What is a Balanced Scorecard?
Harvard professor Robert Kaplan and David Norton, CEO of Palladium Group Inc. found that focusing exclusively on the goals of one department results in lopsided performance. Together, they came up with a strategic planning and management system called the balanced scorecard. This system focuses on looking at a business from a range of different perspectives.
Why balanced scorecards are helpful
A business is a collection of various functions acting in a synchronized manner to achieve the company’s vision and mission. The various departments have different functions and focus areas. For example, the finance department focuses on increasing the performance of financial metrics, while operations aims to improve metrics like cycle time and defect rates. The marketing department, on the other hand, strives to deliver customer satisfaction.
All of the different aspects involved in a company's operations pull it in different directions. By allowing companies to get a more balanced view of performance, Robert Kaplan and David Norton's system can help companies to enhance their performance.
How a balanced scorecard works
A balanced scorecard is a system to look at a business from different perspectives. This eliminates the possibility of a single performance metric gaining lopsided priority over others.
This tool is particularly useful to senior management. They prefer the bird’s-eye view of the complete business as opposed to the performance of just one department. Senior management’s duty is to preserve and increase shareholder value by taking care of all the business’s stakeholders. The balanced scorecard helps in that respect.
The balanced scorecard aligns performance measures from 4 different perspectives. They are as follows:
- Customer perspective — This boils down to how the customers perceive the company. The perspective in a balanced scorecard ensures that delivering value to the customer is not just a motto. It aligns the goals and associated performance measurements to ensure the company is on track to meet expectations.
- Internal perspective — Senior management needs a complete view of the business to identify areas of improvement for the company. This is the aspect that defines how customer expectations are met. It charts out the processes, decisions, and actions necessary to achieve customer satisfaction. It focuses management on the critical internal operations needed to achieve goals.
- Innovation and learning perspective — This aspect deals with how to improve current operations to create more value and unlock the firm’s potential through innovation. Businesses, processes, technology, and even customer preferences constantly evolve. To compete in the changing marketplace, companies must constantly improve products and processes. Innovation and learning perspective sheds light on how to adapt to changing needs and how to measure the evolution.
- Financial perspective — This aspect aims to improve the shareholder value and increase the performance of financial metrics. All the changes in the other perspectives must reflect in the company’s bottom line. The ultimate goal of a business is to increase shareholder value. The financial perspective sets goals and measurement criteria for the same.
Advantages of a balanced scorecard
Over the past few decades, many companies implemented balanced scorecards. It offers significant advantages over the previous systems they had in place.
- Single comprehensive report — Before implementing a balanced scorecard system, different departments filed reports with senior management. This approach required senior management to go through the different reports and tie up the various aspects from different departments to gather the overall picture. A balanced scorecard accomplishes that with a single report that provides a broader view.
- Optimization — The balanced scorecard acts as a guard against suboptimization. Before, companies couldn’t identify whether improvements in one aspect came at the cost of something else. With the balanced scorecard, it’s easy for management to identify how the different metrics influence each other. This helps to achieve an optimal solution balancing the impact on other performance parameters.
The balanced scorecard is an ideal tool to combine various perspectives within the company using a single report. Senior management can gain a better perspective by having access to the company’s complete landscape. This helps in the decision-making process and results in better decision-making.