It is only a decade or two ago that that everyone in business used financial results and nothing else with which to measure performance. This is no longer true because of a change in our economy, we are increasingly moving from predominantly manufacturing to a service industry. There are also globalization influences as well as increasing customer demands, escalating competition, and time compression. Everything has to be "faster, cheaper and better."
These financial measures did not provide management with the information they required to meet the challenges of the changing business environment. Financial metrics, not only, did not provide them with a true measure of performance but also did not help them in managing effectively. This started the quest for a "better" measurement system. The business realities of today require a greater degree of efficiency, customer focus, continuous improvement and innovation. This "new reality" set the stage for the introduction of the Balanced Scorecard (BSC) concept by Robert Kaplan and David Norton. They published their concept in the January-February issue of the Harvard Business Review.
Kaplan maintains that, "In the same way that you can not fly an airplane with just one instrument gauge, you can't manage a company with just one kind of performance measure." (Kaplan 71) The BSC technique still utilizes the financial "outcome" measures that have served business well for hundreds of years; but complement it with operational measures. These other measures try to address the following key questions:
How does the customer see the organization
At what must the organization excel so as to provide value to the customer
How can the organization continue to improve its products and services
How do the stakeholders see the organization
It is Kaplan's position that business operations, in today's competitive and global environment require a metric that is multidimensional, that looks at different aspect of the organization at the same time, and allows managers to successfully manage. The balanced scorecard groups metrics into four critical groups, or perspectives
The customer perspective
The Internal business perspective
The innovation and learning perspective
The financial perspective
Central to measurement is the question of what are we trying to accomplish, what is our vision, our picture of a future state. Once we have stated that the next step is what differentiating activities do we have to engage in to make that future state a reality. That is our strategy. The next step is to establish objectives for how we are going to get there. And of course we will need measures to tell us how we are doing.
To appreciate the concept behind this model it is important to understand that each business is unique and should decide how many perspectives would provide it with the information to manage effectively. It is not a one-size-fits-all proposition. One may decide on three, four, five or even six perspectives for measurement purposes.
