Traditionally, business organizations have focused on financial results, which mainly have reflected the shareholders’ interests. In recent years, organizations have shifted attention to customer issues, such as quality and service, to employees, and to the community.

The balanced scorecard is a set of performance targets and results that show an organization’s performance in meeting its objectives to its stakeholders. It is a management tool that recognizes organizational responsibility to different stakeholder groups, such as employees, suppliers, customers, business partners, the community, and shareholders. Often different stakeholders have different needs or desires that the managers of the organization must balance. The concept of a balanced scorecard is to measure how well the organization is doing in view of those competing stakeholder concerns.

An example of a balanced scorecard is shown below. As you can see, the focus is to balance the efforts of the organization between the financial, customer, internal process, and learning and growth (innovation).

The first step in creating the balanced scorecard is to determine (a) what to measure, and (b) how to measure it. For instance, in creating KPIs for learning and growth, management might ask, “Are we improving and creating value?” From there, the challenge is to find a way to measure that domain. For instance, management might track the number of employee suggestions that are made and implemented, or the number of employee training hours.

Different companies use different perspectives, but the domains would be defined and relevant. For learning purposes, we’ll define the four domains/perspectives as follows:

• Learning and growth – look at organizational performance through the lens of human capital, culture, technology, and infrastructure.
  • Examples of exploratory questions: Are your employees using technology to execute tasks and manage processes? Does the organization provide adequate training and resources? What steps is the company taking to remain competitive?
  • The learning and growth perspective considers how well information and knowledge are captured and implemented by employees to create a competitive advantage.
• Internal processes – focus on how well internal processes are operating.
  • Examples of exploratory questions: Are there gaps, delays, or bottlenecks in the pipeline that need to be addressed? How can the organization streamline processes for greater efficiency and effectiveness? How quickly can the organization adapt to changing business needs or conditions?

• Customer – focuses on finding new customers, building brand recognition and trust, and increasing customer satisfaction.
  • Examples of exploratory questions: “What is important to customers and stakeholders?” How well is the organization serving its customers, shareholders, and other internal and external stakeholders?

• Financial – looks at numbers and financial results.
  • Examples of exploratory questions: How is the company doing financially? In addition to net income, what other financial aspects of the business are important to stakeholders?
  • Although finances are lagging indicators of past decisions, they are still an important part of any organization’s health and key to understanding overall performance and creating strategies for the future.

As in all of managerial accounting, there are no set or prescribed rules, so every company’s balanced scorecard will be unique, but the process is similar.

Here is an overview of the process:

You can view the transcript for “Balanced Scorecard” here (opens in new window).

Here is a more in-depth description of the balanced scorecard:

You can view the transcript for “The Balanced Scorecard” here (opens in new window).

What you will find as you research this topic further, is that there are many ways to create and organize a balanced scorecard.

Now, check your understanding of creating a balanced scorecard.