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www.hbr.org Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton What do companies like Rockwater, Apple Computer, and Advanced Micro Devices have in common? They’re using the scorecard to measure performance and set strategy. Reprint 93505 http://www.hbr.org http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=93505 Putting the Balanced Scorecard to Work by Robert S. Kaplan and David P. Norton harvard business review • september–october 1993 page 1 C O P YR IG H T © 1 99 3 H A R V A R D B U SI N E SS S C H O O L P U B LI SH IN G C O R P O R A T IO N . A LL R IG H T S R E SE R V E D . What do companies like Rockwater, Apple Computer, and Advanced Micro Devices have in common? They’re using the scorecard to measure performance and set strategy. Today’s managers recognize the impact that measures have on performance. But they rarely think of measurement as an essential part of their strategy. For example, executives may introduce new strategies and innovative operating processes intended to achieve breakthrough performance, then continue to use the same short-term financial indicators they have used for decades, measures like re- turn-on-investment, sales growth, and operat- ing income. These managers fail not only to introduce new measures to monitor new goals and processes but also to question whether or not their old measures are relevant to the new initiatives. Effective measurement, however, must be an integral part of the management process. The balanced scorecard, first proposed in the January-February 1992 issue of HBR (“The Bal- anced Scorecard—Measures that Drive Perfor- mance”), provides executives with a compre- hensive framework that translates a company’s strategic objectives into a coherent set of performance measures. Much more than a measurement exercise, the balanced score- card is a management system that can moti- vate breakthrough improvements in such criti- cal areas as product, process, customer, and market development. The scorecard presents managers with four different perspectives from which to choose measures. It complements traditional financial indicators with measures of performance for customers, internal processes, and innovation and improvement activities. These measures differ from those traditionally used by compa- nies in a few important ways: Clearly, many companies already have myr- iad operational and physical measures for local activities. But these local measures are bottom- up and derived from ad hoc processes. The scorecard’s measures, on the other hand, are grounded in an organization’s strategic objec- tives and competitive demands. And, by re- quiring managers to select a limited number of critical indicators within each of the four per- spectives, the scorecard helps focus this strate- gic vision. Putting the Balanced Scorecard to Work harvard business review • september–october 1993 page 2 Robert S. Kaplan is the Arthur Lowes Dickinson Professor of Accounting at the Harvard Business School. David P. Norton is founder and president of Re- naissance Strategy Group, a consulting firm located in Lincoln, Massachusetts. In addition, while traditional financial mea- sures report on what happened last period without indicating how managers can improve performance in the next, the scorecard func- tions as the cornerstone of a company’s cur- rent and future success. Moreover, unlike conventional metrics, the information from the four perspectives provides balance between external measures like operating income and internal measures like new product development. This balanced set of measures both reveals the trade-offs that managers have already made among perfor- mance measures and encourages them to achieve their goals in the future without mak- ing trade-offs among key success factors. Finally, many companies that are now at- tempting to implement local improvement programs such as process reengineering, total quality, and employee empowerment lack a sense of integration. The balanced scorecard can serve as the focal point for the organiza- tion’s efforts, defining and communicating pri- orities to managers, employees, investors, even customers. As a senior executive at one major company said, “Previously, the one-year bud- get was our primary management planning de- vice. The balanced scorecard is now used as the language, the benchmark against which all new projects and businesses are evaluated.” The balanced scorecard is not a template that can be applied to businesses in general or even industrywide. Different market situa- tions, product strategies, and competitive envi- ronments require different scorecards. Busi- ness units devise customized scorecards to fit their mission, strategy, technology, and cul- ture. In fact, a critical test of a scorecard’s suc- cess is its transparency: from the 15 to 20 score- card measures, an observer should be able to see through to the business unit’s competitive strategy. A few examples will illustrate how the scorecard uniquely combines management and measurement in different companies. Rockwater: Responding to a Changing Industry Rockwater, a wholly owned subsidiary of Brown & Root/Halliburton, a global engineer- ing and construction company, is a worldwide leader in underwater engineering and con- struction. Norman Chambers, hired as CEO in late 1989, knew that the industry’s competi- tive world had changed dramatically. “In the 1970s, we were a bunch of guys in wet suits diving off barges into the North Sea with burning torches,” Chambers said. But compe- tition in the subsea contracting business had become keener in the 1980s, and many smaller companies left the industry. In addi- tion, the focus of competition had shifted. Several leading oil companies wanted to de- velop long-term partnerships with their sup- pliers rather than choose suppliers based on low-price competition. With his senior management team, Cham- bers developed a vision: “As our customers’ preferred provider, we shall be the industry leader in providing the highest standards of safety and quality to our clients.” He also de- veloped a strategy to implement the vision. The five elements of that strategy were: ser- vices that surpass customers’ expectations and needs; high levels of customer satisfaction; continuous improvement of safety, equip- ment reliability, responsiveness, and cost ef- fectiveness; high-quality employees; and real- ization of shareholder expectations. Those elements were in turn developed into strate- gic objectives (see the chart “Rockwater’s Strategic Objectives”). If, however, the strate- gic objectives were to create value for the company, they had to be translated into tangi- ble goals and actions. Rockwater’s senior management team transformed its vision and strategy into the balanced scorecard’s four sets of performance measures (see the chart “Rockwater’s Bal- anced Scorecard”): Financial Measures: The financial perspec- tive included three measures of importance to the shareholder. Return-on-capital-employed and cash flow reflected preferences for short- term results, while forecast reliability signaled the corporate parent’s desire to reduce the his- torical uncertainty caused by unexpected vari- ations in performance. Rockwater manage- ment added two financial measures. Project profitability provided focus on the project as the basic unit for planning and control, and sales backlog helped reduce uncertainty of performance. Customer Satisfaction: Rockwater wanted to recognize the distinction between its two types of customers: Tier I customers, oil com- panies that wanted a high value-added rela- tionship, and Tier II customers, those that chose suppliers solely on the basis of price. A Putting the Balanced Scorecard to Work harvard business review • september–october 1993 page 3 price index, incorporating the best available intelligence on competitive position, was in- cluded to ensure that Rockwater could still re- tain Tier II customers’ business when required by competitive conditions. The company’s strategy, however, was to emphasize value-based business. An indepen- dent organization conducted an annual survey to rank customers’ perceptions of Rockwater’s services compared to those of its competitors. In addition, Tier I customers were asked to supply monthly satisfaction and performance ratings. Rockwater executives felt that imple- menting these ratings gave them a direct tie to their customers and a level of market feedback unsurpassed in most industries. Finally, mar- ket share by key accounts provided objective evidence that improvements in customer satis- faction were being translated into tangible benefits. Internal Processes: To develop measures of internal processes, Rockwater executives de- fined the life cycle of a project from launch (when a customer need was recognized) to completion (when the customer need had been satisfied). Measures were formulated for each of the five business-process phases in this project cycle (see the chart “How Rockwater Fulfills Customer Needs”): • Identify: number of hours spent with pros- pects discussing new work; • Win: tender success rate; • Prepare and Deliver: project performance effectiveness index, safety/loss control, rework; • Closeout : length of project closeout cycle. The internal business measures emphasized a major shift in Rockwater’s thinking. For- merly, the company stressed performance for each functional department. The new focus emphasized measures that integrated key busi- ness processes. The development of a compre- hensive and timely index of project perfor- mance effectiveness was viewed as a key core competency for the company. Rockwater felt that safety was also a major competitive factor. Internal studies had revealed that the indirect costs from an accident could be 5 to 50 times the direct costs. The scorecard included a safety index, derived from a comprehensive safety measurement system, that could identify and Putting the Balanced Scorecard to Work harvard business review • september–october 1993 page 4 classify all undesired events with the potential for harm to people, property, or process. The Rockwater team deliberated about the choice of metric for the identification stage. It recognized that hours spent with key prospects discussing new work was an input or process measure rather than an output measure. The management team wanted a metric that would clearly communicate to all members of the organization the importance of building relationships with and satisfying customers. The team believed that spending quality time with key customers was a prerequisite for in- fluencing results. This input measure was de- liberately chosen to educate employees about the importance of working closely to identify and satisfy customer needs. Innovation and Improvement: The inno- vation and learning objectives are intended to drive improvement in financial, customer, and internal process performance. At Rockwa- ter, such improvements came from product and service innovation that would create new sources of revenue and market expansion, as well as from continuous improvement in in- ternal work processes. The first objective was measured by percent revenue from new ser- vices and the second objective by a continuous improvement index that represented the rate of improvement of several key operational measures, such as safety and rework. But in order to drive both product/service innovation and operational improvements, a supportive climate of empowered, motivated employees was believed necessary. A staff attitude survey and a metric for the number of employee sug- gestions measured whether or not such a cli- mate was being created. Finally, revenue per employee measured the outcomes of em- ployee commitment and training programs. The balanced scorecard has helped Rockwa- ter’s management emphasize a process view of operations, motivate its employees, and incor- porate client feedback into its operations. It developed a consensus on the necessity of cre- ating partnerships with key customers, the im- portance of order-of-magnitude reductions in safety-related incidents, and the need for im- proved management at every phase of multi- year projects. Chambers sees the scorecard as Putting the Balanced Scorecard to Work harvard business review • september–october 1993 page 5 an invaluable tool to help his company ulti- mately achieve its mission: to be number one in the industry. Apple Computer: Adjusting Long- Term Performance Apple Computer developed a balanced score- card to focus senior management on a strat- egy that would expand discussions beyond gross margin, return on equity, and market share. A small steering committee, intimately familiar with the deliberations and strategic thinking of Apple’s Executive Management Team, chose to concentrate on measurement categories within each of the four perspectives and to select multiple measurements within each category. For the financial perspective, Apple emphasized shareholder value; for the customer perspective, market share and cus- tomer satisfaction; for the internal process perspective, core competencies; and, finally, for the innovation and improvement perspec- tive, employee attitudes. Apple’s manage- ment stressed these categories in the follow- ing order: Customer Satisfaction: Historically, Apple had been a technology- and product-focused company that competed by designing better computers. Customer satisfaction metrics are just being introduced to orient employees to- ward becoming a customer-driven company. J.D. Power & Associates, a customer-survey company, now works for the computer indus- try. However, because it recognized that its customer base was not homogeneous, Apple felt that it had to go beyond J.D. Power & As- sociates and develop its own independent sur- veys in order to track its key market segments around the world. Core Competencies: Company executives wanted employees to be highly focused on a few key competencies: for example, user- friendly interfaces, powerful software archi- tectures, and effective distribution systems. However, senior executives recognized that measuring performance along these compe- tency dimensions could be difficult. As a re- sult, the company is currently experimenting with obtaining quantitative measures of these hard-to-measure competencies. Employee Commitment and Alignment: Apple conducts a comprehensive employee survey in