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Accountants and business advisors
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Small Business Advice from Lamont Pridmore
In the early 1990s, two Harvard professors, Dr Robert Kaplan and David Norton developed a new approach to strategic business management. This system provides a clear approach to the elements that a company should measure in order to clarify their vision and strategy and takes planning from an annual exercise carried out by management and puts it at the core of the business.
The Balanced Scorecard forces managers to focus on the performance metrics that drive success. It balances a traditional financial perspective with customer, internal process, and learning & growth perspectives.
The overall scorecard system is made up of four processes:
1. Translating the business’ vision into achievable operational goals;
2. Communicating the vision and linking it to team members’ individual performance;
3. Strategic business planning;
4. Feedback and then adjusting the strategy according to lessons learned.
Four Perspectives
The scorecard seeks to measure a business from each of the following four angles and suggests that the business should develop metrics and collect and analyse data relative to each one:
Financial - measures reflecting financial performance, for example number of debtors, cash flow or return on investment. The financial performance of an organization is fundamental to its success. Even non-profit organizations must make the books balance. Financial figures suffer from one major drawback in that they are historical. Whilst they tell us what has happened to the organization, it may not tell us what is currently happening. Nor is it a good indicator of future performance.
Customer - measures having a direct impact on customers, for example time taken to process a phone call, results of customer surveys, number of complaints or competitive rankings.
Business process - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost.
Learning and growth - measures describing the company's learning curve -- for example, number of employee suggestions or total hours spent on staff training.
The specific items to be measured within each of the four areas must be carefully chosen to reflect the particular drivers of each business and industry. The balanced scorecard method can ease the process of separating strategic policymaking from the implementation of the strategy, so that top level organisational goals can be broken down into task orientated objectives which can be managed and fulfilled by front-line staff.
The Balanced Scorecard can also help to detect areas in which activities in two different areas are combining to help achieve larger business goals. For example the internal business objective of implementing a new telephone system will help the customer objective of reducing response time to telephone calls, leading to increased sales from repeat business. In many senses, the objectives chosen are leading indicators of future performance. The efforts made today are reflected in the company’s future profits. Thus, current expenditure becomes an investment in the future of the company.
For further information on the Balanced Scorecard please contact us.
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