A balanced scorecard is a tool used to align daily workflow with long-term organizational goals and principles, as well as keep track of how well these goals are achieved. Balanced scorecards are highly helpful to large institutions as a reliable way to improve internal operations and clarify the roles of the individuals and teams involved.
What They Are
The balanced scorecard is an effective management tool that tracks planning and performance and analyzes how well each supports an organization’s big-picture strategy. Overall performance is evaluated by achievements in four areas: financial, customer, internal business processes, and “learning and growth.” In a balanced scorecard report, distinct processes emerge as key components to operational success. This allows users to reliably gauge where changes may improve performance, and where technological, staff, and capital resources may be directed to optimal effect. It systematically combines several standard methods of measurement to create one highly adaptive and easy-to-interpret system.
How They Work
Organizations customize the balanced scorecard to suit their particular circumstances, taking into account four crucial perspectives:
- Financial-The financial element analyzes financial viability.
Examples of financial information data sources include: cash flow, market share, profit ratios, operating cost management and ratios, sales growth and prices and return on investment.
- Customer– The customer perspective focuses on the customer’s feedback and evaluation.
Examples: market expansion and customer service, retention and feedback.
- Internal-The internal perspective looks at the organizational processes in plan. Here we may see opportunities for closer alignment of people with the systems in place, as well as streamlining the systems themselves. Examples: information technology, core competency and training, streamlining processes, high manufacturing standards, quality control, inventory management and reduced waste reduction.
- Innovation and Learning– This perspective quantifies value creation in terms of innovation and learning–the organization’s dynamic ability to respond to challenges by creative evolution.
Examples: new-product and HR development and service/product diversification.
Who Uses Balanced Scorecards
The balanced scorecard has been widely accepted across industries as a tool not only for use in performance evaluation, but also for informing goal setting and strategic-planning activities. It has become common practice in many of the Fortune 1000 and other major companies of the Western world, spreading to Asia and the Middle East as well.
Pioneered by the US military and General Electric, this tool is commonly implemented in such diverse industries as government and military bodies, health-service organizations, strictly commercial entities and even nonprofits. Small business typically makes less use of balanced scorecards, but the practice is growing in this segment as well.
Aside from the obvious benefits of using a balanced scorecard as an analytical tool, there is also much to be gained simply by going through the process of customizing the system to apply to your particular business. Both the management and the operational staff must be heavily involved for the system to produce useful results. The implementation process therefore necessitates a high level of understanding by diverse players of key processes across the business. It takes an entire company working together to achieve a balanced scorecard and that’s the point.