Key learning outcomes:

  • Learn how the balanced scorecard enables the assessment of a company’s future performance.
  • Describe the four perspectives that are measured – financial, customer, business processes, and learning and growth.
  • Understand that when using this tool, a company devises objectives, measures, targets and initiatives for each perspective.
  • Implement the balance scorecard in your business using the worksheet provided.

Article:

The balanced scorecard was developed by Robert S Kaplan and David Norton in the early 1990s as a tool to evaluate business strategy and performance. The tool has been revised and refined over time, and is still one of the performance management tools most favoured by companies around the globe. It is widely used in large organisations, however it is just as effective when used in small businesses or even a single department.

Kaplan and Norton looked to devise a tool that allowed company performance to be measured beyond the financials. By their nature, financial reports look at how a business has performed in the past; the balanced scorecard looks at how it might perform in the future. In this article, we explain how the tool works and how you can use it in your business.

The framework

The balances scorecard starts with the company strategy at its core. From there, four perspectives are measured – financial, customer, business processes, and learning and growth. Kaplan and Norton believe that this achieves a balanced view of the business’s performance and this assists with successful implementation of business strategy. The following is a visual representation of the framework.[wlm_ismember]

BalancedScorecard

How it works

By working from these four perspectives, you will be able to analyse the business beyond the financial statements. As you can see from the above diagram, performance in each perspective will impact on other areas of the business. For example, a decision to spend more resources on learning and growth may have a negative effect on the bottom line through an increase in expenditure. However, longer term the business might find that the extra expenditure leads to an improvement in business processes, which in turn increases customer satisfaction, income and profitability.

The financial perspective

Strong financial performance is fundamental to the survival of any business and therefore it is essential for this perspective to be monitored and evaluated. When designing the framework, Kaplan and Norton stated that financial analysis is still required, and they maintained that accurate data on the return on capital employed, cash flow, unit costs and profit is important when measuring a business’s success and progress. However, they believed that financial statements measure and evaluate what has already happened and do not give insight into what might be happening right now or what might happen in the future.

The customer perspective

Over time businesses have become very aware of the importance of measuring performance from the customer’s point of view. When looking at the business from this perspective Kaplan and Norton asked the question “how do we look to customers?” The aim is to gauge how satisfied customers are with the product or service they are receiving.  Measurements should include customer satisfaction, customer retention rates and reputation.

The business process perspective

For this perspective, a business will ask, “How effective are we internally?” It looks inwards, measuring the key processes that drive the business. Depending on the type of business, the measures will differ; for example, a manufacturing business might look at quality, order processing time and inventory management and a real estate agency might look at processes such as property inspections or rental increases. One of the key questions management will focus on is “what must we excel at to be successful?”

The learning and growth perspective

This perspective focuses on the need to invest in the development of the people within the business. The measures extend beyond simply training to also include such things as employee retention and satisfaction. This list may be expanded to cover innovation and the development of new products and services.

Scoring the perspectives

For each perspective, the business should set objectives, measures, targets and initiatives. These should all link back to the business’s overall strategy and can then be evaluated over a time frame. For example, a business may determine that improving employee retention is an objective in the learning and growth perspective. The measures will be observable parameters such as staff resignations. The targets are the specific values used to measure performance, for example a staff turnover of 5% or less. The initiatives are the actions the business will implement to achieve the target. In this case it might be a one-on-one coaching or staff development program.

Benefits of the balanced scorecard

Overall view – once all the data from these four perspectives is gathered and evaluated, you will gain a balanced view of the business’s performance rather than one weighted heavily towards financial performance. This allows business owners and managers to make more effective decisions with the benefit of a more balanced and comprehensive view of the business.

Clarification of strategy – a clearer picture of the business as a whole is obtained when the overall strategy is broken down into the four perspectives. This is particularly useful if managers look after just one aspect of the business; for example, the financial controller can gain greater insight into the bigger picture and benefit from the broader feedback and information.

Communication of objectives – the balanced scorecard can be an effective means of sharing the overall business strategy with an entire team. Breaking down the higher-level strategy down into specific objectives and targets allows everyone to understand how each single objective contributes to the overall vision.

Feedback and response – the information gained through the balanced scorecard is specific and enables targets to be met more effectively. Additionally, it allows management to monitor the effects of any strategic change initiatives. For example, logic might suggest that customer satisfaction will increase in line with additional training programs. This can be evaluated using the balanced scorecard. If there was no increase, the reasons can be investigated and remedies implemented accordingly.

Using the balanced scorecard in your business

We have provided a worksheet that will enable you to complete a balanced scorecard for your business.

Start by placing your strategy and vision at the top of the worksheet. Next, answer the questions for each perspective by noting down your objectives, measures, targets and initiatives. You can then assess your current performance level.

The next step is to analyse the scorecard looking for the areas of improvement. These are areas where there is a shortfall or gap between your objectives and targets and your current performance.  It is important to focus on the things that are most critical to the achievement of your overall business strategy and vision. When assessing your balanced scorecard you might discover that you are currently measuring things that are not really important, or that you have not been measuring some perspectives at all.

Look for new insights into your business’s performance. For example, when looking just from the financial perspective you may suspect that your marketing and advertising budget is excessive. However, when reviewing the scorecard you might discover that your customer retention rate is extremely low and this means you need to advertise heavily in order to constantly generate new customers to maintain your income level. Therefore, a decision to simply reduce spending would not be the wisest one, as reduction in advertising will also reduce income unless the issue of poor customer retention is dealt with.

The balanced scorecard offers an excellent framework to use regularly in your business to ensure that you are on track in delivering your business strategy and vision.[/wlm_ismember]

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