An organization’s financial performance results from decisions made by its managers and employees.
Managers and employees need operational performance metrics that are aligned with the daily decisions being made, rather than a high-level set of financial metrics that are reported on a monthly or a quarterly basis.
The Balanced Scorecard (BSC) represents a set of financial, customer, operational, and organizational metrics that capture multidimensional aspects of performance.
Using a BSC, top management can signal strategic objectives to managers and employees. Top management can then gather data that shows whether or not performance at the individual and the strategic business unit levels is aligned with the strategic objectives of the firm.
For generations, many businesses have measured organizational success based on a narrow set of financial performance measures, such as operating and net profit, return on investment, and earnings per share of stock. Financial performance measures are valuable in that they capture the economic consequences of business decisions; however, they tend to be “lagging” indicators of performance that report the financial effects of operational business decisions weeks or months after the decisions have been implemented.
Organizational managers and employees typically manage their work in terms of physical flows and other nonfinancial resources. For example, sales managers focus on market size, sales volume, share of wallet, customer satisfaction, and similar measures. Production managers concentrate on production capacity, throughput time, quality, and productivity metrics. Human resource managers are responsible for hiring appropriately skilled personnel, maintaining a safe and legal workplace, and organizational development outcomes. Managers and employees throughout the organization make decisions and use resources that eventually impact the financial outcomes of the firm; to do so effectively, they need performance feedback that links the outcomes of their decisions to the strategic and financial goals of the firm. This feedback is most useful when it is a “leading” performance indicator, or one that is closely related to the work being performed. The Balanced Scorecard (BSC) was developed as a management tool to help managers better understand and link customer, operational, and organizational decisions to financial outcomes, and to the strategy of the organization.
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