The Balanced Scorecard is an approach to measuring a company's success without using traditional accounting or finance techniques. Instead, the approach is used to understand a firm's productivity, efficiency and organisation with new types of measurements. However, there are both positives and negatives to this approach developed by Harvard Business School professors.
Key Performance Indicators
The Balanced Scorecard uses Key Performance Indicators (KPIs) to measure a firm. The success or failure of the approach is almost completely dependent on whether the KPIs are appropriate. Appropriateness is defined by relevance, timeliness, specificity and actionability. This has both positive and negatives. A good KPI can give great insight into the firm, while a bad KPI could shed no light or give the wrong impression about a company. For example, a good KPI for a manufacturing firm is product failure rate because it ties into the quality and workmanship of the company's products. The product failure rate of a services firm with only a small percentage of revenue from products would not be as valuable.
The person who designs the scorecard is important to the outcome for both good and bad reasons. Individual managers may be inclined to include KPIs that show their division as the most important or efficient part of the firm. For example, an engineering manager may focus on the efficiency of his products while a sales manager will focus on sales metrics. Therefore, many firms hire outside consultants to design the scorecard so an objective person can evaluate overall operations.
The balanced scorecard, when used properly, can be a leading indicator of a company's success. In contrast, financial indicators such as profit and revenue are lagging indicators since they have already occurred. For example, a scorecard that evaluates a sales department will count the number of leads generated, follow-up calls, in-person meetings and closing documents offered. A marked increase in all of these numbers predicts future sales growth for the firm. This is a positive effect of the balanced scorecard.
Data mining is a negative aspect of the balanced scorecard because of the need to continually obtain relatively obscure information from managers. They may feel they are preoccupied and do not have time to fill out forms or data for every action they take. In fact, this may harm productivity. For example, in the above scenario of a sales department, it becomes tedious to log every action taken in the sales process.