Balanced scorecard is also a management tool that businesses use to track how well a staff of people executes their required activities. The balanced scorecard tracks the objectives, measures, targets and initiatives of each subset. It also raises innovation and process improvement methods such asÂ six sigmaÂ and lean manufacturing to a corporate goal. It also ensures that voice of the customer is equally important. The balanced scorecard is utilized in the best organizations globally. The figures show that nearly 70 percent of firms from most flourishing organizations worldwide make use of BSC system. The scorecard has improved some businesses, but it is no cure-all, especially for companies who have shaky finances and not enough time to implement a company-wide plan. The advantages of the Balanced Scorecard are well publicised, but, it has its own problems or disadvantages like any business process or application as well.
BSC provides a broad consideration of all business aspects, both financial and human. It is a performance management tool, used to improve the organization value creation flow with a more integrated viewpoint (Fletcher and Smith, 2004). The balanced scorecard also encourages managers to better understand the multiple aspects of performance. It can help an organization to manage its changes, and help managers to develop the entire evaluation mode of influencing corporate value (Barsky and Bermser, 1999; Norreklit, 2003; Davis and Albright, 2004).
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Apart from that, BSC takes into consideration how each part affects another, rather than just focusing solely on the performance of one particular aspect. Once a balanced scorecard system is in place, it allows for ongoing monitoring of goals and objectives. Therefore, it helps in diagnosing difficulties ahead before they arise or maybe evolve into huge disasters. Unlike traditional methods ofÂ tracking the financial health of a business, the balanced scorecard gives you a full picture as whether your company is meeting its objectives. While it may seem that a company is doing well financially, it may be that customer satisfaction is low, inadequate employee training, or that theÂ particular business processes are outdated.
Besides that, the balanced scorecard allows a comprehensive view of all functions that affect business performance, not just financial results. Balanced scorecards include key performance indicators in each of the employee, internal processes, customer, and financial categories. These KPI are specific to the business and chosen to support the corporate strategy. For example, if a company believes financial success depends on having well-trained employees, efficient production processes and satisfied customers, then performance in each area would be reported in the scorecard. Once the KPI have been identified, they must be measured. Financial performance is measured by metrics such as profit margin, while nonfinancial areas need nonfinancial measures. Employee skill can be measured by the amount of training completed, production efficiency by the amount of materials or time required per item, and customer satisfaction by number of complaints. Hence, company performance in all categories can then be easily presented in a balanced scorecard and compared with the desired targets.
Likewise, by using the same key performance indicators and metrics consistently, improvement can be tracked over time. In fact, balanced scorecards are often used in companies with continuous improvement programs. It allows comparison to be made with company targets and industry benchmarks. BSC can provide concurrent consideration of both the leading and lagging factors of performance evaluation, both financial and non-financial, internal and external business, qualitative and quantitative measurement, as units of a performance measurement track to successfully attain corporate strategy, objectives and missions (Barsky and Bermser, 1999; Huefner, 2002; Fletcher and Smith, 2004) that is, to clarify strategy and translate it into action. Moreover, the balanced scorecard can be a leading indicator of a company's success if used properly. In the contrary, financial indicators such as profit and revenue are lagging indicators since they have already occurred. For example, a scorecard that evaluates a sales department will count the number of leads generated, follow-up calls, in-person meetings and closing documents offered. A marked increase in all of these numbers predicts future sales growth for the firm. The financial indicators are well balanced with customer processes and growth dynamics focused indicators. It is not about unduly favoring one type of performance to the detriment of other components. The integration of the dynamic perspective of growth is also one of the strengths of this method.
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BSC can clarify mission and long-term strategy, and to translate vision in terms of all the structures in an organization (Bontis et al., 1999). It gives significant information on organization performance. The aim of each organization is making profit. Yet, it is not an easy task to succeed if the company does not have a strategic goals nowadays. Strategic aims suggests that executives review information from BSC to become prepared for likely complications. Sure, it is preferable to fix issues in which a couple of solutions have been presented. Therefore, BSC is employed while the strategic aims standards can be altered. A company must be sure that any strategic action implemented matches the desired outcomes. Meanwhile, BSC system also offer signals on bad effectiveness as well as blunders in management.
A balanced scorecard is not just a measurement tool, it is a communication tool. This method of resource management allows for clear communication between various levels of management by providing an exacting framework for reporting. Its unique characteristics of being simple and concise format conveys all the essential information about the company's strategy and performance in one page. Therefore, it can be used to educate the employees on company strategy and demonstrate how their work affects overall performance. It can also be used for internal performance and continuous improvement to outside stakeholders such as investors, lenders and the community.
By using a balanced scorecard approach, the immediate future is not the only thing being evaluated. Often, when an accountant observes the financial bottom line (perhaps the company is not doing well), suggestions given are immediate, rather than looking for long-term purposes. Thus, balanced scorecards can allow stakeholders to determine the health of short, medium, and long term objectives at a glance. The Dow Jones Sustainability Indexes defines corporate sustainability as "a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments." The balanced scorecard method can be adapted to this model to include environmental, social and economic factors. For example, environmental performance can be measured and tracked in terms of carbon footprint or compliance to environmental law. Social performance can include support of community groups and charitable organizations. Companies can measure and communicate their sustainability strategies to internal and external stakeholders by using the balanced scorecard.
Finally, BSC system is an easy platform. Users will certainly have to have balanced scorecard software that is generally simple to apply. Therefore, directors and staff members also do not require state-of-the-art technical specialty on know-how to deal with balanced scorecard system. It would not necessarily mean, however, that beginners may implement BSC system immediately.
Due to the facts that the balanced scorecard looks the affect as a whole, the performance and encouragement of the individual can be lost. For many companies that are not very inclined towards individuals and the organizational culture, implementing the balanced scorecard can be viewed as establishing new monitoring tools rather than genuine performance measurement tools. The large number of variables taken into consideration to form a viable scorecard can be cumbersome and result in unnecessary jobs itself. The balanced scorecard is also the tool for the internal focus and it largely ignores developments of the external business environment. It focuses on selective shareholders and customers and fails to consider the activities of competitors and interest groups such as suppliers.
Although the balanced scorecard is being praised for balancing both financial and non-financial metrics, it has been criticized for being solely focused on balanced information. Thus, if the scorecard fails to include financial and non-financial objectives, it loses its value as a strategic tool. This limitation is worsened by the fact that balanced scorecards do not define an acceptable balance between the two. The financial information included on the scorecard is limited. However, to be successfully implemented, the balanced scorecard must be part of a bigger strategy for company growth that includes thorough accounting methods.
The balanced scorecard takes forethought. It is not a quick fix and it takes considerable thought to develop an appropriate scorecard (Beverly Dianne Calhoun, 2004). It is not a tool that just provide quick solution for a problem. Instead, it is recommended that people hold a meeting to plan out what goals that company would like to reach and achieve. Once the company have clearly stated its objectives, management can then begin to break down these objectives in what company need, financially, to bring these objectives to fruition. Besides, many companies use metrics that are not applicable to their own situation. It is notably important that the information being tracked while using the balanced scorecards is applicable to company needs. Otherwise, the metrics will be meaningless.
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Besides, the different elements that go into creating a balanced scorecard make it less attractive. Once the scorecard is created, the nature of business can change over time, requiring the company to change the scorecard. There are software programs that can manage the scorecard upkeep, but choosing the wrong one may set back the company's ability to evaluate their employees. If the company cannot put in the time to create and change the scorecard, it might not be a good solution for the business.
Furthermore, balanced scorecard does not include direct financial analysis of economic value orÂ risk management. Goal selection under balanced scorecard does not automatically include opportunity cost calculations.Â As the balanced scorecard can add a new type of reporting without necessarily improving quality or financial numbers, it can seem to be an additional set of non-value-added reporting or, even worse, a distraction from achieving actual goals.Â Overly abstract balanced scorecard goals are easy to reach but hard to quantify.Â When a company failed to meet its balanced scorecard goals, the goals need to be re-interpreted to the current state of affairs to meet success or avoid failure.
Moreover, implementing a balanced scorecard system can be costly in terms of training time and additional expenses for any consultants that are required during the process. To figure out the initial cost for a balanced scorecard plan, the company must take the number of employees training in the new system and multiple their wages by the amount of hours they will be trained. In fact, the cost of a facilitator of the plan, cost for the software, and labour needed to maintain it, plus software license expenses, and testing and installation of the software are additional costs. In conjunction, there will be maintenance costs for both the software and the training.
Due to the high initial costs of the program mixed with the time spent on developing the employees, the balanced scorecard program may make a company appear to be not maximizing its own wealth. Shareholders who want the company to make money as much as possible may feel that the balanced scorecard plan wasted the money of company. While this is debatable throught the claims that developed employees will create more results, it will not be entirely evident to shareholders in the short term.
Other than that, the balanced scorecard is essentially a large chart that gives people a top-down overview of the entire company. It does not, however, provide the ideas to improve the performance of the company. The balanced scorecard acts as a fact sheet, but it requires that the management of the company analyze the facts and come up with the evaluation and suitable strategy. It will not be the solution for all of the company's problems and must be combined with a larger overall strategy in order to achieve its potential benefits for the company.
Meanwhile, data mining is also a negative aspect of the balanced scorecard because of the need to continually obtain relatively obscure information from managers. Employees may feel they are preoccupied and do not have time to fill out forms or data for every action they take. As a consequence, this may harm the productivity of company.
Given that many of the advantages are of an intangible nature, it would be difï¬cult to quantify them in a robust manner and to obtain satisfactory scientiï¬c evidence of the true value of the balanced scorecard (Stella Mooraj, 1999). Since there are various advantages and disadvantages of balanced scorecards, it is important for company to recognize whether the BSC is truly beneficial to be fully integrated into accounting system. If the company relies upon the balanced scorecard as its sole metrics for measuring performance, it will likely be disappointed. If, instead, the balanced scorecard is used as a shorthand glance at the health of the company, the tool can be quite effective.