Balanced Scorecard


Sachin Singh
MBA-2nd Semester
Skyline Institute of Engineering & Technology
Knowledge Park-2, Greater Noida (U.P.)

As pressure from investors increases, many companies have been reorganizing, reprioritizing and reinvesting to show profits. Others have made lofty promises to "double revenue" or "triple market share." Difficult times have left many management teams wondering how they can cut spending in a way that still enables them to achieve their exalted goals.

One way to keep a company focused on both its long- and short-term objectives is to use a balanced scorecard. A balanced scorecard is a management tool that encourages corporate behavior that is consistent with corporate goals. When fully implemented, every individual and department in the organization is measured against objectives that are linked directly to the corporate vision.

The balanced scorecard helps managers direct diverse corporate goals to achieve the desired outcomes. It provides extreme focus and accountability to a company -- two very powerful attributes in any economy, and especially useful in an economy that's down. Additionally, it is forward-looking, enabling the management team to see into the future with far greater accuracy than traditional financial measures that focus solely on past performance.

The balanced scorecard method was first described in 1992 by Robert S. Kaplan and David P. Norton in the Harvard Business Review and has been used quite successfully by many corporations ever since. This is how it works.

Implementing a balanced scorecard

To begin, senior management defines the strategic vision of the company or operating unit. That strategy is then translated into objectives for departments and even for individuals. These objectives are aligned with the overall corporate strategy and span four diverse perspectives: financial, customer, internal business processes, and learning and growth.

Here's a fictitious example. The management team of a company that manufactures widgets determines that its vision is to be the leading low-cost provider of widgets. To be the leader and be low-cost, the company needs to provide a good customer experience and quality products at a lower cost. The company's strategies might be to continuously decrease the cost of materials, improve customer satisfaction, supplement employee training and increase the number of employee suggestions related to process improvements.

Each of these strategies is then cascaded down the organization using the four perspectives on the balanced scorecard. So management's strategy of decreasing the cost of materials becomes the operations director's objective of decreasing the overall cost of goods sold by 10 percent.

Further down the organizational chart, the purchasing manager's objectives might then be to decrease the cost of Material A by 10 percent (financial), improve quality by finding new sources for Material A (customer), reduce time from order to delivery by one day (internal process) and learn new bargaining strategies by attending a seminar on negotiations (growth and learning).

The power of metrics

Using a balanced scorecard, each company and department can see how its performance contributes to larger corporate goals. Budgeting can be tied to the scorecard, additionally aligning resource allocation to corporate strategy. And finally, since the scorecard includes both financial and other measures, management can see how decisions will affect not only the financial measures, but also the general health of the company.

The power of the scorecard comes from its ability to:

  • Translate a company's strategy into tactics and clearly communicate both strategy and tactics throughout the organization. Further, the tactics are tightly linked to the strategy, which promotes cooperation between departments and increases likelihood of achieving corporate goals.
  • Provide management with a preview of the future, including the ability to identify problems earlier and find remedies faster.
  • Show the overall health of the company on several perspectives -- not just financial.

Since budgeting is more closely linked to strategy, companies that use a balanced scorecard are more likely to achieve their goals with less corporate waste. Management teams can identify potential problems earlier by reviewing the scorecard throughout the year. Furthermore, management teams can use the scorecard to look to the future -- and even to adjust the future by adjusting the scorecard.

Maximizing the benefits from your balanced scorecard

If the old adage, "You get what you measure" holds true, then it follows that measuring the right things is critical. So an organization that uses a balanced scorecard but only measures short-term profitability might achieve that goal but miss opportunities for future growth and expansion. To fully exploit the benefits of the scorecard, the management team needs to define its vision and select its strategy and objectives deliberately.

Also, the management team should clearly define the corporate strategy and carefully link objectives to the strategy -- so that goals and tactics cascade all the way down the organization. By doing so, individual's work toward common objectives and reduce conflict within the organization.

Further linking the scorecard to the budgeting process provides even greater strength. Budgeting is no longer a stand-alone exercise, but rather a strategic activity. Using the scorecard as a guide, companies can allocate funds to objectives that support the corporate strategy (and eliminate funds from objectives that don't).

Whether your company needs to cut back or push forward, a balanced scorecard can help keep each person and department aligned with strategy. It provides balance between all measures, opens a window to the future and fosters teamwork throughout the company.

Sachin Singh
MBA-2nd Semester
Skyline Institute of Engineering & Technology
Knowledge Park-2, Greater Noida (U.P.)

Source : E-mail July 18, 2006




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