Balanced Scorecard (BSC)

An approach to management integrating both financial and non-financial performance measures into a comprehensive framework developed by Professors Kaplan and Norton.
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What is Balanced Scorecard (BSC)?

The Balanced Scorecard (BSC) is a strategic planning and management system that organizations use to:

  1. Communicate what they are trying to accomplish.
  2. Align the day-to-day work that everyone performs with the organization’s strategy.
  3. Prioritize projects, products, and services.
  4. Measure and monitor progress towards strategic targets.

Originally proposed by Professors Robert Kaplan and David Norton, the BSC was introduced in the Harvard Business Review in 1992. It has become a widely adopted management tool for balancing traditional financial metrics with more forward-looking, non-financial metrics.

The Four Perspectives of BSC

  1. Financial Perspective: How do we measure financial performance? Common metrics include:

    • Operating profits
    • Return on Capital Employed (ROCE)
    • Unit costs

  2. Customer Perspective: How do we measure customer satisfaction? Common metrics include:

    • Customer profitability
    • Customer satisfaction ratings
    • Market share

  3. Internal Business-Process Perspective: What must we excel at? Common metrics include:

    • Time to develop new products
    • Defect rates
    • Product return rates

  4. Learning and Growth Perspective: How can we continue to improve and create value? Common metrics include:

    • Employee satisfaction
    • Employee productivity

Leading and Lagging Measures

The balanced scorecard distinguishes between:

  • Lagging Measures: Financial metrics that indicate the outcomes of past decisions (e.g., profits, cash flow).
  • Leading Measures: Non-financial metrics that predict future performance and are critical for driving future financial results (e.g., employee skills, customer satisfaction, and internal process efficiencies).

Examples

  1. Financial Perspective:

    • Measure: Return on Assets (ROA)
    • Example: A company calculates its ROA quarterly to track how efficiently management is utilizing its assets.

  2. Customer Perspective:

    • Measure: Net Promoter Score (NPS)
    • Example: A retail chain surveys customers after every shopping experience to determine their likelihood to recommend the store to others.

  3. Internal Business-Process Perspective:

    • Measure: Cycle Time
    • Example: A software company tracks the time taken from receiving customer requirements to delivering the software to ensure timely deliveries.

  4. Learning and Growth Perspective:

    • Measure: Employee Training Hours
    • Example: An IT firm monitors the number of training hours per employee to ensure continuous skill development and innovation.

Frequently Asked Questions (FAQs)

  1. What is the main advantage of using a Balanced Scorecard?

    • The main advantage is that it provides a holistic view of an organization’s performance by combining financial and non-financial metrics.

  2. Can small businesses benefit from implementing a Balanced Scorecard?

    • Yes, small businesses can benefit as it ensures alignment of business activities with the organizational vision and strategy.

  3. How frequently should a Balanced Scorecard be reviewed?

    • It is typically reviewed quarterly to ensure alignment with strategic objectives and to make necessary adjustments.

  4. Is the Balanced Scorecard only suitable for profit-oriented organizations?

    • No, it can be tailored for use by not-for-profit organizations and government agencies as well.

  5. What software tools can help in implementing a Balanced Scorecard?

    • Various software tools like BSC Designer, QuickScore, and Balanced Scorecard Professional can assist in implementation and monitoring.
  • Key Performance Indicator (KPI): A type of performance measurement that helps you understand how your company or department is performing.
  • Strategic Planning: The process of defining a business’s strategy, making decisions on allocating resources, and pursuing the strategy.
  • Performance Management: Continuous process of improving performance by setting individual and team objectives which are aligned to the strategic goals of the organization.
  • Benchmarking: The practice of comparing business processes and performance metrics to industry bests and best practices.

Online Resources

Suggested Books

  1. The Balanced Scorecard: Translating Strategy into Action by Robert S. Kaplan and David P. Norton
  2. Balanced Scorecard Evolution: A Dynamic Approach to Strategy Execution by Paul R. Niven
  3. Performance Dashboards: Measuring, Monitoring, and Managing Your Business by Wayne W. Eckerson
  4. HBR Guide to Performance Management by the Harvard Business Review

Accounting Basics: “Balanced Scorecard” Fundamentals Quiz

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Balanced Scorecard (BSC)
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