What is a balanced scorecard? And should your business be using it?
Many CEOs and small business owners are kept up at night by the question, “just how good is my business? Sure, customers can be a goldmine of useful feedback which can be leveraged in the pursuit of positive outcomes. But what about the internal operations of your business? The magic that goes on behind the curtain that customers only get a glimpse of when it impinges on the service you give them?
Every business uses different metrics to measure their success, and success for one department may not necessarily translate to success for the business as a whole. If they’re to succeed in the increasingly competitive climate of the 2020s, businesses need an inclusive set of performance metrics which they can use to measure outcomes against strategic goals. If this is a pain point for your business, could a balanced scorecard be just the solution you need?
What is a balanced scorecard?
A balanced scorecard is a framework for success in business. It is a performance metric by which organisations can identify, improve and assert control over the myriad functions that make your business what it is across its various departments.
The balanced scorecard has been in constant use since its inception in the early ‘90s and is a reliable way of quantifying business performance in a number of financial and nonfinancial ways. Its sheer versatility makes it extremely appealing for all kinds of businesses, industries and even nonprofit and government sectors.
What is included in a balanced scorecard?
A balanced scorecard collects data from across the business and analyses it with four specific focuses. These apply to the whole business across all departments and include:
These are the internal operations that keep your business ticking over. A balanced scorecard identifies operational inefficiencies, barriers and bottlenecks to performance, delays, productivity gaps and instances of waste.
Learning and growth
A balanced scorecard also identifies the extent to which businesses are getting the most out of their employees by providing an infrastructure for learning and growth. This includes not only training provision but the accessibility of knowledge resources, as well as how effectively businesses are able to convert training and development into operational excellence.
It stands to reason that customer satisfaction is a key part of a balanced scorecard, too. It collects the data necessary to accurately gauge customers’ satisfaction with everything from the quality of service and products to pricing and availability.
Financial data isn’t the only measure of your company’s success or health, but there’s no denying that it plays a big part. And there’s way more to consider than just revenue. A balanced scorecard takes account of not just revenue but all business expenditures, margins and ROI to provide a comprehensive overview of your business’ financial wellbeing.
How your business benefits from a balanced scorecard
A balanced scorecard affords businesses a balanced perspective. And even in the age of big data, that’s something that many businesses sorely need. The sheer abundance of available data can actually create its own set of challenges when it comes to seeing the big picture. A balanced scorecard not only gives a clear indication of all aspects of business performance but helps to track alignment with key business goals.
But what does that look like in real terms?
Let’s take a look at some specific ways in which using a balanced scorecard can benefit your business.
It helps to keep different departments aware of the big picture
All too often, different departments can find themselves operating as quasi-independent silos. Because they have their sights set on their own sets of KPIs, they can lose sight of where those KPIs and departmental goals fit in with the big picture. This can lead to a lack of cohesion between departments and diminished awareness of the goals, aims and priorities of the business as a whole.
Not only can balanced scorecards provide a good overview for leaders, they can provide a useful communication tool when sharing that information with the workforce. It can demonstrate where the business is heading and the efforts of each employee in each department in steering the ship on the correct course. This can help prevent departments from working in vacuums and help them to understand the role of their own metrics and KPIs in guiding the business onward.
It tells you what’s going on behind the numbers
Numbers are useful, for sure. But they don’t tell the whole story. A balanced scorecard helps to provide context to the financial and numerical data to help businesses see the “softer” KPIs like customer and employee sentiment. By encouraging leaders to think in more holistic terms, a balanced scorecard can not only prevent businesses from becoming over-reliant on numbers, they can make the numbers themselves more meaningful.
It helps businesses to understand the relationship between perspectives
Returning to the four key perspectives of a balanced scorecard (processes, learning and growth, customer perspectives and financial data), it’s easy to view these as independent of one another. The longer a balanced scorecard is used, however, the clearer the relationship between these perspectives becomes.
Better learning and growth facilitates more efficient business processes. These in turn keep customers happier and as a result, they keep coming back. Thus, finances are improved on the bottom line (reduced operational costs, reduced waste, more efficient processes) and the top line (more repeat customers, customers spending more because they like and trust your brand).
There’s no such thing as getting to know your business too well!
It helps you to stay focused on the goals that matter the most to you
One of the inherent perils of management is that it’s all too easy to become embroiled with all the day-to-day processes that come with running a business that you can’t see the woods for the trees. You can lose sight of your organisation’s long and short term goals and the interdepartmental KPIs by which you’ll chart your progress.
A balanced scorecard makes it easier to master your metrics and track your progress against not just your own goals but industry benchmarks or competing businesses in your sector.
So, should your business be using a balanced scorecard?
Now that we know a little more about what a balanced scorecard is, is it worth integrating into your operations?
Given how easily a balanced scorecard can be integrated into any business operation and given the scope and diversity of the insights it can provide, you need a seriously good reason not to. However, a great starting point is getting business intelligence software which can collate all of your business data together. This will help give you an overview of your business’ performance, and then you can use a balanced scorecard to help align your metrics to your overarching business goals.