Before Balanced Scorecard (BSC) emerged, organizations usually use traditional methods of performance evaluation focused mainly on financial measures such as ROCE, sales and profits. Balanced Scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The scorecard measures organizational performance across four linked perspectives: financial, customer, internal business process, and learning and growth. In recent years, a number of multi-national organizations have introduced BSC as part of their management control systems.
Advantages of the Balanced Scorecard
Balanced Scorecard has been widely used in many organizations in the past 15 years. It obviously has some benefits to these organizations. Here are some of the advantages of Balanced Scorecard and they are also reasons that make so many organizations adopt BSC.
Firstly, each perspective of Balanced Scorecard requires the identification of a number of goals, and suitable measures. This means that BSC can provide strong support to the decision making of the organization. In the world which is full of competition, it’s very important for an organization to identify what is most important. Each goal and each measure of the BSC is closely related to the strategic target of the organization. The organization can make strategic decisions based on the BSC. Multi-national organizations are often very large, they need simplified and concentrated target for the whole organization to keep themselves competitive. Otherwise, the connection between different departments will become weak and the organization will finally fall apart.
Secondly, Balanced Scorecard guards against sub-optimisation, so that improvement in one area is not achieved at the expense of another. Teamwork is a very important part of corporate culture. BSC combines different elements of an organization and that enables managers to consider what different departments’ functions are. In traditional methods of performance evaluation, managers only focus on financial figures. This can lead to decisions that make one department improve its performance on the expense of another. This is quite important to multi-national organizations. A multi-national organization has many departments and one of the managers’ tasks is to coordinate these departments and make the most use of each department. If one department improve its performance on the expense of another, there will be serious problems for the organization.
Thirdly, Balanced Scorecard brings together many of the different elements of a company’s business and strategy into a single report. This can make decision making process more efficient. All of the four perspectives of BSC are key elements to the success of an organization. BSC provides a report of the combination of the four perspectives and it can save time for managers who are making decisions. It also enables managers to minimize information overload by limiting the number of measures used. Nowadays, organizations seldom get bothered because of lack of information, on the contrary, they often have to deal with more information than what they really need. This happens more often on multi-national organizations. Many multi-national organizations hire professionals as consultants and when these consultants provide suggestions, there will usually be an increase in the sources of information. This will thereby increase the pressure of dealing with information. BSC can help managers concentrate on only a few key factors, so that they can minimize information overload and make the right decision at the same time.
Fourthly, Balanced Scorecard challenges managers to look at organizations in new ways and to talk to stakeholders about the issues which really matter. It can also inspire employees to work harder. Traditional methods of performance evaluation stress what managers want employees do and then evaluate the result. They’re about the control of results. BSC, on the other hand, stresses target management. It encourages employees to reach the target creatively. Top managers don’t know everything themselves. The BSC lets people who know the area best make the best decision and the task for top managers is to combine all these together and set a target for the organization as a whole. Managers don’t have to look at the detailed information, they just need to set targets and make decisions for the organization as a whole. This can be quite important to multi-national organizations because they usually have departments all over the world, it’s impossible for top managers to look into every detail in every department and shareholders need the most important information to make decisions. So BSC turns out to be a very good tool for multi-national organizations.
Limitations of Balanced Scorecard
However, Balanced Scorecard is not suitable for every organization in the world. It also has some limitations.
Firstly, Balanced Scorecard is to complicated for some organizations. Organizations have to increase the number and breadth of performance measures when the adopt BSC. Many organizations find it complex for evaluating business units performance because BSC has large number of performance measures across several perspectives. If an organization wants to adopt BSC, it has to establish clear and real cause-and-effect relationships between different measures. This process of establishing relationships may take years to complete. Therefore, many organizations find it hard to adopt BSC. And some organizations which do adopt BSC just simplify it by reducing measures and some even focus on financial measures only, just like what they do in traditional methods.
Secondly, Balanced Scorecard may result in employees paying attention to the areas measured. Since BSC outlines what the organization’s strategy and all the areas that will be measured, employees will start paying attention to these areas so that they can get high reward through good performance in these areas. They’ll ignore areas that won’t be assessed because they won’t get reward from these areas. And this can become a weak point of the organization. The use of BSC requires a change in the orientation of the employees. Managers have to think about customers, internal business process and learning and growth as well as financial perspective, which means managers have to know more than just financial figures. Other employees, at the same time, are also forced to look at the organization’s goal instead of their own production or sales goals. This requires that all of the employees must have a higher education than they had in traditional methods.
Thirdly, Balanced Scorecard may be too restrictive and also may not be able to cope with a fast changing business environment. The market is changing rapidly nowadays and it takes time to construct a BSC system in the organization. Important elements for an organization change everyday. And new elements arise everyday. It’s quite possible that one element is very important when the organizations decides to adopt BSC and becomes not important at all when BSC is finally established.
Fourthly, some organizations may face capital market pressure. Most organizations, especially multi-national organizations, raise fund from the capital market. Capital market influence managers decisions a lot. Managers know what they say and do may affect the stock price and they know that usually analysts are only interested in financial measures. This leads to organizations focus on income and revenues because this is what they’re measured on externally.
Finally, Balanced Scorecard may have a high cost. Balanced Scorecard requires an organization to think from and set target in financial perspective, customer perspective, business process and learning and growth perspective. This require not only deep understanding of the overall strategy of the organization, but also the separation of the strategy into different departments. The organization needs to set proper goals and measures for each department. And employees need to learn about BSC to make sure the system will work. Information of each department and each perspective of the BSC needs to be collected. Establishing BSC consumes a lot of time and resources. Even established, BSC can cost a lot. It needs continuous collection of information. And there is a learning and growth perspective in BSC, which can be quite expensive. So many organizations may abandon BSC just because of the high cost.