In Business performance management, whenever we speak of the performance scorecard, the Balanced Scorecard inevitably becomes the focus. A business performance scorecard can be any range of performance measures that are put in place to better manage a business better. However, for a more well rounded view a balanced scorecard approach is often encouraged.
What is it?
The Balanced Scorecard is a set of performance targets that include both Financial and Operational measures. Financial measures report the results of actions already taken. Operational measures are drivers of the future financial performers. The three dimensions of Operational performers include the customer perspective, the internal process perspective, innovation & learning perspective. It recognises that organisations are responsible to different stakeholder groups, such as employees, suppliers, customers, community and shareholders
Managing a business is a complex task that involves many different parameters. Traditionally most companies measure their performance based on financial outcomes. Financial performance measures work retrospectively and are not effective measures for ongoing improvement. Today, most business owners recognise that traditional financial accounting measures like return-on-investment and earnings-per-share can give misleading signals for continuous improvement. Business owners should not have to choose between financial and operational measures but rather leverage tools to help them measure and manage both aspects so as to navigate their businesses towards growth more successfully.
In today’s competitive environment, competition has changed. Other non-financial performance measures like customer satisfaction, quality, cycle time, and employee motivation can be more effective measures of future performance.
Managing an organization effectively today requires that Business owners be able to have access to performance measures in various key performance areas. Often, it is the lack of information and clarity that leads them to lean more heavily in one direction than the other. They realize that no single measure can provide a clear predictor of performance. As such, having access to various information, both financial and operational measures in different key performance areas help business owners and senior executives analyse and make well founded decisions.
The Four perspectives of a balanced Scorecard includes:
1. The Customer Perspective:
Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost. Lead time measures the time required for the company to meet its customers’ needs. The combination of performance and service measures how the company’s products or services contribute to creating value for its customers.
To put the balanced scorecard to work, companies should articulate goals for time, quality, and performance and service and then translate these goals into specific measures.
Once these measures are in place, a series of questionnaires and audits can be designed and implemented using technology to simplify the implementation and allow the business owner and senior executives to quickly analyse the results.
2. Internal Business Perspective:
Excellent customer performance may be derived from processes, decisions, and actions occurring throughout an organization. Managers need to focus on those critical internal operations that enable them to satisfy customer needs.
Companies should also attempt to identify and measure their company’s core competencies, the critical technologies needed to ensure continued market leadership. Companies should decide what processes and competencies they must excel at and specify measures for each. Once these key performance areas are uncovered, it is important to understand what areas need to be measured, audited and evaluated to ascertain these areas are in line with the Company’s vision.
3. Innovation and Learning Perspective:
As global competition becomes more intense, companies need to continuously improve and innovate their existing products and processes and have the ability to introduce entirely new products with expanded capabilities.
A company’s ability to innovate, improve, and learn ties directly to the company’s value. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins. The ability to be ready to pivot is ever more pressing in today’s business environment.
4. Financial Perspective
Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement. Typical financial goals have to do with profitability, growth, and shareholder value. It is important to note that strong financials do not always indicate strong underpinning performance and strong operations may not also translate directly nor immediately into Financial success.
Challenges faced when implementing a Performance scorecard approach in an organisation:
1. Poorly Defined Key performance areas and associated Metrics
Management need to clearly identify the company’s key performance areas and metrics to be measured against benchmarks need to be relevant and clear. They should be depicted with visual indicators that are easily understood. In addition, metrics need to be collected at the ideal frequency for making decisions, and defined in such a way that the measurement can be consistently applied across the company even if their targets of performance differ.
2. Lack of Efficient Data Collection and Reporting
A primary reason that companies over emphasize financial metrics at the expense of other important operating variables is the simple fact that systems already exist for collecting and reporting financial measures. Other Operational and non-financial often are not available on a system but rather require much human effort to implement, collate and analyse such data. Companies that deliberately plan to define the vital few metrics and commit the resources to automate data collection and subsequent reporting tend to achieve good results. Tree AMS is one such performance management tool that companies can leverage to help to manage their business’s performance.
3. Lack of a Formal Review Structure
Scorecards work best when they are reviewed frequently enough to make a difference. Metrics should be reviewed regularly and should be analysed across functions and key performance areas. Leveraging technology and automation to pull specific data and presenting them dynamically across functions, business units can provide insight that a 2 dimensional view does not. Having a formal review format and structure can systemize and encourage ownership within all stakeholders in the company. A successful implementation of the balanced scorecard within a company will keep the company looking—and moving—forward instead of backward.
Performance Scorecards drive better performance – When people and groups throughout an enterprise know how they are doing and what needs improving, they do better.
Scorecards implement strategy. Scorecards translate your strategy into concrete terms and help you track its implementation. When implemented correctly, Performance Scorecards also reflect operational issues since they are developed in a way that specifically directs attention to your strategy and future direction.
Scorecards help ensure that you have the right measures. Strategically identifying the key performance drivers and a means to measure them bring about focus and drive desired actions.
Measuring and encoding the results of these different areas can become in itself another hurdle. Leveraging technology to simplify and manage the process can save time, encourage the support of such initiatives and overcome the challenges of implementing the performance scorecard initiative.