Intangibles such as customer relationships can account for a massive amount of the total assets of firms in the United States, though such assets are not recorded on firms’ balance sheets under current U.S. accounting standards. The importance of nonfinancial measures is one of the motivations for the increased use of the balanced scorecard, which includes a perspective on customer relationships. However, according to research, data on intangibles such as customer satisfaction can improve forecasts of earnings only when the data are analyzed in conjunction with financial statistics and tied to corporate strategy. This result is based on a wide range of customer relationship data (e.g., customer satisfaction, employee turnover, the speed of loan processing, and the average number of products and services purchased) from 115 retail banks and represents potentially useful guidance for managers wanting to know how to use nonfinancial measures effectively.

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Comment on the implications of the research for the use of the balanced scorecard relative to profit centers. We have noted in the text that it is important to validate the balanced scorecard. What does it mean to validate the scorecard in the context of the retail bank example above?