Introduction to Balanced Scorecard
Balanced scorecard (BSC), originally developed by Kaplan and Norton in 1992 is one of the widely recognized performance management systems that has been used throughout in many corporations and organizations nowadays, as part of their strategic planning process. It was said to be the bridge that helps to link the objectives, initiatives and metrics of a company to its strategies, while monitor, guide, and communicating the priorities to every employees along the process of achieving the goals at the same time. Traditionally, companies would focus on financial metrics to decide whether a company is performing well enough, just by looking at the figures on financial reports. Mc Adam et al.(2008, p. 1155) identified financial metrics as a means of collecting performance information at set intervals to track changes and trends in that performance. In addition, Peter Drucker’s Management by Objectives (MBO) was also another management tool that was being used. It is a management tool that define the objectives clearly to improve the overall company performance. But it usually emphasizes on the setting of goals to attain objectives rather than working on a systematic plan to do so. Thus with the establishment of BSC, it supplements the financial measurement of the company, by taking other non financial factor into account, which are: customers, internal business processes, as well as learning and growth.
Balanced scorecard framework ; management processes
The balanced scorecard relies on four different processes, to bind the short term activities to long term objectives. Translating vision and strategy is the first process. It is important as it would help the managers to build consensus around the company’s vision and strategy.
As shown in the figure above, the balanced scorecard framework is divided into four different perspectives, namely financial, customer, internal business, learning and growth. In this process, each and every objectives of the company are put into their own categories, which allows the company to have a clear direction of what to do, and how to do to achieve a particular objective.
For all profit organizations, financial will always be the top priority when it comes to assessing the company’s performance as producing wealth to the company is their main mantra. Any objectives that are related to the financial health and performance are included in this perspective. Examples of performance measures that can be included here are: net income, return on investment, productivity and revenue growth.
This perspective focuses on performance objectives that are related to customers and the market. These two are usually the core that would contribute to the achievement on financial performance, as the company certainly needs customers to gain revenue and to understand where the company stands in the market. Some of the measures include in this perspectives are: customer satisfaction, customer retention, brand awareness and market share.
In this perspective, managers would identified critical internal processes that a company should excel in or improve. These processes should be able to drive the whole company towards a better, more effective and efficient performance. Examples of internal process objectives might include: process improvements (for example, streamlining an internal approval process), quality optimisation, capacity utilization.
Learning and growth
This final perspective considers the more intangible drivers of performance, such as human capital, focusing on employees’ skill and knowledge; information capital, focusing on the network or technology infrastructure of the company and also organisational capital which means the culture; and leadership style of the managers and the teamwork between each and every employees.
Second process, communicating and linking. The managers would communicate the strategies to different level of employees in the entire organization and link them to departmental or individual objectives. It is essential that every department and individual are aware that whatever they are doing must be aligned with the strategies. In order to have goal congruence between the employees and the company, the scorecard users generally involved in three activities: communicating and educating, setting goals, and linking rewards to performance measures.
Communicating and educating is achieved by maintaining policies that ensure all employees are aware of the strategies of the organization. Typically, managers would think strategies should be disseminate from top to bottom. But for balanced scorecard, it is important for the lower level employees to be able to communicate upwards about whether or not the strategies are realistic from the competitive or operational perspective. Because managers may overlooked situation in the bottom level, i.e frontline and missed out on important information.
Setting goals1333501112520 alone is not sufficient to change employee’s behaviour. Hence, using a personal scorecard can helps to ensure the objectives related to the goals are achieved. This card (Figure 2) contains information that describes corporate objectives, measures, and targets.
As shown in Figure 2, the card also has space allocated for the employees to come up with their own measures according their own departments and personal view. Which also allows them to articulate and define what initiatives they could take to achieve their objectives. With this card in the pocket, the employees would be constantly reminded to carry out meaningful task to reach the goals.
Linking rewards to performance measure. Kaplan and Norton (1996a) suggested that the use of balanced scorecard should be aligned with a reward management system at the final stage of its implementation. Neely, Gregory and Platt (2005) also support the claim for consistency and alignment of the performance measurement system with reward system of the company. Providing rewards to the employees after the achievement on goals and objectives is a way of telling them that their effort in pursuing the goals were appreciated and correctly. Usually this would motivate them to perform even better in the future. Not to mention, they could have a better idea of what the company is expecting. However, this attractive linkage has certain risks. For instance, does the company have the right measures on the balanced scorecard? Or are the measures certainly reflect the overall company’s performance? If these questions were not answered properly then it would means that the company might be providing rewards for something which are not properly achieved.
Next, business planning is the third process of using balanced scorecard. In this stage, the company would integrate strategic planning and budgeting processes to ensure that the budgets are able to support the execution of strategies of the company. The users of the scorecard pick measures that represent each of the four perspectives, and then set targets for each. Then they will decide which specific actions will help them in reaching those targets. Using short-term milestones to evaluate the progress toward the strategic goal is what results from using the balanced scorecard.
Strengths and weaknesses of the Balanced Scorecard
According to the 2015 Bain & Company Management Tools Study, BSC has made to the list of the top 10 most popular tools for several years in a row in 10 different countries which were categorise into several regions: Asia, North America, Europe, Africa, Middle East and Latin America. Hence it is believed that BSC has its own strengths that have outweighed other models.
BSC is flexible. It can be adapted and tweaked in many different ways based on the needs and objectives of the company. For a non profit organization, which is not driven by financial performance, will not put the financial perspective as their priorities but instead focuses on internal processes.
Balanced Scorecard is a strategy management system that helps managers to translate organisation strategy into operational objectives and implement it. BSC framework looks at the strategy from four different perspectives i.e. financial, customer, internal business processes and learning and growth. Thus, it brings in the necessary clarity to strategy. Further, implementation of BSC ensures that strategy gets communicated to all the employees suitably to facilitate implementation by them. Measuring organisational performance through BSC reviews remain integral to BSC concept. Based on the learning from these reviews, strategy gets updated. Thus, the four important steps in BSC designing and implementation include 1) translating vision into operational objectives, 2) communicating the vision and linking it to the individual performance, 3) planning and adjusting the strategy based on feedback and