The Balanced Scorecard Measures That Drive Performance by Robert S. Kaplan and David P.

Norton (Summary)
Where is our organization going? Answer to this query is very important for the managers to shape the behavior of employees. Kaplan and Norton, writers of the subjected article also discuss this question in detail and derive a new measurement-tool with the perspective of current business demands. Traditional financial indicators like earning-per-share and return on investment are there to measure the existing position of any organization. But the motives of organizations have been changed due to competitive environment. Profitability turns into an old business term as compare to emerging concepts like innovations and continuous improvement. Skills and competencies become vital for organizations to survive and prosper in their perspective market. Thus traditional financial system is inadequate to measure all the concerning performances. Many academic researchers give emphasis to operational measures such as cycle-time and defect rates. But according to the research of Kaplan and Norton, many seniors executives desire balanced presentation of financial and operational measures to focus the critical areas of business. Therefore after a year-long research project with 12 companies, a comprehensive performance measurement-tool has been devised with the name of Balanced Scorecard. It is a blend of financial and operational measures which examines performance with customer, internal business, innovation and learning and financial perspectives. It works like a device which shows several complex business activities simultaneously to managers. Balanced scorecard also minimizes the information overload as it focuses on the handful measures that are most critical. Several managers experienced that scorecard fulfills a lot of their managerial needs. Like, Balanced scorecard compiles all the companys competitive agenda as becoming customer oriented, improving quality, reducing response time, shortening new product launch time and teamwork in a single management report. Scorecard also prevents organizations for suboptimization, a compromising position in the market. It shows that whether improvement in one field is due to expense of another or not?

Every organization can make its own scorecard. This article took a balanced scorecard of a hypothetical organization, Electric Circuits Inc. (ECI) as an example which addresses four perspectives one by one.

How do customers see us? Balanced scorecards help managers to measures the most important parameter related to customer service. It translates the factors that really matter to customers. These factors are of four kinds, time, quality, performance and services and cost. Lead time deals with the required time by the company to complete the customers needs. Quality is a factor which is perceived by the customer at a given defect level of product. Performance and service is usually measured by the created value of organization to its customers. Organizations put customers related factors into measurable specific goals by the balanced scorecard. Get standard products to market sooner, improve customers time to market, becomes customers supplier of choice through partnership with them and develop innovative products tailored to customer needs are the general goals made by ECI for customer performance. Some required information by ECIs balanced scorecard with customer perspective is available internally or some from external sources like customer itself or third party. Like goal related to new product can be measured by the percentage of sales. The sales data is available within the organization. While for other goals such as responsive supply, customers would be the best evaluator. With the measurements of time, quality and performance and services, organizations have to be careful with the cost factor of products. If some organization justifies its higher cost as compare to its competitor with right time, best quality and ideal performance and service than customers see price as one component of the cost they incur. There are other measures for the customers perspective like competitive ranking, equipment up-time percentage and meantime response to service call. The second part of the balanced scorecard gives internal glimpse of operations to managers. These operations are necessary to meet the customers satisfaction. Therefore organizations try to find out their core competencies as they can remain leaders to their perspective market. There are some factors of processes which have strong influence on customers satisfaction like cycle-time, quality, productivity and cost. As much of the processes are taking place at work station levels therefore these factors should be decompose to local levels. In this way individuals actions can be linked to organizational competencies and can be measured by the top management. This link helps lower level employees to understand what actually they ought to perform to complete the companys overall mission. Therefore an advanced information system is very important regarding internal business perspective. If any organization has quick information system then it becomes easy to control its flaws at roots level. SCI, the given organization needed operational information system as its scorecard information system is not timely. Therefore the link is not so strong between the measures related to internal business perspective in the SCI. Thus the company is in process to get the information system to overcome this constraint. There are also some other measures regarding internal business perspective like employees knowledge, breakeven time metric and time require to process customer order.

Innovation and learning perspective includes those factors which are necessary to get success in globally competitive environment. Continual improvement in exiting products and introduction new products are core capabilities for the organizations regarding innovation and learning perspective. Organization can add value to itself via innovation and improvement. New markets can also be captured by introducing (innovation) new products and large portion of existing market can be gained by extended (learning) product categories. ECIs goals related to innovation and learning are, technology leadership, manufacturing learning, product focus and time to market. The easiest indicator of this perspective is the percentage sale of new product. Other companies like Analog Devices and Milliken & Co. give emphasis upon managers responsibilities regarding internal business processes and improvement within a specific time period for continuous improvement. Financial perspective deals with the bottom-line improvement of any organization. Traditional financial goals are related to profitability, growth and shareholder value. To survive, to succeed and to prosper are the financial goals of ECI which can be measured by cash flow, quarterly sales growth and increased market share respectively. Traditional financial system has lot of critics as it has well-documented inadequacies, backward-looking focus and inability to address contemporary value-creating issues. Although there is Shareholder value analysis (SVA), a more forward-looking tool of traditional finance which forecasts future cash flows, financial system does not improve customer satisfaction, cycle time, quality and employee motivation. But all the allegations against the traditional financial system are not quite right due to two reasons, A well designed financial system enhances the total quality management program rather than blocking. The supposed linkage between improved operating performance and financial success is actually quite weak and uncertain.

The importance of financial perspective is demonstrated by the example of NYSE electronic company. During the period of three years company achieved so much success regarding quality and on time delivery. Defect rate dropped from 500 parts per million to 50 and delivery time improved from 70% to 90% and it attained growth rate of 50% from 26%. But all these improvements did not get profitability as expected. Basically improvement in manufacturing capabilities did not turn into increased profitability. This difference between operational performance and financial measures generates disappointment among executives. Even an exceptional balanced scorecard does not prove itself successful in this regard. Scorecard only translates organizational goals into measurable objectives. One of the reasons to failure of financial measures is that organization doesnt go for second round after operational improvement. Like due to improvement of quality and cycle-time excess capacity is created in the first round. In the second round this excess capacity should be deleted or make useful for

future by the management so that financial losses will not occur. In other words managers have to make their sales volume high to balance the expense of newly created capacity for improved quality and cycle-time. Therefore executives feel satisfy with improved quality, response time, productivity and new product only when these operations are converted into improved sales and market share, reduced operating expense or higher asset turnover. Balanced scorecard comes with the fundamental change in performance measurement. It has been found by the project participants during the research that the involvement of senior managers is the most important thing for the implementation of balanced scorecard. As traditionally performances were measured by financial experts therefore managers were not assigned to this task. Traditional measurement system is a control based program. Actions are allocated to employees via this system and then measured; means control the behavior of employees. But balanced scorecard has a different philosophy. It gives emphasis to broader vision and strategy, not to control. It specifies the goals irrespective to behavior of the people who is actually responsible to accomplish these goals. Senior managers are familiar with the end result but do not the exact way to achieve it. Balanced scorecard is a sort of specialist to modern concepts of cross-functional integration, customer-supplier partnership, global scale, continuous improvement and teamwork. In short it is device for organizations to keep moving.