Performance measurement systems perform multiple roles:

Communicate the company's strategic objectives

Motivate employees to help the company achieve its strategic objectives

Evaluate the performance of managers, employees, and operating units

Help managers allocate resources to the most productive and profitable

opportunities

Provide feedback on whether the company is making progress in improm

processes and meeting the expectations of customers and shareholders

The challenge is to find the right mix of financial and nonfinancial measures to perform

these multiple tasks.

An organization's intangible assets include the following :

Loyal and profitable customer relationships

High-quality processes

Innovative products and services

Employee skills and motivation

Databases and information systems

The Balanced Scorecard is a general and flexible approach to performance measurement;

surveys indicate that 60% to 70% of companies around the world report they use some

version of this approach. And the Balanced Scorecard has been adapted to work in public

sector and nonprofit enterprises as well. A distinguishing feature of the Balanced

Scorecard is that it provides a framework that selects financial and nonfinancial

performance measures from the company's strategy

THE BALANCED SCORECARD

The Balanced Scorecard measures organizational performance across four different but

linked perspectives that are derived from the organization's vision, strategy, and

objectives :

Financial. How is success measured by our shareholders?

Customer. How do we create value for our customers?

Process. At which processes must we excel to satisfy our customers and share-

holders?

Learning and growth. What employee capabilities, information systems, and

organizational capabilities do we need to continually improve our processes and

customer relationships?

As a simple example of how the Balanced Scorecard measures and links peformance

across its four perspectives, consider the partial scorecard produced by a small

manufacturing company that wins business on the basis of low-cost, high-quality

products that it consistently delivers on-time to its customers. The company’s most

important financial metric is return on investment, which it places in its financial

perspective, (see the following diagram). The company expects to generate increased

revenues for improving its return on investment financial measure by retaining and

expanding sales to existing customers. Therefore, it includes measures in the customer

perspective for percentage of repeat customers and the growth in sales with existing

customers.

The financial and customer measures represent the "what" of strategy, that is, what the

company wants to accomplish with its two most important external constituents:

shareholders and customers. The process perspective describes "how" the strategy will be

executed; it identifies the processes that are most important to meet the expectations of

shareholders and customers. For example, short cycle times and high-quality production

processes are necessary to achieve_exceptional on-time delivery.

Therefore, a measure of employees' skills and capabilities in process improvement is

included within the learning and growth perspective.

Vision, Mission, and Strategy

Many enterprisesfbefore choosing their performance objectives and measures create

vision S tatements and mission statements. These high-level statements provide a general

sense of the organization's direction and purpose; they inspire and-omen motivate

employees about the positive role the enterprise wants to play in society:

VISION

A concise statement that defines the mid- to long-term (3- to 10-year) goals of the

organization. The vision should be external and market oriented and should express—

often in colorful or visionary terms—how the organization wants to be perceived by the

world.

MISSION

A concise, internally focused statement of how an organization expects to compete and

deliver value to customers. The mission often states the reason for the organizations

existence, the basic purpose toward which its activities are directed, and the values that

guide employee's activities.

Examples :

The mission of the City of Charlotte is to ensure the delivery of quality public services

that promotethe safety, health, and quality of life of its citizens. Organizations identify

and respond to community needs and focus on the customer through the following:

Creating and maintaining effective partnerships

Attracting and retaining skilled and motivated employees

Using strategic business planning

Such vision and mission statements set the general direction for the organization. They

should help shareholders, customers, and employees understand what the company is

about and what it intends to achieve. These statements however, are far too vague to

guide day-to-day actions and resource allocation decisions. Companies can make their

statements more operational when they define a strategy of how the vision and mission

will be achieved. Michael Porter, a founder and leader of the strategy field, argues that

strategy is about selecting the set of activities in which an organization will excel to

create a sustainable difference in the marketplace.

OBJECTIVES, MEASURES, AND TARGETS

Once the company's vision, mission, and strategy have been established, the senior

management team selects performance measurements to provide the needed specificity

that makes vision, mission, and strategy statements even more meaningful and actionable

for all employees. The process of building a Balanced Scorecard should start not with

measures but with word statements, called objectives, that describe what the company is

attempting to accomplish.

Increase revenues through expanded sales to existing customers (financial)

Become service oriented (customer)

Achieve excellence in order fulfillment through continuous process improvements

(process)

Align employee incentives and rewards with the strategy (learning and growth)

Measures describe how success in achieving an objective will be determined. Measures

provide specificity and reduce the ambiguity that is inherent in word statements. Take,

for example, an objective to deliver a product or service to a customer on time. The

definition of "on time" can differ between supplier and customer. Thus, measurement is a

powerful tool for communicating clearly and without ambiguity about what the company

means in its word statements of strategic objectives, mission, and vision.

Once the objectives have been translated into measures, managers select targets for each

measure. A target establishes the level of performance or rate of improvement required

fora measure. Targets should be set to represent excellent performance, much like the par

scores on a golf course.

Thus, performance measures serve multiple purposes: communication, clarification,

motivation, feedback, and evaluation. Since performance measures play such important

roles, they should be chosen carefully The Balanced Scorecard frame-work enables

managers to select objectives and measures, derived from their strategy, that are linked

together in a chain of cause-and-effect relationships.

THE STRATEGY MAP AND BALANCED SCORECARD

The development of strategic objectives and measures across the four Balanced

Scorecard perspectives should follow a logical progression. First, identify the long-run

financial objectives, the ultimate destination for the strategy. Then, in the customer

perspective, select the targeted customers for the new strategy and the objectives for the

value proposition offered to attract, retain, and grow the business with the customers. In

the process perspective, select objectives that create and deliver the customer value

proposition and also improve productivity and efficiency, key drivers of several financial

measures. Finally, identify the employee skills, information needs, and company culture

and alignment that would drive improvement in the critical processes. Companies

represent these linkages with a picture called a strategy map, which illustrates the causal

relationships among the objectives in the four Balanced Scorecard perspectives.

Companies generally start their Balanced Scorecard projects by building a strategy map

that contains the word tatements of their strategic objectives in the four perspectives and

the link-ages among them.

Financial Perspective

The Balanced Scorecard's financial perspective contains objectives and measures that

represent the ultimate success measures for profit-maximizing companies. Financial

performance measures, such as operating income and return on investment, indicate

whether the company's strategy and its implementation are delivering increases in

shareholder value. The company's financial performance improves through two basic

approaches: revenue growth and productivity.

One source of revenue growth is to deepen relationships with existing customers, such as

selling them additional products and services beyond the first product or service they

purchase. Companies also generate revenue growth by introducing new products, selling

to new customers, and expanding operations into new markets.

The second component for enhancing financial performance, productivity

improvements, also occurs in two ways. First, companies reduce costs by lowering direct

and indirect expenses. Such cost reductions enable a company to produce the same

quantity of outputs while spending less on people, materials, energy, and supplies.

Second, by utilizing their financial and physical assets more efficiently, companies

reduce the working and fixed capital needed to support a given level of business.