Performance Measurement - Balanced Scorecard

Valid until 31 January 2015 (unless noted)

In 1992, Robert S. Kaplan and David Norton introduced the performance measurement balanced scorecard, a concept for measuring a company's activities in terms of its vision and strategies, to give managers a comprehensive view of the performance of a business. The key new element is focusing not only on financial outcomes but also on the human issues that drive those outcomes, so that organizations focus on the future and act in their long-term best interest. The strategic management system forces managers to focus on the important performance metrics that drive success. It balances a financial perspective with customer, process, and employee perspectives. Measures are often indicators of future performance. The balanced scorecard provides executives with a comprehensive framework that translates a company’s vision and strategy into a coherent set of performance measures.

Basic Concept of the Balanced Scorecard based on (Kaplan and Norton, 1996)

A Balanced Scorecard is made up of four components: mission, perspectives, objectives, and measures. Each of these components and how they build on each other is described below :

# Mission
The mission is the highest, guiding level of the scorecard. It answers the questions:
- What is our overall reason for being?
- What is our mission?
- Why do we exist as an organization?

# Perspectives
Perspectives represent the various areas that influence performance and overall achievement of the mission. There are typically four to five perspectives within a scorecard, however there can be more based on the needs of the organization. Perspectives answer the question “What are our key areas of focus in trying to achieve our mission?” According to (Kaplan and Norton, 1996), the balanced scorecard supplements traditional financial measures with criteria that measure performance from three additional perspectives – those of customers, internal business processes, and learning and growth:

a. Financial Perspective
Financial performance measures indicate whether a company’s strategy, implementation, and execution are contributing to bottom-line improvement. Financial objectives typically relate to profitability measured, for example: operating income, return on assets, cash flow, economic value added.

b. Customer Perspective
Managers identify the customer and market segments in which the business will compete and the measures of the business unit’s performance in these targeted segments. This perspective typically include several core or generic measures of the successful outcomes from well formulated and implemented strategy. The core outcome measures include: customer satisfaction, customer retention, customer acquisition, customer profitability, and market and account share in targeted segments.

c. Internal Business Perspective
The internal business process perspective, executive identify the critical internal processes in which the organization must excel. This process enable the business unit to deliver the value propositions that will attract and retain customers in targeted market segments and satisfy shareholder expectation of excellent financial returns.

d. Learning and Growth Perspective
This perspective identifies the infrastructure that the organization must build to create long term growth and improvement. The customer and internal business processes perspectives identify the factors most critical for current and future success.

The four perspectives of the scorecard permit a balance between short and long term objectives. The balanced scorecard fosters a balance among different strategic measures in an effort to achieve goal congruence, thus encouraging employees to act in the organization’s best interest. It is a tool that helps the company’s focus, improves communication, sets organizational objectives, and provides feedback on strategy.

# Objectives
Within each perspective, objectives identify what needs to be done in order to achieve the overall mission. They answer the questions:
- What must we do (from each perspective) to achieve the overall mission?
- What is most important (from each perspective) to achieving the overall mission?

# Measures
Measures provide a way to determine how an organization is doing in achieving the objectives within the perspectives and in turn the overall mission. They are the most “actionable” component in the scorecard. For each measure, a target is set so that progress toward the objective can be evaluated. Measures answer the question:
“How do we know how well we’re doing in achieving our objectives, and in turn our overall mission?”

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Sources :

Kaplan, R.S. and Norton, D.P. (1996a), The Balanced Scorecard, Harvard Business School Press, Boston, MA.

Anthony / Govindarajan, 2007, “Management Control System”, McGraw-Hill, Inc., Twelfth Edition, Singapore.