Measuring Sources of Value Using the Balanced Scorecard

The dilemma facing most financial managers today is how do I drive value-creation within my organization? Many managers have decided to hang their hat on something called Economic Value Added. But can we really drive value by measuring only the financial parts of our organization? The answer is a resounding NO!

The real sources of value; i.e. those things that result in higher capacities for generating cash flow come from many things. They include great customer service, great products, extremely efficient operations and ultimately the greatest source of value resides in your ability to innovate. As Tom Peters has pointed out in his book The Circle of Innovation , innovation is what separates the men from the boys when it comes to value-creation.

So now that you understand the sources of value, how do you go about doing all of these things (great customer service, great products, innovation, etc.). Well you have to measure it and the way you are going to measure it is on something called the Balanced Scorecard . The Balanced Scorecard is a "balanced" approach to measuring those things that are critical to your future success. Key Performance Indicators (KPI) are established for your critical success factors, such as customer service. KPI's are reported in a dashboard format that resembles the dashboard a car.

Because balanced scorecards provide simple visual output, they often receive wide acceptance throughout the organization. For example, most balanced scorecards report results on gauges or dials with red indicating problems, yellow indicating caution, and green indicating acceptable performance. A series of needles on the gauge will show trends in the KPI. Comments can be added by users to help explain results and indicate what actions will be taken to improve performance.

Over 70% of the Fortune 1000 companies in the United States have implemented a Balanced Scorecard. If you want to measure and drive value, a Balanced Scorecard is possibly the best measurement system you can implement.