Balanced Scorecard: Myth and Reality

Abstract

The performance improvement process is a critical component of the strategic planning process. Call it by any name, the process is very vital, and it has always been practised by many companies worldwide for a long time. This process has been recently dubbed as the balanced scorecard. The balanced scorecard is a system of combining financial and non-financial measures of performance in one single scorecard. It includes performance measures for four perspectives: financial, customer, internal business processes, and learning and growth (innovation). It need not be restricted to four perspectives; more may be added. The social responsibility and environmental concerns are two possible candidates. The balanced scorecard focuses on the link between business processes and decisions and results. It is considered as a device to guide strategy formulation, implementation, and communication. It also helps in tracking the performance and providing quick feedback for control and evaluation. A number of companies in the USA and a few companies in India have implemented the balanced scorecard. The success of the balanced scorecard or a similar device will depend on the clear identification of non-financial and financial variables and their accurate and objective measurement and linking the performance to rewards and penalties. The proponents of the balanced scorecard claim that it aligns with strategy leading to better communication and motivation which causes better performance. This assumption could be the single most important reason for the popularity of the balanced scorecard. However, this may or may not be true in practice. This is an empirical question. There is a need to document the experiences of the balanced scorecard companies and establish the cause-effect relationship. There are several reasons for the use of the balanced scorecard by organizations: The balanced scorecard is a comprehensive tool to understand the target customers, their requirements, and the performance gaps. The balanced scorecard provides logic for focusing on creating intangible and intellectual capital which under the traditional financial performance systems was difficult to do. The balanced scorecard is able to articulate the strategy of growth with business excellence which requires greater focus on non-financial initiatives. The balanced scorecard enables employees to understand strategy and link strategic objectives to their day-to-day operations. The balanced scorecard facilitates performance review and feedback on a continuous basis. The balanced scorecard, we strongly believe, will be useful to an organization when it is a part of the strategic planning process. A successful implementation of the balanced scorecard has the following other prerequisites: Top management commitment and support Determining the critical success factors (CSFs) Translating CSFs into measurable objectives (metrics) Linking performance measures to rewards Installing a simple tracking system Creating and linking the balanced scorecards at all levels of the organization Setting up a sound organizational communication system to harness advantages of the balanced scorecard Linking strategic planning, balanced scorecard, and budgeting process for better allocation of resources.