Balanced Scorecard: Improve Your Organization's Performance and Profitability

What is a Balanced Scorecard?

A balanced scorecard, also called BSC, is a strategic management tool that helps organizations measure and manage performance through a holistic approach. Most businesses tend to focus on financial results as the sole indicator of operational success, but a balanced scorecard provides a balanced view by tracking performance across areas such as:

• Financial outcomes

• Customer satisfaction

• Internal business processes

• Learning and growth

History

In the early 1990s, Harvard University’s Dr. Robert Kaplan and Dr. David Norton created the Balanced Scorecard to measure key performance indicators with a more balanced set of metrics. Traditionally, businesses focus mainly on short-term financial results. The balanced scorecard added non-financial indicators, giving leaders a broader view of long-term success. Over time, the system has evolved into a complete management system that helps businesses align their financial goals with wider strategic objectives.

Benefits

Balanced scorecards are primarily beneficial for tracking businesses’ progress toward their goals and objectives. They outline the criteria for measuring and weighting metrics for companies to ensure that key areas receive proper attention.

In addition, the balanced scorecard approach can help businesses to:

• Communicate their strategy to all employees

• Align day-to-day operations with overall company goals

• Encourage employee involvement in the strategic planning process

• Set and track progress against specific goals and objectives

• Measure performance holistically to support growth in all operations

While BSC may require some initial effort to set up, the long-term payoff can be significant. This approach helps leaders identify strengths and weaknesses, set clear priorities, and ensure that all parts of the organization are working toward common goals.

Use Case Example

Most businesses choose to use balanced scorecards for internal business processes. This can include general financial strategies, performance checks, quality control, knowledge management, customer relationship management, and internal communication.

For example, banks often survey customers to understand how well they deliver customer service. Questions cover wait times,staff interactions, and overall satisfaction with the service. Bank leaders can use this feedback to coach teams, fix issues, and improve products, processes, or services.

This feedback loop helps the bank grow in line with its goals, focusing on areas outside of making revenue for the company. It calls to attention the importance of holistic development to ensure business success in all areas.

The 4 Perspectives of a Balanced Scorecard

To better understand the role of a balanced scorecard in business operations, here’s an in-depth explanation of the four key areas and perspectives:

Customer perspective

This viewpoint looks at how well a company delivers value to its customers and how satisfied they are with its goods or services. It’s a key area of performance because how a firm treats its customers has an impact on its reputation and profitability.

A balanced scorecard usually assesses how customers perceive a company against its competitors. It encourages organizations to step out of their comfort zones and evaluate themselves from the customer’s viewpoint.

Internal business perspective

Internal procedures impact how successfully a business performs. A well-balanced scorecard provides a framework for assessing internal goals that help the company function more effectively.

One common question it raises is, “What are we great at?” The answer to that question may help firms devise marketing plans and develop new and improved services to satisfy customer and market demands.

Organizational capacity perspective

In terms of positive outcomes, organizational capacity is critical in achieving goals and objectives. Employees in the organization’s departments must demonstrate outstanding leadership, corporate culture, application of knowledge, and skill sets within their areas.

Proper infrastructure is necessary for the company to operate following management’s expectations. The organization should, for example, utilize the most up-to-date technology to automate processes and guarantee a consistent flow of operations.

Financial perspective

Every business aims to earn a return on its investments and manage financial risks responsibly. The financial perspective measures outcomes related to profitability, revenue growth, cost management, and overall financial health.

This approach ensures that financial performance doesn't stand alone but are connected with other perspectives like customer satisfaction and internal process improvements, fostering balanced, sustainable  growth.

The 9 Steps in Developing a Balanced Scorecard

The use of a balanced scorecard may vary depending on business and industry needs, but these nine essential steps will help you get started:

Step 1: Assessment

An organization must agree on where it stands before mapping out its future. Assessment involves analyzing current internal and external environments to get a good picture of current business health. For this step, businesses can use digital tools like checklists to document their business health check and take note of challenges, successes, and other stakeholder analyses to make a thorough assessment.

Step 2: Strategy

This step defines how they’ll create value for customers and achieve their mission. Map out a strategy profile to outline main goals and highlight the primary goals to be met.

Strategic themes are the focus areas in which an organization must excel to fulfill its purpose and goal, depending on the enablers it can leverage, the challenges it must overcome, and the client value proposition it must deliver.

Step 3: Strategic objectives

This stage lays the groundwork for the plan. are qualitative, long-term goals that describe what success looks like. Objectives are created on the strategic level and then combined at the organization level to create organizational objectives.

Step 4: Strategy mapping

In strategy mapping, cause-and-effect connections are established between the Strategic Objectives, creating a “value chain” that depicts how pleased consumers and stakeholders are with the organization’s goods or services. Each topic has its Strategy Map to ensure that the entire approach for achieving each primary aim is recorded and combined into a comprehensive document.

Step 5: Performance measures

Key performance indicators (KPIs) are critical for monitoring the effectiveness of an organization’s plan. Operational indicators focus on resource utilization, procedures, and output. For each objective on the strategy map, progress measures are created.

This phase is all about developing the key leading and lagging indicators required to manage strategy execution.

Step 6: Strategic initiatives

Initiatives are the key projects that bring your strategy to life. They assist in closing performance gaps. Staying focused on the company’s most important strategic initiatives rather than a long list of options and projects is critical.

Step 7: Performance analysis

This step transforms information into knowledge and understanding based on evidence. Analyzing data can help people make better judgments, leading to enhanced strategic results. This stage is about assessing and evaluating performance to identify what works well and what doesn’t, as well as implementing changes to become a high-performance company.

Step 8: Alignment

The Alignment step aligns strategy from something only executives care about to something everyone supports, cascading high-level corporate strategy down through the company’s first business and support units before reaching individual employees. This stage includes the generation of scorecards for business and support units and employee and team scores.

Step 9: Evaluation

Evaluation is a time to assess, review, and update. In this stage, leaders and managers evaluate the effectiveness of the organization’s goals and how well the strategic management system improves communication, alignment, and performance. Integrating continuous improvement into day-to-day operations ensures that the strategic planning and management system is dynamic.