A balanced scorecard is a way for a business to measure its performance. It is a methodological tool meant to help business manage their future growth, objectives and plans (4). The balanced scorecard provides measures which help determine whether a set of goals have been met. The tool was developed by Dr. Robert Kaplan and David Norton in 1992 as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executive a more “balanced” view of organizational performance (2). The balanced scorecard evaluates activities in four categories: financial, customer, internal business processes, and learning and growth. The balanced scorecard tracks the objectives, measures, targets and initiative of each subset. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured and enables executives to execute their strategies (2). Both profit and non-profit organizations use this tool to align business activities to the vision and strategy of the organization, improve internal and external communications and monitor organization performance against strategic goals (1). The scorecard has been advantageous to many businesses, but is no “cure all” (4). This tool has limitations including costs and time needed to implement. This paper will describe the advantages and disadvantages of using a balanced scorecard as a tool for strategic management.
The balanced scorecard has evolved to a full strategic planning and management system with many advantages. Some of the advantages are realized by the planning and management of the four scorecard components which are the learning and growth perspective, business process perspective, customer perspective and financial perspective(4). Understanding each of these components is necessary to see the advantages.
The learning and growth perspective includes employee training and corporate cultural attitudes related to both individual and corporate self improvement. In the current climate of rapid technological change, it is becoming necessary for workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help most (2). Learning and growth constitute the essential foundation for success of any “knowledge-worker” organization and focus on this perspective fosters communication that allows workers to readily get help on a problem when needed (2). The learning and growth perspective includes employee training and corporate cultural attitudes related to both individual and corporate self improvement. This perspective covers the intangible drivers of future success such as human capital, organizational capital and information capital including skills, training, organizational culture, leadership systems and databases (3). This perspective also addresses whether a company can continue to progress and be seen by customers as adding value through product or service innovation (5).
The internal business perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements or “the mission” of the mission statement (2). This perspective covers internal operational goals and outlines the key processes necessary to deliver the customer objectives such as employee satisfaction, product quality control and cost reduction (5-book).
The customer perspective refers to how well the organization is doing regarding criteria such as speed to market, service, quality and price (5). This perspective is on customer satisfaction with the knowledge that if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is a leading indicator of future decline, even if the current financial picture looks good (3). This perspective has measurable metrics which covers objectives such as customer satisfaction, market share goals as well as product and service attributes.
The financial performance perspective covers the financial objectives of the organization and allows managers to track financial success and shareholder value. This perspective addresses the concerns of stockholders and other stakeholders about profitability and organizational growth (5). This perspective also includes additional financial-related data such as risk assessment and cost-benefit data.
By looking at the four aspects of a company’s performance, one can get a balanced view of company performance. The balanced scorecard provides a powerful framework for building and communicating strategy. The business model is visualized in a strategy map which forces managers to think about cause and effect relationships (3). This means that performance outcomes as well as key enablers or drivers of future performance are identified to create a complete picture of the strategy (3). The mapped strategy improves communication and execution and allows companies to communicate strategy internally and externally.
The scorecard provides better management information by forcing organizations to design key performance indicators for their various strategic objectives which ensures that companies are measuring what actually matters. The scorecard can provide improved strategic alignment with objectives. In order to execute a plan well, organizations need to ensure that all business and support units are working towards the same goals. Cascading the balanced scorecard into those units will help to achieve that and link strategy to operations (4). Also, the scorecard can provide for better organizational alignment processes such as budgeting, risk management and analytics with the strategic priorities (4). By using a balanced scorecard strategy, a company can be sure that any strategic action implemented matches the desired outcomes.
While there are quite a few advantages to using a balanced scorecard, there are also disadvantages. Balanced scorecards take a great deal of forethought. Also, the four areas covered with a scorecard do not provide all business information needs. The financial information is limited and because of this, it is recommended that the balanced scorecard be part of a bigger strategy for company growth that includes meticulous accounting methods (4). Finally, many companies use metrics which are not applicable to their own situation. It is important when using balanced scorecards to make the information being tracked applicable to the business needs.
There are additional concerns when using a balanced scorecard. Some of the concerns include time needed for upkeep, high initial costs, a company verses profit development and metrics verses strategy approaches. These issues are mostly cost verses benefit arguments which will merit the following explanations.
There is a great deal of time needed to maintain a balanced scorecard once in place partly due to the many different elements that go into creating a scorecard. Once the scorecard is created, the business environment can change which will mandate changes to the scorecard. If the company cannot put in the time to create and change the scorecard, it might not be a good solution for the business (6).
Balanced scorecards have high initial costs. Implementing a scorecard system can cost a lot of money in training time and consultant fees which are needed during the setup process. The costs include training costs, software, facilitation, license fees, testing fees and labor needed to maintain the system (6). In addition, there will be maintenance costs for both the software and training . These fees can add up to a large sum.
Company verses profit development can be an issue in the eyes of the stockholder. Because of the high initial costs of the program in addition to with the time spent on developing employees, the balanced scorecard program may appear as if the company is not maximizing wealth. Shareholders who want maximum profits may find the expenses of the scorecard wasteful, even if its use would be beneficial in the long run (6).
Finally, there is the metrics verses strategy argument which does not support the balanced scorecard. The balanced scorecard provides a top down overview of the entire company. It does not, however, provide ideas to improve company performance (6). The balance scorecard acts as a fact sheet, but requires that you analyze the facts and come up with an evaluation and strategy. The scorecard will not solve all the company’s problems and it must be combined with a larger overall strategy to achieve potential benefits (6).
Considering that there are various advantages and disadvantages of balanced scorecards, it is important to recognize that this tool can be very beneficial when integrated into a system of accounting. If a company relies on the balanced scorecard entirely for performance metrics, they might not have visibility to all aspects of the business environment. However, if the balanced scorecard is used as one component of an overall strategy for measuring the health of a business, the tool can provide beneficial results. The balanced scorecard can assist management with a better understanding of important aspects of the organization which could foster improved product, service and financial plans.
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