Managers are increasingly recognizing that traditional financial measures alone do not provide all the information needed to make strategic and operational decisions. A balanced scorecard uses a mix of financial and nonfinancial metrics related to customers, internal processes, learning and growth, and shareholder value to give managers a more complete picture. This enables continuous performance improvement, strategic execution, and accountability. The balanced scorecard has gained widespread use as it helps articulate strategy, communicate it, motivate execution, and monitor results.

1. A PPLY ING T H E B ALANCED SCOR EC ARD
WHY BUSINESS NEEDS
THE BALANCED SCORECARD
Since the late 1980s, a growing number
of managers at the corporate and busi-
ness unit levels have concluded that
traditional management and financial
accounting fails to give them complete
information for managing their com-
panies. Although these managers receive
a prodigious flow of financial figures,
they often get few of the nonfinancial
figures critical to making decisions
about day-to-day operations or long-
term strategy. These managers have
called for a revolution in performance
measurement. In particular, they are
calling for more measures of quality,
customer satisfaction, turnaround
times, pollution control, and other
WHY BUSINESS NEEDS
THE BALANCED SCORECARD 1
THE DEVELOPMENT
OF VARIOUS MODELS 4
IMPLEMENTING THE
BALANCED SCORECARD 7
USING THE
BALANCED SCORECARD 19
CONCLUSION 26
ENDNOTES 27
BIBLIOGRAPHY 28
As business becomes more complex and competi-
tive, traditional financial measures of performance
fail to give managers all the information they
need to make intelligent strategic and day-to-day
decisions. A powerful new means of delivering
this information is called the balanced scorecard,
a mix of financial and nonfinancial indicators –
about customers, internal processes, organiza-
tional learning, shareholder value, quality,
community relations, and so on. The balanced
scorecard enables managers to accelerate continu-
ous performance improvement, facilitate strategic
formulation and execution, and strengthen
internal and external accountability for creating
value. This publication describes the concept
of the balanced scorecard; explains the critical
steps in implementing one; and shows how
companies have applied scorecards to corporate
advantage.
PAGE
nonfinancial factors. The result of
these calls for change has been a
management innovation that helps
managers implement complex and
nuanced corporate strategies: the
balanced scorecard.
The Nomenclature Today
The balanced scorecard is a focused
set of vital financial and nonfinancial
measures of performance. The notion
is simple, but the nomenclature of
the balanced scorecard can be con-
fusing. To many people, “balanced
scorecard” refers to the model devel-
oped by Robert Kaplan and David
Norton in a definitive set of Harvard
Business Review articles (1992, 1993,
1996c). But in practice, consultants
Responsibility for the content of this material rests solely with The Society of Management Accountants
of Canada. Applying the Balanced Scorecard is designed to provide accurate information in regard to the
subject matter covered. This publication does not represent an official position of The Society of Manage-
ment Accountants of Canada and is distributed with the understanding that the authors, editor and
publisher are not rendering tax, legal, accounting or other professional services in the publication.
Exhibits 2, 5 and 11 reprinted by permission of Harvard Business Review. From “Using the Balanced
Scorecard as a Strategic Management System” by Robert S. Kaplan and David P. Norton. January 1996.
Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved.
C O N T E N T S E X E C U T I V E S U M M A R Y
STRATEGIC
MANAGEMENT
SERIES
Management
Accounting
Guideline
Published by:
C A N A D A
Shaping the Future
STRATEGIC
PERFORMANCE
MEASUREMENT

2. and managers use the term loosely to refer
to any set of financial and nonfinancial
measures. In a study by Walker Information,
59 percent of Canadian executives and 33
percent of U.S. executives claimed familiarity
with the terms “balanced scorecard” or
“balanced measurement system” (Walker
Information, 1998:4). The term has thus
apparently gained a strong foothold as part
of the management lexicon.
To be sure, the notion of using a balanced
set of measures developed over many years.
As far back as 1900, managers in France
began using the “tableau de bord,” or
dashboard of financial and nonfinancial
measures (Epstein and Manzoni 1998). In
the 1980s, with the advent of total quality
management, executives in the North
America began to take the same approach,
attempting to manage with the vital few
indicators of success (The Society of Manage-
ment Accountants of Canada 1994). The
concept came to be increasingly associated
with the term “balanced scorecard.” Thus
the term is used in its generic fashion
throughout this guideline.
The term is popular for good reason.
Managers have embraced the notion of
“scorecard,” which suggests a simple docu-
ment, a shorthand way of putting all critical
variables for running the organization on
one page. They have also embraced the
notion of “balance” among performance
measures – balance between the leading and
lagging, financial and nonfinancial, inter-
nal and external. Note that “balance” does
not necessarily imply equivalence among
all measures. It simply means balancing
the single-minded focus on financial mea-
sures with additional focus on nonfinancial
ones.
To Manage Within the Company
Managers can use the balanced scorecard
as a means to articulate strategy, communi-
cate its details, motivate people to execute
plans, and enable executives to monitor
results. The advantages of using a focused
set of financial and nonfinancial measures
in this way are legion, as documented in
many recent works (Epstein and Birchard
1999; The Society of Management Account-
ants of Canada 1994; Hronec 1993; Kaplan
and Norton 1996a; Lynch and Cross 1995;
Rummler and Brache 1995). Perhaps the
prime advantage is that a broad array of
indicators can improve the decision mak-
ing that contributes to strategic success,
whether in big organizations or small, profit-
focused or nonprofit, whether at the exec-
utive level or the team level. Nonfinancial
measures enable managers to consider more
factors critical to long-term performance.
These factors, flowing directly from the
organization’s strategy, vary from how well
the organization cares for customers to how
fast it innovates.
The gap is huge between the kinds of
measures managers consider critical and
the variables they actually measure. In a
recent study, 63 percent of firms rated
innovation as highly important, but only
22 percent measured it; 76 percent rated
morale and corporate culture as important,
but only 38 percent measure them; and
76 percent of firms considered core com-
petencies as important, but only 36 per-
cent measure them (Stivers et al. 1998:47).
Although hard to quantify, variables like
innovation and competencies often rank
among the most pivotal measures in accu-
rately gauging the success of organizational
strategy.
One of the key reasons managers yearn
for more nonfinancial measurement is
that financial measures, used alone, give
an incomplete picture of an organization’s
performance. Employees evaluated accord-
ing to their ability to achieve short-term
targets cannot be expected to consistently
make the best possible long-term decisions.
In an attempt to meet quarterly revenue
targets, for example, they will fast track at
least some high-value product shipments,
even at the risk of breaking delivery promis-
es on low-value shipments. The harm to
organizational reputation will not show up
in the quarterly budget but will certainly
reappear later in the form of dissatisfied
customers.
Another reason managers yearn for more
nonfinancial measures is that traditional
financial measures give an historical view
of performance – “through the rear-view
mirror,” as the saying goes. The “lagging”
financial figures, like sales volume, help
the firm keep score for quarters and years
just past. They often do not provide as
much insight as forecasted data on quality
and shipping performance. In other words,
financial measures often don’t offer the
predictive information contained in many
nonfinancial metrics. They enable managers
only to extrapolate from the past – clearly
a risky practice in fast-paced organizations
today.
2
STRATEGICPERFORMANCEMEASUREMENT

3. By incorporating new measures in a bal-
anced scorecard, an organization’s managers
arm themselves to compete in the 21st
century:
• To improve performance continuously.
Improving financial results depends on
improving upstream quality, customer
satisfaction, product innovation, and
other results. Managers who identify the
vital few nonfinancial factors in their
business will have the capability to fine-
tune them to deliver reliable long-term
financial results.
• To implement more complex strategies. Many
organizations today compete through
highly differentiated strategies, strategies
that rely on unique products, reengineered
processes, premium service, superior
information, a select mix of sales channels,
and so on. To execute these strategies,
managers need measures that define
organizational objectives precisely.
• To better run lean, decentralized organiza-
tions. Today’s lean organizations rely on
managers, workers, and teams with the
responsibility and authority to act quickly
and independently to achieve the objec-
tives set by top executives. Managers
most effectively empower people across
the organization by providing them with
precise, quantified, financial and non-
financial targets to act upon.
• To feed systems for organizational learning.
Both continuous and breakthrough
improvement first demand that people
understand where they are falling short.
Managers need quantified measures that
let them make “fact-based” decisions about
where they must change to successfully
execute the strategy and continue to add
value to the organization over the long
term.
• To drive organizational change. Managers
and executives who believe they must
execute a new strategy need hard data
that show the effectiveness of the new
strategy. They next need measurement
targets to guide everyone in aligning their
efforts with the new strategy. Executives
must use measures to communicate the
fine points of the strategy, and give clear
marching orders on how to proceed.
By managing the operations and strategy
of an organization with an expanded family
of financial and nonfinancial measures,
managers essentially create a new nervous
system for sending and receiving signals.
This new system, summarized in a single
document, helps top executives to align
action, change, and innovation at every
level, with the strategy set at the top. The
power and utility of this system – the bal-
anced scorecard – has been widely embraced
by managers around the world.
Surveys show just how much companies
need this capability. In a 1996 study, 57
percent of respondents reported only “little”
or “some” linkage between the priorities of
the long-range strategy and the annual
budget. More than two thirds (69 percent)
said that strategic planning had only “some,”
“little,” or “no” influence on the company’s
overall success (Renaissance Solutions and
CFO 1996:4,5). Business organizations clearly
need a means to integrate and execute the
details of corporate strategy.
To Manage Outside the Company
While managers have found they need a
broader set of measures to manage inside
the organization, they are also finding that
they need a broader set to identify external
issues and manage external relationships.
Much of the organization’s success depends
on managing the partners, suppliers, cus-
tomers, shareholders, and other stakeholders
through whom the organization creates
value. To this end, a balanced scorecard
helps in a variety of ways:
• To sense the demands of markets, competition,
and society. In the past, many managers
gauged their success compared to year-
earlier results, or compared to peer-group
companies. But to stay apprised of all
threats and opportunities, managers
must measure not just their own perfor-
mance but that of the “best in class” –
direct and indirect competitors, organiza-
tions running similar processes, and
organizations competing broadly for the
favor of the same customers, shareholders,
employees, and other stakeholders.
• To broaden and deepen supply-chain relation-
ships. Companies today are cutting costs,
increasing speed, accelerating innovation,
and making other improvements by
working as business partners with cus-
tomers and suppliers. To compete through
integrating the supply chain, managers
need to measure and report internal and
external variables that inform decision
making along this chain.
• To broaden and deepen relationships with
stakeholders. Competition in product,
labor, and capital markets has intensified
inexorably in recent years. Today, to
Applyi ng the Bal ance d Score card
3

4. secure the loyalty of increasingly power-
ful customers, employees, and sharehold-
ers, managers need to develop and report
measures that demonstrate the company
is delivering the value demanded.
• To demonstrate accountability for perfor-
mance. Regulators and the public con-
tinue to pressure companies for greater
transparency. People outside the firm
seek reassurance that companies operate
with acceptable, if not superior, perfor-
mance. Managers need measures – of
performance and management-system
implementation – to demonstrate they
deserve a “license to operate.”
By managing relationships outside the
company with an expanded family of
measures, managers position themselves to
turn corporate accountability to competitive
advantage. Measures of financial, opera-
tional, and social performance become
the language of strategic execution, from
developing goals and initiatives to setting
targets and dispensing pay and incentives.
Many firms today have embedded measure-
ment systems in both their internal and
external management systems to win in
the marketplace for low-cost capital, talent-
ed employees, loyal, profitable customers,
and supportive local communities.
Ultimately, the balanced scorecard can
provide the basis for fulfilling a new model
of accountability known as the account-
ability cycle (Epstein and Birchard 1999:143).
The measures, monitored by an enlightened
board of directors, integrated in manage-
ment control systems, and reported broadly
inside and outside the corporation, become
the fuel for powering a cycle of continuous
and breakthrough performance. (See Exhibit
1) In this way, the balanced scorecard
helps managers deliver maximum value
for the organization.
THE DEVELOPMENT OF
VARIOUS MODELS
With the swirl of activity in the late 1980s
and early 1990s, academics and consultants
proposed a number of new models for
developing balanced scorecards. In each
case, these experts sought to provide man-
agers with a formula to develop the critical
measures for guiding long-term corporate
management. They posed the question: How
can managers choose measures, financial
and nonfinancial, that will guide them in
delivering consistent value for the enter-
prise over the course of months and years?
From the results of a research project
conducted in 1990 with twelve companies,
4
STRATEGICPERFORMANCEMEASUREMENT
Exhibit 1 – The Accountability Cycle
Accountability
Shareholders
Measurement
Management
Systems
Reporting
Customers
Communities
Employees
Governance
External
Reporting &
Review
Objectives
& Critical
Success
Factors
Financial
Operational &
Social Measures
Internal
Reporting
& Review
Pay &
Incentive
Feedback Feedback
FeedbackFeedback
Initiatives
Strategy
(with Board of Directors)
Targets & Budgets

5. Kaplan, of Harvard Business School, and
Norton, of Renaissance Worldwide, answered
that question in their first article introducing
the balanced scorecard (Kaplan and Norton
1992). They presented the scorecard as an
organizational scheme. The concept breaks
out the critical categories of performance
measurement into four “perspectives”: finan-
cial, customer, internal business, and innova-
tion and learning. (See Exhibit 2)
Taken together, the measures that fall into
Kaplan and Norton’s four balanced scorecard
categories comprise a broad set of financial
and nonfinancial gauges for running the
organization. They aid people in focusing
on more than financial measures.
One of Kaplan and Norton’s most signifi-
cant contributions was to stress that execu-
tives should use the measures to translate
vision and strategy into concrete directions
for action by people throughout the organiza-
tion. In their later work, Kaplan and Norton
showed managers how to use the balanced
scorecard as a strategic management system
(Kaplan and Norton 1996). The measures in
the balanced scorecard were not to be a wish
list for continuous improvement. They pre-
scribe a plan for strategic execution.
Meanwhile, in Sweden, at Skandia Group,
a team led by Leif Edvinsson, corporate
director, intellectual capital, operated under
the belief that to succeed as an insurer, the
company had to build value through “intel-
lectual capital.” That is, to deliver reliable
financial results, Skandia had to build and
leverage the value of intangible assets like
solid customer relationships and unique
computer software. In 1990, Skandia pio-
neered new ways to value intellectual capital
and created measures for managing a firm
that relies on intellectual capital to build
value (Edvinsson and Malone 1997). Skandia
created a balanced scorecard called the
“navigator” (Edvinsson and Malone 1997),
separating corporate performance into five
categories, or “focuses”: financial, customer,
human, process, and renewal and develop-
ment. As with the Kaplan and Norton model,
performance in the latter four contribute to
financial performance. (See Exhibit 3) Note
that Edvinsson, like Kaplan and Norton,
stressed the importance of learning and
renewal as a root source of financial results.
At about the same time, other companies
were experimenting with a third approach
to the balanced scorecard. In Canada, at
Bank of Montreal, a team led by the then
Chief Executive Matthew Barrett operated
under the belief that, to succeed as a bank,
executives had to deliver top performance
to four stakeholder groups: shareholders,
customers, employees, and communities.
The team thus created measurements of
performance for each group, and became
one of the leaders in this “stakeholder” bal-
anced scorecard (Atkinson et al. 1997:33-35
and Epstein and Birchard 1999:91-93).
Applyi ng the Bal ance d Score card
5
Source: Kaplan and Norton 1996c:76. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by permission
of Harvard Business Review.
Exhibit 2 – The Balanced Scorecard Framework
FINANCIAL
Objectives Measures Targets Initiatives“To succeed
financially, how
should we
appear to our
shareholders?”
INTERNAL BUSINESS PROCESS
Objectives Measures Targets Initiatives
“To satisfy our
shareholders
and customers,
what business
processes must
we excel at?”
CUSTOMER
Objectives Measures Targets Initiatives“To achieve
our vision,
how should we
appear to our
customers?”
LEARNING AND GROWTH
Objectives Measures Targets Initiatives“To achieve our
vision, how will
we sustain our
ability to change
and improve?”
Vision and
Strategy

6. In various versions of the stakeholder-
style balanced scorecard, managers organize
corporate measures into three to five cate-
gories, according to stakeholder groups.
Managers first choose the three to five
stakeholder groups who contribute most
to execution of corporate strategy. They
then, as with other versions of the balanced
scorecard, ask a series of probing questions
to devise measures to gauge performance in
each category. (See Exhibit 4) The measures
created for customers, employees, commu-
nities, and suppliers drive performance for
shareholders in much the same cause-and-
effect fashion as proposed by Edvinsson and
Kaplan and Norton.
Note that some organizations operating
with a stakeholder-style scorecard may give
priority to one stakeholder or another. Bank
of Montreal gives a weight of 40 percent to
shareholders, 30 percent to customers, 20
percent to employees, and 10 percent to
communities. But other organizations
steer clear of priority rankings. Eastman
Chemical of Kingsport, Tennessee breaks
out five stakeholders, customers, employees,
investors, suppliers, and publics (i.e., com-
munities, government agencies). Eastman
gives all five stakeholder categories equal
priority (Epstein and Birchard 1999:149).
6
STRATEGICPERFORMANCEMEASUREMENT
Exhibit 3 – The Skandia Navigator Framework
Source: Skandia Group, 1999.
¬
¬
¬
¬Human
Focus
Market Focus
Renewal and Development Focus
Process Focus
Yesterday
Today
Tomorrow
Financial Focus
Exhibit 4 – The “Stakeholder” Balanced Scorecard
Source: Adapted from Epstein and Birchard 1999:149-154. Copyright © 1999 by Marc Epstein and Bill Birchard. Used by permission.
Shareholders
Customers
Employees
Communities
Vision
&
Strategy
How can employees
help fulfill our strategy?
—
How can we show we
deliver value in return?
How can communities
help fulfill our strategy?
—
How can we show we
deliver value in return?
How can we show
we’re delivering value
customers expect?
How can we show
our strategy is
succeeding financially?

7. IMPLEMENTING THE
BALANCED SCORECARD
To implement the balanced scorecard, man-
agers must take into account not only orga-
nizational structure and systems; they must
consider their organization’s history, manage-
ment style, and culture. The approach to
implementation that suits one organization
will not always suit the next. This is especially
true of nonprofit organizations, whose mis-
sions vary dramatically. For example, when
the United Way of Southeastern New England
created a balanced scorecard in 1996, a big
question was which constituency to stress
as the “customer” for the sake of scorecard
measures. Was it donors, charitable organi-
zations, or communities? Any of the three
could have been appropriate. But managers
chose donors because the United Way unit’s
total quality management efforts had already
made the organization donor-focused (Kaplan
1997).
The size of the organization does not
significantly matter to implementation.
Research shows that the scorecard works
for companies of all sizes. Chow, Haddad,
and Williamson (1997), for example, show
that the scorecard, though developed at
large companies, functions equally well for
companies with just 100 to 1,200 employees.
The United Way of Southeastern New
England, again, provides a good example.
The organization had less than 50 full-time
employees, albeit supplemented by many
volunteers.
How long does the implementation of
a balanced scorecard take? Generally about
one to three years. This assumes a small team
of under a half dozen people initially works
full time on the effort, and executives make
themselves available for interviewing, brain-
storming, and support. The initial rollout of
performance measures takes considerably
less time, roughly four months, but experi-
ence shows that integrating the scorecard
into organizational management systems
can take an additional year of time (The
Society of Management Accountants of
Canada 1994:48-49; Kaplan and Norton
1996a:278, 288, 309).
Getting Started
The objective from the start is to create a
list of measures that, by gauging only the
most critical factors of success, telegraphs to
all managers and employees what they need
to do to help achieve corporate strategy. As
Kaplan and Norton say, the balanced score-
card should tell the story of the strategy. In
fact, someone without knowledge of the
strategy should be able to infer it from the
final set of measures, which will number
perhaps no more than two dozen. The mea-
sures will then become the marching orders
of the corporation, and if measures are
poorly chosen, the corporation will march
off in the wrong direction.
Managers should not make the mistake
of building a scorecard comprised solely of
lagging, internal, financial, or nonstrategic
indicators. Certainly some of the indicators
will be financial, and will lag, since these
are the characteristics that describe the
“outcome,” or “results,” measures of tradi-
tional financial systems. Many of these
indicators – net income, for example – are
even the same from company to company.
But most of the indicators should measure
the elements of corporate performance that
lead to good results and may include input
and process measures in addition to output
measures. Note how the four perspectives
also connect in a chain of cause and effect:
innovation and learning improve internal
business processes; internal business processes
improve customer satisfaction; and customer
satisfaction leads to improved financial per-
formance. In other words, one category of
measurement drives performance in the
next. These indicators should reinforce each
other, all contributing to measuring the
accomplishment of a unified strategy. (See
Exhibit 5)
In practice, the notion of leading versus
lagging should be thought of as a continuum.
Customer satisfaction is a leading indicator
of financial performance, and also a lagging
indicator of on-time delivery. Toxic emissions
are a leading indicator of environmental
costs, and also a lagging indicator of process
efficiency. Managers should think of measures
as data points in a complex flow of causes
and effects. They will then better understand
that they have to pinpoint the drivers of
corporate performance to succeed with their
scorecard effort.
As a rule, the final list of measures should
be both financial and nonfinancial; external
and internal; and lagging and leading. A
rich mix of measures reflects the complexity
of business today. (See Exhibit 6) In coming
up with a diverse list, managers will have
several difficulties. The first is coming up
with new measures of factors, like innovation,
that the company has never measured
Applyi ng the Bal ance d Score card
7

8. before. In some instances, developing a
reliably quantifiable outcome measure may
not be feasible, owing to lack of data or to
high cost. Substituting an “input” measure,
however, may have to suffice. Hours of
training, for example, may have to substitute
as an indicator of organizational learning.
Exhibit 6 — Measurement Mix
A bit of both makes the scorecard balanced:
A second difficulty is winnowing the
list of measures to the vital few, and thus
blessing a final list that embraces all critical
factors while avoiding duplication. One
guide to minimizing the number of mea-
sures is seeking those that are both complete
and controllable (Epstein and Manzoni
1998:201-202). Complete means the mea-
sure sums up in one number the contribu-
tion of all elements of performance that
matter. For example, long-term financial
returns are the most complete measure of
corporate performance at the executive
level. Controllable means that people can
actually control improvement in the factor
measured. So that the scorecard translates
strategy into action, employees should
believe that they or their work groups
could act personally to make at least a
small difference in a measured variable.
8
STRATEGICPERFORMANCEMEASUREMENT
Exhibit 5 — The Cause-and-Effect Flow of the Balanced Scorecard
Source: Kaplan and Norton 1996c:83. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by
permission of Harvard Business Review.
Financial
Customers
Internal
Business
Processes
Learning
and
Growth
Return on capital
Employed (ROCE)
Accounts
Receivable
Operating
Expenses
Customer
Satisfaction
On-time
Delivery
Process
Quality
Shorter
Cycle
Time
Lower
Rework
Employee
Morale
Employee
Skills
Employee
Suggestions
Leading Lagging
Nonfinancial Financial
External Internal
Strategic Tactical
Process Product
People Technology
Input Output

9. In practice, managers creating the balanced
scorecard will find much room for disagree-
ment. They will disagree on the fine points
of strategy, and they will disagree on which
factors drive success of the strategy. Gaining
consensus takes time, as managers work out
their differences over, say, the drivers of
innovation, customer satisfaction, and prof-
its. Conflicts in points of view actually offer
an opportunity to align, sometimes for the
first time, the details of strategic execution
so that people down in the organization do
not work at cross purposes. In this sense,
the process of creating a scorecard, of gain-
ing consensus and alignment, can be more
valuable than the result itself.
Successful implementations follow a rough
sequence of steps, covered in detail in other
publications (The Society of Management
Accountants of Canada 1994). The essential
precondition for success is top management
support, followed by engaging a broad-cross
section of people in the organization to
assure buy-in at all levels. The sequence of
implementation generally begins after top
managers articulate strategy. Among the
most critical aspects of implementation:
• Devising the measures;
• Pinning down causal linkages;
• Cascading the scorecards;
• Linking to compensation; and
• Preparing the technology infrastructure.
Devising the Measures
To speed the process of both brainstorming
and winnowing the set of measures, managers
may turn to one of the models of balanced
measurement for guidance (The Society of
Management Accountants of Canada 1994;
Hronec 1993; Kaplan and Norton 1996;
Epstein and Birchard 1999; Lynch and
Cross 1995; Rummler and Brache 1995).
Each model provides a means to surface
ideas, group them, and guide the logic of
linking each driver to final outcome mea-
sures. To begin with, managers can consider
the four categories in the Kaplan and Norton
model:
i) Financial. The first category on the
Kaplan and Norton balanced scorecard
is financial. Managers devising financial
measures should ask themselves, How
can we show our strategy is succeeding
financially? At the highest level, long-
term profitability and stock price growth
demonstrate financial success of the
strategy. But managers should also con-
sider financial measures particular to
their strategy. If the firm is young, on a
high-growth trajectory, sales growth by
sales channel may be a critical financial
measure. If the firm operates in a mature
business, cash flow may be the right
measure. If it falls in between, economic
profit, a measure that charges the com-
pany for the cost of equity capital, may
be the right measure.
ii) Customer. The second box in the Kaplan
and Norton model is the customer per-
spective. Managers devising customer
measures should ask themselves, How
can we show we’re delivering to customers
the value they expect? At the highest
level, many companies track customer
satisfaction. But other measures are also
necessary, like customer retention, mar-
ket share, and share of wallet (i.e., share
of a customer’s business in a particular
product or service line). Companies may
also devise specific surveys. For example,
Eastman Chemical surveys companies
to find out how they score Eastman on
“customer value.”
iii) Internal business process. The third box
in the Kaplan and Norton model is
internal business. Managers developing
measures for this perspective should ask,
What processes must we excel at to
deliver value to our customers? For
example, Analog Devices measures chip
yield, cycle time, on-time delivery, and
parts per million defects to gauge the
performance of manufacturing process-
es. CIGNA Property & Casualty, the
Philadelphia insurer acquired by Ace Ltd.
of Bermuda, developed a system to mea-
sure underwriting quality (by survey)
and loss ratio (claims paid divided by
premium collected) to gauge the quality
of its underwriting processes.
iv) Learning and growth. The fourth box in
the Kaplan and Norton model is learn-
ing and growth. For this perspective,
managers should ask, What action must
the company take to prepare the people
and organization for the future? As an
example, CIGNA Property & Casualty
developed measures for competency
development, key staff turnover, and
acquisition of key staff. Whirlpool devel-
oped measures of variables such as com-
pletion of cultural milestones and, by
survey, strength of leadership, commit-
ment, and diversity. The measures in
the learning and growth perspective
stress reskilling, systems development,
Applyi ng the Bal ance d Score card
9

10. change procedures, and development
of personal and organizational capabil-
ities.
One business that followed Kaplan and
Norton’s balanced scorecard model was
Mobil Corporation’s U.S. Marketing and
Refining Division. In 1994, the $20 billion
division was searching for a means to
cement in place a new strategy of targeting
and selling to specific market segments.
Mobil’s research showed that American gas
buyers come in five varieties, which Mobil
dubbed road warrior (generally men who
drive a lot), true blues (affluent, loyal cus-
tomers), generation F3 (yuppies on the go
who want fuel, food, and want them fast),
homebodies (generally homemakers), and
price shoppers. Mobil aimed to focus on
just the first three, which included 61 per-
cent of all gas buyers (Kaplan 1996a:1, 3).
Exhibit 7 shows how the measures Mobil
developed clarified the strategy precisely.
Note that the exhibit includes objectives
as well, showing that in the development
of measures, managers don’t brainstorm
directly from strategy, but first come up
with objectives. After creating objectives
and measures, they launch initiatives to
meet them. In Mobil’s case, the division
upgraded its stations to give fast, friendly
service – with “speed, smiles, and strokes.”
It also redesigned its onsite convenience
stores to recast them as destination shops
with the right food and snacks for its seg-
ments of buyers.
As with every other management model,
managers should view the balanced score-
card as flexible. The Kaplan and Norton
model, and the other models, offer a start-
ing point. Many managers will see fit to
alter the groups in each model or add dif-
ferent ones. Companies that rely heavily
on good relationships in the local commu-
nity – a bank for example – might add a
category for community. Companies that
consume vast amounts of raw materials –
oil, wood products, and mining firms –
might add a category for the environment.
Companies that rely heavily on upstream
suppliers might single out a category for
performance with partners in the supply
chain.
Alternatively, companies can include a
broader array of measures than suggested
by any of the models. Other possible areas
of measurement include society, regulators,
and even milestones for major strategic
projects, such as building a plant, establish-
ing an overseas distribution operation, or
reengineering a process. Managers may also
want to complement their internal data
gathering with information from bench-
marking and competitive analysis. They
can then report scorecard results not just
for their own operations but for the opera-
tions of peers and competitors, heightening
management’s awareness of future threats
and opportunities.
Managers must bear in mind, however,
that too many measures can spoil the
scorecard as an effective management tool,
especially if the measures fail to contribute
in an overall cause-and-effect fashion to
strategic success. Many critical measures,
such as order turnaround time, may be
necessary for operational control, but not
necessary to include on the corporate-level
scorecard. If managers cannot justify a mea-
sure as critical to organizational priorities,
they should consider dropping it during
the winnowing process.
Allstate Insurance Corporation is an
example of one company that has cus-
tomized its scorecard to fit its industry.
Allstate operates with a strategy of winning
through the building of strong, enduring
relationships with customers, employees,
agents, shareholders, and even community
partners. As a result, the company has
devised a scorecard that today essentially
follows the stakeholder model of measure-
ment, as discussed in Epstein and Birchard
(1999:144-154). (See Exhibit 8) For Allstate,
taking care of stakeholders means taking
care of the bottom line.
Allstate, for example, maintains that
expanding career and advancement oppor-
tunities equally for all employees drives
employee satisfaction. These measures are
captured under the “employee” focus.
Employee satisfaction drives customer
growth and retention. The latter two mea-
sures are captured under the “customer”
focus. And customer growth and retention
drive profitability, captured under the
“shareholder” focus. In practice, feeding
the community stakeholder, as Allstate does
through financial and volunteer support,
feeds the customer and employee stakehold-
ers, which in turn feeds the shareholder
stakeholder.
How does a company get started on the
process of developing measures? The spur
to action may come from a variety of causes:
10
STRATEGICPERFORMANCEMEASUREMENT

11. a financial shock, in which profits turn
down for several quarters; a new strategic
vision, in which executives lay a new course
to attack growth markets; a change in chief
executive, in which priorities shift sharply
to align with the new executive’s way of
managing. Whatever the cause, the spur
convinces top executives that the company
has to adopt a new approach to managing,
and probably a new culture that values
measurement and accountability.
Applyi ng the Bal ance d Score card
11
Exhibit 7 – Mobil Corporation, U.S. Marketing and Refining, Balanced Scorecard
Source: Kaplan 1996a. Copyright © 1996 by the President and Fellows of Harvard College. Reprinted by permission.
Financial Perspective
Return on capital employed ROCE
Cash flow Cash flow excluding dividends
Cash flow including dividends
Profitability P&L ($millions after tax)
Net margin (cents/gal before tax)
Lowest cost Total operating expenses (cents/gal)
Most profitable growth targets Volume growth, gas retail sales
Volume growth, distillate to trade
Volume growth, lubes
Customer Perspective
Continually delight the targeted consumer Share of segment
% of road warriors
% of true blues
% of generation F3s
Mystery shopper rating
Improve the profitability of our partners Total gross profit, split
Internal Perspective
Improve environmental, health, and safety performance Safety incidents
Environmental incidents
Product, service, and APC development APC gross margin/store/month
Lower costs of manufacturing versus competition Refinery ROCE
Refinery expense
Improve hardware performance Refinery reliability index
Refinery yield index
Improve environmental, health, and safety performance Refinery safety index
Reducing laid down cost LDC vs. best comp. supply – gas
LDC vs. best comp. supply – dist
Inventory management Inventory level
Product availability index
Quality Quality index
Learning and Growth
Organization involvement Climate survey index
Core competencies and skills Strategic competency availability
Access to strategic information Strategic systems availability
Objective Measure

12. Exhibit 8 – Allstate Balanced Framework
Source:The Allstate Corporation, 1999.
Once the top management team commits
itself to a balanced scorecard project, a single
executive or senior manager can lead a
team of managers to guide and coordinate
a series of executive interviews and brain-
storming sessions that result in a group of
tentative objectives and measures. These
interviews and sessions often reveal that
executives do not all agree on the answers
to two questions: Where do we want to
be? How are we going to get there?
The balanced scorecard team can high-
light for executives the inconsistencies in
their responses. The executive team can
subsequently debate elements of strategy,
objectives, and measures – in several ses-
sions with breakout groups as necessary. By
ironing out the kinks in corporate strategy,
executives can arrive at clear priorities and,
in turn, create the final scorecard (Kaplan
and Norton 1996:300-308).
During the early 1990s, BC Rail, in North
Vancouver, Canada, developed business-
unit scorecards, which managers incorpo-
rated into the monthly corporate financial
package. Although useful, the measures
never became integral to the company’s
management process. Alan Owen, BC Rail
Controller, maintained that the reason for
this lack of takeup was that the measures
never connected directly to corporate goals.
When BC Rail introduced a formal balanced
scorecard in 1996, the measures came
directly from the strategic plan. BC Rail
managers adopted the following process to
create their scorecard (Owen 1997:12-13):
• Involve a broad senior management team.
• Reexamine the corporate mission.
• Analyze strengths, weaknesses, opportu-
nities, and threats.
• Reexamine the successes and failures of
the previous five-year strategic plan.
• Define the company’s three critical
goals.
• Establish core strategies to achieve each
goal.
• Identify key metrics to measure progress
toward each goal.
• Establish clear responsibilities and targets
for each metric.
• Develop action plans to achieve targets.
• Develop annual objectives for each
manager and link them to incentive
compensation.
Note that, to succeed, top management
must remain intensively involved with the
scorecard. This involvement, throughout
the early phases of the scorecard develop-
ment, may last six to twelve months. Rarely
do balanced scorecards succeed when the
chief executive and his or her team with-
draw their support before completion of
the initial rollout, or play only a token
role in the process (Kaplan and Norton
1996a:294). The executives may also have
to change their attitudes or behavior to
stress measurement, and accountability for
measured results, as a management priority.
If they do not hold themselves and the
organization responsible for reporting and
reviewing results, people within the com-
pany will not take the effort seriously.
A big part of signaling the shift in priori-
ties is a change in reporting. Internal reports
should broadcast the critical balanced
scorecard priorities, targets, and results –
to every level of the organization. The new
internal reports will help to demonstrate
management commitment. Many compa-
nies will want to go on to broadcast key
measures and results externally as well.
Putting balanced scorecard targets and
results in the annual report shows convinc-
ingly that management is serious and
expects shareholders and other stakeholders
to hold it accountable for executing strategy.
Pinning Down Cause and Effect Linkages
If managers have chosen measures to fit
carefully in a chain of cause and effect, they
will end up with a concrete logic for creat-
ing value. They will be able to express this
logic in a number of if/then hypotheses. If
we train employees more intensively, then
we will satisfy more customers. If we satisfy
12
STRATEGICPERFORMANCEMEASUREMENT
The Allstate Corporation
Key Focus Areas – Long Term Goals
Customers
• Satisfaction
• Retention
Communities Employees
• Volunteerism • Leadership Index
• Giving Campaign • Communication
• Reaching Youth Index
Shareholders
• Growth
• Expenses
Process

13. more customers, then we will sell more ser-
vices. If we sell more services, then we will
boost both margins and profits. The obvious
question remains: Will the hypothesized logic,
albeit a product of the collective wisdom of
many executives, prove out in practice?
This is not always easy to answer when
a scorecard has a dozen or more measures,
especially given the complexity of some
causal links. At Allstate, for example, man-
agers measure such front-line statistics as
claim contact time (the elapsed time between
an auto accident and when an Allstate cus-
tomer is contacted by an Allstate adjuster to
begin the repair process). By Allstate’s way
of thinking, shorter contact time leads to
higher customer satisfaction; higher customer
satisfaction leads to higher renewal rates;
higher renewal rates to higher premium
revenues; and higher premium revenues to
higher operating income and share prices.
In graphical form, the linkage looks like this:
Contact time ¨ customer satisfaction ¨ customer
retention ¨ premium revenues ¨ operating income
¨ share prices
Allstate also believes that shorter contact
time leads to lower claims costs (such as
amounts paid for rental vehicles and storage
of disabled vehicles); lower claim costs lead
to lower claims payments; lower claims pay-
ments lead to lower loss ratios; and finally
lower loss ratios lead, again, to higher oper-
ating income and share prices. In graphical
form, this parallel linkage looks like this:
Contact time ¨ lower costs ¨ severities ¨ loss
ratio ¨ operating income ¨ share prices
This complexity – especially when drawn
as a web of interdependencies among numer-
ous front-line and corporate measures –
makes clear why managers must take a rig-
orous approach to creating a “performance
logic” (Rummler and Brache 1995). Getting
the performance logic right, a far more
complex job than drafting a few linear chains
of cause and effect, means constantly retest-
ing to be sure that the entire executive team
achieves a genuine consensus on each ele-
ment of strategy: which markets and seg-
ments the firm will serve; which elements of
value the firm will promise customers; and
which processes and capabilities the com-
pany will develop to deliver on its value
proposition. Only then will the measures
of, say, competency development, actually
contribute to customer value and create
sales in the targeted market segments.
To the extent that companies are betting
their future on their strategy, they should
then prove the links between specific non-
financial measures and financial success.
Managers can take their cue from models
like the service profit chain: internal service
quality leads in turn to employee satisfaction,
employee retention, external service quality,
customer satisfaction, customer retention,
and finally to profit (Heskett et al. 1997). This
was the approach taken by Sears, Roebuck,
when it examined the chain of causation
linking employee attitudes to customer
satisfaction, and customer satisfaction to
profits (Rucci et al. 1998).
Sears’s dedication to nonfinancial perfor-
mance developed in 1993 and 1994, when
the company’s top 150 managers crystal-
lized the company’s new direction in what
they called the three Cs: to make Sears a
compelling place to work, a compelling
place to shop, and a compelling place to
invest. They then began an attempt to cor-
relate all three, and they found they could
not only quantify the factors that drive
each kind of performance, they could also
quantify how much an improvement in
each link of the “employee-customer-profit”
chain stemmed from improvements in a
previous link.
By 1996, Sears actually developed a cor-
porate-wide, statistically rigorous means to
manage employee attitudes and customer
impressions to boost financial returns. It
can now actually calculate that a 5-point
gain in employee attitudes will translate
into a 1.3-unit increase in customer impres-
sions. The 1.3-unit customer-impression
increase will then boost revenue growth by
0.5 percent. The model even predicts the
lag time between one improvement and
the next.
Though many companies rely on a com-
mon-sense approach to linkage, Sears relies
on data – data verified by external auditors.
Why is this so important? Sears managers
found, for example, that two measures orig-
inally proposed for the employee-customer-
profit chain – personal growth and develop-
ment, and empowered teams – failed to
relate statistically to any customer data. The
two measures do matter to managers, but
they don’t lie on the causal pathway from
employee satisfaction to profits. Sears also
found that 10 of 70 questions in the com-
pany’s employee survey do relate well to
customer data, in particular those in just
Applyi ng the Bal ance d Score card
13

14. two categories: peoples’ attitude about
their jobs and attitude about the company.
So Sears uses those ten questions in its
employee-customer-profit chain, giving
managers uncanny insight on how to
manage the contributors of company value.
This is precisely the kind of thinking, if
not the approach, that other companies
should consider.
Cascading the Scorecards
Once top managers have devised a balanced
scorecard for the organization as a whole,
their next job is to help each unit devise
complementary scorecards. This process,
referred to as cascading the scorecards, calls
on team, division, and functional managers
to craft measures that contribute, via a
natural performance logic, to furthering
the strategic objectives prescribed in the
organization’s scorecard.
By involving many managers at many
levels, the cascading process enlists the
energy and engenders the commitment
of a broad cross-section of people to meet
ambitious goals. Managers at each level
14
STRATEGICPERFORMANCEMEASUREMENT
Constancy and Change
A prime lesson learned by veterans of balanced scorecard management? Executives and managers have to refine
or revamp measures as times change. At least annually, they need to evaluate measures for consistency with
corporate strategies and priorities.They may even want to assign a team to conduct this balanced scorecard
review.
One company that illustrates the constancy of evolution is Analog Devices.Analog, first chronicled for its
measurement work in 1990 (Kaplan, 1990), actually provided the prototype for the balanced scorecard.Analog
reviews and changes its measures at least slightly every year, attempting to retain consistency while assuring
relevancy.
Analog’s scorecard has three parts: financial, product development and quality improvement.These categories
reflect the variables that, as both leading and lagging indicators, make or break a firm in the intensely competitive
integrated-circuit business, where customers the world over demand leading-edge designs, delivered to meet
demanding manufacturing schedules. In recent years, Analog has added such measures as customer responsiveness
and quality of work environment.
Analog Devices Balanced Scorecard:TenYears of Evolution
1987 1997
Source: Robert Stasey, director of Quality Improvement,Analog Devices, personal communication, September 1997. Used by permission.
Financial
Quality Improvement Process
New Products
Revenue Bookings
Revenue growth Revenue
Profit Gross margin %
ROA SMGA %
Profit
New product introductions 6Q window sales
New product bookings 6Q window gross margin %
Business peak plan revenue # of products to first silicon
Time to market customer sample hit rate
# of products released
Tape-outs per product
New product WIP
On-time delivery On-time delivery
Cycle time Cycle time
Yield Yield
PPM (defects) PPM (defects)
Cost Quality of work environment
Employee productivity Customer responsiveness
Turnover Baldridge score

15. work interactively, in the same way as the
top management team, and through their
participation gain a sense of buy-in to both
the company’s strategy and the measures
that specify how to execute it.
At Mobil’s U.S. Marketing & Refining
Division, each tier of management created
a scorecard that dovetailed with the score-
cards above in the hierarchy. The scorecards
vertically connect like links in a chain all
the way to the individuals on the front lines,
who have their own personal scorecard. This
of course helps employees, from truck drivers
on up, to understand how they contribute
to corporate strategy: Specific, measurable
objectives and performance plans make the
connection clear.
In the Mobil Lubricants Business Unit, the
balanced scorecard team developed seven
criteria for creating personal scorecards
(Kaplan 1996c:2):
• Personal scorecard must support supervi-
sor/manager’s scorecard;
• Scorecard must include an objective and
measure that supports another part of
the business;
• Every supervisor/manager must have an
objective and measure related to coaching,
counseling, or employee development;
• Scorecard must include a mix of lead and
lag indicators;
• Minimum of one objective/measure per
perspective;
• Do not exceed 15 measures; and
• Any change must be agreed to by both
supervisor and employee.
Properly done, the scorecards at each level
align everyone’s efforts because they are rel-
evant, understandable, and controllable at
the local level. While the scorecard for the
chief financial officer’s team may prescribe
a 30 percent reduction in working capital,
the scorecard for billing clerks may prescribe
a 50 percent reduction in invoicing errors
(inaccurate invoices slow payment and
increase working capital). The clerks cannot
rally around a working capital goal, but
they can rally around a goal to fix mistakes
in their own work.
As an example of how one measure cas-
cades down through multiple tiers of manage-
ment, consider the measurement of safety
performance at Eastman Chemical Company.
At the corporate level, executives track three
safety measures, including the U.S. Occupa-
tional Safety and Health Administration
“recordable incidence rate.” In turn, the
Tennessee Eastman Division tracks items
like consecutive work days worked safely
and number of serious incidents. The
Tennessee division’s acid unit measures items
like total injury rate and documentation of
near misses. The department responsible for
acetic anhydride measures items like safety
concerns identified and corrected and the
number of safety projects per crew. The
department’s crews measure safety concerns
identified and safety improvement projects
(Epstein and Birchard 1999:155).
Exhibit 9 provides an example of cascading
an entire scorecard. On the left is a balanced
scorecard for the insurance company affiliated
with a bank. On the right is the scorecard
for the customer service subunit. While
some of the measures cascaded are the same,
others have been dropped as irrelevant to
the subunit, and still others have been
adjusted or changed to fit the subunit’s
approach to contributing to the company’s
overall strategy.
Linking to Compensation
Even if managers masterfully cascade score-
cards down through their organizations,
they can fall victim to what Steven Kerr
has called “the folly of rewarding A, while
hoping for B.” In an update to Kerr’s classic
1975 article on this topic (Kerr 1995), he
notes how managers even today routinely
declare one set of objectives yet reward
people for another. They hope for long-term
growth but reward quarterly earnings; they
hope for total quality but reward on-time
shipment even with defects. They in effect
engage in doubletalk – and the result is they
double the difficulty of aligning people’s
behavior with strategy.
While many organizations have begun
to pay people for achieving goals beyond
traditional financial budget numbers, the
record is spotty. In one survey, in which
eight out of ten executives said they included
measures of operating efficiency and cus-
tomer satisfaction in regular management
reviews, only five out of the ten linked the
operational measures to pay and only three
out of ten linked customer satisfaction to
pay. In the same survey, in which three of
ten executives measure innovation/change,
only one of ten linked the measure to pay
(Lingle and Schiemann 1996:59). It is safe
to say that the pay programs in these firms
send mixed signals on which goals are
important.
Applyi ng the Bal ance d Score card
15

16. Organizations that fail to link measures
to pay and other rewards often explain that
they are taking a “wait while we learn”
approach. They hesitate to change pay
systems until they believe they have both
reliable data for each new measure and
ample experience in verifying the causal
links among scorecard measures. These
concerns are understandable, yet as Kerr
points out, it is unreasonable to hope
managers will invest valuable time and
energy in behavior B if they get rewarded
for A. Ultimately, executives have to put
their money where their mouth is. They
have to involve the human resources
department in developing pay and reward
programs that motivate people to do more
than achieve short-term budget numbers.
Among the companies that have tightly
linked pay to balanced scorecard perfor-
mance are CIGNA Property & Casualty,
Mobil, and Citibank. At Citibank (Dávila
and Simons1997), the California division
adopted a “performance scorecard” in
1996 with six categories: 1) financial, 2)
strategy implementation, 3) customer sat-
isfaction, 4) control of internal processes,
5) people management, and 6) standards
(for leadership, business ethics, customer
interaction, community involvement and
contribution to the overall business). The
president of Citibank California cascaded
these measures to his regions (“areas”) and
then to bank branches.
As an example of how the measures link
to pay, in October of each year, Citibank
California area managers set targets for
each of their branch managers in four per-
formance categories. For the financial and
strategy implementation categories, they
negotiate numbers with each branch man-
ager. For the customer satisfaction and
16
STRATEGICPERFORMANCEMEASUREMENT
Exhibit 9 – Cascading an Insurance Company Scorecard
Insurance Company Scorecard Customer Service Unit Scorecard
Source:Adapted from Epstein and Manzoni 1998:195.
Company Financials Unit Financials
Contribution (income less direct costs) Costs vs budget
Cost/income trend Unit costs vs budget unit costs
Costs vs budget
Income vs budget
Headcount vs budget
Investment performance
Company Customer Satisfaction Unit Customer Satisfaction
Monthly customer survey (weighted average, five criteria) Average customer survey score
Depth/breadth of parent bank’s customer base Sales force perception
Number of complaints Complaints received
Market share Call abandonment rate
Customer retention % of calls answered within 20 seconds
Company Growth and Development Unit Growth & Development/Investing in People
Progress on key projects Training time (% of permanent headcount)
Sales force growth Absenteeism
Sales force turnover Self-certified sickness/certified sickness
Training days (per employee) Turnover
Product mix (% of sales from a certain type of products) Staff satisfaction
Number of suggestions Skills/knowledge perception
Company Business Efficiency Unit Business Efficiency/Process Efficiency
Product profitability Service standards
– Line A Zero carried forward
– Line B Quality checks
New business pipeline (work-in-progress as a % of Resource allocation
proposals received) Customer services pipeline
Premium collection
Teleservicing (abandoned calls + response time)

17. control categories, they pass down numerical
goals set by the division. For the remaining
two categories, people management and
standards, they leave targets open to judg-
ment at the time of the appraisal.
Every quarter, the area managers work
with a team from finance, quality, and
human resources to evaluate each branch
manager. For each measure, the evaluators
give a par, above par, or below par rating.
For the finance category, for instance, they
give a par to branch managers who hit goals
for revenues, expenses, and margins. For
strategy implementation, they give a par to
managers hitting goals for total households,
new-to-bank households, lost-to-bank house-
holds, cross-sold households, retail asset
balances, and market share. For customer
satisfaction, they give a par to managers
scoring above a threshold figure calculated
from independent surveys of customers.
These ratings and those for the remaining
three categories are then tallied. Without a
par rating in all categories, a manager cannot
achieve an “above par” rating overall. A par
rating yields a 15 percent bonus. An above
par rating can mean a bonus of up to 30
percent. At Citibank California, linking pay
in such a direct fashion to long-term drivers
of performance assures that executives reward
the performance they hope for. They thus
have gone a long way toward eliminating
mixed signals that can hobble execution of
the bank’s strategy to build strong relation-
ships and deliver premium service.
Preparing the Information Technology
Like many recent management innovations,
the balanced scorecard has emerged as an
especially powerful tool thanks to advances
in information technology. Today’s comput-
ers, networks, software, and databases enable
managers to access, compile, distill, and
analyze data like never before. Managers can
now make decisions with the benefit of
insights gained only through the power of
technology. On the other hand, the advance
of technology forces companies to face an
ongoing threat: As competitors use informa-
tion technology to turn data into intelligence,
organizations that don’t follow risk losing
their competitiveness.
To prepare the information technology
infrastructure necessary for the balanced
scorecard, managers face two tasks. The first
is preparing the information, the second
preparing the technology. The biggest chal-
lenge may often be the first. Most organiza-
tions simply haven’t organized their data
gathering and reporting to match the logic
of the balanced scorecard. Managers gener-
ally receive data on functional or business-
unit performance, not on cross-company
performance. The result is that the perfor-
mance-measurement language spoken in one
part of the organization fails to match the
language elsewhere. In organizations that
compete through strong organization-wide
capabilities and cross-company processes,
language barriers of this sort can be debili-
tating.
The first task, then, is standardizing defi-
nitions for shared data and shared measure-
ments, and standardizing the way units
compile, aggregate, and report information.
Many companies have worked long and
hard to standardize their general ledgers for
unified global financial reporting. They must
make the same kind of effort to standardize
the ledgers of the balanced scorecard, at
least for data that flows upward and down-
ward in the company’s balanced scorecard
performance logic. Many companies today
manually adjust figures to create consistent
numbers at quarterly or annual reporting
time. Increasingly, they must automate this
task, lest they hamstring the effectiveness
of their balanced scorecard program.
In this reengineering of data definitions
and flows, accountants should take the
opportunity to relink financial and manage-
ment accounting. In the 1980s, in their
classic book Relevance Lost, Thomas Johnson
and Robert Kaplan advocated delinking the
two, and for good reason (Johnson and
Kaplan 1987). Over the years, management
accountants had come to build management
accounts mainly to fit the mandated rules
of financial reporting, and thus the numbers
increasingly failed to serve the decision-
making needs of executives. The manage-
ment accounts yielded good data on, say,
average costs of inventory, but precious little
on, say, the real cost to make one product
or another.
Today, however, as accountants restore
relevance to the management accounts
through such innovations as activity-based
costing and the balanced scorecard, the
time has come to relink the two cousins of
accounting. The numbers of management
accounting can feed financial reporting in
one system of rationalized information flows.
Accountants have the opportunity to bring
into a single database the numbers used for
Applyi ng the Bal ance d Score card
17

18. both running the business and reporting
results.
As accountants do complete this task,
they must tackle the second part of the
information technology challenge, the
technology. In the same way that an orga-
nization must rationalize information flows,
it must rationalize the myriad information
systems for delivering them. This requires
configuring and managing the components
of the systems appropriately to create an
integrated system (Silk 1998:40-44).
Some companies initially deliver balanced
scorecard figures in an executive informa-
tion system, generally personal computers
drawing data from mainframes. An EIS of
this sort is a welcome advance. However,
the balanced scorecard gains its full power
as part of an enterprise-wide information
system that provides balanced scorecard
data for each organizational unit, and offers
comprehensive analytic software for local
decision-making.
CIGNA Property & Casualty, for example,
developed a system of this kind. Thousands
of managers and employees can view their
units’ scorecards, the company’s scorecard,
or any other unit’s scorecard, on their
computers – all thanks to putting the com-
pany’s entire strategic information, moni-
toring, assessment, and feedback system
on-line (Epstein and Birchard 1999:111-112).
People throughout the organization can
study lists of objectives, numerical results,
written assessments, and initiatives, each
identified by “owner.” In effect, they can
get a complete picture of where the com-
pany and its units’ performance is today, as
well as its priorities, initiatives, and future
goals for tomorrow.
The new system enables people all over
the company to take charge of their work.
By using the company intranet and browser,
they can point and click their way to the
specific screens of information they need
for their jobs. If they feel unclear about
how they support company strategy, they
can browse their group’s scorecards, study
objectives and initiatives, and even read
assessments to get a feel for what their
bosses want. In this way, the system enables
every person at the bottom to fathom the
strategic wishes of the executives at the top.
If someone has a question as to how, or if,
his or her work furthers the company’s
strategic thrust, he or she need only grab a
computer mouse to find out.
CIGNA Property & Casualty’s goal is to
unleash a rich flow of feedback from people
all over the company. On each browser page,
employees can click a button to log an
idea, complaint or comment. A claims rep
in one unit could read about troubles with
an analogous problem in another unit –
and in seconds offer lessons from experience
that become part of the company’s knowl-
edge base. The promise of the system is to
significantly shorten the lag time between
field learning and management action. Only
the most current technology today can
make this happen.
To top off this digital nervous system,
one high-tech firm, N.E.T. Research of
Belgium, even offers a product called the
“management cockpit.” In one room,
flanked by dozens of computer screens, a
top manager can track the operations of
the entire company, the same way Mission
Control tracks a space flight from Houston.
Screens show internal and external infor-
mation like profit, customer satisfaction,
brand value, project progress, sales activities,
quality of staff, and threats and opportuni-
ties. Red lights flash when a screen reveals
off-target results, and a cockpit officer gives
regular briefings.
A Few Barriers to Implementation
When managers introduce the balanced
scorecard, they will face not only challenges
in devising new systems and practices, they
will face challenges in managing people.
The scorecard brings change to an organi-
zation, and people with secure jobs and
familiar work routines rarely open their arms
and accept change eagerly. Among the
barriers to people embracing the balanced
scorecard are resistance to added work; a
lack of sustained support by management;
failure to link the scorecard to reporting;
and resistance to greater transparency.
Developing and maintaining the bal-
anced scorecard naturally creates added
work, if only temporarily, for many people.
Some of the measures will probably require
data nobody yet collects. Capturing this
data may require people to devise altogether
new measurement and reporting mecha-
nisms. Managers stretched by current
workloads will reflexively resist doing more.
They have learned through experience
that if they wait long enough, they may
get away without doing anything at all.
Executives serious about implementing the
scorecard must guard against people writ-
18
STRATEGICPERFORMANCEMEASUREMENT

19. ing off the scorecard as a passing whimsy of
management.
A second barrier to implementation is
management that withdraws its support for
the balanced scorecard. Too often, at the
first sign of missed financial targets, man-
agers set the scorecard aside and embrace
the traditional budget numbers anew. This
backsliding will immediately undermine,
perhaps fatally, the credibility of the score-
card. Executives must demonstrate their
commitment to a balanced set of measures
over and over, praising efforts and rewarding
people for acting to improve the nonfinan-
cial drivers of long-term financial perfor-
mance. They must continue to take this
new approach even as economic cycles come
and go and corporate strategy evolves to
meet new demands of the market and com-
petition.
A third barrier to implementation arises
when management fails to organize all cor-
porate reporting around the scorecard. When
an organization introduces the scorecard,
some employees view it as an additional
burden on top of other reporting. Managers
must ruthlessly eliminate conflicting and
competing reports and measures from the
organization. The balanced scorecard should
not simply add to an already unwieldy bliz-
zard of paper and cacophony of numbers,
but instead should draw focus to the impor-
tant.
A fourth barrier, perhaps the most diffi-
cult, is resistance to greater transparency.
Introducing new measures threatens many
people. New, quantitative information that
paints a holistic picture of various units’
performance, especially when exposed
broadly for the first time, immediately
changes the balance of power within the
organization. Some managers will see their
power erode as new measures replace their
role as interpreters and managers of corporate
performance drivers. Others will see their
power threatened as measures limit their
freedom to operate in their own interests
rather than in the interests of the corporation.
Senior managers should not assume that
an absence of quantitative indicators in the
past was always due to ignorance or excessive
workload. In many cases, such absence
reflects “opaqueness by design” (Epstein
and Manzoni 1998:199). Local managers
have learned to develop secondary sources
of information that are not accessible to top
management or subordinates. Maintaining
this opaqueness can help managers centralize
authority, thus taking power from lower
levels of the organization. Or it can help
managers protect themselves from scrutiny
and questioning by their boss, thus taking
power from the upper levels. When man-
agers boost quarter-end revenue figures by
deferring shipment of low-value product to
one customer and speeding shipment of
high-value product to another, they don’t
necessarily want to let top managers in on
their game.
It is safe to say that, as with any change
project, introducing the balanced scorecard
can expose top managers to a minefield of
political barriers to change. To succeed with
the implementation, executives must antici-
pate these difficulties and have a strategy
for dealing with them. A chief component
of that strategy will be to engage a broad
cross-section of people to gain buy-in to the
new measurement approach.1
USING THE BALANCED SCORECARD
As organizations develop balanced score-
cards, they can apply them in at least three
ways: as part of a performance improve-
ment system, as part of a strategic manage-
ment system, and as part of an internal and
external accountability system. The first
application is the most modest and the
most straightforward, the last the most
ambitious while being the most sophisticated
and powerful. Each application builds on
the one before. In each case, managers will
Applyi ng the Bal ance d Score card
19
10 Questions for Better Measure
• Do measures include critical drivers of long-term
performance?
• Do the measures mix leading/lagging,
financial/nonfinancial, input/output variables?
• Do the measures incorporate the feedback and
buy-in of managers at all levels?
• Do the measures provide data for strategic
improvement, not just tactical control?
• Do measures reflect performance required by
stakeholders?
• Do measures link in causal-chain to strategic success?
• Are measures critical to competitive advantage?
• Do the measures tell the story of the company’s
strategy?
• Are the measures complete and controllable?
• Are the measures limited to a compact list of
10 to 20?

20. find themselves using measures to integrate
the organization and its management
practices to an ever-greater degree. Achieving
this integration – extending up and down
the hierarchy, spanning functions and
divisions, embracing outside stakeholders
– will increasingly become a competitive
requirement of the 21st century.
As a Performance Improvement System
Using the balanced scorecard as a perfor-
mance improvement system enables man-
agers to deliver better results with current
plans and processes. Top executives who
are largely satisfied with the company’s
chosen strategy, yet dissatisfied with strategic
execution, can use a balanced set of mea-
sures to drive continuous improvement
with the same plan-do-check-act cycle they
are familiar with from total quality manage-
ment. The difference is that they can rely
on the powerful linking of measures, in a
cascading fashion, to the drivers of perfor-
mance at every level. This cascading enables
firm-wide, not just factory-wide, improve-
ment of performance.
To make this happen, managers must
integrate the new performance measures
into management planning and control
systems. Integrated into these systems, the
balanced scorecard enables managers to
clearly identify gaps between expected and
targeted performance. This gives managers
the capability to engage in real-time, con-
tinuous tuning to improve performance –
essentially total quality management on
a corporate-level scale. Some companies
even use a stoplight-reporting model to
alert managers of critical gaps in perfor-
mance. Management reports show a red
light when the company is falling short,
yellow when in danger of falling short, and
green when meeting or exceeding plan.
One of the most obvious advantages of
the balanced scorecard is that it enables
managers to begin improving results simply
by making company objectives unmistak-
ably clear. No more do managers have to
look only to foggy narrative phrases from
the strategic plan for guidance. Placing the
measures on the scorecard, quantified to
give them a hard edge, calls unprecedented
attention to concrete actions that make a
difference. As the old adage goes, “What
gets measured gets done.”
To gain the full benefit of integrating
the measures in the management control
systems, however, managers must use them
consistently, at every level, for empower-
ment and learning rather than for com-
mand and control. They have to reverse
the pattern of traditional corporate budget
meetings, which often degenerate into ses-
sions where managers obsess over variances
and engage in fingerpointing. They must
turn review meetings into deliberative
sessions where managers clarify the root
causes of problems and share insights on
how to close gaps.
In other words, managers must use
quantitative figures not as ends in them-
selves but as a means to understand and
improve corporate activities. Managers can
engage in these continuous-improvement
discussions during normal review meet-
ings, monthly or quarterly, during capital
spending reviews, and during meetings for
preparing plans or budgets. The balanced
scorecard then facilitates learning by struc-
turing the agenda. These discussions also
give managers the opportunity to set an
example of a new culture – a learning
culture. If executives squander this oppor-
tunity, if they instead use quantitative data
to assign guilt for errors, people will with-
hold information, stall communication,
and slow continuous improvement.
As an example of the results companies
can achieve by using measures to both
empower and oblige managers to deliver
continuous performance improvement,
take the case of Tenneco. During Tenneco’s
turnaround, which began in 1992, execu-
tives sought to reverse severe losses by
drastically cutting costs and boosting qual-
ity. They installed, and cascaded to every
level, a set of balanced measures. One new
measure was called the “cost of quality.”
Cost of quality is the sum of failure costs
(scrap, rework, warranties, lawsuits) and
prevention and appraisal costs (inspection,
testing, training, planning). The cost-of-
quality measure, albeit one of many new
measures focused Tenneco managers on
the same goals like never before – taking
out costs that pointed to opportunities
for improving quality. In 1992, Tenneco
cut $215 million in quality costs; in 1993,
it cut $246 million more. In 1997, the
company was still at it, cutting another
$236 million.
Applying the cost-of-quality measure at
Tenneco, along with a host of other non-
financial measures, helped to quickly restore
20
STRATEGICPERFORMANCEMEASUREMENT

21. the company to health. No more did man-
agers focus just on income before interest
and taxes (IBIT), the previous preeminent
measure. By focusing on a balanced score-
card, Tenneco executives returned all six of
its original units (shipbuilding, farm and
construction equipment, automotive parts,
packaging, natural gas transportation, and
chemicals) to strong competitive positions
(Epstein and Birchard 1999:28-29).
Another example of a firm that applied a
balanced scorecard to continuously improve
performance is Rexam Custom Europe, a
precision coater, laminator, and converter
of flexible materials, and a unit of Rexam of
the United Kingdom (Butler et al. 1997).
Rexam Custom Europe had two main goals:
to grow rapidly, in excess of 20 percent per
year, and focus on continuous improvement,
particularly project cycle times. As a supplier
of custom products, its ability to enlarge
its customer base and increase its speed in
working on customer projects was critical to
rapid growth.
To meet its goals, the unit tailored its
balanced scorecard in a novel way. Early on,
managers concluded that traditional forms
of the balanced scorecard boxes fit poorly
with its goals, so it created a two-tier score-
card. One part focused the organization
on measures directly driving its strategy for
growth and continuous improvement. A
second focused on measurement of four
earlier-established Rexam Custom Europe
principles, widely embraced by managers,
for building the high-performance culture
and work practices needed to propel the
firm into the 21st century. The scorecard
became the basis for improving performance
of the business. (See Exhibit 10.)
Applyi ng the Bal ance d Score card
21
Customer Principle Shareholder’s Perspective
(Objective: customer focus, durable relationships) (Objective: RONA improvement)
Customer satisfaction index Gross margin
% partners Overhead, % of sales
Working capital %
People Principle Extraordinary Growth Perspective
(Objective: integrity, culture of learning, (Objective: % sales growth, broader
world-class competence) base of customers)
Employee satisfaction index % annual sales growth
Training hours/employee % sales from new projects
% sales from top 4 customers
Factored sales of new projects sanctioned
Market share in markets where number 1 or 2
Innovation Principle Continuous Profit Improvement
(Objective: Foster creativity, making problems opportunities) (Objective: % target return on sales)
% sales from new products Capacity utilization
# of “Spirit of Innovation” awards Contribution/productive machine hour
Waste
% annual production cost improvement
Gross margin for new project development
Customer returns
Process Principle Continuous Cycle Time Reduction Improvement
(Objective: Cross-functional team work, open information sharing, (Objective: % targeted reduction)
participative decision making)
# of “Spirit of Co-operation” awards Average turnaround, sample requests
# of commendations Projects, sanctioned/commercialized
R&D time on new projects
% projects productive
# projects changed after commercialized
On-time delivery
Part A: Strategy Part B: Principles
Exhibit 10 – Rexam Custom Europe’s Two-Part Scorecard
Source:Adapted from Butler et al. 1997:249, 251

22. As a Strategic Management System
The second way to apply the balanced score-
card is as a strategic management system,
the application championed by Kaplan and
Norton. This enables managers to deliver
more than better results. It helps them
deliver a better strategy. As Kaplan and
Norton maintain, executives can use it, as
shown in Exhibit 11, to translate the cor-
porate vision, communicate strategy down
through the organization, integrate business
and financial plans to deliver the strategy,
and stimulate feedback that shows how to
change the strategy to increase its effective-
ness (Kaplan and Norton 1996). Each of
these processes is useful by itself; together
they can play a decisive role in corporate
success, especially when a firm launches
a new strategy or undergoes considerable
change.
One company that clarified its strategy by
using the scorecard is CIGNA Property &
Casualty (Epstein and Birchard 1999:86-88
and Gouillart and Kelly 1995:16, 79-83,
165-168). In 1993, a new management team
sought to change the unit from a generalist
to a specialty insurer. In a generalist strategy,
an insurer seeks premium revenue wherever
it can find it. In a specialist strategy, it seeks
income only in selected markets (marine,
farm, aerospace, residential, financial insti-
tutions) with carefully selected customers
where underwriters understand the risk
and the company can make good margins.
What kinds of measurements translate
the specialty vision into a working strategy?
One of those created by CIGNA was per-
centage of premiums from new segments.
Another was quality of relationships with
brokers in segments targeted for growth.
Executives at CIGNA worked for three
months to develop these kinds of measures.
By working together, they weeded out mis-
understandings and resolved differences to
develop a precise, shared view of the drivers
of success. The entire process created a
joint, and strong, commitment to a strategy
defined more explicitly than ever before.
CIGNA P&C went on to use the balanced
scorecard to communicate its strategy down
through the organization. Managers carried
out this communication during the process
of cascading, when they worked with sub-
ordinates down through the hierarchy to
gain agreement on how to tailor comple-
mentary scorecards to unit strategies. As
22
STRATEGICPERFORMANCEMEASUREMENT
Source: Kaplan and Norton 1996c:77. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved. Reprinted by
permission of Harvard Business Review.
Exhibit 11 – Using the Balanced Scorecard as a Strategic Management System
Translating the Vision
• Clarifying the visions
• Gaining consensus
Communicating and Linking
• Communicating objectives
• Setting goals
• Linking strategies
Feedback and Learning
• Articulating the feedback
• Supplying strategic information
• Facilitating learning
Business Planning
• Setting targets
• Aligning initiatives
• Allocating resources
• Establishing milestones
BALANCED
SCORECARD

23. an example, executives at the top wanted to
communicate forcefully that every unit –
whether selling insurance to the marine
market or residential market – should pur-
sue stronger relationships with brokers and
agents. Some units believed they could best
strengthen relationships by providing more
flexible underwriting. Others felt they could
strengthen relationships by faster under-
writing decisions. Still others felt they should
focus on providing a broader array of services.
And yet others felt they should stress more
price competitiveness. Each unit worked with
executives to devise appropriate measures
accordingly.
Along with translating the vision and
communicating strategy, companies can
apply the balanced scorecard to strengthen-
ing business planning processes. The score-
card specifically helps companies by linking
two critical parts of the planning and con-
trol system, strategic planning and annual
budgeting. To be sure, companies have long
sought this integration, but often they have
failed. The people and processes for setting
strategy (a part of the planning and develop-
ment function) have meshed poorly with the
people and processes for establishing the
annual and day-to-day orders for the troops
(a part of finance). Moreover, the language
of strategy – ordinarily a set of qualitative
statements about markets, innovation,
process changes, competency management,
and so on – have translated poorly into the
language of financial budgets. The balanced
scorecard bridges the gap between strategy
and execution. It assures that the company
focuses on long-term drivers of success –
most often nonfinancial measures.
Tenneco used its balanced set of measures
to integrate management planning and
control. Today, in the Tenneco process,
executives first lay out the big picture for
the company with long-term strategic plan-
ning (Epstein and Birchard, 1999:106-108).
They then move to long-term business
planning and annual operating planning
to create a working plan for each business
unit. Next, they flesh out those plans by
specifying objectives, measures, and people
responsible in a document called a matrix.
Finally, they link every employee to the
matrix with individual, annual performance
agreements. The management planning and
control system essentially takes the grand
scheme for company strategy, defined by a
variety of financial and nonfinancial mea-
sures, and explodes it into concrete, bite-size
pieces – essentially individual scorecards for
each person in the company.
Once managers have applied the scorecard
to translating the vision, communicating
strategy, and integrating planning, they have
positioned themselves for the fourth critical
aspect of strategic management: gaining
feedback to change the strategy itself (Kaplan
and Norton 1996a). Given that a flawed
strategy can mire a company in mediocre
performance, the scorecard provides an
invaluable means to test the strategy’s
validity. At most companies, management
review meetings focus almost entirely on
operational issues, rarely on strategic ones.
Managers at companies with a balanced set
of measures derived from strategy, however,
can use the meetings to ask whether the
measures indicate the strategy is working.
If managers have placed their bets on
a strategy of using quality improvement
to boost sales, for example, they will have
created a performance logic to go along with
their thinking. They will probably have
theorized that lower product defect rates
will boost customer satisfaction; that higher
customer satisfaction will boost customer
retention; and that higher retention will
boost sales. They can use the results on the
scorecard to see whether their hypotheses
are borne out in practice. In other words,
the balanced set of measures can provide
early-warning signs of a strategy gone wrong.
Managers may find as they review results
that defect rates are falling as planned, and
customer satisfaction and retention are rising
– but sales are running flat. If so, they must
dig deeper to find potential flaws in their
strategy. They may find, for example, that
buyers of low-end products are buying more,
but buyers of high-end products are buying
elsewhere. They may then want to go back
to the strategic drawing board. For their
business, the quickest route to higher sales
may not lie principally in improving quality
but in accelerating innovation or adding
premium service.
Note that in today’s competitive environ-
ment, using the scorecard to refine strategy
demands more than asking a cloistered
management team to drill deep into a
mountain of freshly obtained data. It also
demands collecting insights from the best
and brightest employees, wherever they are.
For this reason, managers cannot consider
strategy evaluation solely the job of executives.
A broad cross-section of people throughout
Applyi ng the Bal ance d Score card
23

24. the organization – if not everyone – should
have access to balanced scorecard results.
The more transparent the reporting of
internal measurement, the better to stimu-
late people to express ideas on rectifying
shortfalls.
That’s not to say that organizations
should release to outsiders every measure
on the balanced scorecard. At times, the
scorecard may reveal sensitive aspects of
strategy best kept proprietary. Whirlpool
Corporation, for example, releases to the
work force only a subset of the data given
to top executives. (Epstein and Birchard
1999:85). On the whole, however, many
elements of strategy reflect industry-wide
efforts to compete on like terms, or reflect
information willingly disclosed by top
managers to explain their actions to stake-
holders. In such cases, the small selection
of measures in the corporate-level balanced
scorecard rarely reveal secrets that manage-
ment must keep within the organization.
Weyerhauser Company’s Prince Albert Pulp
and Paper unit, in northern Saskatchewan,
developed four scorecards, one for the pulp
mill, one for the paper mill, one for the
“site” activities, and one for the overall unit.
Managers publish much of the information
in the scorecards – on safety, productivity,
quality, and environmental performance –
either daily or weekly. The company believes
the information gives employees more fre-
quent feedback on how to better manage
the mill, and gives managers feedback on
the success of their strategies (Hribar et al.
1997:36-40). Managers at other firms should
encourage such openness, reporting finan-
cial and nonfinancial numbers and provid-
ing means for employees to communicate
ideas back up the chain of command.
Note also that managers should not treat
the balanced scorecard as simply a sophis-
ticated control panel for management by
exception, where indicators are discussed
only if they fail to reach some pre-set stan-
dard. Instead, the balanced scorecard should
help managers control their organizations
in an interactive manner, providing the
fodder for frequent face-to-face meetings
of superiors, subordinates, and peers to
discuss what is going right and wrong. In
these meetings, rather than discussing
numbers for numbers’ sake, managers
should challenge and debate the underlying
data, assumptions, and action plans. From
this discussion comes true insight on
developing the best possible strategy.
As an External Accountability System
The third way to apply the balanced score-
card is as part of a corporate accountability
system. When managers use measures as a
performance-improvement system, or as a
strategic management system, they are
largely restricting themselves to an internal
focus. They consequently develop strong
internal accountability – systems for defin-
ing goals, meeting them, and gathering
intelligence on doing better next time.
But in today’s world, systems of internal
accountability aren’t enough for long-term
success. A firm also needs a means to fulfill
the competitive and social demands for
external accountability, The balanced
scorecard provides that means. Managers
can use it outside the firm in much the
same way they do inside. They can use it
to communicate strategy, align goals, stim-
ulate strategic feedback, and engage the
hearts and minds of outsiders in working
in the company’s favor.
To begin with, companies can use their
balanced set of measures to communicate
strategy to outsiders. A variety of stake-
holders either need or want this informa-
tion. After all, companies work peer to
peer with these stakeholders – with share-
holders, customers, suppliers, community
leaders, and a mobile pool of talented
employees – to execute corporate strategies.
By providing a snapshot of a balanced
mix of measures, a company clarifies the
nuances of its strategy for partners outside
the company in the same way it does for
managers within the company.
Company executives cannot expect to
tighten linkages along the supply chain
unless they open their measurement doors
with more financial and nonfinancial
information. In a sense, managers are
extending the concept of open-book man-
agement beyond the walls of the compa-
ny, and expanding the scope of open-book
data beyond the financial metrics. They
can then better align stakeholder interests
with company interests.
Opening a window on the balanced set
of measures is also a means for a firm to
demonstrate its superiority as a business
partner. Disclosing reliable, germane,
quantified data on performance reduces
skepticism and uncertainty on the part of
business partners. A more open sharing of
information is critical to strengthen stake-
holder loyalty, and may be a powerful way
24
STRATEGICPERFORMANCEMEASUREMENT

25. to market organizational capabilities to cus-
tomers and other stakeholders (Epstein and
Birchard 1999:207).
Some industries have already applied the
scorecard externally as a critical competitive
tool. One of these industries is health care.
In the early 1990s, the largest managed-care
firms in the U.S., including U.S. Healthcare
(now Aetna U.S. Healthcare) and United
Healthcare, began releasing some of their
balanced-measurement data – data on cus-
tomer satisfaction, quality of care, adminis-
trative efficiency, and cost reduction. The
companies used the reporting of measures
to attract customers and repel efforts to reg-
ulate the industry. In the years since, using
the scorecard measures to fill in a report
card of progress has become a competitive
requirement for leading health-care organi-
zations in the U.S. In 1999, the premier
health-maintenance organization accrediting
organization, the National Committee for
Quality Assurance, started to require health-
maintenance organizations to report non-
financial measures of performance.
Some executives doubt the advantages
of applying a balanced scorecard developed
internally to help the company externally.
Some even view this application of the
scorecard as risky. But recent research sug-
gests that shareholders give companies a
competitive edge for disclosing more (Healy
et al. 1998). Better disclosure – even when
controlled for earnings increases – is accom-
panied by better stock performance, more
institutional ownership, more analyst fol-
lowing, and greater liquidity.
Managers can also use the broader report-
ing of measures in the balanced scorecard
as a way to spur performance. Publicly
committing to the practice of regularly
stating and reporting on quantified perfor-
mance goals creates a far greater sense of
obligation than a commitment made behind
closed doors. In adopting new shareholder
value measures in recent years, several com-
panies have adopted this approach to using
public commitments and reporting as a lever
for better internal performance. Briggs &
Stratton, Eli Lilly, SPX Corporation, and
Herman Miller report economic profit,
committing the firms to financial returns
exceeding the weighted average cost of
capital. This sends a strong message to
employees that the new measures count.
This kind of external sharing of balanced
scorecard measures enables another valuable
corporate capability: incorporating stake-
holders within the feedback system that
stimulates corporate learning. As with
benchmarking internal processes with out-
siders, sharing a balanced set of measures
more broadly promises to elicit even more
learning from outside sources. This is one
of the reasons behind Skandia’s practice of
reporting in a series of intellectual capital
reports an unparalleled amount of data on
the operational performance of a number of
its units. (For an excerpt, see Exhibit 12)
Willing to take the risk of disclosing even
some sensitive competitive information,
Skandia has unleashed a flood of feedback.
In 1998, the company published 40,000
copies of its Intellectual Capital report to
meet demand, four times the print run of
its traditional financial report. Starting in
2000, for fiscal year 1999, Skandia hopes
to expand its reporting further, integrating
corporate-wide intellectual capital measures
into its traditional financial report.
Finally, a company can use the balanced
scorecard to fulfill a growing expectation of
the public, an expectation that stakeholders
have a “right to know” about what goes on
inside a corporation. Whether managers
agree or not, outsiders believe they deserve
more information about finances, operations,
environmental performance, diversity, and
even social responsibility. By developing a
rigorous system of measures to help the
company compete internally, and then
Applyi ng the Bal ance d Score card
25
Source: Skandia Group. 1998. Human Capital inTransformation: Intellectual
Capital Prototype Report, Skandia 1998. Stockholm: Skandia Group.
Gross premiums written
Gross premiums written per employee
Telephone accessibility
Number of individual policies
Customer satisfaction index
Average age
Number of employees
Time in training (days/year)
IT employees/total number of employees
Increase in gross premiums written
Share of direct payments in claims assessment system
Number of ideas filed with Idea Group
Financial Focus
Customer Focus
Human Focus
Process Focus
Renewal & Development Focus
Exhibit 12 – Skandia Group’s Navigator
(Navigator for Dial)

26. reporting the results, managers help assure
that the public will continue to trust their
word, and continue to support their “license
to operate.”
An example of this application of mea-
sures appears most prominently in the realm
of environmental performance. In 1998, 600
companies issued formal environmental
reports, disclosing numerous quantitative
measures of improvement. Nortel Networks
reported an “environmental performance
index,” for example. It uses the index to
help continuously track and reduce its
environmental impacts. The index aggre-
gates and weights 25 variables of environ-
mental performance – from energy con-
sumption to hazardous waste cleanup.
Nortel has learned to apply its measure to
both improve operationally and strategically
internally and to demonstrate accountability
externally.
CONCLUSION
Management accountants, financial execu-
tives, general managers, and external accoun-
tants all need to improve the way they
measure the performance of organizations
in our society today. They must improve
these measures to raise performance; they
must improve them to compete with
stronger strategies more adeptly executed;
and they must improve them to demon-
strate accountability to stakeholders for
building value.
The measures chosen by outstanding
organizations of the future must be a bal-
anced set, a mixture of familiar financial
figures and – to many organizations –
unfamiliar nonfinancial ones. These mea-
sures must reflect the complexity of business
today, and the heightened requirement for
world-class performance in far more aspects
of corporate operations — from emphasiz-
ing innovation to fostering diversity.
At a minimum, measures should reflect
financial performance along with two to
four nonfinancial categories, such as cus-
tomer, employee, internal business process,
or learning and growth. But they should
be tailored to meet the needs of each com-
pany’s business, and they should be expand-
ed when necessary to take into account
the critical stakeholder relationships the
firm depends on to prosper, whether with
suppliers, customers, community, lenders,
or others.
The measures should link one to the
other in a web of logic that, in a sort of
shorthand, shows the core cause-and-effect
relationships that enable the company to
create value. The balanced scorecard high-
lights the drivers of company profits – in
much the same way that activity-based
costing elucidates the drivers of costs. In
many companies, the critical success factors
are poorly defined, and poorly communi-
cated. Many people just don’t understand
them. With the balanced scorecard, the
key performance indicators can be crisply
defined, crisply communicated, and easily
monitored to evaluate success.
Today, companies of all sizes, centralized
and decentralized, local and global, have
adapted the balanced scorecard in order to
run at a much higher level of performance.
They have cascaded scorecards down the
corporate hierarchy to make strategy clear
to everyone in the company. They have
linked employees’ compensation to the
scorecard to motivate action that consis-
tently contributes to company goals. They
have even begun to incorporate their
measures into the accountability model
described by Epstein and Birchard (1999),
an integration of enlightened board gover-
nance, financial, operational and social
measures, management planning and
control systems, and internal and external
reporting systems (Exhibit 1).
Realizing the full power of the balanced
scorecard calls on top managers to first
make a commitment to introduce the new
measures that will guide decision making
away from a single-minded focus on finan-
cial figures. As they learn to manage with
a dashboard of new dials, they will align
themselves, and their organizations, behind
their strategies with a precision they have
never before experienced. And they will
position themselves to generate the profit-
ability and to demonstrate the accountabil-
ity demanded by customers, shareholders,
employees, and the communities around
them.
26
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27. ENDNOTES
1 See also, The Society of Management
Accountants of Canada. 1992, revised
1999. Managing the Human Aspects of
Organizational Change. Management
Accounting Guideline. Mississauga, ON:
The Society of Management Accountants
of Canada.
Applyi ng the Bal ance d Score card
27

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31. NOTES
Applyi ng the Bal ance d Score card
31

32. ©1999 by The Society of Management Accountants of Canada
All rights reserved.
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C A N A D A
Shaping the Future
This Management Accounting Guideline was prepared with the
assistance of: Marc Epstein, Research Professor of Management,
Jesse H. Jones Graduate School of Management, Rice University,
and Bill Birchard, Contributing Editor, CFO Magazine, Amherst,
New Hampshire.