Some managers may choose to focus on financial data to measure success. Others may focus on operational processes or customer satisfaction.
Instead of focusing on measuring only one aspect of a business, the balanced scorecard takes a holistic approach.
After all, a single measure can’t accurately represent all elements of a business. By using a scorecard, managers can get a balanced view of financial performance, operational processes, and customer satisfaction.
Table of contents
- What is a balanced scorecard?
- What are the benefits of a balanced scorecard approach?
- What are the 4 perspectives of a balanced scorecard?
- Balanced scorecard examples
- How to create a balanced scorecard (with template)
What is a balanced scorecard?
A balanced scorecard provides a comprehensive overview of how a company is performing currently. It takes into account finances, operational processes, customer satisfaction, and employee performance. Using a balanced scorecard can help managers find issues and improve business outcomes.
Ultimately, a balanced scorecard is a tool to help drive strategy, implement business actions, and improve financial performance.
What are the benefits of a balanced scorecard approach?
A balanced scorecard seeks to uncover the answers to four questions:
- How do customers see us?
- What must we excel at?
- Can we continue to improve and create value?
- How do we look to shareholders?
Here are a few more benefits of using a balanced scorecard:
- Improves focus
- Puts all measures in one document
- Forces consideration of all operational measures
- Improves communication with senior managers
- Removes control bias
Improves focus
The balanced scorecard forces managers to choose only a few critical measures to determine performance. Many companies suffer from data overload and don’t know how to glean actionable insights from all of the data they collect. A balanced scorecard provides only key information, which helps you to avoid getting bogged down with too many numbers and figures.
Puts all measures in one document
Since balanced scorecards focus on critical data, it makes it easier to bring several elements into a single management report. A balanced scorecard contains everything a manager needs to make informed decisions. It can help managers focus on customer-oriented products, improve quality, and better internal processes.
Forces consideration of all operational measures
Because operations, finances, and customer satisfaction are presented together, you’re forced to consider how each aspect affects the other. Sometimes, you might make a decision purely on financial data without considering that the result may lead to poorer internal processes and lower customer satisfaction. A balanced scorecard helps prevent this scenario because the data is available to you.
Improves communication with senior managers
Implementing the balanced scorecard is hard to do without involving senior management. These people often have a better understanding of the company’s vision and processes. This improvement in communication often helps remove underlying assumptions about a company’s performance and goes beyond only focusing on financials.
Removes control bias
Traditional performance management measures are designed to dictate what they want employees to do and gauge whether they are doing it. This approach doesn’t always work well in modern business because the standard way of doing things may become obsolete within a year.
Learn more →Instead, the balanced scorecard puts vision and strategy at the center. It works to establish goals and pull employees toward a shared company vision. The balanced scorecard lets managers view interrelationships and lets employees determine the best course of action to meet company goals.
What are the 4 perspectives of a balanced scorecard?
The balanced scorecard is comprised of four perspectives:
- Financial perspective
- Customer perspective
- Internal process perspective
- Learning and growth perspective
Each perspective focuses on a different aspect of an organization’s business strategy. Let’s dig a little deeper into what these perspectives provide to the balanced scorecard:
Financial perspective
The financial perspective hones in on how the company looks to shareholders. Assuring shareholders they are receiving a return on their investment is crucial to the growth of the company. Executives may analyze data regarding the company’s financial performance and determine whether the company is profitable and make adjustments for improvement.
Customer perspective
To sell your product or service, customers need to have a desire satisfied. The customer perspective determines customer satisfaction with the company’s current products and services. The more satisfied the customers are, the more likely they are to stay customers.
Data collected for this perspective can include customer feedback and competitor analysis. Based on the results, you can start to offer new products, promote high-satisfaction features, or improve product quality.
Internal process perspective
A proper analysis of business processes answers what you are good at doing and what you are bad at doing. Finding these answers can help you fix issues with bottlenecks, product delays, and other performance problems. It can also help you determine core competencies.
Essentially, this perspective aims to find opportunities to run at maximum efficiency.
Learning and growth perspective
Also known as the organizational capacity perspective, this area focuses on employees and their ability to produce work that improves and creates value for the company. It examines whether employees are receiving the training and resources they need to do their job. It also analyzes company culture and leadership performance.
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Balanced scorecard examples
Let’s look at a couple of real-world examples of balanced scorecards:
Case study 1: Improving financial performance with a balanced scorecard
A company is looking for ways to improve its financial performance. However, it focuses purely on financial metrics to make these evaluations. This means they miss out on discovering how internal processes, customer satisfaction, and employee productivity can have an impact on its bottom line.
By taking a balanced scorecard approach, it notices an opportunity to use the excess capability to market its existing products to a new, relevant audience. This adds revenue to the company with only moderate expenses. Periodic financial reports prove that this new campaign improved sales and overall market share.
Case study 2: Enhancing customer satisfaction through a balanced scorecard approach
In this example, a company has made vast improvements in its delivery performance and overall product quality. But over the course of three years, the company didn’t have financial improvement and saw its value go down.
So what happened? By using the balanced scorecard, the company can notice that it failed to recognize the aspect of customer satisfaction and the demand for new products. Executives will need to rethink their strategy and consider the ways it can better meet the needs of their customers.
How to create a balanced scorecard (with template)
To make your own balance scorecard, follow these eight steps:
- Define purpose — Determine what you want to achieve with a balanced scorecard and identify the business unit you will be analyzing
- Interview senior managers — The facilitator will interview senior managers to get their perspectives on the company’s strategic goals and performance measures
- Discuss with executive management — Top management will define the mission and strategy as well as what measures will be used to determine success
- Interview senior managers — Senior managers are interviewed a second time to review and consolidate input to create a first draft of the balanced scorecard
- Hold a manager workshop — All levels of managers gather to discuss the mission, strategy, and the first draft of the balanced scorecard. They may begin to implement an action plan or create stretch performance goals
- Hold a senior executive workshop — Senior executives approve of the balanced scorecard and develop stretch performance goals for measures
- Initiate an action plan — Based on the balanced scorecard, an implementation plan is created and communicated to everyone in the organization
- Review balanced scorecard — The balanced scorecard is not a one-and-done plan or a long-term goal list; it needs to have periodic reviews to ensure management is properly using excess capacity or removing it. Otherwise, operational improvements won’t help the bottom line
When everything is said and done, your balanced scorecard should look something like this:
Keep in mind, even the most efficient balanced scorecard doesn’t guarantee success. It only takes a company’s strategy and turns it into a measurable action plan. However, you can make better-informed decisions when it takes into account all variables of the scorecard instead of only focusing on one or two aspects.
Conclusion
A balanced scorecard creates value for the average employee. The measures are designed to motivate employees to fulfill the company’s strategic vision. While the balanced scorecard establishes goals, it leaves employees and managers to adopt behaviors and actions they deem appropriate to reach those goals.
This approach provides flexibility in a work environment that is constantly changing and evolving. Since the goals are created in a holistic manner, it will ideally lead to better financial performance as the company improves operations, customer satisfaction, and employee productivity.
Featured image source: IconScout
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