The balanced scorecard is a tool for measuring business success. It works on the assumption that financial targets are not the only indicators of success, and that targets should be set under the following headings:
- Internal business processes
- Learning and growth.
The idea behind the model was that measurement of achievement should not just be financial, because this does not give a balanced and representative view of success. Looking at other areas too gives a broader perspective and allows the organisation to be more successful.
What is it used for?
This tool is a method by which companies can set themselves strategic objectives that will help the firm progress in a more thoughtful and balanced way. It is most commonly used to improve and align strategy and to justify budgets. Examples of why this might be important:
- If your objectives are only finance-based, you might be making a lot of money, but your customers might be really unhappy with your product and looking for alternatives
- If no focus is put on learning and development, your staff may be considering moving to another company where their needs are taken more into consideration and you could lose expertise and knowledge
- Your internal business processes may be directly linked to your financial results – if your internal processes fall down, your customers may become disheartened with your product or you might be being inefficient.
Robert Kaplan, a Harvard Business School professor, and David Norton, president of a US consultancy, came up with the idea of the balanced scorecard in 1992 as a method of tying all of these areas together into a more forward-thinking strategic approach.
How do I use it?
Consider the company objectives as they are right now and then think about the following questions:
- How does the company set targets?
- Are those targets set across the whole spectrum of the balanced scorecard, or are they just based on one or two categories?
- What is the company currently measuring well?
- What could it measure more effectively?
- How does the company measure financial success?
- In what ways does the company measure success with its customers?
- How does the company focus on learning and development?
- What targets are set to ensure that business processes are optimised and constantly being improved for efficiency?
Then look at the areas where your company does not measure effectively and think about how that could be changed to embrace a more balanced approach, for example:
- Could the company implement a survey or focus groups on a regular basis to improve feedback and subsequently improve products or business processes?
- How can learning and development be measured?
- What is the company doing to retain good staff?
In this way, you should be able to come up with an amended set of objectives that are more balanced in approach.
What are its limitations?
Some limitations of the balanced scorecard are:
Gaining stakeholder buy-in
Stakeholders at all levels in an organisation have to be in agreement with the objectives that have been set for this tool to work. If there is still a tendency to think that only the financial targets are important and to place more emphasis on those, then the model will not work to its full effect.
The categories that have been selected for measurement do not necessarily fit for all organisations at all points in time. This has been addressed to some degree and variations on the model are available.
This model is still relatively new and thus far there is little scientific evidence to prove that it is successful.
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