Business leaders rely on performance measurements to know how their businesses are doing and to gain insights in options for improvement. However, concentrating on the wrong criteria of measurement leads to less useful results that do not inform executives on skills and competences needed today.
Businesses can use balanced scorecards as remedies to the dilemma of what should be measured and what should be not. It is a tool for consolidating financial measures and operational measures for the business, covering customer satisfaction, internal processes, organization innovation and improvement activities. Due to the amalgamation of different measures, the balanced scorecard provides both a glimpse and a detailed view of a business from the most important perspectives of its existence.
Consequently, executives and business analysts can rely on the balanced scorecard to know four key things, namely the way customers see the business, the things that the business must focus on to excel, the options for business improvement and value creation, and the review of the business by stakeholders. In summary, the four key aspects are customers, internal business, innovation and learning, and financial perspectives.
With a balanced scorecard, managers have to use specific measurements that are achievable, instead of relying on broad strategic goals. Under the customer perspectives, business managers must look at time, quality, performance, service, and cost. Therefore, first the company has to have the overall goals for each of the four categories and then translate the goals into achievable measurements to be used in evaluating performance (Kaplan and Norton 73).
Under the internal business perspective, focus is given to business processes that have salient influence on customer satisfaction. The processes will encompass factors affecting cycle time, quality, employee skills, and productivity. These should be identified alongside the core competencies of the company that will allow the business to achieve and sustain market leadership (Niven 151). Measurements must be done on activities performed at individual employee levels so that the subordinate employees in the organization know what to do, what decisions to take, and the improvement activities necessary to realize overall company objectives (Kaplan and Norton 74).
An information system is an invaluable tool for successful use in measuring different elements within the four perspectives of the balanced scorecard. Within the innovation and learning perspective, different companies will have different measurable targets. However, the unifying factor is the focus on improvement in product development and the creation of more value for customers. The same criterion of measurable targets and focus on individuals and departments still applies to this perspective.
Lastly, under the financial perspective, the business aims to have an overall bottom line improvement. With the right design and implementation of a financial control system, the business will have a production and efficient quality management system. Improvement of the business performance must reflect the company’s bottom line, otherwise, the business strategy will not be profitable (Niven 153).
In summary, the importance of the balanced scorecard is evident when viewed from the perspective of cross-functional integration. Moreover, it ensures that customer-supplier relationships are consistent (Kaplan and Norton 79). A balanced scorecard helps in maintaining continuous improvement and ensuring team accountability. Moreover, the tool minimizes information overload for management by reducing the number of reports that managers have to use to make informed decisions (Kaplan and Norton 71). It forces managers to consider all perspectives and decision consequences, which limit optimization in the organization.
Kaplan, Robert S and David P Norton. “The Balanced Scorecard – Measures that Drive Performance.” Harvard Business Review (1992): 71-79. Print.
Niven, Paul R. Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. Hoboken, NJ: John Wiley & Sons, Inc., 2006. Print.