While several academic models have been suggested over the years, Kaplan and Norton's Balanced Scorecard framework, which has been around for more than a decade, is the most commonly applied by organizations worldwide. It has four perspectives -- financial (investors), customers, internal processes, and innovation and learning. Its chief virtue when it was first presented -- in Harvard Business Review, 1992 and 1993 -- was that it advocated the application of nonfinancial measures in a business world then dominated by accounting measures. We should be grateful to this first generation framework for breaking that ground. However, when you stop to examine how many of the organization's stakeholders it actually addresses -- just investors and customers -- you begin to realize that this is an anachronism in today's business environment. Many practitioners even change the fourth dimension -- innovation and learning -- to people or employees. But what about intermediaries, suppliers, regulators, and communities?

Aware of these shortcomings and in the absence of practical alternatives, some organizations have tried to adapt the European Foundation for Quality Management's business excellence model or, more usually in the United States, the Malcolm Baldrige award criteria. While these have their virtues, they are both essentially self-assessment frameworks for quality awards and were never designed as integrated performance measurement system design aids, and so inevitably possess some flaws when applied for this purpose.

The Performance Prism

Our solution to this problem is the three-dimensional framework that we call the Performance Prism, which specifically addresses the organization's relationship with all of its key stakeholders and links this to its strategies, processes, and capabilities. This second-generation performance measurement and management framework consists of five interrelated outlooks on performance that pose vital questions.

• Stakeholder satisfaction .Who are our key stakeholders and what do they want and need?
• Stakeholder contribution. What do we want and need from our stakeholders on a reciprocal basis?
• Strategies. What strategies do we need to put in place to satisfy these twin sets of wants and needs?
• Processes. What processes do we need to put in place to enable us to execute our strategies?
• Capabilities. What capabilities do we need to put in place to allow us to operate and improve these processes?

By answering these questions, organizations can build a structured business performance model. Together these five viewpoints provide a comprehensive and integrated framework for managing organizational performance (see exhibit 2). Let's examine why the framework looks this way and why it consists of these components.

Stakeholder satisfaction. One of the great fallacies of measurement design is that performance measures should be derived from strategy. Listen to any conference speaker or read any management text on the subject. Generally the statement will be made: "derive your measures from your strategy." This is such a conceptually appealing notion that nobody stops to question it. In reality, strategies are reactions to opportunities or threats in the organization's operating environment. Understanding -- through quantification -- the operating environment must, therefore, be the starting point. Knowledge of stakeholders' changing wants and needs and how well the organization is satisfying them is both the output of prior strategies and the basis of new strategies. The starting point for deciding what to measure shouldn't be "What is the organization's strategy?" but instead, "Who are the organization's key stakeholders and what do they want and need?" Therefore, the first viewpoint on performance encapsulated in the Performance Prism is that of stakeholder satisfaction.

A business's key stakeholders are likely to be a combination of a number of the following: investors, principally shareholders but including other capital providers; customers and intermediaries; employees and labor unions; suppliers and alliance partners; and regulators, pressure groups, and communities. Their relative importance will vary from organization to organization. Potentially, stakeholder subgroups with inhomogeneous wants and needs may exist within each category too. A nonprofit organization will tend to have greater social impact priorities, but will still need to demonstrate some return on investment to funders.

Stakeholder contribution. The second outlook on performance is a subtle, but critical twist on the first. Take, for example, customers as stakeholders. In the early 1980s, organizations began to measure customer satisfaction by tracking the number of customer complaints they received. When research evidence exemplified that only about 10 percent of dissatisfied customers complained, organizations moved to more sophisticated measures, such as customer satisfaction. In the late 1980s and early 1990s, people questioned whether customer satisfaction was enough. Research data that was first gathered by Xerox showed that customers who were very satisfied were six times more likely to repeat their purchase in the next 18 months than those who were just satisfied. This, and other similar observations, resulted in the development of the concept known as customer loyalty. The aim was to track whether customers came back to buy more and recommended the organization to others.