The Balanced Score Card

The objective of the balanced scorecard was to create a system, which could measure the performance of an organization and to improve any deficiencies that occur. One of the main reasons for many organizations to be unsuccessful is that they fail to understand and adhere to the objectives that have been set for the organization.

The balanced scorecard provides a solution for this by breaking down objectives and making it easier for management and employees to understand.

The balanced scorecard (BSC) is a strategic planning and management system that organizations use to:

• Communicate what they are trying to accomplish
• Align the day-to-day work that everyone is doing with strategy
• Prioritize projects, products, and services
• Measure and monitor progress towards strategic targets

Following is the simplest illustration of the concept of balanced scorecard. The four boxes represent the main areas of consideration under balanced scorecard. All four main areas of consideration are bound by the business organization's vision and strategy.

The balanced scorecard is divided into four main areas and a successful organization is one that finds the right balance between these areas.

Each area (perspective) represents a different aspect of the business organization in order to operate at optimal capacity.

• Financial Perspective - This consists of costs or measurement involved, in terms of rate of return on capital (ROI) employed and operating income of the organization.
• Customer Perspective - Measures the level of customer satisfaction, customer retention and market share held by the organization.
• Business Process Perspective - This consists of measures such as cost and quality related to the business processes.
• Learning and Growth Perspective - Consists of measures such as employee satisfaction, employee retention and knowledge management.

The four perspectives are interrelated. Therefore, they do not function independently. In real-world situations, organizations need one or more perspectives combined together to achieve its business objectives.

For example, Customer Perspective is needed to determine the Financial Perspective, which in turn can be used to improve the Learning and Growth Perspective.

Features of Balanced Scorecard

From the above diagram, you will see that there are four perspectives on a balanced scorecard. Each of these four perspectives should be considered with respect to the following factors.

When it comes to defining and assessing the four perspectives, following factors are used:

• Objectives - This reflects the organization's objectives such as profitability or market share.
• Measures - Based on the objectives, measures will be put in place to gauge the progress of achieving objectives.
• Targets - This could be department based or overall as a company. There will be specific targets that have been set to achieve the measures.
• Initiatives - These could be classified as actions that are taken to meet the objectives.

Conclusion

Balanced score cards have become a great tool used by organizations these days as explained above. This helps the organization remain focused on its objectives and track achievement of these objectives.