One big idea per decade

Measuring performance from financial point of view is really just one of a bunch of many performance measurements that collectively determine the real value of the organisation and the keys it needs to hold for the future. (EJ)

Balanced scorecard

Dec 26th 2008
From Economist.com

ROBERT KAPLAN seems to come up with one big idea per decade. In the 1980s it was activity-based costing; in the 1990s it was the balanced scorecard.

The idea was first set out in an article that Kaplan wrote in 1992 for Harvard Business Review, along with David Norton, president of a consulting firm. The article, entitled "The Balanced Scorecard—Measures that Drive Performance", began with the principle that what you measure is what you get. Or, as the great 19th century English physicist Lord Kelvin put it: "If you cannot measure it, you cannot improve it." If you measure only financial performance, then you can hope only for improvement in financial performance. If you take a wider view, and measure things from other perspectives, then (and only then) do you stand a chance of achieving goals other than purely financial ones.

In particular, Kaplan and Norton suggested that companies should consider the following:

• The customer's perspective. How does the customer see the organisation, and what should the organisation do to remain that customer's valued supplier?

• The company's internal perspective. What are the internal processes that the company must improve if it is to achieve its objectives vis-à-vis customers, shareholders and others?

• Innovation and improvement. How can the company continue to improve and to create value in the future? What should it be measuring to make this happen?

The idea of the balanced scorecard was embraced with enthusiasm when it first appeared. Companies were frustrated with traditional measures of performance that related only to the shareholders' point of view. That view was seen as unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation's perception of where it stands today, but it also helps it to identify things that might guarantee its success in the future.

Kaplan and Norton saw the benefits of the balanced scorecard as follows:

• It helps companies to focus on what needs to be done to create a "breakthrough performance".

• It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.

• It translates strategy into performance measures and targets.

• It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organisational effectiveness.

• It provides a comprehensive view that overturns the traditional idea of the organisation as a collection of isolated, independent functions and departments.

Further reading

Kaplan, R.S. and Norton, D.P., "The Balanced Scorecard—Measures that Drive Performance", Harvard Business Review, January–February 1992

Kaplan, R.S. and Norton, D.P., "The Balanced Scorecard: Translating Strategy into Action", Harvard Business School Press, 1996

Kaplan, R.S. and Norton, D.P., "Using the Balanced Scorecard as a Strategic Management System", Harvard Business Review, 1996, reproduced July/August 2007

Niven, P.R., "Balanced Scorecard Step-by-Step: Maximising Performance and Maintaining Results", John Wiley & Sons, 2002; 2nd edn, 2006