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Did you know that the Balanced Scorecard (BSC) is ranked fifth on Bain & Co’s list of the top ten most widely used management tools worldwide? It’s also been recognized by Harvard Business Review as one of the most influential business ideas of the past 75 years.
With its ability to align strategies and drive performance, the balanced scorecard has become a game-changer for organizations aiming to achieve their long-term goals. But what is this scorecard, and why is it so important? This article explains everything you need to know about BSC. Read on!
What is a balanced scorecard?
A balanced scorecard is a well-structured report that acts as a strategic performance management tool companies use to improve internal business operations and external outcomes.
Instead of focusing only on financial results, it looks at four key areas:
- Financial performance – How well the company is doing financially.
- Customer perspective – How satisfied and loyal customers are.
- Internal processes – How efficient and effective internal operations are.
- Learning and growth – How the company improves and prepares for the future (e.g., employee skills and innovation).
Simply put, a balanced scorecard is a tool that helps a company see how well its plans are working. It’s like a report card showing what employees are doing and what results those actions create.
What is the purpose of a balanced scorecard?
The purpose of a balanced scorecard is to turn a strategy into actionable objectives that drive performance and align the entire organization towards achieving its goals.
It provides a structured framework to measure progress through Key Performance Indicators (KPIs), ensuring that strategic objectives are clear, measurable, and focused on outcomes rather than just projects.
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Business strategy consultant Franklin Covey summed it up simply:
- If your strategy has 3 goals, you’ll likely achieve all 3.
- If it has 4-10 goals, you’ll only achieve 1-2.
- If it has more than 10 goals, you’ll likely achieve none.
The less, the better the chances of achieving. If there are more strategies, you will most likely be confused.
The scorecard also helps monitor the “health” of an organization by evaluating both leading and lagging indicators, enabling informed decision-making and continuous improvement.
Who uses balanced scorecards?
Balanced scorecards were initially introduced for for-profit companies but were later adapted for government agencies and nonprofit organizations.
It was initially coined by Dr. Robert Kaplan of Harvard University and Dr. David Norton as a framework for measuring company performance. Currently, BSCs are used extensively in the United States, Asia, and Europe and are gaining prominence in the Middle East and Africa.
What are the 4 perspectives of the balanced scorecard?
The four key areas or perspectives of BSC are as follows.
Financial perspective
The main objective of a company from a financial perspective is to understand financial performance and to assess how well a company has used its financial resources to achieve a good return on investment.
It also ensures that the key risks are managed smoothly and the goal has been achieved satisfactorily for customers, shareholders, and suppliers.
Shareholders are an important part of the business because they provide the money needed to run it. They want to see the company do well financially. This means the company should make money and meet goals like increasing profits and finding new ways to earn.
To achieve these goals, the company might launch new products or services, offer more value to customers, and find ways to reduce costs.
Customer perspective
Customer perspective is collected to understand how well customers like or dislike the product or service. If the entity could satisfy customers regarding quality, availability, and pricing. This is the biggest indicator of a company’s success.
BSC considers the company’s reputation versus that of its competitors. Did your customers like your competitor’s product or yours? This ensures that companies view themselves from the customer’s point of view.
The only way to improve customer satisfaction is by providing quality products, improving customer experience, tweaking prices according to market conditions, and providing free or sample services or products.
Related: 5 tips to evaluate customer satisfaction analysis skills
Internal business processes perspective
A business’s internal processes show how smoothly it operates. A scorecard helps identify what needs to improve for the business to run better. It also checks if the company’s products or services meet customer expectations.
One key question it focuses on is, “What are we good at?” Answering this helps the company create better marketing strategies and develop new ideas to serve customers in better ways.
Organizational capacity perspective (or learning & growth)
Organizational capacity is about ensuring the company has what it needs to achieve its goals successfully.
Employees in every department need to perform well, show strong leadership, and use their knowledge and skills effectively. It focuses on people, tools, technology, organizational culture, and other essential resources for achieving exceptional results.
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The company also needs the right tools and systems to work efficiently. For example, using the latest technology to automate tasks can help everything run smoothly and meet management’s expectations.
What are the elements of a balanced scorecard?
Conventionally, a balanced scorecard consists of four perspectives (which we already discussed). This number can be extrapolated to include a few other aspects equally important to drive an organization’s success and improvement. As a result, the four traditional perspectives become seven, namely.
- Financial performance
- Customer satisfaction
- Internal processes
- Learning and growth
- Aligning strategy and vision to ensure all scorecard activities support the organization’s goals
- Establishing governance and accountability to build trust and maintain transparency
- Implementing clear communication and feedback systems, such as regular performance reviews, to track and drive continuous improvement
Importance of a balanced scorecard (BSC)
The balanced scorecard is an important tool because it helps a company measure how well it’s achieving its goals. It evaluates how the management team performs by checking their results against specific Key Performance Indicators (KPIs).
This shows how effectively they contribute to the company’s strategy and growth targets and how the business is progressing compared to competitors.
It’s not just for management—other employees can also use it to see how their work supports the company’s success. It can even play a role in decisions about promotions and salary increases.
What makes the scorecard stand out is its focus on important topics for the organization and its use of both financial and non-financial information. This ensures that the company’s strategy is based on a complete and balanced view of its performance.
Challenges of a balanced scorecard
Though having a BSC is a crucial aspect of any business management, its implementation has several challenges.
Some of them include:
Data quality and availability
Ensuring high-quality data is a pressing issue. If the whole data in BSC is incomplete or inaccurate, it will affect the entire company’s decision making, revenue, and profitability. An established robust data collection and validation process should ensure trustworthy and reliable information.
Not understanding the concept clearly
Many executives mistakenly believe a scorecard is a quick and easy fix. They see it as something that can be set up quickly without realizing it needs proper strategic planning to work well. This lack of understanding often leads to using it shallowly, which doesn’t produce the desired results.
Resistance to change
Implementing a scorecard often requires changing how the organization works. Employees and managers might resist these changes, especially if they don’t see quick benefits. It’s important to address this resistance to make the scorecard successful.
Complexity in implementation
The scorecard examines finances, customer satisfaction, internal processes, and growth. Balancing these areas can be tricky, and organizations might struggle to align their strategies, leading to confusion.
Focus on intangibles
The scorecard tries to measure everything that impacts success, but some important factors, like employee engagement or customer happiness, are hard to measure. This can make it challenging to include these in the scorecard effectively.
Examples of a balanced scorecard
Retail companies often use a balanced scorecard to improve their overall performance. For instance, a large clothing retailer might track its success by focusing on key areas like customer satisfaction, internal processes, financial goals, and employee growth.
To measure customer satisfaction, they could collect feedback through post-purchase surveys, asking customers to rate their shopping experience, the quality of service, and the ease of finding products. This information helps them identify areas for improvement, such as better customer support or reorganizing store layouts.
On the internal process side, the retailer may monitor how quickly inventory is restocked and how well stores are maintained. They might use data analytics to optimize their supply chain and reduce delivery times for online orders.
For financial goals, they would set targets for revenue growth and profit margins, regularly reviewing sales performance to ensure they are on track.
Lastly, the retailer invests in employee development by offering training programs and tracking staff engagement through surveys. This ensures their team is equipped to deliver excellent service and contribute to the company’s success.
By balancing these four areas, the retailer ensures they meet customer expectations, improve operations, grow financially, and support their employees—all critical for long-term success.
3 steps to create a balanced scorecard
Step 1: Create a strategic map
This is the first and most important step in creating a BSC.
Why?
The strategy map clarifies the cause-and-effect relationships between objectives, such as financial performance, customer satisfaction, internal processes, and learning and growth.
List the four perspectives of the scorecard in this order:
- Financial perspective
- Customer perspective
- Process perspective
- Learning and growth perspective
Position “learning and growth” at the bottom of your strategy map, as this will be the foundation.
Start by listing your goals in each category using action verbs. What actions will you take?
For instance, in the “learning and growth” category, you could write “improve employee skills through online courses.” In the “customer perspective” category, you might write “enhance customer loyalty through personalized service.”
These goals are called “critical performance variables.” You must achieve them all for your strategy to succeed; that’s why it is called “critical”.
To finish, draw arrows pointing upwards between each category. For example, “learning and growth” should point to “process,” which leads to “customer,” and then to “financial.”
The arrows are key in a strategy map. They show how each step influences the next, helping everyone in the organization understand how value is created. The results from one stage become the starting point for the next.
Step 2: Select how you will measure the progress
Having a great strategy and sharing it with employees is important, but it’s likely to fail without knowing how to measure progress. Every employee will be evaluated based on specific criteria, so choosing those criteria is crucial. Only then can employees work towards achieving the goals.
Select and assess your measures by asking three questions:
- Does the measure connect to my strategy map?
- Is it clear, complete, and actionable?
- Does it relate to economic value?
For example, if your goal is to “increase customer satisfaction,” some measures could include:
- Number of referrals
- Number and speed of resolved support tickets
- Number of testimonials
- Net Promoter Score (NPS)
By linking these measures to your strategy map, you can objectively track progress, make changes, and connect them to your organization’s economic value.
Step 3: Set challenging but achievable goals
The final step in creating your scorecard is setting targets. What numbers do you need to hit to achieve your goals using your selected metrics? Think about the target you want to reach and the timeline for reaching it.
For example, if your goal is to increase employee productivity, targets for each sample measurement could be:
- Number of completed projects: Finish 120 projects by the end of the year.
- Employee training hours: Ensure each employee completes 40 hours of training per quarter.
- Team collaboration: Increase cross-departmental collaboration by having 10 joint projects per quarter.
- Employee engagement score: Achieve an engagement score of 85% or higher by the end of the year.
Setting targets helps you measure and define what successful strategy execution looks like for each metric.
Keep in mind that failing to meet “learning and growth” goals can affect the rest of your strategy.
There you go; now you know how the balanced scorecard works. It’s a powerful tool because it goes beyond just financial measures, giving a clear view of overall performance. Ultimately, it’s all about ensuring your strategy is on track and leading to success.
