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Recently a number of companies have begun to create new performance measurement systems that supplement and extend the more traditional financial measures of corporate performance.(1) In response to changing markets, new strategies, and concerns about a "short-term orientation," these firms have begun to measure quality, customer satisfaction, innovation, human resource development, and market share in addition to accounting results. Advances in information technology and the emergence of proprietary database companies with comparative nonfinancial information are facilitating these efforts.
While this recent interest in combining financial and nonfinancial measures is widespread, it is not new. Since at least the turn of the century,(2) individual companies and sometimes whole industries have tried to complement their "bottom line" measures with some indication of nonfinancial results. Still, most companies today use financial and accounting results as the ultimate measure of business performance.
Of course, we would not deny the central role that financial measures play in assessing the overall performance of a business. They are legitimate and important indicators of how well management is utilizing the assets under its control to increase shareholder value. But, as every manager knows, there are important limitations in relying exclusively on financial measures of performance.
One of the most important limitations is that accounting measures are lagging indicators; that is, they are the result of management action and organizational performance, not the cause of it. They tell managers the consequences of decisions that already have been made but do little to predict future performance. As a result, they do not provide much guidance for what must be done differently.
A recent study(3) found that accounting measures played a limited role in management decision making for this reason. One manager in our research noted that "using financial measures to improve performance is like concentrating on the scoreboard in a football game. While the scoreboard tells you whether you are winning or losing, it doesn't provide much guidance about the plays that should be called." What is needed is information about the intermediate decisions that ultimately affect the score, such as which running plays are most successful, how well the quarterback is passing, how well the defense is stopping the opponent's attack, and so on. In business terms, measures are needed of the underlying processes...