NURS 6231: HEALTHCARE SYSTEMS AND QUALITY OUTCOMES - Discussion 9 (Grading Rubic and Media Attached)

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The Balanced Scorecard

Measures That Drive Performance

by Robert S. Kaplan and David P. Norton

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The balanced scorecard tracks

all the important elements of

a company’s strategy—from

continuous improvement and

partnerships to teamwork and

global scale. And that allows

companies to excel.

Reprint R0507Q This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

E S T

O F

H B R 1 9 9 2

The Balanced Scorecard

Measures That Drive Performance

by Robert S. Kaplan and David P. Norton

harvard business review • the high-performance organization • july–august 2005 page 1

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The balanced scorecard tracks all the important elements of a

company’s strategy—from continuous improvement and partnerships

to teamwork and global scale. And that allows companies to excel.

By the 1980s, many executives were convinced that traditional measures of financial performance didn’t let them manage effectively and wanted to replace them with operational measures. Arguing that executives should track both financial and op- erational metrics, Robert Kaplan and David Norton suggested four sets of parameters.

First, how do customers see your company? Find out by measuring lead times, quality, performance and service, and costs. Second, what must your company excel at? Determine the processes and competencies that are most critical, and specify measures, such as cycle time, quality, employee skills, and productivity, to track them. Third, can your company continue to improve and create value? Monitor your ability to launch new products, create more value for customers, and improve op- erating efficiencies. Fourth, how has your company done by its shareholders? Measure cash flow, quar- terly sales growth, operating income by division, and increased market share by segment and return on equity.

The balanced scorecard lets executives see whether they have improved in one area at the ex-

pense of another. Knowing that, say the authors, will protect companies from posting suboptimal performance.

What you measure is what you get. Senior exec- utives understand that their organization’s mea- surement system strongly affects the behavior of managers and employees. Executives also un- derstand that traditional financial accounting measures like return on investment and earn- ings per share can give misleading signals for continuous improvement and innovation— activities today’s competitive environment de- mands. The traditional financial performance 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 tried to remedy the inadequacies of current performance measurement systems, some have focused on making financial measures more relevant. Others have said, ‘‘Forget the fi- nancial measures; improve operational mea- sures like cycle time and defect rates. The fi-

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

•

EST

HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 2

Robert S. Kaplan

is the Marvin Bower Professor of Leadership Development at Harvard Business School in Boston. He is a cofounder of the Balanced Scorecard Collaborative.

David P. Norton

is president and a cofounder of the Balanced Scorecard Collaborative, a Palladium company. Kaplan and Norton are the coauthors of six HBR articles and four books on the Balanced Scorecard.

nancial results will follow.’’ But managers should not have to choose between financial and operational measures. In observing and working with many companies, we have found that senior executives do not rely on one set of measures to the exclusion of the other. They realize that no single measure can provide a clear performance target or focus attention on the critical areas of the business. Managers want a balanced presentation of both financial and operational measures.

During a yearlong research project with 12 companies at the leading edge of performance measurement, we devised a ‘‘balanced score- card’’—a set of measures that gives top manag- ers a fast but comprehensive view of the busi- ness. The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the financial mea- sures with operational measures on customer satisfaction, internal processes, and the organi- zation’s innovation and improvement activi- ties—operational measures that are the drivers of future financial performance.

Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying a plane, pilots need detailed information about many aspects of the flight. They need information on fuel, airspeed, altitude, bearing, destination, and other indicators that summarize the cur- rent and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view perfor- mance in several areas at once.

The balanced scorecard allows managers to look at the business from four important per- spectives. (See the exhibit ‘‘The Balanced Score- card Links Performance Measures.’’) It provides answers to four basic questions:

• How do customers see us? (customer per- spective)

• What must we excel at? (internal business perspective)

• Can we continue to improve and create value? (innovation and learning perspective)

• How do we look to shareholders? (finan- cial perspective)

While giving senior managers information from four different perspectives, the balanced scorecard minimizes information overload by limiting the number of measures used. Compa- nies rarely suffer from having too few mea-

sures. More commonly, they keep adding new measures whenever an employee or a consult- ant makes a worthwhile suggestion. One man- ager described the proliferation of new mea- sures at his company as its ‘‘kill another tree program.’’ The balanced scorecard forces man- agers to focus on the handful of measures that are most critical.

Several companies have already adopted the balanced scorecard. Their early experiences using the scorecard have demonstrated that it meets several managerial needs. First, the scorecard brings together, in a single manage- ment report, many of the seemingly disparate elements of a company’s competitive agenda: becoming customer oriented, shortening re- sponse time, improving quality, emphasizing teamwork, reducing new product launch times, and managing for the long term.

Second, the scorecard guards against subop- timization. By forcing senior managers to con- sider all the important operational measures together, the balanced scorecard lets them see whether improvement in one area may have been achieved at the expense of another. Even the best objective can be achieved badly. Com- panies can reduce time to market, for example, in two very different ways: by improving the management of new product introductions or by releasing only products that are incremen- tally different from existing products. Spend- ing on setups can be cut either by reducing setup times or by increasing batch sizes. Simi- larly, production output and first-pass yields can rise, but the increases may be due to a shift in the product mix to more standard, easy-to- produce but lower-margin products.

We will illustrate how companies can create their own balanced scorecard with the experi- ences of one semiconductor company—let’s call it Electronic Circuits Incorporated. ECI saw the scorecard as a way to clarify, simplify, and then operationalize the vision at the top of the organization. The ECI scorecard was designed to focus the attention of its top executives on a short list of critical indicators of current and fu- ture performance.

Customer Perspective: How Do Customers See Us?

Many companies today have a corporate mis- sion that focuses on the customer. ‘‘To be num- ber one in delivering value to customers’’ is a typical mission statement. How a company is

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

•

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HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 3

performing from its customers’ perspective has become, therefore, a priority for top man- agement. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers.

Customers’ concerns tend to fall into four categories: time, quality, performance and ser- vice, and cost. Lead time measures the time re- quired for the company to meet its customers’ needs. For existing products, lead time can be measured from the time the company receives an order to the time it actually delivers the product or service to the customer. For new products, lead time represents the time to mar- ket, or how long it takes to bring a new prod- uct from the product definition stage to the start of shipments. Quality measures the defect level of incoming products as perceived and measured by the customer. Quality could also measure on-time delivery—the accuracy of the organization’s delivery forecasts. The combina- tion of performance and service measures how the company’s products or services contribute to creating value for its customers.

To put the balanced scorecard to work, com- panies should articulate goals for time, quality,

and performance and service and then trans- late these goals into specific measures. Senior managers at ECI, for example, established gen- eral goals for customer performance: Get stan- dard products to market sooner, improve cus- tomers’ time to market, become customers’ supplier of choice through partnerships with them, and develop innovative products tai- lored to customer needs. The managers trans- lated these general goals into four specific goals and identified an appropriate measure for each. (See the exhibit ‘‘ECI’s Balanced Busi- ness Scorecard.’’)

To track the specific goal of providing a con- tinuous stream of attractive solutions, ECI measured the percentage of sales from new products and the percentage of sales from pro- prietary products. That information was avail- able internally, but certain other measures forced the company to get data from outside. To assess whether the company was achieving its goal of providing reliable, responsive sup- ply, ECI turned to its customers. When it found that each customer defined ‘‘reliable, respon- sive supply’’ differently, ECI created a database of the factors as defined by each of its major customers. The shift to external measures of performance with customers led ECI to rede- fine ‘‘on time’’ so it matched customers’ expec- tations. Some customers defined “on time” as any shipment that arrived within five days of scheduled delivery; others used a nine-day win- dow. ECI itself had been using a seven-day win- dow, which meant that it wasn’t satisfying some of its customers and overachieving for others. ECI also asked its top ten customers to rank the company as a supplier overall.

Depending on customers’ evaluations to define some of a company’s performance measures forces that company to view its per- formance through customers’ eyes. Some com- panies hire third parties to perform anonymous customer surveys, resulting in a customer- driven report card. The J.D. Power quality sur- vey, for example, has become the standard of performance for the automobile industry, while the U.S. Department of Transportation’s mea- surement of on-time arrivals and lost baggage provides external standards for airlines. Bench- marking procedures are yet another technique companies use to compare their performance against competitors’ best practices. Many com- panies have introduced ‘‘best of breed’’ compari- son programs: The company looks to one in-

Financial Perspective

GOALS MEASURES

Customer Perspective

GOALS MEASURES

Innovation and Learning Perspective

GOALS MEASURES

How do we look to shareholders?

What must we excel at?

How do customers see us?

Can we continue to improve and create value?

The Balanced Scorecard Links Performance Measures

Internal Business Perspective

GOALS MEASURES

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This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

•

EST

HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 4

dustry to find, say, the best distribution system, to another industry for the lowest cost payroll process, and then forms a com- posite of those best practices to set objectives for its own performance.

In addition to measures of time, quality, and performance and service, companies must re- main sensitive to the cost of their products. But customers see price as only one compo- nent of the cost they incur when dealing with their suppliers. Other supplier-driven costs range from ordering, scheduling delivery, and paying for the materials; to receiving, inspect- ing, handling, and storing the materials; to the scrapping, reworking, and obsolescence caused by the materials; and schedule disruptions (ex- pediting and value of lost output) from incor- rect deliveries. An excellent supplier may charge a higher unit price for products than

other vendors but nonetheless be a lower cost supplier because it can deliver defect-free prod- ucts in exactly the right quantities at exactly the right time directly to the production pro- cess and can minimize, through electronic data interchange, the administrative hassles of or- dering, invoicing, and paying for materials.

Internal Business Perspective: What Must We Excel At?

Customer-based measures are important, but they must be translated into measures of what the company must do internally to meet its customers’ expectations. After all, excellent customer performance derives from processes, decisions, and actions occurring throughout an organization. Managers need to focus on those critical internal operations that enable them to satisfy customer needs. The second part of the balanced scorecard gives managers that internal perspective.

The internal measures for the balanced scorecard should stem from the business pro- cesses that have the greatest impact on cus- tomer satisfaction—factors that affect cycle time, quality, employee skills, and productivity, for example. Companies should also attempt to identify and measure their company’s core competencies, the critical technologies needed to ensure continued market leadership. Com- panies should decide what processes and com- petencies they must excel at and specify mea- sures for each.

Managers at ECI determined that submi- cron technology capability was critical to its market position. They also decided that they had to focus on manufacturing excellence, de- sign productivity, and new product introduc- tion. The company developed operational measures for each of these four internal busi- ness goals.

To achieve goals on cycle time, quality, pro- ductivity, and cost, managers must devise mea- sures that are influenced by employees’ ac- tions. Since much of the action takes place at the department and workstation levels, man- agers need to decompose overall cycle time, quality, product, and cost measures to local lev- els. That way, the measures link top manage- ment’s judgment about key internal processes and competencies to the actions taken by indi- viduals that affect overall corporate objectives. This linkage ensures that employees at lower levels in the organization have clear targets for

ECI’s Balanced Business Scorecard

Customer Perspective

GOALS MEASURES

New products Percentage of sales from new products

Percentage of sales from proprietary products

Responsive On-time delivery supply (defined by customer)

Preferred Share of key accounts’ suppliers purchases

Ranking by key accounts

Customer Number of cooperative partnerships engineering efforts

Innovation and Learning Perspective

GOALS MEASURES

Technology Time to develop next leadership generation

Manufacturing Process time to maturity learning

Product focus Percentage of products that equal 80% of sales

Time to New product intro- market duction versus compe-

tition

Internal Business Perspective

GOALS MEASURES

Technology Manufacturing capability geometry versus

competition

Manufacturing Cycle time, unit cost, excellence yield

Design Silicon efficiency, productivity engineering efficiency

New product Actual introduction introduction schedule versus plan

Financial Perspective

GOALS MEASURES

Survive Cash flow

Succeed Quarterly sales growth and operating income by division

Prosper Increased market share and ROE

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This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

•

EST

HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 5

actions, decisions, and improvement activities that will contribute to the company’s overall mission.

Information systems play an invaluable role in helping managers disaggregate the summary measures. When an unexpected sig- nal appears on the balanced scorecard, execu- tives can query their information system to find the source of the trouble. If the aggregate measure for on-time delivery is poor, for ex- ample, executives with a good information system can quickly look behind the aggregate measure until they can identify late deliver- ies, day by day, by a particular plant to an in- dividual customer.

If the information system is unresponsive, however, it can be the Achilles’ heel of perfor- mance measurement. Managers at ECI are currently limited by the absence of such an op- erational information system. Their greatest concern is that the scorecard information is not timely; reports are generally a week behind the company’s routine management meetings, and the measures have yet to be linked to measures for managers and employees at lower levels of the organization. The company is in the pro- cess of developing a more responsive informa- tion system to eliminate this constraint.

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

The customer-based and internal business pro-

cess measures on the balanced scorecard iden- tify the parameters that the company consid- ers most important for competitive success. But the targets for success keep changing. In- tense global competition requires that compa- nies make continual improvements to their ex- isting products and processes and have the ability to introduce entirely new products with expanded capabilities.

A company’s ability to innovate, improve, and learn ties directly to the company’s value. That is, only through the ability to launch new products, create more value for customers, and improve operating efficiencies continually can a company penetrate new markets and in- crease revenues and margins—in short, grow and thereby increase shareholder value.

ECI’s innovation measures focus on the company’s ability to develop and introduce standard products rapidly, products that the company expects will form the bulk of its fu- ture sales. Its manufacturing improvement measure focuses on new products; the goal is to achieve stability in the manufacturing of new products rather than to improve manufac- turing of existing products. Like many other companies, ECI uses the percentage of sales from new products as one of its innovation and improvement measures. If sales from new prod- ucts are trending downward, managers can ex- plore whether problems have arisen in new product design or new product introduction.

In addition to measures on product and process innovation, some companies overlay specific improvement goals for their existing processes. For example, Analog Devices, a Massachusetts-based manufacturer of spe- cialized semiconductors, expects managers to improve their customer and internal busi- ness process performance continuously. The company estimates specific rates of improve- ment for on-time delivery, cycle time, defect rate, and yield.

Other companies, like Milliken & Company, require that managers make improvements within a specific time period. Milliken did not want its ‘‘associates’’ (Milliken’s word for em- ployees) to rest on their laurels after winning the Baldrige Award. Chairman and CEO Roger Milliken asked each plant to implement a ‘‘ten four’’ improvement program: Measures of pro- cess defects, missed deliveries, and scrap were to be reduced by a factor of ten over the next four years. These targets emphasize the role

Other Measures for the Customer’s Perspective

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A computer manufacturer wanted to be the competitive leader in cus- tomer satisfaction, so it measured competitive rankings. The com- pany got the rankings through an outside organization hired to talk directly with customers. The com- pany also wanted to do a better job of solving customers’ problems by creating more partnerships with other suppliers. It measured the percentage of revenue from third- party relationships.

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The customers of a producer of very expensive medical equipment de-

manded high reliability. The com- pany developed two customer-based metrics for its operations: equip- ment up-time percentage and mean- time response to a service call.

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A semiconductor manufacturer asked each major customer to rank the company against comparable suppliers on efforts to improve qual- ity, delivery time, and price perfor- mance. When the chip maker dis- covered it ranked in the middle, managers made improvements that moved the company to the top of customers’ rankings.

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

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HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 6

for continuous improvement in customer satis- faction and internal business processes.

Financial Perspective: How Do We Look to Shareholders?

Financial performance measures indicate whether the company’s strategy, implemen- tation, and execution 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 prosper. Survival was measured by cash flow, success by quarterly sales growth and operating income by division, and prosperity by increased market share by segment and return on equity.

But given today’s business environment, should senior managers even look at the busi- ness from a financial perspective? Should they pay attention to short-term financial measures like quarterly sales and operating income? Many have criticized financial measures be- cause of their well-documented inadequacies, their backward-looking focus, and their inabil- ity to reflect contemporary value-creating ac- tions. Shareholder value analysis (SVA), which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more for-

ward-looking. But SVA still is based on cash flow rather than on the activities and processes that drive cash flow.

Some critics go much further in their indict- ment of financial measures. They argue that the terms of competition have changed and that traditional financial measures do not im- prove customer satisfaction, quality, cycle time, and employee motivation. In their view, financial performance is the result of opera- tional actions, and financial success should be the logical consequence of doing the funda- mentals well. In other words, companies should stop navigating by financial measures. By making fundamental improvements in their operations, the financial numbers will take care of themselves, the argument goes.

Assertions that financial measures are un- necessary are incorrect for at least two reasons. A well-designed financial-control system can actually enhance rather than inhibit an organi- zation’s total quality management program. (See the sidebar ‘‘How One Company Used a Daily Financial Report to Improve Quality.’’) More important, however, the alleged linkage between improved operating performance and financial success is actually quite tenuous and uncertain. Let us demonstrate rather than argue this point.

During the three-year period between 1987 and 1990, a NYSE electronics company made an order-of-magnitude improvement in quality an on-time delivery performance. The outgo- ing defect rate dropped from 500 parts per mil- lion to 50, on-time delivery improved from 70% to 96%, and yield jumped from 26% to 51%. Did these breakthrough improvements in quality, productivity, and customer service pro- vide substantial benefits to the company? Un- fortunately not. During the same three-year period, the company’s financial results showed little improvement, and its stock price plum- meted to one-third of its July 1987 value. The considerable improvements in manufacturing capabilities had not been translated into in- creased profitability. Slow releases of new products and a failure to expand marketing to new and perhaps more demanding customers prevented the company from realizing the benefits of its manufacturing achievements. The operational achievements were real, but the company had failed to capitalize on them.

The disparity between improved opera- tional performance and disappointing finan-

Other Measures for the Internal Business Perspective

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One company recognized that the success of its total quality manage- ment (TQM) program depended on all its employees internalizing and acting on the program’s messages. The company performed a monthly survey of 600 randomly selected em- ployees to determine if they were aware of TQM, had changed their behavior because of it, believed the outcome was favorable, or had be- come missionaries to others.

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Hewlett-Packard uses breakeven time (BET) to measure the effective- ness of its product development cy- cle. BET measures the time required for all the accumulated expenses in the product and process develop-

ment cycle (including equipment acquisition) to be recovered by the product’s contribution margin (the selling price less manufacturing, de- livery, and selling expenses).

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A major office products manufac- turer, wanting to respond rapidly to changes in the marketplace, set out to reduce cycle time by 50%. Lower levels of the organization aimed to radically cut the times required to process customer orders, order and receive materials from suppliers, move materials and products be- tween plants, make and assemble products, and deliver products to customers.

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

•

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HBR 1992

harvard business review • the high-performance organization • july–august 2005 page 7

cial measures creates frustration for senior ex- ecutives. This frustration is often vented at nameless Wall Street analysts who allegedly cannot see past quarterly blips in financial per- formance to the underlying long-term values these executives sincerely believe they are cre- ating in their organizations. But the hard truth is that if improved performance fails to be re- flected in the bottom line, executives should reexamine the basic assumptions of their strat- egy and mission. Not all long-term strategies are profitable strategies.

Measures of customer satisfaction, internal business performance, and innovation and im- provement are derived from the company’s particular view of the world and its perspective on key success factors. But that view is not nec- essarily correct. Even an excellent set of bal- anced scorecard measures does not guarantee a winning strategy. The balanced scorecard can only translate a company’s strategy into specific measurable objectives. A failure to convert im- proved operational performance, as measured in the scorecard, into improved financial per- formance should send executives back to their

drawing boards to rethink the company’s strat- egy or its implementation plans.

As one example, disappointing financial measures sometimes occur because compa- nies don’t follow up their operational improve- ments with another round of actions. Quality and cycle-time improvements can create excess capacity. Managers should be prepared to ei- ther 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 re- ducing expenses if operational improvements are to be brought down to the bottom line.

As companies improve their quality and re- sponse time, they eliminate the need to build, inspect, and rework out-of-conformance prod- ucts or to reschedule and expedite delayed or- ders. Eliminating these tasks means that some of the people who perform them are no longer needed. Companies are understandably reluc- tant to lay off employees, especially since the employees may have been the source of the ideas that produced the higher quality and re- duced cycle time. Layoffs are a poor reward for past improvement and can damage the morale

How One Company Used a Daily Financial Report to Improve Quality

In the 1980s, a chemicals company became committed to a total quality management program and began to make extensive mea- surements—of employee participation, sta- tistical process control, and key quality indi- cators. Using computerized control and remote data entry systems, the plant moni- tored more than 30,000 observations of its production processes every four hours. The department managers and operating person- nel who now had access to massive amounts of real-time operational data found their monthly financial reports to be irrelevant.

But one enterprising department manager saw things differently. He created a daily in- come statement. Each day, he estimated the value of the output from the production pro- cess using market prices and subtracted the expenses of raw materials, energy, and capital consumed in the production process. To ap- proximate the cost of producing out-of-con- formance product, he cut the revenues from off-spec output by 50% to 100%.

The daily financial report gave operators powerful feedback and motivation and

guided their quality and productivity efforts. The department head understood that it is not always possible to improve quality, re- duce energy consumption, and increase throughput simultaneously; trade-offs are usually necessary. He wanted the daily finan- cial statement to guide those trade-offs. The difference between the input consumed and the output produced indicated the success or failure of the employees’ efforts on the previ- ous day. The operators were empowered to make decisions that might improve quality, increase productivity, and reduce consump- tion of energy and materials.

That feedback and empowerment had visi- ble results. When, for example, a hydrogen compressor failed, a supervisor on the mid- night shift sent an emergency repair crew into action. Previously, such a failure of a noncritical component would have been re- ported in the shift log, where the department manager arriving for work the following morning would have to discover it. The mid- night shift supervisor knew the cost of losing the hydrogen gas and made the decision that

the cost of expediting the repairs would be re- paid several times over by the output pro- duced by having the compressor back on line before morning.

The department proceeded to set quality and output records. Over time, the depart- ment manager became concerned that em- ployees would lose interest in continually im- proving operations. He tightened the parameters for in-spec production and reset the prices to reflect a 25% premium for out- put containing only negligible fractions of impurities. The operators continued to im- prove the production process.

The success of the daily financial report hinged on the manager’s ability to establish a financial penalty for what had previously been an intangible variable: the quality of output. With this innovation, it was easy to see where process improvements and capital invest- ments could generate the highest returns.

Source: ‘‘Texas Eastman Company,’’

Robert S. Kaplan, Harvard Business School case

number 9-190-039.

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.

The Balanced Scorecard

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of remaining workers, curtailing further im- provement. But companies will not realize all the financial benefits of their improvements until their employees and facilities are working to capacity—or the companies confront the pain of downsizing to eliminate the expenses of the newly created excess capacity.

If executives fully understood the conse- quences of their quality and cycle-time im- provement programs, they might be more ag- gressive about using the newly created capacity. To capitalize on this self-created new capacity, however, companies must expand sales to existing customers, market existing products to entirely new customers (who are now accessible because of the improved qual- ity and delivery performance), and increase the flow of new products to the market. These actions can generate added revenues with only modest increases in operating expenses. If marketing and sales and R&D do not gener- ate the increased volume, the operating im- provements will stand as excess capacity, re- dundancy, and untapped capabilities. Periodic financial statements remind executives that improved quality, response time, productivity, or new products benefit the company only when they are translated into improved sales and market share, reduced operating ex- penses, or higher asset turnover.

Ideally, companies should specify how im- provements in quality, cycle time, quoted lead times, delivery, and new product introduction will lead to higher market share, operating margins, and asset turnover or to reduced op- erating expenses. The challenge is to learn how to make such explicit linkage between opera- tions and finance. Exploring the complex dy- namics will probably require simulation and cost modeling.

Measures That Move Companies Forward

As companies have applied the balanced score- card, we have begun to recognize that the scorecard represents a fundamental change in the underlying assumptions about perfor- mance measurement. As the controllers and fi- nance vice presidents involved in the research project took the concept back to their organiza- tions, the project participants found that they were not able to implement the balanced score- card without the involvement of the senior

managers who had the most complete picture of the company’s vision and priorities. This was revealing, because most existing performance measurement systems have been designed and overseen by financial experts. Rarely do con- trollers need to have senior managers so heavily involved.

Probably because traditional measurement systems have sprung from the finance function, the systems have a control bias. That is, tradi- tional performance measurement systems spec- ify the particular actions they want employees to take and then measure to see whether the em- ployees have in fact taken those actions. In that way, the systems try to control behavior. Such measurement systems fit with the engineering mentality of the industrial age.

The balanced scorecard, on the other hand, is well suited to the kind of organization many companies are trying to become. The scorecard puts strategy and vision, not control, at the cen- ter. It establishes goals but assumes that people will adopt whatever behaviors and take whatever actions are necessary to arrive at those goals. The measures are designed to pull people toward the overall vision. Senior managers may know what the end result should be, but they cannot tell em- ployees exactly how to achieve that result, if only because the conditions in which employees oper- ate are constantly changing.

This new approach to performance mea- surement is consistent with the initiatives under way in many companies: cross-func- tional integration, customer-supplier partner- ships, global scale, continuous improvement, and team rather than individual accountability. By combining the financial, customer, internal process and innovation, and organizational learning perspectives, the balanced scorecard helps managers understand, at least implicitly, many interrelationships. This understanding can help managers transcend traditional no- tions about functional barriers and ultimately lead to improved decision making and prob- lem solving. The balanced scorecard keeps companies looking—and moving—forward in- stead of backward.

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As companies have

applied the balanced

scorecard, we have begun

to recognize that the

scorecard represents a

fundamental change in

the underlying

assumptions about

performance

measurement.

This document is authorized for use only in Angela Montgomery's Healthcare Systems and Quality Outcomes course at Laureate Education - Baltimore, from July 2016 to September 2017.