations to measure their performance from different angles and incorporate the necessary key performance indicators. The four perspectives shown in the above figure can be summarised and explained as follows:

  1. Customer, how are we perceived by our customers?
  2. People/ growth assets/ innovation, what is the level of capacity for the organization to grow and learn?
  3. Financial, what is the impact of performance on shareholder value?
  4. Internal processes, what core competencies do we possess and what can we develop more?

The Balanced Scorecard retains financial metrics as the ultimate outcome measures for company success, but supplements these with metrics from three additional perspectives – customer, internal process, and learning and growth – that we proposed as the drivers for creating long-term shareholder value.
(Lipe & Salterio, 2000) described the balanced scorecard as an integrated set of leading and lagging performance measures designed to capture the organization’s strategy.
(Bloomfield, 2002) noted that automation is essential in order to manage the vast amount of information related to a company’s mission and vision, strategic goals, objectives, perspectives, measures, causal relationships, and initiatives. The alternative is a manual process, which significantly increases the effort and cost of scorecard development and sets back progress in the early stages of the balanced scorecard development, when momentum is critical.

Advantages of balanced scorecard

Apart from the fact that the balanced scorecard covers the for various performance indicators of an organization, there are other advantages associated as well.
By using the balanced scorecard approach, the organizations can make sure that it’s not only the current or short term future which is evaluated but the results can give the stakeholders an overview of the health of the organization at short, intermediate and long term.
By using a balanced scorecard, a company can be sure that any strategic action implemented matches the desired outcomes. It might, if the customer is satisfied with that product, or if the processes involved with creating that product make the product of a higher quality.

Disadvantages of balanced scorecard

While there a lot of advantages in balanced scorecard, there are certain disadvantages and limitations associated as well. One of limitation of using balanced scorecard is that it needs a proper forethought process before implementation. This means that it is not a tool which can be used to solve the problems in quick span of time without a proper plan. Various authors such as (Johnson, 1980) have supported this argument that companies should focus on improving quality, reducing cycle times, and improving companies’ responsiveness to customers’ demands. Doing these activities well, they believed, would lead naturally to improved financial performance.
It is recommended while implementing a balanced scorecard in an organization to hold a meeting plan to state all the objectives which are to be met. Once you have the clearly stated objectives, these can be broken down in to further smaller objectives which meets the planned outcome.
While balanced scorecard gives you a holistic view of the four dimensional factors, it is often not the complete picture what is happening within the organization. Thus, it is recommended that the balanced scorecard is treated at the organization’s strategy that includes multiple success factors.
Some authors such as (Jensen, 2001) have also stated that Balanced Scorecard theory is flawed because it presents managers with a scorecard which gives no score – that is no single-valued measure how they have performed. Thus managers evaluated with such a system have no way to make principled or purposeful decisions.

Summary

We live in a competitive world and organizations want to gain the advantage by transforming them based on the information available. The performance management systems are not only important and applicable to the organizations but they can be applied to human resources, products or even processes to measure their effectiveness and learn about the areas which needs attention. Balanced Scorecard is one of the most popular and effective measurement systems used by organizations. One of the primary reasons for its popularity is of course the reason that it not only limits the measurement in one area but also adds multiple side dimensions to get a more holistic view.

Further Reading

Using the Balanced Scorecard as a Strategic Management System

Balanced Scorecard: Panacea or poisoned chalice?

New Ways to Improve Communications and Risk Management

Using Balanced Scorecard to Measure Software Quality

Balanced Scorecard: 6 Ways to Turn Business Strategy Into Business Success