A balanced scorecard evaluates business performance against a range of factors. Traditionally, businesses measure performance by financial results. However, this gives a historical picture with a single focus. Balanced scorecards also focus on customers, business processes and organizational capacity, enabling you to improve future performance based on a broader range of results. However, balanced scorecard systems are not perfect and have some disadvantages.
Balanced scorecard systems require a significant investment. This is a long-term rather than a short-term solution. A company must manage its system actively and constantly, which comes with time and financial costs. All employees need to understand how the system works, which may increase training expenses. If you don't have internal expertise, you may have to hire external consultants to help you implement the system and learn how to use it. You also may need to factor in software purchasing and maintenance costs.
All employees should buy into a balanced scorecard system for it to work effectively. This may be more difficult than you think. If employees don't understand how the system works or cannot see its benefits, they may not invest in it. Those resistant to change may have problems accepting a new system. Even if you gain acceptance, training must enable employees to use the system correctly. Over time, some employees may become frustrated if they don't see tangible benefits or if they perceive scorecards as an added pressure on their workloads rather than a useful tool.
An effective balanced scorecard system aligns with your strategic objectives, breaking them into measurable metrics. If you don't plan and communicate these elements with and to your stakeholders, the system may not produce the desired results. It may become bloated and hard to manage if you add too many objectives or metrics to the mix. If controls and measurements are inconsistent, they may not produce the same benefits across your business. Putting too much focus on metrics can divert you from your overall strategic direction.
You may need to train users so that they understand when and how to measure and analyze data. Balanced scorecards may give you useful information on areas that require improvement, but you have to be able to spot these indicators and then implement an appropriate strategy yourself. Scorecard results can only be as good as the underlying data that supports them. If you don't set appropriate data measures and don't input the right information consistently, you run the risk of getting inaccurate results. This could prompt you to work on areas that don't need improvement and to ignore areas that do.
Balanced scorecards may give you a broader internal focus, but they do not give a full external picture. As a default, they consider your customers but they do not factor in other key performance indicators, such as your competitors or changes to your business environment, for example. This may lead to an over-emphasis on internal performance and a lack of awareness of external factors that also could influence your company's operations.