What Is a Balanced Scorecard (BSC)?
The term balanced scorecard (BSC) refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes. Used to measure and provide feedback to organizations, balanced scorecards are common among companies in the United States, the United Kingdom, Japan, and Europe. Data collection is crucial to providing quantitative results as managers and executives gather and interpret the information. Company personnel can use this information to make better decisions for the future of their organizations.
Key Takeaways
- A balanced scorecard is a performance metric used to identify, improve, and control a business's various functions and resulting outcomes.
- The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information.
- BSCs were originally developed for for-profit companies but were later adapted for use by nonprofits and government agencies.
- The balanced scorecard involves measuring four main aspects of a business: Learning and growth, business processes, customers, and finance.
- BSCs allow companies to pool information in a single report, to provide information into service and quality in addition to financial performance, and to help improve efficiencies.
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Understanding Balanced Scorecards (BSCs)
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton first introduced the balanced scorecard. The Harvard Business Review first published it in the 1992 article "The Balanced Scorecard—Measures That Drive Performance." Both Kaplan and Norton worked on a year-long project involving 12 top-performing companies. Their study took previous performance measures and adapted them to include nonfinancial information.
Companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards.
BSCs were originally meant for for-profit companies but were later adapted for nonprofit organizations and government agencies. It is meant to measure the intellectual capital of a company, such as training, skills, knowledge, and any other proprietary information that gives it a competitive advantage in the market. The balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve:
- Learning and growth
- Business processes
- Customers
- Finance
The BSC is used to gather important information, such as objectives, measurements, initiatives, and goals, that result from these four primary functions of a business. Companies can easily identify factors that hinder business performance and outline strategic changes tracked by future scorecards.
The scorecard can provide information about the firm as a whole when viewing company objectives. An organization may use the balanced scorecard model to implement strategy mapping to see where value is added within an organization. A company may also use a BSC to develop strategic initiatives and strategic objectives. This can be done by assigning tasks and projects to different areas of the company in order to boost financial and operational efficiencies, thus improving the company's bottom line.
Characteristics of the Balanced Scorecard Model (BSC)
Information is collected and analyzed from four aspects of a business:
- Learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use that information to convert it to a competitive advantage within the industry.
- Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
- Customer perspectives are collected to gauge customer satisfaction with the quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
- Financial data, such as sales, expenditures, and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected.
The balanced scorecard analyzes is often referred to as a management tool rather than a measurement tool because of its application by a company's key personnel.
Benefits of a Balanced Scorecard (BSC)
There are many benefits to using a balanced scorecard. For instance, the BSC allows businesses to pool together information and data into a single report rather than having to deal with multiple tools. This allows management to save time, money, and resources when they need to execute reviews to improve procedures and operations.
Scorecards provide management with valuable insight into their firm's service and quality in addition to its financial track record. By measuring all of these metrics, executives are able to train employees and other stakeholders and provide them with guidance and support. This allows them to communicate their goals and priorities in order to meet their future goals.
Another key benefit of BSCs is how it helps companies reduce their reliance on inefficiencies in their processes. This is referred to as suboptimization. This often results in reduced productivity or output, which can lead to higher costs, lower revenue, and a breakdown in company brand names and their reputations.
Examples of a Balanced Scorecard (BSC)
Corporations can use their own, internal versions of BSCs, For example, banks often contact customers and conduct surveys to gauge how well they do in their customer service. These surveys include rating recent banking visits, with questions ranging from wait times, interactions with bank staff, and overall satisfaction. They may also ask customers to make suggestions for improvement. Bank managers can use this information to help retrain staff if there are problems with service or to identify any issues customers have with products, procedures, and services.
In other cases, companies may use external firms to develop reports for them. For instance, the J.D. Power survey is one of the most common examples of a balanced scorecard. This firm provides data, insights, and advisory services to help companies identify problems in their operations and make improvements for the future. J.D. Power does this through surveys in various industries, including the financial services and automotive industries. Results are compiled and reported back to the hiring firm.
Balanced Scorecard (BSC) FAQs
What Is a Balanced Scorecard and How Does It Work?
A balanced scorecard is a strategic management performance metric that helps companies identify and improve their internal operations to help their external outcomes. It measures past performance data and provides organizations with feedback on how to make better decisions in the future.
What Are the Four Perspectives of the Balanced Scorecard?
The four perspectives of a balanced scorecard are learning and growth, business processes, customer perspectives, and financial data. These four areas, which are also called legs, make up a company's vision and strategy. As such they require a firm's key personnel, whether that's the executive and/or its management team(s), to analyze the data collected in the scorecard.
How Do You Use a Balanced Scorecard?
Balanced scorecards allow companies to measure their intellectual capital along with their financial data to break down successes and failures in their internal processes. By compiling data from past performance in a single report, management can identify inefficiencies, devise plans for improvement, and communicate goals and priorities to their employees and other stakeholders.
What Are the Balanced Scorecard Benefits?
There are many benefits to using a scorecard. The most important advantages include the ability to bring information into a single report, which can save time, money, and resources. It also allows companies to track their performance in service and quality in addition to tracking their financial data. Scorecards also allow companies to recognize and reduce inefficiencies.
What Is a Balanced Scorecard Example?
Corporations may use internal methods to develop scorecards. For instance, they may conduct customer service surveys to identify the successes and failures of their products and services or they may hire external firms to do the work for them. J.D. Power is an example of one such firm that is hired by companies to conduct research on their behalf.
The Bottom Line
Companies have a number of options available to help identify and resolve issues with their internal processes so they can improve their financial success. Balanced scorecards allow companies to collect and study data from four key areas, including learning and growth, business processes, customers, and finance. By pooling together information in just one report. companies can save time, money, and resources to better train staff, communicate with stakeholders, and improve their financial position in the market.
