For a long time, the standard way the business world measured corporate performance was pretty straightforward – looking at financial profits.
But this narrow focus does not capture the whole picture. Contemporary analysts recognize that non-financial indicators are just as important to organizational success.
The Balanced Scorecard approach changes how strategic management is implemented, and the way an organization’s success is evaluated. It does this by identifying key performance indicators from company-wide sources. The focus is on overall long-term success, not short-term financial gains. By isolating separate areas of an organization for independent analysis and examining how they are interconnected, strategic management is approached in a more holistic manner.
The four performance measurements that are evaluated under the Balanced Scorecard method are Financial, Customer, Internal Business Process and Learning and Growth. Using the company’s vision and mission statements as a guide, each area is looked at from the perspective of stakeholder groups. How does the organization appear to shareholders? To customers? To employees? What do the various stakeholder groups expect from the business?
These four perspectives are not isolated. Learning the cause and effect relationship between them, and the order of that relationship, is crucial. Balanced scorecards indicate that each perspective builds on the previous one. When implemented correctly, one can see the benefits of improvement at one level move like a wave through the entire company.
For instance, one of the factors covered under the Learning and Growth perspective is employee training. Better employee training results in higher competency levels and more efficient Internal Business Processes. This leads to customer satisfaction and expanded market share which, in turn, means bigger profits. In this way, benefiting the bottom line involves a balanced approach to all parts of an organization.
It is called “the Balanced Scorecard” because it balances the effects of performance and outcome, financial and non-financial data, strategy and tactics, cost-savings and expenditure, and contrasts how an organization sees itself compared to how others see it. It is a disciplined framework to achieve maximum efficiency and outcomes for companies, through the realization that it is the combination of all parts of an organization that makes success happen.
This material has been drawn in part from SEEC’s upcoming program Financial and Managerial Accounting for Non-Financial Managers: Beyond the Basics (starting Dec. 5, 2018). The program is designed for non-financial managers to use financial analysis to support key strategic business, management and resource allocation decisions.