The Balanced Scorecard was introduced as one of the newest management tools. The purpose was to allow organizations to be better able to use their intangible assets. The balanced scorecard is to be used as a supplement to traditional financial measures. It measures performance from three additional perspectives; customers, internal business processes, and learning and growth. The scorecard can help top-level management link the long-term strategy with the short-term actions. Managers using a balanced scorecard do not only have to rely on the short-term financial results as indicators of the company’s progress.
It brings in other indicators that provide information about how the short-term results have affected the long-term strategy.
The scorecard allows managers to introduce four new processes;
1. translating the vision,
2. communicating and linking,
3. business planning, and
4. feedback and learning.
Translating the vision is a means of expressing the mission/vision statements with an integrated set of objectives and measures. This forces the top management to develop operational measures, which requires them to discuss, and eventually agree on, a means of achieving the goals of the company.
Communicating and linking is a process that facilitates the communication of strategies throughout the entire organization. Departmental and individual objectives must be aligned with the strategy through evaluation procedures and incentives. To have goal congruence between the individual employees and the company, scorecard users engage in three activities: communicating and educating, setting goals, and linking rewards to performance measures which are in turn linked to the overall strategy.
Communicating and educating is achieved by maintaining policies that ensure all employees are aware of the strategies of the organization. Also, it is important for the lower level employees to be able to communicate upwards about whether or not the strategies are realistic from the competitive or operational perspective.
Setting goals alone is not sufficient to change employee’s mind-set. One technique to ensure the objectives related to the goals are achieved is the use of a personal scorecard.
It is simply a card that has information that describes corporate objectives, measures, and targets. Employees would carry it with them. This allows employees to better translate these objectives into meaningful tasks that will help reach these goals.
Linking rewards to performance is an important incentive to help an organization achieve its purpose.
What the balanced scorecard adds to the traditional means of linking rewards to financial performance is that it takes a more holistic look at the organization. It ensures that the correct criteria are used as a measure of performance before rewards are given. The idea is that, if you are not using the correct indicators to evaluate performance, there is a high risk in rewarding this behaviour.
Business planning is the third process used by managers with the balanced scorecard. By using the scorecard, businesses will integrate their strategic planning and budgeting processes. This makes sure that the budgets support the strategies of the company. The users of the scorecard pick measures that represent each of the four perspectives, and then set targets for each. Then they will decide which specific actions will help them in reaching those targets. Using short-term milestones to evaluate the progress toward the strategic goal is what results from using the balanced scorecard.
The fourth, and final, process is feedback and learning. With the balanced scorecard in place managers can monitor feedback and relate this to the strategy. The first three processes are very important, but they demand a constant objective. Any deviation from the plan is considered a defect. By adding the feedback and learning process, the scorecard becomes balanced by providing real time information to enhance strategic learning.
The balanced scorecard supplies three essential items to strategic learning.
1. It articulates the vision. The holistic vision is communicated to the entire organization, and the individual efforts are linked to business unit objectives.
2. The scorecard supplies a strategic feedback system. This system views the strategies as hypotheses, and should be able to test, validate, and modify these hypotheses.
3. The balanced scorecard facilitates strategy review. Instead of using periodic meetings to evaluate past performances as the traditional financial review process does, scorecard users review the feedback in a way to gain a better understanding of if the strategy is being reached, how is it being reached, and should the strategy be modified based on new information. This gives the organization a forward focus.
The balanced scorecard facilitates an organization’s plan to align management processes and focuses with the long-term strategy of the company. Without the scorecard, it would be nearly impossible to maintain a consistency of vision and action while attempting to introduce new strategies and processes. “The balanced scorecard provides a framework for managing the implementation of a strategy, while also allowing the strategy to evolve in response to changes in the company’s competitive, market, and technological environments.”