Balanced Scorecard

What Is a Balanced Scorecard?

A balanced scorecard is a management framework for measuring and guiding performance. It was developed in the early 1990s by Robert Kaplan and David Norton, who argued that companies relying only on financial reporting measures, such as profit and revenue, tend to look backward at results instead of showing what drives future success. The framework adds other viewpoints so that managers can see the full picture of how a business is performing and where it is heading.

The Four Perspectives

The original framework groups measures into four categories:

• Financial: how the business looks to owners and shareholders, often covering profitability, growth, and return on investment.
• Customer: how well the organization serves its customers, such as satisfaction, retention, and market share.
• Internal processes: what the organization must do well, such as quality, cycle time, and operational efficiency.
• Learning and growth: the capabilities needed for the future, such as employee skills, information systems, and organizational culture.

Each perspective connects to the others. The idea is that improvements in learning and growth lead to better internal processes, which then improve customer outcomes and, eventually, financial results.

How It Works

Organizations usually start by defining a strategy and then translate it into specific objectives for each perspective. For every objective, they choose one or more measures, set targets, and identify initiatives to reach those targets. The result is a set of linked goals, often displayed on a one-page summary that leadership reviews regularly. Measures can be both leading indicators, which predict future performance, and lagging indicators, which report results that have already occurred.

Advantages and Limitations

The main advantage is that the balanced scorecard links day-to-day activities to long-term strategy and makes cause-and-effect relationships visible. It also encourages a mix of measures instead of over-focusing on one area, which can reduce the risk of managers optimizing short-term numbers at the expense of the business.

The framework has limitations. Choosing the right measures takes judgment, and poorly chosen metrics can distort behavior. Building and maintaining a scorecard can require significant effort, and the links between perspectives are often assumed rather than proven. Critics also note that a scorecard can become a reporting exercise if it is not used in actual decision-making.

Why It Matters to Investors

For individual investors, the balanced scorecard is an internal management tool, so it is rarely published in full. Companies sometimes describe their strategic priorities or use similar metrics in investor presentations and annual reports, which can help investors understand which measures management considers important. Looking at non-financial indicators alongside earnings per share or other financial figures can give a more complete view of a company's prospects.