The Balanced Scorecard – Measures that Drive Performance

1 The Balanced Scorecard Measures that Drive Performanceby Robert S. Kaplan and David P. NortonReprint 92105 Harvard Business ReviewHBRJANUARY FEBRAU RY 1992 The Balanced Scorecard Measuresthat Drive PerformanceRobert S. Kaplan and David P. NortonWhat you measure is what you get. Senior execu-other. They realize that no single measure can pro-vide a clear Performance target or focus attention ontives understand that their organization s measure -ment system strongly affects the behavior ofthe critical areas of the business. Managers want abalanced presentation of both financial and opera-managers and employees. Executives also under-stand that traditional financial accounting measurestional a year-long research project with 12 compa-like return-on-investment and earnings-per-sharecan give misleading signals for continuous improve-nies at the leading edge of Performance measure -ment, we devised a Balanced Scorecard a set ofment and innovation activities today s competitiveenvironment demands.

2 The traditional financial per- Measures that gives top managers a fast but compre-hensive view of the business. The Balanced scorecardformance Measures worked well for the industrialera, but they are out of step with the skills and com-includes financial Measures that tell the results ofactions already taken. And it complements the fi-petencies companies are trying to master managers and academic researchers have triednancial Measures with operational Measures oncustomer satisfaction, internal processes, and the or-to remedy the inadequacies of current performancemeasurement systems, some have focused on mak-ganization s innovation and improvement activi-ties operational Measures that are the drivers ofing financial Measures more relevant. Others havesaid, Forget the financial Measures . Improve opera-future financial of the Balanced Scorecard as the dials andtional Measures like cycle time and defect rates; thefinancial results will follow.

3 But managers shouldindicators in an airplane cockpit. For the complextask of navigating and flying an airplane, pilots neednot have to choose between financial and operationalmeasures. In observing and working with many com-detailed information about many aspects of theflight. They need information on fuel, air speed, alti-panies, we have found that senior executives do notrely on one set of Measures to the exclusion of thetude, bearing, destination, and other indicators thatsummarize the current and predicted on one instrument can be fatal. Similarly,Robert S. Kaplan is the Arthur Lowes Dickinson Professor ofthe complexity of managing an organization todayAccounting at the Harvard Business School. David P. Norton isrequires that managers be able to view performancepresident of Nolan, Norton & Company, Inc.

4 , a Massachusetts-based information technology consulting firm he several areas fourdifferentperspectives,thebalancedsco recardminimizesinformationoverloadbylimi tingthe(Seetheexhibit TheBalancedScorecardLinksPer-formanceMea sures. )Itprovidesanswerstofour ,basicquestions:theykeepaddingnewmeasure swheneveranem-ployeeoraconsultantmakesaw orthwhilesugges- Howdocustomersseeus?(customerperspective ) Whatmustweexcelat?(internalperspective) killanothertree Canwecontinuetoimproveandcreatevalue?(in novationandlearningperspective) program. Thebalancedscorecardforcesmanagerstofocu sonthehandfulofmeasuresthataremost Howdowelooktoshareholders?(financialper- spective) Do We Lookto Shareholders?How DoCustomers See Us?

5 What Must We Excel At?Can We Continueto Improve andCreate Value?Customer PerspectiveGOALS MEASURESI nternal Business PerspectiveGOALS MEASURESF inancial PerspectiveGOALS MEASURESI nnovation and LearningPerspectiveGOALS MEASURES72 HARVARDBUSINESSREVIEW January February1992 Several companies have already adopted the bal-anced Scorecard . Their early experiences using theOther Measures for thescorecard have demonstrated that it meets severalmanagerial needs. First, the Scorecard brings to-Customer s Perspectivegether, in a single management report, many of theA computer manufacturer wanted to be the com-seemingly disparate elements of a company s com-petitive leader in customer satisfaction, so it mea-petitive agenda: becoming customer oriented, short-sured competitive rankings.

6 The company got theening response time, improving quality, emphasizingrankings through an outside organization hired toteamwork, reducing new product launch times, andtalk directly with customers. The company alsomanaging for the long to do a better job of solving customers prob-Second, the Scorecard guards against suboptimiza-lems by creating more partnerships with other sup-tion. By forcing senior managers to consider all thepliers. It measured the percentage of revenue fromimportant operational Measures together, the bal-third-party Scorecard lets them see whether improvementin one area may have been achieved at the expenseThe customers of a producer of very expensiveof another. Even the best objective can be achievedmedical equipment demanded high reliability. Thecompany developed two customer-based metrics forbadly.

7 Companies can reduce time to market, forits operations: equipment up-time percentage andexample, in two very different ways: by improvingmean-time response to a service management of new product introductions orby releasing only products that are incrementallyA semiconductor company asked each major cus-different from existing products. Spending on setupstomer to rank the company against comparable sup-can be cut either by reducing setup times or by in-pliers on efforts to improve quality, delivery time,creasing batch sizes. Similarly, production outputand price Performance . When the manufacturer dis-and first-pass yields can rise, but the increases maycovered that it ranked in the middle, managers madebe due to a shift in the product mix to more standard,improvements that moved the company to the topeasy-to-produce but lower-margin customers will illustrate how companies can create theirown Balanced Scorecard with the experiences of onesemiconductor company let s call it Electronic Cir-cuits Inc.

8 ECI saw the Scorecard as a way to clarify,simplify, and then operationalize the vision at thetop of the organization. The ECI Scorecard was de-company receives an order to the time it actuallydelivers the product or service to the customer. Forsigned to focus the attention of its top executives ona short list of critical indicators of current and futurenew products, lead time represents the time to mar-ket, or how long it takes to bring a new product product definition stage to the start of Measures the defect level of incoming prod-ucts as perceived and measured by the Perspective: How DoQuality could also measure on-time delivery, the ac-curacy of the company s delivery forecasts. The com-Customers See Us?bination of Performance and service Measures howthe company s products or services contribute to cre-Many companies today have a corporate missionthat focuses on the customer.

9 To be number one inating value for its put the Balanced Scorecard to work, companiesdelivering value to customers is a typical missionstatement. How a company is performing from itsshould articulate goals for time, quality, and perfor-mance and service and then translate these goalscustomers perspective has become, therefore, a pri-ority for top management. The Balanced scorecardinto specific Measures . Senior managers at ECI, forexample, established general goals for customer per-demands that managers translate their general mis-sion statement on customer service into specificformance: get standard products to market sooner,improve customers time to market, become custom- Measures that reflect the factors that really matterto supplier of choice through partnerships withthem, and develop innovative products tailored toCustomers concerns tend to fall into four catego-ries: time, quality, Performance and service, and needs.

10 The managers translated these gen-eral goals into four specific goals and identified anLead time Measures the time required for the com-pany to meet its customers needs. For existing prod-appropriate measure for each. (See the exhibit ECI sBalanced Scorecard . )ucts, lead time can be measured from the time theHARVARD BUSINESS REVIEW January February 199273To track the specific goal of providing a continuousin exactly the right quantities at exactly the righttime directly to the production process and can mini-stream of attractive solutions, ECI measured the per-cent of sales from new products and the percent ofmize, through electronic data interchange, the ad-ministrative hassles of ordering, invoicing, andsales from proprietary products. that informationwas available internally. But certain other measurespaying for the company to get data from outside.