APPENDIX D2

Kaplan and Norton (1992) introduced the concept of a balanced scorecard for motivating and measuring the performance of an organization. Four perspectives -- financial, customer, internal business process, and learning and growth -- provide a balanced picture of current operating performance as well as the drivers of future performance. To simply supplement traditional financial measures, such as internal rate of return (IRR) or cash flow, with non-financial measures, such as customer satisfaction and employee attitudes, is not sufficient. Many of the most popular non-financial measures provide little focus on the future. Quite often those measures are not related to specific strategic objectives that will provide sustainable competitive advantage. According to Kaplan and Norton (1996) financial and non-financial measures should be derived from an organizations unique strategy. The multiple measures on a properly constructed balanced scorecard should consist of a linked series of objectives and measures that are both consistent and mutually reinforcing. The measures on a balanced scorecard can be used to articulate and communicate the strategy and vision of an organization as well as to help align individual, organizational, and cross-departmental initiatives to achieve a common goal. A good balanced scorecard enables an organization to integrate its business and financial plans and provides feedback and learning opportunities by monitoring short-term results from the different perspectives (Kaplan & Norton 1996). The financial perspective ("How do we look to shareholders?"; Kaplan & Norton, 1992) focuses on the long-term objectives of an organization. Most organizations might emphasize profitability objectives. In the customer perspective ("How do customers see us?"; Kaplan & Norton, 1992), managers identify customer and market segments in which the organization will operate and the measures of the organizations performance in these segments. In the internal business process perspective of the balanced scorecard ("What must we excel at?"; Kaplan & Norton, 1992) critical internal processes are identified. The customer and internal business perspective identify the factors most critical for current and future success (Kaplan & Norton, 1996) . Finally, the learning and growth perspective ("Can we continue to improve and create value?"; Kaplan & Norton, 1992) identifies the infrastructure that the organization must build to create long-term growth and improvement.

References
Kaplan, R.S. and Norton, D.P. 1992. The Balanced Scorecard -- Measures that Drive Performance. Harvard Business Review, Vol. 70, No. 1: 47-54 Kaplan, R.S. and Norton, D.P. 1996a. Linking the Balanced Scorecard to Strategy. California Management Review, Vol. 39, No. 1: 53-79 Kaplan, R.S. and Norton, D.P. 1996b. Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review, Vol. 74, No. 1: 75-85

Application of the Balanced Scorecard

Kaplan and Norton (1996) provide a case study for design and development of a balanced scorecard for Metro Bank with the overall goal of improving future financial performance. Metro Bank operated in retail banking and had 30 % of the region's core deposit accounts. Because of increased competition and lower interest rates Metro Bank's income could no longer be sustained. After a detailed situation analysis, Metro Bank developed a new strategy with two major components: (1) growing revenues shall be achieved by developing and offering additional products for current customers; (2) operating efficiency shall be improved by shifting non-profitable customers to more cost-effective channels of distribution (e.g.

APPENDIX D2
electronic banking). These two components of the strategy were translated into objectives and measures in the four perspectives. The financial objectives were clearly defined by broaden the revenue mix and improve operating efficiency. Metro Bank would focus on its current customers, identify customers who would likely be interested in a broader range of services, and then sell an expanded set of financial products and services to the identified customers. To achieve high customer satisfaction, Metro Bank focused on shifting the customers to the appropriate channels (electronic banking vs. personal banking), minimizing problems, and providing rapid response. High employee satisfaction was identified as essential for achieving the set financial objectives. Table 1 summarizes the objectives and measures for Metro Bank's balanced scorecard for the growing revenues strategy. It indicates the mixture of leading and lagging indicators on the scorecard. Table 1: Metro Banks balanced scorecard for the growing revenue strategy (Kaplan & Norton, 1996) Strategic Objectives Strategic Measures Lag Indicators Lead Indicators Return on Investment Improve Returns Financial Revenue Mix Broaden Revenue Mix Revenue Growth Customer Retention Customer Increase Customer Satisfaction Customer Satisf. Survey Depth of Relation Understand the Customers Share of Segment Product Develop. Cycle Internal Create Innovative Products Revenue New Products Hours with Customers Cross-Sell Products Cross-Sell Ratio Build Strategic Information Strat. Information Avail. Develop Strategic Skills Revenue per Employee Learning Strat. Job Coverage Focus Resources Employee Satisfaction Personal Goals Align Employee Effectiveness Most of the leading or driving indicators occur for both the internal business process and the learning and growth measures. The internal objectives led naturally to a final set of factors to implement the revenue growth strategy. The learning and growth strategy of the scorecard identified the need for salespersons to undergo a major role change. This role change would require a broader set of skills, improved access to information, and realignment of the incentive systems to encourage the new behavior. The lead indicators focused on those major changes are the upgrading of the skill base and qualified people (strategic job coverage ratio), the access to information technology tools and data (strategic information availability ratio), and the realignment of individual goals and incentives (personal goal alignment). The lag indicators include a productivity measure (revenue per employee) and the attitudes of the work force (employee satisfaction). This Metro Bank case study shows how a balanced scorecard can describe a system of cause and effect relationships and incorporate a mix of leading and lagging indicators, all of which point to improving future financial performance.

References
Kaplan, R.S. and Norton, D.P. 1996a. Linking the Balanced Scorecard to Strategy. California Management Review, Vol. 39, No. 1: 53-79.