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Squaring it off one more time please
Understanding process interrelationships using the Balanced Scorecard
(column by Robert S. Kaplan, Professor at Harvard Business School Co-founder, Balanced Scorecard and David P. Norton, President and Co-founder, Balanced Scorecard)
What you measure is what you get. Senior executives understand that their organization's measurement system strongly affects the behavior of managers and employees. Executives also understand that traditional financial accounting measures like return on investment and earnings per share can give misleading signals: Such measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today.
During a year-long research project with 12 companies at the leading edge of performance measurement, we devised a balanced scorecard; a set of measures that gives top managers a fast but comprehensive view of the business. It includes both financial and operational measures.
The balanced scorecard provides answers to four basic questions: How do customers see us? What must we excel at? Can we continue to improve and create value? How do we look to shareholders? Companies rarely suffer from having too few measures. More commonly, they keep adding new measures whenever an employee or a consultant makes a worthwhile suggestion. The balanced scorecard forces managers to focus on the handful of measures that are most critical.
Several companies have already adopted the balanced scorecard. Their experiences have demonstrated that it meets several managerial needs, bringing together many of the disparate elements of a company's competitive agenda and guarding against sub-optimization. By forcing senior managers to consider all the important operational measures together, the balanced scorecard lets them see whether improvement in one area may have been achieved at the expense of another.
1. Customer perspective
Many companies today have a corporate mission that focuses on the customer. "To be number one in delivering value to customers," is a typical mission statement. The balanced scorecard demands that managers translate their general mission statement into specific measures that reflect the factors that matter to customers.
Customers' concerns tend to fall into four categories: time, quality, performance and service, and cost. Lead time measures the time required for the company to meet its customers' needs. Quality measures the defect level of incoming products as perceived and measured by the customer (Quality could also measure, for example, the accuracy of the organization's delivery forecasts). The combination of performance and service measures how the company's products or services contribute to creating value for its customers.
To put the balanced scorecard to work, companies should articulate goals for time, quality, and performance and service and then translate these goals into specific measures. Senior managers at one semiconductor company - let's call it Electronic Circuits Incorporated (ECI) - established general goals for customer performance: Get standard products to market sooner, improve customers' time to market, become customers' supplier of choice through partnerships with them and develop products tailored to customer needs. The managers translated these general goals into four specific goals and identified an appropriate measure for each.
To assess whether the company was achieving its goal of providing reliable, responsive supply, ECI turned to its customers. When it found that each customer defined reliable, responsive supply differently, ECI created a database of the factors as defined by each of its major customers. The shift to external measures of performance with customers led ECI to redefine "on time" so it matched customers' expectations.
Depending on customers' evaluations to define some of a company's performance measures forces a company to view its performance through customers' eyes. Some companies hire third parties to perform anonymous customer surveys. In addition to the above measures, companies must remain sensitive to the cost of their products, but customers see price as only one component of the cost they incur when dealing with their suppliers. Other supplier-driven costs range from ordering and scheduling delivery to the scrapping of the materials. An excellent supplier may charge a higher unit price for products than other vendors but nonetheless be a lower-cost supplier because it can deliver defect-free products in exactly the right quantities at exactly the right time, minimizing hassles.
2. Internal business perspective
Customer-based measures must be translated into measures of what the company must do internally to meet customers' expectations. These internal measures should stem from the business processes that have the greatest impact on customer satisfaction factors - quality, employee skills and productivity, for example. Companies should also attempt to identify and measure their company' score competencies, the critical technologies needed to ensure continued market leadership. To achieve goals, managers must devise measures that are influenced by employees' actions.
3. Innovation and learning perspective
The customer-based and internal business process measures on the balanced scorecard identify the parameters that the company considers most important for competitive success. But the targets for success keep changing - only through the ability to launch new products, create more value for customers and improve operating efficiencies continually can a company penetrate new markets and increase revenues and margins.
ECI's innovation measures focus on the company's ability to develop and introduce products rapidly. Its manufacturing improvement measure focuses on achieving stability in the manufacturing of new products rather than to improve manufacturing of existing products. In addition to measures on product and process innovation, some companies overlay specific improvement goals for their existing processes. Other companies require that managers make improvements within a specific time period.
4. Financial perspective
Financial performance measures indicate whether the company's strategy and execution are contributing to bottomline improvement. Typical financial goals have to do with profitability, growth and shareholder value. But given today's business environment, should senior managers even look at the business from a financial perspective? Some critics argue that the terms of competition have changed and that traditional financial measures do not improve customer satisfaction, quality, cycle time and employee motivation. In their view, companies should stop navigating by financial measures.
Such assertions are incorrect. A well-designed financial-control system can enhance an organization's quality management program. However, the balanced scorecard does not guarantee a winning strategy: It can only translate a company's strategy into specific measurable objectives.
A failure to convert improved operational performance into improved financial performance should send executives back to their drawing boards to rethink the company's strategy or its implementation. Ideally, companies should specify how improvements will lead to higher market share, operating margins and asset turnover or to reduced operating expenses. By combining the financial, customer, internal process and innovation, and organizational learning perspectives, the balanced scorecard helps managers understand many interrelationships. This understanding can help managers improve decision making and keep companies looking and moving forward instead of backward.
(End of Robert S. Kaplan and David P. Norton column)
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