Balanced scorecard is strategic planning and management system used for business and industry, government, non profit organizations worldwide. it is used for business activities like vision and strategy of organization to improve internal and external communication to monitor organizations performance against goals.
Balanced scorecard is designed by Drs. Robert Kaplan and David Norton for performance measurement in their series of articles in ‘Harvard Business review’. It is designed for executives and managers to get balanced view of organizational performance. In early balanced scorecard was only used for simple performance measurement system. The new system transforms an organization’s strategic plan from attractive document into ‘marching orders’ for organizations on a daily basis.
The balanced scorecard system is totally works on:-
– Company’s Strategic Plan
-The financial status of organization
– The level of expertise in the organization.
-Customer satisfaction level.
In the past, the organizational growth was measured in financial measures only, which were not adequate to measure the performance. However, to look into future with great value, companies must have to invest through customers, suppliers, employees, processes, technology and innovation.
The balanced scorecard has emerged as a effective tool in the process to allow organizations to implement different strategies successfully. Organizations all around the globe has benefited by balanced scorecard like increased financial returns, employee alignment in with overall growth, improved collaboration and focus on strategy.
BALANCED SCORECARD PERSPECTIVES
Balanced scorecard divided into mainly four perspectives.
Learning and Growth Perspective
The Business Process Perspective
The Customer Perspective
The Financial Perspective
VISION AND STRATEGY
LEARNING AND GROWTH
INTERNAL BUSINESS PROCESSES
BALANCED SCORECARD PERSPECTIVES
1. LEARNING AND GROWTH PERSPECTIVE:-
This perspective mainly includes training and growth of employee potential as well as their practical skills. Now days, there is a rapid changes in new
Technologies, so the employee must be in the continuous learning mode, so that they can learn new technologies and apply it.
In this perspective, it is searched that, is there correct level of expertise for the job? Employee turnover ratio analyzed in this perspective, so that job satisfaction among the employees can be measured and corrective action can be taken.
The learning and growth perspective concentrate on learning rather than training, because it includes tutors and mentors in the organization so that there will be easy flow of communication and problems can be solved within organization.
2. THE BUSINESS PROCESS PERSPECTIVE:-
This perspective consists of internal business processes. By using this perspective managers can know that how well their business is running, whether its products meet to customer needs and demands or not. The process alignment is checked that it is right department. The process should carefully design to meet standards of product that meets customer requirements.
3. THE CUSTOMER PERSPECTIVE:-
In recent studies, it has been seen that customer satisfaction and customer focus are important for success of any business. If customer is not satisfied then they will find any other supplier who satisfies their needs. These will surely the failure of the business that doesn’t meet to the customer needs.
Delivery performance, quality performance, customer satisfaction, customer percentage in market and customer retention rate are some of the important aspects of customer perspective.
4. FINANCIAL PERSPECTIVE:-
Financial perspective is very important to measure success of any company.
When financial objectives reached, only then organization can exist successfully in the long run. This perspective expressed in the terms of budget and target achievements.
This perspective focuses on the quarterly or yearly financial results, return on investment, cash flow, etc.
Q. 1. Why change and how balanced scorecard approach different?
The business environment in now days is very competitive in terms of product quality, market share, customer satisfaction and volatile than ever been. In order to survive in the market, organizations need to be far more efficient in the use of their resources, should understand needs of their customers, should organize their internal system and procedure, and have employees who have a far level of interpersonal skills than in the past.
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The financial system was mainly backward looking, focusing upon reporting achievements rather than upon the attainment and pursuit of objectives. The financial system was paying attention to fulfill short term objectives rather to fulfill long term objectives. This system need to in corporate data capture and analysis of non-financial measures, such as customer profiles, customer satisfaction, employee performance, employee satisfaction, product quality, service quality, organizational transformation and development. So, organizations need to think beyond the historical perspective of their traditional financial reporting systems. The financial system has limitations because of considering limited factors. To improve performance evaluation, there was a need to change old financial system with the more balanced and which bridges strengths of the traditional financial measures of past performance with the benefits of
measuring factors that impact upon or drive future performance.
Q.2) Discuss in general terms the information which would be required by a manager to implement this approach to measuring performance.
The balanced scorecard approach is mainly consists of four approaches: financial, customer, internal processes and learning and growth.
The balanced scorecard focuses mainly towards ‘common goal’. The process of developing balanced scorecard gives an organization a clear picture of future and path to reach there.
To implement balanced scorecard, manager need to implement its four perspectives and also needs information of its key elements as follows:-
Financial objectives are used to represent long term goals of organization. In this perspective of balanced scorecard, a manager need to identify financial objectives of an organization and develop measures that indicate how successful the organization achieving those objectives.
In this aspect of balanced scorecard, manager needs information of following measures:
return capital employed
return on net assets
Bad debts of company
The customer perspective is designed to measure how well the company is meeting the demands of customers and market. The major goal of an organization is to supply for the demands of customers. In today’s environment company must provide a quality product, and also timely delivery, and customer service following the sale. There are some more information which also to be considered like,
The very important price of the product
Increasing customer base
Rate of goods returned by customers
The Internal business processes perspective:
This perspective focuses mainly on internal processes to deliver the goals of customers and shareholders. This aspect works within the company.
The information needs is related to:
Quality control rejection rate
Production lead times
– Level of production capacity utilization.
Learning and growth perspective:
This perspective identifies human relations and works to improve the
Skills of employees, infrastructure and innovation. Employees are very important part of the organization and key to innovation. re
Sources must be allocated to educate them on the processes of company and mission of company. This education should be coupled with the motivation. This starts with autonomy to employee so that they can suggest changes in organization. The manager should know information of this aspect:
Information system capabilities
Level of spending per head on employee training
Employee absenteeism rate
Staff turnover rate
Range of products
This information is very important to implement the balanced scorecard approach within the organization. By having this information, manager can implement this approach in the organization to measure performance.
Q.3) Comment on three specific examples of performance measures which could be used in service industry.
1. Balanced scorecard in the Hotel industry:
The balanced scorecard derives its name primarily from the way it provides
a structured focus upon the main organizational performance dimensions: the financial, customer, internal processes and learning and growth.
Balanced scorecard thinks far beyond the traditional financial system, so that
hotel appears the appropriate setting for implementation of the balanced scorecard.
The first step in developing a balanced involves is determining a mission or vision. A vision outlines the purpose of an organization. After vision, we need to determine what strategy will be employed to achieve the mission. After strategy we need to translate this strategy into specific strategic objectives. If the strategic objective of staff is to be regarded among most friendly, appropriate performance measures could include: hours s pent to train staff on politeness and friendly customer engagement, customer survey ratings with respect to perceived friendliness of staff. As strategic objectives and performance measures would need to be developed for each of four balanced scorecard’s key perspectives.
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a] Financial perspective in hotel:
The financial perspective contains strategic objectives that are developed from shareholder’s perspective. Kaplan and Norton suggest these objectives can be developed by answering the question: To succeed financially, how should we appear to our shareholders! Once these objectives have been developed, a set of financial measures generated. The financial measures includes departmental cost, cost of providing a room night, hotel profit, profit of market segment, revenue per available room, share price, revenue growth compared to budget, sales mix, operating profit compared to prior year, ROI, etc.
b] Customer perspective:
This comprises strategic objectives that are developed by customer point of view. To achieve our objectives, how should we appear to our customers! Once these objectives developed, a set of customer related performance measures can be developed. This includes: customer loyalty, proportion of returning customers, customer complaints, customer profitability, new customer acquisition, market segmentation, market share etc.
These factors are considered while measurement of customer related performance.
c] Internal process perspective:
This perspective concerns the development of process related objectives that are consistent with achieving financial and customer objectives. These objectives can be developed by responding to question, to achieve our internal objective which types of processes should we undertake!
A set of performance related measures are: customer billing errors, time taken to check-in, restaurant service errors, workplace safety, customer database availability, internal control practices, etc.
d] Learning and growth perspective:
This perspective concerns the development of organizational capability goals that are consistent with achieving financial and customer objectives.
Possible learning and growth measures includes: training investment per employee, absenteeism, employee motivation index, employee satisfaction, personal growth of staff, internal promotion levels, staff retention, staff empowerment, frequency of training, etc.
The balanced scorecard’s group-wide application has greatly increased opportunities to use the achievements of best practice hotels. Balanced scorecard provides focused approach towards the common objectives of a hotel. By using above all performance measures, we can use balanced scorecard successfully in the hotel.
Refrence online book:-
Accounting essentials for hospitality managers by Mr. Chris Guilding
2) Balanced scorecard in the Insurance sector:-
Now days insurance sector is very competitive industry among the service industries. There are different types of insurance like car insurance, general insurance, medical insurance, etc. this sector is totally customer oriented sector and totally depends upon needs of customers. The performance
Measurement of this sector by balanced scorecard is consists of measurement of its four perspectives. The mission and strategy of an insurance company is determined by board of director of company. After the strategy, the objectives and targets are set by management for the particular period of time. Then the company operates to fulfill those objectives. The measures of the insurance sector according to four perspectives are as follows:
1. Financial perspective:-
The major financial perspective in the insurance sector is the share holder’s perspective because share holders are the important part to provide capital for the business. The measures contain cost of employees, incentives as percentage of salary, annual salary, increase in training cost, the cost per insurance, total profit earned, operating costs, total sales, share price, Etc.
2. Customer perspective:-
Customer perspective focuses totally towards customer satisfaction and customer retention. Customer is leading indicator in the insurance sector, if he satisfied then only company can earn profit. The customer perspective’s measures are number of referrals generated from the customers, number of customer focused products developed, decrease in customer complaints, and percentage of upgraded policies, etc.
3. Internal process perspective:
This perspective works totally on developing internal processes to meet customer needs and demands, so that customer can be satisfied with the service. It improves on negative aspects of the internal system and try to improve it. The possible measures can be percentage of renewed policies to the number of policies sold, number of sales targets achieved, percentage of decrease in employee turn over, types of insurance policies generated.
4. Learning and growth perspective:-
This perspective works on the employee development and corporate cultural attitudes related to both company and self improvement. It works on improving sales efficiency of the sales force. The possible measures comes under this perspective can be number of training sessions, number of brain storming sessions, number of motivational sessions, number of quality feedback from the employees, etc.
3) Balanced scorecard in the banking industry:-
Balanced scorecard received a wide range of use and promotion by global business organizations and some international banks have successfully implemented this approach to measure and increase their performance. In response to different problems faced by the global banking industry like the recession of the year 2008, balanced scorecard research helps to solve those problems effectively and results in the profit. In the rapid innovation and development of financial sectors, the banking industry facing intense competition. The measures of banking
Industries according to the four perspectives of the balanced scorecard are as follows:-
1. Financial perspective:-
Balanced scorecard is not only indicator of appraisal system but also strategic management tool. The balanced scorecard breaks the traditional financial measurement system. It adds future value to the financial measures. The measures of the financial perspective can be improvement of product quality, time to complete orders, productivity, new product development, customer satisfaction into increased sales, reduction in operating cost, economic value, added bank profits, the per capital profit, net interest income, marketing cost, income ratio, office expenses, labor costs, loan, etc.
2. Customer perspective:-
Due to intense competition, customer has become very important aspect of the banking industry. Attracting customers towards bank is very important so that the strategy of the bank should be customer focused. The possible measures of bank performance according to customer perspective can be:
Market share, customer retention rate, rate of new customer, customer satisfaction, customer profitability level, customer complaints, etc.
3. Internal processes perspective:-
In order to retain target customers and to meet the requirements of shareholders about financial returns, managers need to focus on customer satisfaction and improve internal processes and establish measurable indicators. In this perspective balanced scorecard not only paying attention to a simple process to improve but also confirms request of customers and shareholders as a starting point to satisfy both customers and shareholders.
Measures are: product and service innovation, new product and service revenue, the new loan rate and increasing rate, the number of internal regulations, responsibility of accidents, etc.
4. Learning and growth perspective:-
It includes an investment which the organization must be carried out to achieve long term performance in the future, like ability of employees, organization information system, employee satisfaction, staff violation rate, pass rate of status examination, professional development program, staff training sessions, etc.
These are measures of a bank for performance measurement on the basis of the balanced scorecard approach. We can evaluate the performance of the bank by using these measures.
www.google.com ( google books )
Magna Cara College online Library
University of Wales online library
Frank Wood and Alan Sangster – Business Accounting 2
Chris Guilding – Accounting essentials for Hospitality Managers
www.academypublisher.com ( article)
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