Balanced Scorecard (BSC)
The Balanced Scorecard (BSC) is a management tool developed by Dr.
Robert Kaplan and Dr. David Norton as a new approach to strategic management.
It retains traditional financial measures. However, financial measures
tell the story of past events, an adequate story for industrial age
companies when investments in long-term capabilities and customer relationships
were not critical for success. These financial measures are inadequate,
however, for guiding and evaluating the journey that information age
companies must make to create future value through investment in customers,
suppliers, employees, processes, technology, and innovation.
BSC is used by different companies, as well as universities, like Open
University, Glasgow Caledonian University, Napier University, University
of California and Ohio State University.
Four Perspectives of BSC
- Financial: shareholder value, revenue growth, profitability
To succeed financially, how should we appear to our shareholders?
Kaplan and Norton do not disregard the traditional need for financial
data. Timely and accurate funding data will always be a priority,
and managers will do whatever is necessary to provide for it. In fact,
there is more than enough handling and processing of financial data.
With the implementation of a corporate database, it is hoped that
more of the processing can be centralized and automated. Moreover,
the point is that the current emphasis on financials leads to the
"unbalanced" situation with regard to other perspectives.
- Customer: Market share, account share, acquisition
and retention
To achieve our vision, how should we appear to our customers?
Recent management philosophy has shown an increasing realization
of the importance of customer focus and customer satisfaction in any
business. These are leading indicators of whether customers are not
satisfied, or if they will eventually find other suppliers that will
meet their needs. Poor performance from this perspective is thus a
leading indicator of future decline, even though the current financial
picture may look good.
In developing metrics for satisfaction, customer profiles should
be analyzed in terms of the kind of customers and processes for which
we are providing a product or service.
- Internal Business Processes: Innovation measures,
operation measures, after sales measures
To satisfy our shareholders and customers, what business processes
must we excel at?
This perspective refers to internal business processes. Metrics based
on this perspective allow the managers to know how well their business
is running, and whether its products and services conform to customer
requirements (the mission). These metrics have to be carefully designed
by those who know these processes most intimately; with our unique
missions, these are not something that can be developed by outside
consultants.
- Learning and growth: Skills and competencies, infrastructure,
productivity
To achieve our vision, how will we sustain our ability
to change and improve?
This perspective includes employee training and corporate cultural
attitudes related to both individual and corporate self-improvement.
In a knowledge-worker organization, people -- the only repository
of knowledge -- the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers
to be in a continuous learning mode.
Government agencies often find themselves unable to hire new technical
workers, and at the same time, is showing a decline in training
of existing employees. This is a leading indicator of 'brain drain'
that must be reversed. Metrics can be put into place to guide managers
in focusing training funds where they can help the most. In any
case, learning and growth constitute the essential foundation for
success of any knowledge-worker organization.
When Should You Use BSC?
BSC is helpful in translating high-level organizational vision into
specific short-term deliverables across different but connected critical
success factors or key performance indicators relevant to the organization.
A Balanced Scorecard is used to:
- clarify or update a business’s strategy;
- link strategic objectives to long-term targets and annual budgets;
- track the key elements of the business strategy;
- incorporate strategic objectives into resource allocation processes;
- facilitate organizational change;
- compare performance of geographically diverse business units; and
- increase company-wide understanding of the corporate vision and
strategy.
How Should You Use BSC?
Before going into details on the concept of leading measures, it is
helpful to understand a few key Balanced Scorecard terms. (After all,
one major benefit that Kaplan and Norton have touted is the establishment
of a standard set of terms and definitions that can allow people to
communicate more effectively with regard to strategy execution and performance
management.) Some of the most important terms are perspectives, objectives,
measures, targets, initiatives, and cascading.
The Balanced Scorecard methodology stresses that objectives and measures
from multiple perspectives should all be considered. The classic perspectives
in for-profit businesses are financial, customer, Internal Operations/Processes,
and Learning and Growth (which focuses on human capital, technology
and organizational culture — the intangible assets that create
value). By looking carefully at all four (4) perspectives, organizations
can focus on both the causal drivers of performance and the outcomes.
In the Balanced Scorecard, the strategic objectives (often just referred
to as objectives) are the stars of the show. Objectives often consist
of a verb-adjective-noun phrase. For example, an objective may be something
like “Grow International Sales” or “Build Deep Client
Partnerships.” These objectives should be linked in cause-and-effect
chains that cross the multiple scorecard perspectives — graphically
depicted in what has become known as a strategy map. The diagram shows
objectives linked in cause-and-effect chains that are part of a strategy
map for a software company based in the U.S. that wants to execute a
strategy for reviewing international sales.
View
sample Balanced Scorecard
For a practical guide on BSC, you may refer to this link: http://www.quickmba.com/accounting/mgmt/balanced-scorecard/
