The Balanced

VOL.7 NO.4

Summer Scorecard:
2006
Here and Back
B Y LY N N B I B L E , S T E P H E N K E R R , AND MICHAEL ZANINI

FROM ITS BEGINNINGS AS A PERFORMANCE MEASUREMENT TOOL THAT LOOKED BEYOND

THE TRADITIONAL FINANCIAL MEASURES, THE BALANCED SCORECARD HAS EVOLVED INTO

AN ALL-ENCOMPASSING STRATEGIC MANAGEMENT AND CONTROL SYSTEM.

he balanced scorecard is a strategic perfor- ton, CEO of Nolan Norton, was the study leader, and

T mance measurement system developed by

Robert S. Kaplan and David P. Norton to
help organizations achieve breakthrough
results by embedding strategy at the heart
of the organization. Developed 12 years ago, the concept
was significantly different from any existing perfor-
mance measurement system and generated consider-
Robert Kaplan served as an academic consultant. The
12 companies that formed the original study group
believed that the exclusive reliance on financial perfor-
mance metrics alone was causing their companies to do
the wrong things. Many of the activities that create
organizational value are not derived from the tangible,
fixed assets of the firm. Intangible assets such as cus-
able excitement. A variety of applications and variations tomer and supplier relationships, innovative product
of the balanced scorecard have emerged since its incep- development, and intellectual capital are where most of
tion. It was received and used so enthusiastically and the value lies. Decisions based on traditional financial
effectively that the Harvard Business Review labeled it measures often fail to incorporate the importance of
in 1997 as one of the 75 most influential ideas of the these real value drivers.
20th Century.1 Early on, a navigation metaphor was Severe cost-cutting programs can have a significant
used to illustrate the need for additional performance impact on short-term financial measures. This results in a
measures. Over time, the navigation metaphor expand- positive outcome guided by financial metrics alone.
ed to include the process of strategic mapping and deci- Unfortunately, long-term value-creating functions such as
sions about where to lead your company. This article market development, employee growth, and research
outlines the evolution of the balanced scorecard. and development are often the target of these cost reduc-
tions. A strict reliance on financial measures alone to
BALANCED SCORECARD: THE INCEPTION guide organizations often results in negative outcomes.
In 1990, the Nolan Norton Institute, the research arm Kaplan, Norton, and the 12 company representatives
of KPMG, sponsored a one-year, multi-company study met every other month throughout 1990 to develop a
on the future of performance measurement. David Nor- new performance measurement model. They began by

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analyzing case studies involving innovative performance ment tool to a strategic performance management sys-
measurement systems. The ideas investigated included: tem can be followed through Kaplan and Norton’s next
shareholder value, productivity and quality measure- three HBR articles and their first book. They revised
ments, new compensation plans, and a case study of and improved the BSC concept as they obtained more
Analog Devices’s “corporate scorecard.”2 and more experience with it. Returning to the naviga-
The group settled on the scorecard as the most tion metaphor, they showed a connection between the
promising system and set out to refine the concept. The performance measures and the desired destination.
end result was the balanced scorecard (BSC). They rec- Several organizations adopted the balanced scorecard
ommended that companies use four common perspec- soon after the first HBR article, enabling further refine-
tives in their scorecard, supplementing these with a ment of the concept. The BSC system was used to
number of customized perspectives as needed. The four communicate and change organizational strategies away
perspectives were: financial, customer, internal, and from the historic, short-term, financial-only focus to a
innovation and learning. Each perspective helped value-added, customer-intensive strategy. The first con-
answer a basic performance question: How do we look nection between performance metrics and strategy was
to shareholders? How do customers see us? What must forged. Kaplan and Norton’s second balanced scorecard
we excel at? Can we improve and create value? article stressed the importance of this connection: “By
The performance measurement scorecard struck a requiring managers to select a limited number of critical
balance between leading and lagging indicators, short- indicators within each of the four perspectives, the
and long-term objectives, and external and internal per- scorecard helps focus this strategic vision.”4 It helped to
formance perspectives. It also forced management to balance out conventional measures such as operating
concentrate on drivers of future performance and not income with new goal-oriented measures such as new
just on past performance. These operational drivers and product development. In the article, however, Kaplan
measures complemented the traditional financial mea- and Norton cautioned that the balanced scorecard “is
sures, providing a more comprehensive picture of the not a template that can be applied to businesses in gen-
company’s performance. eral or even industry-wide.”5 They stressed the need
Several of the companies built prototype balanced for the BSC to be customized to meet the needs of the
scorecards at pilot sites within their organizations and different markets, strategies, and environments of each
reported their findings to the group. An important find- and every organization.
ing was that the BSC “brings together, in a single man- Kaplan and Norton published their third article,
agement report, many of the seemingly disparate “Using the Balanced Scorecard as a Strategic Manage-
elements of a company’s competitive agenda....”3 A sec- ment System,” in 1996.6 Further work with senior exec-
ond finding was that the BSC helped determine if utives of several organizations demonstrated that
improvement in one area was achieved to the detriment metrics spread across the four perspectives could effec-
of another area. At the conclusion of the study in tively drive a single strategy. They believed attention to
December 1990, the group documented the feasibility all perspectives would improve future financial perfor-
of the new performance measurement system. mance. The scorecard began to be used as the rallying
Kaplan and Norton summarized the results from the framework for core managerial processes such as
study in their 1992 Harvard Business Review (HBR) arti- resource allocation, budgeting and planning, goal set-
cle, “The Balanced Scorecard: Measures that Drive ting, and employee learning. Four new management
Performance.” The article generated a considerable processes were introduced to help managers link strate-
amount of excitement, and a new generation of perfor- gic objectives to actions: translating the vision, commu-
mance measurement was thus born. nication and linking, business planning, and feedback
and learning. Use of the BSC with these processes
BALANCED SCORECARD: THE DEVELOPMENT clearly identified the evolution of the scorecard away
The evolution from strictly a performance measure- from a simple performance measurement tool.

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 These processes operationalized the BSC approach. indicators alone. Together, this is like giving manage-
“Translating the vision” helps senior management ment access to the entire set of gauges in a cockpit.
come to a consensus on how to clarify the vision and In 2000, Kaplan and Norton wrote their fourth HBR
strategy of the corporation. This enables “communicat- article, “Having Trouble with Your Strategy? Then Map
ing and linking.” Not only can managers communicate It.”8 The article specifically chronicled how strategy can
the long-term strategic goals in terms that everyone up be explicitly linked to the perspectives of the balanced
and down the ladder can understand, but also they can scorecard. During their studies of adopters, Kaplan and
communicate how the organization intends to achieve Norton realized that the balanced scorecard was more
these goals. The “linking” action of the process brings than a stand-alone performance measurement tool. It
together the performance measures with the rewards. was a complete framework for implementing and exe-
“Business planning” involves setting targets and mile- cuting strategy. They realized that effective implemen-
stones and then aligning strategic initiatives with them. tation of strategy throughout an organization required
By doing so, companies can allocate resources that help clear communication of key performance drivers at
them move towards their long-term strategies. The every level. These performance drivers are classified
integration of business and financial plans occurs during into the customer, internal, and learning and growth
this phase. With the final process, “feedback and learn- perspectives. In order to determine which metrics
ing,” management can monitor their progress by evalu- ultimately drive strategy, a series of cause-and-effect
ating their performance in regard to the balanced relationships must first be developed from strategic
scorecard perspectives. objectives. The illustration of all these relationships and
The use of the balanced scorecard as a strategic per- linkages are what Kaplan and Norton call “Strategy
formance measurement system was summarized in Maps.”
Kaplan and Norton’s first book on the subject, The Bal-
anced Scorecard: Translating Strategy into Action, published BALANCED SCORECARD: HERE
in 1996. The book sold over 250,000 copies and was Kaplan and Norton’s four HBR articles and their 1996
translated into 12 languages. In it, Kaplan and Norton book documented the evolution of the balanced score-
explained, “The scorecard thus enables companies to card from a stand-alone performance measurement tool
modify strategies to reflect real-time learning.”7 to a strategic performance management system. Their
Kaplan and Norton focused on the changes in the second book, published in 2001, discussed the final stage
new economy that reduce the critical importance of of the BSC evolution—the move to an all-encompassing
financial measures when predicting future success. strategic management and control system.
Financial measures are lagging indicators. They provide In the years since Kaplan and Norton unveiled the
information on past performance and give little insight BSC, they studied more than 200 companies that
into long-term success. Information-age companies, implemented the balanced scorecard concept. They
however, needed better guides that indicate future val- summarized their findings in The Strategy-Focused Orga-
ue through unique customer relationships, efficient nization.9 The authors insist that all measures on the
internal processes, and through the learning and growth scorecard should have a strong cause-and-effect rela-
of the organization. Leading indicators provide neces- tionship that clearly defines the organizational strategy.
sary information concerning the organization’s current In the customer perspective, the chosen measures
performance on key aspects that are likely to drive should define who the target customers are and what
future performance. For instance, if product quality is a the value proposition is in serving them. For example, is
key indicator of sales and revenue, then ensuring con- the organization competing based on product attributes
tinuous improvement in product quality is likely to drive (quality or price), innovation (technical leadership), or
sales and performance. Perspectives that focus on lead- customer relationship (customized service)? The cus-
ing indicators, therefore, provide better insight into tomer proposition should become obvious by the per-
company performance than is possible from financial spective metrics being used. Some of these metrics

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include: customer satisfaction, customer loyalty, market zations. Surveys of management consultants reported
share, customer acquisition rates, and annual sales per that 70%-90% of effectively formulated strategies were
customer. poorly executed.10 Kaplan and Norton noticed that
Each customer value proposition requires the effi- companies that used the balanced scorecard to align
cient operation of different internal processes. The their business and service units, teams, and individuals
internal process perspective should include measures around strategic goals were more effective at imple-
that track the progress of processes that are essential to menting new strategies and achieved positive returns
achieving strategic objectives. In many cases, measures within one or two years. These pioneering companies
here will be lead indicators for the customer perspective used the balanced scorecard as the focal point for all
measures. By focusing on internal measures based on key management processes, from planning and budget-
strategy—instead of minor improvements in existing ing to reporting and resource allocation. While adoption
activities—entirely new processes might be identified did not guarantee success, they were excited by the
and measured. Supply chain measurements, product indication that the probability of success improved.
development, manufacturing efficiencies, or product Measurements derived from the vision and strategy of
delivery measurements could all be the performance an organization became a crucial part of the balanced
drivers in this perspective. scorecard process.
The learning and growth perspective is the founda- Clearly the balanced scorecard is now also a commu-
tion of employee skills and information systems that nication vehicle. Leaders can indicate their beliefs con-
drive improvements and successes in the other perspec- cerning the cause-and-effect relationships between the
tives. Measures in this perspective are often the most performance drivers. At this point, the representation of
difficult to develop because they encompass an area the balanced scorecard shows linkages that were not
that is perhaps the most intangible—intellectual ability. evident in the initial diagrams of four separate cards.
For this reason, it has often been ignored or left to the Strategic performance drivers are emphasized. Ulti-
Human Resources department to manage. Kaplan and mately, this drives the achievement of strategic objec-
Norton suggest that the learning and growth perspec- tives and, assuming the strategy was chosen well,
tive is just as, or perhaps more, important for strategic organizational success.
success than the other perspectives. Learning and
growth performance measurements might include train- BA L A N C E D S CO R E CA R D : BAC K TO T H E

ing hours, leadership development, employee satisfac- FUTURE

tion, lost time accidents, and employee productivity. The balanced scorecard has evolved from a perfor-
Financial measures remain an integral part of the bal- mance measurement reporting tool to a complete strate-
anced scorecard. The metrics chosen for this perspec- gic management system in 12 short years. Its use and
tive are typically lagging indicators that report on past popularity have grown so much that the Balanced
performance. Some indication of past performance is Scorecard Collaborative was formed in 1999 to provide
necessary to guide strategy and help in the future exe- support, education, research, and training to the many
cution of strategy. The measures in this perspective are companies interested in the process.
the counterweight of the nonfinancial leading perfor- Current developments and questions bring to light
mance drivers. Traditional financial measures, linked to some contradictory issues. One has to ask if the bal-
the organization’s strategy, are found here. They anced scorecard has been overdeveloped, resulting in a
include: net income, revenue, return on net assets, loss of utility. It might not be possible to create a process
return on equity, share price, and cash flow. that can address all strategic and performance measure-
The probability of corporate success is enhanced by ment needs. At some point it may be necessary to return
both thorough, careful strategy formulation and diligent to the essential performance measurement questions
implementation. Kaplan and Norton contend that suc- that gave rise to the whole process, or has the balance
cessful execution of strategy is a rarity in today’s organi- scorecard found its niche in the strategic management

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community? The following areas have become interest- group that focuses on developing long-range plans and
ing new directions for balanced scorecard development. business planners who independently develop operat-
Balanced Scorecard Software. Software manufacturers ing and capital plans. This independence results in over
have begun to provide technology to support balance 60% of organizations not having a link between budgets
scorecard users. Software can now be customized and and strategy.13 The balanced scorecard has been pro-
automated to collect, summarize, and display data as it posed as a way to put strategy back into the center of
pertains to the BSC measures.11 This allows real-time the budgeting process. Companies such as Volvo Car
intranet display of performance indicators. Color-coded Corporation and Swedish bank Svenska Handels-
warning alarms can show, at a glance, when measures banken have banished the traditional annual budget
are out of set ranges or targets. Management can model altogether.14
respond to leading indicators with unprecedented Instead of banishing the budget entirely, Kaplan and
alacrity. The software allows for customization of pages Norton argue that budgeting should be viewed as two
for departments, groups, or individuals to help keep related processes. The operational budget consists pri-
track of the most important and/or relevant measures. marily of nondiscretionary spending and expenses that
The market has become increasingly competitive as are determined by the volume and mix of goods and
more and more companies from large enterprise services produced or delivered. The operational budget
resource planning (ERP) vendors to small niche compa- can be dynamic to allow for new opportunities and
nies strive for a share of this emerging market. environmental changes. The second process, which
External Reporting. The recent Enron and WorldCom they refer to as the strategic budget, involves spending on
scandals have made the public more aware of the ease new initiatives and capabilities that enable future
with which the current traditional accounting formats growth. In this way, discretionary spending is limited to
can be manipulated. Managers can manipulate strict initiatives that drive future performance and is linked to
financial measures in the short term by taking actions the organization’s strategy. Decisions on this spending is
that betray long-term strategic choices. The balanced based on the balanced scorecard. Kaplan and Norton
scorecard may become an effective moderating variable suggest that organizations need both of these processes,
that can indicate whether the financial results are in linked by the balanced scorecard, in order to manage
accordance with the strategic choices or by other means. both tactics and strategies.
Use of the balanced scorecard may be extended to Another approach is to use the balanced scorecard to
external reporting for this reason. Skandia, a Swedish develop budgets that use strategy at the center of the
insurance company, publishes a supplement to their process. Paul Niven suggests a five-step budgeting
annual report that discusses the fiscal year in balanced process in which spending is geared toward achieving
scorecard terms.12 strategic objectives instead of a simple tweaking of last
An example of this process is the importance year’s numbers.15 First, organizations intensely publi-
investors may place on customer loyalty as a leading cize their intention to use the BSC to center the
indicator of success. A company’s commitment to process. Next, if a high-level scorecard hasn’t been
improve and grow customer loyalty (a strategic objec- developed, it should be done. Step three involves cas-
tive) can be tracked by a measure on the BSC. This cading the BSC down through the organization, with
measure can then be used to determine if improved each business unit scorecard focusing on the objectives
financial performance is due to improvement in this and measures that drive high-level strategic initiatives.
area or from other short-term, nonstrategic means. They should also include targets, initiatives, and the
The Budgeting Process. The balanced scorecard cost of the initiatives necessary to achieve success on
reflects managers’ desire to move away from the com- the BSC metrics. Furthermore, typical budget line
mand and control features that are so commonly items and operations expenses should also be included.
embedded in traditional budgeting procedures. Many According to the process’s proponents, this forces the
organizations consequently have a strategic planning organization to critically examine current operations and

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determine how expenses are linked to strategic initia- Michael Zanini is a process engineer at Inco, Ltd, Ontario,
tives. In step four, results from across the organization Canada. You can contact Michael at [email protected].
are compiled and analyzed to ensure balanced spending
on initiatives that drive strategy. The last step involves E N D N OT E S
1 Paul Niven, Balanced Scorecard Step-by-Step: Maximizing Perfor-
intense dialogue among senior management and execu-
mance and Maintaining Results, John Wiley & Sons, New York,
tives to finalize the new budget. 2002.
These budgeting developments suggest a desire to 2 Robert S. Kaplan and David P. Norton, The Balanced Scorecard:
Translating Strategy into Action, Harvard Business School Press,
encourage everyone in the organization to be constantly Boston, 1996.
aware of organizational strategy and the drivers of long- 3 Robert S. Kaplan and David P. Norton, “The Balanced Score-
term performance. Game playing, politics, and the card: Measures that Drive Performance,” Harvard Business
Review, January-February 1992.
numbers shuffling that are inherent in traditional bud- 4 Robert S. Kaplan and David P. Norton, “Putting the Balanced
get models are minimized. Instead, the organization is Scorecard to Work,” Harvard Business Review, September-
October 1993.
fully in tune with its strategy and is able to spend capi- 5 Ibid.
tal wisely on the drivers of long-term performance. 6 Robert S. Kaplan and David P. Norton, “Using the Balanced
Scorecard as a Strategic Management System, Harvard Busi-
ness Review, January-February 1996.
C O N S TA N T LY E V O LV I N G 7 Kaplan and Norton, The Balanced Scorecard: Translating Strategy
The balanced scorecard has been adopted successfully into Action, 1996.
8 Robert S. Kaplan and David P. Norton, “Having Trouble with
in all types of organizations, including both large and Your Strategy? Then Map It,” Harvard Business Review,
small, manufacturing and service, public and private, September-October 2000.
growth and mature, and profit and nonprofit organiza- 9 Robert S. Kaplan and David P. Norton, The Strategy-Focused
Organization, Harvard Business School Press, Boston, 2001.
tions. Initially, it was developed as a performance mea- 10 Walter Kiechel, “Corporate Strategists Under Fire,” Fortune,
surement tool to be used to capture the value-creating December 27, 1982, pp. 34-39; and Ram Charan and Geoffrey
Colvin, “Why CEOs Fail,” Fortune, June 21, 1999, pp. 68-78.
activities from an organization’s intangible assets: innov- 11 Harvey Okin and Daniel Pfau, “Connecting IT to the Busi-
ative products and services, customer loyalty and rela- ness,” Accenture Outlook, 2000-2001. Retrieved January 10,
tionships, and employee skills and motivation. Kaplan 2003, from www.accenture.com/xdoc/en/ideas/outlook/pov/
connecting_it_to_business_pov_rev.pdf.
and Norton contend that these assets could not be ade- 12 Nils-Göran Olve, Jan Roy, and Magnus Wetter, Performance
quately valued through traditional financial measure- Drivers: A Practical Guide to Using the Balanced Scorecard, John
Wiley & Sons, New York, 1999.
ments alone. As they gained experience, they determined 13 Kaplan and Norton, 2001.
that the balanced scorecard had evolved into an effec- 14 Olve, et al., 1999; and Niven, 2002.
15 Niven, 2002.
tive tool to implement and direct strategies throughout
an entire organization. By placing strategy at the heart of
the performance measurement process, the BSC gradu-
ated to a strategic performance management system.
The balanced scorecard still continues to evolve and
mature, illustrating the concept’s flexibility. This should
encourage all accountants to consider how to utilize the
effective insights gained on the journey so far. ■

Lynn Bible is an associate professor of accounting at Berry

College in Mount Berry, Ga. You can contact Lynn at (706)
238-7876 or [email protected].

Stephen Kerr is an assistant professor at the University of

Nevada, Reno in Reno, Nev. You can contact Steven at
[email protected].

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