Balanced Scorecard is a tool for growth
By balancing focus across the four key areas, it ensures that one area doesn’t take precedence to the detriment of other areas. Over the long term a business can achieve better growth by balancing the four factors than would be possible if it placed emphasis on some factors at the expense of others. To illustrate why, consider these two companies.
|Goals||Company A||Company B|
|Financial||Increase profit by 5%||Increase revenue by 15%|
Increase profit by 5%
|Customer||Increase customer satisfaction by 10%|
|Internal Process||Reduce production costs by 15%||Reduce production costs by 5%|
Improve customer service first response time by 15 minutes
Implement a new service ticketing system by March
|Learning & Growth||Train all front line staff on customer service by June|
Train service staff on the new ticketing system by March
Both companies A and B plan to increase profits. Company A is planning to achieve this by slashing production costs dramatically. Company B is planning a more holistic approach that includes a reduction in production costs, improving customer service, implementing new systems and training staff.
Even if company A can achieve its goal to reduce production costs by 15%, over the long term it will face a number of problems:
- Because they have not focussed on customer satisfaction, company A may lose customers to a competitor who does focus on customers.
- Because company A staff receive less training they are more likely to seek better jobs elsewhere.
- Because company A staff have to work with less efficient processes they are more likely to move to a company that has more effective processes and technology.
- Because company A has not focusses on process improvements other than reducing production costs, their overall costs will be higher than a competitor who has improved processes.
What is Balanced Scorecard Performance Management?
Balanced Scorecard in Performance Management is an approach to aligning employees to a company’s strategic plan. Alignment is a challenge that every organisation needs to do well. With large numbers of employees it’s easy for individuals to spend time working hard on what seems important to them, but may not be directed toward the company’s strategic plan. To succeed in any endeavour it’s necessary to get people moving in the same direction. In other words aligning them.
Organisations typically use one of two approaches to goal alignment:
- Top down functional model
- Balanced scorecard model
The top down functional model has traditionally been the most widely used. This is primarily because of its ease of use in paper based processes. Using this model goals are simply cascaded through the reporting lines of a company. An employee’s goals are cascaded from their manager and those employee’s goals are then cascaded to their subordinates and so on.
The balanced scorecard model is more robust. It balances employees across the four factors (financial, customers, internal process, learning & growth) and aligns them with the company’s strategic plan.
See our article How To Use Balanced Scorecard In Performance Management to see how this works in practice.
Balanced Scorecard Performance Management in Government and Not For Profits
Because Government and Not For Profit organisations don’t need to produce a profit and may not have customers in the sense that a company does, some people may wonder if Balanced Scorecard is relevant. The answer is that it’s just as relevant in Government and Not For Profits.
While they don’t use the concept of a profit, Government and Not For Profits do need to be concerned with budgets, costs and financial efficiency. They have finite resources and those resources need to be managed. Likewise they also provide services to people internally and externally who are in effect their customers.
The possibility that too much strategic focus could be placed on one area to the detriment of others is just as likely in Government and Not For Profits. This makes the need to balance focus across the four areas of financial, customer, internal process and learning & growth of the same importance as it is to any company.