Using balanced scorecard to establish relationship between financial and non-financial objectives of companies

How does the Balanced Scorecard build the relationship between non-financial objectives and financial objectives? 

In order to understand how the approach works, it most appropriate to begin with an understanding of what balanced scorecard is. In the definition presented by ssdc, it was made known that organizations cannot be successful without adopting a given strategy and strategic planning process. This is because when an organization is capable of combining its financial and non-financial indicators in the same sheet, it will be better positioned to understand what its expectations are and align such with the corporate objectives – this process is actually known as “balanced scorecard.”

People can also call it different names, but the ideology of balanced scorecard is not something that began in the present generation, instead it has been around for ages as companies make use of it in different settings for the purpose of determining the different financial and non-financial goals of the company and also for evaluating the overall performance of the company.

In any case, the main purpose of this research is to understand how balanced scorecard can be used to build relationship between financial and non-financial objectives of any given company. The essence is designing the balanced scorecard in such a way that the financial objectives are aligned with the non-financial objectives because while the financial essence is used to influence the non-financial scope, it is also the non-financial approach that determines the financial performance of the company. This will be demonstrated with ABC bank.

ABC bank is a very bank with a deposit in the excess of 7,000 billion and advance in excess of 3,000 billion with overall network of 500 billion and a fee based income of about 5% of their overall net worth. The process of aligning financial and non-financial objectives together as demonstrated in ABC bank involves the following steps:

1.      Strategic analysis – in the start, the group of managers developed a balanced scorecard for the bank by conducting a SWOT analyses and reflecting on the current performance of the bank. From the analysis, the strengths and weaknesses are identified, thus the company was better positioned to understand where it underperformed and draft necessary strategies to increase overall performance of the company.

2.      Strategic mapping – the company also performed a detailed strategic mapping of its balanced scorecard. Strategic mapping is described as pictorial description of the strategy designed and elements of such strategic. The mapping is also used as the means for establishing relationship between the financial and non-financial objectives. The belief is that once strategies are shown in the map, the chance of success is increased  (Norton and Kaplan, 2001). The financial objectives is the goal of increasing the overall net value and performance of the company, while the non-financial objective is redesigning or aligning the bank’s management process in such a way that the financial objectives are achievable.

3.      Measurement of objectives – once the objectives (both financial and non-financial) has been mapped out, the next approach in the bank was to define the measurement tactics to determining the extent each of the objectives defined has been meet. This involves creating an understanding as to whether the bank was able to achieve set level of increase in net share and whether such achievement was done in line or within the range of set financial costs.

From the above analysis, it can be seen that the process of aligning (building relationship) between the financial and non-financial objectives of companies takes shape in three steps as first defining what the objectives is all about, then mapping the objectives strategically in order to ensure that they are aligned (that means, to ensure that the non-financial objectives can be used to achieve the financial objectives) and finally defining the approach to measuring the extent to which these objectives.

References

Kaplan, R S and Norton, D P (1992). “The Balanced Scorecard — Measures that Drive Performance,” Harvard Business Review, January-February, 71-79.

Kaplan, R S and Norton, D P (1993), “Putting the Balanced Scorecard to Work,” Harvard Business Review, September -October, 143-142.

Kaplan, R S and Norton, D P (1996a). The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Business School Publishing.

Kaplan, R S and Norton, D P (1996b). “Using the Balanced Scorecard as a Strategic Management System,” Harvard  Business Review,  January - February, 75-85.

Kaplan, R S and Norton, D P (1996c), “Linking the Balanced Scorecard to Strategy,” California Management Review, Fall, 53-79.

Norton, David and Kaplan, Robert (2001).  The Strategy Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment, Boston, MA: Harvard Business School Press.