In a seminal 2005 article, “The Balanced Scorecard”, Robert Kaplan and David Norton argued that executives should track both financial and operational metrics because traditional measures of ﬁnancial performance didn’t let them manage effectively and were focused on the short term.
“During a yearlong research project with 12 companies at the leading edge of performance measurement, we devised a ‘balanced scorecard’ — a set of measures that gives top managers a fast but comprehensive view of the business. The balanced scorecard includes financial measures that tell the results of actions already taken. And it complements the financial measures with operational measures on customer satisfaction, internal processes, and the organization’s innovation and improvement activities — operational measures that are the drivers of future financial performance.”
“Think of the balanced scorecard as the dials and indicators in an airplane cockpit. For the complex task of navigating and flying a plane, pilots need detailed information about many aspects of the flight. They need information on fuel, airspeed, altitude, bearing, destination, and other indicators that summarize the current and predicted environment. Reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas at once.”
A new video explainer gives a great overview of the theory in under three minutes.