Using Balanced Scorecard
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Using Balanced Scorecard
The balance scorecard first came to prominence in the early 1990’s. Dr Robert Kaplan and Dr David Norton of the Harvard Business School developed this system of performance management measurement. It is an approach to performance measurement that combines traditional financial measures with non-financial measures. This approach provides managers with richer and more relevant information about the activities they are managing, increasing the likelihood of organizational objectives being achieved. . Use of Balanced scorecard The scorecard will help the organizations to measure the performance from the following perspectives: * Financial perspective - measures reflecting financial performance, for example number of debtors, cash flow or return on investment. * Customer perspective - measures having a direct impact on customers, for example time taken to process a phone call, results of customer surveys, number of complaints or competitive rankings. * Business process perspective - measures reflecting the performance of key business processes, for example the time spent prospecting, number of units that required rework or process cost. * Learning and growth perspective - measures describing the companies’ learning curve, for example number of employee suggestions or total hours spent on staff training. The specific measurable performance measures are described below: Financial Goals Revenue Profit Margins Operating cash flows Customer Goals Customer Satisfaction Customer Relationship Repeat Purchase Market Share New Product /Product extension Launches Internal Business Processes Supply Chain Performance Operating Costs Quality Management Learning and Development Employee Satisfaction Employee Retention Employee Development As opposed to Return on capital employed, the balanced scorecard didn’t just focus on the financial perspective. The balanced scorecard aims to have a balance over the four areas rather than one area being much more focused upon “The BSC (Balanced Scorecard) divides the business environment into four key business areas” (Hepworth 1998) , e.g. a business putting most of their efforts into trying to gain short term profit. One of the main advantages of the Balanced Scorecard is considered to be the opinion that it allows managers to view levels of performance all over an organization at the same time “Primarily, the “balanced scorecard” gives managers the ability to view performance in several areas simultaneously” (Kippenberger 1996). The Balanced Scorecard tends to focus more on critical performance indicators and missing out what can be considered less important indicators (Kippenberger 1996). The balanced scorecard helps take the sole focus of organizations being high short term profit away by incorporating three other critical factors. “Most companies base strategic decision-making solely on financial measurements and reporting. However, the Balanced Scorecard links your organization’s strategy to various key performance measures and avoids the traditional focus of only examining short-term financial factors” (iqpc). Thus it will be helpful to organizations in following manner: • Clarify and update strategy • Tracking progress towards achieving goals • Communicate strategy throughout the company • Align unit and individual goals with strategy • Link strategic objectives to long term targets and annual budgets • Identify and align strategic initiatives • Conduct periodic performance reviews to learn about and improve strategy Problems in Balance Scorecard Cost-Benefit analysis Although the balanced scorecard appears to hold many advantages for businesses that use it there is a major problem with first implementing it. The cost of bringing in the balanced scorecard method is very expensive. If the costs are to outweigh the benefits for a particular organization then it is unsuitable to proceed with implementing the balanced scorecard. All measures are not quantifiable It could be argued that some of the things the balanced scorecard cannot be measured. Whilst commenting on the balanced scorecard Roest (1997) states “not all measures can be quantified”. The Balanced Scorecard Institute are agreeing that many factors in business cannot be measured but they claim that metrics must be developed from a set of key criteria and business drivers and that these metrics can be measured. CONCLUSION As a performance measurement tool the balanced scorecard could be considered to be very successful. If it is implemented correctly and used within the correct organization there can be many positives for a business. Again, for cost and management accounting the balanced scorecard can be an effective tool. A reason that means it is successful as a management accounting tool is because “if you can’t measure it you can’t manage it” (Microsoft). The balanced scorecard helps manage intangible assets that are usually difficult to measure but by measuring and managing all aspects of a company’s performance it becomes possible for these tangible assets to be measured (Pearsoncmg). Overall the Balanced Scorecard appears that it can be a useful performance measurement tool.
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