What is the balanced scorecard?
The balanced scorecard is a planning and management system that considers non-financial aspects of corporate performance, such as customer satisfaction and business markets, to create a complete scenario of how the company is more likely to perform this in the future. For example, lowering the level of customer service may help to boost current earnings, but the balanced scorecard approach would also take into account the potential loss of future earnings due to poor customer satisfaction.
The Four Perspectives
The high-level financial notes and financial objectives of the organisation that help answer the question – How do we look to our shareholders? Financial objectives are usually the easiest to define and measure. However, creating a financial objective, for example, Improve Profit, rarely provides a clue as to how to achieve the objective. by linking objectives from the lower levels in the model, we begin to see exactly where to define projects and make investments.
Objectives and measures that are directly related to the organization’s customers, focusing on customer satisfaction. To answer the question: How do our customers see all of us? It is always important to take a step outside and view your company or organization from a customer-centric viewpoint. You need to understand what they want from you, not necessarily, what you offer.
Objectives that show how well the business is organised and whether the good or service conforms to what is required by the customers, in other words, what should put all our focus to? Some of the largest cost items can be reduced by streamlining internal processes. This is also the best method to focus on new and creative concepts.
Organisational Capacity measures and objectives regarding how well our people perform, their skills, training, company culture, leadership and knowledge base. This area also includes infrastructure and new-age technology. It tends to be the area where the most investment takes place.
Who uses it?
Companies, organizations, and governments across the world successfully use BSC. or the Balanced Scorecard it’s a business-related (performance) management and performance measurement system all-in-one. Organization size is not a major part of this decision, although the BSC is used by over 50% of the largest firms in the world and it is also used by countless small to medium-sized firms as well. The only drawback applicable to BSC is that within an organization, it has to be established and in place for several years.
Measures that Move Companies Forward
As companies have published the balanced scorecard, we have begun to recognize that the scorecard represents a fundamental change in the underlying assumptions about performance measurement. As the dominant sites and finance vice presidents get involved in the research project and took the ideas back to their organizations, the project participants found that they could not implement the scorecard which is balanced without the hand of the senior managers who have the most complete picture of the company’s vision and priorities. This was shocking because most existing performance measurement systems have been designed and managed by financial experts. Rarely do controllers need to have senior managers so heavily involved.
Why? Mainly because traditional measurement systems that are born from the finance functions have a control system. In the traditional performance measurement systems, it specifies the particular actions they want employees to take and then measure those actions to see whether the employees have in fact taken those steps. In this manner, the systems try to control behaviour. Such management systems fit with the engineering mentality of the Industrial Age and don't work well with the modern era of OKR functions and accountability based functions.
The balanced scorecard, on the otherside, is well suited to the kind of organization many companies are aiming to become. The scorecard holds strategy, not control, at the centre of the concept. It decides on goals but assumes that people will undertake whatever behaviors and take whatever actions are necessary to meet those goals. The measures are taken in such a way that it pulls people toward the overall vision. Senior managers may know what the end result should be, but they cannot inform employees exactly how to go about achieving that result, if only because the conditions in which employees operate are constantly changing.
This new way of performance measurement is consistent with the progress underway in multiple companies: cross-functional integration, customer-supplier partnerships, global scale, continuous improvement, and team rather than individual accountability. By marrying the financial, customer, internal process and innovation, and organizational learning viewpoints, the balanced scorecard helps managers get an overall view, at least implicitly, many intersectionalities. This method can help managers go past traditional notions such as functional barriers and ultimately lead to improved decision making processes and problem-solving. The balanced scorecard keeps companies looking forward instead of backward.
6 Benefits of a Balanced scorecard
1. Better Strategic Planning
The Scorecard consists of a powerful framework made for building and communicating strategy. The business model is foreseen in a Strategy Map which helps managers to understand about cause-and-effect relationships between the different strategic objectives. The process of creating a Strategy Mind map makes sure that consensus is attained over a set of related strategic objectives. It means that performance outcomes, as well as key enablers or drivers of future performance, are noticed to create a whole picture of the strategy.
2. Improved Strategy Communication & Execution
Having a picture of the strategy allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan facilitates the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of the strategy. The thing to keep in mind is that it is difficult for people to help execute a strategy which they don’t fully understand.
3. Better Alignment of Projects and Initiatives
The Scorecard helps organization build their ideas to the different strategic objectives, which in turn ensures that the projects and initiatives are immensely focused on delivering the most strategic objectives.
4. Better Management Information
The Balanced Scorecard method helps organization make key performance indicators for their various strategic objectives. This makes sure that companies are looking what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and better decision makers.
5. Improved Performance Reporting
The Balanced Scorecard can be used to imply the design of performance dashboards. This makes sure that the management reporting focus on the most important strategic issues and helps companies have a control the execution of their plan.
6. Better Process Alignment
finely organised Balanced Scorecards also help to align organizational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a true strategy focused organization.
What are the Components of a Balanced Scorecard?
The balanced scorecard helps us majorly in four management processes that link short-term initiatives with long-term objectives:
- The first process translates the company strategy into operational steps.
- The second process communicates the terms to the company's other departments.
- The third process is planning, which helps managers choose the most effective strategies for achieving various objectives.
The fourth and final process is feedback and learning.