Balanced Scorecard Leads to Performance Improvement

Learning from experience is an important source of information for continually raising productivity, quality and time of delivery. Companies need to repeatedly measure the value of the resources invested versus the results achieved in order to learn the reasons from their successes and failures. They need detailed numbers that can be sliced and diced to extract insights about the determinants of their financial performance.

Financial statements such as the income statements and the balance sheet are much too aggregated to help pinpoint inefficiencies in manufacturing, supply chain or their marketing systems. Companies need to assign responsibility to individual departments for specific performance goals as well as the means to measure the results to keep track of their progress. Operational managers need guidance on how they can influence the variables under their control to contribute to the overall goals of the company as a whole. A factory manager, for example, needs information on specifics such as energy usage, production cycle time, rejection rates, etc., to plan for the design of production processes. Similarly, sales managers need information on territory coverage, orders received, deliveries, etc., to measure and control their performance. The financial statements, by contrast, measure the overall performance of the company which is much too remote from the world of operating managers.

Furthermore, financial performance is a narrative of the past leaving few clues for assessing the future performance. At best, financial numbers such as NPV, IRR or return on capital invested are a comment on the performance of past investments. They provide few hints about how investments currently underway will perform in the future. Non-financial indicators, on the other hand, are a measure of a company's competitive advantage and resource strengths that are a predictor of its future performance.

In order to plan for performance improvement, companies need numbers that help them to determine reasonable expectations of what they can achieve in the future. With the financial numbers, the best they can do is to project the past numbers onto the past by using statistical methods or by simple extrapolation. However, this is unlikely to be an effective method since the financial outcomes interact in complex ways with non-financial variables. Companies can use these correlations between variables to conduct scenario analysis and evaluation their decision options.