BALANCED SCORECARDThe Balanced Scorecard (BSC) is a systemic and strategic tool of measuring performance of an organization. It is a tool which enables managers to monitor and measure the different levels of performance activities done by their staff members. It also helps them to control and make decisions basis on performance results.
The characteristics of balance scorecard are derived from financial and non-financial parameters which indicate internal business process and performances which are based on external outcomes. As founder of Balance scorecard,
Kaplan and Norton, defines it as, “The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success.
These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”
The balance scorecard supports the strategic decisions of an organization and characteristics as:
- Data capture, analysis and monitoring
- A combination of financial and non-financial data
- Its emphasis on the strategic plan of the organization
Balanced Scorecard Perspective
The balance scorecard comprises the activities of collecting data, develop matrices and analysis it through four perspectives, which are:
- Objectives – It consists of strategy at organization and department level
- Measures – The progress report and measurement bases on desired objectives
- Targets – Refers to targets consists of each parameters set by organization
- Initiatives – the parameters to facilitate the performance initiatives
360 degree appraisal has five integral components:
- Self appraisal
- Superior’s appraisal
- Subordinate’s appraisal
- Peer appraisal
- External Sources (Customers and Clients)
Not only does this method provide feedback from a variety of viewpoints, it also minimizes the bias problems that are inherent to evaluations. The more appraisers an employee has, the more likely the biases of the raters will tend to cancel one another out, and the more perspectives will combine to give a complete, accurate and honest picture.
The above four parameters are interconnected with each other to make the business process more effective results which leads to improve the financial performances. The organizations make balance scorecard as per their own objectives, measures, targets and initiatives. Also it standardized weightages in each parameter as per their business processes and goals. Giving weightages on each parameter is the sole choice of organization
The balance scorecard is based on four perspectives i.e. financial, customers, internal business process and learning growth perspectives. Each parameter contributes the performance measurement and suggests improvement areas which are completely based on weightages assign to each parameters.
1. FINANCIAL PERSPECTIVE
The financial perspective is one of the most important aspects of balance scorecard. It contributes to the bottom line improvements of the company. In other words, it consists as balance sheet of performance standards of the organization. However, this tool is made only for the internal stakeholders and management and reflects the financial health of company.
The financial perspective to create balance scorecard are as follows:
Profit and loss Margins
Fixed cost, variable cost and Lower Costs
Working capital of organization
Annual growth of Revenue
Net and gross Profit Ratio
The business life cycle of the company is dependent on financial goals. Therefore, these stages are comprised with following levels:
- Growth stage – this is the primary stage where the company has entered and started growth in market
- Sustain stage – at this stage, the company reaches to profitable level and sustain it within market
- Harvest stage – at this stage, the aim of the organization is to increase the cash flow and revenue and reduce capital requirements
2. CUSTOMER PERSPECTIVE
The main goal of any organization is to deliver value to the customer. The two main indicators of evaluating the organization performance in the eyes of customers are; “customer feedback “and “customer satisfaction” reports. The customers could be either “business to business” (B2B) or “business to customers” (B2C). Viewing the core business and industry, the relationship with the customers determines. For example, in case of manufacturing units, the relationship with the customer are generally B2B, whereas in service industry, there company maintain direct relationship with the customer i.e. B2C.
Customer perspective enables to identify the parameters of measuring satisfactions of customers i.e. “how the customer sees us” or “what are the expectations of customers from us” In view of customer perfective, the main parameters taken by many organizations are:
- Product and service Offering
- Brand identity & brand image
- Relationship with the customers
- The customer services
- New products and services
- Entering new market
- Customer satisfaction and its retention
- Customer loyalty
- Fast response on customer query and complaints
3. INTERNAL BUSINESS PROCESS PERSPECTIVE
The metrics of balance scorecard made basis on internal business process which allows managers to direct the channels of their department growth. In other words,it enables to identify the strength and weakness of internal business process systems. The focus areas of business perspectives could be:
- Operations Management Processes
- Innovation Processes
- Customer Relationship Processes
- Regulatory & Environmental Processes
5. LEARNING & GROWTH PERSPECTIVE
The Learning and growth perspective is the fourth element of balance scorecard. It enables to identify the training, development and learning needs in an organization’s. In other words, it identifies the gap between “what we have learned “& “what should we learn “to meet objectives. This perspective is majorly used in training need identification as well in various organizations. Kaplan and Norton emphasize that ‘learning’ is something more than ‘training’; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. Hence, it comprises with
- Organization Culture
- Employee skills and competency levels.
- Leadership and managerial skills
- Capabilities of executing Information system
Process of building a Balanced Scorecard
While there are many ways to develop a Balanced Scorecard, Kaplan and Norton defined a four-step process that has been used across a wide range of organizations.
- Define the measurement architecture – the initial level of balance scorecard implementation, the focus areas should be strategic business units instead of corporate level. This would enable to create architecture of long term information flow and process implementation of balance scorecard.
- Specify strategic objectives – the potential measure of each perspective as discussed above should be identified. This would enable to make the strategic objective more focused and strong.
- Choose strategic measures – the parameters of measuring should be related to the actual performance drivers. This would enable to evaluating the progress made toward achieving the objectives.
- Develop the implementation plan – the targets should clearly be defined in balance scorecard. The information system of the organization should be developed and linked with the top level metrics to lower level of operational activities.