Balanced Scorecard

In the early 1990s (at the same time as ideas about the business process reengineering, which stigmatized excessive departmentalism and invited to see organizations in a more holistic way and process-based way), two consultants, Robert S. Kaplan and David P. Norton, published for Harvard Business Review the article: "The Balanced Scorecard Measures That DrivePerformance" [Ref.1] where they argued that “Financial measures by themselves do not provide incentives for success. Financial measures tell a story about the past, but not the future; they have importance, but will not guide performance in creating value.” 

Over the years, with the gradual transition from an industrial economy, characterized by mass production of standardized products and services, to an economy based on flexibility, responsiveness, customization of products and services, where the fundamental assets companies need to compete are knowledge-based, mainly IT and people's skills, the ideas proposed in that article have grown in relevance.

The beginning of the Kaplan and Norton article is illuminating, it should make managers think about what are some of the most important drivers to give the desired identity to the company: “What you measure is what you get. Senior executives understand that their organization’s measurement system strongly affects the behavior of managers and employees.”

Following, I would like to include, in quotation marks, the article’s passages that I found most significant with, in some cases, some my own additions or personal considerations.

“During a year-long research project with 12 companies at the leading edge of performance measurement, we devised a "balanced scorecard"- a set of measures that gives 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 financial measures with operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement activities-operational measures that are the drivers for future financial performance.” Kaplan and Norton argued that financial measures say of actions already taken in the past, but they say nothing about the adequacy of the actions put in place by the company to compete in the market, in the medium and long term, to satisfy all stakeholders, not just shareholders, who have interests around the company.

The authors conceive a “balanced scorecard, a set of measures that gives top managers a comprehensive view of the business and that complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization's innovation and improvement activities-operational measures that are the drivers of future financial performance”

The balanced scorecard allows managers to look at the business from four important perspectives and “It provides answers to four basic questions:

• 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)”

Norton and Kaplan claim that “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.”

But let's take a closer look at the perspective proposed by the Balanced Scorecard and some examples of related measures.

Customer Perspective: How Do Customers See Us? For all managers, of any organization, this perspective, that of the value offered to the customer and therefore of his satisfaction, is vital. Well, how many companies invest resources to answer questions like: what does my client expect? Am I satisfying his needs? Is he satisfied with the products and services I'm offering him?

“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”

Some measures relating to this perspective are:

• time between the company receives an order and the time it actually delivers the product or service to the customer (for existing products)
• time to market, how long it takes to bring a new product from the product definition stage to the start of shipments (for new products)
• defect level of incoming products as perceived and measured by the customer
• on-time delivery, the accuracy of the company's delivery forecasts
• number of cooperative engineering efforts: customer partnership
• users rate migration to new product versions
• product profitability
• customer satisfaction survey results

Among the measures should not be overlooked the cost of products, to which customers are always sensitive and, as mentioned, their profitability.

Internal Business Perspective: What Must We Excel at? “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.”

Examples of measures relating to this perspective are:

• process cycle time
• rework time
• scrap cost/production cost ratio
• defects per lot/n. lot pieces ratio
• cpk for a process feature
• n. of incorrect bids /n. total number of bids issued ratio
• number of defects
• machine downtime for faults
• n. client complaints
• n. corrective actions
• n. non-compliance found at v.i.i.
• effective/total training purposes of training interventions ratio
• personal % formed on personal total

In particular, service companies should carefully define and evaluate performance measures that are influenced by people. “This linkage ensures that employees at lower levels in the organization have clear targets for actions, decisions, and improvement activities that will contribute to the company's overall mission.”

“Companies should decide what processes and competencies they must excel at and specify measures for each”, and this means, identify some of the most important company's strategy elements.

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 - inshort, grow and thereby increase shareholder value”

The learning and growth perspective is concerned with the skills of the people employed inthe company(humancapital), the systems (information capital), and the corporate culture (organization capital) of the enterprise. These three factors relate to what Kaplan and Norton claim is the infrastructure that is needed in order to enable ambitious objectives in the other three perspectives to be achieved.

Examples of measures relating to this perspective are:

• investment rate
• employee turnover rate
• retention rate
• gender/racial ratio
• time to develop next generation production
• employee satisfaction survey results
• assessment of motivation and degree of alignment of personal goals to business objectives
• valuating the degree of collaboration and sharing of knowledge among people
• skills assessments and performance management scores
• training effectiveness
• level of investments in networks and technology infrastructure
• No proposals for improvement presented by employees per year
• No proposals made on the total number of proposals
• no hours worked in teams

Knowledge and skills on one hand and sharing and integration of these into joint working groups on the other hand, are therefore key factors in sharing common goals, for innovation and companies prosperity.

Financial Perspective: How Do We Look to Shareholders? “Measures of customer satisfaction, intemal business performance, and innovation and improvement are derived from the company's particular view of the world and its perspective on kby success factors. But that view is not necessarily correct. Even an excellent set of balanced scorecard measures does not guarantee a winning strategy. The balanced scorecard can only translate a company's strategy into specific measurable objectives. A failure to convert improved operational performance, as measured in the scorecard, into improved financial performance should send executives back to their drawing boards to rethink the company's strategy or its implementation plans”

So, it makes sense the question you might ask: should senior managers look at the business from a financial perspective, or is it enough to do well the companies that fall within the other prospects to automatically achieve good financial results? The answer is certainly yes. This because financial measures, if well documented and timely, allow us to go back and review the strategy, or its implementation plans, before it may be too late, if results are not expected ones.

The measures for this perspective are well known, as follows onlysomeexamples:

• growth in the medium and long term (sales trend)
• profitability
• shareholder value
• return of investment

Sample Generic Scorecard An example based on an electronics company appears below based on an illustration in Kaplan and Norton 1992. [Rif.2]

“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. Senior managers may know what the end result should be, but they cannot tell employees exactly how to achieve that result, if only because the conditions in which employees operate are constantly changing. 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. Tie balanced scorecard keeps companies looking- and moving-forward instead of backward.”

From the conclusion of the article, and from all above, two important considerations arise. The first is that the mere financial goals, often the only ones known in the company, cannot act as drivers for the prosperity of organizations. This function can be carried out instead, by the definition and sharing of a vision, a corporate mission that is able to make all employees, at all levels, involved, motivated and aligned in achieving ever more ambitious goals. The second consideration is that the ideas behind the Balanced Scorecard's approach to performance measurements are more than ever important and in line with the Business Process Management approach to organization management: cross-functional integration, customer supplier partnerships, global scale, continuous improvement and team rather than individual accountability.

But, how can the Balanced Scorecard ideas can be applied in a process-oriented organization? What are the approaches, techniques and tools available? We'll see it in another article.

For more information on the Balanced Scorecard, I refer you to the original article Robert S. Kaplan and David P. Norton, the numerous texts on the subject as well as the various resources on the internet.

Sources:

1. https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2
2. https://maaw.info/BalScoreSum.htm

Photo by Christophe Hautier on Unsplash