The 4 Balanced Scorecard Perspectives

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, to analyze the data collected in the scorecard. If executives fully understood the consequences of their quality and cycle-time improvement programs, they might be more aggressive about using the newly created capacity. To capitalize on this self-created new capacity, however, companies must expand sales to existing customers, market existing products to entirely new customers , and increase the flow of new products to the market.

A balanced scorecard is a widely accepted organizational performance model that uses strategy to measure results in four perspectives. That is; customers, internal processes, finance and learning and growth. These perspectives allow a company to achieve its long-term goals when looking to grow bigger and better.

What Is A Balanced Scorecard Bsc?

Rework time and/or costs are tracked for key production and service delivery processes. Organizations often cut back on these costs during tough times, which may cause them to mortgage their future for the sake of short-term financial gains. Growth in sales from a particular geographic region or a particular industry may also be a future-oriented financial statistic if the company is looking to grow into new or emerging markets.

While giving senior managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. More commonly, they keep adding new measures whenever an employee or a consultant makes a worthwhile suggestion. One manager described the proliferation of new measures at his company as its “kill another tree program.” The balanced scorecard forces managers to focus on the handful of measures that are most critical. Employee satisfaction recognises the importance of employee morale for improving productivity, quality, customer satisfaction and responsiveness to situations. Managers can measure employee satisfaction by sending surveys, interviewing employees, or observing employees at work.

Balanced Scorecard

The incentive pay handed to Fannie executives more than quadrupled after this change, rising from $8.5 million to $35.2 million . In 2003, the regulator overseeing Fannie Mae found accounting fraud.

• There are so many types of government funded organizations, for this example, let’s imagine a secondary school or university.
• Thus, a BSC is the plan at the executional level that supports achievement of an organization’s mission.
• The moment you have a balanced scorecard template, then you can start filling in the blanks.
• In addition to measures on product and process innovation, some companies overlay specific improvement goals for their existing processes.
• Even an excellent set of balanced scorecard measures does not guarantee a winning strategy.

Systems – measure of availability of critical real time information needed for front line employees. Business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.

Financial Perspective: How Do We Look To Shareholders?

Each perspective will have multiple strategies that are linked to achieving future business goals. The internal perspective require focus on the things the organization must excel at to achieve its financial and customer objectives. The value chain processes consists of those processes namely innovation process, the operation process and the post sale process. Examples of internal business measures include product, service or functional efficiency or expertise. Think Nordstrom’s for service, Apple for design capabilities and Proctor & Gamble’s marketing and distribution expertise.

• This perspective deals with the company’s competencies in training students on the technology that is changing rapidly.
• These core measures can be grouped in a chain of relationships causal as displayed in Exhibit 16.3.
• It is impressionistic and closely resembles propaganda with heavily loaded words, metaphors, irony, exaggerations, incoherence and a climax.
• The term balanced scorecard refers to a strategic management performance metric used to identify and improve various internal business functions and their resulting external outcomes.
• But certain other measures forced the company to get data from outside.
• The internal business and production process perspective indicates the ability of the internal business processes to add value to customers and to improve shareholder wealth.
• 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.

Employee training and development, mentoring programs, succession planning, and knowledge creation and sharing provide the necessary talent and human capital pool to ensure the future of the organization. The organization has developed an overall safety index that is tracked at least once a month, and consists of several output measures like lost-time accidents, as well as a number of preventive or behavioral measures. The core measurement group of customer outcomes is generic across all kinds of organizations.

The Need For A Balanced Scorecard

The excess capacity must be either used by boosting revenues or eliminated by reducing expenses if operational improvements are to be brought down to the bottom line. Process measures provide with the data needed to predict and control the quality of products and services. When a problem occurs with a product or service, the cause is usually found by looking at the process data. But how those results are achieved—the process measures—is also very important to tract. Other personnel in the organizational hierarchy can depend on the balanced scorecard to show their contribution to the growth of the business, or their suitability for job promotions and salary reviews.

Mission sets the vision of a business while strategy sets out the plan to achieve the mission. The mission includes objectives for the next five years whereas the strategy sets them out for just the year ahead. The mission sets goals for the board of directors while the strategy sets targets for managers.

What Is A Performance Dashboard?

Scorecards also allow companies to recognize and reduce inefficiencies. 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. 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. The scorecard can provide information about the firm as a whole when viewing company objectives.

When the manufacturer discovered that it ranked in the middle, managers made improvements that moved the company to the top of customers’ rankings. Firms committed to retaining employees recognise that employees develop organisation-specific intellectual capital and provide a valuable non-financial asset to the company. Furthermore, firms incur costs when they must find and hire good talent to replace people who leave. Firms measure employee retention as the inverse of employee turnover—the percent of people who leave each year. Standards or goals are set for all key process measures, and those standards are based upon benchmark organizations and customer requirements. The balanced scorecard is anchored on four perspectives, which include financial, business process, customer, and organizational capacity.

Robert Kaplan And David Norton’s Balanced Scorecard

Previously, such a failure of a noncritical component would have been reported in the shift log, where the department manager arriving for work the following morning would have to discover it. Hewlett-Packard uses a metric called breakeven time to measure the effectiveness of its product development cycle.

In the same way that you can’t fly an airplane with just one instrument gauge, you can’t manage a company with just one kind of performance measure. Think of a balanced scorecard as the instrument panel in the cockpit of an airplane. It’s a set of interrelated gauges that links seemingly disparate information about a company’s finances and operations. Together, they give you a more complete view of how your company has been performing, as well as where it’s headed. Process measures promote a preventive approach to achieving consistently high-quality products and services. The balanced scorecard shows an organisation’s performance in meeting its objectives relating to stakeholders. For example, employees depend on an organisation for their employment.

To develop this view, Kaplan and Norton recommend a combination of internal and external research. For example, a company would have the data required to measure a goal of reducing delivery time. However, to evaluate competitive standing or market perception of quality or performance requires a company to survey customers. It’s worth noting that customers often define factors such as “on time delivery” differently. Compiling the data for major customers will allow the organization to make a determination on what the target should be. As one example, disappointing financial measures sometimes occur because companies don’t follow up their operational improvements with another round of actions. Managers should be prepared to either put the excess capacity to work or else get rid of it.

To show their contributions to the strategy and attainment of the targets set forth. Success is measured against the specified goals or targets to determine the rate at which the business is growing and how it compares to its competitors.

A Full & Exhaustive Balanced Scorecard Example

The shift to external measures of performance with customers led ECI to redefine “on time” so it matched customers’ expectations. Some customers defined “on-time” as any shipment that arrived within five days of scheduled delivery; others used a nine-day window. ECI itself had been using a seven-day window, which meant that the company was not satisfying some of its customers and overachieving at others.

IT software will simplify the process of compiling data manually. Only data that is available in the legacy system can be captured in the system. They link measures to compensation which later improves the rewards system. If 6-8 departmental cascades are to be included, then for all the scorecards to be completed, it will take roughly weeks. Several first and second workshops will be conducted during this time. The four perspectives mentioned above are still the fundamental pillar of the approach.

It provides a simple, clean, visual representation of your strategy that is easily referred back to. The important word is “balance.” The balance of the four perspectives is paramount. You should never penalize an area to promote another, but highlight the causal links of the four perspectives. So, according to the authors Kaplan and Norton, the ROI will be effective. The following graphic provides a framework for developing a scorecard for the information systems function. For an explanation see the summary of Martinsons, Davison and Tse. An example based on an electronics company appears below based on an illustration in Kaplan and Norton 1992.