Existing performance measurement approaches rely primarily on financial accounting measures.
A group of researchers thinking that such a single focus is not sufficient for today's complex
competitive environment, came together under leadership of KPMG and developed the
Balanced Scorecard Approach (BSC).

BSC is organized around four perspectives:
- financial,
- customer,
- internal,
- innovation and learning.

Usually there are 20-25 measures across these perspectives.

The term "balance" is demonstrating the need for balance between:
- short and long-term objectives,
- financial and non-financial measures,
- lagging and leading indicators,
- external and internal performance perspectives.

BSC mainly translates an organization's mission and strategy into a comprehensive set of performance
measures, achieving an emphasis on achieving financial objectives. The objectives and measures are
derived from an organization's vision and strategy. It is a critical transition project from "vision" to
"action".

The operating environment for BSC is described as follows:

i. Cross-functions: Maximization of functional specialization led to inefficiencies and hand-offs between
departments and slow response processes. As a solution "integrated business processes" cutting across
traditional business functions are introduced.

ii. Links to Customers and Suppliers: Integration of supply, production and delivery processes so that
operations are triggered by customer orders, not by production plans. So cost, quality and response
times are being improved.

iii. Customer Segmentation: Customized products and services without paying the usual cost penalty
for high-variety, low-volume operations.

iv. Global Scale: Information age companies must combine the efficiencies and competitive honing of
global operations with marketing sensitivity to local customers.

v. Knowledge Workers: People are viewed as problem-solvers, not variable costs.

The traditional financial accounting model, which is the "language" for businesses,  based on quarterly
and annual financial reports should have been expanded to incorporate the valuation of a company's
intangible and intellectual assets. Financial and non-financial measures must be part of the information
system for employees at all levels of the organization. Frontline employees must understand the financial
consequences of their decisions and actions; senior executives  must understand the drivers of long
term financial success. I should translate a business unit¹s mission and strategy into tangible objectives
and measures.

[Fig.1-2, p.11, R.S.Kaplan and D.P.Norton: The Balanced Scorecard, 1996, Boston]

1. Clarify and translate vision and strategy into specific strategic objectives for each business unit. Then
identify the objectives and measures for its internal business process. Traditional performance systems
focus on improving cost, quality, and cycle times of existing processes. BSC highlightsmost critical
processes for achieving breakthrough performance for customers and shareholders. BSC creates
consensus and teamwork among all senior executives.

2. Communicate and link strategic objectives and measures throughout an organization via company
newsletters, bulletin boards, videos, and electronic tools. Once all employees understand high-level
objectives and measures, they can establish local objectives that support the business unit¹s global
strategy.

3. Plan, set targets and align strategic initiatives: The BSC has its greatest impact when it is deployed to
drive organizational change. The targets should represent a discontinuity in business and performance.

4. Enhance strategic feedback and learning: This process is the most innovative and most important
aspect of the entire BSC process. It provides the capability for organiztional learning in the executive level.
Traditional management systems do not encourage nor facilitate the formulation, implementation and testing
of strategy in continually changing environments.

Double-loop learning process: Managers need feedback about whether their planned strategy is being
executed according to plan: "single-loop".  Feedback about whether the planned strategy remains a viable
and successful strategy: "double-loop".

The BSC should be based on a series of cause-and-effect relationships derived from the strategy, including
estimates of the response times and magnitudes of the linkages among these measures.

The BSC should be used as a communication, informing and learning system, NOT as a controlling system.

The BSC is primarily a mechanism for strategy implementation, NOT for strategy formulation.

A strategy is a set of hypotheses about cause and effect. A properly constructed BSC tells the story of the
business unit's strategy. It should identify and make explicit the sequence of hypotheses about the
cause-and-effect relationships between outcome measures and the performance drivers of these outcomes.
Every measure selected for a BSC should be an element in a chain of cause-and-effect relationship that
communicates the meaning of the business unit¹s strategy to the organization.

A good BSC should also have a mix of outcome measures (lagging indicators) and performance drivers
(leading indicators); must retain a strong emphasis on financial outcomes.

The pressure for short-term financial performance can cause companies to reduce spending on new product
development, process improvements, human resources development, information technologies, databases,
and systems as well as customer and market development [Case Xerox].

i. Financial Perspective:

BSC should encourage business units to link their financial objectives to corporate strategy. For most
organizations, the financial themes of increasing revenues, improving cost and productivity, enhancing
asset utilization, and reducing risk can provide the necessary linkages across all four scorecard perspectives.

3 x 3 : Three stages (growth, sustain, harvest) / Three financial themes (revenue growth and mix, cost
reduction and productivity improvement, asset utilization and investment strategy)

[Fig.3-1, p.52, R.S.Kaplan and D.P.Norton: The Balanced Scorecard, 1996, Boston]

ii. Customer Perspective:

Companies identify the customer and market segments in which they have chosen to compete.
These segments represent the sources that will deliver the revenue component of the company's financial
objectives. Core customers outcome measures: satisfaction, loyalty, retention, acquisition and profitability

In the past, companies could concentrate on their internal capabilities, emphasizing product performance and
technology innovation. Now companies are shifting their focus externally to customers. Customer value
outcome measures: market share, customer retention, customer acquisition, customer satisfaction and
customer profitability.

[Fig.4-1, p.68, R.S.Kaplan and D.P.Norton: The Balanced Scorecard, 1996, Boston]

iii. Internal Business Proces Perspective:

Processes that are most critical for achieving customer and shareholder objectives. A generic value-chain
model provides a template that companies can customize in preparing
Their internal-business-process perspective. Three principal processes: innovation, operations, post-sale
service.

[Fig.5-1, p.96, R.S.Kaplan and D.P.Norton: The Balanced Scorecard, 1996, Boston]

iv. Learning and Growth Perspective:

It drives organizational learning and growth. Three principal categories:
- Employee capabilities,
- Information systems,
- Motivation, empowerment and alignment.

Since almost all routine work is automated, major reskill of employees is necessary so that their minds and
creative abilities can be mobilized for achieving organizational objectives.

Three outcome measurements: employee satistfaction, employee retention (percentage of key staff turnover),
employee productivity (revenue per employee).

1. Linking BSC Measures

Balanced Scorecards need to be more than a mixture of 15-25 financial and non-financial measures, grouped
into four perspectives. It should tell the story of the business unit¹s strategy,via linking outcome (lagging
indicators) and performance drivers measures (leading indicators) together via a series of cause-and-effect
relationships.

2. Structure and Strategy

Sample items that would be the elements of the strategies for each strategic business unit across the four
perspectives:
 Financial: aggressive growth, maintain overall margins
 Customer: customer loyalty, complete product line offering
Internal Business process: build the brand, fashion leader, quality product, superior
shopping experience
 Learning and Growth: strategic skills, personal growth

3. Achieving Top-Down Strategic Alignment

In an ideal world, every person in the organization from the board room to the back room would understand
the strategy and how his or her individual actions support the "big picture".

The development of the BSC should begin with the executive team. To gain maximum benefit, the executive
team should share its vision and strategy with the whole organization, and with key outside constituents; which
is an extended and complex process. Three widely used mechanisms:
- Communication and education programs,
- Goal setting programs,
- Reward system linkage

5. Feedback and the Strategic Learning Process

The use of measurement as a language helps translate complex and frequently nebulous concepts into more precise
ideas that align and mobilize all individuals into actions directed at attaining organizational objectives.

The emphasis on constructing cause-and-effect relationships in the BSC introduces "dynamic systems thinking".

Performance monitoring can take the form of hypothesis testing and double-loop learning.

6. Implementation

The process of developing a good BSC gives an organization a clear picture of the future and a path for getting there.
Given this clarification and management consensus about what the future organization should look like, enthusiasm
and momentum are being created. Expectations are raised.

"The Balanced Scorecard: A Foundation for the Strategic Management of Information Systems"
M.Martinsons, R.Davison and D.Tse
Decision Support Systems, Vol.25 (1999), pp.71-88

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