The development and benefits of the Balanced Scorecard


Background on Performance Measurement

Over the last two decades, there have been radical changes in the manner in which organizations are managed. For instance, there has been a shift from 'traditional management' to performance management. Performance management is the systematic procedure through which an organization engages its employees in improving the effectiveness of the organization in accomplishing its objectives and goals. The procedure of performance management entails five distinct activities. The first activity is planning and setting targets. After targets have been set, performance is continually monitored to asses whether the targets are being met. Depending on whether targets are being met, employees' capacity to perform is enhanced. Performance is then rated periodically and rewards given for good performance.

There a re a number of systems for measuring performance. These systems include performance prism, customer relationship management, quality management, economic value added, activity-based management and the balanced scorecard.

What the Balanced Scorecard is

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The balanced scorecard was developed in 1992 by Dr. David Norton and Dr. Robert Kaplan (Nair, 2004). It is one of the most popular management systems in use at the moment. The balanced scorecard is a methodology utilized in solving problems that arise as from the fact that there are many different ways of meeting targets. Taking cognizance of the fact that there are many ways of looking at the performance of an organization, the balanced scorecard introduced measures for the different perspectives of performance. The avenues of meeting targets have to be thought up, considered then a choice of the best method made.

The balanced scorecard is one of the systems that can be used to choose the most suitable strategy from a variety of strategies. Contrary to common belief, the balanced scorecard is not a tool used for measurement of parameters but rather a guide towards the achievement of goals set by a strategy. The balanced score card uses a number of perspectives together to gauge performance. This is different from performance measures that were used before the development of the balanced score card, which only concentrated on one perspective of a business such as customer satisfaction.

How the Balanced Scorecard works.

As we mentioned in our definition of the balanced scorecard, this is a system of measuring performance that assesses the performance of organizations from four different angles. We also mentioned that this approach was a break from the examples set by preceding performance measures. The balanced scorecard analyses performance from the customer, internal business, innovation and learning and the financial perspectives.

The aim of the balanced scorecard is to establish as many measures as possible for each of the four perspectives. These measures are used to asses whether the goals of the organization have been achieved from the four different perspectives. The balanced scorecard approach begins with each of the four perspectives. For each of the four perspectives, a question is posed that establishes the goals of that specific perspective. These questions are then followed by measures which are used to appraise the extent to which the goals have been met.

Let us turn our attention to each of the four perspectives. The questions and measures highlighted in each of the four perspectives below are a good example of the balanced scorecard in action.

The customer perspective

In the customer perspective, those in charge of performance need to ask themselves what customers think about the organization, its products and services. The question would be "What do customers think about our products and services?" To answer this question, there are a number of measure that could be used to asses customer perception. These measures include market share, customer satisfaction index, percentage on time deliveries and percentage sales to new customers.

Internal business perspective

In this perspective, managers need to ask themselves what activities they need to stand out at in order to meet set objectives. The measures that are used to asses whether internally set objectives are being met include analysis of unit costs, efficiency levels, value analysis and process times.

Financial perspective

This perspective assesses performance from the viewpoint of shareholders who are the main financiers of most organizations. The basic question in this perspective is whether shareholders are getting valuable returns for their investment. Measures used to asses performance from the finical perspective are widely used and include profitability, return on investment, cash flows and sales growth.

Innovation and learning perspective

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Innovation is crucial for the survival of any business. For any business to stay ahead of competition and therefore stand a high chance of survival, it must invest in innovation. Those in charge of steering the organization should ask themselves how they can continually improve and make future value. Measures of innovation and learning include the rate of introduction of new products and the amount of resources spent marketing for new products.

On average, twenty to twenty five measures are used by most of the companies assessing performance using the balanced scorecard. Fewer measures may be used for smaller organizations. For any single organization, the upper limit is twenty five. The ideal balanced scorecard uses nine metrics for internal processes and five metrics each for the three other perspectives. Internal processes perspective is given positive bias because it is the basic avenue through which the company's strategy is implemented.

Benefits of Balanced Scorecard

Organizations stand to benefit from the use of the balanced scorecard system managing performance. In this section of this report, I will list the reasons why I am of the opinion that SAC should adopt the balanced scorecard.

First, the use of the balanced scorecard integrates the various components of a business and channels all attention and energies towards achieving organizational goals. Secondly, the balanced scorecard boosts communication and encourages transparency in the operations of the organization. This is because feedback is regularly sought from customers, employees, shareholders and management about the issues affecting them. Communication is encouraged by the promise that the concerns of the different groups will be addressed. Thirdly, the balanced scorecard necessitates the prioritization of projects and other organizational activities. This compels the organization to settle on objectives that are strategic.

The fourth benefit is that the balanced scorecard assists managers to transit from a reactive approach to a proactive approach to management. Performance levels and other management issues are exposed early and this gives managers ample opportunity to take action to rectify the situation. This is in contrast to situations where problems would be discovered late calling for contingency actions. These benefits support my contention that SAC should adopt the balanced scorecard.