Balanced Scorecard – Opportunities and Risks in Business Use

The Balanced Scorecard is much more than just another management tool – it is a kind of strategic cockpit for your company.

But as with any powerful tool, there is also light and shadow here. Let's take a look at what this method really does and where you should be careful.

What is a Balanced scorecard Really?

Imagine running a business and always looking at the profit and loss account. It's like driving a car and only staring at the speedometer – you miss the traffic lights, the curves and the other road users. This is where the Balanced scorecard to.

The method developed by Robert Kaplan and David Norton in the 90s looks at your company from four different angles: the financial perspective, the customer perspective, the internal process perspective and the learning and development perspective. These four dashboards together give a complete picture of your business situation.

The idea behind it is simple: If you only look at financial metrics, you will always only react when the child has already fallen into the well. The BSC, on the other hand, also shows you leading indicators – warning signals that help you to counteract in time.

The Four Perspectives in Detail

Financial perspective: Here you will find the classic figures – turnover, profit, cash flow, ROI. These metrics are important, but they only tell you the story of the past.

Customer perspective: How satisfied are your customers? What is your repurchase rate? Are the complaints rising? These indicators often tell you months in advance whether your financial figures will become problematic later on.

Process perspective: Are your internal processes running smoothly? How long do delivery times take? What is the error rate in production? This is about the efficiency of your ‘company’ machine.

Learning and development perspective: Are you investing enough in the future? How motivated are your employees? Are there enough innovations? This perspective is almost your look into the glass ball.

Benefits of the Balanced Scorecard

The biggest advantage of the BSC is its holistic view. You recognize connections that would otherwise be hidden from you. For example, if employee satisfaction drops, you'll see it long before it affects customer service and ultimately sales.

Another advantage is the focus. Instead of tracking hundreds of metrics, focus on the truly strategically relevant ones. This creates clarity and makes it easier to set priorities.

The BSC also combines operational activities with strategic objectives. Every employee can understand how their work contributes to the overall strategy. This is worth gold for the motivation and commitment in the team.

The balance between early and late indicators is also particularly valuable. While financial metrics show where you've been, numbers about customer satisfaction and employee motivation tell you early on where the journey is going.

The Disadvantages and Risks

But be careful – the BSC is not a panacea. A big problem is the complexity of the introduction. Not only do you need to find the right metrics, but you also need to understand the cause-and-effect relationships between the perspectives. It takes and costs resources.

Another stumbling block is the danger of complete override. Some companies fall into a real rush of metrics and measure everything that is measurable. This leads to Analysis Paralysis, which in German is most likely to translate with decision fatigue – you spend more time measuring and analyzing than you actually need to do. In the worst case, the path or the search for the perfect solution paralyzes you until it is too late to react.

The quality of the data is also critical. If your basic data is bad, the most beautiful BSC is worthless. And let's be honest: In companies, it is always right here. A good example of this is the globally popular NPS, the NetPromoterScore. We will look at it later in detail.

The BSC can also develop a certain inertia. Once established, the key figures are often no longer questioned, even if the strategic orientation has long since changed.

Areas of application and industry examples

Production companies: A machine builder could track ROI in the financial perspective, measure delivery reliability in the customer perspective, monitor lead times in the process perspective, and count the number of new patents in the development perspective.

Services sector: A management consultancy might keep track of revenue per consultant (finances), customer satisfaction per project (customers), project lead times (processes) and training days per employee (development).

Retail trade: A fashion house could measure revenue per square meter (finances), repurchaser rate (customers), inventory turnover rate (processes), and employee turnover (development).

Health care: A hospital might track cost recovery (finance), patient satisfaction (customers), length of stay (processes) and staff training rate (development).

Technology startups: Here, burn rate and runway (finance), user growth and churn rate (customers), time-to-market of new features (processes) and the number of developers (development) could be key metrics.

The BSC as an employee assessment tool – beware of the trap!

A particularly sensitive topic is the use of the Balanced Scorecard for employee evaluation. At first glance, this seems logical: You have clear metrics, so you can also clearly assess who has achieved their goals and who hasn't. But there is a great danger lurking here.

The problem starts with the fact that not all BSC metrics are directly influenced by individual employees. Measuring a sales representative based on customer satisfaction, but mainly based on product quality, leads to frustration and unfair reviews.

It becomes even more problematic when employees start to focus their work exclusively on the BSC goals. This is also called ‘teaching to the test’, a phenomenon in education that shows what happens when teachers only teach for exams instead of for real understanding.

Imagine that a customer service representative is mainly measured by the number of requests processed. What happens? At worst, he will try to process requests as quickly as possible, even if that means problems aren't really solved. The result: The metric improves in the short term, but actual customer satisfaction decreases.

Or let's take a developer measured by the number of bugs fixed. He might be tempted to prefer simple bugs or even create bugs himself to fix them later. This is an extreme example, of course, but it shows the direction.

The real problem is that people get creative when it comes to their assessment – often at the expense of the actual goal. This effect is further amplified by the apparent objectivity of key figures. Managers think: "Numbers don't lie", but the reality is unfortunately much more complex.

Let's take the example of the NPS from above again. The Net Promoter Score is a measure of customer satisfaction. You may have experienced this yourself here and there, when after a request to a customer service, a short survey pops up asking you to rate the experience on a scale of 1-10, with the question ‘How likely is it that you would recommend our company to a friend based on this contact with customer service?’ 1: Not at all, 10: Definitely.

Now the following may happen: The customer service representative is (partly) evaluated on the basis of the NPS, so to speak, his success rate is measured. All answers except 9 and 10 are considered as ‘unsatisfied customers’ in this system 9 and 10 as the answer, whereas the two ratings are then internally recorded as ‘satisfied customers’ in the company. Should the company now use this key figure to evaluate the employee, anger is pre-programmed. It often does not take long for the employee to work towards rating 9 or 10 as the main target, instead of focusing on the customer, the cause of his problem or, at worst, even on the ‘professional correct answer’, which would actually be the desired goal.

How can you avoid this trap?

First, you should never use the BSC as your sole assessment tool. Key figures are indicators, never judgments. They show you where to look more closely, but they do not replace the conversation with the employee.

Secondly, it is important to choose the right metrics for the right level. Strategic BSC goals are usually not suitable for individual employee evaluation. Instead, use more specific goals derived from this, which the employee can really influence.

Third, you should always consider several metrics in context. If an employee overachieves one metric but neglects another, that's also a clear warning signal.

Fourth, regular communication is crucial. Explain not only the key figures to your employees, but also the underlying goals. When they understand why something is being measured, they tend to work in the sense of the overall goal rather than just the metric.

On the site bscdesigner.com You are also welcome to delve a little further into the matter and expand on the advantages based on a nice list and ideally reduce or avoid possible disadvantages. A shared approach with additional measurement data that can be adjusted more regularly can also help to record changed targets more quickly and counteract them if necessary. If the Balanced Scorecard is adjusted annually, one could, for example, adjust or redefine interim targets every quarter. This is where the OKR, ‘Objectives and Key Results’ come into play. A possible type of application along with the Balanced Scorecard Go to mooncamp.com nicely described.

Conclusion: A powerful tool with responsibility

The Balanced Scorecard is a powerful tool for strategic corporate governance. It helps you to widen your gaze and react to problems at an early stage. But like any powerful tool, you have to handle it responsibly.

The BSC is not self-sufficient – it needs regular care, critical review and, above all, people who can think outside the box of key figures. Use them to make better decisions, not to replace them.

Caution should be exercised, especially when used in employee evaluation. Numbers can be manipulated, and people get creative when it comes to their evaluation. Use the BSC as a compass, not as a judge.

At the end of the day, the Balanced Scorecard is what you make of it. In the right hands, it can take your business to the next level. In the wrong, it becomes a bureaucratic burden that does more harm than good. The choice is up to you.