The Balanced Scorecard

Kaplan and Norton propose that companies measure performance across four perspectives rather than through financial results alone: financial, customer, internal business process, and learning and growth.

Their diagnosis is that financial measures report the consequences of past decisions and say nothing about whether the actions being taken now will produce future results. A company can improve reported earnings for several years by reducing investment in customers, process and capability, and the financial statements will register this as success until the consequences arrive. The other three perspectives are intended to measure the drivers of future financial performance while they are being created.

Their stronger claim is that a scorecard should not be a collection of metrics but a statement of the strategy expressed as a chain of cause and effect: learning and capability produce process improvement, which produces customer outcomes, which produce financial results. Each measure should sit in that chain and the links should be testable hypotheses. This is what they later developed as strategy mapping.

The framework has been adopted very widely and has been implemented badly in most cases, becoming a dashboard of unconnected metrics rather than an articulated strategy, which the authors have complained about repeatedly.

The evidence base is consulting experience rather than controlled research. Critics argue the causal chains are asserted rather than tested, that four perspectives is arbitrary, and that any measurement system creates incentives to manage the measures. The insight that financial results are lagging indicators of decisions already made is the durable part.