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Home > Performance Management Best Practice > Multidimensional Performance Measurement Using the Balanced Scorecard

Performance Management Best Practice

Multidimensional Performance Measurement Using the Balanced Scorecard

by Priscilla Wisner

Table of contents

Executive Summary

  • An organization’s financial performance results from decisions made by its managers and employees.

  • Managers and employees need operational performance metrics that are aligned with the daily decisions being made, rather than a high-level set of financial metrics that are reported on a monthly or a quarterly basis.

  • The Balanced Scorecard (BSC) represents a set of financial, customer, operational, and organizational metrics that capture multidimensional aspects of performance.

  • Using a BSC, top management can signal strategic objectives to managers and employees. Top management can then gather data that shows whether or not performance at the individual and the strategic business unit levels is aligned with the strategic objectives of the firm.

Introduction

For generations, many businesses have measured organizational success based on a narrow set of financial performance measures, such as operating and net profit, return on investment, and earnings per share of stock. Financial performance measures are valuable in that they capture the economic consequences of business decisions; however, they tend to be “lagging” indicators of performance that report the financial effects of operational business decisions weeks or months after the decisions have been implemented.

Organizational managers and employees typically manage their work in terms of physical flows and other nonfinancial resources. For example, sales managers focus on market size, sales volume, share of wallet, customer satisfaction, and similar measures. Production managers concentrate on production capacity, throughput time, quality, and productivity metrics. Human resource managers are responsible for hiring appropriately skilled personnel, maintaining a safe and legal workplace, and organizational development outcomes. Managers and employees throughout the organization make decisions and use resources that eventually impact the financial outcomes of the firm; to do so effectively, they need performance feedback that links the outcomes of their decisions to the strategic and financial goals of the firm. This feedback is most useful when it is a “leading” performance indicator, or one that is closely related to the work being performed. The Balanced Scorecard (BSC) was developed as a management tool to help managers better understand and link customer, operational, and organizational decisions to financial outcomes, and to the strategy of the organization.

BSC Basics

While General Electric has been credited with developing one of the first balanced scorecard performance models,1 the BSC concept was first described by Dr Robert Kaplan and David Norton in a series of Harvard Business Review articles in the early 1990s, and was subsequently expanded upon in books and articles by these and other professionals. The BSC as a management tool has gained widespread acceptance in the corporate world. In a survey of more than 700 companies operating in five continents, Bain and Company reported that 62% of the respondents used the BSC.2

BSC perspectives typically include financial, customer, operational (internal business processes), and organizational (learning and growth) aspects. By identifying key performance measures within each of these perspectives, top management signals strategic objectives and organizational goals to managers and employees. By receiving feedback on achieved outcomes for each of these measures, management is able to evaluate how closely performance is meeting strategic objectives.

As shown in Figure 1, the four traditional BSC perspectives are interlinked, and are linked to the overall vision and strategy of the organization. Each perspective reflects a focus area for the implementation of strategy and, therefore, for performance measurement:3

  • Financial perspective—focuses on financial aspects of performance, and links strategic objectives with financial impacts. Balance sheet, income statement, and cash flow performance measures are often included in this dimension. Some firms include alternative measures of financial performance, such as economic value added, recycling income, and sales growth by channel.

  • Customer perspective—contains measures that reflect how the firm is creating customer value. Customer satisfaction measures are typical, but leading firms will include measures such as share of mind and share of wallet, consumption per capita, customer retention, and product accessibility measures.

  • Internal business processes perspective—focuses on how a company is performing through an operational lens. Internal business processes encompasses many facets of operations, including engineering design, purchasing, manufacturing, distribution, and environmental and social performance. In a customer service organization, measures might include response time, process quality, employee productivity, and bridge to sales ratios.

  • Learning and growth perspective—assesses how well the organization is preparing itself and its employees for the future. This perspective often includes measures of organizational practices, employee development and satisfaction, and systems development and deployment. Aspects commonly measured in this perspective include employee turnover, diversity, promotions from within, training hours or expense by employee, innovation measures, and surveys of corporate climate.

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Further reading

Books:

  • Epstein, Marc J., and Bill Birchard. Counting What Counts: Turning Corporate Accountability to Competitive Advantage. Reading, MA: Perseus Books, 1999.
  • Kaplan, Robert, and David P. Norton. The Balanced Scorecard: Translating Strategy into Action. Boston, MA: Harvard Business School Press, 1996.
  • Kaplan, Robert, and David P. Norton. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business School Press, 2001

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