A REPORT

ON

BALANCED SCORECARD

Submitted By

Name: Khushboo Raj

PRN: 17020841174

SYMBIOSIS INSTITUTE OF BUSINESS MANAGEMENT,

BENGALURU
95/1 & 95/2, Electronic City Phase-1, Hosur Road, Bengaluru – 560100

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 ORIGIN OF BALANCE SCORECARD

In 1990, the Nolan Norton Institute, the research arm of KPMG, sponsored a one-year multi
company study, “Measuring Performance in the Organization of the Future.” The study was
motivated by a belief that existing performance measurement approaches, primarily relying on
financial accounting measures, were becoming obsolete.

The study participants believed that reliance on summary financial-performance measures were
hindering organizations’ abilities to create future economic value. David Norton, CEO of Nolan
Norton, served as the study leader and Robert Kaplan as an academic consultant. Representatives
from a dozen companies-manufacturing and service, heavy industry and high-tech met bimonthly
throughout 1990 to develop a new performance-measurement model.

A mid-sized semiconductor company called Analog Devices was used as a case study. The company
was using a newly created “Corporate Scorecard” that contained, in addition to several traditional
financial measures, performance measures relating to customer delivery times, quality and cycle
times of manufacturing processes, and effectiveness of new product developments.

Art Schneiderman, then vice president of quality improvement and productivity at Analog Devices
Inc (ADI), introduced goals for a series of quality measures that correspond to what he considered to
be the critical success factors for ADI (Anthony and Govindarajan, 1997). As part of the five-year
strategic plan of ADI, Schneiderman also developed a one-page report, called the Scorecard. This
scorecard showed three categories of measures: financial, new products and Quality Improvement
Process. The basic idea in creating this scorecard was to integrate financial and nonfinancial metrics
into a single system in which they did not compete with one another for management airtime
(Schneiderman, 2001)

The Scorecard at Analog Devices, Inc.

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A variety of other ideas were presented during the first half of the study, including shareholder
value, productivity and quality measurements, and new compensation plans, but the participants
soon focused on the multidimensional scorecard as offering the most promise for their needs. The
group discussions led to an expansion of the scorecard to what was labelled a “Balanced Scorecard,”
organized around four distinct perspectives- Financial, customer, internal, and innovation and
learning.

The name reflected the balance provided between short- term and long-term objectives, between
financial and non-financial measures, between lagging and leading indicators, and between external
and internal performance perspectives. Several participants experimented with building prototype
Balanced Scorecards at pilot sites in their companies. They reported back to the study group on the
acceptance, the barriers, and the opportunities of the Balanced Scorecard.

The conclusion of the study, in December 1990, documented the feasibility and the benefits from
such a balanced measurement system. The findings of the study group were summarized in an
article, “The Balanced Scorecard-Measures That Drive Performance,” Harvard Business Review
(January-February 1992).

FOUR PERSPECTIVES OF BALANCE SCORECARD

The Balanced Scorecard is a set of performance targets and results relating to four dimensions of
performance—financial, customer, internal process and innovation. It recognises that organisations
are responsible to different stakeholder groups, such as employees, suppliers, customers, com-
munity and shareholders.

The balanced scorecard shows an organisation’s performance in meeting its objectives relating to
stakeholders. Sometimes different stakeholders have different wants. For example, employees
depend on an organisation for their employment. Shareholders depend on an organisation to
maintain their investment. The organisation must balance those competing wants. Hence, the
concept of a balanced scorecard is to measure how well the organisation is doing in view of
competing stakeholder wants.

Most organisations use four perspectives or four categories of performance measures. The financial
perspective indicates whether the company’s strategy and operations add value to shareholders. For
organisations that do not have shareholders, the financial perspective indicates how well the
strategy and operations contribute to improving the organisation’s financial health. The customer
perspective indicates how the company’s strategy and operations add value to customers.

The internal business and production process perspective indicates the ability of the internal
business processes to add value to customers and to improve shareholder wealth. Finally, the
learning and growth perspective indicates the strength of the infrastructure for innovation and long-
term growth. The balanced scorecard framework derives its power by providing a holistic view of
business value through its four perspectives.

Hansen and Mown have referred to balanced scorecard as ‘strategic-based responsibility accounting
system’ which translates the mission and strategy of an organisation into operational objectives and

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measures for four different perspectives: the financial perspective, the customer perspective, the
process perspective and the infrastructure (learning and growth) perspective.

These four perspectives have been briefly discussed below:

1. Financial Perspective:
The balanced scorecard uses financial performance measures, such as net income and return on
investment, because all for-profit organisations use them. Financial performance measures provide a
common language for analysing and comparing companies. People who provide funds to companies,
such as financial institutions and shareholders, rely heavily on financial performance measures in
deciding whether to lend or invest funds. Properly designed financial measures can provide an ag-
gregate view of an organisation’s success.

Financial measures by themselves do not provide incentives for success. Financial measures tell a
story about the past, but not the future; they have importance, but will not guide performance in
creating value.

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According to Brown, a sound approach to financial measurement is to make sure that your data
base includes three types of information’s:

a. Historical Data:

How did we do last month, last week, this year, last year, and so on?

b. Current Data:

How are we doing right now, today?

c. Future Data:

How will we be doing in the next few months or years?

From a financial standpoint, the purpose of a business is to create wealth for its owners. Output
measures or historical financial measures help an organization keep score of how well it is doing at
creating wealth. These data are always past-focused because they are based on events that have
already occurred: our net profit for the year versus last year, our sales revenue this year versus last
year, and our average stock price this month versus last month.

Another measure of today’s financial results is the amount of cash the business has on hand or the
total value of its assets as compared with its liabilities. This is a good measure of an organization’s
overall financial health. These types of financial metrics should answer the question: How are we
doing today?

The third type of financial data needed in a complete set of measures is used to predict the
company’s future financial performance. These forecasts are used to plan for future workload and
resource requirements. Another common future-oriented financial statistic is the amounts invested
in research and development as a ratio to sales revenue or profit.

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Organizations often cut back on these costs during tough times, which may cause them to mortgage
their future for the sake of short-term financial gains. Growth in sales from a particular geographic
region or a particular industry may also be a future-oriented financial statistic if the company is
looking to grow into new or emerging markets.

2. Customer Perspective:
In the customer perspective of the Balanced Scorecard, managers identify the customer and market
segments in which the business unit will compete and the measures of the business unit’s
performance in these targeted segments. This perspective typically includes several core or generic
measures of the successful outcomes from a well-formulated and implemented strategy.

The core outcome measures include customer satisfaction, customer retention, new customer
acquisition, customer profitability, and market share in targeted segments. But the customer
perspective should also include specific measures of the value propositions that the company will
deliver to customers in targeted market segments.

The segment-specific drivers of core customer outcomes represent those factors that are critical for
customers to switch to or remain loyal to their suppliers. For example, customers could value short
lead times and on-time delivery or a constant stream of innovative products and services or a
supplier able to anticipate their emerging needs and capable of developing new products and
approaches to satisfy those needs. The customer perspective enables business unit managers to
articulate the customer and market-based strategy that will deliver superior future financial returns.

The core measurement group of customer outcomes is generic across all kinds of organizations.

The core measurement group includes measures of:

a. Market share

b. Customer retention

c. Customer acquisition

d. Customer satisfaction

e. Customer profitability.

The Customer perspective, core measures

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3. Internal-Business-Process Perspective:
In the internal-business-process perspective, managers identify the critical internal processes in
which the organization must excel.

These processes enable the business organizations to:

i. Deliver the value propositions that will attract and retain customers in targeted market segments,
and

ii. Satisfy shareholder expectations of excellent financial returns.

The key to excellence in any organization is control of its processes to produce reliable and
consistent products and services. Performing the right processes in the right manner leads to consis-
tent levels of product and service quality. The difficulty lies in finding the right process variables to
measure and setting the standards appropriate to performance levels of each of the process
measures. Process and operational measures are leading-edge measures that are more short-term-
focused.

In order to achieve consistently high performance, an organization must control its inputs. The two
most important inputs to good performance are knowledge of customer requirements and high-
quality goods and services from key suppliers.

Macro process model for an organization

Brown finds that excellent organizations measure processes and operational results in the
following manner:

a. Cycle time for all key processes is measured.

b. Rework time and/or costs are tracked for key production and service delivery processes.

c. Key measures of productivity are identified and tracked for major processes in the organization.

d. Key processes have been identified in each unit, function, and department of the organization,
and process measures have been defined for each key process.

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e. Process measures are correlated directly with product/service characteristics or performance
factors that are of prime importance to customers.

f. Standards or goals are set for all key process measures, and those standards are based upon
benchmark organizations and customer requirements.

4. The Learning and Growth Perspective:

For incentive purposes, the learning and growth perspective focuses on the capabilities of people.
Managers would be responsible for developing employee capabilities. Key measures for evaluating
managers’ performance would be employee satisfaction, employee retention, and employee
productivity.

(a) Employee Satisfaction:

Employee satisfaction recognises the importance of employee morale for improving productivity,
quality, customer satisfaction and responsiveness to situations. Managers can measure employee
satisfaction by sending surveys, interviewing employees, or observing employees at work.

(b) Employee Retention:

Firms committed to retaining employees recognise that employees develop organisation-specific

intellectual capital and provide a valuable non-financial asset to the company. Furthermore, firms
incur costs when they must find and hire good talent to replace people who leave. Firms measure
employee retention as the inverse of employee turnover—the percent of people who leave each
year.

(c) Employee Productivity:

Employee productivity recognises the importance of output per employee. Employees create
physical output (i.e., miles driven, pages produced, or lawns mowed), or financial output (i.e.,
revenue per employee or profits per employee). The number of loans processed per loan officer per
month would provide a simple measure of productivity for loan officers at a bank.

Within this core, the employee satisfaction objective is generally considered the driver of the other
two measures, employee retention and employee productivity.

The Learning and growth measurement framework

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 EXAMPLE OF BALANCE SCORECARD

Company- Tata Consultancy Services Ltd

Vision Provide Highest customer satisfaction at lowest

cost

Mission To be recognized and respected as professional,

innovative, profitable information, and
knowledge-based services enterprise

Cascading the vision to levels of the organisation

LEVELS VISION
L1 Board of directors Improve customer satisfaction

L2 Division Managers IT Improve Service quality of customer facing

L3 Department Manager IT Improve quality of application development and system

testing
L4 Team Leader IT % delivery of maintenance work and meet user needs
without rework

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Few KPIs under Financial perspective:
Return on Investment

Day’s working capital

Cash flow return on investment

EVA

Current ratio

Growth rate in tangible assets

Few KPIs under Learning and growth:

Market share

Growth in market share

% of sales from new products

% of sales from new customers

Number of employee suggestions

Reduction in cycle time

Growth rate in knowledge assets

Few KPIs under Customer perspective:

On-time delivery

Number of customer suggestions

Customer returns

Repeat orders

Few KPIs under Internal Business perspective:

Unit cost

Number of defects per million

Cycle time

% Waste/scrap

Distribution reach

Number of training hours

Stock-out percentage

Percentage of components outsourced

Ratio of number of skilled employees to total employees

% Effectiveness

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