It is the most widely used business performance measurement framework, introduced by Robert S. Kaplan and David P. Norton in 1992. Balanced scorecards were initially focused on finding a way to report on leading indicators of a business’s health, they were refocused to measure the firm’s strategy that directly relate to the firm’s strategy. Usually the balanced scorecard is broken down into four sections, called perspectives, as
- The financial perspective – The strategy for growth, profitability and risk from the shareholder’s perspective. It focuses on the ability to provide financial profitability and stability for private organizations or cost-efficiency/effectiveness for public organizations.
- The customer perspective – The strategy for creating value and differentiation from the perspective of the customer. It focuses on the ability to provide quality goods and services, delivery effectiveness, and customer satisfaction
- The internal business perspective – The strategic priorities for various business processes that create customer and shareholder satisfaction. It aims for internal processes that lead to “financial” goals
- The learning and growth perspective – The priorities to create a climate that supports organizational change, innovation and growth. It targets the ability of employees, technology tools and effects of change to support organizational goals.
The Balanced Scorecard is needed due to various factors, as
- Focus on traditional financial accounting measures such as ROA, ROE, EPS gives misleading signals to executives with regards to quality and innovation. It is important to look at the means used to achieve outcomes such as ROA, not just focus on the outcomes themselves.
- Executive performance needs to be judged on success at meeting a mix of both financial and non-financial measures to effectively operate a business.
- Some non-financial measures are drivers of financial outcome measures which give managers more control to take corrective actions quickly.
- Too many measures, such as hundreds of possible cost accounting index measures, can confuse and distract an executive from focusing on important strategic priorities. The balanced scorecard disciplines an executive to focus on several important measures that drive the strategy.