Balanced Scorecard

• Author: Laurie Hillstrom
• Pages: 30-35

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The balanced scorecard is a performance measurement tool developed in 1992 by Harvard Business School professor Robert S. Kaplan and management consultant David P. Norton. Kaplan and Norton's research led them to believe that traditional financial

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measures, like return on investment, could not provide an accurate picture of a company's performance in the innovative business environment of the 1990s. Rather than forcing managers to choose between "hard" financial measures and "soft" operational measures—such as customer retention, product development cycle times, or employee satisfaction—they developed a method that would allow managers to consider both types of measures in a balanced way. "The balanced scorecard includes financial measures that tell the results of actions already taken," Kaplan and Norton explained in the seminal 1992 Harvard Business Review article that launched the balanced scorecard methodology. "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."

The balanced scorecard provides a framework for managers to use in linking the different types of measurements together. Kaplan and Norton recommend looking at the business from four perspectives: the customer's perspective, an internal business perspective, an innovation and learning perspective, and the financial (or shareholder's) perspective. Using the overall corporate strategy as a guide, managers derive three to five goals related to each perspective, and then develop specific measures to support each goal. Ideally, the scorecard helps managers to clarify their vision for the organization and translate that vision into measurable actions that employees can understand. It also enables managers to balance the concerns of various stakeholders in order to improve the company's overall performance. "The balanced score-card is a powerful concept based on a simple principle: managers need a balanced set of performance indicators to run an organization well," Paul McCunn wrote in Management Accounting. "The indicators should measure performance against the critical success factors of the business, and the 'balance' is the balancing tension between the traditional financial and nonfinancial operational, leading and lagging, and action-oriented and monitoring measures."

The balanced scorecard concept has enjoyed significant success since its introduction. According to the Financial Times, it was adopted by 80 percent of large U.S. companies as of 2004, making it the nation's most popular management tool for increasing performance. In addition, it has increasingly been applied in the public sector since it was promoted by the National Partnership for Reinventing Government. Part of the balanced scorecard's popularity can be attributed to the fact that it is consistent with many common performance improvement initiatives undertaken by companies, such as continuous improvement, cross-functional teamwork, or customer-supplier partnering. It complements these initiatives by helping managers to understand the complex interrelationships among different business areas. By linking the elements of a company's competitive strategy in one report, the balanced scorecard points out situations

Table 1

Balanced Scorecard

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where improvement in one area comes at the expense of another. In this way, the scorecard helps managers to make the decisions and tradeoffs necessary for success in today's fast-paced and competitive business environment.

HISTORY OF THE BALANCEDSCORECARD APPROACH

In 1990 Robert S. Kaplan, a professor of accounting at the Harvard Business School, and David P. Norton, co-founder of a Massachusetts-based strategy consulting firm called Renaissance Worldwide Inc., conducted a year-long research project involving 12 large companies. The original idea behind the study, as Anita van de Vliet explained in Management Today, was that "relying primarily on financial accounting measures was leading to short-term decision-making, over-investment in easily valued assets (through mergers and acquisitions) with readily measurable returns, and under-investment in intangible assets, such as product and process innovation, employee skills, or customer satisfaction, whose short-term returns are more difficult to measure" (1997, pp.78).

Kaplan and Norton looked at the way these companies used performance measurements to control the behavior of managers and employees. They used their findings to devise a new performance measurement system that would provide businesses with a balanced view of financial and operational measures. Kaplan and Norton laid out their balanced scorecard approach to performance measurement in three Harvard Business Review articles beginning in 1992. Before long, the balanced scorecard had become one of the hottest topics at...