A balanced scorecard allows organizations to get feedback on the state of internal business processes and external outcomes, allowing leaders to sharpen performance and achieve better business results. This strategic management performance metric has been an important tool in Six Sigma and quality management for many years, and remains popular to this day.
Robert S. Kaplan and David P. Norton famously introduced the concept in a 1992 article written for the Harvard Business Review. They compared the balanced scorecard to the dials and indicators in an airplane cockpit. Much in the way pilots need information on a variety of factors to safely fly a plane – such as air speed, bearing and destination – business leaders also need information on a variety of business metrics to lead an organization to success.
“Reliance on one instrument can be fatal,” the pair wrote. “Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.” Those words remain true to this day.
The Four Areas of a Balanced Scorecard
The term “balanced” is used in the balanced scorecard to reflect that it considers a variety of factors in determining the health of a company. As opposed to just looking at profit and loss or achievement of strategic goals, a balanced scorecard looks at every aspect of a business to determine how well it is performing.
It also helps business leaders identify areas where process improvement can create benefits. While started for use with for-profit companies, the balanced scorecard has since become popular with non-profits and government agencies, as well.
Most organizations examine four main areas when using a balanced scorecard.
Business processes: An examination of the efficiency of business processes and the quality of products and services produced to ensure they exceed customer expectations. The focus is on finding bottlenecks in the process and wasteful actions that organizations can eliminate.
Finances: This includes data on income, details on expenses, analysis of sales and a variety of other financial metrics. This part of the scorecard provides a “bottom line” view of the organization from the perspective of shareholders and investors.
Customers: A detailed look at a company from the perspective of customers and clients. What is the buying experience like? What is their level of satisfaction with the quality, availability and price of services and products?
Learning and Growth: A detailed analysis of the quality of training and knowledge resources offered to employees as well as how effectively they apply what they learn in ways that improve company performance. Learning and growth should help organizations gain a competitive advantage in the competition.
Why Businesses Use The Balanced Scorecard
By examining all four of these areas in a single report, organizational leaders develop a comprehensive view of the operation they lead rather than having to piece it together from multiple reports. They can use this information to develop an improved vision and strategy for the company.
The balanced scorecard also helps business executives and managers better communicate the strategic goals of the company and find ways to align daily operations with overall business strategy. It also allows everyone involved in decision-making processes to refer to the same report and understand the metrics employed by the company.
Many of these advantages are clear for practitioners of Lean Six Sigma. For example, by placing the emphasis on the perspective of the customer (known as Voice of the Customer in Lean), leaders make better decisions on what products and services to prioritize, develop ideas for new products and services, and make changes to improve the quality of existing products and services.
Understanding the state of current operations, including how the daily work of employees contributes to strategic goals, also allows managers and executives to find new ways to measure and monitor progress of day-to-day operations.
Examples of Balanced Scorecards
The J.D. Power survey offers an example of an outside consultant providing a company with a balanced scorecard. J.D. Power provides scorecards for firms in a variety of industries, providing insight and advice. The company has established benchmarks by industry to help companies improve return on investment, quality of products and better engage with existing and potential customers.
Many companies also do customer surveys or create customer focus groups to get feedback on the company’s products and services. They typically talk to consumers in different market segmentations, divided by characteristics such as age, gender, geographic location, economic status, and more.
Lean Six Sigma also offers a variety of tools and techniques to focus on operational efficiency and eliminating waste. Using them to create a balanced scorecard can help business leaders drive focus onto the key issues that influence a company’s success.
