The balanced scorecard looks at performance from four perspectives:
1. Customer perspective—how do our customers see us?
2. Internal business process perspective—at what must we excel?
3. Learning and growth perspective— company must continue to grow and change in the modern dynamic business environment.
4. Financial perspective—how do we look to shareholders?
The four perspectives should complement each other. If customers are happy, for example, this should lead to greater revenues and profits, which improve the financial perspective.
2 Balanced Scorecard Philosophy
2.1 Setting Measures and Performance Targets
Within each of the four perspectives, management needs to identify:
1. Objectives—what are the main objectives?
2. Measures—how can the performance be measured against the objectives?
3. Targets—what targets should be set for each of the measures?
4. Initiatives—what actions could be taken to improve performance?
2.2 Leading and Lagging Indicators
Kaplan and Norton are interested in the cause and effect aspects of performance measurement. In this, they talk about leading and lagging indicators.
Lagging (downstream) indicators show the effect of decisions long after they were made. The balanced scorecard refers to financial measures as a lagging indicator because that performance results from past decisions.
Leading (upstream) indicators drive future financial performance. These are the non-financial performance indicators relating to customer, internal business processes and learning and growth.
2.3 Importance of Strategy
Kaplan and Norton also realised that companies chose many performance measures inconsistent with company strategy. The company should choose objectives for the four areas which reflect its mission and strategy, and measure appropriate results.
Many companies began to use the balanced scorecard not simply as a performance measurement tool, which was the original objective, but also as a tool to clarify and manage strategy.
3 Advantages and Disadvantages
It leads to a wider view of the performance of an organisation rather than concentrating on the financial aspects of performance.
It links performance measurement to the objectives of the organisation and therefore its strategy. This ensures that what is being measured is relevant to the strategy and objectives of the entire organisation.
The use of a small number of KPIs ensures that management is able to concentrate on the most important aspects and not be confused by an excessive number of performance indicators.
Introducing the balanced scorecard would require training and a change in culture. Managers and staff may initially be sceptical.
Identifying the most appropriate measures may be difficult.
The balanced scorecard focuses only on the needs of two stakeholders—owners and customers; it ignores the needs of other groups, such as employees.