The origins of the balanced scorecard method can be traced back to 1990, when the research arm of KPMG sponsored a study on measuring performance in organisations. The study was motivated by a belief that existing performance measurement approaches, primarily relying on financial parameters, were becoming obsolete. It was a common belief that relying purely on financial accounting measures was hindering companies' abilities to create future economic value.

Analog experience
The early days of the project saw the evaluation of the 'corporate scorecard' being used at Analog Devices as an alternative measure. This scorecard included, 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.

A variety of other ideas, including shareholder value, productivity and quality measurements, and new compensation plans were discussed. In the end, the participants focussed on the multi-dimensional scorecard as offering the best promise for their needs.

The balanced scorecard provides an inter-connected model for measuring performance and revolves around four distinct perspectives -- financial, customer, internal processes, and innovation and learning. Each of these perspectives is stated in terms of the company's objectives, performance measures, targets, and initiatives, and all are harnessed to implement corporate vision and strategy.

The name also reflects the balance between the short- and long-term objectives, between financial and non-financial measures, between lagging and leading indicators and between external and internal performance perspectives.

All levels considered
A lot of the concept of the balanced scorecard has to do with a previously existing concept called MBO, or management by objectives. The scorecard concept is objective-driven, with a significant difference.

It is objective-driven based on multiple levels in the organisation. So if the company CEO, for example, has five key objectives that the board of directors is going to be measuring the CEO on, one could break those objectives down into various levels depending on the organisational hierarchy reporting to the CEO. Each executive at the levels below would have four or five key objectives that they would need to achieve. Some would be similar to the CEO's, but they could also be different.

With most companies, the problem with managing and communicating strategy is that by the time the objective percolates from the CEO's objectives to the front-line workers' objectives, there's no connection between the two. What the balanced scorecard allows you to do is something called cascading, through linkages between objectives throughout the organisation. The whole philosophy behind the scorecard is that you should communicate your strategy to the mass of employees because, if only the executive level understands the strategy, it'll never be executed.

The scorecard process begins with the management team working together and deliberating on translating the company's business strategy into specific strategic objectives. The first task is to freeze on the first two perspectives of the scorecard, the financial and the customer perspectives – after which the organisation identifies the objectives and measures for its internal processes. It then progresses to creating the learning and growth objectives.

Organisational learning
Robert S Kaplan and David P Norton, the architects of the balanced scorecard approach, recognised early on that long-term improvement in overall performance was unlikely to happen through technology only, and hence placed greater emphasis on organisational learning and growth. These, in turn, consist of the integrated development of employees, information, and systems capabilities.

Underlying the whole process are performance drivers; these are very specific measures for comparing planned outcomes with actual results. The performance driver for planned employee development links to, and supports, all of the others -- which brings us home to training and development.

Once the scorecard parameters are frozen, they are clearly and unambiguously communicated throughout the organisation. This process initiates a dialogue between the various businesses and the employees throughout the organisation. At the conclusion of the communication process, everyone in the organisation should clearly understand the company's long-term goals and the strategy being adopted to achieve them.

The greatest impact is achieved when the balanced scorecard is used to drive organisational change. It provides for a front-end justification as well as a focus and integration for the continuous improvement, re-engineering and transformation process.

The final, and most important, aspect of the scorecard is the ability to provide managers with feedback, thus enabling them to monitor and adjust the implementation of their strategy – even to the extent of changing the strategy itself. In today's information age, organisations operate in very turbulent environments. Planned strategy, though initiated with the best of intentions and with the best available information at the time of planning, may no longer be appropriate or valid for contemporary conditions.

In such constantly shifting environments, management must learn to continuously adapt to new strategies that can emerge from capitalising on opportunities or countering threats. A properly constructed balanced scorecard can provide management with the ideal tool in reacting to the turbulent environment and helping the organisation to correct the course to success.

(For more information on the subject, refer to The Balanced Scorecard – Translating Strategy Into Action by Robert S Kaplan and David P Norton, 1996, Harvard Business School Press {ISBN 0-87584-651-3})