The Balanced Scorecard: Four Perspectives, Measures, Targets and Criticisms

The managing director of a Lagos logistics firm is handed two reports. The first, the monthly variance report, shows costs under budget in nearly every department and a small favourable profit variance.

The second, a one-page scorecard, shows that on-time delivery has fallen below target, three of the five largest customers have reduced their volumes, the damage rate has doubled and the share of revenue from new services is far below plan. The first report says all is well. The second says the profit will fall in six months.

The difference is that the first looks backward at results of past decisions and at cost only, and the second looks at the factors that produce results. The balanced scorecard, developed by Kaplan and Norton in the 1990s, is a way of measuring performance against long-term objectives by setting targets for four perspectives: customer, internal, innovation and learning, and financial.

This topic explains the idea, the four perspectives and the key question for each, the measures typically used, how to apply the scorecard to a case, how it reduces short-termism, its conflicts and its criticisms. It builds on the earlier topic on sustainability and ESG performance measures. The next topic covers the Fitzgerald and Moon building block model.

The concept of the balanced scorecard

Kaplan and Norton argued that the main objective of a business entity is financial, but that to achieve it over the long term it is also necessary to meet goals that are not financial. The concept is that there are several aspects of performance, or perspectives, and targets should be set for each.

They may sometimes appear to conflict, since achieving an objective on one may need a compromise on another. The aim is a satisfactory balance, and actual performance is measured against all the targets together. By setting targets for several factors and making compromises between them, managers take a more balanced and long-term view and avoid too much emphasis on financial targets and short-term results.

Short-term targets can still be set for each item, so the scorecard can be combined with the annual budget and an annual incentive scheme.

The four perspectives, using the scorecard and criticisms

For each perspective the entity answers a key question to identify the critical issues, then selects measures and sets targets. Specific measures vary with the business.

The chain of cause and effect

Although the main objectives are financial, long-term success depends on meeting the needs of customers (customer perspective). To satisfy them the organisation needs efficient and effective internal processes (internal perspective). To have such processes it needs people with knowledge and skills and a capacity to keep innovating (innovation and learning perspective). The scorecard therefore shows how the leading, non-financial perspectives should drive the lagging, financial one.

Several measures may be chosen for each perspective, or just one; too many add complexity.

Using the scorecard

With the balanced scorecard the focus is on strategic objectives and the critical success factors needed to achieve them, and on what must be done now to ensure future success. The main performance report to management each month can be the scorecard report rather than budgetary control and variance reports. Strategy is translated into measures at each level; targets are set for each; results are compared and acted on.

An example from the book describes an oil company in the early 1990s that competed on price and station location and focused on cost reduction, with low returns. It changed its strategy to attract high-spending customers who would buy other goods at the station.

It set a target to double return on capital employed in three years, targets for productivity and sales growth (financial), for clean and safe stations, speedy and helpful service and loyalty rewards (customer), and for reliable supply of products and goods at the station (internal).

Conflicting targets and criticisms

• Conflict between perspectives. Higher service levels may cost more; investment in innovation reduces short-term profit. For a commercial business the financial perspective should prevail: the football manager analogy is that the score is what finally matters, while shots on goal, corners, tackles and possession are indicators of how the match is going.
• Too many measures can overload managers and dilute focus.
• Difficulty in choosing the right measures, in measuring some (customer satisfaction), and in setting targets.
• No weights or single result: it does not say how to trade one measure against another or give one overall score.
• Cost and time of collecting data and keeping the system updated.
• Assumed cause and effect which may not hold in practice; and it focuses on owners and customers, with less on other stakeholders.
• Gaming: managers may concentrate on measures they are rewarded for.

Layouts for applying the scorecard

1. State the strategic objective.
2. For each perspective: the key question, the critical success factor, one or two measures, a target.
3. Compare actual with target (gap, percentage).
4. Link the perspectives (cause and effect) and spot conflicts.
5. Recommend actions and note limits.

Percentages to one decimal place; each answer is rounded once, at the end.

Worked examples

1. Customer retention.
   4,250 ÷ 5,000 = 85.0%; 750 customers lost.
2. Revenue from new customers.
   540 ÷ 3,000 = 18.0%.
3. Revenue from new services.
   270 ÷ 3,000 = 9.0%.
4. Re-delivery rate. 4.2% against 3%, 40% above target.
5. Comment. New customers replace those lost, which hides a retention problem (15% lost); the re-delivery rate suggests service problems that may be the cause (internal affects customer); and 9% of revenue from new services shows some innovation, to be compared with a target. The scorecard shows that growth is being bought by recruiting, not by keeping customers.

1. Financial: revenue growth 3 points below target.
2. Customer: churn 0.6 points above target, 24% worse.
3. Internal: downtime 8 hours over, 80% above target.
4. Innovation and learning: training 8 hours short, 26.7% below target.
5. Chain. Less training and more network downtime lead to poorer service, so customers leave, so revenue grows less than planned. The scorecard points to training and the network, which are the causes, and not to the sales department, where the symptom appears.

Expect variants: building a scorecard for a named organisation (a hospital, school or bank), identifying which perspective each given indicator belongs to, and discussing how the scorecard would help or hinder the strategy.

Example: a scorecard for an airline

An airline’s goal is profitable growth through reliable, safe, good-value flights. Financial: operating margin and revenue per available seat kilometre. Customer: on-time arrival, complaints per 1,000 passengers, baggage mishandled. Internal: aircraft turnaround time, load factor, safety incidents. Innovation and learning: crew training hours, new routes and services launched. Suppose 54,000 seats were filled out of 72,000 available (load factor 75.0%) and 2,880 of 3,600 flights arrived on time (80.0% against a 90% target, 10 points short).

Usefulness: the scorecard links each measure to the goal, shows the leading causes of poor profit (late flights, low load factor) before they appear in the accounts, and makes managers weigh conflicting aims (fast turnaround against safety checks). Limits: too many measures, difficulty setting targets, and no single overall score.

Common mistakes

• Putting measures in the wrong perspective.
• Listing measures with no link to the strategy or no targets.
• Forgetting the financial perspective or treating it as unimportant.
• Too many measures in a recommendation.
• Ignoring cause and effect between perspectives.
• No discussion of limits.

Quick revision

• Four perspectives: customer, internal, innovation and learning, financial. Three are non-financial.
• Key questions: what do customers value; what must we excel at; can we keep improving; how do we create value for owners.
• Chain: learning → internal → customer → financial. Financial remains most important.
• Criticisms: conflicts, too many measures, cost, no weights.

How the marks are earned

• Measures in the right perspective with targets.
• Gaps and the cause-and-effect chain.
• Limits and a recommendation.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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