Balanced Scorecard for Performance Management

A Better Balanced Scorecard

The Balanced Scorecard (BSC) retains financial measurement as a critical summary of managerial and business performance, but it highlights a more general and integrated set of measurements that link current customer, internal process, employee, and system performance to long term financial success.

Many companies have mission statements or visions. Often these are translated into strategies. However, often that is where it ends and the strategies are never fully implemented. The BSC provides executives with a comprehensive framework that translates an organisation's vision and strategy into an integrated set of performance and action measures, cascaded down through the organisation. By articulating the outcomes the organisation desires and the drivers of those outcomes, the energies, abilities and specific knowledge of people throughout the organisation are aligned with achieving long term goals.

The BSC financial perspective retains the use of traditional financial measures such as operating income, return on capital employed, economic value-added etc.

In the customer perspective, customer and market segments in which the business unit will compete are identified. Core outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market share in targeted segments. Drivers that represent those factors critical for customers to switch to or remain loyal to their suppliers should also be included.

In the internal business process perspective executives must identify the critical internal processes in which the organisation must excel to:

• Improve the drivers that will attract and retain customers in targeted market segments

• Satisfy shareholder expectations of excellent financial returns

This perspective highlights two fundamental differences between traditional and the BSC approaches to performance measurement. Traditional approaches attempt to monitor and improve existing business processes. The BSC approach, however, will usually identify entirely new processes at which an organisation must excel to meet customer and financial objectives. The second difference is to incorporate innovation processes. Often these may result in the development of new products or services.

The learning and growth perspective of the BSC identifies the infrastructure that the organisation must build to create long term growth and improvement. The financial, customer and internal process objectives of the BSC will often reveal gaps between the existing capabilities of people, systems and procedures and what will be required to achieve them. To close these gaps, organisations will have to invest in reskilling employees, enhancing information technology and systems, and aligning organisational procedures and routines.

Employee based measures include generic outcome measures - employee satisfaction, retention, training and skills - and the drivers of these, such as detailed, business specific indexes of the particular skills required for the new competitive environment.

The Balanced Scorcard is more than a set of key performance indicators (KPIs) or critical success factors. There must be a chain of cause and effect between the various objectives and measures through all four perspectives. The following example, while a bit of a mouthful demonstrates how this can be achieved. Training and improving skills of operating staff ( a learning and growth perspective objective) could lead to a reduction in cycle times (an internal process perspective objective) that may lead to improved customer satisfaction and loyalty through shorter delivery times, and hence greater sales revenue, (an objective of the customer perspective) leading to an increase in return on capital employed ( an outcome measure in the financial perspective).

Typically this cause and effect chain would be derived by starting with the financial perspective outcome measures and then working down through the perspective layers identifying appropriate performance drivers and measures on the way. Outcome measures need performance (or "action") drivers to indicate how the outcomes are to be achieved. Performance drivers need outcome measures to determine if they are having the impact that was originally expected. A BSC should have an appropriate mix of outcomes (lagging indicators) and performance drivers (leading indicators) of the business unit's strategy. This should also be a balanced mix across the four perspectives. For example, operational improvements (internal process perspective) such as improved quality and reduced cycle times will not necessarily lead to improved financial measures unless they are linked by a cause and effect chain through the customer perspective to these measures.

If improved operational performance fails to improve financial performance this indicates that the chain of cause and effect has not been established correctly and the organisation's strategy implementation plans need to be revised.

In summary, the BSC translates vision and strategy into objectives and measures across a balanced set of perspectives. The BSC includes measures of desired outcomes as well as processes that will drive the desired outcomes for the future.