What is Balanced Scorecard?
Balanced Scorecard is a Strategic Management Tool that links a company's current actions to its long-term goals. Balanced Scorecard is one of the most recognised and popular methodologies for Business Management, but what is it, and is the tool still relevant?
Balanced Scorecard is a method for performance measurement and management: a holistic and balanced set of actions that reflects the various drivers that contribute to performance and the achievement of the company's strategic goals, supported by operational management.
The Balanced Scorecard is driven by the assumption that there is a cause-and-effect relationship between learning, internal efficiency, business processes, customers, and financial results. It helps you transform your vision into a set of goals and performance metrics that can be quantified and assessed.
Balanced Scorecard as a methodology is based on different perspectives and thus covers what you need to keep your strategic eye on:
- Financial perspective (measured by financial position and profitability). Answers the question: How do we make money and are stakeholders satisfied with our return?
- Customer perspective (measured by customer satisfaction and market share). Answers the question: How do our customers see us?
- Learning and development perspective (measured by innovation intensity and the share of new products in sales). Answers the question: How can we improve in value creation?
- Internal processes and internal efficiency (measured by lead times and quality level). Answers the question: What should we be best at?
- Employee perspective (measured by employee satisfaction and development). Answers the question: How do our employees see us?
Who invented Balanced Scorecard?
Robert Kaplan and David Norton launched the idea of Balanced Scorecard (BSC) in the Harvard Business Review in 1992. Since then, additional generations of the model have been developed. Balanced Scorecard serves as a counterbalance to Financial and Economic Management.
By focusing only on financial measures to see how the company has performed (a historical perspective), trends and important perspectives were missed, which Kaplan and Norton believed could improve organisational management. Learning and renewal as a perspective take on a clear forward-looking role, for example.
The strategy consulting firm 2GC conducts an annual survey on companies' satisfaction with their work on Balanced Scorecard. 93 percent of those surveyed are satisfied with the method. Of those who work with Strategic Management in the surveyed organisations, 88 percent work with Balanced Scorecard.
Business Management with Balanced Scorecard as a Template
To construct and implement a Balanced Scorecard, management should formulate and communicate a vision, strategy, and goals both in the short and long term. To succeed with balanced management, your goals must also be SMART (Specific, Measurable, Acceptable, Realistic, and Time-bound).
Next, identify the KPIs (key performance indicators) that most affect the results (your goals), set targets for these, and ensure that employees understand them. Establish appropriate control, budgeting, communication, and reward systems. This will enable you to analyse data, follow up, and take action.
If you have developed goals and metrics in a good way, have results-driven employees, and have good system support for planning and follow-up, you have a good chance of succeeding with your Balanced Management.
Companies use Balanced Scorecards in their Business Management to:
- Clarify and increase understanding of the company's vision and business strategy.
- Link operational goals and annual budgets to strategic goals and long-term goals.
- Identify the most important components of the business strategy (through KPIs and goals).
- Incorporate strategic goals in resource allocation processes.
- Strategically plan possible organisational changes.
- Compare the performance of different business units.
Is the Balanced Scorecard Still Relevant?
It is difficult to know exactly how many companies consider themselves to use "Balanced Management", but estimates show that about half of the companies in the US, Europe, and Asia do.
However, the results can be interpreted differently as the model for Balanced Management has come in several generations and is often adapted to the individual business. For example, you can add new perspectives, such as sustainability, which is (and should be) increasingly important in many people's management.
Regardless of how the development is interpreted, the Balanced Scorecard is a widely used methodology. You should see it as a good foundation for your Strategic Management and as a flexible tool in your Strategic Planning. Many others do, and therefore the decline is potentially misleading.
In the discussion about the future of the Balanced Scorecard, it should be emphasised that there is an evolution of the model as such. In addition, Key Performance Indicators are easier to update today because there are better digital solutions (and integrations) than those available in the 1990s. It forms the basis of more agile and contemporary Balanced Management. The help you can get is also something that is continuously improving.
The employee perspective is not as established internationally (relative to the original idea) and is gaining ground. The workforce is valued more today because the complexity of many jobs is increasing, and skilled labor then becomes a scarce commodity.
There has also been the development of new management models, where companies choose what suits them best, with balanced management as a partial or theoretical basis. Professionally, it is possible to see, for example, that the controller's role has changed from being strictly financial to becoming more "business-oriented".
Do you have the mandate to measure what is relevant, and important, and what you can influence? Hypergene has a tool that can help you who work with Balanced Management, as well as with many other management models.
10-minute video demo of Hypergenes solution: