The Balanced Scorecard-Measure that drive Performance

In layman’s terms, a balanced scorecard is a set of quantitative metrics that a company can track and report on, hopefully to all employees. Simply put, a balanced scorecard provides a snapshot of the performance of a company (or individual, department, or business unit) compared to its objectives.

Firms that select the right metrics to measure and effectively communicate those metrics reinforce their organizational line of sight between the organization’s purpose, values, vision, and strategic plan. Under this system, daily operations are clearly connected to programs and services that themselves ultimately link to long-term goals.

Measuring, tracking, and communicating performance goals on an organizational level, as well as the employee level, reinforces this mutual commitment.

The balanced scorecard allows managers to look at the business from four important perspectives. (See the exhibit “The Balanced Scorecard Links Performance Measures.”) It provides answers to four basic questions:

The Balanced Scorecard Links Performance Measures

• How do customers see us? (customer perspective)

• What must we excel at? (internal perspective)

• Can we continue to improve and create value? (innovation and learning perspective)

• How do we look to shareholders? (financial perspective)

Customer Perspective: How Do Customers See Us?

Many companies today have a corporate mission that focuses on the customer. “To be number one in delivering value to customers” is a typical mission statement. How a company is performing from its customers’ perspective has become, therefore, a priority for top management. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers. Customers’ concerns tend to fall into four categories: time, quality, performance and service, and cost. To put the balanced scorecard to work, companies should articulate goals for time, quality, and performance and service and then translate these goals into specific measures

Internal Business Perspective: What Must We Excel at?

Customer-based measures are important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. After all, excellent customer performance derives from processes, decisions, and actions occurring throughout an organization. Managers need to focus on those critical internal operations that enable them to satisfy customer needs. The second part of the balanced scorecard gives managers that internal perspective. The internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction—factors that affect cycle time, quality, employee skills, and productivity, for example. Companies should also attempt to identify and measure their company’s core competencies, the critical technologies needed to ensure continued market leadership. Companies should decide what processes and competencies they must excel at and specify measures for each.

Innovation and Learning Perspective: Can We Continue to Improve and Create Value?

The customer-based and internal business process measures on the balanced scorecard identify the parameters that the company considers most important for competitive success. But the targets for success keep changing. Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities. A company’s ability to innovate, improve, and learn ties directly to the company’s value. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins—in short, grow and thereby increase shareholder value.

Financial Perspective: How Do We Look to Shareholders?

Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement. Typical financial goals have to do with profitability, growth, and shareholder value. Survival was measured by cash flow, success by quarterly sales growth and operating income by division, and prosperity by increased market share by segment and return on equity.

But given today’s business environment, should senior managers even look at the business from a financial perspective? Should they pay attention to short-term financial measures like quarterly sales and operating income Shareholder value analysis (SVA), which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more forward looking. But SVA still is based on cash flow rather than on the activities and processes that drive cash flow.

Measures that Move Companies Forward

As companies have applied the balanced scorecard, we have begun to recognize that the scorecard represents a fundamental change in the underlying assumptions about performance measurement This new approach to performance measurement is consistent with the initiatives under way in many companies: cross-functional integration, customer-supplier partnerships, global scale, continuous improvement, and team rather than individual accountability. By combining the financial, customer, internal process and innovation, and organizational learning perspectives, the balanced scorecard helps managers understand, at least implicitly, many interrelationships. This understanding can help managers transcend traditional notions about functional barriers and ultimately lead to improved decision making and problem solving. The balanced scorecard keeps companies looking—and moving—forward instead of backward.