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 for continuous improvement and innovation—activities today’s competitive environment demands. The traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies companies are trying to master today.
As managers and academic researchers have tried to remedy the inadequacies of current performance measurement systems, some have focused on making financial measures more relevant. Others have said, “Forget the financial measures. Improve operational measures like cycle time and defect rates; the financial results will follow.” But managers should not have to choose between financial and operational measures. In observing and working with many companies, we have found that senior executives do not rely on one set of measures to the exclusion of the other. They realize that no single measure can provide a clear performance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures.
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. The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization’s innovation and improvement activities—operational measures that are the drivers of future financial performance.
Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying an airplane, pilots need detailed information about many aspects of the flight. They need information on fuel, air speed, altitude, bearing, destination, and other indicators that summarize the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.
The balanced scorecard allows managers to look at the business from four important perspectives. (See the exhibit “The Balanced Scorecard Links Performance Measures.”) It provides answers to four basic questions:
The Balanced Scorecard Links Performance Measures;
- firstly, How do customers see us? (customer perspective)
- secondly, What must we excel at? (internal perspective)
- thirdly, Can we continue to improve and create value? (innovation and learning perspective)
- further, How do we look to shareholders? (financial perspective)
- Lastly, plan
While giving senior managers
information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. 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. One manager described the proliferation of new measures at his company as its “kill another tree program.” 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 early experiences using the scorecard have demonstrated that it meets several managerial needs. First, the scorecard brings together, in a single management report, many of the seemingly disparate elements of a company’s competitive agenda: becoming customer oriented, shortening response time, improving quality, emphasizing teamwork, reducing new product launch times, and managing for the long term.
Second, the sc