The balanced scorecard is a system used for planning and management to make sure business operations are aligned with the organization’s mission, vision, and strategy. It is used to monitor performance against goals. It is also useful to improve communications because it standardizes measurements and facilitates the creation of a common performance-management language. Thirdly, it balances the goals pursued with the way those goals are attained by using various measures to determine success.
The balanced scored is used by for-profit and non-profit organizations alike as a performance measurement tool that adds strategic non-financial performance measures to traditional financial metrics. It gives management a more 'balanced' view of organizational performance and helps senior management turn strategies and plans into reality.
In terms of its contents, it is important to remember that financial measures are retrospective and focus on the past. To look forward, create value, and succeed, organizations must also monitor metrics related to employees, customers, suppliers, processes, and innovation.
The main resource for most organizations, especially those in knowledge-based industries, is their workforce because they are the most important asset and main value creators. So, the balanced scorecard should measure training, engagement, and cultural attitudes at the individual and organizational levels. Some of the key questions are:
- Do workers know what they need to know?
- Is that knowledge institutionalized and documented, or does it reside only in their heads?
- Is the organization acting to prepare workers for future knowledge needs?
- Do employees embrace change and continuous learning given the changing nature of the world around us?
- How engaged is the workforce?
It is imperative that organizations implement metrics to guide the allocation of training funds where they can maximize their utility. Furthermore, training should also include coaching, mentoring, and other mechanisms workers can use to help them answer questions when needed.
An organization cannot succeed without satisfying the needs and wants of its customers. Customer satisfaction is paramount because without customers there is no business. The concept of leading indicators is also useful here because unhappy customers will buy less, recommend the company less, post negative reviews online, complain more, and eventually find other providers that meet their needs. So, tracking satisfaction levels, purchasing patterns, and retention figures is important. Customer segmentation is also important because customers should be analyzed in terms of their type or characteristics, and the kinds of processes that provide them the products and services each customer group is looking for.
Poor performance involving customers is a leading indicator of future decline, even if current financial results are positive.
Many organizations depend heavily on third-party providers for needed supplies, or to handle activities that are not part of the organization’s core activities (e.g. IT support services, payroll, warehousing, transportation). It is very important for organizations to monitor the performance of these external business relationships. Poor controls and service delivery by these entities can cause substantial security, continuity, compliance and strategic damage.
When organizations outsource activities, they do not eliminate the related risks; they retain most of them, share some, and create new ones as well.
Process-focused metrics make it possible for managers to know how well the business is running, and whether its products and services align with the organization’s mission and customer requirements. These metrics must be designed carefully by those who know these processes best.
Process metrics are increasingly also including environmental impacts affecting our planet. Some of the traditional metrics (e.g. scrap, fuel consumption) can be linked to environmental impacts. Others related to the type of waste produced, the method of disposing of such waste, and the sourcing of materials (e.g. fair trade, locally sourced) are increasingly being monitored too.
Market disruption is occurring at a fast pace in most industries, so organizations must be careful not to become complacent and believe that because a business model and operating practice was successful in the past, that it will remain successful in the future. Innovation is essential for sustainable growth and success.
Innovation metrics include quality, idea generation, training, and research and development investments geared towards the improvement and development of products and services.
The balanced scorecard is not a piece of software and implementing some form of software is not the same as implementing a balanced scorecard. The process and metrics must come first, then performance management software can be used to obtain, analyze and disseminate the appropriate performance information to the right people at the right time.
Balanced scorecards help employees focus their attention on what matters most for the organization to be successful; it measures accomplishments (outcomes), not just work (output); provide a way to see if the organization’s strategy is working, and provide a means to compare performance and gauge progress over time.
There will always be a need for financial information, but disproportionately focusing on monetary results often leads to unbalanced situations regarding other perspectives. Organizations should consider the way results are obtained and adopt a multi-dimensional approach that considers risks, tangible and intangible costs, reputation, satisfaction and stakeholder relations.
Interested in learning more about this and other tools and techniques? Join Dr. Murdock when he teaches Lean Six Sigma Skills for Auditors, Internal Audit School, and High-Impact Skills for Developing and Leading Your Audit Team.