The Idea in Brief
What makes a balanced scorecard special? Four characteristics stand out:
1. It is a top-down reflection of the company’s mission and strategy. By contrast, the measures most companies track are bottom-up: deriving from local activities or ad hoc processes, they are often irrelevant to the overall strategy.
2. It is forward-looking. It addresses current and future success. Traditional financial measures describe how the company performed during the last reporting period—without indicating how managers can improve performance during the next.
3. It integrates external and internal measures. This helps managers see where they have made trade-offs between performance measures in the past, and helps ensure that future success on one measure does not come at the expense of another.
4. It helps you focus. Many companies track more measures than they can possibly use. But a balanced scorecard requires managers to reach agreement on only those measures that are most critical to the success of the company’s strategy. Fifteen to twenty distinct measures are usually enough, each measure custom-designed for the unit to which it applies.
The Idea in Practice
Linking measurements to strategy is the heart of a successful scorecard development process. The three key questions to ask here:
1. If we succeed with our vision and strategy, how will we look different
- to our shareholders and customers?
- in terms of our internal processes?
- in terms of our ability to innovate and grow?
2. What are the critical success factors in each of the four scorecard perspectives?
3. What are the key measurements that will tell us whether we’re addressing those success factors as planned?
The balanced scorecard also brings an organizational focus to the variety of local change programs under way in a company at any given time. As the benchmark against which all new projects are evaluated, the scorecard functions as more than just a measurement system. In the words of FMC Corp. executive Larry Brady, it becomes “the cornerstone of the way you run the business,” that is, “the core of the management system” itself. Example:
Rockwater, an underwater engineering and construction firm, crafted a five-pronged strategy: to provide services that surpassed customers’ expectations and needs; to achieve high levels of customer satisfaction; to make continuous improvements in safety, equipment reliability, responsiveness, and cost effectiveness; to recruit and retain high-quality employees; and to realize shareholder expectations. Using the balanced scorecard, Rockwater’s senior management translated this strategy into tangible goals and actions.
- The financial measures they chose included return-on-capital employed and cash flow, because shareholders had indicated a preference for short-term results.
- Customer measures focused on those clients most interested in a high value-added relationship.
- The company introduced new benchmarks that emphasized the integration of key internal processes. It also added a safety index as a means of controlling indirect costs associated with accidents.
- Learning and growth targets emphasized the percentage of revenue coming from new services and the rate of improvement of safety and rework measures.
Today’s managers recognize the impact that measures have on performance. But they rarely think of measurement as an essential part of their strategy. For example, executives may introduce new strategies and innovative operating processes intended to achieve breakthrough performance, then continue to use the same short-term financial indicators they have used for decades, measures like return-on-investment, sales growth, and operating income. These managers fail not only to introduce new measures to monitor new goals and processes but also to question whether or not their old measures are relevant to the new initiatives.