A performance measurement system is a process developed to implement an organizations strategy effectively.

Customer Perspective

        Financial performance measures, however, are not the only measure of importance to a company's success and, in fact, can be detrimental to the organization's long-term success if overemphasized.  For this reason, it is only one of the four perspectives to be considered in the BSC system.  Another measure of the BSC system is the Customer Perspective.  Many companies focus on "customer satisfaction" but the BSC forces managers to identify the critical factors related to customer satisfaction and the means to measure or monitor them on a regular basis.  Concerns generally fall into the four categories of timeliness, quality, service and cost.  The important and often overlooked key to this perspective is determining the wants, needs, and expectations of the customer rather than setting the goals arbitrarily.  It is often beneficial to use external measures in order to establish company goals with respect to the customer perspective.  External measures include customer surveys, report cards, and benchmarking current practices with leading competitors' best systems (Kaplan & Norton, 1992).  This category of the BSC system is particularly important to repeat business sales and long term success from customer loyalty and retention.  The cause and effect relation between the internal business perspective, customer perspective and the resulting financial perspective is shown in the class text page 499.

Internal Business Perspective

The internal business perspective is the mechanism that provides data linking  internal business results to financial success and satisfied customers.  Organizational objectives and customer expectations are met through the identification of critical business processes. These processes are then monitored or measured frequently to ensure satisfactory outcomes (Balance Scorecard home page).  The data obtained from customer measures and financial performance is then utilized to refine internal processes to achieve goals relating to processes including cycle time, quality, employee skills and productivity.  Measures must reflect localized department and workstation levels that are influenced directly by employee actions.  In doing so, the employee takes direct ownership of their actions and is fully integrated into the measurement of goals thereby increasing motivation.  For example, a responsive information system would allow for the tracking of a late delivery to its source.  However, poorly designed measures and the resulting lack of feedback would result in an inability to track problem sources with a concomitant lack of individual responsibility for employees at lower levels.  Without properly identified critical goals and measures and a clear understanding and measurement  of those goals, employees are unable to contribute and optimize activities that promote the companies overall mission and contribute to financial success. (Kaplan & Norton, 1992)

Innovation and Learning Perspective

        The final link that completes the BSC chain involves the company's ability to evolve to accommodate changes in demand, technological advances, and remain competitive in the marketplace.  As company goals evolve and change in response to internal and external measures, the importance of this final segment is realized.  Inability to measure and respond with innovative improvements in operations and new products would quickly cause a company to lose its competitive edge.  While this segment might consume a percentage of the bottom line, the long-term benefits are realized in continual growth and development of the internal processes and customer satisfaction and thus leads to increased overall company value. (Kaplan & Norton, 1992).  

The primary benefit of this system is its ability to bridge the distance between upper management strategy and its application to lower level operations.  When properly researched and applied the system allows for ease of communication between upper management and all departmental levels.  Key objectives are identified and their interrelationship is illuminated.  Lower level workers are empowered to make decisions to improve processes.  New and better processes are continually discovered, implemented, and reviewed and innovation and action are rewarded at all levels. (Hall, 2000)

Putting the Balanced Scorecard to Work ( Implementing BSC )

Theoretical implementation of the balanced scorecard involves four basic steps:

1. Define strategy
2. Define measures of strategy
3. Integrate measures into the management  system
4. Review measures and results frequently

(Anthony & Govindarajan, ch 11, p 500)

While all aspects are important to the success of the system, the essential part is the implementation of measures.  Managers must introduce new measures to monitor new goals and processes and continually reevaluate old measures to determine their relevance as the system evolves. (Kaplan & Norton, 1993)

        The first step involves defining one's strategy.  The BSC is not a one size fits all template, but rather varies widely from one company to the next.  It is designed to fit each company's mission, strategy, technology, and culture. (Kaplan & Norton, 1993).  The scorecard is defined by its ability to link various perspectives of a company.  This interrelationship is the direct result of formulating a concrete company strategy with explicit goals.  By defining overall strategy at the corporate level, the scorecard is then applied to the lower levels. (Anthony & Govindarajan, p. 501)  In this way, all goals and measurement systems remain interrelated and directed toward the ultimate strategy and well defined goals initially established at the corporate level.

        With a well defined strategy and set of critical goals, the system must follow through in applying measures to not only to operations and financial processes, but also to the management system itself.  For example, compensation and rewards must also be based on measurement system successes rather then solely on financial performance. (Anthony & Govindarajan, p. 500)

Unlike many other systems, BSC balances critical factors in both financial and operational measures allowing companies to tell the results of actions already taken while simultaneously measuring current practices in customer satisfaction, internal processes, and the organization's innovation and improvement activities which are the indicators for future financial performance. (Kaplan & Norton, 1992)  Therefore the review of these measures and results on a regular and frequent basis is the final step in  implementation of BSC.  It is the responsibility of senior management to constantly analyze the measures and implement changes in the strategy and adjust measures accordingly to be congruent with  revised strategies and goals.  In doing so, management is constantly aware of whether the strategy  is being implemented correctly and its overall success; the importance of these measures is conveyed to all levels of the company;  and strategy are constantly evolving and measurements are improving to better reflect those outcomes. (Anthony & Govindarajan, p. 501)

Practical implementation of BSC requires a company to build a unique scorecard.  These steps are outlined in the article "Bridging the Distance" by Mary Jo Hall.  The design will very depending on where the organization is in terms of strategic planning and implementation, but the process of developing a BSC can be divided into a series of stages that apply to all.  When completed, the BSC serves as a mechanism that forces cause and effect analysis and integrates strategy with daily work.  The series of six stages include: (Hall, 2000)

1. Mobilizing the leadership
2. Developing the architecture
3. Linking and aligning the parts
4. Mapping the initiatives
5. Rolling out and cascading throughout the organization
6. Continuing to focus and improve the strategy

( source, Hall, 2000, p. 26)

In the first stage senior leadership must be knowledgeable and committed to the BSC structure.  A thorough understanding of the BSC system is needed to implement the cascading chain of command that it requires.  This is followed by the strategic architecture (stage 2) or developing the perspectives that are appropriate for the organization.  Traditionally, the four perspectives include financial, customers, internal business, and learning and growth, but these may be modified to fit the company focus.  The value of this architecture is that it forces the company to view its processes and service through the eyes of its customers.  Leadership must determine a "Value Proposition" defined by the equation:

        Value = Product and Service Attributes + Image + Relationships

Customer satisfaction measures include time (rapid response), quality (defect free products and services), and price (not just at purchase but over the lifetime). (Kaplan & Norton, 1996).  Leadership must therefore create a "value chain"  that links internal processes with customer perceived value including the development of new work, production, and delivery.  Objectives can then be determined for each BSC perspective.  This is accomplished via brainstorming for each perspective and then identifying the most critical objectives.

        In stage 3 the perspectives are lined up horizontally with financial on top, followed by customer, internal processes, and learning and growth on the bottom. (see Figure 2, Strategic

Map)  

Figure 2, Strategic Map, source: Hall, 2000, p 26

An interrelationship digraph is constructed for each objective.  This often times reveals a critical path that highlights the " high impact objectives" (those steps that produce the greatest return in the shortest amount of time).  Measures are then assigned for each objective including defining the unit of measure, and how and when it is collected.  

        With clear objectives and measures determined, stage 4 involves mapping initiatives.  These action projects are used to evaluate the company strategy once  the initiatives are mapped the strategic map is basically complete and can be implemented.  

        Stage 5 and 6 are the implementation of the strategic plan via creating links between resources and initiatives.  This involves establishment of communication, implementation techniques, and feedback mechanisms.  Followed by the continual improvement via feedback loops to constantly assess and report the BSC process. (Hall, 2000).  

Case Studies

        The remainder of this paper will review BSC applications in several organizations to show the variations and modifications of the BSC system as it applies to different company models: traditional for profit, Department of Defense, government, and health care industry.  As stated earlier, creation of the balanced scorecard for each company is customized to reflect the company's strategy and objectives.  BSC is utilized by more than 50% of North American companies nationwide attesting to its popularity and effectiveness as a management system. (Turner, 2000).  

Rockwater Case

        Rockwater, a wholly owned subsidiary of Halliburton, a global engineering and construction company, is a worldwide leader in underwater engineering and construction.  Increased competition forced the CEO to consider ways to make the company more competitive.  The strategy involved developing long-term relationships with large suppliers based on value and safety rather than low-price competition, while maintaining a second-tier service for customers that chose suppliers solely on the basis of price.  The following diagram (Figure 3) shows how Rockwater's vision was translated to a company strategy and then broken down into the critical strategic objectives from the four BSC perspectives.

Figure 3, Rockwater’s Strategic Objectives, source: Kaplan & Norton,  HBR , p.135,1993

The vision was determined by the senior management team. Then the strategy was developed to implement the vision.  These were, in turn developed into strategic objectives.  The next step, of course, was translating those objectives into tangible goals and actions.  The Balanced Scorecard's set of four performance measures was thus utilized to facilitate that link.  See Rockwater's BSC , Figure 4 below.

Figure 4, Rockwater’s BSC, source: Kaplan & Norton,  HBR , p.135,1993

        The financial measures encompassed both short-term goals of: Return on Capital Employed, Cash Flow, and Project Profitability addressed historical uncertainty caused by unexpected variations in performance.

        Customer satisfaction perspective was divided into Tier I and Tier II customers.  Tier I customers were asked to supply monthly service and performance ratings, providing the company with competitive market feedback.  Market share by key accounts provided objective measures of their success in this area. (Kaplan & Norton, 1993).  

        Internal processes were determined for each project life cycle.  Emphasis was placed on the aspects that the company found most important to their vision including 1) time spent with new customers.  This emphasis communicated the company's belief in the importance of building long term relationships and satisfying customers  2) emphasis was also placed on safety as internal studies revealed that indirect costs from accidents could be 5 – 50 times the direct costs.

        Innovation and Improvements came from product and service innovation and improved internal work processes.  Measurement for these systems was tracked by percent revenue from new services and by a continuos improvement index that followed several key operational measures such as safety and rework.  This perspective also included  staff attitude survey and employee suggestions which the company felt empowered and motivated their employees.

        In this example, the BSC assisted Rockwater in achieving a process view of operations, motivation of employees, improved safety protocols and long-term value oriented partnerships with customers which culminated in their original mission statement: to be number one in the industry. (Kaplan & Norton, 1993)

Department of Defense Case

        The Department of Defense (DoD) has also adapted the BSC as a means to measure performance for electronic business and electronic commerce (EB / EC).  Figure 5 shows the use of BSC that has been modified to a phase continuum model.

Figure 5, Use of the EB/EC Continuum

With this modification, organizations with DoD can evolve from Phase 1 usage of EB / EC to the more complex use of electronic technology in Phase 3.  Each phase outlines the goals and performance measures established for the segment and is designed such that the department can graduate seamlessly to the next phase. (Defense Reform, Electronic Commerce Conference, April,2000)

        Traditionally, federal agencies focused on internal or process performance as determined  by factors including: number of programs controlled by the agency, number of full time equivalents allotted, and the size of the budget.  With the BSC system, the framework allows the measurement of the organization's short-term and long-term ability to meet goals through the identification and assessment of performance drivers and outcomes.  (Defense Reform, Electronic Commerce Conference, April,2000).

        The following diagram (Figure 6) illustrates the balanced scorecard perspectives used by the DoD.

Figure 6, Balance Scorecard Perspectives

Again, the BSC system has been modified from the original four perspectives to include all of the relevant  perspectives required to achieve the desired goal by balancing the results of internal processes with external stakeholder measures. (Defense Reform, Electronic Commerce Conference, April,2000).

        Due to the immense number of processes and organizations throughout the DoD, measurement approaches using the BSC system must be applied to small segments toward individual project goals and processes.  This adaptation also veers away from the original design of BSC in that top management does not dictate one singular strategy and list of goals, but rather encourages specific projects to develop measures appropriate to each projects goals and processes prior to implementation, thus utilizing the BSC framework in manageable applications.

Government use of BSC case(s)

        Government agencies have also found the BSC system useful.  The city of Charlotte, N.C. modified and implemented the BSC system in an attempt to promote vision and strategy for the future.  City mangers have found the system useful as it provides "substantial focus, motivation, and accountability in government…" (Syfert, Elliott, 1998)

        Another  government variation of BSC is seen in the article by Dale Quinlivan, Rescaling the Balanced Scorecard for Local Government.  This article suggest that the original framework is not adequate for 'not-for-profit' organization and that the Australian Business Excellence Framework categories would serve as more appropriate perspective categories.

        According to, The Balanced Scorecard Institute in its world wide web page, "in government settings, outcomes are based on mission success rather than profit", and Kaplan and Norton go further to say: "Success for government and not-for-profit organizations should be measured by how they meet the needs of their constituencies.  Tangible objectives must be defined for customers and constituencies.  Financial considerations can play an enabling or constraining role, but will rarely be the primary objective." (Kaplan and Norton, 1996)

        This was also seen in the BSC application in Charlotte, N.C. where the financial perspective was replaced with the customer perspective.  The Kaplan model assumes a link between customer service and financial objectives, but this link does not necessarily exist when the services are provided by public funds.  For this reason, Quinlivan suggests the perspectives be altered or customized to meet the not-for-profit criteria.  Health care organizations for example have adapted the four perspectives of:

1. Patient – value added – patient perspective
2. Employee – value added - internal perspective
3. Business – value added – learning perspective
4. Business – value added – financial perspective

For each perspective, the vision of what was to be achieved was translated into changes in behavior, performance and perception.  This established, the BSC for the vision and a list of actions and measures to achieve them could be devised.  (Quinlivan, 2000)

        Similarly, the Australian Business Excellence framework categories might better serve a government model.  This model shows categories that have been proven to be important dimensions of an organizations ability to deliver effective service. ( Quinlivan, 2000, p39).  The Business Results category provides the framework to link cause and effect to business outcomes.  Because government organizations deliver an unusually large number of services, the perspectives chosen for the BSC must focus on major strategies required to maximize service success.  For example, Charlotte, N.C. identified 5 key areas in their strategic plan: community safety, city-within-a-city, transportation, economic development, and restructuring government.  Each area utilized its own BSC towards a common set of 19 objectives established by the City.  With these minor modifications, the BSC has proven to be an effective management system for government applications in Charlotte, N.C., and the health care industry. (Quinlivan, 2000, p. 40)

Health Care Industry (case)

As briefly mentioned, public health care service industry is yet another organization that requires some modification of the BSC system.  Performance management within a multi-agency healthcare setting would be potentially beneficial for two reasons:

1. Public services would benefit from improvement in areas including economy, efficiency, and service delivery.
2. To reinforce accountability and account for the resources used  and outcomes that are achieved.

(source: International Journal of Medical Marketing, p 175, 2003)

        The BSC system was implemented within the Bradford Health Action Zone at a primary care trust facility.  This organization implemented the BSC system using the four steps indicated in the following diagram (Figure 7) to achieve its primary goal and vision.

Figure 7, How the BSC seeks to deliver strategic benefits, source: International Journal of Medical Marketing, p 181, vol. 3, 3)

        The following diagram (Figure 8) below, demonstrates the Balanced Scorecard designed for the healthcare facility and how the components relate to the mission statement which states, " is that via partnership working, it will provide and commission services and improvement programs that will reduce health inequalities and increase standards of health for its local population…" (International Journal of Medical Marketing, p 184, 2003)

Figure 8, Balanced Scorecard

This system utilizes four perspectives as outlines by Kaplan and Norton, however, the financial perspective is replaced by a cost perspective which is designed to maximize the allocated budget by attaining goals set forth in the remaining three areas.  Application of the BSC system proved to be attainable and promising in the analysis of its application to the public health care system.

Conclusion

        The BSC is a comprehensive view of an entire organizational system that allows management to look at the past, present, and future financial measures.  The cause and effect of relationships and the enhanced communication that are fostered creates a goal congruent atmosphere that includes participation from lower level employees.  The measures allow for constant reevaluation and improvement by upper management with a cascading chain of command that filters back to the operations on a daily basis.  These measures and processes address the inadequacies of traditional financial based systems and when implemented correctly, provide and dynamic framework for long-term organizational success.  

        Furthermore, the BSC system is dynamic enough  to be adapted to not-for-profit organizations and government systems with similar results.

---