Compared to other performance management approaches the balanced scorecard provides more than financial KPIs and measures, but it incorporates four strategic categories of performance indicators into one strategic system. The four categories include: financial, customer, process and learning & growth perspectives.
Even though the approach provides an integrated business strategy and measurement system including the four categories, it is clear that the top of the scorecard always shows the financial perspective as financial goals and objectives being the overall goal of the organization.
The balanced scorecard is a cause and effect performance management system where relationships among KPIs and performance metrics are clearly represented and shown on the scorecard.
By looking at any example of balanced scorecard you’ll always find the financial perspective first followed by customer perspective which is further followed by business process and learning and growth perspectives.
The logic is simple because if the company excels in growing and developing its core skills and capabilities and have effective business processes in place which maximize customer value and are continuously improved – such a company will quickly create a large base of satisfied customers which in turn drives the financial performance.
Let’s focus on the customer perspective now:
The customer perspective of the balanced scorecard has enormous impact on the success of the initiative which in turn will drive the success of developing and implementing winning business strategies. Why is this category crucial for success?
To get the most of your balanced scorecard program you need to think of the customers’ perspective as a central point of the entire performance management system because of the following two reasons:
- If you look at your balanced scorecard report you can see that the financial performance (achieving the financial targets) depends directly on the company’s success with the customers. Regardless of what your KPIs are in any of the categories if you fail to deliver the customer related metrics and targets you’ll fail on executing your financial objectives.
- The bottom two categories, the process and learning perspectives, are all about creating and delivering customer value both in short term and long term. Business processes create and deliver the products and services and make sure customers get what they need and when they need it. The learning and growth perspective gives the training, support and development to the employees so they can produce and deliver competitive offering and create sustainable competitive advantage.
Here is the single most important step in developing a balanced scorecard: defining the customer perspective to reflect your overall organizational goals and identifying the right KPIs for this category.
The balanced scorecard framework includes different perspective from the entire organization and it is easy for people to get into creating a list of metrics for each category without linking them to the overall strategy. The focus on the customer along with the customer KPIs and measures require special attention.
First of all, the main customer objective needs to be defined. Second, the metrics, targets and KPIs are developed to quantify the main customer objective and provide a way to measure the progress towards achieving those objectives.
The main goal and objectives related to the customers will be different for different companies based on the overall strategy. This is where you need to pick your main customer theme, objective or discipline.
For example, if your strategic intent is to innovate and be a product leader in your industry – in that case you need to focus on product innovation – a good example is Apple. Apple focuses on developing the best products on a continuous basis and building a loyal base of customers who are not only customers but brand advocates and loyal fans. As a result customer retention, customer satisfaction, rate of new product development and brand recognition are the key performance indicators related to the customers which drive the financial performances.
Now let’s take a look at another example. If you build a competitive advantage and you are trying to become the leader in your marketplace through operational excellence your focus will be completely different from the previous example. A good example for this approach is FedEx. FedEx focuses on operational excellence and providing its customers with piece of mind knowing that their package will be delivered always on time.
Business customers who mainly demand reliability and speed appreciate this promise made by FedEx. As a result the company focuses on customer satisfaction and loyalty by making sure they execute each of the millions orders flawlessly. Customer retention rate is a key performance indicator here.
Here are a few examples of customer perspectives in balanced scorecard:
- Customer service (measuring customer service effectiveness through overall customer satisfaction index created on an ongoing basis through customer surveys)
- Customer retention (measuring customer retention rate – this is measured by using internal data which companies already have)
- Market share (measuring market share will track continuously your share in your marketplace – this is easy to monitor in most industries)
- New customers (tracking the number of new customers – this is KPI which used in every single organization regardless of the strategy)
- On time delivery (measuring the effectiveness of the delivery process – this metrics has direct impact on customer satisfaction and the % of late or lost or wrong orders should me measured)
- Customer Loyalty (loyalty can be measured by tracking repeat orders over a certain timeframe)
- Customer value (measuring customer value by using surveys and interviews especially after each new product launch)
- Customer satisfaction (tracking number of complaints in order to identify any unfavorable trend and identify ways to improvement – number of complaints per period)
You should see the balanced scorecard as a measurement system of implementing your strategy so make sure you identify the right metrics which will reflect your strategy and goals. What you measure and report on your scorecard will drive your decisions and performance and your results in the future. The customer perspective is a key to success and requires a thorough analysis and efforts to make sure you focus on the most important things for your organization.
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