Balanced Scorecard is a method of implementing a metrics system which aligns activities with the vision and strategy of the organization in a way that fosters action. It was created by Drs. Robert Kaplan and David Norton as a method of "performance measurement framework that added strategic non-financial performance measures ... to give managers and executives a more 'balanced' view of organizational performance." (Balanced Scorecard Institute)
Balanced Scorecard Principles
According to Kaplan and Norton, organizations should be viewed from four angles:
- Learning and Growth Perspective- relates to employee training and development.
- Business Process Perspective- refers to the internal business processes which allow managers to recognize if the business is running well.
- Customer Perspective- understands the customer and his needs.
- Financial Perspective- implements timely and accurate funding data
It is reported that over 50% of Fortune 1000 firms now use the Balanced Scorecard methodology and an estimated 85% of organizations have adopted a performance measurement initiative of some form. Despite the prevalence of implementing Balanced Scorecard solutions, it still has problems.
While there is nothing inherently wrong with the Balanced Scorecard system, some managers view it as a "quick fix" system to implement that will solve the problems of the business. Businesses will fail when they neglect to realize that Balanced Scorecard is an evolving process which should be carried out over the long term.
In a 2006 article for BPM Institute, Steven Smith outlined five of the major problems with using the Balanced Scorecard system:
- Poorly defined metrics- "A system that has sloppy or inconsistently defined metrics will be vulnerable to criticism by people who want to avoid accountability for results."
- Lack of efficient data collection and reporting- companies should prioritize performance indicators and allocate research money accordingly allowing for the most vital information to be reported.
- Lack of formal review structure- "Scorecards work best when they are reviewed frequently enough to make a difference."
- No Process Improvement Methodology- instead use time-tested process improvement methodologies in conjunction with problem solving methodologies.
- Too much internal focus- consider beginning with external focus and then reflecting on the business' strengths, weaknesses, opportunities and threats. (BPM Institute)
Focusing on one measurement of business success can be detrimental to the company. Companies should employ a comprehensive view of measurements, including "an equal emphasis on outcome measures (the financial measures or lagging indicators), measures that will tell us how well the company is doing now (current indicators) and measures of how it might do in the future (leading indicators)."
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