Balanced Scorecard for Business Efficiency - dummies

Balanced Scorecard for Business Efficiency

By Marina Martin

The Balanced Scorecard methodology helps business efficiency by giving equal weight to four distinct areas of business: customer needs, internal knowledge and education, productivity, and finances. A “balanced” company maintains dashboards of key metrics in each of the four sectors, both to track progress toward related goals and to see where the company stands in objective terms on these measurements.

On a high level, to look for inefficiencies from a Balanced Scorecard perspective, you’ll want to brainstorm what’s standing between your current operations and the maximum achieveable level of success in each area.

A much more revealing approach is to actually measure your current organization and assemble initial scorecards. Low scores or growth percentages are the best places to start your inefficiency investigation.

A low score in and of itself is not always a sign of inefficiency, just as there may be significant room for improvement in a metric with a high score. For example, in some highly competitive industries a 1 percent year-over-year growth in new customers is well above average, while in others that same metric would be akin to failure.

Scorecard levels

There are three different levels of scorecards: strategic, operational, and tactical. Each viewpoint can reveal its own set of potential issues.

On a strategic level, you consider your company’s long-term objectives. Where do you want to be in five years? Why aren’t you there now? Consider the landscape between these two points.

On an operational level, you measure many of the same (and some new) metrics on an annual basis. Instead of looking five years out, look one year out. What are the biggest hurdles toward achieving those objectives over the next 12 months? What’s standing in the way of getting there faster or for less money?

Finally, on a tactical level, you review these metrics (and perhaps some additional ones) on a daily basis. If you’re just starting out with Balanced Scorecard, you can’t do much in the way of comparisons on the strategic or operational levels, but you definitely have time to track the tactical level for a few weeks. This deep-dive perspective is where you find the most insights into inefficiencies as you explore trends that stand out.

Efficiency in customer needs

The customer dashboard include metrics such as retention rates, market share, number of new customers, customer service complaints, customer service satisfaction, customer response time, average time between orders, average value of each order, and average customer acquisition costs.

The top inefficiencies to explore in this corner include the following:

  • Why are existing customers leaving?

  • Why aren’t customers ordering more or more often?

  • Why don’t potential customers become actual customers?

  • What are customers complaining about?

  • Why do customers feel dissatisfied about a customer service inquiry?

  • What takes so long to respond to customers?

  • What are the costs involved in acquiring a new customer?

  • Why can’t we give the customer what he wants?

Efficiency in internal knowledge and education

The internal knowledge and education dashboard includes metrics such as employee sentiment about work, employee sentiment about qualifications, access to information, training hours, completion of/scores on certification exams, and career development hours.

The top inefficiencies to explore in this corner include the following:

  • What are the top employee complaints?

  • What information can’t employees access?

  • What resources are available for completing necessary education hours or certifications?

Efficiency in productivity

The productivity dashboard includes metrics such as lead time, process (cycle) time, machine/process downtime, new product development time, time to market, warranty returns, sales returns, time spent servicing accounts, defect rate, process capability, cost of waste, amount of rework, labor costs, research and development costs, marketing/advertising costs, compliance costs, floor space utilization, unused inventory, and forecasting accuracy.

The top inefficiencies to explore in this corner include:

  • Why does it take so long to get to market?

  • What causes machine/process downtime?

  • What causes waste such as defects or rework?

  • Why do customers make returns? Is our return policy efficient? Should we accept returns?

  • What are the top issues addressed during account servicing?

  • What led to existing unused inventory?

  • Can compliance costs (for example, inspections) be prevented?

Efficiency in finances

The financial dashboard includes metrics such as revenue, market penetration, gross profit, net profit, revenue per department/division, expenses per department/division, revenues and expenses per product/service line, budgeted versus actual costs, savings, number of shipments, and number of on-time shipments.

Thanks to tax and accounting requirements, most businesses can assemble retroactive scorecards much more easily than any other kind, which can provide additional insights into expenses, revenue, and savings. The top inefficiencies to explore in this corner include:

  • What are the largest expenses company-wide?

  • What are the largest expenses in each division?

  • What are the largest expenses in each product line?

  • What are the largest expenses in the best-selling product line?

  • What divisions have increased costs over time?

  • What causes delayed shipments?

If you fully adopt a Balanced Scorecard in your organization, tracking metrics over time, then a dip (or, if the metric is negative, such as “customer complaints,” then an increase) in any particular metric is often a red flag that a new inefficiency has been introduced into your organization.