Background
There are numerous performance management tools available that can talk about the present or past performance. Also, they work in silos. Some focuses more on financial metrics while some on customer services. All of them lack the holistic view. This is when in 1992, Robert Kaplan and David Norton published article in Harvard business Review that introduces the balanced scorecard and it become best seller quickly. The Unique proposition of this tool is that it not only talks about present performance but also captures the data points that indicate how well the firm is positioned in order to deliver value in future. Also, rather than talking in silos, this framework of performance assessment was holistic and has 4 major areas which are as follows:
- Financial perspective
- Internal business processes perspective
- Customer perspective
- Learning and Innovation
Each of the above perspective will be discussed in detail in further course of this paper.
Balanced scorecard helps in channelizing the efforts of the whole organization towards achieving few key metrics which are actually responsible for creating more value to your customers and that is how it helps in building the more balanced business ensuring that good performance in 1 department is not just getting offset by low performance in another department. Instead, it focuses on both leading and lagging indicators so that the organizations is more balanced and grow in all the 4 perspectives (Keyes, 2016).
- Financial perspective talks about the indicators from financial point of view like if the organization is generating value for its stakeholders, if there is return on investment for investors, how is the cash flow of the company, working capital. This tool does not mentioned about the specific indicators but broadly mention the key areas each of which has some indicators aligned to organization vision and mission. It also talks about increase in sales revenue, operation margin, asset utilization and how the shareholder value can be improved. Cash to cash cycle is another important thing that can be considered from financial point of view.
- Internal business processes perspective talks about how the company is managing its internal processes in order to provide value to its customers. With the advent of digitalization and technology, more and more companies are automating their business processes and removing redundancy. Organization need to assess its business processes and identify the bottlenecks and can focus on process re engineering to improve the processes. Organization can define key performance indicators for its key processes like order to cash cycle, procure to pay cycle. Also, it is important for the organization to know about its on-time delivery of goods, order fulfillment rate, defect rate. Organizations which are not mature operate in Silos, for instance there are no cross functional goals so as to improve the performance of the process but each department have their own goal and focus on improving it. Improvement in goals defined for a particular department may help that department but may or may not help the organization. Thus, the business processes should be cross functional that will help the organization. People should focus on the overall process and end objectives and not just immediate goals. Initiatives like Six sigma, total quality management, lean systems shows the holistic initiatives designed to get the more out of the business processes by reducing the wastage and removing the non value added steps.
- Customer perspective is one of the most important criteria for the success of the organization. Organization must be able to create the same impression in the minds of the customers what it wants to be perceived by its customers. Organization can define indicators like customer satisfaction, rate of return, rate of complains and turnaround time for complains and ability to quickly solve the customer problems (Hoque, 2014). It can also talk about the how organizations are acquiring new customers as well as sustaining existing customers.
- Learning and Innovation is also one of the criteria for evaluating how the firm will perform over the future. It is because innovation is the key to survival these days. Companies can either reinvent themselves continuously or vanish. Thus, it is very important that organizations should keep its employees up to date and also provide them with the appropriate trainings required to excel at their work. Job enrichment and Job enlargement are some of the strategies that can help the employees to become better at work and also learn multiple skills which broaden their horizon and ability to see the more holistic picture (Gibbons & Kaplan, 2015).
Balanced scorecard companies are those that have implemented or are in process of implementing this scorecard. There are companies like Cigna Insurance, Exxon Mobil, Emerson Electric that have implemented this scorecard. In order to implement it, organization first defines its business strategy. Business strategy consists of defining a vision statement and where the organization sees itself in next 5 or 10 years and mission statement that talks about how the organization will achieve its vision. Once the strategy is defined, organization defines key business objective that help the organization to achieve the business strategy. Next step is identifying measures and metrics to track the progress (Kaplan, & Anderson, 2013). Balanced scorecard has defined the 4 criteria and key metrics from each of the area should be selected to track the progress. Last step is implement which consists of getting data points and calculate metrics value and focus on continuous improvement so as to improve the value of the metrics.
Also, all these steps are interdependent. For instance, Business strategy is used to define the objectives and at the same time performances are measured against objectives which confirm to the strategy (Letza & Coe, 2014). This model will be refined and more details will be added as the organization progresses. The model of balance scorecard yields maximum benefits only when it has the support of various internal and external stakeholders in the organization. It is important that the leaders and managers should have the support of both internal and external stakeholders.
Balanced Scorecard Analysis
Balance scorecard is one of the most widely tool used by current days organizations. In fact, the use of balanced scorecard has increased in last decades and it is expected that its use would further increase in the future. Balanced scorecard is quite relevant for business because it is not something that works in isolation. But it can be aligned to the management strategy and thus become a framework to evaluate the effectiveness of the strategy and how the organization is positioned to perform in the future. The main advantage of this scorecard is that it helps the business to convert the business strategy into business objectives and which can then be split into key metrics for all the 4 areas defined by the balanced scorecard. Once the key metrics are identified, their performance can be benchmarked against best in class companies and company can understand where it stands in terms of competition and what steps should it take to become more competitive. It also becomes aware of its strong points and weak points. This model equally focuses on strong and weak points and suggests that strong points should not be offset for weaker points. It is because this model is holistic in nature and advocates that organization should focus on key metrics from all the 4 areas as they are the true reflection of the effectiveness of the strategy (Niven, 2014).
Also, this model is quite flexible from management point of view and allows changes with changes in strategy. Business strategy is very hollow terms unless it is accompanied by the parameters whose value can be measured. Parameters like market share, core competency focus on 1 aspect but not balanced. For instance it is possible that 1 organization have maximum market share but if it is not balanced on Innovation and learning area as mentioned in balanced scorecard, it will fail in future. Yahoo, Kodak, Xerox are examples of such companies which become laggards from leaders because they fail to reinvent themselves with changing market conditions. Core competency is also about the internal processes that company do very well and that differentiates itself from its competitors however alone core competency does not tell anything if your customer is willing to pay for your core competency. Hence, balanced scorecard is needed that can talk about the parameters from holistic point of view (Perkins, Grey, & Remmers, 2014).
Reference
Coe, N., & Letza, S. (2014). Two decades of the balanced scorecard: A review of developments. The Poznan University of Economics Review, 14(1), 63.
Gibbons, R., & Kaplan, R. S. (2015). Formal Measures in Informal Management: Can a Balanced Scorecard Change a Culture?.
Hoque, Z. (2014). 20 years of studies on the balanced scorecard: trends, accomplishments, gaps and opportunities for future research. The British accounting review, 46(1), 33-59.
Kaplan, R., & Anderson, S. R. (2013). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.
Keyes, J. (2016). Implementing the IT balanced scorecard: Aligning IT with corporate strategy. CRC Press.
Niven, P. R. (2014). Balanced Scorecard Evolution: A Dynamic Approach to Strategy Execution. John Wiley & Sons.
Perkins, M., Grey, A., & Remmers, H. (2014). What do we really mean by “Balanced Scorecard”?. International Journal of Productivity and Performance Management, 63(2), 148-169.
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