Free The Balanced Scorecard: Translating Strategy Into Action by Robert S. Kaplan, David P. Norton Page A

Mix
    Some organizations have multiple channels by which customers can conduct transactions with them. For example, retail banking customers can transact manually with in-branch tellers, through automatic teller machines (ATMs), and electronically by phone and computer. The cost to the bank of processing transactions via these various channels is very different. For manufacturers, some ordering from suppliers can be done traditionally, with a purchasing person calling for bids from external suppliers, evaluating the bids, selecting the best one, and then negotiating terms of delivery. Alternatively, the manufacturer could establish long-term relationships with certified suppliers, provide electronic data interchange (EDI) between the manufacturing process and the supplier, with the supplier taking responsibility for providing the required goods on time and directly to the production process. The cost of an EDI transaction is much lower than a traditional purchase transaction performed manually. Thus, an especially promising method for reducing costs is to shift customers and suppliers from high-cost manually processed channels to low-cost electronic channels. If this cost-reduction strategy is deployed by a business unit, it can measure the percentage of business it transacts through the various channels, with a goal of shifting the mix from high-to low-cost channels. Thus, even without any efficiency improvements in the underlying processes (an unrealistically conservative assumption), just shifting to more efficient processing channels can significantly increase productivity and lower the cost of doing business.
Reduce Operating Expenses
    Many organizations are now actively trying to lower their selling, general, and administrative expenses. 5 The success of these efforts can be measured by tracking the absolute amount of these expenses or their percentage to total costs or revenues. For example, if managers feel that their support spending is too high relative to competitors’ and relative to the customer benefits being generated, they could set objectives to reduce, say, administrative expenses as a percentage of sales, or distribution or marketing and selling expenses. Objectives to reduce spending and expenses levels, however, should be balanced, on the scorecard, by other measures, say of customer responsiveness, quality, and performance, so that cost cutting does not interfere with achieving important customer and internal process objectives.
We admit, however, not being completely comfortable with this type of measurement since it implicitly assumes that these expenses are a “burden” on the organization that must be contained and eliminated over time. Ideally, organizations should attempt to measure the outputs produced from their indirect and support resources. They should try not just to reduce the spending and supply of these resources, but to increase their effectiveness—more customers, more sales, more transactions processed, more new products, better processes—as well as the efficiency of the work done by these resources—how much output and benefits these resources produce for a given level of input resources. These productivity-like measurements require that the organization analyze the work being performed by support resources, attempt to quantify the output produced, and then derive measures of the quantity and quality of the output produced as well as the ratio of outputs produced to inputs consumed. Activity-based cost analysis provides just such a linkage between spending on indirect, support, and administrative resources, and the activities and business processes performed by these resources and the outputs they produce and service. Viewed from this perspective, the somewhat artificial distinction, prevalent in many organizations today, between direct and indirect costs can be eliminated.
A SSET U TILIZATION /I NVESTMENT S TRATEGY
    Objectives, such as return-on-capital employed,