Balanced scorecard (BSC)

A balanced scorecard (BSC) is a method of analyzing organizations and creating strategies to meet organizational goals. Balanced scorecards align an organization's goals and strategies with many performance measures and other factors such as customer satisfaction, financial performance, internal efficiency, and innovations. By setting targets and analyzing performance in these categories, organization leaders can assess whether the group is meeting its goals and make informed decisions about how to correct any problems within the organization.

First popularized in the early 1990s by Robert Kaplan and David Norton, balanced scorecards underwent a long process of refinement over the next few years. By the twenty-first century, the third major version of the balanced scorecard system became a major management tool in organizations around the world. Many kinds of organizations, including businesses and industries, government offices, and nonprofit groups, have employed balanced scorecard methods.

History of Balanced Scorecards

In the early 1990s, Dr. Robert Kaplan of Harvard Business School and Dr. David Norton began studying and writing about various methods of measuring performance in businesses and other organizations. The researchers noted that many traditional methods were critically flawed and ineffective. Some approaches were too vague or subjective. Others focused only on the financial bottom line and left out all the other details of business.

Kaplan and Norton began searching for more effective alternatives. They developed a new method of performance measurement referred to as a balanced scorecard. The "balance" in the term refers to carefully weighed interactions between financial factors (traditionally favored in performance measurements) and nonfinancial factors (previously overlooked elements such as goals and strategies). The researchers claimed that balancing these elements would give leaders comprehensive insights into the successes and failures of their organizations.

Although balanced scorecards became popular in the early 1990s, their roots reach back farther. Kaplan and Norton may have drawn inspiration from the self-assessment endeavors of several firms, such as Analog Devices, in the mid-1980s. Some elements of balanced scorecards may be traceable to General Electric performance reports from the 1950s, or even to a French measurement system known as Tableau de Bord (Dashboard) whose elements date back to the early 1900s.

Measures and Perspectives

A balanced scorecard is based on an assortment of interrelated organizational elements. Scorecard users analyze these elements and set targets for how an organization will address each element to meet its overall goals. In time, performance reports can be matched against the targets to help analyze how well or poorly the organization is proceeding toward its goals.

Among the most important factors on a balanced scorecard are the vision and strategy of the organization's leaders. The vision and strategy must take into account many other factors, including the knowledge of leaders and workers; the innovations used in training, research, and planning; the efficiency demonstrated in the internal workings of the group; the satisfaction of customers and other stakeholders; and the financial performance of the group. All of these factors are interconnected and must be addressed properly to ensure the overall success of the organization.

The balanced scorecard also acknowledges a number of perspectives through which various data and measurements must be assessed. These perspectives help to ensure that the parts of an organization all work together to benefit people inside and outside the organization. Some important perspectives relate to the ongoing learning and training of organization members; how effectively an organization operates on a daily basis; whether the organization is financially feasible; and how customers and stakeholders perceive the organization and its work.

Development and Uses

The first balanced scorecard system, as proposed by Kaplan and Norton in the early 1990s, was a relatively simple framework for performance measurement. This framework used a limited variety of measuring criteria that was analyzed through four main perspectives: financial, customer, internal processes, and learning and growth. This early version, known later as the first generation, contained the essential elements of a balanced scorecard, but was still unrefined. Many users found the available measures and perspectives too narrow to fit a wide range of organizations and goals, or had difficulty choosing appropriate measures or targets. For these reasons, many early balanced scorecards were unsuccessful.

In the mid-1990s, second generation balanced scorecards resolved some of the weaknesses of the initial version. The new scorecard design provided clearer objectives to help leaders choose the best targets and goals. It also included a Strategic Linkage Model (or Strategy Map) to assist leaders in choosing performance measures and justifying their choices.

Around 2000, a third generation of balanced scorecards appeared. These offered users greater ease of implementation and more focus on planning stages. Through improved planning, leaders may find better ways to choose and agree upon common goals and strategies, as well as set shared targets and measures. This generation of balanced scorecards was proven more successful than its predecessors and became widely used.

Advances in the balanced scorecard system turned it from a passive academic analysis into a dynamic tool that helps leaders create and implement strategies in the daily life of an organization. Users reported that balanced scorecards help organizations form and carry out plans; align shared goals and strategies within an organization; better maintain finances and customer relationships; and gather feedback on an organization's progress.

In the twenty-first century, balanced scorecards became one of the most influential management tools in the world. According to a study performed by the Gartner Group, more than 50 percent of large firms in the United States, Europe, and Asia employed balanced scorecard methods by the end of 2000. Another study by Bain and Co. confirmed that about 44 percent of companies in North America used balanced scorecard methods during the same period. The system also became popular in many African and Middle Eastern nations. By 2019, one survey noted that of those who used the balanced scorecard method, 88 percent found it extremely or very useful.

Criticism of Balanced Scorecards

The balanced scorecard method has been criticized on several different points. The academic community has criticized Kaplan and Norton for not citing any earlier papers in their original publication. Meanwhile, the method itself has been criticized for not providing any conclusions, recommendations, or synthesis of the data; it is simply a list of metrics. Some critics have also pointed out that these metrics can be subjective and difficult to quantify. Finally, balanced scorecards have been criticized for prioritizing the needs of financial stakeholders above all else, which is not necessarily a detriment to their use in traditional commercial organizations, but makes them a poor fit for nonprofits and other such organizations where the financial bottom line may not be the primary concern. Some companies, however, have used the framework of balanced scorecards while altering the categories to better fit their organization's specific needs.

Bibliography

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"Balanced Scorecard Usage Survey 2019." 2GC Active Management, 2019, 2gc.eu/resources/survey-reports/2019-survey. Accessed 8 Jun. 2022.

Cote, Catherine. "What Is a Balanced Scorecard?" Harvard Business School Online, 26 Oct. 2023, online.hbs.edu/blog/post/balanced-scorecard. Accessed 17 July 2024.

Kaplan, Robert S., and David P. Norton. "Using the Balanced Scorecard as a Strategic Management System." Harvard Business Review, July 2007, hbr.org/2007/07/using-the-balanced-scorecard-as-a-strategic-management-system. Accessed 8 June 2022.

Marr, Bernard. "Balanced Scorecard: How Many Companies Use This Tool?" Bernard Marr & Co., bernardmarr.com/balanced-scorecard-how-many-companies-use-this-tool/. Accessed 8 Jun. 2022.

Tarver, Evan. "What Is a Balanced Scorecard (BSC), How Is It Used in Business?" Investopedia, 24 Feb. 2024, www.investopedia.com/terms/b/balancedscorecard.asp. Accessed 17 July 2024.

Wilhite, Tamara. "Balanced Scorecard: The Pros and the Cons of BSC." ToughNickel, 6 Sept. 2022, toughnickel.com/business/Balanced-Scorecard-Pros-and-Cons. Accessed 17 July 2024.