The term balanced scorecard (BSC) refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Used to measure and provide feedback to organizations, balanced scorecards are common among companies globally. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information. Company personnel can use this information to make better decisions for the future of their organizations.
Key Takeaways
- A balanced scorecard is a performance metric used to identify, improve, and control a business’s various functions and resulting outcomes.
- The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information.
- BSCs were originally developed for for-profit companies but were later adapted for use by nonprofits and government agencies.
- The balanced scorecard involves measuring four main aspects of a business: learning and growth, business processes, customers, and finance.
- BSCs allow companies to pool information in a single report, providing insights into service and quality in addition to financial performance, and to help improve efficiencies.
Understanding Balanced Scorecards (BSCs)
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton first introduced the balanced scorecard. They published their findings in a 1992 article titled “The Balanced Scorecard—Measures That Drive Performance.” Both Kaplan and Norton worked on a year-long project involving 12 top-performing companies. Their study took previous performance measures and adapted them to include nonfinancial information.
Companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards.
BSCs were originally formulated for for-profit companies but were soon adapted for nonprofit organizations and government agencies. It measures the intellectual capital of a company, such as training, skills, knowledge, and any other proprietary information that gives it a competitive advantage in the market. The balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed: learning and growth, business processes, customers, and finance.
The BSC gathers vital information including objectives, measurements, initiatives, and goals related to these four primary business functions. Companies can easily pinpoint issues that hinder performance and set strategic changes for future scorecards.
The balanced scorecard provides a comprehensive view of the firm by aligning company objectives with its vision. Organizations may use this model to implement strategy mapping to identify where value is added within the company. They may also develop strategic initiatives and objectives by assigning tasks and projects to different areas to boost both financial and operational efficiencies.
Characteristics of the Balanced Scorecard Model (BSC)
Information is collected and analyzed from four aspects of a business:
- Learning and growth are analyzed through an investigation of training and knowledge resources. This area captures how information is gathered and how efficiently employees use that information to gain a competitive advantage within the industry.
- Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
- Customer perspectives gauge customer satisfaction with the quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
- Financial data, such as sales, expenditures, and income, are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
These four areas encompass the vision and strategy of an organization and require active management to analyze the data collected. As a result, the balanced scorecard is often referred to as a management tool rather than just a measurement tool due to its application by a company’s key personnel.
Benefits of a Balanced Scorecard (BSC)
There are numerous benefits to using a balanced scorecard. For instance, the BSC allows businesses to pool together information and data into a single report rather than relying on multiple tools. This helps management save time, money, and resources when executing reviews to improve procedures and operations.
Scorecards provide valuable insights into a firm’s service and quality in addition to its financial track record. By measuring all these metrics, executives can train employees and stakeholders efficiently and provide them with the necessary guidance and support. This facilitates better communication of goals and priorities, hence aligning organizational efforts to meet future objectives.
Another key benefit of BSCs is their ability to reduce suboptimization—the reliance on inefficient processes that can lead to lowered productivity, higher costs, reduced revenue, and a potential breakdown of brand reputation.
Examples of a Balanced Scorecard (BSC)
Corporations often develop their own internal BSCs. For example, banks may contact customers and conduct surveys to gauge their satisfaction with customer service. Feedback can range from wait times to interactions with bank staff. Managers can use this data to retrain staff and address any issues.
Some companies may use external firms to develop reports. For example, J.D. Power is a firm hired by various industries to perform surveys and provide insights. It helps companies identify problems and make performance improvements.
FAQs
What is a Balanced Scorecard and How Does It Work?
A balanced scorecard is a strategic management tool that helps companies identify and improve internal operations, thus enhancing external outcomes. It measures past performance data and provides feedback for better decision-making in the future.
What Are the Four Perspectives of the Balanced Scorecard?
The four perspectives are learning and growth, business processes, customer perspectives, and financial data. These components capture the company’s vision and strategy, hence requiring analysis from key personnel within the organization.
How Do You Use a Balanced Scorecard?
Balanced scorecards enable companies to measure their intellectual capital along with financial data, breaking down successes and failures in their internal processes. Management can compile past performance data in a single report to identify inefficiencies, propose improvements, and communicate organizational goals to employees and stakeholders.
What Are the Key Benefits of a Balanced Scorecard?
The main advantages include consolidating information into a single report to save time, money, and resources, tracking service and quality along with financial data, and recognizing and reducing inefficiencies.
Provide an Example of a Balanced Scorecard
Companies can use either internal or external methods to create BSCs. For example, they might conduct customer satisfaction surveys to assess the performance of their services, or they might hire firms like J.D. Power for research to highlight key areas for improvement.
The Bottom Line
Balanced scorecards offer a structured approach for companies to identify and resolve inefficiencies, thus improving their financial success. By collecting and analyzing data from learning and growth, business processes, customers, and finance, BSCs help companies save resources and improve their standings both operationally and financially.
Related Terms: Strategic Management, Performance Metrics, Intellectual Capital, Competitive Advantage.
References
- Harvard Business School. “Business Insights: What Is a Balanced Scorecard?”
- Harvard Business Review. “The Balanced Scorecard—Measures That Drive Performance”.
- J.D. Power. “The Key Indicators and Drivers of Performance”.
