When viewing management information it can often be the case that managers can end up concentrating only on one aspect of a company performance but it is important to take a holistic view.
One of the most popular methods of doing this is to adopt the Balanced Scorecard approach as it brings together this holistic view into a single understandable report allowing a quick evaluation of performance to be made.
The aim of the balanced scorecard is to concentrate the minds of owners and managers onto the key performance indicators whilst making sure that no important area is overlooked.
First designed by Robert Kaplan and David Norton, the scorecard aligns reporting with company strategy and attempts to focus sometimes woolly mission statements into actionable performance indicators.
This real world view has arguably been one of the biggest factors in the popularity of the balanced scorecard and a key driver in its widespread adoption in industry.
The aim of a good corporate balanced scorecard is to move information presentation from the simply theoretical and fairly static report of the past into a forward looking and practical document that managers and executives can use on a daily basis to provide direction to the company.
Simplicity is also a key aspect of the system with the activity of the company clarified into four key perspectives; Financial, Internal Business Process, Learning & Growth and Customer with Kaplan and Norton arguing that concentration on the presentation of one or two aspects to the exclusion of the others can actually harm a business.
The four perspectives
Splitting down the balanced scorecard template into its component parts gives us a sense of what we need to consider when producing a template.
The Financial Perspective
The traditional approach to reporting in companies used to focus on the financial aspects of the business and this is clearly an important area. Consequently this is included in the balanced scorecard but the key here has to be on presenting just a few key metrics rather than providing reams of figures that add little in the way of understanding.
Managers should seek to identify the key financial indicators that not only show how the business is doing but also that they can use to affect the performance of the company in the future.
The Process Perspective
Understanding the efficiency of the company using the scorecard allows visibility of how effectively the firm is utilising its resources.
This perspective concentrates on internal business processes to show how the company is performing and looks to present information around what the company does and how well it does it.
The Customer perspective
Although it may theoretically be possible to run a business using the last two perspectives, in the real world the simple fact is that if a business isn’t satisfying customer demands then it will fail as buyers move to find businesses that do provide what they want.
The customer perspective in the balanced scorecard looks at key performance indicators that show how well the business satisfies things that are important to their particular consumers.
Clearly this will require a deep understanding of what the customer actually wants rather than what the business thinks the customer wants, so some additional research is likely to be needed.
The Learning and Growth Perspective
The previous three perspectives in the balanced scorecard look at a mixture of where the company is and what its performance has been like in the past.
The Learning and Growth perspective pushes the business to consider how it will develop in the future.
In today’s fast moving world it is important that firms invest in developing their employees and customer offering and this aspect of the scorecard looks at how effective that investment has been and where it should be concentrated in the future.
For service based companies it has long been understood that investment in their people is rarely wasted but the balanced scorecard approach also helps more traditional manufacturing type companies develop world class capability in its staff.
The Balanced Scorecard in practice
Although it is tempting to look for a standard balanced scorecard template it is important to understand that its value comes from codifying the work of each company on an individual basis.
At a practical level managers need to decide on a series of metrics for each of the perspectives and then subject these to some key tests.
For each metric managers need to ask; is this measure aligned to our strategy? What action can we take as a result of this measure? Is there another measure that will better tell us what is happening?
The number of metrics also needs to be slimmed down to feature only to the most important; as the old saying goes ‘concentrating on everything means that you concentrate on nothing’.
It is also worth noting that the scorecard isn’t a fixed and permanent fixture. The template should be adjusted to match the strategic and tactical focus of the business at the time and managers should be open to assessing its effectiveness on a periodic basis and adding or removing metrics as their relevance changes.
READ: Key Terms Of The Balanced Scorecard