Corporate Performance Management: The Balanced Scorecard

The trend today in Corporate Performance Management today is to use a more encompassing method of evaluation and include not only financial measures, but also non-financial measures by looking at the overall contribution to the achievement of company goals. One methodology that is popular today is called a balanced scorecard.

The balanced scorecard is a strategic management tool which developed as a response to problems caused by evaluating managers only on the quarterly or annual financial performance of their business units. If managers are evaluated and rewarded for one thing (short-term financial performance), it results in their focus on that one thing, often to the detriment of other dimensions which are equally, if not more, important for improved long-term financial performance.

The balanced scorecard encourages managers to focus on elements of long-term success instead of on short-term financial performance by rewarding them for improvements in those elements of long-term success.

Each company needs to develop its own set of metrics and means to assess continual improvement, and they will probably be different for different divisions and departments within the same company. However, the metrics fall into four broad categories of performance indicators, known as perspectives.

The four perspectives are:

1. Financial perspective, focusing on profitability. Financial performance is still a priority, but it is recognized that good long-term financial performance will not be achieved if goals in the other categories are not attained.
2. Customer perspective. Developing the company’s customer perspective involves identifying the market segment(s) it wants to target and then measuring its success in those segments. Customer satisfaction is another vital part of the customer perspective, because if customers are not satisfied, they will take their business elsewhere. And without customers, a business has no business.
3. Internal business process perspective, which includes innovation in products and services, innovations and improvements in operations, and customer service/support after the sale.
4. Innovation and learning, which emphasizes an organizational culture that supports employee innovation, growth and development. In today’s technological environment, employees need to be continuously updating their skills.

It is important for the business to select just a few critical measures that are most relevant to its specific business strategy and then to track them rigorously, rather than using many different measurements. These critical measures are called critical success factors. They are measures of the aspects of the company’s performance that are essential to its competitive advantage and therefore its success.

Different business strategies call for different scorecards, and quality is more important than quantity when developing balanced scorecard measures. Management attention needs to be focused on the few key measures that are the most important to implementation of the company’s chosen strategies and not be distracted by measures that are not critical.

The balanced scorecard uses a concept of a strategy map which links these four perspectives together, beginning at the bottom, innovation and learning. The goals of the innovation and learning perspective contribute to the internal business process perspective, because the staff members use their competencies and strategic awareness to make operational improvements. In turn, the operational improvements made in internal business processes support the goals of the customer satisfaction perspective, since they provide the operations support needed to fulfill the goal of customer satisfaction. And customer satisfaction brings about increased business, increased profits, and improved financial performance. When the company’s financial and non-financial measures are linked in this way, the non-financial measures serve as leading indicators of the firm’s future financial performance. The strategy map provides a way for all employees to see how their work is linked to the corporation’s goals.