www.h
.org
Putting the Balanced
Scorecard to Work
y 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
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Putting the Balanced
Scorecard to Work
y Robert S. Kaplan and David P. Norton
harvard business review • september–october 1993 page 1
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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
arely think of measurement as an essential
part of their strategy. For example, executives
may introduce new strategies and innovative
operating processes intended to achieve
eakthrough 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 o
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-Fe
uary 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
eakthrough improvements in such criti-
cal areas as product, process, customer, and
market development.
The scorecard presents managers with fou
different perspectives from which to choose
measures. It complements traditional financial
indicators with measures of performance fo
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-
ent
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 majo
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 o
even industrywide. Different market situa-
tions, product strategies, and competitive envi-
onments 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
urning torches,” Chambers said. But compe-
tition in the subsea contracting business had
ecome 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-
ers developed a vision: “As our customers’
prefe
ed 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-
le goals and actions.
Rockwater’s senior management team
transformed its vision and strategy into the
alanced 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
y 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
atings. 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
enefits.
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
een satisfied). Measures were formulated fo
each of the five business-process phases in this
project cycle (see the chart “How Rockwate
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 fo
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
ecognized 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
elationships 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 pe
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 bette
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 cu
ently experimenting
with obtaining quantitative measures of these
hard-to-measure competencies.
Employee Commitment and Alignment:
Apple conducts a comprehensive employee
survey in