By Michael Iverson
If a business advisor told you that more than half of the largest U.S. corporations used a particular management tool, chances are pretty good that you would be interested in using it for your business. The balanced scorecard is, in fact, widely used by America’s largest companies. Editors of the Harvard Business Review named it one of the most influential business ideas of the past 75 years.
The purpose of the balanced scorecard is alignment of strategy with the daily activities of a business. It was introduced as a performance measurement framework in the 1990s by two business professors — Drs. Robert Kaplan and David Norton. The idea is to augment traditional financial business metrics with strategic, non-financial performance measurements. In combination, the two very different kinds of measurements provide a more balanced view of a company’s performance, especially its progress toward achieving long-term, strategic objectives.
A Change of Focus
The balanced scorecard attempts to address a long-time shortcoming of U.S. businesses – their focus on attainment of quarterly earnings goals, while paying too little attention to building long-term value. By focusing on near-term earnings, which are easily measurable, American businesses often neglect investment in intangibles, the returns of which are more difficult to measure.
Focusing on past events causes companies to under-invest in important areas like product and process innovation, building and retaining employee skills, and improving customer satisfaction levels. These intangibles contribute significantly to the long-term value of a business. Companies create future value by investing in customers, suppliers, employees, processes, technology and innovation – the intangibles that matter today.
Companies can only improve management of their intangible assets if they integrate measurement of those intangibles into their management systems. This notion led to development of a management tool for describing, communicating and implementing strategy – the balanced scorecard.
The scorecard envisions a company’s Vision and Strategy at the center of a continuous feedback loop, surrounded by four perspectives, each with its own business metrics. A company collects and analyzes data relative to each perspective.
The Learning & Growth Perspective
Employee training, individual growth and company-wide improvement are hallmarks of great companies. Employees who embrace technological advances and mentoring become more productive. Their collective knowledge significantly enhances the company’s value.
The Business Process Perspective
Managers need to know how well the business is performing based on its internal processes. Are the internal processes allowing the company to produce quality products and services, while achieving incremental improvement? The metrics for this perspective are unique to each business and should be designed by managers who are intimately aware of both internal processes and customer needs.
The Customer Perspective
Perhaps the most important management concept of recent years is the realization that meeting, if not exceeding, customer expectations is a leading indicator of business success. Customers whose expectations are met or exceeded become extremely loyal, building business value. When expectations are not met, customers begin to look for other suppliers.
The Financial Perspective
Traditional financial analysis does provide useful information. Kaplan and Norton suggest that it is most useful when it encompasses risk assessment and cost-benefit measurements, and when it is balanced by data from the other three perspectives.
If you would like help in creating a balanced scorecard for your business, just give us a call at (404) 353-2148 or send us an email, and we will be happy to help!