The balanced scorecard approach to managerial control

Need for the balanced scorecard

Control has long rested mainly on financial measures: traditional techniques such as budgetary control and break-even analysis, and modern ones such as return on investment and ratio analysis. These are lagging indicators: they report the results of past decisions, they encourage short-term thinking, and they say little about the things that create future value: customer loyalty, efficient processes, skills and innovation.

Meaning of the balanced scorecard

The balanced scorecard (BSC), developed by Robert Kaplan and David Norton and listed in the DU course among the modern measures of control, is a strategic performance-measurement and control system that translates an organisation's vision and strategy into a balanced set of objectives and measures from four perspectives. The balance is between financial and non-financial measures, short-term and long-term goals, lagging and leading indicators, and external and internal views.

The four perspectives

1. Financial perspective — How do we look to shareholders? Objectives such as profitability, growth and cost reduction; measures such as return on capital employed, revenue growth, operating margin and economic value added.
2. Customer perspective — How do customers see us? Objectives such as satisfaction, retention and market share; measures such as customer-satisfaction scores, repeat purchases, complaints and on-time delivery.
3. Internal business process perspective — What must we excel at? Objectives in the processes that create value for customers; measures such as cycle time, defect rate, productivity and new-product development time.
4. Learning and growth perspective — Can we continue to improve and create value? Objectives for people, systems and culture; measures such as training hours, employee satisfaction and retention, skills coverage and suggestions implemented.

The perspectives are linked by cause and effect: skilled, motivated staff (learning and growth) improve processes, which raise customer satisfaction, which in turn leads to better financial results.

How the scorecard is used for control

1. Clarify the vision and strategy and translate them into objectives for each perspective.
2. Choose measures, set targets and identify initiatives for each objective; a strategy map shows the links.
3. Cascade the scorecard to divisions, departments and individuals, so that everyone's goals support the strategy.
4. Measure actual performance regularly and review results against targets in all four perspectives.
5. Take corrective action and use feedback to test and revise the strategy itself (strategic learning).
6. Link rewards to scorecard performance.

Example. A hotel chain sets targets for revenue per available room (financial), guest-satisfaction rating and repeat bookings (customer), check-in time and room-turnaround time (internal process), and staff training days and staff turnover (learning and growth). A fall in guest ratings is traced to slow check-ins and high staff turnover, prompting training and retention measures before profits suffer.

Merits and limitations

Merits: links control to strategy; balances short- and long-term goals; uses leading indicators that warn early; aligns everyone with the strategy; and supports communication. Limitations: choosing the right measures is difficult; too many measures cause confusion; cause-and-effect links are assumed rather than proved; and it needs time, data systems and top-management commitment.