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Balanced Scorecard Summary

Performance Measurements for Success

Traditional financial measures - ROI, net profit, sales growth, and market share - fail to capture the true picture of a firm's value propositions because they focus on the past. They tell the story of what has happened to the organization. They explain the results of past transactions and disregard what the future benefits could be. Traditional financial measures are only part of the information that managers need to successfully guide their organizations through highly competitive marketplaces.

During the 1990s, two Harvard professors and consultants - Kaplan and Norton, devised a tool, the Balanced Scorecard, to rectify the deficiencies in relying primarily on traditional financial measures. A Balanced Scorecard allows better measurement of a firm's capabilities to create long-term value by identifying the key drivers of this value. The drivers are then translated into four categories of measures- customer, internal/operational, innovation/learning, and financial. The financial measures are typically focused on short-term results; while the other three categories are coupled to future oriented activities needed to successfully sustain the enterprise.

Obviously financial health is critical for any business organization- cash in the bank is necessary to pay the bills. However, many managers become nearsighted as a result of this requirement and believe that by making fundamental improvements in their operations, the financial numbers will resolve themselves. This is an utter fallacy. For example, if a firm has a goal of increasing net profit from 10% to 13% for the current fiscal year, there are a number of interrelated factors that must be in place to succeed. Possibly customer satisfaction must be enhanced to increase the number of customers or increase the loyalty of existing customers. May be the product/service's defect level must be decreased to boost customer satisfaction? So if the manager waits until the end of the fiscal year to determine if he/she was successful, there will be a "history" lesson on the events of the past period. However, if the defect rate is currently monitored or customer returns observed, the manager can make mid-course corrections to the firm's strategy in order to accomplish the goal of increasing net profit. In other words, the manager should develop and monitor measures of drivers of that net profit goal.

As such, managers should develop strategic measures that are specifically tied to their firms' unique strategy. There is not a "one size fits all" Balanced Scorecard. The following is the basic categorization for balanced measures of firm performance.

I. Financial perspective-how do we look to investors?
Measures that indicate whether the company's strategy, implementation, and execution are contributing to bottom line improvement.

Cash flow
Sales growth
Market share
ROE

II. Customer perspective-how do customers see us? Customer concerns in four categories.

1. Time-measures time required for company to meet customers' needs.
2. Quality-defect level as sent to customers.
3. Performance-how company's products/services contribute to creating value for its customers.
4. Cost-not just price of goods/services, but what does it "cost" the customer when he finally uses it.

III. Internal/Operational perspective-what must be excelled at?

Business processes that have the greatest impact on customer satisfaction.
What competencies are needed to maintain market leadership?

IV. Innovation/Learning perspective-can we continue to improve and create value?

Ability to innovate, improve, and learn ties directly to company's value.
Launch new products.
More value for customers.
Penetration of new markets.

Caution- a balanced performance measurement tool is not a collection of disparate financial and non-financial measures. It is more than supplementing traditional financial measures with non-financial measures. It is a process of developing interrelated measures, some leading and some lagging, that uniquely depicts a firm's strategy in attempting to create competitive advantage.

A scorecard:

focuses manager's attention on a handful of measures that are critical for the firm's success.
is a way to clarify, simply, and then operationalize the mission and vision of the organization.

(Excerpted by Howard Olsen PhD, CPA from Robert Kaplan and David Norton (1992), Harvard Business Review, January-February, pages 71 to 79 and (1996), California Management Review, Fall v39n1, pages 53 to 79.)

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