Why is balanced scorecard useful

ECI stated its financial goals simply: to survive, to succeed, and to prosper. Survival was measured by cash flow, success by quarterly sales growth and operating income by division, and prosperity by increased market share by segment and return on equity.

Should they pay attention to short-term financial measures like quarterly sales and operating income? Many have criticized financial measures because of their well-documented inadequacies, their backward-looking focus, and their inability to reflect contemporary value-creating actions.

Shareholder value analysis SVA , which forecasts future cash flows and discounts them back to a rough estimate of current value, is an attempt to make financial analysis more forward looking. But SVA still is based on cash flow rather than on the activities and processes that drive cash flow. Some critics go much further in their indictment of financial measures. They argue that the terms of competition have changed and that traditional financial measures do not improve customer satisfaction, quality, cycle time, and employee motivation.

In their view, financial performance is the result of operational actions, and financial success should be the logical consequence of doing the fundamentals well.

In other words, companies should stop navigating by financial measures. By making fundamental improvements in their operations, the financial numbers will take care of themselves, the argument goes. Assertions that financial measures are unnecessary are incorrect for at least two reasons. Let us demonstrate rather than argue this point.

In the s, a chemicals company became committed to a total quality management program and began to make extensive measurements of employee participation, statistical process control, and key quality indicators.

Using computerized controls and remote data entry systems, the plant monitored more than 30, observations of its production processes every four hours. The department managers and operating personnel who now had access to massive amounts of real-time operational data found their monthly financial reports to be irrelevant.

But one enterprising department manager saw things differently. He created a daily income statement. Each day, he estimated the value of the output from the production process using estimated market prices and subtracted the expenses of raw materials, energy, and capital consumed in the production process.

The daily financial report gave operators powerful feedback and motivation and guided their quality and productivity efforts. The department head understood that it is not always possible to improve quality, reduce energy consumption, and increase throughput simultaneously; tradeoffs are usually necessary. He wanted the daily financial statement to guide those tradeoffs.

The operators were empowered to make decisions that might improve quality, increase productivity, and reduce consumption of energy and materials. That feedback and empowerment had visible results. When, for example, a hydrogen compressor failed, a supervisor on the midnight shift ordered an emergency repair crew into action. Previously, such a failure of a noncritical component would have been reported in the shift log, where the department manager arriving for work the following morning would have to discover it.

The midnight shift supervisor knew the cost of losing the hydrogen gas and made the decision that the cost of expediting the repairs would be repaid several times over by the output produced by having the compressor back on line before morning.

The department proceeded to set quality and output records. Over time, the department manager became concerned that employees would lose interest in continually improving operations. The operators continued to improve the production process. With this innovation, it was easy to see where process improvements and capital investments could generate the highest returns. Over the three-year period between and , a NYSE electronics company made an order-of-magnitude improvement in quality and on-time delivery performance.

Did these breakthrough improvements in quality, productivity, and customer service provide substantial benefits to the company? Unfortunately not. The considerable improvements in manufacturing capabilities had not been translated into increased profitability. Slow releases of new products and a failure to expand marketing to new and perhaps more demanding customers prevented the company from realizing the benefits of its manufacturing achievements.

The operational achievements were real, but the company had failed to capitalize on them. The disparity between improved operational performance and disappointing financial measures creates frustration for senior executives. This frustration is often vented at nameless Wall Street analysts who allegedly cannot see past quarterly blips in financial performance to the underlying long-term values these executives sincerely believe they are creating in their organizations.

But the hard truth is that if improved performance fails to be reflected in the bottom line, executives should reexamine the basic assumptions of their strategy and mission. Not all long-term strategies are profitable strategies. But that view is not necessarily correct.

Even an excellent set of balanced scorecard measures does not guarantee a winning strategy. Quality and cycle-time improvements can create excess capacity. Managers should be prepared to either put the excess capacity to work or else get rid of it. The excess capacity must be either used by boosting revenues or eliminated by reducing expenses if operational improvements are to be brought down to the bottom line.

As companies improve their quality and response time, they eliminate the need to build, inspect, and rework out-of-conformance products or to reschedule and expedite delayed orders.

Eliminating these tasks means that some of the people who perform them are no longer needed. Companies are understandably reluctant to lay off employees, especially since the employees may have been the source of the ideas that produced the higher quality and reduced cycle time. Layoffs are a poor reward for past improvement and can damage the morale of remaining workers, curtailing further improvement. But companies will not realize all the financial benefits of their improvements until their employees and facilities are working to capacity—or the companies confront the pain of downsizing to eliminate the expenses of the newly created excess capacity.

If executives fully understood the consequences of their quality and cycle-time improvement programs, they might be more aggressive about using the newly created capacity. To capitalize on this self-created new capacity, however, companies must expand sales to existing customers, market existing products to entirely new customers who are now accessible because of the improved quality and delivery performance , and increase the flow of new products to the market.

These actions can generate added revenues with only modest increases in operating expenses. Periodic financial statements remind executives that improved quality, response time, productivity, or new products benefit the company only when they are translated into improved sales and market share, reduced operating expenses, or higher asset turnover.

Ideally, companies should specify how improvements in quality, cycle time, quoted lead times, delivery, and new product introduction will lead to higher market share, operating margins, and asset turnover or to reduced operating expenses. The challenge is to learn how to make such explicit linkage between operations and finance. Exploring the complex dynamics will likely require simulation and cost modeling. As companies have applied the balanced scorecard, we have begun to recognize that the scorecard represents a fundamental change in the underlying assumptions about performance measurement.

This was revealing because most existing performance measurement systems have been designed and overseen by financial experts. Rarely do controllers need to have senior managers so heavily involved. Probably because traditional measurement systems have sprung from the finance function, the systems have a control bias. That is, traditional performance measurement systems specify the particular actions they want employees to take and then measure to see whether the employees have in fact taken those actions.

Some of the most significant benefits that part of the companies who have successfully implemented the BSC methodology agreed upon are listed as follows:. The list does not stop here, as each company, depending on the industry it activates in, can identify many other specific benefits of implementing a Balanced Scorecard methodology. However, in order to arrive at the benefits of a Balanced Scorecard approach , companies need to understand how to efficiently implement and use the tool studying best practices, but also keeping in mind that they have to focus on what matters most for them , and to ensure that all employees have a clear picture of the whole performance system.

Another important aspect is to be aware that it is an ongoing process that needs analysis, initiative identification, and successful implementation to keep the business competitive. The balanced scorecard consists of four basic perspectives that contribute to creating a balance in the performance of the organization, which are financial, customers, internal process, learning and growth.

Communicate strategic destination to all staff at all levels. It is interesting to point out that BSC aligns Key Performance Indicators KPIs with strategy at all levels of an organization, not just strategic, but also at operational and individual level. BSC is a great concept to apply It presents multiple views and sides to focus on strategy implementation that concentrate different kind of resources; it creates a common understanding and clarity for all concerns parties.

Moreover, BSC is not allowing us to be unbalanced while integration or slip with one priority over other priorities and aspects. It sets a 2-way communication with stakeholders and enables a dialogue to refine processes and promote feedback.

Do you want to implement a Balanced Scorecard to meet your organizations needs? Contact us to discover more about Lean and how it can help improve your business!

This is part of a series of Blogs on the manufacturing industry and this represents the third article in this series. Ben Bonmati has 20 years of industry experience working at Intel and Sanofi Pasteur across 4 countries. He is Lean Black Belt and Six Sigma Green Belt and has a long experience working in high volume manufacturing environment and using visual management to implement out of the box solutions. Learn more about our data protection and privacy policies.