Balanced Scorecard A Great Tool To Measure Company’s Success
Thinking of using balanced scorecard in your business? Read this guide to understand how it works and how to measure your success.
Every business owner, manager, or leader understands the importance of defining goals. Without goals, you’re in a blind spot. Without goals, you won’t be able to define success, and much more important – measure it. That’s why in this blog post we are going to talk about a tool called Balanced Scorecard.
You just keep doing what you’re doing without a clear direction.
But goals are not enough. To turn your goals into specific, actionable steps, you need to set objectives. You do this by breaking down a goal into smaller fragments and determining the key steps to achieve them.
It doesn’t stop there. You also need to measure your success. You need to know how well your organisation is doing by comparing your current performance against your goals. And to do that you need metrics.
Speaking of metrics, there are different ways to track and monitor performance. We’ve talked about lean management concepts like KPIs and OKRs. Now, let us discuss another popular performance tracking approach – the balanced scorecard.
Developed in the 1990s by Robert S. Kaplan and David Norton of Harvard Business School, the Balanced Scorecard is widely used by modern organisations as part of their strategic planning and management processes.
It focuses on four areas: learning and growth, business processes, customers, and finances.
The balanced scorecard is used to understand how a business’ internal functions affect external outcomes. Companies use it primarily to assess the implementation of a strategy or operational activities.
It may also be used to assess the performance of individual employees but based on a 2017 survey, only a small number of companies (17%) use it this way.
The main purpose of a balanced scorecard is to reinforce good behaviour in an organisation assessing performance in four major areas, also called “legs”.
Learning and Growth
This area looks at how the company is doing in terms of keeping a strong, productive, and effective workforce.
A balanced scorecard is used to assess how fast a company responds to change, how well it trains employees especially on the rapidly changing technologies, and how long it takes to develop a product and bring it to market.
As companies embark in an era of rapid technological growth, businesses must be in a continuous learning mode. Businesses often face the challenge of hiring technical workers.
At the same time, they also need to train existing employees to keep up with the change.
According to Kaplan and Norton, learning is more than training. They emphasise the need for mentors and tutors within the organisation, as well as the importance of ensuring that workers readily get help when faced with a problem.
Internal processes have a major impact on the external outcomes of a company. The business process perspective pertains to internal activities, functions, and initiatives that need to be measured or assessed.
Such processes have to be examined and evaluated to measure its impact and whether or not they are helping the organisation achieve its mission.
Aside from the strategic management processes, this area also covers mission-oriented processes which are the major functions of the organisation, and the support processes which are repetitive and are therefore easier to measure.
The metrics in the balanced scorecard create people who know these processes most intimately.
Customer satisfaction is what brings money to the table. That is why most companies rank customer perspective second in their balanced scorecard, next to finances.
The concept behind the customer perspective is simple. In order for your customers to patronise your products and services, you have to keep them happy. To make them happy, you have to understand them.
Companies make use of different metrics for the customer perspective on their balanced scorecards. But it all boils down to knowing what the customers really want.
When putting together your balanced scorecard for this leg, keep in mind the following things:
1. What your customers are looking for
Objectives like “increase the number of customers by XXX” are not enough. Instead, aim for something unique and specific to your business by differentiating your products or services and knowing why customers choose you.
2. Describe your objectives from the customers’ viewpoint
3. Understand the difference between what your customers say and do
There are customers who can give you amazing reviews but won’t buy from you again while there are others who keep on complaining but buy from you regularly.
Looking at things like their purchasing behaviour, renewal rates, speed of purchasing, and other factors can give you great insights that you’re less likely to see from surveys.
Finances are lagging indicators, which means they don’t do well in telling you what could happen, but only what did happen.
Financial indicators are the most important element in the strategic management process. In fact, the financial perspective is what drove the creation of the balanced scorecard.
As a for-profit company, your main goal is to increase your profit. But what specific measures should you use to track this goal?
While profit is important, there are other things to consider, such as how you can keep the costs down so they don’t grow faster than your revenue. Some other measures include cash flow, debt leverage, and bond ratings.
Objectives measured on profit primarily involves revenue growth while objectives based on expenses include measures like production, marketing, and overhead expenses.
Balanced Scorecard and OKR
A balanced scorecard is a promising tool used by many companies to measure performance in four key business areas: growth, business process, customer, and finances.
It’s a more traditional model which possess some similarities to the agile framework OKR. The two frameworks complement each other fluidly because OKR the success of the four perspectives can be structured and enabled by OKRs.
Meanwhile, the KPIs in a balanced scorecard gives you a benchmark in setting ambitious yet achievable goals. Want to know more about OKRs? Download our complete guide here.