Building a Balanced Scorecard

Most sane people wouldn't consider steering a ship by looking backward, but that's exactly what most companies do when they focus entirely on financial measures for decision making. The balanced scorecard, one of the most significant management philosophies of the last quarter-century, confronts that stratagem head-on with a simple core concept: Stop trying to manage your organization by financial measures alone. Why? Because financial measures always look backward. They tell you what happened last month, last quarter or last year, but they say little about what will happen in the future.

Financial measures are important, but so are others. Robert S. Kaplan and David P. Norton, authors of The Balanced Scorecard (Harvard Business School Press, 1996), advocate the use of a balanced portfolio of business measures. What exactly is a balanced scorecard? It's a model of metrics, with four boxes representing different measurement categories. The four categories drive performance across different time frames: short, medium and long term. The intent is that organizations will analyze their performance across all four categories of metrics instead of just analyzing and acting on financial measures. Focusing on a balanced portfolio of measures will drive improvement over the long term. Anyone with any amount of business experience knows that financial success in the short term doesn't always translate into long-term success, and that's the underlying wisdom of the balanced scorecard.



The specific measures that reside within each box of the balanced scorecard will be different from one organization to the next. In fact, one of the challenges of the balanced scorecard is in determining logical measures and getting accustomed to acting on them. Here's a summary of the four boxes and how they relate to one another:

• Financial measures. These metrics drive performance over the short term because actions taken to improve financial measures show results quickly. Examples include revenue, profit and cash flow. Financial measures are important because they represent the immediate survival of the organization. They are usually considered the starting point for any balanced scorecard.

• Internal performance measures. These drive achievement in the medium term because actions take longer to show results. Examples include efficiency, innovation and inventory turnover. Internal performance measures rarely show up on financial and accounting reports, but they indicate how well the organization manages its internal processes. Success on internal performance measures will have a direct, positive effect on financial measures, but the effect may take a number of months to appear.

• Customer and marketplace measures. These drive success over the medium to long term because actions might take months or years to show tangible results. Examples include customer perceptions, brand loyalty and market share. Customer and marketplace measures look at success through the eyes of customers, a point of view that is often ignored or minimized. These directly affect financial measures but shift gradually over time. Once customer perceptions begin to move, their momentum is hard to control. This underlies the importance of having a strong grip on what customers really think and what the organization plans to do about it.

• Human resource measures. These drive success over the long term because actions might take years to show tangible results. Examples include hours of training per employee, employee survey results and employee retention rates. Human resource measures are possibly the furthest removed from financial measures because they're often difficult to trace back to bottom-line numbers. But make no mistake---how well an organization manages its human resources certainly affects financial success.

Organizations should try to produce effective results not just for next month but also next year and next decade. Actions taken to improve medium- to long-term metrics are investments in the organization's future. Other themes of the balanced scorecard include linking metrics to strategy, communicating metrics to all personnel and regular progress reviews. These common-sense concepts fit perfectly with the ISO 9001 requirement for measurable objectives.

Are you ready to build a balanced scorecard for your organization? If so, here are some steps that will help ensure success.

Involve top management

The balanced scorecard represents a significant shift in the way organizations gauge their performance. For this reason, top management must embrace the concept fervently enough to become its primary champion. This kind of sales job is no small feat. How do you generate such enthusiasm for a seemingly radical concept? Here's one path:

• Describe what the organization is doing now, which is using financial measures primarily to make all decisions. Show how this has led to shortsighted decisions and mistakes. Make sure to be very diplomatic in how these problems are portrayed.

• Describe the balanced scorecard and explain why it's superior to the measurement methods used by most organizations. Discuss companies that have utilized the concept and provide examples of the measures they used. Make sure to mention that the measures on a balanced scorecard are derived directly from the organization's strategy, which links them perfectly with long-term success.

• Describe how the balanced scorecard could be used in your organization. Outline the strategic benefits to managing a balanced portfolio of measures that drive performance over the short, medium and long term. Explain how a balanced scorecard would remove the ambiguity and confusion that usually accompany the deployment of strategy.

Get top management energized by the concept. Having top management's ear can be very helpful. To achieve this, your sales job is actually twofold: You must sell the people who have top management's ear and then have them assist you in selling top management. The concept almost sells itself when presented correctly. Kaplan and Norton's book can facilitate your preparation, as can a number of others. If you've sold yourself on the concept and truly believe in it, then you'll be in a good position to spread that enthusiasm.

Your best allies during this sales and education process can be your finance people. This might sound a little strange because these would seem to be the people with the most to lose from focusing on things other than financial measures. A smart CFO understands the pitfalls of managing for the short term, though. Use the financial leaders in your organization as sounding boards. It's likely that they'll see the obvious benefits of the approach. Once you have the finance people convinced, your president or CEO should be easy.

Ask the right people the right questions

After top management has become engaged by the concept, someone has to do the dirty work--i.e., build the scorecard itself. A project of this sort will be challenging because the metrics of the past and present might not be much help. The starting point is the organization's strategy. What broad actions are you taking during the next year to stay competitive? The measures on the balanced scorecard will support the strategy, examining it from the perspectives of four quadrants: financial, internal performance, customers and the marketplace, and human resources. That means you'll have to go to the process owners and stakeholders who are tied to these perspectives. Typically, these are the people who are best prepared to assist in developing the respective parts of the balanced scorecard:
• Financial measures: finance, accounting, top management and sales
• Internal performance measures: production, design, quality assurance, engineering, purchasing and logistics
• Customer and marketplace measures: sales, marketing and customer service
• Human resource measures: human resources, training, health and safety

Note that top management is present in only one of these groups. This is so it won't unduly influence measures in the other three groups. There's no benefit to upholding the paradigms of the past when building a scorecard.

The best way to engage each group is through a facilitated session during which you guide participants through an exploration of their own experiences and knowledge about the issues at stake. If the organization has a well-defined strategy, this process is relatively simple. What measures will support achieving the strategy? Define these from each of the four quadrants, and the resulting set of measures will become your balanced scorecard.

The problem is that many organizations don't have a well-defined strategy. Some never get around to doing strategic planning at all. In that kind of organization, developing a balanced scorecard will prove challenging. Even when there's an existing strategy, it's often the result of "group think" or has little connection to the organization's practical requirements.

I recommend holding a series of facilitated meetings with representatives from the four groups listed earlier. During these sessions, you'll guide the participants through a SWOT (strengths, weaknesses, opportunities and threats) analysis specifically focused on their functional areas. For example, participants in the customer and marketplace group will examine strengths, weaknesses, opportunities and threats through the eyes of their customers. The resulting measures will seek to maximize strengths and opportunities, and minimize weaknesses and threats, as viewed through their customers' perceptions. Here are some of the questions in each of the balanced scorecard sections:

• Customer and marketplace SWOT analysis:
--In the eyes of our customers, what do we do especially well?
--What was our biggest customer service success last year?
--What problems do customers keep telling us about?

• Human resource SWOT analysis:
--What makes our people better than employees in other organizations?
--What employee skills and abilities could be improved?
--What skills and abilities do we think will be critical 10 years from now?

• Internal process SWOT analysis:
--What part of our organization experiences the least waste? What enables this efficiency?
--What efficiencies do our competitors have that we don't? What could we do to adopt these efficiencies?
--What's one process improvement we could implement that would put us ahead of the competition?

• Financial SWOT analysis:
--What financial assets do we manage especially well?
--What problems do our accountants keep telling us about?
--What financial advantages do our top competitors have we that we don't?
--What are the three most likely ways our capital could dry up in the next
five years?

The full versions of these SWOT worksheets are available for download:
• SWOT--Customer
• SWOT--Financial
• SWOT--Human Resources
• SWOT--Internal
• Proposed Measure Evaluation Worksheet


Each of the SWOT analyses will produce a set of measures. Not all the measures will appear on the final scorecard, of course, but at least one measure from each group will. The groups can trim their lists through a multivoting methodology (i.e., where each group member casts a predetermined number of votes) or through a more quantitative process. A tool called the proposed measures evaluation worksheet is also available at Quality Digest's Web site. Regardless of the method used to select your final measures, keep your list short. Having a punchy list of five to 10 measures will clearly communicate to everyone what matters most. If you adopt more than 10 measures for your balanced scorecard, the focus becomes diminished. People are able to concentrate on only a few things at a time, so don't overcomplicate the process. If your balanced scorecard is linked to your competitive reality, then it can be an indispensable tool to drive your long-term success

Measuring Service Quality

As quality practitioners, we’re accustomed to measuring the physical attributes of a product: dimensions, angles, power, hardness, tensile strength, color, and many other characteristics. Getting a handle on services can be more difficult. Often there are no physical attributes to measure, or they don’t clearly affect the essential nature of the service. We have to think about what really matters to the customer about the service. Although this is the case with both goods and services, it takes on special significance with a service. Let’s examine the nature of services and discuss the most effective ways of gauging their effectiveness.

The first thing to keep in mind about the service sector is that it is completely different from manufacturing. The things that you take for granted in manufacturing simply don’t exist in many service situations. Consider:

• You control the environment. Even if you subcontract manufacturing to an outside firm, you can still stipulate the environmental conditions. With a service, the environment is often dictated or strongly influenced by the customer. You must adapt to these environmental issues, which can be a huge challenge.

• The customer usually isn’t present. Sure, the customer’s presence is felt through specifications, tolerances, and product requirements, but the customer isn’t standing in front of you or peering over your shoulder. With a service, on the other hand, the customer is front and center. He or she is right there, throwing curve balls and changing requirements midstream.


For these reasons, service provision is radically different from manufacturing. Output measurements that are applied in manufacturing make no sense in a service situation because the customer has such a strong influence over our environment. Think about these traditional measures of output:

• Number of customers processed per hour
• Minutes spent on each call
• Reports generated per day
• Average time per repair
• Rooms cleaned per shift

I’ve seen all of these measures applied aggressively in service environments, and all of them frequently backfired because you can meet output objectives and still generate very low customer satisfaction. That’s why the best way to understand service effectiveness is through customer perceptions.

Customer perceptions are key

Customer perceptions are critical in any product context. In the world of service delivery, they’re especially important due to the personal and interactive nature of services. You may satisfy every stated requirement and still fail to satisfy the customer in a profound way. The ground is shifting as the service is performed, and what you think was perfect may be far from satisfactory. That’s why you must specifically ask your customer what he or she thinks about your services. Don’t provide a long survey that probes every aspect of the service experience; just start with two simple questions: “How satisfied are you with the quality of our services?” and “How likely are you to recommend our services to a colleague?”

These two questions apply to nearly any service situation and industry. The first question addresses basic satisfaction, essentially asking if the services met all requirements. The second question takes this a step further and addresses true commitment: Do you feel strongly enough to recommend our services to somebody else? These represent two different places on the same continuum (as seen in figure 1), and both arenecessary for long-term success.



It’s worth noting that satisfaction falls only in the middle range of the continuum. The blunt reality of business is that basic customer satisfaction is no longer adequate for businesses to remain successful. Basic satisfaction simply means that they might use your services in the future--unless a better offer comes up. Satisfaction is little more than the absence of dissatisfaction, and there’s no glory in just squeaking by. Satisfaction is a reasonable starting point, but the ultimate goal is the kind of commitment that results in customers telling their friends and colleagues about your organization and recommending your services. That’s what you should be striving for.

The two survey questions include a four-point response scale. Some data gurus might question whether this provides much constructive information. Keep in mind, however, that people aren’t reliable measuring instruments. With subjective judgments, four or five degrees of resolution are about as precise as you can expect. Combine the preceding questions with the following two open-ended questions and you’ll have a very useful tool for measuring your services:

• How can we improve our existing services? This is one of the simplest yet most effective questions ever conceived. It strikes at the heart of quality: improvement. It gives customers control of the dialogue, and they can do with it what they will. The responses will provide a clear path to making improvements that your customers value.

• What services would you like to see us offer in the future? Innovation is the key to long-term survival, and this question enlists your customers’ help in making you an innovator. The range of responses is limited only by your customers’ imaginations.

In the case of the open-ended questions, the results can be sorted into similar categories. These can then be plotted on a Pareto diagram to provide guidance on the actions that should be taken. Many quality practitioners bristle at open-ended questions because they don’t produce data in a traditional sense. The responses can be converted to data, however, without much difficulty. Even more important, the results point the way to exactly the improvements and innovations that your customers desire.

You now have a dynamic tool that will take less than a minute of somebody’s time. The scaled questions probe two timeless issues--satisfaction and commitment--and produce solid data that can be tracked, while the open-ended questions provide direction for your improvement efforts. Together you have one of the most streamlined and effective service surveys imaginable.

When to capture perceptions

Ask customers for their feedback as soon as the effects of the service are felt. This might be immediately after performing the service or six months later; it all depends on the type of product you’re addressing and the sorts of contractual obligations that were made with the customer. Consider these service scenarios:

• Restaurant. Feedback could be provided immediately following the experience, or certainly within a day or two of it.

• Appliance repair. Feedback could be provided immediately on certain aspects of the service, but it would probably take weeks to know how effective the repair was. Most appliance-repair companies warranty their repairs for a certain length of time, so the feedback horizon could follow a similar time frame.

• Management consulting. Complex consulting projects that aim to increase a company’s profitability and competitiveness might take up to a year to evaluate. Asking for feedback any sooner would be premature.

These three examples illustrate a range of time frames for feedback, from immediately after the service to a year later. Each organization must decide for itself when the effects of its services can be determined and, thus, when it’s appropriate to solicit feedback.

Once you’ve determined when to capture feedback, the next logical question is how to do it. Yes, you already have the tool, but how exactly will it be administered? Your choices are many: in person or by telephone, e-mail, web site, fax, postal mail, or text message. The chosen method should reflect the most convenient process for your customers. In general, try not to add another communication burden to your customers. If you have frequent face-to-face contact with them, use these interactions for getting their feedback. This also goes for existing communications via telephone and e-mail. If it’s already happening, use it. Providing feedback will only add a minute of extra time, and that’s an investment that most customers are glad to make.

Objective measures

Everything we’ve discussed so far is related to subjective measures of service quality. In other words, we’re asking someone’s opinion of how we performed. They probably don’t have data to back up their opinions, and they may not even be able to provide specific examples. These opinions are the basis for making buying decisions, however, so they’re valuable to you as a service supplier.

Besides subjective performance measures, there are also many objective measures that can be applied to your services. You need only look as far as your service guarantees and contracts to find some effective metrics. Nearly every service provider commits to performing its service within a certain time frame. This naturally gives rise to the question: Was the service performed on time? No opinions are necessary here; you either met your commitments or you didn’t. The data can easily be gathered, charted, and analyzed by your own organization. Hard data provide an excellent counterpoint to customer feedback, and they usually substantiate the themes revealed through customer feedback. When data don’t support these themes, it’s useful to explore the reason for the gaps; e.g., “Our customers think we’re always late, yet our data show this isn’t the case. What’s causing this difference in perceptions?” When there’s a difference of this sort, one of two things typically must happen:

1. The data-collection method must be changed to better match what the customer experiences.

2. The customer must be educated at the performance level. Sometimes providing objective data can shape people’s perceptions, and there’s nothing wrong with doing this.

So, what sorts of measures are helpful in managing service quality? Here are some of the most common:

• On-time delivery. The scheduled date and time is agreed upon between the customer and services provider, and deviations from this schedule can cause serious problems. On-time delivery is an excellent measure that’s usually easy to track.

• Responsiveness. This means your ability to respond to the customer within a reasonable amount of time. The response could be related to a question, problem, quote, inquiry, or order change. Organizations that cultivate “customer intimacy” are usually concerned about how responsive they are.

• Effectiveness. All services are supposed to accomplish something: provide information, repair an appliance, process a transaction, or develop a program, among others. If you’re able to determine if your service was effective, then this is an important measure. Keep in mind that I’m talking about an objective measure of effectiveness, not the customer’s perception of effectiveness.

• Availability. Services that are up and running must be concerned with availability. Examples include utilities providing water, electricity, gas, telephone, or other resources exactly when they’re needed. Being down for a few hours can cause millions of dollars in losses and huge claims.

• Audit results. Processes that provide a service can usually be audited. Either through in-person observation or by examining records, an audit can reveal whether the service was performed as planned. Ideally, conformity with the plan would mean that the service is effective, though this isn’t always the case.

• Cost control. This means adhering to established budgets and spending plans while meeting other service objectives. Notice I didn’t say “cost reduction,” which often is used to justify a reduction in service quality.

In summary, a two-pronged approach is the most effective way to measure service quality. Gauge service effectiveness through customer perceptions and through objective data, and remember that measures are worthless unless you take action.