Balanced Scorecard is for Performance Management
Balanced Score Card Approach Helps Align Operations with Vision
Apr 29, 2009
Balanced Scorecard is an approach where emphasis is on managing operating performance rather than reviewing the financial results of the performance. Instead of just setting a financial budget, businesses seek to identify action initiatives that lead to the achievement of the business vision. Balance Scorecard implementation forces attention to qualitative aspects of performance in addition to the quantitative dimension.
Balanced Scorecard is for Management, not just Review
While the financial Performance Ratio Analysis provides a picture of what happened during the review period, Balanced Scorecard actively tries to manage performance. It tries to do this by deriving specific action initiatives from the company's mission and vision statement. It is a multi-step process starting with converting the mission and vision statement into "perspectives" for relevant major areas, then setting major "objectives" under each perspective and finally deriving specific action "initiatives" for each objective.
Typical perspective areas are:
- Customer satisfaction
- Business process performance
- Learning and skills development
- Financial outcomes
Balanced Scorecard recognizes that financial outcomes are determined by business processes, value that customers receive and employee competence. Hence the focus on these broad perspectives. Financial outcomes continue to retain their importance; but attention is on the drivers of the financial performance.
Merely identifying perspective areas does not lead to results. Specific objectives have to be set under each perspective. These objectives indicate the specific goals to be aimed for under each perspective. The goals clarify what desirable performance means under each of the areas.
Next is the task of identifying how to measure performance under each goal. The business must be able to gauge whether it is achieving or failing to achieve desired performance. It must also be able to identify the underperforming areas. It is right metrics that help proper performance measurement, and considerable attention is devoted to selecting the metrics.
Examples of performance measures:
- Customer: Market share, Customer complaints
- Business Processes: Equipment utilization, Accident ratios, Environment compliance, new Products
- Learning and Skills: Employee turnover, Illness rate, Promotions
- Financial: Financial Results, Return on Equity, Return on Capital Employed
Actionable initiatives are developed to achieve each goal. It is at this stage that the company's vision gets translated into things concrete. The action initiatives provide managers specific programs to implement.
Developments in Balanced Scorecard Methodology
There have been constant attempts to improve methodology. Linkage diagrams that show the interrelationships among the goals under each perspective, and using these diagrams for choosing measures to gauge the achievement of goals, for example, have made the measures more concrete and acceptable. With modern tools, it is possible to drill down to the basic factors that lead to underperformance in specific areas.
Balanced Scorecard is a methodology that seeks to translate a company's mission and vision statement into day-to-day action programs. In a multi-step process, the vision statement is converted into broad perspectives, a few major goals under each perspective, metrics to measure the achievement of goals and specific action initiatives to achieve the goals.
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