What is a 'Balanced Scorecard'
A balanced scorecard is a performance metric used in strategic management to identify and improve various internal functions of a business and their resulting external outcomes. It is used to measure and provide feedback to organizations. Data collection is crucial to providing quantitative results, as the information gathered is interpreted by managers and executives, and used to make better decisions for the organization.
BREAKING DOWN 'Balanced Scorecard'
The balanced scorecard was first introduced by accounting academic Dr. Robert Kaplan and business executive and theorist Dr. David Norton. It was first published in 1992 in a Harvard Business Review article. Dr. Kaplan and Dr. Norton took previous metric performance measures and adapted them to include nonfinancial information.
Purpose Behind the Balanced Scorecard
The balanced scorecard is used to reinforce good behaviors in an organization by isolating four separate areas that need to be analyzed. These four areas, also called legs, involve learning and growth, business processes, customers, and finance. The balanced scorecard is used to attain objectives, measurements, initiatives and goals that result from these four primary functions of a business. Companies can easily identify factors hindering company performance and outline strategic changes tracked by future scorecards. With the balanced scorecard, they look at the company as a whole when viewing company objectives. An organization may use the balanced scorecard to implement strategy mapping to see where value is added within an organization. A company also utilizes the balanced scorecard to develop strategic initiatives and strategy objectives.
The Four Legs of the Balanced Scorecard
Information is collected and analyzed from four aspects of a business. First, learning and growth are analyzed through the investigation of training and knowledge resources. This first leg handles how well information is captured and how effectively employees utilize the information to convert it to a competitive advantage over the industry. Second, business processes are evaluated by investigating how well products are manufactured. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages or waste.
Third, customer perspectives are collected to gauge customer satisfaction with quality, price and availability of products or services. Customers provide feedback regarding if their needs are being met with current products. Finally, financial data such as sales, expenditures and income are used to understand financial performance. These financial metrics may include dollar amounts, financial ratios, budget variances or income targets. These four legs encompass the vision and strategy of an organization and require active management to analyze the data collected. Therefore, the balanced scorecard is often referred to as a management tool, not a measurement tool.