From The Balanced Scorecard, by Robert S. Kaplan and David P. Norton, Copyright (c) 1996 by The President and Fellows of Harvard College. All rights reserved.
Imagine entering the cockpit of a modern jet airplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot?
Q: I am surprised to see you operating the plane with only a single instrument. What does it measure?
A: Airspeed. I’m really working on airspeed this flight.
Q: That’s good. Airspeed certainly seems important. But what about altitude? Wouldn’t an altimeter be helpful?
A: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I have to concentrate on proper airspeed.
Q: But I notice you don’t even have a fuel gauge. Wouldn’t that be useful?
A: You’re right; fuel is significant, but I can’t concentrate on doing too many things well at the same time. So on this flight I’m focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of flights.
We suspect that you would not board the plane after this discussion. Even if the pilot did an exceptional job on airspeed, you would be worried about colliding with tall mountains or running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of guiding a complex vehicle like ajet airplane through crowded air spaces with only a single instrument. Skilled pilots are able to process information from a large number of indicators to navigate their aircraft. Yet navigating today’s organizations through complex competitive environments is at least as complicated as flying a jet. Why should we believe that executives need anything less than a full battery of instrumentation for guiding their companies? Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward excellent future outcomes.
The Balanced Scorecard provides managers with the instrumentation they need to navigate to future competitive success. Today, organizations are competing in complex environments so that an accurate understanding of their goals and the methods for attaining those goals is vital. The Balanced Scorecard translates an organization’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system. The Balanced Scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.
But is there anything new about a call for a ‘balanced’ set of measures? While virtually all organizations do indeed have financial and nonfinancial measures, many use their nonfinancial measures for local improvements, at their front-line and customer-facing operations. Aggregate financial measures are used by senior managers as if these measures could summarize adequately the results of operations performed by their lower and midlevel employees. These organizations are using their financial and nonfinancial performance measures only for tactical feedback and control of’ short-term operations.
The Balanced Scorecard emphasizes that financial and nonfinancial measures must be part of the information system for employees at all levels of the organization. Front-line employees must understand the financial consequences of their decisions and actions; senior executives must understand the drivers of long-term financial success. The objectives and measures for the Balanced Scorecard are more than a somewhat ad hoc collection of financial and nonfinancial performance measures; they are derived from a top-down process driven by the mission and strategy of the business. The Balanced Scorecard should translate a business unit’s mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation, and learning and growth. The measures are balanced between outcome measures-the results from past efforts-and the measures that drive future performance. And the scorecard is balanced between objective, easily quantified outcome measures and subjective, somewhat judgmental performance drives of the outcome measures.
One test of whether a Balanced Scorecard truly communicates both the outcomes and the performance drivers of a business units strategy is its sensitivity and transparency. Observers should be able to took at the scorecard and see behind it, into the strategy that underlies the scorecard objectives and measures.
As am example, one division president reported to his company’s president when he turned in his first Balanced Scorecard: In the past if you had lost my strategic document on an airplane and a competitor found it, I would have been angry but I would have gotten over it. In reality, it wouldn’t have been that big a loss. Or if I had left my monthly operating review somewhere and a competitor obtained a copy, I would have been upset, but, again, it wouldn’t have been that big a deal This Balanced Scorecard, however, communicates my strategy so well that a competitor seeing this would be able to block the strategy and cause it to become ineffective.
The Balanced Scorecard is more than a new measurement system. Innovative companies use the scorecard as the central, organizing framework for their management processes. Companies can develop an initial Balanced Scorecard with fairly narrow objectives: to gain clarification, consensus, and focus on their strategy, and then to communicate that strategy throughout the organization. The real power of the Balance Scorecard, however, occurs when it is transformed from a measurement system to a management system. As more and more companies work with the Balanced Scorecard, they see how it can be used to:
Clarification and gain consensus about strategy
Communicate strategy throughout the organization
Align department and personal goals to the strategy
Link strategic objectives to long-term targets and annual budgets
Identify and align strategic initiatives
Perform periodic and systematic strategic reviews
Obtain feedback to learn about and improve strategy
The Balanced Scorecard fills the void that exists in most management systems-the lack of a systematic process to implement and obtain feedback about strategy. Management processes built around the scorecard enable the organization to become aligned and focused on implementing the long-term strategy. Used in this way, the Balanced Scorecard becomes the foundation for managing information age organizations.
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