december 02, 2022
What you need to know about the Balanced Scorecard
The Balanced Scorecard (BSC) is a modern management methodology that acts as a mechanism for consistently communicating the strategic goals of a company to its staff and controlling their achievement through Key Performance Indicators (KPIs).
A Key Performance Indicator (KPI) is a measure of the achievement of goals as well as the effectiveness of business processes and the performance of each department or employee. Within the concept of balanced indicators, each specialist is responsible for their own set of indicators. Just as the HR director is only responsible for personnel management, and the quality director is responsible for the quality of production, the financial director is solely responsible for the financial aspects of the business.
The Balanced Scorecard was developed based on research conducted in 1990 by Harvard Business School professors David Norton and Robert Kaplan. The purpose of the research was to identify new ways to enhance business performance and goal achievement. The main principle of BSC, which has largely contributed to its high effectiveness, is that you can only manage what you can measure. In other words, goals can only be achieved if measurable indicators exist, which tell the manager what needs to be done and whether they are doing it correctly to achieve the goal. With the BSC, management can evaluate the company’s performance based on both financial and non-financial indicators, such as customer satisfaction, internal process efficiency, and the number of innovations.
The authors of the BSC suggested four key perspectives for evaluating performance, which answer the most important questions for the successful operation of a company:
- Finance (What do shareholders and investors think of the company?)
- Customers (How do customers perceive the company’s products?)
- Business Processes (Which business processes need optimisation? Which areas should be focused on, and which should be abandoned?)
- Learning and Growth (What opportunities exist for the company’s growth and development?)
Each company has a unique target structure that reflects its division into key functional areas. For example, for a manufacturing company, key areas include raw material supply, production, finished product distribution, and logistics. For a service-oriented company, key areas might include marketing, strategy development, promotion, sales, and customer service. Based on the company’s target structure, management accounting and budgeting systems are developed. These are interrelated because evaluating financial results requires comparing actual performance with planned (budgeted) data. The specific indicators that best reflect the company’s performance depend on the nature of the business.
An integral part of the BSC is the motivation system. When assessing each employee, the indicators that reflect the effectiveness of their work should be used. These indicators are used during the annual employee evaluation, influencing bonuses and career advancement. For example, in many companies with a customer base, salespeople do not seek new customers. Therefore, it is logical to reward regular customers with one bonus, while attracting new customers should be rewarded with a higher bonus. The connection between the BSC and the motivation system is the closest. The BSC can and should become the foundation for developing a motivation system. Without integration with the motivation system, the BSC remains just an informational system.
Key performance indicators allow for a holistic view of the business, while also diving into details if needed. When using the BSC, the manager can view the system of indicators on a single page, showing the development and status of the company. It is important that the manager of a company that has implemented the BSC does not receive a formal profit and loss report but a profitability and efficiency management system where all the indicators from the profit and loss statement are reflected with more accurate, business-adapted algorithms. It’s not that the information in the balance sheets is ignored in the BSC. The manager sees these indicators in a different sequence, restructured, and more accurately corresponding to the business, grouped and adjusted for the current situation. Balance sheets are, of course, not abolished. These forms are universal—used by builders, oil workers, sellers, manufacturers. For the manager, it is important that the system developed in the company is tailored to their business. Also, the manager should evaluate the company’s performance not through 5-10 reports but in one interface that consolidates all necessary information. One of the main advantages of the BSC is that decision-making is based on available data, providing clarity and fast information processing.
The development and implementation of the BSC consists of three main stages:
Technologically, building a BSC for a specific company includes several necessary elements:
- A strategic task map logically linked to the company’s strategic goals.
- A balanced scorecard map (quantifying business process effectiveness, “goal achievement points,” and the timeline for achieving required results).
- Target projects (investments, training, etc.) to support necessary changes.
- Executive dashboards for managers at various levels for operational control and performance evaluation.
Like any project, implementing the BSC requires resources—time, money, labor, etc. Clearly, a failed implementation leads to the loss of these resources. However, in the case of BSC, indirect losses are even more substantial than direct ones. As a result of an unsuccessful project, companies typically develop an atmosphere of pessimism. This is reflected in the loss of interest in the BSC from top management, and sometimes it leads to a loss of faith in improving management technologies. As a result, subsequent efforts in this direction become difficult.
Main reasons why BSC fails
- BSC implementation without direct involvement from top management, delegating responsibility to subordinates.
- A complete lack or formal strategic development plan.
- Lack of or low automation, reliance on “manual” methods.
- Resistance or indifference from key employees to BSC implementation.
- Substituting BSC goals with personal objectives, e.g., using BSC as a tool to compromise or exert pressure on a company manager.
- Lack of continuous project support from business owners and top managers throughout the project lifecycle.
- No link between BSC and employee motivation.
- Weak BSC design and business process management. Incorrect settings of subsystems and performance indicators (e.g., target values are incorrectly calculated for the future period, or the manager spends several days to evaluate results from detailed reports).
- BSC is implemented but no further development is made.
The Balanced Scorecard system allows businesses to bridge the gap between their strategic planning and everyday operations. In other words, the BSC is necessary for a company only when it has a strategy. You cannot set a company strategy once and then create a BSC system. Strategic management is a continuous process. As business strategies evolve, so too must the key performance indicators. Therefore, it is necessary to continuously manage the process of strategic change and improve the BSC.
