The Balanced Scorecard
Academic Paper
Ana Maria Tudose 87604
5/5/2008
ABSTRACT
The purpose of this paper is to analyze and identify key elements related to Balanced Scorecard, which is an actual subject' in b-to-b environment at the moment.
Nowadays most of the firms in the world actively adopt new approaches to their performance measurement systems. A new approach to strategic management was developed in the early 1990's by Kaplan and Norton. They named this system the 'balanced scorecard'. The balanced scorecard (BSC) is one of the major developments in management accounting in the past decade (Ittner and Larcker, 2001).
Many organizations have invested substantial resources in recent years to implement a balanced scorecard of performance metrics (Banker et al., 2004).
The paper shows that the most important factors that could encourage firms to adopt Balanced Scorecard are the following: it helps companies to assess the application of its vision and strategy; enables managers to translate business unit strategies into a measurement system; provides executives with a comprehensive framework to translate the company's strategic objectives into a coherent set of performance measures; enables managers to see the breadth and totality of company operations; and it helps companies to assess the importance of its vision and strategy. A set of development steps are presented and also some implementation tips. The balanced scorecard evolved a lot by now and continues to evolve and mature, illustrating the concept's flexibility. This should encourage all accountants to consider how to utilize the effective insights gained on the journey so far. In conclusion, the success of the balanced scorecard will depend on the clear identification of non-financial and financial variables and their accurate and objective measurement and linking the performance to rewards and penalties.
INTRODUCTION
The main goal of all profit companies is achieving profit then maximizes it. A company should continually search for new tools to improve profitability. Measuring organizational performance and success is a continuous challenge for both managers and researchers.
The choice of performance indicators is one of the most critical challenges facing firms. Performance reporting is important in motivating employees to enhance performance and is an essential element of an organization's control system (Ittner and Larcker, 1998a; Ittner and Larcker, 1998b; Malina and Selto, 2001).
To measure performance most organizations use traditional financial scorecards such as the Income Statements and Balance Sheet. However, recently there has been increasing criticism of financial scorecards (Kaplan and Norton, 1992, 1996, 2001a, 2001b, Shields, 1997, Atkinson et al., 1997, Ittner and Larcker, 1998b, Banker et al., 2000, Hoque and James, 2000). The major criticisms are that current financial scorecards are historical in nature and are not a reliable predictor of future financial performance.
A BRIEF HISTORY
The idea of the balanced scorecard was highly attractive when it first appeared. Companies were increasingly frustrated with traditional measures of performance that related only to the shareholders' point of view. Many felt that this was unduly short-termist and too concerned with stockmarket twitches; it prevented boardrooms and managers from considering longer-term opportunities. The balanced scorecard not only broadens the organisation's perception of where it stands today, but it also helps it to identify things that will ensure its success in the future.
Kaplan and Norton themselves saw some of the benefits of the balanced scorecard as follows:
? It helps companies to focus on what needs to be done in order to create a "breakthrough performance".
? It acts as an integrating device for a variety of often disconnected corporate programmes, such as quality, re-engineering, process redesign and customer service.
? It translates strategy into performance measures and targets.
? It helps break down corporate-wide measures so that local managers and employees can see what they need to do to improve organizational effectiveness.
? It provides a comprehensive view that overturns the traditional idea of the organization as a collection of isolated, independent functions and departments.
The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.
While the phrase balanced scorecard was coined in the early 1990s, the roots of the this type of approach are deep, and include the pioneering work of General Electric on performance measurement reporting in the 1950's and the work of French process engineers (who created the Tableau de Bord - literally, a "dashboard" of performance measures) in the early part of the 20th century.
The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The "new" balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only determines performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.
This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and ...
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The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The "new" balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only determines performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.
This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise.
Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."
The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:
The Learning & Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people, the only repository of knowledge, are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Government agencies often find themselves unable to hire new technical workers, and at the same time there is a decline in training of existing employees. This is a leading indicator of 'brain drain' that must be reversed. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.
Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call "high performance work systems."
The Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.
In addition to the strategic management process, two kinds of business processes may be identified: a) mission-oriented processes, and b) support processes. Mission-oriented processes are the special functions of government offices, and many unique problems are encountered in these processes. The support processes are more repetitive in nature, and hence easier to measure and benchmark using generic metrics.
The Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.
The Financial Perspective
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives.
There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.
DEVELOPING THE BALANCED SCORECARD
The balanced scorecard is a strategic planning and management system that helps everyone in an organization understand and work towards a shared vision. It has evolved from a performance measurement reporting tool to a complete strategic management system in 12 short years.
A completed scorecard system aligns the organization's picture of the future (shared vision), with business strategy, desired employee behaviors, and day-to-day operations. Strategic performance measures are used to better inform decision-making and show progress toward desired results. The organization can then focus on the most important things that are needed to achieve its Vision and satisfy customers, stakeholders, and employees. Other benefits include measuring what matters, identifying more efficient processes focused on customer needs, improving prioritization of initiatives, improving internal and external communications, improving alignment of strategy and day-to-day operations, and linking budgeting and cost control processes to strategy.
The components of the management system are shown in the figure above. Starting at "high altitude", Mission, Vision, and Core Values are translated into desired Strategic Results. The organization's "Pillars of Excellence", or Strategic Themes, are selected to focus effort on the strategies that matter the most to success. Strategic Objectives are used to decompose strategy into actionable components that can be monitored using Performance Measures. Measures allow the organization to track results against targets, and to celebrate success and identify potential problems early enough to fix them. Finally, Strategic Initiatives translate strategy into a set of high-priority projects that need to be implemented to ensure the success of strategy. Engaged leadership and interactive, two-way communication are the cornerstones of a successful management system. Once the strategic thinking and necessary actions are determined, annual program plans, projects and service level agreements can be developed and translated into budget requests.
The balanced scorecard management system is built by the organization's leaders, managers, and other employees. Facilitated workshops, led by our senior consultants, keep employees at all levels of the organization engaged, on track and on schedule.
Step One of the scorecard building process starts with an assessment of the organization's mission and vision, challenges (pains), enablers, and values. The first step also includes preparing a change management plan for the organization, and conducting a focused communications workshop to identify key messages, media outlets, timing, and messengers.
In Step Two, elements of the organization's strategy, including strategic results, strategic themes, and perspectives, are developed by workshop participants to focus attention on customer needs and the organization's value proposition.
In Step Three, the strategic elements developed in Steps One and Two are decomposed into strategic objectives, which are the basic building blocks of strategy and define the organization's strategic intent. Objectives are first initiated and categorized on the strategic theme level, categorized by perspective, linked in cause-effect linkages (Strategy Maps) for each strategic theme, and then later merged together to produce one set of strategic objectives for the entire organization.
In Step Four, the cause and effect linkages between the enterprise-wide strategic objectives are formalized in an enterprise-wide strategy map, which is later on developed to show how the organization creates value for its customers and stakeholders.
In Step Five, performance measures are developed for each of the enterprise-wide strategic objectives. Leading and lagging measures are identified, expected targets and thresholds are established, and baseline and benchmarking data is developed.
In Step Six, strategic initiatives are developed that support the strategic objectives. To build accountability throughout the organization, ownership of performance measures and strategic initiatives is assigned to the appropriate staff and documented in data definition tables.
In Step Seven, the implementation process begins by applying performance measurement software to get the right performance information to the right people at the right time. Automation adds structure and discipline to implementing the Balanced Scorecard system, helps transform disparate corporate data into information and knowledge, and helps communicate performance information. In short, automation helps people make better decisions because it offers quick access to actual performance data.
In Step Eight, the enterprise-level scorecard is 'cascaded' down into business and support unit scorecards, meaning the organizational level scorecard (the first Tier) is translated into business unit or support unit scorecards (the second Tier) and then later to team and individual scorecards (the third Tier). Cascading translates high-level strategy into lower-level objectives, measures, and operational details. Cascading is the key to organization alignment around strategy. Team and individual scorecards link day-to-day work with department goals and corporate vision. Cascading is the key to organization alignment around strategy. Performance measures are developed for all objectives at all organization levels. As the scorecard management system is cascaded down through the organization, objectives become more operational and tactical, as do the performance measures. Accountability follows the objectives and measures, as ownership is defined at each level. An emphasis on results and the strategies needed to produce results is communicated throughout the organization.
In Step Nine, an Evaluation of the completed scorecard is done. During this evaluation, the organization tries to answer questions such as, 'Are our strategies working?', 'Are we measuring the right things?', 'Has our environment changed?' and 'Are we budgeting our money strategically?'
IMPLEMENTING A BALANCED SCORECARD
We have stated earlier that strategic planning process includes determining multiple strategic objectives for stakeholders, measuring them, setting targets, reviewing the performance, and using feedback for improvement in real time. The balanced scorecard is a simple device to perform these performance management aspects of the strategic planning process. The experiences of the companies that implement balanced scorecard show that the following conditions are necessary for the successful implementation:
• Top management commitment and support:
The top and senior management must be committed to the balanced scorecard to drive it down through the organization. They should be educated through seminars and workshops. The role of the CEO is much more critical in the success of the balanced scorecard. He/she should take lead in introducing and implementing the balanced scorecard.
• Determine the critical success factors (CSFs):
This is the most critical aspect of the balanced scorecard implementation. The CSFs are superior quality, low cycle time, faster inventory turns, minimum defects, high customer response, after - sales service, employees competency, etc. For organizations which have already reached high levels of customer satisfaction through superior quality and other measures, the areas of improvements are not very obvious. The challenge is to identify the most fundamental CSFs. The organization must assign priorities to the stakeholders' requirements and rate them in terms of their impact.
• Translate CSFs into measurable objectives (metrics):
The identified objectives will not lead the organizations anywhere unless the CSFs are converted into good measures or metrics. The proponents of the balanced scorecard claim that it is a device to link performance measures to strategy and performance outcomes. These measures should be precise and consistent surrogate for achieving the desired objective (for example, customer satisfaction); they should be based on objective facts and information; they should be verifiable and accessible to all interested persons in the organization; they should be simple to grasp and should be actionable; and they should be amenable to review and further improvement. It is important that the number of measures may be kept to a level which can be easily managed.
• Link performance measures to rewards:
The success of any performance management system depends on its link to rewards. A reward system that is easily understood and is prompt in rewarding employees motivates them to attain the targets.
• Install a simple tracking system:
The performance metrics and targets are of no value if they are not tracked quickly, feedback not provided, and lessons not learnt. An organization should follow a simple and fast tracking system which everyone can easily understand.
• Create and link the balanced scorecards at all levels of the organization:
An organization will better serve its purpose of providing delight to all its stakeholders if it develops scorecards at corporate, divisional, and even at the individual levels. The achievement of the targets of the scorecards at a lower level must ensure that targets of higher scorecards are met. The scorecard measures, particularly relating to strategic objectives, must be disaggregated so that every one understands them and are able to relate to his/her actions to strategy.
• Communication:
The balanced scorecard is a communication device-a device to communicate strategy and its components to all levels of the organization. It provides a common language. But, this does not happen automatically.
• Link strategic planning, balanced scorecard, and budgeting process:
The strategic initiatives to meet the targets require funds. The strategic planning process that builds a balanced scorecard should be linked to the budgeting process to set priorities and allocate resources to strategic initiatives.
CONSTANTLY EVOLVING
The balanced scorecard has been adopted successfully in all types of organizations, including both large and small, manufacturing and service, public and private, growth and mature, and profit and nonprofit organizations. Initially, it was developed as a performance measurement tool to be used to capture the value-creating activities from an organization's intangible assets: innovative products and services, customer loyalty and relationships, and employee skills and motivation.
Kaplan and Norton contend that these assets could not be adequately valued through traditional financial measurements alone. As they gained experience, they determined that the balanced scorecard had evolved into an effective tool to implement and direct strategies throughout an entire organization. By placing strategy at the heart of the performance measurement process, the BSC graduated to a strategic performance management system.
The balanced scorecard still continues to evolve and mature, illustrating the concept's flexibility. This should encourage all accountants to consider how to utilize the effective insights gained on the journey so far.
CONCLUSION
The balanced scorecard is a system of combining financial and non-financial measures of performance in one single scorecard. The popular form of this card includes performance measures from four perspectives: financial, customer, internal business processes, and learning and growth (innovation). It focuses on the link between business processes and decisions and results. Hence, the proponents of the balanced scorecard claim that it is a device to guide strategy formulation, implementation, and communication (Kaplan and Norton, 1996a). It also helps in tracking the performance and providing quick
feedback for control and evaluation. A good aspect of the balanced scorecard is that it is a simple, systematic, and easy-to-understand approach for performance measurement, review, and evaluation. It is also a convenient mechanism to communicate strategy and strategic objectives to all levels of management. The success of the balanced scorecard will depend on the clear identification of non-financial and financial variables and their accurate and objective measurement and linking the performance to rewards and penalties.
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