Question

What are the importance of Balanced score card as a tool for directing and evaluating performance?

Answer 1

Introduction:

Balanced Score Card (BSC) method is a performance management technique that is used for breaking down the Entity's objective or mission into specific goals that are both financial and non-financial. The organisation's performance is monitored and assessed for through these specific goals. The BSC method has four perspectives as four pillars for its effective implementation.

1. Customers perspective (What the Customers are expecting from us?)

2. Internal Business perspective (What can we do to meet and exceed the expectations from customers?)

3. Leaning and growth perspective (What is the level of improvements and value addition?)

4. Financial perspective (What we have to do for creating value to the shareholders?)

Importance of Balanced Score Card:

With the BSC method the organisation's performance is viewed in four different perspective.

1. Customer Perspective: The organisation's performance can be assessed by the perspective of the customers about the business. That can be evidenced with the help of the Customer Loyalty, Customer Retention and Customer Addition. By this we can assess the performance as these are directly related with the performance of the Organisation.

2. Internal Business Processes Perspective: Under this perspective to meet the needs of the changing customer tastes and other market factors we have to improve our internal business processes for the effective and optimal utilisation of the resources. This can be evidenced through the assessment of the key internal processes with the industry bench-marks and improving such key internal processes to be cost effective.

3. Learning and Growth Perspective: This perspective deals with the ability of the human resources in the accomplishment of the organisational goals. The learning of the employees is a key factor for achieving the optimal performance as the trained employees can be more effective in the processes. The growth of the employees by undertaking new responsibilities, involving in the new processes that change with the changing needs of the customers create value for the organisation. This can be evidenced through the employee retention, employee efficiency, employee capabilities, employee training and such other factors.

4. Financial Perspective: Under this perspective the shareholders of the organisation always aims at the improvement in the financial performance for the creation of wealth instead of the short term profits. They are more inclined towards wealth creation rather than profit-making. This provides the quantifiable goals to monitor the organisation's performance. Some of the financial tools are Asset Turnover Ratio, EPS, DPS, Profitability ratio, current ratio and such other tools.

The BSC method of performance management helps an organisation in the balancing the needs of the customers and shareholders with the internal process improvements and growth. This helps in allocating the budget across various objectives of the organisation and monitor for the improvements in the performance. It aims at the creation of value for the organisation and wealth for shareholders. This helps in the effective communication of the entity's objective for the managers and both qualifying and quantifying the performance goals. This helps in identifying and improving the processes for the achieving the strategic objectives of the entity.