The Balanced Scorecard—Measures that Drive Performance “What you measure is what you get” Robert Kaplan & David Norton, 1992

The problem “Traditional financial accounting measures (e.g., return-on-investment) can give misleading signals for continuous improvements and innovation—activities today’s competitive environment demands” Traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies as mastering today

What to do? Rely on a single measure? Forget the financial measures! Improve operational measures like cycle time and defect rates… No!

Multiple measures No single measure can provide a clear performance target or focus attention on the critical areas of the business Managers want a balanced presentation of both financial and operational measures

The solution Balanced scorecard A set of measures that gives top managers a fast but comprehensive view of the business Financial measures (results of action already taken) Operational measures (drivers of future financial performance) Customer satisfaction Internal processes Innovation and improvement

Linking performances Customer perspective Internal perspective How do customers see us? Internal perspective What must we excel at? Innovation and learning perspective Can we continue to improve and create value? Financial perspective What do we look to shareholders?

A good balance The balanced scorecard gives senior managers information from four different perspectives yet it minimizes information overload by limiting the number of measures used Forces managers to focus on the handful of measures that are most critical instead of allowing them to continue adding new measures

Customer perspective— How do customers see us? To be the number one in delivering value to customers—mission statement, but how? Translate that mission into specific measures Four categories Time need to meet customers’ needs Time to market Quality of products Defect level of incoming products Performance & Service Is your product creating value? Cost What is the cost of your product?

Internal perspective— What must we excel at? What do we need to do well, internally, to be the number one in delivering value to customers? Measures that have great impact on customer satisfaction We need to be Technology capable Excellent in manufacturing Productive in design First to introduce products

Innovation & Learning— Can we continue to improve and create value? What do we need to do to innovate, improve, and learn so that we can continue to be the number one in delivering value to customers? Measures that focus on your ability to develop and introduce new ideas rapidly We need to Create more value to customers Improve operating efficiencies continually Launch new products

Financial Perspective— How do we look to shareholders? What do we need to do to survive, succeed, and prosper so that we can continue to be the number one in delivering value to customers? Measures that focus on your financial health Examples include Cash flow Quarterly sales growth and operating income by division Increased market share

Robert Kaplan: The Balanced Scorecard

In Class Exercise Get with your group members for this class and start sketching your “team” balanced scorecard. In doing so, think about the following: What is your mission, as a team? Who are/is your customer(s)? What measures make sense for you? Financial, operational (customer satisfaction, internal processes, & innovation) or both? Link your performances Are the four perspectives applicable for you? Find a good balance (develop metrics that are specific and most critical)

Conclusion What you measure is what you get A balanced scorecard puts strategy and vision, not control, at the center! It establishes goals but assumes that people will adopt behaviors and take whatever actions are necessary to arrive at those goals. The measures are designed to pull people toward the overall mission The balanced scorecard keeps companies looking—and moving forward instead of backward

Example