History has taught many of us an all important lesson of not overly relying on financial measures and other performance measurement metrics that can easily be manipulated by managers and other stakeholders. Traditional performance measurement places too many importance on financially quantifiable variables in order to determine the success or failure of a business or the management team that are responsible stirring the affairs of a company’s assets.
A balanced scorecard is like a dashboard used by business managers to incorporate both financial and non financial factors while analysing a business or company. Although maximising the wealth of shareholders is the objective of profit making organizations, this objective of profit maximization cannot be achieved without achieving other organizational goals.
A balanced scorecards through its four perspectives provides managers a more robust and scalable dashboard that can be leveraged on in the bid to strike the necessary balance needed to form the pillars upon which to build the long run of meeting the objective of putting smile on the face of shareholders.
PILLARS OF BSC
The idea of managing businesses using balanced scorecard is based on what the founders (Kaplan and Norton) called perspectives. The four perspectives are:
- Financial perspective: here, financial measure like EPS, cash flows, ROCE, EVA, etc is considered. These performance measurement metrics cannot make a company successful. Other non financial factors plays very important role in shaping the fortune of a business.
- Customer perspective: a business that does not have happy and loyal customers cannot exist for long. This perspective measure a company’s performance by looking at KPI’s like; repeat orders, referrals from existing customers, sales growth, satisfaction ratings, etc.
- Internal business perspective: the objective here is to measure the operational efficiency and effectiveness. Percentage of rework completed within a given time, average delivery time, unit costs, etc are some of the criteria used in this perspective to measure the level of success that a business has achieved.
- Innovation and learning perspective: a business will quickly become dead if things stay the same over a period of time. Performance measure will not be complete without taking into consideration the level of innovation and human resource development that is taking place in a company. New number of products launched over time, number of patent files created, number of employees that gained value added qualifications, etc are some of the ways of measuring how well or badly a company is doing.
Using a well developed strategy mapping techniques, the various perspectives are linked together to form a complete, successful business management tool. BSC though useful cannot be used a as standalone business analysis tool. Two most important tools that provide input to BSC are:
- Critical success factor: critical success factors are that lifeblood that a business entity cannot do without. According to Johnson, Scholes and Whittington, CSF are those product features that are particularly valued by a group of customers and businesses cannot therefore survive without providing those features. Analysis of CSF gives vital input in all perspectives of the bsc. A company for example through the analysing critical success factor will gain insight into what needs to be done in order to improve customer perspective.
- Benchmarking processes: through benchmarking process and reverse engineering, companies gain useful knowledge that helps tweak processes in an innovative way so as to get competitive advantage. The internal operation perspective and innovation perspective heavily relies on the output of benchmarking process.
ADVANTAGES OF BALANCED SCORECARD
- Complete picture of a company: by having company’s objectives condensed in an intelligent usable format, complete picture of a company can easily be captured without having to do too much work.
- Enhances decision making: balance scorecard helps bring company’s strategy into perspectives. Managerial decisions are easily reached using the measured output of events and activities from bsc.
- Competitive advantage: a carefully developed bsc is competitive tool that companies can use to edge ahead of its competitors. A well implemented IT balanced scorecard for example helps align the overall business objective of a company with its IT strategy, which ultimately results in gaining competitive advantage.
- Places management in a position to view the effects of various components of a business.
- Allows for easy ongoing and continuous monitoring
DISADVANTAGES OF BALANCED SCORE CARD
You will agree with me that no process or activity is without some drawback, BSC has some flaws that when not properly managed can cause some problems within an organization. Some of such disadvantages of bsc are:
- BSC can affect employee morals negatively
- BSC can be complex to prepare
We have seen that a balanced score card is a tool that helps spread the resources of a company amongst many components that work together to make a company successful. For a balanced scorecard process to be complete, vital input has to come from CSF and benchmarking process.