Business Topics: The Balanced Scorecard

In the business world the primary goal of all business leaders is long-term success.  Incredible amounts of money are spent on research in an attempt to achieve it.  This success is not just measured in terms financial success, but in terms of non financial success as well.  One performance based report based on both financial and non financial procedures, can be a vital tool in achieving long-term success, this tool is the Balanced Scorecard.

The Balanced Scorecard approach has roots in the 1950's when General Electric took part in performance measurement reporting during the decade. However, the actual term wasn't coined until the early 1990's by Drs. Robert Kaplan and David Norton when they developed a performance measurement framework that included non financial measures as well as financial measures to give top management a more balanced view of how performance really is.

Since the work completed in the early 1990's the balanced scorecard has become very popular and an invaluable tool for any organization, not just businesses trying to make profit.  Today it is used by non-profit organizations, governments, and all who are trying to conform their activities to their strategy and make sure that their activities are meeting the goals set by their strategy.

So if the Balanced Scorecard is such a valuable tool for any organization, what is it made of? How does it work?  What is needed to implement the Balanced Scorecard in your organization?  And what are the benefits of implementing it into your organization?

The Balanced Scorecard is generally made up of four perspectives, or groupings of critical success factors.  This does not mean that every Balanced Scorecard consists of four groups of critical success factors.  Any particular scorecard may have as few as one critical success factor or as many as the organization making their scorecard feels necessary.  The four general critical success factors are financial factors, customer satisfaction, internal process, and learning and innovation factors.

Financial success factors of organizations include financial data like operating income and cash flow.  Even though the Balanced Scorecard stresses not just measuring financial success it does recognize that usually financial factors are the key factor of most organizations, and should be slightly more focused on if they are more important than the other critical success factors.

Another general critical success factor is the internal process of an organization.  This critical success factor is about the measurement of productivity and speed.  The data that is gathered for this factor is used by management to determine how well or poor an internal process is running.  Therefore what the data shows to be analyzed by management should be configured by someone with a mastery of the particular process to ensure greater accuracy.

The Learning and Innovation factor, also a general critical success factor, deals with employee training and the number of new patents developed or new products produced.  Learning and Innovation factors are not just limited to training though.  On the contrary, it can also deal with communication between employees to help cut down on problem solving time.

The remaining general critical success factor is the customer perspective which deals with customer satisfaction.  Recently this factor has become increasingly important because even though currently things may be going well, if your customers are unsatisfied it is more likely you will see a decline in business in the future.

The aforementioned critical success factors are what make up the general Balance Scorecard.  So how do organizations use those factors to implement their vision?  Typically management will take its critical success factors and allocate a percentage to each one based on its importance in the organization, adding in total to one-hundred percent.

With what makes up the Balanced Scorecard and how it works in mind, there are certain things needed to make sure that the Balanced Scorecard is used effectively.  Some of the things needed are:

• Strong support from top management
• Accurate reflection of organizational strategy
• Communication of the strategy, clearly to all employees
• Processes that verify information used in making the scorecard
• Process that reviews and modifies the scorecard

Going through all of this work is not an easy task and can be very time consuming, but adopting the Balanced Scorecard in your organization can lead to some very positive benefits.  Some of the key benefits are, but are not limited to:

• Way to track progress toward accomplishing goals
• Way to implement strategy by showing managers the critical success factors and rewards for accomplishing those goals.
• Some benchmark organizations can use to accomplish desired change in strategy.
• A scale to determine how managers can advance and be compensated
• A guide that unites efforts within an organization to fulfill critical success factors

The Balanced Scorecard, like it or not, is here to stay.  It is a great tool that can be essential for an organization to achieve long-term success not only financially, but in all areas in which an organization wishes to be successful.