Examining the balanced scorecard

Banking hallWhat you measure is what you get. Senior executives understand that their organization’s measurement system strongly affects the behavior of managers and employees. Today’s competitive environment demands continuous improvement and innovation. However, traditional financial accounting measures like return on investment (ROI) and earnings per share (EPS) can give misleading signals for such activities.

The traditional financial performance measures work well for manufacturing industries, but there are not adequate for the skills and competencies companies which are trying to master for the contemporary business environment.

In observing and working with many companies, Robert Kaplan and David Norton have found that top management do not rely on one set of measures to the exclusion of the other. Senior executives realize that no single measure can provide a clear performance target or focus attention on the critical areas of business. Managers want a balanced presentation of both financial and operational measures.

During a yearlong research project with a dozen of companies at the leading edge of performance measurement, Kaplan and Norton devised a “balanced scorecard” – a set of measures that give top managers a fast but comprehensive view of the business. The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the operational measures on customer satisfaction, internal processes, and organization’s innovation and improvement activities.

The balance scorecard should be conceptualized as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying an aircraft, pilots need detailed information about many aspects for the flight. They need information on fuel, airspeed, altitude, bearing, destination, and other indicators that summarize the current and predictable environment. Reliance on one instrument could be fatal. (A pilot cannot park an aircraft and change a tire in the course of a flight). Similarly, the complexity of managing an organization today requires that managers are able to view performance in several areas at once.

The balanced scorecard allows managers to look at the business from four important perspectives:

q      Customer Perspective: How do customers view the company?

q      Internal Business Perspective: What must the company excel at?

q      Innovation and Learning Perspective: Can the organization continue to improve and create value?

q      Financial Perspective: How does the company look to shareholders?

While giving senior managers information from four different perspectives, the balance scorecard minimizes information overload by limiting the number of measures used. It forces managers to focus on the handful of measures that are most critical.

The balanced scorecard meets several management needs. First, the scorecard brings together, in a single management report, many of the seemingly disparate elements of a company’s strategic intent: becoming customer oriented, shortening response time, improving quality, emphasizing teamwork, new product introduction, and managing for the long term. Secondly, the scorecard guards against sub-optimization. By forcing senior managers to consider all the important operational measures together, the balance scorecard let them see whether improvement in one area may have been achieved at the expense of another.

 

Customer Perspective

How a company is performing from its customers’ perspective has become a priority for top management. The balance scorecard demands that managers translate their general policy 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. Lead time measures the time required for the company to meet its customers’ needs. Quality measures the defect level of incoming products as perceived and measured by the customer.

Quality could also measure on-time delivery – the accuracy of the organization’s delivery forecasts. The combination of performance and service measures how the company’s products or services contribute to creating value for its customers. In addition to measures of time, quality, and performance measures, companies must remain sensitive to the cost of their products, but it must be recognized that customers see price as only one component of the cost they incur dealing with their suppliers.

 

Internal Business Perspective

Customer-based measures are important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. Excellent customer performance derives from processes, decisions, and actions occurring through 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 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 competitive advantage. Companies should decide what processes and competencies they must excel at and specify measures for each.

Innovation and Learning Perspective

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

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. Well-designed financial-control system can actually enhance rather than inhibit an organization’s total quality management program.

Measures That Move Companies Forward

The scorecard represents a fundamental change in the underlying assumptions about performance measurement. Because traditional measurement systems have come from the finance function, the system seems to have control bias. That is, traditional performance measurement systems specify the particular actions they want employees to take and then measure to see whether the employee have in fact taken actions. In that way, the systems try to control behavior.

The scorecard puts strategy and vision, not control, at the center. It establishes goals but assumes that people will adopt whatever behaviors and take whatever actions are necessary to arrive at those goals. The measures are designed to pull people toward the overall vision.

By combining the financial, customer, internal process and innovation, and organizational learning perspectives, the balanced scorecard helps managers understand 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.

By
Captain Sam Addaih (Rtd)

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