What is Balanced Scorecard?

The balanced scorecard (BSC) is a performance metric used in strategic management in order to identify and improve various internal functions of a business. It is a tool which enables managers to monitor and measure different levels of performance done by the staff members. It also helps them to control and make decisions basis on performance results.

The attribute of balanced scorecard is derived from financial and non financial framework. It includes internal business process and performance based on external outcome. The founder of balance scorecard Kaplan-Norton, defines the balance scorecard as it provides a relevant range of financial and non-financial information. Kaplan and Norton devised a framework based on four perspectives – financial, customer, internal, learning and growth.

Benefits of balanced scorecard

·         Better strategic planning

·         Improved strategy communication and execution

·         Better alignment of project and initiatives

·         Better management information

·         Improved performance rating

·         Better organizational alignment

·         Better process alignment

Four perspective of balance scorecard

·         Financial perspective

·         Customer perspective

·         Internal-business process perspective

·         The learning and growth perspective

Financial perspective:

The financial perspective is the most important aspect of balance scorecard. It contributes to the bottom line improvement of the company. Finances are critical for companies to monitor and measure.

The financial perspective to create balance scorecard are as follows:

·         Company’s turnover

·         Profit and loss margins

·         Fixed cost, variable cost and other costs

·         Working capital of organization

·         Investment capital

·         Annual growth of revenue

·         Market share

·         Net and gross profit ratio

The business life cycle of the company is highly dependent on financial goals. Therefore, these stages are comprised with following levels:

1. Growth stage – this is the primary stage where the company has entered and started growth in market
2. Sustain stage – at this stage, the company reaches to profitable level and sustain it within market
3. Harvest stage – at this stage, the aim of the organization is to increase the cash flow and revenue and reduce capital requirements

Customer perspective

These perspectives focus on performance objectives related to customers. The main indicators in this perspective are evaluating performance from customer point of view. This includes customer feedback and customer satisfaction.

The main parameters taken by many organization for customer perspective are:

·         Product offering and service offering

·         Brand identity and brand image

·         Relationship with customers existing or new

·         Providing customer services

·         New product and services

·         Penetration into new markets

·         Customer satisfaction and retention of customers

·         Customer loyalty

·         Quick response on customer query and complaints

INTERNAL BUSINESS PROCESS PERSPECTIVE

The metrics of balance scorecard refers to internal business processes. This perspective enables the managers to know how well their business is running, and whether its products and services conform to customer requirements. In other words it enables to identify the strength and weakness of internal business process systems. The focus areas of business process perspective could be :

1. Operations Management Processes
2. Innovation Processes
3. Customer Relationship Processes
4. Regulatory & Environmental Processes

LEARNING & GROWTH PERSPECTIVE

The learning and growth perspective is the fourth element of balanced scorecard. This perspective identifies the training, development and learning needs in an organization. This perspective is broken down into the following components

·         Human capital

·         Information capital

·         Organizational capital

Process of building a Balanced Scorecard

There are many ways and means to develop and improve a balanced scorecard

The four step process given by Kaplan and Norton used across organizations are:

·         Define the measurement architecture- this is the initial level of balance scorecard implementation. The focus areas are strategic business units.

·         Specify strategic objectives-The potential measure of each perspective should be identified and this would make the strategic objective more focused and strong.

·         Choose strategic measures- The parameters of measuring should be related to the actual performance drivers. This would enable to evaluate the progress done towards achieving the objectives.

·         Develop the implementation plan-the targets should clearly defined in balance scorecard. The information system of the organization sould be clearly developed and it should be linked with the top level metrics to lower level of operational activities.

Use of balance scorecard

 The balanced scorecard is used to

·         Attain objectives

·         Measurements

·         Initiatives

·         Goals

Disadvantages of Balance Score card

Balanced scorecard systems are not perfect and have some disadvantages:

·         Time and financial cost investment

·         Stakeholder acceptance and usage

·         Strategic direction and metric planning

·         Data collection and analysis

·         Lack of external focus

·         It requires strong leadership support to be successful