Businesses use the balanced scorecard to connect the big picture to the little details. In showing how daily activities relate to organizational goals, managers can see how the company is performing. Looking beyond short-term metrics like sales and production statistics, the scorecard measures results in financial and nonfinancial terms. Advantages and disadvantages of a balanced scorecard depend on how a company implements and executes the management system.
The balanced scorecard views a business from four perspectives. Companies set objectives and targets for each perspective. Then, they pursue those objectives through initiatives, measuring their progress in terms of key performance indicators.
- Financial: Companies traditionally measure performance in terms of sales, profit and return on investment. The most relevant of these based on a company’s goals may be included in a company’s balanced scorecard. For example, if growing the top line is a priority, then the scorecard may include monthly sales.
- Customer: Viewing the company from a customer’s perspective can help a business retain its customers, which is important since it costs less to service existing customers than it does to acquire new customers. Measuring factors like the number of customer-service calls and whether customers are satisfied after the calls can help a company retain customers.
- Internal Processes: Measuring how well a company produces, sells and services its products can help it earn more profits because efficiency determines profitability. The balanced scorecard helps businesses determine where they have implemented systems and processes as well as how efficiently they are working.
- Organizational Capacity: The balanced scorecard helps companies determine whether they have the right people, the proper technology and the appropriate culture for achieving their goals.
A company’s success often involves more than just selling products. It also must earn profits and invest in the company wisely to sustain growth.
The balanced scorecard helps companies form strategies designed for more than selling products by making managers consider factors like external customers and internal efficiencies. They can explain their goals and strategies as well.
Then, managers can assign projects and tasks that align with the company’s strategies. Employees see how their work helps the company achieve its goals.
So much has been written about the balanced scorecard, and so many companies have used it that businesses may not know how to implement it within their organization. The nuances that make it succeed at one company but not another make it difficult for one business to copy the example of another.
It also requires support from top management because middle managers and employees may hesitate to implement it if they have difficulty doing so. Apprising managers and employees of progress can be challenging as well because many metrics must be captured, and presenting them in a single presentation accurately and informatively is not easy.
Companies often must make extensive changes when implementing the balanced scorecard. Its effectiveness hinges on the people who deploy it and the systems they use to do so.
- Accurate Data: Enterprise resource-planning software and similar data-capturing systems should be properly configured so that they provide data that is accurate and relevant, with minimal manual entry and review.
- Attention to Measurement: Managers and employees may have always thought they were doing well based on traditional measures like hours worked, units produced and products sold. However, they must be willing to look for and accept new measurements that may make their performance look worse, like the number of hours it takes to produce a unit and the costs of each unit sold.