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Balanced Scorecard for Business Management

In today’s business world, it can often seem as if the employees simply do not understand the overall company vision. This is where the balanced scorecard comes into play. The balanced scorecard is a business management tool that incorporates strategic business goals into performance measures that provide rewards for management teams that are successful in meeting the set performance measures.

Benefits of Balanced Scorecards
Strategic business goals are generally viewed from the financial perspective. However, these numbers do not provide the entire picture of the innovations and quality measures that lead to those financial outcomes. The balanced scorecard allows the company executives to better understand the success of departmental managers in meeting both non-financial and financial measures, while also helping managers and employees better understand the functions that lead to business success.

Perspectives Used in Balanced Scorecards
There are four essential perspectives that go into the balanced scorecard, allowing managers to focus on the most important key measures, rather than trying to focus on a wide range of cost and accounting measures. These perspectives are not based in financial outcomes, but are drivers that lead to the success of the actual financial outcomes. The balanced scorecard perspectives require the answers to four questions, which are:

  • Financial – How does the organization looks to the shareholders?
  • Customers – How do the customers view the organization?
  • Internal Business Process – In what area does the organization most excel?
  • Innovation and Learning – Can the organization continue to improve to successfully add value?

The answers to each of these questions allow managers to help their employees gain a better understanding of how their actions influence the strategic goals of the company. Using these goals to determine more efficient business management practices allows managers to correlate the employee level actions with the strategic goals and vision of the organization.

Incentives
Another important aspect of the balanced scorecard in business management is the incentives. These rewards are provided for managers that meet or exceed the performance measures of the balanced scorecard, providing a greater incentive for them to ensure that the performance of their employees allows the organization to meet their strategic goals. Together, the performance measures, coupled with the incentives, provide management with the tools they need to improve business management practices. In return, these improvements allow the organization to reach their overall goals and vision, creating better financial outcomes.

Balanced Scorecard’s Key Performance Indicators

Key performance indicators (KPIs) are an integral part of balanced scorecards in strategic management. KPIs allow management to track employee performance, and visualize how that performance affects the long-term strategic goals of the company so that changes can be made where necessary.

Key performance indicators assist managers in developing resource management strategies by focusing on four perspectives:

  1. Financial
  2. Customer
  3. Internal Processes
  4. Innovation

In balanced scorecards, these perspectives work together to ensure organizational growth, allowing managers to understand the areas that need improvement in order to reach company goals. When using balanced scorecards to gauge these perspectives, each requires the evaluation of four distinct areas:

  • Current Objectives
  • Current Measures
  • Targets
  • Initiatives

These four areas work together within each KPI perspective to answer the questions that will allow management to refine their current strategic management processes to drive organizational success.

Financial Perspective
The financial KPI answers the question of how the company looks to current shareholders. This perspective allows management to gauge current financial progress, as well as what needs to be done for further financial success.

Customer Perspective
The customer perspective provides insight into how current customers view the organization. These answers allow management to come up with the necessary goals and objectives that will ensure that the organization achieves their current vision.

Internal Business Processes Perspective
Internal business processes are responsible for the overall success of the company. This perspective allows management to understand the performance of the current processes, allowing them to determine which ones require the most focus to ensure the satisfaction of customers and shareholders.

Innovation
The innovation perspective promotes a better understanding of the requirements necessary for education and growth. All organizations must be able to learn the effects of training, capital, information systems, and other intangibles in order to see continued growth. The innovation perspective allows management to gauge the overall ability of the organization to change and improve, which are required for future success.

These balanced scorecard key performance indicators provide a detailed view of the success of current strategic management practices. Once these indicators are understood, they provide the framework needed to ensure that the organizational goals can be met. Management can then use this information to educate their employees on the required objectives to ensure that the goals of the organization are in line with the goals of the employees.

The Importance of Balanced Scorecard in Strategic Management

Strategic management is a necessary part of any organization’s success, but adding the balanced scorecard can allow businesses to see exactly where they are going, and what needs to be changed to meet their long-term goals.

What is the Balanced Scorecard?
The balanced scorecard (BSC) is a tool that allows managers to better follow and understand not only how their staff is performing, but also how that performance relates to the overall growth of the organization. The information gained from balanced scorecard provides deeper insight into how the current actions within the company affect the long term goals of strategic management, allowing managers to make the changes needed to ensure that the organization’s goals are met.

Four Processes of Balanced Scorecard
The balanced scorecard includes four processes that integrate the goals of strategic management with the actions of the employees, rather than strictly focusing on financial measures to gauge performance.

  • Translating the Vision
  • Communication and Linking
  • Planning
  • Learning and Feedback

These processes, when incorporated with current strategic management practices, allow managers to provide the guidance and information needed by their employees to better meet long-term goals.

Translating the Vision
Translating the vision brings the goals and strategies of the organization to the employees in a manner that helps them better understand how their actions affect the overall success of the company. This is done by formulating objectives at the employee level that will help them understand what is needed for long-term success.

Communication and Linking
Strategic planning requires communication, and this balanced scorecard process helps managers tie their strategic goals in with individual and departmental objectives. This integration ensures that all employees within an organization have a better understanding of strategic goals, and how their abilities to meet the objectives line up with them.

Planning
Business planning allows managers to align the financial initiatives of the company with employee level goals. The balanced scorecard goals help managers make better allocation and prioritizing decisions, enabling them to see exactly which initiatives are necessary for meeting organizational goals.

Learning and Feedback
The fourth aspect of balanced scorecard incorporates reviews and feedback from customers, internal processes, and growth. These perspectives assist managers in the performance evaluation of current strategies, helping them understand which objectives require modification.
These balanced scorecard processes promote better results from the strategic management goals, driving the success of the organization.

Cascading a Balanced Scorecard

Is it possible for your organization to improve its performance if you could somehow better communicate to your employees what your strategy is?  Do you have employees whose hard work is actually running counter to the organization’s goals because they do not understand what you are trying to accomplish?  Do various departments in your organization focus on activities within their own silo more than their support the organization’s mission and vision? 

The problems addressed by these questions center on organizational alignment.  While the balanced scorecard has been touted as an effective tool for creating organizational alignment, the actual success of the system as an alignment tool varies depending on the strategic focus of scorecard. This is because the simple performance measurement dashboard tends not to be very helpful.

The systems success also depends on the success of its implementation and whether or not the organization successfully cascades the scorecard down to business or support unit level and/or individual levels.

Leaving the issues of proper strategic focus and successful implementation to be addressed on other pages, let us now focus on;

What is cascading and how does one do so effectively?

Cascading a balanced scorecard means to translate the corporate-wide scorecard (referred to as Tier 1) down to first business units, support units or departments (Tier 2) and then teams or individuals (Tier 3).  The end result should be focused across all levels of the organization in consistency. 

The organization alignment should be clearly visible through strategy, using the strategy map, performance measures / targets, and initiatives. Scorecards are used to improve accountability through objective and performance measure ownership, and the desired employee behaviors are given as incentives with recognition and rewards.

If you would like to learn more about how we can help your organization cascade, contact us.

IT balanced scorecard

It is necessary for you to implement the right strategies to stay ahead of the competition. Companies use different strategies to reach this goal. One is to follow the balance scorecard strategy.

The information technology (IT) department in most corporations today faces a strange phenomenon: While investments in IT have been steadily growing in the last two decades, business sponsors often have a question: Are the benefits/returns from the IT investments as high as initially expected?

As a business discipline, IT has become crucial to most organizations for achieving their business goals as well as differentiating the company from the competition. Achieving market leadership is increasingly a function of getting the right data inputs from the field, interpreting the raw data and passing this value-added information to the strategic decision-makers. The quality of business intelligence decides the fate of many organizations.

If companies are to survive and prosper in today’s competitive environment, the corporate IT portfolio-planning function needs to plan IT initiatives strategically. They must use performance measures that are derived from the overall strategies of their business.

Therefore the IT department or arm of a business absolutely needs the balanced scorecard.

In a future article we shall examine how to implement the balanced scorecard in the IT department.

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