The balanced scorecard is a performance metric in strategic management. It helps companies to set their direction and communicate to employees what’s valued in the company. In other words, what the company wants from them to improve the performance.
Further, a balanced scorecard greatly helps the company control different internal aspects that, in return, help control external environmental aspects. It provides an excellent base to measure performance and provide feedback to employees in case of the performance measurement. In addition, managers can base their decisions on the Key performance indicators discussed in the balanced scorecard.
The best part of the balanced scorecard is that it does not rely on a single performance metric but contains different aspects of financial and non-financial aspects.
It’s one of the best matrices for the not for profit organizations and Government agencies. It contains four aspects that include business processes, learning and growth, finance, and customer perspective.
The companies using BSC can easily get information like goals, initiatives, weaknesses in the system, and improvement. For instance, an increased number of complaints from the customer perspective suggests that the company needs to work on the customer perspective of the product/services.
1- The financial perspective of balanced scorecard
It’s one of the four perspectives of the balanced scorecard. It includes analysis of different financial metrics like movement in the profits, assets’, size of the liabilities, financial ratios, and other financial indicators.
Investors/shareholders of the company seem to be more interested in this perspective of the balanced scorecard regarding financial returns.
2- Customer perspective of balanced scorecard
The satisfaction of the customer makes a massive impact on the success of the business. If the customers of the business are happy with products and services, they seem to be returned. There can be different metrics of the customer perspective that include customer surveys, the volume of sales, feedback from the customers, data from focused groups, and reduced number of complaints, etc.
Output from a customer perspective can help the company get to know the customers’ thoughts about the products/services. For instance, I-phone reduced price after getting feedback from the customers that their prices are higher. They reduced phone prices by reducing some functions. Hence, they valued their customers by their actions which is the purpose of the balanced scorecard.
3- Internal processes
These are the processes that add value to the products. This perspective helps to place a focus on the key activities and the processes that provide value as expected by the customers. Conclusion: there can be both long and short-term objectives that need to be focused on to improve the process improvement. This perspective is more focused on supply chain management and the utilization of the assets. So that process efficiency can be improved. Improvement of the quality and reduction of the price can be expected with an adequate improvement of the process design.
4- Learning and growth perspective
This perspective is focused on improving, learnings, and increasing the efficiency of the overall business operations. This perspective is mainly based on human capital, informational capital, and organizational capital.
Focus on this perspective leads to financial improvement in the long term, although the company’s short-term profitability may be compromised.
Importance of balanced scorecard
The balanced scorecard has been the successful framework for the companies of all the size and sectors. It helps to convert long-term strategic goals into short term measurable metrics that can be monitored and controlled on a day to day basis.
Further, applying the concept of a balanced scorecard helps manage diverse units and provides a common benchmark for evaluating their performance. In addition to this, other frameworks are either financial or non-financial, but a balanced scorecard provides both aspects of the performance measurement.
Benefits of balanced scorecard
Following are the advantages associated with the balanced scorecard.
- Balanced scorecard helps to clarify that how better financial performance can be achieved. How customers can be made happy, and how processes can be improved to improve the business’s overall performance and related operations.
- It helps to assess if there is some impact of some applied innovations. For instance, if the company has implied some innovative modification/process changes, the company can conclude if there is some effect of this.
- It helps the company to identify if there is some grey/damaged area in the functional processes of the company. In other words, it helps to identify areas of weak performance.
- The performance of the company can be measured against set targets. For instance, if the company had set a target to achieve 25% of the ROE, the actual result can be compared easily.
- It helps the company to balanced the short term and long term objectives.
Criticism on the balanced scorecard
Following are the criticisms,
- It can be really difficult to apply for the balanced scorecard as it’s difficult to gather sufficient data.
- Its just focused on the internal processes and does not take into account the external environmental factors like competitors and changes in the market etc.
- It seems to required overloaded information. For instance, there are four different perspectives, and if we put four metrics in each perspective. It will be 16 metrics that can be something overload of the information.
Also, read US GAAP!