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The Balanced Scorecard is Really Useful. Here’s Why

The Balanced Scorecard. What is it? It’s a performance management framework alright – what’s that you ask? 

Probably one of the most useful frameworks around to support in the management of performance and strategy. The framework has been commended by both business people and academics alike.

Now, I’m not going to bore you with too many details but the Balanced Scorecard is essentially a tool that gives a company a template on how to manage both financial and non-financial strategic performance in line with goals and objectives that are set by the company or owner. Objectives, measures, targets and initiatives are set to implement, monitor and respond to, to ensure that the company is working towards it’s overall and longer-term objectives.

Now before we begin, it is probably worth defining, success.

  • Increased profits year on year?
  • A happy customer base?
  • A competent team?
  • Is it being efficient in all aspects of the company?
  • Or all of the above + more?

The Balanced Scorecard response to this question is that, all of the above definitions define success collectively. The Balanced Scorecard takes a “holistic” approach to strategic performance management, ie. managing different ‘dimensions’ of the business collectively, successfully.

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The Balanced Scorecard has four distinct sections to it and they are as follows:

  1. Financial – Focuses on financial objectives and ‘shareholder’ opinions of the organisation.
  2. Internal Business Processes – Focuses on the processes and systems in place to help the business excel.
  3. Learning and Growth – Focuses on the resources and infrastructure the company must establish and maintain to ensure growth, learning and development, resulting in innovation, effective team etc.
  4. Customer – Focuses on the approaches, processes and systems to ensure the customer is always satisfied.

The Balanced Scorecard poses a number of questions to Managers that contextualise the scorecards into a more accessible, friendly format, in order to allow Managers to better respond. The questions ask Managers to consider what metrics are important based on each scorecard. The questions are as follows with some example metrics:

  • Financial: “How should we appear to our Shareholders?”
    Example metrics include, ROI (%), Liquidity, Profitability Margins etc.
  • Internal Business Processes: “What business processes must we excel at?”
    Example metrics include processing times, individual steps needed for a process, wastage, errors etc.
  • Learning and Growth: “How will we sustain our ability to change and improve?”
    Example metrics include, Research and Development spend, innovative solutions, speed to market, corrective action response times and success rates etc.
  • Customers: “How should we appear to our customers?”
    Example metrics include delivery times, quality control, customer experience statistics etc.

In order for Managers to choose metrics that add real value, they must first understand what the company wants to achieve over the long term. With this knowledge, companies can then answer the above questions and choose measures, targets and initiatives to direct day-to-day activities that ultimately meet longer-term objectives.

For details and examples on the subheadings to each scorecard, with examples, please read this fabulous post, here.

The overall results of the implementation of the Balanced Scorecard can be improved processes, greater customer satisfaction, educated and motivated employees, better overall internal systems, increased and sustained profits and overall value added to all dimensions of the business. Why would you not want to use this tool to help determine what to monitor? It helps the company align its day-to-day operations with longer-term objectives and ambitions as all short-term objectives, targets and initiatives are based on long-term objectives.

You might be thinking, but why do I need this now? I’ve been doing just fine without a framework; indeed this is true but the point of the Balanced Scorecard is to provide a template on which to build upon. You may already be using the Balanced Scorecard unknowingly. The Balanced Scorecard simply provides a template, a structure, a guideline on how to structure performance management and strategy.
 
Related read: Balanced Scorecard In Detail.