Management
Measure and Improve with HBR’s Balanced Scorecard
Building on the early work of Art Schneiderman, Robert Kaplan and David Norton developed a tool for strategic management that they called the Balanced Scorecard in a 1992 Harvard Business Review article. Their approach represents a fundamental change in performance management. Prior approaches to measuring success in a company arose from financial departments. These managers had what Kaplan called a “control bias” – they focused on specifying desired behaviors and measuring to see if those behaviors were happening. That’s all very well and good for an industrial age company driven by an engineering mentality. But a more modern company seeks to pursue a more dynamic vision. Rather than focus on measuring adherence to a predefined procedure, a balanced scorecard allows managers to establish broad goals and measure progress towards those goals no matter how it is achieved. This approach allows a more flexible approach to success based on continuous improvement rather than adherence to existing procedure. The HBR balanced scorecard combines financial with operational measures to give a more clear picture of flexible progress towards a goal in a typically dynamic contemporary business environment.
In order to get a broad picture of where a company is succeeding and where there are problems to address, the balanced scorecard asks four questions in each of four areas, financial, customer, internal process, and learning and growth. In the financial area, we answer the question “how do we look to our shareholders?” With respect to customers, we ask “What is important to our customers and are we delivering it?” We then consider our internal business procedures and ask “What must we excel at?” Finally, with regard to learning and growth, we ask ourselves “How can we continue to improve?”
Many companies wisely put the customer at the center of their mission. The scorecard approach encourages managers to measure success in serving customer needs. Broadly speaking, we can categorize customer concerns into four categories: time, quality, service/performance, and cost. Managers should set goals for each of these areas and develop measures to show if they are meeting goals. To truly succeed in this approach, your managers must put themselves in the customers’ shoes. What the company considers timely does not really matter. What matters is customer perception of timeliness. Surveys can help define customer expectations.
It is important to measure customer satisfaction, but that alone won’t tell you what you need to do. In order to satisfy customers, you need to take action internally to meet their expectations. Success in serving customers arises from the processes and decisions that happen in a company. The internal measures you choose for your balanced scorecard should reflect the processes that are the most important in determining customer satisfaction. Things like production cycle time, quality control, productivity, and customer-facing employee skills will typically be important to consider. The concept of “core competencies” – your basic must-have abilities- can help guide your search for good measurements.
To get a good understanding of how your internal processes are running, you need to understand employee actions, preferably down to the individual level. And it will probably be helpful to report that information rapidly so that responses do not lag behind problems. When top management can see disaggregated data about processes, they can use it to establish clear and specific targets for their individual actions that contribute to the overall goals.
Now we come to the old way of looking at things, the financial picture that by itself would constitute what you might call an unbalanced scorecard. Some have suggested that short-term financial measures like monthly operating income or sales are not even worth thinking about because they are backward looking and they don’t help drive current action that creates new value. Some say that traditional financial metrics do not really help get better results in the most important areas like product quality, customer satisfaction, and employee morale. But that is misguided. Smart managers combine all four aspects of the balanced scorecard to drive results. Let’s consider some balanced scorecard examples of how the financial perspective is important to inform process decision making.
A chemical company implemented a total quality management program with 30,000 observations of production processes recorded every four hours. Most of the managers armed with this detailed data decided financial reports were no longer relevant. But one manager created a daily income statement, estimating the value of output and subtracting production costs. He adjusted the output value to reflect information about quality control, reducing the estimated value of output with quality control problems. This financial information gave operators a clearer motivation to guide their efforts. And the financial statement allowed managers to assess tradeoffs between quality, resource consumption, and speed of production. This resulted in real changes in procedures. Prior to the implementation of this type of reporting, failure of a production line component would be logged and addressed by the next shift manager. But the financial report revealed that the higher cost of scrambling to fix the problem immediately would be thoroughly justified by mitigating losses in production by getting back online faster.
A company can guide their business strategy by measuring customer satisfaction, internal performance, and innovation and making some assumptions about what is desirable for each of these key areas. But those assumptions are not necessarily going to be correct. To make sure you are moving in the right direction, you must measure and analyze the financial results. For example, you might think improving operational efficiency would save money and increase profits. If you reduce the number of required full-time-equivalent workers to complete a process, you might expect that to increase your profitability. But it will only do so if you are able to lay off or redirect the excess labor capacity. Examining the resulting financial picture provides the ultimate guide for analyzing the success of the other three sectors of a well balanced scorecard.
The Balanced Scorecard Asks and Answers Four Questions
In order to get a broad picture of where a company is succeeding and where there are problems to address, the balanced scorecard asks four questions in each of four areas, financial, customer, internal process, and learning and growth. In the financial area, we answer the question “how do we look to our shareholders?” With respect to customers, we ask “What is important to our customers and are we delivering it?” We then consider our internal business procedures and ask “What must we excel at?” Finally, with regard to learning and growth, we ask ourselves “How can we continue to improve?”
Question One: The Customer Perspective – How do customers see us?
Many companies wisely put the customer at the center of their mission. The scorecard approach encourages managers to measure success in serving customer needs. Broadly speaking, we can categorize customer concerns into four categories: time, quality, service/performance, and cost. Managers should set goals for each of these areas and develop measures to show if they are meeting goals. To truly succeed in this approach, your managers must put themselves in the customers’ shoes. What the company considers timely does not really matter. What matters is customer perception of timeliness. Surveys can help define customer expectations.
Question Two: The Internal Business Perspective – What do we need to excel at?
It is important to measure customer satisfaction, but that alone won’t tell you what you need to do. In order to satisfy customers, you need to take action internally to meet their expectations. Success in serving customers arises from the processes and decisions that happen in a company. The internal measures you choose for your balanced scorecard should reflect the processes that are the most important in determining customer satisfaction. Things like production cycle time, quality control, productivity, and customer-facing employee skills will typically be important to consider. The concept of “core competencies” – your basic must-have abilities- can help guide your search for good measurements.
To get a good understanding of how your internal processes are running, you need to understand employee actions, preferably down to the individual level. And it will probably be helpful to report that information rapidly so that responses do not lag behind problems. When top management can see disaggregated data about processes, they can use it to establish clear and specific targets for their individual actions that contribute to the overall goals.
Question Three: Innovation and Learning Perspective – How can we continue to improve?
By looking at customer-based measures and creating internal process measures to assess ongoing efforts to reach those customer based-goals, a company can create a clear picture of some important issues. But a modern business does not operate in a static environment. Your competitors are extending and improving their product lines and services and if you are not doing that, you will fall behind. If you want to increase revenues and margins, you need to change something. By launching new products or adjusting existing offers to create more value for customers with the products that you already have, you can grow the value of your company. You can define measurements and goals to help guide continuous improvement. For instance, at a big picture level, you could look at new products as a percentage of total sales and develop some expectations and measure results. You could take a more narrow focus and strive for operational improvement. Where you have established benchmarks for delivery time, product cycle time, and quality control, you can strive to achieve a particular rate of improvement for each benchmark.Question Four: Financial Perspective – How do we look to shareholders?
Now we come to the old way of looking at things, the financial picture that by itself would constitute what you might call an unbalanced scorecard. Some have suggested that short-term financial measures like monthly operating income or sales are not even worth thinking about because they are backward looking and they don’t help drive current action that creates new value. Some say that traditional financial metrics do not really help get better results in the most important areas like product quality, customer satisfaction, and employee morale. But that is misguided. Smart managers combine all four aspects of the balanced scorecard to drive results. Let’s consider some balanced scorecard examples of how the financial perspective is important to inform process decision making.
A chemical company implemented a total quality management program with 30,000 observations of production processes recorded every four hours. Most of the managers armed with this detailed data decided financial reports were no longer relevant. But one manager created a daily income statement, estimating the value of output and subtracting production costs. He adjusted the output value to reflect information about quality control, reducing the estimated value of output with quality control problems. This financial information gave operators a clearer motivation to guide their efforts. And the financial statement allowed managers to assess tradeoffs between quality, resource consumption, and speed of production. This resulted in real changes in procedures. Prior to the implementation of this type of reporting, failure of a production line component would be logged and addressed by the next shift manager. But the financial report revealed that the higher cost of scrambling to fix the problem immediately would be thoroughly justified by mitigating losses in production by getting back online faster.
A company can guide their business strategy by measuring customer satisfaction, internal performance, and innovation and making some assumptions about what is desirable for each of these key areas. But those assumptions are not necessarily going to be correct. To make sure you are moving in the right direction, you must measure and analyze the financial results. For example, you might think improving operational efficiency would save money and increase profits. If you reduce the number of required full-time-equivalent workers to complete a process, you might expect that to increase your profitability. But it will only do so if you are able to lay off or redirect the excess labor capacity. Examining the resulting financial picture provides the ultimate guide for analyzing the success of the other three sectors of a well balanced scorecard.
Summing Up the HBR Balanced Scorecard
You can combine customer satisfaction, internal process, innovation, and financial measurements in a balanced scorecard to help understand the relationships between these goals and metrics. This understanding can help guide a forward-looking strategy of continuous improvement. We think it is worth the effort. Find out what happens when you apply it to your business and join us next week for another helpful perspective to help you reach new heights.
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