Balanced measures

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<ul><li><p> THE HIGH-PERFORMANCE ORGANIZATION</p><p>1992</p><p>BEST OF HBR</p><p>By the 1980s, many executives were convinced that traditional measures of</p><p>financial performance didn't let them manage effectively and wanted to re-</p><p>place them with operational measures. Arguing that executives should track</p><p>both financial and operational metrics, Robert Kaplan and David Norton</p><p>suggested four sets of parameters.</p><p>First, how do customers see your company? Find out by measuring lead times,</p><p>quality, performance and service, and costs. Second, what must your company</p><p>excel at? Determine the processes and competencies that are most critical, and</p><p>specify measures, such as cycle time, quality, employee skills, and productivity,</p><p>to track them. Third, can your company continue to improve and create value?</p><p>Monitor your ability to launch new products, create more value for customers,</p><p>and improve operating efficiencies. Fourth, how has your company done by its</p><p>shareholders? Measure cash flow, quarterly sales growth, operating income by</p><p>division, and increased market share by segment and return on equity.</p><p>The balanced scorecard lets executives see whether they have improved in</p><p>one area at the expense of another. Knowing that, say the authors, will protect</p><p>companies from posting suboptimal performance.</p><p>The Balanced Scorecard:Measures That Drive Performanceby Robert S. Kaplan and David P. Norton</p><p>The balanced scorecardtracks all the importantelements of a company'sstrategy-from continuousimprovement andpartnerships to teamworkand global scale. And thatallows companies to excel.</p><p>^ ^ "ha t you measure is what youget Senk&gt;r executives understand thattheii (rtganization's measurement sys-tem strongly affects the behavior ofmanagers and employees. Executivesalso understand that traditional finan-cial accounting measures like return oninvestment and earnings per share cangive misleading signals for continu-ous improvement and innovation - ac-tivities today's competitive environ-ment demands. The traditional finan-cial performance measures workedwell for the industrial era, but they areout of step with the skills and compe-tencies companies are trying to mastertoday.</p><p>As managers and academic research-ers have tried to remedy the inadequa-</p><p>cies of current performance measure-ment systems, some have focused onmaking financial measures more rele-vant. Others have said, "Forget the fi-nancial measures; improve operationalmeasures like cycle time and defectrates. The financial results will follow."But managers should not have tochoose between financial and opera-tional measures. In observing and work-ing with many companies, we havefound that senior executives do not relyon one set of measures to the exclusionof the other. They realize that no singlemeasure can provide a clear perfor-mance target or focus attention on thecritical areas ofthe business. Managerswant a balanced presentation of bothfinancial and operational measures.</p><p>172 HARVARD BUSINESS REVIEW</p></li><li><p> THE HIGH-PERFORMANCE ORGANIZATION</p><p>During a yearlong research projectwith 12 companies at the leading edge ofperformance measurement, we deviseda "balanced scorecard"- a set of mea-sures that gives top managers a fast butcomprehensive view ofthe business. Thebalanced scorecard includes financialmeasures that tell the results of actionsalready taken. And it complements thefinancial measures with operationalmeasures on customer satisfaction, in-ternal processes, and the organization'sinnovation and improvement activi-ties-operational measures that are thedrivers of future financial performance.</p><p>Think of the balanced scorecard asthe dials and indicators in an airplanecockpit. For the complex task of navi-gating and flying a plane, pilots need de-tailed information about many aspectsofthe fiight. They need information onfuel, airspeed, altitude, bearing, desti-nation, and other indicators that sum-marize the current and predicted envi-ronment. Reliance on one instrumentcan be fatal. Similarly, the complexityof managing an organization today re-quires that managers be able to viewperformance in several areas at once.</p><p>The balanced scorecard allows man-agers to look at the business from fourimportant perspectives. (See the exhibit"The Balanced Scorecard Links Perfor-mance Measures.") It provides answersto four basic questions: How do customers see us? (customerperspective)</p><p> What must we excel at? (internal busi-ness perspective)</p><p> Can we continue to improve and cre-ate value? (Innovation and learningperspective)</p><p> How do we look to shareholders?(financial perspective)While giving senior managers infor-</p><p>mation from four different perspec-tives, the balanced scorecard minimizesinfonnation overload by limiting thenumber of measures used. Companies</p><p>The Balanced ScorecardLinks Performance Measures</p><p>How docustomerssee us?</p><p>Financli l Panpectlv*</p><p>COALS MEASURES</p><p>How do we lookto shareholders?</p><p>What mustwe excel at?</p><p>Cuttomtr PtnpMtlv*</p><p>COALS MEASURES</p></li><li><p>The Balanced Scorecard BEST OF HBR</p><p>ganization. The ECl scorecard was de-signed to focus the attention of its top ex-ecutives on a short list of critical indica-tors of current and future performance.</p><p>Customer Perspective:How Do Customers See Us?Many companies today have a corpo-rate mission that focuses on the cus-tomer. "To be number one in deliver-ing value to customers" is a typicalmission statement. How a company isperforming from its customers' per-spective has become, therefore, a prior-ity for top management. The balancedscorecard demands that managers trans-late their general mission statementon customer service into specific mea-sures that refiect the factors that reallymatter to customers.</p><p>Customers' concerns tend to fall intofour categories: time, quality, perfor-mance and service, and cost. Lead timemeasures the time required for thecompany to meet its customers' needs.For existing products, lead time can bemeasured from the time the companyreceives an order to the time it actu-ally delivers the product or service tothe customer. For new products, leadtime represents the time to market, orhow long it takes to bring a new prod-uct from the product definition stageto the start of shipments. Quality mea-sures the defect level of incoming prod-</p><p>ucts as perceived and measured by thecustomer. Quality could also measureon-time delivery-the accuracy oftheorganization's delivery forecasts. Thecombination of performance and ser-vice measures how the company's prod-ucts or services contribute to creatingvalue for its customers.</p><p>To put the balanced scorecard towork, companies should articulate goalsfor time, quality, and performance andservice and then translate these goals</p><p>To track the specific goal of providinga continuous stream of attractive solu-tions, ECl measured the percentage ofsales from new products and the per-centage of sales from proprietary prod-ucts. That information was availableinternally, but certain other measuresforced the company to get data fromoutside. To assess whether the com-pany was achieving its goal of providingreliable, responsive supply, ECl turnedto its customers. When it found that each</p><p>Traditional financial performance measuresworked well for the industrial era, but they are</p><p>out of step with the skills and competenciescompanies are trying to master today.</p><p>into specific measures. Senior manag-ers at ECl, for example, establishedgeneral goals for customer perfor-mance: Get standard products to mar-ket sooner, improve customers' time tomarket, become customers' supplier ofchoice through partnerships with them,and develop innovative products tai-lored to customer needs. The managerstranslated these general goals into fourspecific goals and identified an appro-priate measure for each. (See the exhibit"ECl's Balanced Business Scorecard.")</p><p>customer defined "reliable, responsivesupply" differently, ECl created a data-base ofthe factors as defined by eachof its major customers. The shift to ex-ternal measures of performance withcustomers led EC! to redefine "on time"so it matched customers' expectations.Some customers defined "on time"as any shipment that arrived withinfive days of scheduled delivery; othersused a nine-day window. ECl itself hadbeen using a seven-day window, whichmeant that it wasn't satisfying some of</p><p>JULY-AUGUST 2005 175</p></li><li><p> THE HIGH-PERFORMANCE ORGANIZATION</p><p>its customers and overachieving forothers. ECI also asked its top ten cus-tomers to rank the company as a sup-plier overall.</p><p>Depending on customers' evaluationsto define some of a company's perfor-mance measures forces that company toview its performance through custom-ers' eyes. Some companies hire third par-ties to perform anonymous customersurveys, resulting in a customer-drivenreport card. The J.D. Power quality sur-vey, for example, has become the stan-dard of performance for the automobileindustry, while the U.S. Department ofTransportation's measurement of on-time arrivals and lost baggage providesextemal standards for airlines. Bench-marking procedures are yet anothertechnique companies use to comparetheir performance against competi-tors' best practices. Many companieshave introduced "best of breed" com-parison programs: The company looksto one industry to find, say, the best dis-tribution system, to another industryfor the lowest cost payroll process, andthen forms a composite of those bestpractices to set objectives for its ownperformance.</p><p>in addition to measures of time, qual-ity, and performance and service, com-panies must remain sensitive to the costof their products. But customers seeprice as only one component ofthe costthey incur when dealing with their sup-pliers. Other supplier-driven costs rangefrom ordering, scheduling delivery,and paying for the materials; to receiv-ing, inspecting, handling, and storingthe materials; to the scrapping, rework-ing, and obsolescence caused by the ma-terials; and schedule disruptions (ex-pediting and value of lost output) fromincorrect deliveries. An excellent sup-plier may charge a higher unit pricefor products than other vendors butnonetheless be a lower cost supplierbecause it can deliver defect-free prod-ucts in exactly the right quantities atexactly the right time directly to the pro-duction process and can minimize,through electronic data interchange,the administrative hassles of ordering,invoicing, and paying for materials.</p><p>Internal BusinessPerspective: What MustWe Excel At?Customer-based measures are impor-tant, but they must be translated intomeasures of what the company mustdo internally to meet its customers' ex-pectations. After all, excellent customerperformance derives from processes,decisions, and actions occurring through-out an organization. Managers need tofocus on those critical internal opera-tions that enable them to satisfy cus-tomer needs. The second part ofthe bal-anced scorecard gives managers thatinternal perspective.</p><p>The internal measures for the balancedscorecard should stem from the busi-ness processes that have the greatestimpact on customer satisfaction - fac-tors that affect cycle time, quality, em-ployee skills, and productivity, for ex-ample. Companies should also attemptto identify and measure their com-pany's core competencies, the criticaltechnologies needed to ensure contin-ued market leadership. Companiesshould decide what processes and com-petencies they must excel at and specifymeasures for each.</p><p>Managers at ECI determined thatsubmicron technology capability wascritical to its market position. They alsodecided that they had to focus on man-ufacturing excellence, design produc-tivity, and new product introduction.The company developed operationalmeasures for each of these four inter-nal business goals.</p><p>To achieve goals on cycle time, qual-ity, productivity, and cost, managersmust devise measures that are influ-enced by employees' actions. Sincemuch of the action takes place at thedepartment and workstation levels,managers need to decompose overallcycle time, quality, product, and costmeasures to local levels. That way, themeasures link top management's judg-ment about key internal processes andcompetencies to the actions taken byindividualsthat affect overall corporateobjectives. This linkage ensures thatemployees at lower levels in the organi-zation have clear targets for actions,decisions, and improvement activitiesthat will contribute to the company'soverall mission.</p><p>Information systems play an invalu-able role in helping managers disaggre-</p><p>Other Measures for theCustomer's Perspective</p><p>&gt; A computer manufacturer wanted to be the competitive leaderin customer satisfaction, so it measured competitive rankings. Thecompany gottherankingsthrough an outside organization hired totalk directly with customers. The company also wanted to do a betterjob of solving customers' problems by creating more partnershipswith other suppliers. It measured the percentage of revenue fromthird-party relationships.</p><p>&gt; The customers of a producerof very expensive medical equipmentdemanded high reliability. The company developed two customer-based metrics for its operations: equipment up-time percentage andmean-time response to a service call.</p><p>&gt; A semiconductor manufacturer asked each major customer to rankthe company against comparable suppliers on efforts to improvequality, delivery time, and price performance. When the chip makerdiscovered it ranked in the middle, managers made improvementsthat moved the company tothe top of customers'rankings.</p><p>176 HARVARD BUSINESS REVIEW</p></li><li><p>The Balanced Scorecard BEST OF HBR</p><p>Other Measures for theInternal Business Perspective</p><p>&gt; One company recognized that the success of its total quality</p><p>management (TQM) program depended on all its employees</p><p>internalizing and acting on the program's messages. The company</p><p>performed a monthly survey of 600 randomly selected employees to</p><p>determine if they were aware of TQM, had changed their behavior</p><p>because of it, believed the outcome was favorable, or had become</p><p>missionaries to others.</p><p>&gt; Hewlett-Packard uses breakeven time (BET) to measure the</p><p>effectiveness of its product development cycle. BET measures the time</p><p>required for all the accumulated expenses in the product and process</p><p>development cycle (including equipment acquisition) to be recovered</p><p>by the product's contribution margin (the selling price less</p><p>manufacturing, delivery, and selling expenses).</p><p>&gt; A major office products manufacturer, wanting to respond rapidly to</p><p>changes in the marketplace, set out to reduce cycie time by 50%. Lower</p><p>leveis of the organization aimed to radically cut the times required to</p><p>process customer orders, order and receive materials from suppliers,</p><p>move materials and products between plants, make and assemble</p><p>products, and deliver products to customers.</p><p>gate the summary measures. When anunexpected signal appears on the baJ-anced scorecard, executives can querytheir information system to find the</p><p>management meetings, and the mea-sures have yet to be linked to measuresfor managers and employees at lowerlevels ofthe oi^anization. The company</p><p>cesses and have the ability to introduceentirely...</p></li></ul>