The scoiecard tracks the key elements of a company's strategy-fiom continuous improvement and partnerships to tearnwork andglobal scale.

The Balanced Scorecard -Measures That DrivePerformance

by Robert S. Kaplan and David P. Norton

what you measure is what you get. Senior execu-tives understand that their organization's, measure-ment system strongly affects the behavior of man-agers and employees. Executives also understandthat traditional financial accounting measures likereturn-on-investment and earnings-per-share cangive misleading signals for continuous improvementand innovation-activities today's competitive envi-

The balanced scorecardis like the diais ir̂ ar̂airpiane ccci<pit: it givesmanagers connplexinfarnnation at a glance.

ronment demands. The traditional financial perfor-mance measures worked well for the industrial era,but they are out of step with the skills and compe-tencies companies are trying to master today.

As managers and academic researchers have triedto remedy the inadequacies of current performancemeasurement systems, some have focused on mak-ing financial measures more relevant. Others havesaid, "Forget the financial measures. Improve opera-tional measures like cycle time and defect rates,- the

financial results will follow." But managers shouldnot have to choose between financial and opera-tional measures. In observing and working withmany companies, we have found that senior execu-tives do not rely on one set of measures to the exclu-sion of the other. They realize that no single mea-sure can provide a clear perforniance target or focusattention on the critical areas of the business. Man-agers want a balanced presentation of both financialand operational measures.

During a year-long research project with 12 com-/panies at the leading edge of performance measure-ment, we devised a "balanced scorecard"-a set ofmeasures that gives top managers a fast but compre-hensive view of the business. The balanced score-card includes financial measures that tell the resultsof actions already taken. And it complements thefinancial measures with operational measures oncustomer satisfaction, internal processes, and theorganization's innovation and iniprovement activi-ties-operational measures that are the drivers offuture financial performance.

Robert S. Kaplan is the Arthur Lowes DickinsonProfessor of Accounting at the Harvard Business School.David P. Norton is president of N()lan, Norton et> Com-pany, Inc., a Massachusetts-based\information technol-ogy consulting firm he cofounded.

HARVARD BUSINESS REVIEW January-February 1992 71

BALANCED SCORECARD

Think of the balanced scorecard as the dials andindicators in an airplane cockpit. For the complextask of navigating and flying an airplane, pilots needdetailed information about many aspects of theflight. They need information on fuel, air speed, alti-tude, bearing, destination, and other indicators thatsummarize the current and predicted environment.Reliance on one instrument can be fatal. Similarly,the complexity of managing an organization todayrequires that managers be able to view performancein several areas simultaneously.

The balanced scorecard allows managers to lookat the business from four important perspectives.

(See the exhibit "The Balanced Scorecard Links Per-formance Measures.") It provides answers to fourbasic questions:DHow do customers see us? (customer perspective)n What must we excel at? (internal perspective)D Can we continue to improve and create value?(innovation and learning perspective)DHow do we look to shareholders? (financial per-spective)

While giving senior managers information fromfour different perspectives, the balanced scorecardminimizes information overload by limiting thenumber of measures used. Companies rarely suffer

The Balanced Scorecard Links Performance Measures

How DoCustomers See Us?

Financial Perspective

GOALS MEASURES

How Do We Lookto Shoreholders?

Wtiat Must We Excel At?

Customer Perspective

GOALS MEASURES

InternalBusiness Perspective

GOALS MEASURES

Innovation andLearning Perspective

GOALS MEASURES

Can We Continueto Improve andCreate Value?

72 HARVARD BUSINESS REVIEW January-February 1992

from having too few measures. More commonly,they keep adding new measures whenever an em-ployee or a consultant makes a worthwhile sugges-tion. One manager descrihed the proliferation ofnew measures at his company as its "kill anothertree program." The halanced scorecard forces man-agers to focus on the handful of measures that aremost critical.

Several companies have already adopted the hal-anced scorecard. Their early experiences using thescorecard have demonstrated that it meets severalmanagerial needs. First, the scorecard brings togeth-er, in a single management report, many of theseemingly disparate elements of a company's com-petitive agenda: becoming customer oriented, short-ening response time, improving quality, emphasiz-ing teamwork, reducing new product launch times,and managing for the long term.

Second, the scorecard guards against suboptimiza-tion. By forcing senior managers to consider all theimportant operational measures together, the bal-anced scorecard lets them see whether improvementin one area may have been achieved at the expense ofanother. Even the best objective can be achieved bad-ly. Companies can reduce time to market, for ex-ample, in two very different ways: by improving themanagement of new product introductions or by re-leasing only products that are incrementally differ-ent from existing products. Spending on setups canbe cut either by reducing setup times or by increas-ing batch sizes. Similarly, production output andfirst-pass yields can rise, but the increases may bedue to a shift in the product mix to more standard,easy-to-produce but lower-margin products.

We will illustrate how companies can create theirown balanced scorecard with the experiences of onesemiconductor company-let's call it Electronic Cir-cuits Inc. 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-signed to focus the attention of its top executives ona short list of critical indicators of current and futureperformance.

Customer Perspective:How Do Customers See Us?

Many companies today have a corporate missionthat focuses on the customer. "To be number one indelivering value to customers" is a typical missionstatement. How a company is performing from itscustomers' perspective has become, therefore, a pri-ority for top management. The balanced scorecard

HARVARD BUSINESS REVIEW January-February 1992

demands that managers translate their general mis-sion statement on customer service into specificmeasures that reflect the factors that really matterto customers.

Customers' concerns tend to fall into four cate-gories: time, quality, performance and service, andcost. Lead time measures the time required for the

The balanced scorecardshows how results areachieved: Did the costof setups fall becguseof shorter setup tinpes orbigger batch sizes?

company to meet its customers' needs. For existingproducts, lead time can be measured from the timethe company receives an order to (the time it actuallydelivers the product or service t i the customer. Fornew products, lead time represerits the time to mar-ket, or how long it takes to bring a new product fromthe product definition stage to the start of ship-ments. Quality measures the defect level of incom-ing products as perceived and measured by the cus-tomer. Quality could also measure on-time delivery,the accuracy of the company's delivery forecasts.The combination of performance and service mea-sures how the company's products or services con-tribute to creating value for its customers.

To put the balanced scorecard to work, companiesshould articulate goals for time, quality, and perfor-mance and service and then translate these goals

into specific measures. Senior managers at ECI,for example, established general goals for customerperformance: get standard products to market soon-er, improve customers' time to rriarket, become cus-tomers' supplier of choice through partnershipswith them, and develop innovative products tailoredto customer needs. The managers translated thesegeneral goals into four specific goals and identifiedan appropriate measure for each. (See the exhibit"ECI's Balanced Scorecard.")

To track the specific goal of providing a continuousstream of attractive solutions, ECI measured the per-cent of sales from new products' and the percent ofsales from proprietary products That informationwas available internally. But certain other measuresforced the company to get data from outside. To as-sess whether the company was achieving its goal ofproviding reliable, responsive supply, ECI turned toits customers. When it found that each customer de-fined "reliable, responsive supply" differently, ECI

73

BALANCED SCORECARD

Other Measures for the Customer'isPerspective

A computer manufacturer wanted to be the competitive leader incustomer satisfaction, so it measured competitive rankings. The com-pany got the rankings through an outside organization hired to talkdirectly with customers. The company also wanted to do a betterjob of solving customers' problems by creating more partnershipswith other suppliers. It measured the percentage of revenue fromthird-party relationships.

The customers of a producer of very expensive medical equipmentdemanded high reliability. The company developed two customer-based metrics for its operations: equipment up-time percentage andmean-time response to a service call.

A semiconductor company asked each major customer to rank thecompany against comparable suppliers on efforts to improve quality,delivery time, and price performance. When the manufacturer discov-ered that it ranked in the middle, managers made improvements thatmoved the company to the top of customers' rankings.

created a database of the factors as defined hy each ofits major customers. The shift to external measuresof performance with customers led ECI to redefine"on time" so it matched customers' expectations.Some customers defined "on-time" as any shipmentthat arrived within five days of scheduled delivery,-others used a nine-day window. ECI itself had heenusing a seven-day window, which meant that thecompany was not satisfying some of its customersand overachieving at others. ECI also asked its top tencustomers to rank the cornpany as a supplier overall.

Depending on customers' evaluations to definesome of a company's performance measures forcesthat company to view its performance through cus-tomers' eyes. Some companies hire third parties toperform anonymous customer surveys, resulting in acustomer-driven report card. The J.D. Powers qualitysurvey, for example, has become the standard of per-formance for the automohile industry, while the De-partment of Transportation's measurement of on-time arrivals and lost haggage provides externalstandards for airlines. Benchmarking procedures areyet another technique companies use to comparetheir performance against competitors' hest prac-

tice. Many companies have intro-duced "best of breed" compari-son programs: the companylooks to one industry to find, say,the best distribution system, toanother industry for the lowestcost payroll process, and thenforms a composite of those hestpractices to set ohjectives for itsown performance.

In addition to measures oftime, quality, and performanceand service, companies must re-main sensitive to the cost of theirproducts. But customers see priceas only one component of thecost they incur when dealingwith their suppliers. Qther sup-plier-driven costs range from or-dering, scheduling delivery, andpaying for the materials; to re-ceiving, inspecting, handling,and storing the materials; to thescrap, rework, and obsolescencecaused by the materials; andschedule disruptions (expeditingand value of lost output) from in-correct deliveries. An excellentsupplier may charge a higher unitprice for products than other ven-dors but nonetheless he a lower

cost supplier because it can deliver defect-free prod-ucts in exactly the right quantities at exactly theright time directly to the production process and canminimize, through electronic data interchange, theadministrative hassles of ordering, invoicing, andpaying for materials.

Internal Business Perspective:What Must We Excel at?

Customer-based measures are important, but theymust be translated into measures of what the com-pany must do internally to meet its customers'expectations. After all, excellent customer per-formance derives from processes, decisions, andactions occurring throughout an organization. Man-agers need to focus on those critical internal opera-tions that enahle them to satisfy customer needs.The second part of the balanced scorecard givesmanagers that internal perspective.

The internal measures for the balanced scorecardshould stem from the business processes that have

74 HARVARD BUSINESS REVIEW January-February 1992

the greatest impact on customersatisfaction-factors that affectcycle time, quality, employeeskills, and productivity, for ex-ample. Companies should alsoattempt to identify and mea-sure their company's core com-petencies, the critical technol-ogies needed to ensure continuedmarket leadership. Companiesshould decide what processes andcompetencies they must excel atand specify measures for each.

Managers at ECI determinedthat suhmicron technology capa-hility was critical to its marketposition. They also decided thatthey had to focus on manufactur-ing excellence, design productivi-ty, and new product introduction.The company developed opera-tional measures for each of thesefour internal business goals.

To achieve goals on cycle time,quality, productivity, and cost,managers must devise measuresthat are influenced hy employees'actions. Since much of the actiontakes place at the department andworkstation levels, managersneed to decompose overall cycletime, quality, product, and costmeasures to local levels. Thatway, the measures link top management's judgmentabout key internal processes and competencies tothe actions taken hy individuals that affect overallcorporate objectives. This linkage ensures that em-ployees at lower levels in the organization have cleartargets for actions, decisions, and improvement ac-tivities that will contribute to the company's overallmission.

Information systems play an invaluable role inhelping managers disaggregate the summary mea-sures. When an unexpected signal appears on thebalanced scorecard, executives can query their infor-mation system to find the source of the trouhle. Ifthe aggregate measure for on-time delivery is poor,for example, executives with a good information sys-tem can quickly look behind the aggregate measureuntil they can identify late deliveries, day by day, bya particular plant to an individual customer.

If the information system is unresponsive, how-ever, it can be the Achilles' heel of performance mea-surement. Managers at ECI are currently limited bythe absence of such an operational information sys-

HARVARD BUSINESS REVIEW January-February 1992

Other Measures for the InteirnaiBusiness Perspective

One company recognized that the success of its TQM program de-pended on all its employees internalizing and acting on the program'smessages. The company performed a monthly survey of 600 randomlyselected employees to determine if they were aware of TQM, hadchanged their behavior because of it, believed the outcome was favor-able, or had become missionaries to others.

Hewlett-Packard uses a metric called breakeven time (BET) to mea-sure the effectiveness of its product development cycle. BET measuresthe time required for all the accumulated expenses in the product andprocess development cycle (including equipment acquisition) to berecovered by the product's contribution margin (the selling price lessmanufacturing, delivery, and selling expenses).

A major office products manufacturer, wanting to respond rapidly tochanges in the marketplace, set out to reduce cycle time by 50%. Low-er levels of the organization aimed to radically cut the times requiredto process customer orders, order and receive materials from suppliers,move materials and products between plants, produce and assembleproducts, and deliver products to customers.

tem. Their greatest concern is that the scorecard in-formation is not timely; reports are generally a weekbehind the company's routine ijianagement meet-ings, and the measures have yet to be linked to mea-sures for managers and employees at lower levels ofthe organization. The company is in the process ofdeveloping a more responsive information system toeliminate this constraint.

Innovation and Learning Perspective:Can We Continue to Improve andCreate Value? :

The customer-based and internal business processmeasures on the balanced scorecard identify the pa-rameters that the company considers most impor-tant for competitive success. But the targets for suc-cess keep changing. Intense glohal competitionrequires that companies make continual improve-

75

BALANCED SCORECARD

ments to their existing products and processes andhave the ability to introduce entirely new productswith expanded capabilities.

A company's ability to innovate, improve, andlearn ties directly to the company's value. That is,only through the ability to launch new products, cre-ate more value for customers, and improve operatingefficiencies continually can a company penetratenew markets and increase revenues and margins - inshort, grow and thereby increase shareholder value.

ECI's innovation measures focus on the compa-ny's ability to develop and introduce standard prod-ucts rapidly, products that the company expects willform the bulk of its future sales. Its manufacturing

improvement measure focuses on new products; thegoal is to achieve stability in the manufacturing ofnew products rather than to improve manufacturingof existing products. Like many other companies,ECI uses the percent of sales from new products asone of its innovation and improvement measures. Ifsales from new products is trending downward, man-agers can explore whether problems have arisen innew product design or new product introduction.

In addition to measures on product and process in-novation, some companies overlay specific improve-ment goals for their existing processes. For example.Analog Devices, a Massachusetts-based manufac-turer of specialized semiconductors, expects man-

ECI'S Balanced Business Scorecard

Financial Perspective 1

GOALS

Survive

Succeed

Prosper

Internai

MEASURES

Cash flow

Quarterly sales growthand operating incomeby division

increased maritet shareand ROE

1Business Perspective 1

GOALS

Technologycapability

iVIanufacturingexceilence

Designproductivity

New productintroduction

MEASURES

iVIanufacturing geometryvs. competition

Cycie timeUnit costYieid

Siiicon efficiencyEngineering efficiency

Acfuai introductionscheduie vs. pian

1 Customer Perspective

GOALS

Newproducts

Responsivesuppiy

Preferredsuppiler

Customerpartnership

MEASURES

Percent of saies from newproducts

Percent of saies fromproprietary products

On-time delivery (definedby customer)

Share of Key accounts'purchases

Ranking by key accounts

Number of cooperativeengineering efforts

1 Innovation and1 Learning Perspective

GOALS

Technoiogyieadership

iVIanufacturingiearning

Productfocus

Time tomari(et

MEASURES

Time to deveiop nextgeneration

Process time to maturity

Percent of products thatequai 8 0 % saies

New product introductionvs. competition

76 HARVARD BUSINESS REVIEW January-February 1992

agers to improve their customer and intemal busi-ness process performance continuously. The compa-ny estimates specific rates of improvement foron-time delivery, cycle time, defect rate, and yield.

Other companies, like Milliken &. Co., requirethat managers make improvements within a specif-ic time period. Milliken did not want its "associ-ates" (Milliken's word for employees) to rest ontheir laurels after winning the Baldrige Award.Chairman and CEO Roger Milliken asked eachplant to implement a "ten-four" improvement pro-gram: measures of process defects, missed deliver-ies, and scrap were to be reduced by a factor of tenover the next four years. These targets emphasizethe role for continuous improvement in customersatisfaction and intemal business processes.

Financial Perspective: How Do WeLook to Sharehoiders?

Financial performance measures indicate whetherthe company's strategy, implementation, and execu-tion are contributing to bottom-line improvement.Typical financial goals have to do with profitability,growth, and shareholder value. ECI stated its finan-cial goals simply: to survive, to succeed, and to pros-per. Survival was measured by cash flow, successby quarterly sales growth and operating income bydivision, and prosperity by increased market shareby segment and retum on equity.

But given today's business environment, shouldsenior managers even look at the business from a fi-nancial perspective? Should they pay attention toshort-term financial measures like quarterly salesand operating income? Many have criticized finan-cial measures because of their well-documented in-adequacies, their backward-looking focus, and theirinability to reflect contemporary value-creating ac-tions. Shareholder value analysis (SVA), which fore-casts future cash flows and discounts them back to arough estimate of current value, is an attempt tomake financial analysis more forward looking. ButSVA still is based on cash flow rather than on the ac-tivities and processes that drive cash flow.

Some critics go much further in their indictmentof financial measures. They argue that the terms ofcompetition have changed and that traditional finan-cial measures do not improve customer satisfaction,quality, cycle time, and employee motivation. Intheir view, financial performance is the result ofoperational actions, and financial success shouldbe the logical consequence of doing the fundamen-tals well. In other words, companies should stop

HARVARD BUSINESS REVIEW January-Febraary 1992

navigating by financial measures. By making fun-damental improvements in their operations, the fi-nancial numbers will take care bf themselves, theargument goes.

Assertions that financial measures are unneces-sary are incorrect for at least tM̂ o reasons. A well-designed financial control systerjn can actually en-hance rather than inhibit an organization's totalquality management program. (S^e the insert,"HowOne Company Used a Daily Financial Report to Im-prove Ouality.") More important, however, the al-leged linkage between improved operating per-formance and financial success is actually quitetenuous and uncertain. Let us demonstrate ratherthan argue this point.

Over the three-year period between 1987 and1990, a NYSE electronics company made an order-of-magnitude improvement in quality and on-timedelivery performance. Outgoing defect rate droppedfrom 500 parts per million to 50, on-time deliveryimproved from 70% to 96%, and yield jumped from26% to 51 %. Did these breakthroiigh improvementsin quality, productivity, and customer service pro-vide substantial benefits to the company? Unfortu-nately not. During the same three-year period, thecompany's financial results showed little improve-ment, and its stock price plummeted to one-third ofits July 1987 value. The considerable improvementsin manufacturing capabilities had not been translat-ed into increased profitability. Sl6w releases of newproducts and a failure to expand marketing to newand perhaps more demanding customers preventedthe company from realizing the benefits of its manu-facturing achievements. The operational achieve-ments were real, but the company had failed to capi-talize on them.

The disparity between improved operational per-formance and disappointing finaricial measures cre-ates frustration for senior executives. This frustra-tion is often vented at nameless Wall Street analystswho allegedly cannot see past quarterly blips in fi-nancial performance to the underlying long-termvalues these executives sincerely believe they arecreating in their organizations. But the hard tmth isthat if improved performance fails to be reflected inthe bottom line, executives should reexamine thebasic assumptions of their strategy and mission. Notall long-term strategies are profitable strategies.

Measures of customer satisfaction, intemal busi-ness performance, and innovation and improvementare derived from the company's particular view ofthe world and its perspective on kby success factors.But that view is not necessarily correct. Even an ex-cellent set of balanced scorecard measures does notguarantee a wirming strategy. The balanced score-

11

How One Company Used a Daily Financial Reportto Improve Quality*

In the 1980s, a chemicals company became commit-ted to a total quality management program and beganto make extensive measurements of employee partici-pation, statistical process control, and key quality indi-cators. Using computerized controls and remote dataentry systems, the plant monitored more than 30,000observations of its production processes every fourhours. The department managers and operating person-nel who now had access to massiveamounts of real-time operationaldata found their monthly financialreports to he irrelevant.

But one enterprising departmentmanager saw things differently. Hecreated a daily income statement.Each day, he estimated the value ofthe output from the production pro-cess using estimated market pricesand subtracted the expenses of rawmaterials, energy, and capital consumed in the produc-tion process. To approximate the cost of producing out-of-conformance product, he cut the revenues from off-spec output by 50% to 100%.

The daily financial report gave operators powerfulfeedback and motivation and guided their quality andproductivity efforts. The department head understoodthat it is not always possible to improve quality, reduceenergy consumption, and increase throughput simulta-neously; tradeoffs are usually necessary. He wanted thedaily financial statement to guide those tradeoffs. Thedifference between the input consumed and outputproduced indicated the success or failure of the em-ployees' efforts on the previous day. The operators wereempowered to make decisions that might improve

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quality, increase productivity, and reduce consumptionof energy and materials.

That feedback and empowerment had visible results.When, for example, a hydrogen compressor failed, a su-pervisor on the midnight shift ordered an emergencyrepair crew into action. Previously, such a failure of anoncritical component would have been reported in theshift log, where the department manager arriving for

work the following morning wouldhave to discover it. The midnightshift supervisor knew the cost oflosing the hydrogen gas and madethe decision that the cost of expe-diting the repairs would be repaidseveral times over by the outputproduced by having the compressorback on line before morning.

The department proceeded to setquality and output records. Over

time, the department manager became concemed thatemployees would lose interest in continually improv-ing operations. He tightened the parameters for in-specproduction and reset the prices to reflect a 25% premi-vim for output containing only negligible fractions ofimpurities. The operators continued to improve theproduction process.

The success of the daily financial report hinged onthe manager's ability to establish a financial penalty forwhat had previously been an intangible variable: thequality of output. With this irmovation, it was easy tosee where process improvements and capital invest-ments could generate the highest returns.

•Source: "Texas Eastman Company," by Robert S. Kaplan, HarvardBusiness School Case No. 9-190-039.

card can only translate a company's strategy into

specific measurable objectives. A failure to convert

improved operational performance, as measured in

the scorecard, into improved financial performance

should send executives back to their drawing boards

to rethink the company's strategy or its implemen-

tation plans.

As one example, disappointing financial measures

sometimes occur because companies don't follow

up their operational improvements with another

round of actions. Quality and cycle-time improve-

ments can create excess capacity. Managers should

be prepared to either put the excess capacity to work

or else get rid of it. The excess capacity must be

either used by boosting revenues or eliminated by

reducing expenses if operational improvements are

to be brought dov̂ ni to the bottom line.

As companies improve their quality and response

time, they eliminate the need to build, inspect, and

rework out-of-conformance products or to resched-

ule and expedite delayed orders. Eliminating these

tasks means that some of the people who perform

them are no longer needed. Companies are under-

standably reluctant to lay off employees, especially

since the employees may have been the source of the

ideas that produced the higher quality and reduced

cycle time. Layoffs are a poor reward for past im-

provement and can damage the morale of remaining

worker's, curtailing further improvement. But com-

panies will not realize all the financial benefits of

78 HARVARD BUSINESS REVIEW January-February 1991

BALANCED SCORECARD

their improvements until their employees and facili-ties are working to capacity-or the companies con-front the pain of downsizing to eliminate the ex-penses of the newly created excess capacity.

If executives fully understood the consequences oftheir quality and cycle-time improvement programs,they might be more aggressive about using the new-ly created capacity. To capitalize on this self-creatednew capacity, however, companies must expandsales to existing customers, market existing prod-ucts to entirely new customers (who are now acces-sible because of the improved quality and deliveryperformance), and increase the flow of new productsto the market. These actions can generate addedrevenues with only modest increases in operatingexpenses. If marketing and sales and R&JD do notgenerate the increased volume, the operating im-provements will stand as excess capacity, redundan-cy, and untapped capabilities. Periodic financialstatements remind executives that improved quali-ty, response time, productivity, or new productsbenefit the company only when they are translatedinto improved sales and market share, reduced op-erating expenses, or higher asset turnover.

Ideally, companies should specify how improve-ments in quality, cycle time, quoted lead times, de-livery, and new product introduction will lead tohigher market share, operating margins, and assetturnover or to reduced operating expenses. The chal-lenge is to learn how to make such explicit linkagebetween operations and finance. Exploring the com-plex dynamics will likely require simulation andcost modeling.

Measures That Move CompaniesForward

As companies have applied the balanced score-card, we have begun to recognize that the scorecardrepresents a fundamental change in the underlyingassumptions about performance measurement. Asthe controllers and finance vice presidents involvedin the research project took the concept back to theirorganizations, the project participants found thatthey could not implement the balanced scorecardwithout the involvement of the senior managerswho have the most complete picture of the compa-

ny's vision and priorities. This was revealing be-cause most existing performance measurement sys-tems have heen designed and overseen by financialexperts. Rarely do controllers need to have seniormanagers so heavily involved.

IThe balanced scorecardputs strategy - notat the center.

control -

Probably because traditional measurement sys-tems have sprung from the finance function, the sys-tems have a control bias. That is] traditional perfor-mance measurement systems specify the particularactions they want employees to take and then mea-svire to see whether the employees have in fact takenthose actions. In that way, the systems try to controlbehavior. Such measurement systems fit with theengineering mentality of the Industrial Age.

The balanced scorecard, on the other hand, is wellsuited to the kind of organization many companiesare trying to become. The scorecard puts strategyand vision, not control, at the center. It establishesgoals but assumes that people will adopt whateverbehaviors and take whatever actions are necessary toarrive at those goals. The measures are designed topull people toward the overall vision. Senior man-agers may know what the end result should be, butthey carmot tell employees exactly how to achievethat result, if only because the conditions in whichemployees operate are constantly changing.

This new approach to performance measurementis consistent with the initiatives under way in manycompanies: cross-functional inteigration, customer-supplier partnerships, global scale, continuous im-provement, and team rather than individual ac-countability. By combining the financial, customer,intemal process and innovation, and organizationallearning perspectives, the balanced scorecard helpsmanagers understand, at least irnplicitly, many in-terrelationships. This understanding can help man-agers transcend traditional notions about functionalbarriers and ultimately lead to improved decisionmaking and problem solving. T ie balanced score-card keeps companies looking- and moving-for-ward instead of backward.

Reprint 92105

HARVARD BUSINESS REVIEW January-February 1991 79