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Balanced Scorecard: A powerful strategic tool for organizations

By Professor Soumyadip Chakraborty of WSB

Whenever I hear the CEO, MD, or Chairman of any organization highlight “Employee Engagement” as a major point of concern, I ask them a simple question: “Does your organization have a Balanced Scorecard in place?” And voila! In 90% of the cases the answer is “No”, “Don’t think so”, “Not sure”, etc. 8% of the companies say, “Yes, but not fully implemented”, or “Yes, but not sure whether every employee knows about it”. Only around 2% of the companies are at the two extremes – either they haven’t heard of it, or they argue that there are better ways for employee engagement. Whatever it is, let us understand why Balanced Scorecard is important in the context of employee engagement.

What is Balanced Scorecard

The concept of Balanced Scorecard was first introduced by two management gurus, Robert Kaplan and David Norton in the 90’s. It added three new dimensions along with the traditional financial parameters of reporting health of an organization: Customer, Business processes or Internal processes and Learning & growth. Soon Business Inc. realized that reporting only the financial health of an organization is not enough.

Balanced Scorecard not only focused on reporting the performance of a corporate across these four areas but also focused on reporting in a SMART manner, with the help of different KPIs or Key Performance Indicators. These KPIs were sometimes simple and sometimes calculated as a ratio, or product between two simple KPIs. Since introduction, Balanced Scorecard became very favorite among the companies and reporting started at the same line. GE, Caterpillar, DuPont, Ford, Daimler Chrysler, First Energy Corp., etc. were among the first adopters of Balanced Scorecard. One of the reasons Balanced Scorecard gained traction was that the concept helped organizations not only report the KPIs but also track the movement of the KPIs. A properly implemented Balanced Scorecard also allowed KPI owners to register the action plans against non-achievement of desired pro-rata KPI values.

Four areas focused in Balanced Scorecard

As mentioned above, Balanced Scorecard covers four aspects or areas of an organization in order to find out how it is performing. Balanced Scorecard can be prepared monthly, weekly or even daily. The four areas of analysis are:

  1. Financial:

Financial parameters include KPIs like “Sales” or “Revenue”, “Cost”, “Profit”, “Profit per unit of goods sold”, “Income from other sources”, etc. The Financial KPIs can be broken down into different other values. These are called Dimensions. For example, Sales can be divided into Geography and we can have Sales from North, South, East & West of India. Revenue can be further broken down based on Products. In that case, Product will be a dimension.

  1. Customer:

Customer related KPIs signify how the organization focuses on Customers. For example, “Reduction in number of customer complaints”, or “Increase in Customer satisfaction score”, “Reduction in waiting time in queue” could be some examples of Customer related KPIs.

  1. Internal processes:

Any organization will have a number of processes in order to serve the customers. The indication of efficacy and effectiveness of such processes are measured here. Some examples of such nature are “Turn-around time (TAT) for serving a request”, “Reduction in average TAT”, “Improvement in vendor scoring”, “Safety index”, etc. However, it is noteworthy that there is no Chinese wall among the four areas. For example, “Reduction in waiting time in queue” related to Customer as it results in customer delight and it is also related to Internal processes as the same is an outcome of internal efficiency of the organization. In such cases, it is up to the organization how it looks at it.

  1. Learning & growth:

It is related to the learning & growth of the employees of the organization. Some KPIs are “Training Hours”, “Training cost”, “Productivity improvement”. Calculating these KPIs sometimes involve a few assumptions (like “Productivity”, etc.), but calculation can be done.

Transformation of Balanced Scorecard

Over a period of time Balanced Scorecard transformed a number of organizations. Corporates benefited a lot in the domain of strategy implementation and making sure that the organizations are more sustainable. However, over this time, Balanced Scorecard had also undergone changes itself. Rather than being used merely as a tracking system, Balanced Scorecard gradually got deployed as a key strategic tool by many organizations. Rather than monitoring the parameters across four dimensions at the end of the performance cycle, the organizations started focusing on KPIs from the beginning of the year and introduced new KPIs based on the strategic intent. For example, while the companies are into expansion mode, “Number of new stores”, “New geographic areas covered”, etc. became more important than “Store efficiency”, “Operating cost/ Store”, etc. Hence by the beginning of the new century, Balanced Scorecard was one of the major strategic tools for leading corporates. However, along with strategic tool, Balanced Scorecard can also work as a major employee engagement tool.

How Balanced Scorecard can help in employee engagement

It is a well-established fact that lack of information about the organization’s strategy and roadmap is a major reason why employees feel disengaged. If the employees are not aware where in the organization they are adding value, they feel that perhaps their work is not important. Knowing about how the performance is getting measured and how that is important are the major gaps and both can be addressed by Balanced Scorecard. So what the organizations should do?

  1. They need not look at Balanced Scorecard and employee performance management in silos. Both these concepts are connected to each other.
  2. Best performer and other awards should also not be stand-alone, they should also get connected to Balanced Scorecard.
  3. Every employee should have a scorecard of his/her own, whereby (s)he can monitor own performance in a transparent way.
  4. Balanced Scorecard should directly focus on organization’s goals and the KPIs should be defined accordingly. Then those KPIs should be rolled out to the functional heads, Business Unit heads and gradually to the last mile, i.e. till the last employee of the organization.
  5. It should be ensured that like organizations, the employee performance parameters should also have all the four dimensions, i.e. Financial, Customer, Business Process and Learning & growth.

Organizations leveraging Balanced Scorecard in a strategic way are always one step ahead of their competition. However, organizations using that for employee engagement are ahead in terms of attracting and retaining the best talents as well. So Balanced Scorecard is an extremely useful strategic artifact for superior performance and stability of organizations.