Most performance measurement tools either consider financial or non-financial metrics. The balanced scorecard takes into account both aspects of performance measurement.
The balanced scorecard also considers both internal and external perspectives of an organization. It lets management measure the performance of the organization through four key elements.
The management can then set key performance indicators (KPIs) to analyze and assess the performance of the organization in each aspect.
Let us discuss the concept of the balanced scorecard and see how it can be implemented effectively.
What is the Balanced Scorecard?
The balanced scorecard (BSC) is a strategic performance measurement tool. It analyzes the financial and non-financial metrics of the organization. It also evaluates the effectiveness of the internal business functions and their respective external outcomes.
The balanced scorecard (BSC) takes a balanced approach in appraising the performance of an organization. Initially, the BSC model was developed to measure the non-financial metrics that were often ignored in other performance measurement models.
The BSC model can be implemented effectively for not-for-profit and for-profit organizations. The management needs to identify the four key perspectives, the KPIs, and tools to measure the KPIs.
The Balanced Scorecard Framework
The balanced scorecard framework considers four key elements. The management can then identify critical success factors (CSFs) against each of these elements. Then, the management can use key performance indicators (KPIs) to measure and improve the performance of the organization.
The four key perspectives of the BSC model are:
- Financial Perspective
- Financial Performance
- Effective Resource use
- Customer Perspective
- Total Customer Value
- Customer retention (satisfaction)
- Internal Business Process
- Innovation and Learning
- Human Capital
- Infrastructure and Technology
- Research and Development
The management can rename their key perspectives according to their specific needs. However, these key four elements remain critical for the strategic success of any organization according to the BSC model.
The BSC model then considers four key questions related to these elements:
- How do we look to our shareholders?
- How do our customers see us? Their expectations
- What processes we must excel at?
- Can we continue to improve and create value?
Let us elaborate on these four perspectives.
The financial perspective means earning profits and return on investment for shareholders. Shareholders are the key stakeholders of an organization.
The financial perspective also means managing the risks of the business.
Common financial critical success factors can be profitability, Liquidity, and solvency. The KPIs to measure these CSFs can be profit margins, ROI, ROCE, and solvency ratios.
The customer perspective lets a company evaluate its performance from an external point of view. How do our customers perceive our products and services as compared to our competitors?
Some commonly used CSFs in this regard can be low-cost products, high-quality products, and prompt customer services. The KPIs can be benchmarking, damaged goods percentage, competitors’ costs, and so on.
The internal process perspective explores the question: “what do we excel at?”
In other words, it asks an organization to set the highest standards of innovation and efficiency in its internal processes. It lets an organization create a competitive internal environment that strives for continuous improvements.
Operational efficiency is the main CSF here. The KPIs to analyze operational efficiency can be budgeting, process benchmarking, and production cycle time.
Learning and Growth
This is the key perspective in the BSC model where an organization’s employees need to demonstrate the highest level of knowledge, skills, and information.
It also focuses on how well the organization’s employees utilize the information provided. It takes a holistic approach to create a culture of innovation, learning, and growth.
The CSFs in this regard can be product innovation, new product launches, employee learning, and internal process developments.
Implementation of the Balanced Scorecard
The balanced scorecard comes with several benefits theoretically. However, as with any other framework, the challenge is in the effective implementation.
The balanced scorecard can be implemented by taking the following step-by-step approach.
Develop the Strategy
The first step is to develop an explicit strategy and define the goals of the organization clearly. The strategic goals of an organization can be market share, new products, and resources.
For instance, a company may want to maintain its market share in the long run. Others may want to create a culture of innovation, like Apple Inc.
Choose the Measures
A critical aspect of the BSC model is to choose the right performance measurement metrics. The performance evaluations metrics must align with the strategic goals of the organization.
For example, a commercial company would seek profit maximization. A not-for-profit organization like a hospital seeks patient satisfaction.
Performance Measurement – Define and Refine
This stage requires the management to continuously monitor the performance. The management must seek reports on CSFs and measure them through KPIs.
This step will involve regular improvements and corrections throughout the implementation framework.
Deal with the People
The BSC model is unique in the sense that it focuses on developing a culture of excellence. It means the BSC model strives to change human behavior in an organization.
This final step of implementation in the BSC model requires taking a balanced approach by considering the needs of the employees as well. The strategic goals of the organization must also focus on career growth, skills development, and remunerations.
Strategy mapping is an additional tool that managers can use for the effective implementation of the balanced scorecard.
The strategy mapping is mainly a strategy visualization tool that helps managers with the BSC framework implementation.
The key steps in the strategy mapping include the following:
- Identify the overriding objective of the organization.
- Determine how the main objective will create value for the stakeholders of the organization.
- Next, evaluate the financial perspective. How the financial resources will support in achieving the objectives.
- Identify the skills and resources required to implement the strategy.
- Analyze how internal processes will support the strategy.
- Develop customer-oriented strategies that align with organization strategy overall.
Benefits of Using the Balanced Scorecard
The balanced scorecard model offers comprehensive benefits in the performance measurement of an organization.
- The BSC model can be used to measure both the financial and non-financial metrics.
- It links the internal and external performance perspectives of the organization.
- It can be implemented by for-profit and not-for-profit organizations alike.
- It considers the needs of the key stakeholders of an organization including shareholders, customers, and employees.
- It helps management to analyze operational efficiency through a single report rather than measuring different reports.
- It focuses on internal process improvements and efficient use of resources.
Limitations of Using the Balanced Scorecard
Despite its usefulness and comprehensive approach, the balanced scorecard comes with some limitations as well.
- The BSC model focuses on developing the strategy first, rather than identifying the needs and wants of all stakeholders.
- As it takes a holistic approach, it may take time to bring results.
- The implementation costs of the BSC framework can be high.
- It provides performance evaluations measures but does not offer solutions.
- In practice, management and employees pose resistance to the implementation of such theoretical performance measurement models as it may affect them directly.
The balanced scorecard model is a comprehensive performance measurement framework. It considers financial and non-financial metrics. The organization can link its internal process and external factors for performance measurement effectively.