The balanced scorecard is a strategic methodology used in business management developed by Harvard University Professor Robert Steven Kaplan and founder of Renaissance Solutions, a consulting firm, David Norton.
What is a Balanced Scorecard?
The balanced scorecard is both an integrated management tool using various performance metrics and a “corporate learning” tool.
This approach, proposed by Robert Kaplan and David Norton in the early 1990s, is based on the idea of linking business strategies to goals and checking whether strategies are delivering the expected results by monitoring indicators (KPIs) representing those relationships.
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What are the Benefits of the Balanced Scorecard Model?
In global competition, as companies begin to shape themselves towards knowledge-based competition, their ability to manage their physical assets has become even more decisive. With the balanced scorecard, companies can develop the skills needed to grow in a financial context and also own intangible assets. Balanced scorecard is a method developed to complement, not replace, financial measures.
In short, a balanced scorecard states that firms must rely on non-financial perspectives to gain a competitive advantage. In the studies conducted so far, it has been strikingly revealed that 75% of the factors that make a firm more successful actually stem from non-financial indicators. In the past, when looking at the success of a firm, we focused on its profitability, that is, we used financial figures as a criterion. Today, balanced scorecard says that success is a result and that it comes from reasons.
Research has shown that organizations using the Balanced Scorecard approach tend to outperform organizations without a formal approach to strategic performance management. We can list the main benefits of using BSC under 7 headings;
Better Strategic Planning
The Balanced Scorecard provides a powerful framework for creating and communicating strategy. The business model is visualized in a strategy map that helps managers think about cause-effect relationships between different strategic goals. The strategy mapping process allows for consensus on a set of interrelated strategic objectives. Agreeing on the strategy map; means identifying the main providers or drivers of future performance, as well as performance results to create a complete picture of the strategy.
You can look at Strategic Planning to learn more about strategy.
Enhanced Strategy Communication and Execution
Having a one-page picture of the strategy allows companies to easily communicate the strategy internally and externally. We've known for a long time that a picture is worth a thousand words. It is also quite obvious that the images are more catchy than words. Visuals facilitate understanding of the "plan on page" strategy and help involve staff and external stakeholders in the implementation and review of the strategy. To implement a strategy, it is first necessary to fully understand the strategy.
Better Alignment of Projects and Initiatives
The balanced scorecard helps organizations match their projects and initiatives with different strategic goals, which ensures that projects and initiatives are firmly focused on achieving the most strategic goals.
Better Management Information
The balanced scorecard approach helps organizations design key performance indicators for various strategic goals. It ensures that the KPIs of the purpose are revealed. This helps companies measure what really matters. Studies show that companies with a BSC(Balanced Scorecard) approach tend to have higher quality management information and better decision-making.
Improved Performance Reporting
The balanced scorecard can be used to guide the design of performance reports and dashboards. When used for guidance, a balanced scorecard enables management reporting to focus on the most important strategic issues and helps companies implement their plans. Targets are determined, KPIs are planned and measured in the Balanced scorecard. As Prosoftly, we also create a report on how well people have achieved their goals.
Better Organizational Accordance
The balanced scorecard ensures that the organizational structures of companies are better aligned with strategic goals. To run a plan well, all business units and support functions of organizations must work towards the same goals. Cascading the balanced scorecard into these units will help achieve success and link strategy to operations.
Better Process Alignment
Well-implemented balanced scorecards also help align organizational processes such as budgeting, risk management, and analytics with strategic priorities. This will help build a truly strategy-driven organization.
Why Is Balanced Scorecard Important?
Austrian Management guru Peter Drucker "You cannot manage what you cannot measure." he said. Actually, this is a very important statement. As humans, we even try to measure emotions, so of course, we will want to measure the output in the company. It is necessary to measure the work results of the relevant process or employee with objective data in order to make a healthy performance evaluation and to create actions according to the performance result.
In traditional performance management, subjective methods that are not based on data are commonly used. Kaplan and Norton drew attention to this situation and mentioned the inadequacy of traditional performance methods used in performance evaluation. According to Kaplan and Norton, it is very important to link strategies with goals and check whether the strategies are achieving the expected results by monitoring indicators (KPIs) that represent these relationships.
The balanced scorecard is used to achieve goals, metrics, initiatives, and goals that result from the four basic functions of a business. Companies can easily identify factors hindering business performance and outline strategic changes tracked by future scorecards.
The balanced scorecard can provide information about the company as a whole while displaying company goals. An organization can use the balanced scorecard model to apply strategy mapping to see where value is being added. A company can also use a balanced scorecard to develop strategic initiatives and strategic goals. Companies in every sector need to make a balanced scorecard. If you are looking at different management frameworks for your large organization, here are four critical advantages that highlight the importance of the corporate scoreboard (BSC) in strategic management;
1.The balanced scorecard can tie your long-term strategy to short-term goals. It is much easier to look one year ago than five or 10 years ago. Large organizations know that planning scenarios for the future are critical. For example, companies can determine how they will react if the economy shrinks by 5% or grows 3%, and how each scenario will affect their strategy. They can also conduct environmental scans to see what happens if major changes occur in their work environment. For example, what happens if two of your competitors merge? These techniques allow large firms to apply long-term strategic views and use balanced scorecards as a management framework, allowing such organizations to interact with long-term "what if" scenarios as well as their short-term strategic plans. Your strategic plan in your balanced scorecard will take into account some of these long-term views.
2.Balanced scorecard is a frame of the frame. Balanced scorecard is unique in that it is a flexible enough management framework to manage many other frameworks. For example, many large companies have advanced approaches to finance, customer relations, or human resources. They can rely on any number of frameworks (for example, Six Sigma or Total Quality Management) to help organize these systems. The beauty of BSC is that it can act as the organizational system for all other management frameworks and help employees across the company see the link between departmental approaches and engage them.
3.A balanced scorecard can help manage various corporate units. Large organizations tend to have a wide variety of units, divisions, and departments, and these groups all work ideally for the same strategy. For example, in a large municipality, there may be hundreds to thousands of people employed in transport, public safety, or parks and recreation areas. The employee combination can be so diverse that they may not interact with each other outside of the highest leadership levels. The balanced scorecard allows each department to see and understand the clear links between its strategy and the strategy of the organization as a whole. This gives employees a clear perspective on how their roles can be translated across the organization and where the commonalities between departments lie. BSC can also be positioned independently in a single department or department without interfering elsewhere. Independent positioning is not recommended but can be done if conditions do not provide company-wide strategic alignment.
4.You can use a balanced scorecard to manage a large number of data sources. One of the biggest challenges in large organizations is managing hundreds of data sources. Bringing them all in one common place can be a major challenge, as BSC relies on strategic measures across the organization. Large companies with strategy teams of 3-5 people need to collect data full-time to generate scorecards or their latest reports. Data collection efforts can quickly eliminate a strategy burdening the company. When using a robust balanced scorecard software, you can automatically load data from a variety of sources or accept as many people as you want to enter data sources. This makes reporting much easier and helps large companies handle both organizational and departmental strategies.
How to Make Balanced Scorecard? What Is Accomplished?
First Step: Organizational Assessment
It includes the realization of strategic elements and organizational evaluation. The first step of the scorecard creation process; To finalize the balanced scorecard plan that will detail all the teams that will be included in the design of the scorecard and the training they will need.
Mission, vision, SWOT analysis, and organizational values should be taken into account. It is about preparing a change management plan that will require a readiness review for a change to determine how ready the organization is for the journey and what needs to be fulfilled to get it ready. Defining the communication strategy that will determine the target audience, main messages, media channels, timing, and reporters of the communication takes place. Change management activities are included in every step.
Step Two: Strategy
The second step (strategy) is about identifying strategic themes, including strategic outcomes, strategic themes, and perspectives developed to focus on customers' needs and value proposition. The most important element of this step is to make sure you uncover what your customers are looking for in terms of function, relationship, and image from their establishment to determine whether you are adding value to your customers.
Step Three: Objectives
The third step (goals) is about setting your organization's goals. Goals are continuous improvement activities that should be linked to your organization, your strategic themes, perspectives, and strategic results. In this process, it is determined what needs to be improved.
Step Four: Strategy Maps
The goals designed in the third step are linked to cause and effect relationships to create a strategy map for each strategic theme. Theme strategy maps are then combined into an overall corporate strategy map showing how the organization creates value for its customers and stakeholders. Strategy maps should be company-specific.
Fifth Step: Performance Measures
In the fifth step, performance measures are developed for strategic goals. Performance metrics should be clearly defined, differentiating outcome and outcome measures, as well as leading metrics (expected future performance) and lag metrics (past performance history). In this step, you will also design your performance goals. Designing performance goals can be perceived as the most difficult and confusing step, so it is important to allocate time for performance measures to be meaningful.
Sixth Step: Strategic Initiatives
In the sixth step, strategic initiatives are developed that support strategic goals. This is the part where the projects that should be undertaken to ensure the success of the organization (to what extent the organization fulfills its mission or vision) are designed and assigned. To establish accountability across the organization, performance metrics and strategic initiatives are assigned to owners and documented in data definition tables.
Seventh Step: Software and Automation
The seventh step (software and automation) involves automating the balanced scorecard system and choosing the most cost-effective software is critical today. Today, many companies continue their business manually. Every company should digitize every process. Software and automation enable to analyze software options and user requirements to meet future corporate performance information requirements. Before starting the automation, software seduction process, it is necessary to make sure that appropriate emphasis is placed on strategic thinking and strategy development. Buying software too early limits creative strategic thinking. The late purchase of software makes it difficult to maintain the momentum of the new system. That's why it's so important to maintain balance. The use of performance information reporting is an early advantage to be gained from the process of establishing a scorecard system.
Eighth Step: Cascading
Following the development of the corporate scorecard, the eighth step (cascading) involves the transfer of the corporate scorecard to business and support units throughout the organization. Team and individual scorecards are then developed to relate to daily work, department goals, and corporate vision.
Cascading is the key to organizational cohesion around strategy. Optionally, the goals of customer-facing processes can be integrated into the compliance process to produce linked results and responsibilities across the organization. Performance criteria are developed for all objectives at all organizational levels. Goals and performance metrics become more operational and tactical as the scorecard management system gradually descends within the organization. As responsibility defines ownership at all levels, it follows goals and measures. Emphasis on results and the strategies required to produce results is conveyed throughout the organization.
Ninth Step: Evaluation
Evaluation; It includes evaluating the success of chosen business strategies. The key question asked is "Have the expected results been achieved?" in the form.
The evaluation step includes the following items:
- "Can we ensure that organizational learning and knowledge creation are included in planning?"
- "Have we made any adjustments to the current service schedules?"
- "If it is more cost-effective, are new programs added?"
- "Are programs that do not provide cost-effective services or meet customer needs, eliminated?"
- "Is planning linked to budgeting?"
- "Do we process our targets to the right extent and apply them with the right KPIs?"
- "Have we been able to set the correct odds on the targets?"
What Components and Perspectives Does the Balanced Scorecard Have?
Based on the vision and strategy in the BSC structure created by Kaplan and Norton, 4 perspectives in general emerge;
1.Financial Indicators (How should we look to shareholders for financial success?)
- It covers long-term goals.
- It consists of profitability, efficiency, and ROI (RETURN OF INVESTMENT) return.
- Consequently, the financial perspective is the focus of other perspectives as a goal. If we want to develop the company, we cannot only look at the financial situation, we must also pay attention to internal processes, customers, learning, and development.
2. Internal Processes (How should I organize my internal processes to satisfy our customers and shareholders?)
- It includes determining the processes to be done in the company to achieve the goals set in the financial and customer perspective.
- It fulfills the needs of the customer, the needs of the market, and the expectations of the shareholders.
- It focuses on attracting new customers from the market.
3. Customer (How should we look to our shareholders to realize our vision?)
- It is a perspective that makes the financial perspective come true.
- The customer perspective forms the revenue part of the financial perspective.
- While creating a customer perspective, the market should be clearly demonstrated.
- After the target principle is determined, targets should be set according to customer and request expectations.
4. Learning and Development (How should we protect our ability to change and develop to reach our vision?)
- It is the ability to have the capacity to create value for shareholders.
- It includes changes that need to be made in the infrastructure to focus on strategic goals. (Their system is smooth, a quality system, the programs used, etc.)
- It is necessary to focus on sharing information within the company, improving the quality of the employee and employee satisfaction. It is very important to have qualified personnel.
- To achieve long-term goals with a learning and development perspective, it should be associated with infrastructure, customers, and internal processes.
Norton and Kaplan say that a maximum of 25 measures can be put in the 4 perspectives above. In addition to these 4 perspectives, there may be titles such as sustainability, environmentalism, social issues, and law. It should not be more than 25 meters because otherwise the job may not be solved.
The 4 perspectives affect each other and the relationships between perspectives can be shown in a strategy map. Considering the perspectives and sub-criteria;
Financial: Profitability and efficiency,
Customer: Customer retention, customer satisfaction, customer acquisition, customer profitability, increasing market share, increasing customer share,
Internal Processes: Shortening the current product life cycle, increasing brand management, increasing technology capacity (increasing the level of digitalization), creating innovation processes (innovations), improving regulatory and social processes,
Learning and Development: Improving global knowledge management, increasing employee motivation, improving employee competencies, providing training to employees, retaining competent and qualified employees.
What is the Difference Between Corporate and Individual Scorecards? What is Corporate and Individual Scorecard Management?
Balanced scorecard management brings a balanced perspective to performance management. As Prosoftly, we handle the corporate scorecard, the entire financial perspective of the institution, internal processes, learning and growth direction, and customer perspective in line with the company's mission and vision. We define a management style that shows its general condition. With the balanced scorecard application, the institution ensures that all company employees focus on a common goal. The spread of strategies throughout the organization in this way is a very important phenomenon for companies in terms of contributing to corporate identity.
Individual Report Card
While creating a balanced corporate scorecard, the logic is reduced from the institution to departments and from departments to individuals; It allows the whole institution to act in line with the same goals and objectives. When defining individual scorecards, you can give fair targets to the relevant positions of the appropriate KPIs. Giving priority to KPIs by weighting according to the impact rate on the scorecard also enables the person to use his work plan and effort in a more planned manner. The person can determine the actions to be taken for the goals to be achieved.
Can You Provide A Balanced Scorecard Sample?
Balanced scorecard templates, that is, balanced scorecard templates, can be very diverse depending on how detailed it is desired. As Norton said, max. We set 25 criteria and add weight, target, and extension rates to this measure and add points in the formulation. Purposes; weight, measure (KPI), target ratio, stretch ratio, and score.
We obtain financial score, customer score, internal processes, and learning development scores. We have created an average score in total. "Is my score above my target score?", "How high is my score above the target score?", "Where did we drop our score?" and "Where are we missing?" We reveal the answers to the questions like.
We show the answers on the table and color them according to these answers. We can give blue if the score is much higher than our target, green if it is slightly above, yellow if it is the same or slightly below, and red if it is much below. For example; There is a project that we look at financially. As a perspective, we decided to evaluate it in 2 criteria under the title of productivity and growth. Let the productivity aim be to reduce costs in the industry. Let my target rate of KPI indicator and cost reduction per unit be 20%, and the result is 10%. Here the score is 50%. Let's say my market share target rate for growth is 50% and the result is 40%. Here the score is 80%.
Mean Performance means that my average score in finance and customer is 65%. My criteria should be timeliness and quality. Let's call my goals zero defects and on-time delivery. My target rate for the quality of KPIs was 100%, and the score I achieved was 80%. At this point, the score is 80%. If my target rate of on-time delivery is 95% and the actual rate is 90%, the score will be 95%. At this point, the mean performance is 87%.
Each measure may have a different weight. The numbers are subject to change. Companies can find many templates in the crimes and adapt them to them. The goals and criteria of each sector may differ.