In the past and until recently, organisations have always been driven by financial reports in managing their business. However, in the past few years, these traditional management reporting systems have been found not to be as beneficial in the current business environment. They are viewed as being backward looking and, while they generated financial results for various organisational units, they failed to supply information necessary for a healthy future. Senior executives now realise that no single measure can provide a well-defined performance target or emphasise critical areas of the business. Nowadays, managers require a balanced presentation of both financial and operational measures.

One approach being utilised in many companies is the Balanced Scorecard concept. Essentially, the Balanced Scorecard is a set of financial and non-financial measures that gives managers a fast and comprehensive view of the critical success factors of the business. It looks at medium- and long-term policies and aspirations as well as short-term targets, and also at internal and external measures. The Balanced Scorecard translates mission and strategy into objectives and measures to guide the company towards a prosperous future- it helps to focus on what drives performance.

The Balanced Scorecard is constructed in such a way as to allow managers to view the business from four important perspectives. It includes financial measures giving the results of actions taken- the financial perspective- and introduces three additional perspectives- those of customer, internal business processes and organisational learning. Scorecard users select measures of progress from all these perspectives and set targets for each of them. Performance drivers are then identified along with measures to be applied to these drivers from the perspectives, and short-term milestones to mark strategic progress are established- thus the scorecard enables the company to link its financial budgets with its strategic goals.

FINANCIAL PERSPECTIVE: The Balanced Scorecard retains traditional financial measures. This perspective essentially asks the question "How do we look to our shareholders?" and serves as a focus for the objectives and measures in the other scorecard perspectives. This perspective needs to link in with the others to ensure a successful future. Financial performance is the result of operational actions, and a failure to achieve it from improved operational performance forces a rethink of strategic plans. The challenge is to make explicit linkages between operations and finance.

Financial performance measures indicate whether the strategy, implementation and execution of the company are contributing to bottom-line improvement. Examples of financial objectives include improving returns on spending, cost reductions, increasing revenues, reducing risks and rapid sales growth. Such objectives are typically related to profitability, which has various measures such as Return on Investment, cashflow, operating income, and the more recent concept of Economic Value Added (EVA).

Shareholder Value Analysis forecasts future cash flows and discounts them back to a rough estimate of current value, attempting to make financial analysis more forward looking. But it is still based on cash flows rather than on activities and processes that drive cash flows.

So, while financial measures alone are inadequate in guiding the creation of future value, it is still a very necessary perspective of the BSC.

CUSTOMER PERSPECTIVE: This perspective essentially asks the question "How do our customers see us?" It is necessary for the company to pay attention to the needs and desires of its customers who ultimately pay for company costs and provide for its profits. It may thus be necessary for a company to view its performance and practices through the eyes of customers.

This perspective of the scorecard identifies the customer and the market segments in which the business unit will compete and the measures of performance required in these segments. The firm needs to translate its strategic aims into specific measures reflecting the factors that really matter to customers.

Generic customer measures typically include market and account share, customer acquisition, customer retention (leading to customer loyalty), customer satisfaction and customer profitability. Beyond this, customers’ expectations need to be met. This can be done through supplying products in good time, of a sufficient quality and at a fair price. A good after-sales service may also be essential in enhancing the image and reputation of the firm as they appear to customers.

INTERNAL BUSINESS PERSPECTIVE: This perspective asks the question "What must we excel at?" It focuses on internal business processes at which it must succeed to deliver the required performance once the critical factors to attract, retain and satisfy customers have been identified. As well as satisfying customers, the company must also satisfy shareholders’ expectations of excellent financial returns. While each business has its own distinct set of processes, Kaplan and Norton have drawn up a generic Internal Value Chain.

Firstly, the Innovation Cycle deals with identifying the relevant market segment and creating the product or service to satisfy customers’ needs in that market. The Operations Cycle is concerned with the actual production of the product/service and its delivery to the relevant client. Lastly, the customer can be given assistance after the original sale through the Post-sales Service Cycle. This may include repair activities or treatment of defects or returns.

Beyond that, the company can measure and improve its time, quality and costs in its internal business processes. This perspective provides for the identification of entirely new processes at which the company must excel to meet objectives, while traditional approaches merely focused on improving existing processes.

LEARNING AND GROWTH: This asks the question "can we continue to improve and create value?" Intense global competition requires that companies make continual improvements in existing products and processes and have the ability to introduce entirely new products with extended capabilities. This perspective identifies the infrastructure that the firm must build to create long-term growth and advancement.

Organisational learning and growth comes from three key sources, namely, people, systems and organisational procedures. To bridge the gaps between the existing capabilities of these three sources and what will be required to achieve targets for breakthrough performance, businesses must invest in re-skilling employees, enhancing information technology and systems, and aligning organisational procedures and routines. While it is vital for businesses to adapt to technological advancement, to invest in R&D and to provide measures for product development, it is also essential that employees are carefully considered.

Employee satisfaction, retention and productivity are core learning and growth measures. Also, linking rewards to performance could be beneficial to keeping employees, who ultimately implement new practices, satisfied.

The objectives in the learning and growth perspective should be the drivers of successful outcomes in the first three perspectives. It is important that all four perspectives are inter-linked. For example, the employees may be trained to manufacture a new product to satisfy an emerging consumer need. In turn, the customer will pay for this good and add to the revenue of the company.

The Balanced Scorecard puts strategy and vision, rather than the traditional view of control, at the centre. It signals to everyone involved what the organisation is trying to achieve for shareholders and customers alike.

It is important for front-line employees to be able to understand the financial consequences of their decisions and actions, and senior executives to understand the drivers of long-term financial success. Adequate communication of strategy throughout the business is therefore essential.

Kaplan and Norton highlighted how the BSC allows managers to bring in "four new management processes that, separately and in combination, contribute to linking long-term strategic objectives with short-term actions.

The first of these is ‘translating the vision’- helping to build a consensus about the firm’s goals and strategies. Strategies need to be translated into operational terms for employees to guide their actions, thus the statements must be expressed as an integrated set of objectives and measures describing long-term drivers of success.

Secondly, ‘communicating and linking’ assists managers in tying overall objectives and strategies to those of departments and individuals. It ensures that all levels of the organisation are made aware of and understand the company’s long-term strategy.

Thirdly, ‘business planning’ helps organisations to integrate their business and financial plans. It involves setting targets, aligning strategic initiatives, allocating resources and establishing milestones.

The final process is ‘feedback and learning’, helping management direct the organisation towards strategic learning. Involved in this process is articulating the shared feedback, supplying strategic information and facilitating learning.

The Balanced Scorecard is a management system that better reflects the modern business environment. Without it, most firms are unable to achieve a similar consistency of vision and action as they attempt to change direction and develop new strategies and processes. It provides a framework for managing strategy implementation while allowing the strategy itself to adapt to changes in the company’s competitive, market and technological environments.

Chemical Bank realised that measures other than financial were required to motivate and value its importance in order to compete in an increasingly competitive banking industry, with customers demanding a wider range of services. The Retail Bank’s New York Markets division identified the following six critical success factors:

(i)Commit to business processes driven by service quality.

(ii)Implement a continuous process for understanding markets, segments and individual customers.

(iii)Develop a rapid, customer focused product management and development process.

(iv)Ensure flexible and market-responsive delivery channels.

(v)Develop information management processes and platforms driven by business needs.

(vi)Implement an expense management process to streamline the cost base.

The Organisation Chart of the Retail Bank illustrated that non-financial measures were felt to be crucial. There were such departments as Market Development, Sales & Service, Staff Support and Community Development.

The Managing Director of Strategic Planning and Finance, Mr. Francavilla had noted that a balanced scorecard approach with financial, customer, internal business, and learning and growth perspectives would be a useful way to implement the required changes at Chemical Bank. A scorecard was implemented over a period highlighting the various strategic objectives that needed to be fulfilled through both financial and non-financial measures.

There exist various strengths and weaknesses of the balanced scorecard built at Chemical’s Retail Bank.

Strengths: In the first instance, the BSC forced the Bank to examine themselves in a more competitive environment. In addition, it helped to provide a more cohesive strategy with the Manufacturers Hanover Corporation after the merger.

The Head of the Bank, Hegarty pointed out that the BSC would help in communicating and reinforcing strategy. The scorecard gave them the measures needed to stay focused on performance, while simultaneously clarifying and communicating the vision. Hegarty saw it as a forward-thinking tool.

The various strategic objectives illustrated in the scorecard seemed theoretically very good, and gave a sense of direction for the business. They highlighted the essentials. For example, under the Internal Process perspective, Chemical Retail Bank realised that "quality delivery of our products and services is not an area of differentiation, but it is critical to our survival."

The BSC helped to develop causal links across the objectives and measures, which would be more conducive to achieving strategic aims. Also, several new internal processes had been identified so that the organisation could develop better delivery capabilities. Issues that would link improving capabilities with achieving long-term financial goals were kept to the forefront for senior management through the scorecard.

Dave Mooney (involved in implementing the BSC) noted two particular advantages: Firstly, "The great value of the BSC was that it articulated the key levers of performance and reduced these to a few important drivers." In addition, one of its most powerful features is that "its both motivating and obligating. The BSC forced us to stay on track and to follow up.

Francavilla mentioned that the knowledge of customer segments and customer profitability through the scorecard was already driving the pricing of some products, and the Bank was becoming more sophisticated in designing new products and marketing programs.

Weaknesses: While the scorecard was good in theory and clearly laid out, it was not reviewed adequately, had not been implemented correctly, and employees were not familiar with it.

The customer representatives would have to expand their skills so as to advise their customers, but they could not do this unless the scorecard was properly communicated to them- it had not been. The BSC, in fact, was only being experienced by 27 top-level managers. Clearly, this was a weakness in the scorecard and had to change. In the newsletter, the executives had promised that "profitability and segment information will be available on-line" so that "branch staff will be able to improve their sales efforts by customer segment or profit score." It remained to be seen if this measure would be successful.

Employees did not know the BSC by name, although it was envisaged that they would become very familiar with the concept in the future.

Hegarty admitted that he had no idea how good his sales force was- the BSC was not evaluating this. Also, under the BSC, they were only just beginning to rethink training, and would have to find new measures to evaluate it. Indeed, they experienced problems with a number of their measures, such as customer retention. Clearly, the objectives, which had been well defined under the various perspectives, would suffer.

The ‘Trailway to Trolls’ measure was one that was not actionable- another apparent weakness. This measure of customer dissatisfaction failed to highlight just how serious a problem was in this area.

The BSC is a valuable tool, but one that needs to keep evolving and be regularly updated. The Bank seemed to rely on their original proposals without question, and this can be viewed as a discrepancy in the scorecard- it did not evolve as necessary.

In conclusion, while the ideas behind the Balanced Scorecard at Chemical’s Retail Bank were good, results had not yet been achieved. Better implementation and regular review would, hopefully, be conducive to a better performance in a more fiercely competitive market.