Balanced Scorecard

Balanced Scorecard

Balanced Scorecard is a performance management framework used by strategic decision makers to make the right decisions about their business. Balanced scorecard not only a set of strategic goals; it is also a method for monitoring progress toward organization's strategic goals.

The balanced scorecard method is a management technique designed to provide a view of an organization from both internal and external perspective. Before we get to the details, let us draw your attention to some other strategic management models, such as SWOT analysis, IFE matrix, EFE matrix, BCG matrix, and SPACE matrix.

Strategic management professionals often work also with the quite analytical model called QSPM model. Understanding the Product Life Cycle and Porter's Five-Forces model is also very important.

What is balanced scorecard and how does it work?

Balanced scorecard views organization from four perspectives:

  • Customer perspective,
  • Internal-business processes,
  • Learning and growth,
  • Financials.

The first step in the balance scorecard framework is to analyze these four perspectives. However, balanced scorecard does not end there, it goes further. Balanced scorecard also develops metrics and methods for collecting data to calculate them. After data is collected and metrics calculated, each of the four perspectives can be analyzed relative to each other.

Balanced Scorecard Method Example

Balanced scorecard provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.

Perspective 1: Customer

Customers are the ones who pay the bills; therefore, it is important to keep them satisfied so that they not only come back but also spread the word and bring new customers too. Every business should be constantly asking the question:

"How well are we meeting the needs of our customers, and how can we make them more satisfied?"

Balanced scorecard brings this question into action items. Balanced scorecard includes the question, methods for how we measure results, and an analysis of how our results meet our goals. This is an example of how the Customer perspective can be handled in the balance scorecard framework:

Metric: Overall satisfaction ratings measured via surveys and polls.
Target: At least 4.00 out of 5.0 from each of the major customer groups: youth, adult, elderly.
Method: Our business regularly conducts customer surveys. A final question in each survey asks the respondent to rate his or her overall satisfaction. Data for this metric is compiled monthly.

Perspective 2: Internal-business process

After defining our customer and knowing how to make him happy, we also need to focus on our processes that get us to the customer. We ask the question:

"How do our internal processes function to efficiently deliver products and services, and how can we improve our efficiency?"

Balanced scorecard can translate this into concrete targets, metrics, and methods. Below you can find an example of how balance scorecard addresses the Internal-business process perspective:

Metric: Servicing customer calls in our call center.
Target 1: Answer each incoming phone call from a customer within one minute.
Target 2: Decrease the number of dropped calls to less than 2%.
Method: This metric will measure the elapsed time from the moment when incoming phone call reaches our network to the time it is picked up by an operator. An automated phone auditing IT system will be implemented to track phone statistics.

Perspective 3: Learning and growth

Innovation and learning is the key ingredient needed for being ahead of the competition. Employees need to keep educating themselves and the company needs to provide them the right tools and motivation. Strategic planners need to ask the question:

"How well are we positioned to ensure that goals are met in the future?"

And again, balance scorecard can help translating this question into action steps. Below is an example of how balanced scorecard can handle the Learning and growth perspective.

Metric: Staff development.
Target: Each employee has to take training ABC by the end of March next year and succeed at least 80% score on a test.
Method: The company will offer training ABC that will be followed by a test.

Perspective 4: Finance

Everything is about the bottom line. A business needs to align its priorities with activities that bring in revenue, and it has to be done in an efficient way. Decision makers need to ask the question:

"How well are our finances managed to achieve our mission?"

And this can be translated into detailed action steps, measures, and goals in the balanced scorecard framework as well. Here is an example:

Metric: The Sales department expenditures as a proportion of company expenditures.
Target 1: The Sales department expenditures will be less than 20% of the total company expenditures.
Target 2: The Sales department expenditures will grow at the same or lower rate than revenues from sales.
Method: Total expenditures of company and revenues from sales figures will be obtained from the corporate accounting system. Expenditures for the Sales department will be obtained from intradepartmental book-keeping system. These two figures will be used to calculate the percent.

Why is the balanced scorecard method good?

The good aspect of the balanced scorecard method is that it is tactical and concrete. While strategic planning documents often tend to be passive, they only say what should be accomplished but do not say how and do not say how it will be measured, balanced scorecard attempts to be active.

The balanced scorecard method transforms an organization’s strategic plans and goals from mere statements into execution plans and "orders". This can be done at a very granular level if needed. Balanced scorecard provides a framework that not only provides performance measurements, but it also helps planners identify what should be done and how it should be measured. Balanced scorecard enables executives to truly execute their strategies.

How is balanced scorecard implemented in real business?

Major units throughout organizations often establish their own scorecard which is then integrated with the scorecards of other units to achieve the scorecard of the overall organization.

The balanced scorecard method today is often implemented as a full strategic planning and management system where data is fed directly from accounting and company IT systems into the model to calculate metrics and compare them with strategic goals and plans.

What is the history of the Balanced Scorecard method?

The balanced scorecard method was first published by Dr. Robert Kaplan and David Norton. They introduced the balance scorecard framework as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more balanced view of organizational performance.

How does balanced scorecard compare to other management methods?

The Michael Porter's Five Forces model analyzes company from outside. It analyzes its external position.

The SWOT analysis method and IFE/EFE matrix is one step closer to analyzing a business from inside.

Balanced scorecard is two steps closer, it focuses very much on internals but also deals with external factors.

I have questions about the Balanced scorecard method

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