Balanced Scorecards

Written by Serena Berger
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Balanced scorecards are a relatively new and innovative form of comprehensive financial management. They were created slightly over a decade ago by Robert Kaplan and David Norton, who felt that traditional models were neither complete nor sufficiently flexible to keep up with business plans in the Information Age. Their objective was to develop a financial planning tool that was more complete than older management approaches, and which could be used by any company to get a balanced perspective on their current state of finances and the optimal way to move into the future.

The ultimate result of using the balanced scorecard system is the clarification of vision and the appropriate strategy to achieve your goals. Balanced scorecards make sure that your analysts have all of the information they need to determine the best actions to be taken. Their conclusions will be based on the history and current state of internal business processes and external outcomes affecting your company. Balanced scorecards aim to give you comprehensive feedback, which you can use to look further into the future than you can with more traditional financial measures.

The balanced scorecard takes four perspectives into consideration. None of these perspectives is considered more important than the others, so no hierarchy should be assumed based on the order in which they are presented. The four perspectives must be considered singularly and then each in combination with the others to gain the complete benefit of this type of model.

The Four Perspectives on Balanced Scorecards

The first perspective considered, as defined by Kaplan and Norton, is the learning and growth perspective. The second is the business process perspective. Third is the customer perspective and fourth, the financial perspective. Some consultants break these perspectives down even more--but even if they do, this basic structure remains intact, and understanding these four perspectives can help you understand why balanced scorecards are so useful to a company willing to put in the time and effort to use them.

The learning and growth perspective is concerned with the ability to change and grow as a business. Some traditional financial models do not give you this flexibility. They cannot be used to predict the results of many changes, or they do not make it clear which aspects of performance would be likely to alter or solve the problems that you currently have. It is of little use to highlight areas that are weaker than others if you are not able or prepared to change operations in order to improve them.

The business process perspective emphasizes any aspects of internal organization that must be strengthened in order to meet your goals. Business processes are any actionable concepts, and many companies err on the side of isolating too few of them. They may think of billing, for example, as a single process when it is actually better broken down into several smaller processes. You may have skilled staff and a sufficient software system, but when it comes to mailing, you may not be as efficient as possible. For balanced scorecards to work for you, you must take the time to break down your business processes and evaluate every aspect of performance.

The Customer Perspective

The customer perspective refers to how you appear to your customers. As with businesses processes, companies frequently do not identify all of the separate aspects of this perspective accurately. You must have an objective--how you want to appear to your customers and potential customers--and a way to measure how close you come to meeting that objective. Balanced scorecards will help you develop a realistic picture of how your customers view your product or service and integrate that in your plan for growth.

The financial perspective is a little different that you might expect--its focus is how the company appears to the shareholders. Of course, this includes a realistic analysis of the state of the company's finances, but the point is that a company cannot succeed unless shareholders feel confident in management and strategic planning. The balanced scorecard helps you look at ways to justify or explain what could be considered risks or innovations in your business plan, and also helps you verify that your shareholders have confidence in your business.

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