Understanding Balanced Scorecard and what it represents

Understanding Balanced Scorecard and what it represents

The Balanced Scorecard (BSC) is a strategy performance management tool – a semi-standard structured report, supported by design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these actions. (Source)

Developed by Drs. Robert Kaplan and David Norton, their book ‘The Balanced Scorecard’ remains one of the most popular books on the subject. Harvard Business Review has selected BSC concept as one of the most influential management ideas of the past 75 years.

It has been used worldwide in businesses and industries irrespective of their verticals, to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. Some of the biggest companies that have successfully adopted the Balanced Scorecard Approach are DaimlerChrysler, DuPont, Ford Motor Company, General Electric, Siemens AG and many others.

How Balanced Scorecard works:

Earlier BSC was primarily used as a performance measurement framework and it was quite effective. Gradually it has evolved into a full fledged strategic planning and management system. It helps the management break down its strategy to an operational level and create a plan of action for the entire organisation. Company strategy is great to look at but if everyone is clueless about how to actually implement it, it will hardly be of any use.

The scorecard presents managers with four different perspectives from which to choose measures. It complements traditional financial indicators with measures of performance for customers, internal processes, and innovation and improvement activities. (Source: Harvard Business Review)

In simple words, the scorecard should reflect the following perspectives:

Balanced scorecard

Growth Perspective:

To achieve its vision, how should the company sustain its ability to change and improve?

While most organisations have a training and development department, they are only functional when new employees are onboarded. In today’s dynamic environment, organisations and their employees need to be in a mode of continuous improvement. Learning is essential as it creates a high performance work environment.

Financial Perspective:

To succeed financially, how should the company appear to its shareholders?

The management needs to provide a realistic picture to its shareholders of its cash-flow and return-on-capital employed in the short run. It also takes past financial data into consideration as it helps in forecasting probable risks and costs that may arise.

Internal Process Perspective:

Which internal processes should the company excel to satisfy its customers and shareholders?

The management needs to apply relevant metrics to its internal processes and analyse which ones are efficient and which need to be improved. Their products and services must be developed according to their customers expectations to ensure that they continue to grow. Those who are in direct contact with customers and the market are able to provide better criteria for defining these metrics.

Customer Perspective:

To achieve its vision, how should the company appear to its customers?

Employees need to be educated about the importance of building relationships with customers if they want to gain understanding of their requirements. Customers are the best sources of identifying whether the products and services are meeting their demands or not. If not, they will readily turn to competitor’s solutions.

These perspectives provide a thorough picture of what are the important factors that the company should consider for its growth.

Balanced Scorecard and OKRs

You can view Balanced Scorecard as a well established company, whereas Objectives & Key Results (OKRs) as a startup that is gaining momentum by the day. Though both have been around since the later part of 20th century, Balanced Scorecard has been firmly established as an efficient management process. OKRs on the other hand gained popularity after Rick Klau’s video on OKRs at Google that was released in 2013. It was revealed that they have been instrumental in the success of many Silicon Valley companies including Google, Sears, LinkedIn and a couple others. Suddenly many companies outside Silicon Valley were looking to understand and adopt OKRs to replicate the success of these companies.

There have been many debates as to which approach is better. However it would be unfair to say that one is better than the other. They both have their merits and demerits. It is up to the management to decide which framework is more suitable for the organisation and then implement it.

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