Balanced Scorecard in 2020: Advantages and Disadvantages
13 Dec, 2020
Similar to the OKR approach, balanced scorecards are a useful tool for measuring organizational performance based on a set of determined measurements.
The balanced scorecard was originally developed by Dr. Robert Kaplan of Harvard University and the US management consultancy Nolan-Norton in the early 90s. Knowledge of this approach spread widely in 1996 when they published a book, The Balanced Scorecard, and the method began to be adopted by many organizations, large and small.
In this article, we’ll teach you about the balanced scorecard, how the balanced scorecard approach works, the advantages and disadvantages of using it, and more.
What is a balanced scorecard?
Here is an excerpt from the Kaplan and Norton book on The Balanced Scorecard:
“The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.”
Simply put, The balanced scorecard is a fully integrated strategic management system. It is a way of measuring performance across an organization to monitor progress and set appropriate goals. It’s also a very effective tool in getting team members aligned.
The balanced scorecard approach
To understand The balanced scorecard approach, it’s important to understand that it looks at business through four distinct perspectives. These perspectives are:
The measurement of the organization’s success in terms of finances. This includes items like sales numbers, profit margins, and return on investment (ROI). The financial measurements that are the most important will differ based on the specific goals of the organization.
Looking at the organization from the viewpoint of a customer or stakeholder. This helps businesses understand what is working with their customer base and make necessary adjustments. Some metrics to measure this might be the number of tickets resolved, customer satisfaction surveys, and customer service calls.
Examining the efficiency and quality of the organization’s performance internally. On the balanced scorecard, this perspective helps organization leaders analyze how well internal systems and processes are working, or if something could be improved/changed to increase profitability.
Looking at what’s important to performance, from technology used to company culture to human capital and infrastructure. All of these items force company leaders to look at items (that often get overlooked) and assess how they are all serving the company as far as goal achievement goes.
Based on these four perspectives, organizations are meant to come up with key performance indicators (KPIs), objectives, and targets they want to hit. There is also usually a data mining aspect as well, in which the organization selects the exact data they want to have tracked and reported on.
Advantages & disadvantages of the balanced scorecard
Now that we’ve covered the basics surrounding balanced scorecards, let’s go over the advantages and disadvantages of using this performance measurement method for your organization.
Advantages of a balanced scorecard:
Overall, a balanced scorecard helps companies focus on performance measurement in more than one area. It takes into account items that can sometimes get overlooked in a company such as internal processes and current customer satisfaction. Here are some of the biggest advantages of using this method in your business:
1. Brings structure to business strategy
Different departments within an organization may have their own way of measuring performance and what they consider to be important in terms of metrics. With a balanced scorecard, different leaders and departments can still individualize their performance measurement, but it all falls within a set structure that can be understood across the organization. It gives a common place to everyone in the company to measure success.
2. Makes communication easier
Communication across team members and departments becomes easier when everyone is speaking the same language. In other words, having a streamlined performance measurement system means that it’s easier to talk about strategy and progress within the organization.
3. Facilitates better alignment
With a balanced scorecard, members of the organization can easily link their objectives and goals at different levels of the company. It takes the guesswork out of trying to understand everyone’s responsibilities and it gets teams and departments synced up under one structure. This also leads to having a much clearer picture over projects and initiatives, which hopefully turns into a shorter turnaround time with more optimal results.
4. Connects the individual worker to organizational goals
A balanced scorecard helps employees “keep their eyes on the prize” so-to-speak in terms of goals. Individual workers may find it helps their own performance when they can see the greater purpose behind the goals and objectives they’re aiming to hit. It also has the added benefit of helping employees find purpose in the organization, thus keeping them engaged in their work.
Disadvantages of a balanced scorecard
While there are so many advantages to implementing a balanced scorecard system into your workplace, there are also potential roadblocks and disadvantages to balanced scorecards.
1. It must be tailored to the organization
A balanced scorecard is supposed to provide a framework from which to work from, however, it will still need to be customized to every organization using this system. This can take up a lot of time, and while examples are helpful, they can’t be copied exactly due to the unique needs of every business.
2. It needs buy-in from leadership to be successful
For the balanced scorecard system to be fully effective, it must be implemented from the bottom all the way to the top of the organization. This means getting buy-in from leaders, which can sometimes take some convincing, not to mention the learning curve involved with getting the whole organization to use the new system.
3. It can get complicated
The framework itself of balanced scorecards takes some time and dedication to understand. There are countless resources and case studies to read from and it’s easy to get bogged down with the many different ways of using this method.
4. It requires a lot of data
Most of the time balanced scorecards require managers and team members to report information, which means logging data. Many don’t like this because they find it tedious and also, it can get in the way of doing the work required to meet objectives.
While a balanced scorecard is definitely a tried and true method with many potential advantages, it’s important to take into consideration the way that your company operates and whether a balanced scorecard system will be worth the investment.
At Heartpace, we’ve recently updated our approach to balanced scorecards to make it an easier method for your company to adopt. Learn about our software to see if it is the right fit for your organization.