The Balanced Scorecard - Measures That Drive Performance

The Balanced Scorecard-Measures that Drive Performance

Robert S. Caplan and David P. Norton

Introduction

In the January-February 1992 Issue of the Harvard Business Review, Robert Caplan and David Norton revealed the results of a years’ worth of research using 12 companies at the leading edge of performance as the test subjects. The theory behind the initial research was to see what company’s were currently using as key performance measurements (KPI’s) and identify flaws in that thinking. The business mindset at the time was based primarily on financial performance. Caplan and Norton theorized that with only a rear looking measurement strategy, business decision makers were not getting the full picture. What was needed was a more balanced overview of a company’s performance.

Traditional management decisions centered on return-on-investment and earnings-per-share have value in the information that they provide, yet do not provide real time status or forward looking projections to allow for long term goal decisions. The purpose of a Balanced Scorecard was to narrow the focus of the information gathered and ultimately measured to provide senior management with up to date information on critical measurements of business performance. The narrowed focus drills down the information to only what is important in making current and foreword looking projections and plans. The challenge was to identify which KPI’s to use in making the Balanced Score Card.

Summary

There are many factors that have an effect on the success of a business regardless of product or underlying industry. One of the main objectives of management is to review performance in the quest to improve upon successes and fix or eliminate underperformance. The aim of the Balanced Score card is not to suggest that companies have not been performing these functions but instead clear up the background noise. Benchmarking and performance matrix’s have always existed in a managers tool box, yet Kaplan and Norton have seized on the concept that modern companies were suffering from information overload. Starting with the rise of the industrial revolution financial centric measurements were the traditional method of gauging performance or lack thereof. Kaplan and Norton’s argument was based on the theory that utilizing a select group of measurements could provide management with current and useful information to base short and long term decisions on.

There exist some potential flaws with Kaplan and Norton’s Balanced Score Card. The biggest issues are that it is not a management method in the true sense but a management measuring method. The ability to identify the four core areas to measure and embarking on that task is not a road map to successful business practice. Each company is unique in its own methods, while many can be grouped into areas such as manufacturing company’s or service providers they are not exact copies of each other. The four areas of measurement that Kaplan and Norton suggest may not be enough variables for a company to be able to gauge performance. An example would be a nuclear power plant building company. This type of industry may require years to complete a task, and incremental measurements could provide no real value to management.