What Is a Balanced Scorecard (BSC): Examples and Uses
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What Is a Balanced Scorecard (BSC)?
A balanced scorecard (BSC) is a strategic management performance metric that a company can use to improve internal business operations and external results. It’s a way for organizations to focus on processes, that, when combined, can help them meet their financial goals.
The balanced scorecard takes into account four perspectives that are essential to value creation for an organization: the financial perspective as well as a focus on customers, internal business processes, and learning and growth. Within each of these areas, the BSC measures and monitors the key performance data that are critical to an organization’s success.
Key Takeaways
- A balanced scorecard is a performance metric used to identify, improve, and control a business’s various functions and resulting outcomes.
- The concept of BSCs was first introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information.
- BSCs were originally developed for for-profit companies but were later adapted for use by nonprofits and government agencies.
- The balanced scorecard involves measuring four main aspects of a business: Learning and growth, business processes, customers, and finance.
- BSCs allow companies to pool information in a single report, to provide information on service and quality in addition to financial performance, and to help improve efficiencies.
Investopedia / Michela Buttignol
Understanding Balanced Scorecards (BSCs)
The performance metric known as a balanced scorecard is meant to measure the intellectual capital of a company, such as training, skills, knowledge, and any other proprietary information that gives it a competitive advantage in the market. The term itself refers to examining strategic measures as well as financial ones in order to get a more balanced understanding of performance.
The balanced scorecard concept has evolved into a more holistic system of overseeing strategy—the planning, the projects and programs people work on, and the measures that track success—that allows an organization to link that strategy to its mission and vision.
Accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton introduced the balanced scorecard in a 1992 Harvard Business Review article entitled “The Balanced Scorecard—Measures That Drive Performance.” Both Kaplan and Norton worked on a year-long study involving 12 top-performing companies that took previous performance measures and adapted them to include nonfinancial information.
Who Uses Balanced Scorecards?
BSCs were originally meant for for-profit companies but were later adapted for nonprofit organizations and government agencies. Currently, they are used in business and industry, government, and nonprofits in the United States, Europe, and Asia, and they are gaining wider acceptance in the Middle East and Africa.
What Are the Balanced Scorecard Perspectives?
The balanced scorecard model reinforces good behavior in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve:
- Finance
- Customers
- Internal business processes
- Learning and growth
The BSC is used to gather important information, such as objectives, measurements, initiatives, and goals, that result from these four primary functions of a business. Companies can easily identify factors that hinder business performance and outline strategic changes tracked by future scorecards.
The scorecard can provide information about the firm as a whole when viewing company objectives. An organization may use the balanced scorecard model to implement strategy mapping to see where value is added within an organization. A company may also use a BSC to develop strategic initiatives and strategic objectives. This can be done by assigning tasks and projects to different areas of the company in order to boost financial and operational efficiencies, thus improving the company’s bottom line.
Characteristics of the Balanced Scorecard Model (BSC)
In a balanced scorecard model, information is collected from four aspects of a business and analyzed:
- Financial data, such as sales, expenditures, and income, are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances, or income targets.
- Customer perspectives are collected to gauge customer satisfaction with the quality, price, and availability of products or services. Customers provide feedback about their satisfaction with current products.
- Internal business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages, or waste.
- Learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees use that information to convert it to a competitive advantage within the industry.
These four perspectives encompass the vision and strategy of an organization and require active management to analyze the data collected.
The balanced scorecard is often referred to as a management tool rather than a measurement tool because of its application by a company’s key personnel.
Benefits of a Balanced Scorecard (BSC)
There are many benefits to using a balanced scorecard. For instance, the BSC allows businesses to pool information and data into a single report rather than having to deal with multiple tools. This allows management to save time, money, and resources when they need to execute reviews to improve procedures and operations.
Scorecards provide management with valuable insight into their firm’s service and quality in addition to its financial track record. By measuring all of these metrics, executives are able to train employees and other stakeholders and provide them with guidance and support. This allows them to communicate their goals and priorities in order to meet their future goals.
Another key benefit of BSCs is the help it provides companies to reduce their reliance on inefficiencies in their processes. This is referred to as suboptimization. This often results in reduced productivity or output, which can lead to higher costs, lower revenue, and a breakdown in company brand names and their reputations.
Examples of a Balanced Scorecard (BSC)
Corporations can use their own, internal versions of BSCs. For example, banks often contact customers and conduct surveys to gauge how well they do in their customer service. These surveys include rating recent banking visits with questions about wait times, interactions with bank staff, and overall satisfaction. They may also ask customers to make suggestions for improvement. Bank managers can use this information to help retrain staff if there are problems with service or to identify any issues customers have with products, procedures, and services.
In other cases, companies may use external firms to develop reports for them. For instance, the J.D. Power survey is one of the most common examples of a balanced scorecard. This firm provides data, insights, and advisory services to help companies identify problems in their operations and make improvements for the future. J.D. Power does this through surveys in various industries, including the financial services and automotive industries. Results are compiled and reported back to the hiring firm.
What Is a Balanced Scorecard and How Does It Work?
A balanced scorecard is a strategic management performance metric that helps companies identify and improve their internal operations to help their external outcomes. It measures past performance data and provides organizations with feedback on how to make better decisions in the future.
What Are the Four Perspectives of the Balanced Scorecard?
The four perspectives of a balanced scorecard are learning and growth, business processes, customer perspectives, and financial data. These four areas, which are also called legs, make up a company’s vision and strategy. As such, they require a firm’s key personnel, whether that’s the executive and/or its management team(s), to analyze the data collected in the scorecard.
What Are the 7 Main Elements of the Balanced Scorecard?
Traditionally, a balanced scorecard is made up of four perspectives. That number can be expanded to take into account three more to drive an organization’s improvement and success from a strategic management perspective. Here are the seven main elements:
- Financial performance
- Customer satisfaction
- Internal processes
- Learning and growth
- Strategy and vision alignment, ensuring that scorecard activities support the organization’s goals
- Governance and accountability, which create trust and transparency
- Communication and feedback mechanisms, including regular performance reviews, to keep improvements on track
How Do You Use a Balanced Scorecard?
Balanced scorecards allow companies to measure their intellectual capital along with their financial data to break down successes and failures in their internal processes. By compiling data from past performance in a single report, management can identify inefficiencies, devise plans for improvement, and communicate goals and priorities to their employees and other stakeholders.
What Are the Balanced Scorecard Benefits?
There are many benefits to using a scorecard. The most important advantages include the ability to bring information into a single report, which can save time, money, and resources. It also allows companies to track their performance in service and quality in addition to tracking their financial data. Scorecards also allow companies to recognize and reduce inefficiencies.
What Is a Balanced Scorecard Example?
Corporations may use internal methods to develop scorecards. For instance, they may conduct customer service surveys to identify the successes and failures of their products and services or they may hire external firms to do the work for them. J.D. Power is an example of one such firm that is hired by companies to conduct research on their behalf.
The Bottom Line
Companies have a number of options available to help identify and resolve issues with their internal processes so they can improve their financial success. Balanced scorecards allow companies to collect and study data from four key areas, including learning and growth, business processes, customers, and finance. By pooling information in just one report, companies can save time, money, and resources to better train staff, communicate with stakeholders, and improve their financial position in the market.
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