Balanced Scorecard In Performance Measurement

By Author: Sherry Roberts
Total Articles: 99
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Introduction
The call for accountants to make business’s intangible assets more visible to investors and managers by placing them on the organization’s balance sheet necessitated the use of a balanced scorecard. A firm’s' balance sheet statement records tangible assets separately in the format of raw material equipment and land based on their cost. This was sufficient for industrial-age companies, which accomplished much by combining and transforming the tangible assets into products whose value surpassed their acquisition and production costs. Nevertheless, such costs are poor approximations of the realizable value shaped by investing in such intangible assets. Intangible assets generate value for organizations, but that does not mean that they have separable market values. Many linked and internal organizational processes, such as delivery, design and service required in transforming the value of intangible assets into products that have tangible value. The Balanced Scorecard was designed to provide a new framework for recording value-creating strategies that link tangible and intangible assets. The intent of this ...
... paper is to demonstrate how the concept performance measurement is incorporated in the use of Balanced Scorecard to assist the organization in managing its strategies. It defines the Balanced Scorecard as a tool for performance measurement that focuses mainly on leading and lagging financial indicators to give a forward-looking and predictive view of the overall organization beyond focus on short-term bottom-line results. The literature review covers the effectiveness of the balanced scorecard approach to performance evaluation, Building a balanced scorecard, Management perception of the Balanced Scorecard as a performance management tool, Factors that contribute to successful implementation of balanced scorecard, Automating the balanced scorecard and the balanced scorecard as a supplement to conventional financial reporting.
Literature review
The balanced scorecard
Frigo observes that many financial managers seem to rely more on financial measures alone to evaluate subordinates' performance. Using financial measures alone disregards key elements in the organization's strategic mission and unintentionally emphasize on measures that trail the actual firm performance. The purpose of the balanced scorecard, as created by Kaplan and Norton (1996), was to enable managers of the organization to make use of strategically essential nonfinancial as well as financial measures. Each unit in the organization should develop its own scorecard designed to capture the unit's unique strategy. The author recommends the need to avoid bias when using the scorecard approach when performing performance evaluation since common-measures bias undercuts the approach’s potential usefulness. (Frigo, 2002)
An empirical study of the effectiveness of the balanced scorecard
The paper covers the empirical study of the effectiveness of the effectiveness of using the balanced scorecard in measuring organization performance. The paper reports evidence on the effectiveness of the Balanced Scorecard as a management control and communication device. It contains the review of management control and communication literatures that identify attributes of effective communication and control of strategy. The study also offers a model of control and communication applicable to the balanced scorecard. The study subsequently analyzed the archival data and empirical interview to assess the use and evaluate the control and communication effectiveness of the balanced scorecard. The study takes account of data from various divisions of large, international manufacturing firms. Data was obtained from the Balance Scorecard administrators; designer’s and managers in North American whose divisions were objects of the approach. The study builds up evidence concerning the challenges faced by large and wee-funded organizations when designing and implementing the balanced scorecard.
According to the authors, the companies introduced the balanced scorecard to advance their strategy. The scorecard significantly affected the outlook and actions of users, both constructively and adversely. The authors note that when elements of the balanced scorecard are properly designed and effectively communicated, the balanced scorecard appeared to motivate and impact on lower-level managers to align their actions with organizations strategy. Furthermore, they believed that the changes resulted in improved performance of the organization. However, the authors found consistent evidence that the fault in the balanced scorecard had adversely affected relations between different levels of managers. The authors recommend that the findings may be generalizable to other firms or businesses that have adopted or are considering adopting the Balance Scorecard as a strategic and management control device. (Malina and Selto, 2001)
An integrative approach to performance evaluation
According to the authors, financial managers should assess intangible assets that affect the organization's bottom line, in addition to strict financial outcomes. Coupled with data-warehousing capabilities, the balanced scorecard, offers a way to evaluate the performance of an organization's against its strategic objectives at the same time focusing on increasing capacity to attain the objectives. The author notes that the balanced scorecard is mostly used to assess performance related to finance, internal processes, human resources and customers. The author recommends the availability of significant amounts of data; that is necessary to establish an organizational data warehouse comprising of both operational and financial data useful in decision support. The authors argue that the balanced scorecard approaches are pointer that managers and employees can be influenced directly by their actions. The balanced scorecard approach to performance measurement supports behavioral changes intended to achieve organization's strategies.
Performance measurement
According to the authors, a performance measurement system that is based exclusively on financial reporting indicators has limitations since it takes a short-term view of strategy and centers on past performance. Once managers focus strictly on improving such indicators, they often miss the opportunity to assess and develop the intangible assets needed to maximize the customer value over a lifetime. The authors note that performance measurement should be aimed at improving management rather than simply keeping records. Managers ought, therefore, to establish the relationship between organization strategy and the tactical business objectives necessary to achieve the strategy, hence the appropriateness of the balanced scorecard to present Performance indicators. The results encourage changes in behavior and activities to achieve corporate strategies since they are influenced directly by managers and staff. Such indicators include customer satisfaction, staff development, long-term financial performance and internal efficiency.
The authors give an illustration of the case of a financial loss in a particular product line. The fundamental causes of the loss ought to be explored: Were revenue or cost objectives missed? If so why? What resource and processes capacity would improve performance in the area? Are customers dissatisfied with product or service delivery? The balanced scorecard attaches every question that corresponds to a corporate objective to a result measurement that provides the data to examine the attainment of desired objectives. In turn, each outcome measurement should be linked to a measurement of a supporting process, a "driver" that facilitates the realization of the corporate objective. The outcome measurement is referred to as a lagging indicator since it measures what happened example, revenue increased, costs decreased and quality decreased. A leading indicator called the driver measurement measures the building of capacity to improve performance. Example, 75 percent of managers, have been trained in team-building skills. A balanced scorecard that attaches measurements of drivers with measurements of outcomes allows the firms managers to develop actions aimed at improving performance.
The cause-and-effect relationship of drivers and outcomes can be established by assessing the measurement of the profitability performance objective. One technique to attain profitable growth is to reduce costs. One approach to reducing costs is to decrease length-of-stay rates in patients in a medically responsible way. The Length of Stay outcome measurement should be linked to a performance driver measurement that point to how the length of stay outcome is to be achieved. The authors give an example of the percentage of admissions in compliance with developed critical pathways as a driver measurement that can impact on the reduced outcome.
To observe whether there exists any patient dissatisfaction as a result of such medical management, a patient-satisfaction outcome measurement is taken from the quality score in the form of a questionnaire or a different assessment tool used in the organization. In turn, provision of comprehensive education to customers or patients in this context as regards the availability of different services could drive the patient satisfaction outcome. The progress in efficiency and services can often influence the number of people being served by the organization. The increase in the number of number of customers’ impacts can impact on revenue and profitability.
Building a balanced scorecard
An inappropriately build score card can adversely affect the outcome of a performance measurement. According to the article, a balanced scorecard framework can be created using several steps. Building the business case: The authors state that it is a critical importance to obtain support from the executives to implement the balanced scorecard in order to guarantee availability of management resources, support, and strategic directions. Similar to any strategic project, the first step to obtaining the required support is by building a business case for implementing a balanced scorecard.
Identifying strategies: The members of the team should then identify specific business strategies to achieve the purposes and benefits stated in the business case. For example, transforming a product line into a center of excellence and marketing it. Such goals may be accomplished by means of three strategies: a cost strategy, a marketing strategy, and an effectiveness strategy to improve the quality and efficiency.
Identifying tactical objectives: The design team can then determine detailed tactical objectives for the strategies using the four balanced scorecard perspectives on performance: customer, financial, internal process, and human resources. Some strategies may require the development of unique tactical objectives. However, its framework should include existing organizational tactical objectives that may help to achieve almost any strategy
Identifying performance measurements: For every existing and new tactical objective identified, the team should then establish driver and outcome measurements. The measurements should then be used to identify trends in the desired direction. The team should then formulate effective driver and outcome performance measurements for measuring the objective.
Identifying data sources: A large amount of necessary data may be to calculate the performance measurements may be obtainable from the business existing information systems. Financial measurements can be obtained from the accounts payable, general ledger, fixed asset systems and grants management. The remaining data may be obtained from payroll, human resources, budgeting and cost accounting systems. The availability of the necessary information in the disparate and numerous systems signifies the need for integrating the data into the data warehouse as a single source of information. Since the goal of the balanced scorecard is purposely to create views of the business beyond the financial, competitor market share also are required.
Creating the data warehouse: A data warehouse refers to information on a definite analytical subject area, in this case, performance measurement The information sources need to be collected, corrected, and organized into a data warehouse designed for the systematic needs of performance measurement. This data comprises various internal and external data sources and information systems. The data must be integrated, data values standardized, and invalid data removed. (Oliveira, J. (2001).
According to the author, previous systems that included nonfinancial measurements used ad hoc collections measures similar to checklists of measures to keep the trail of and improve than an inclusive system of linked measurements. The development of Balanced Scorecard put emphasis on the linkage of measurement to strategy. The closer link between the firm’s strategy measurement and the system and elevate the function of nonfinancial measures to a comprehensive system for strategy implementation as opposed to an operational checklist. The authors reckon that, the Balanced Scorecard mirror the changing nature of technology and competitive advantage in this era. The intangible assets have become the major source of competitive advantage in this century. In 1992, tangible book values represented only 38 percent of industrial organizations' market values
The call for accountants to make business’s intangible assets more visible to investors and managers by placing them on the organization’s balance sheet calls for the use of a balanced scorecard. But several factors prevent valid valuation of intangible assets on balance sheets. The first reason is that the value obtained from intangible assets is normally indirect. Assets such as technology and knowledge hardly ever have a direct impact on profit and revenue. Organizations recognize that Improvements in intangible assets influence financial performance through chains of cause-and-effect relationships involving two or three intermediate stages. For example, the authors consider several examples of inter-related factors such as: investments in employee training can lead to improvements in service quality, better quality of services may lead to higher customer satisfaction, higher customer satisfaction can lead to increased customer loyalty and increased customer loyalty can generate increased margins and revenues.
Such financial outcomes are separated temporally and causally from improving employees' capabilities. The multifaceted association makes it complex or impossible, to place a financial value on an asset such as employee morale or labor force capabilities much less to assess period-to-period change in that financial value. Secondly, the value obtained from intangible assets relies on organizational strategy and context. However, such a value cannot be alienated from the firm’s processes that convert intangibles into financial and customer outcomes. The balance sheet records every class of asset separately and determines the total by totaling up each asset's recorded value, hence a linear, additive model. However, the value created by investing in individual intangible assets is neither linear nor additive. (Oliveira, J. (2001).
The balanced scorecard as a supplement to conventional financial reporting
A firm’s' balance sheets statement records tangible assets separately in the format of raw material equipment and land based on their cost. This was sufficient for industrial-age companies, which accomplished much by combining and transforming the tangible assets into products whose value surpassed their acquisition and production costs. Nevertheless, such costs are poor approximations of the realizable value shaped by investing in such intangible assets. Intangible assets generate value for organizations, but that does not mean that they have separable market values. Many linked and internal organizational processes, such as delivery, design and service required in transforming the potential value of intangible assets into products and services that have tangible value. The Balanced Scorecard was designed to provide a new framework for recording value-creating strategies that link tangible and intangible assets. (Northcott and Tuivaiti, 2012)
The authors urge that a balanced scorecard measures an organization's intangible assets in units other than the currency does rather does not attempt to "value" an organization's intangible assets. The Balanced Scorecard illustrates how intangible assets get mobilized and combined with intangible assets to produce superior financial outcomes and differentiated customer value propositions. This vision creates a clearer picture of the firm’s overall goal, which could lead it to becoming a top-quartile performer.
Financial Perspective
According to the authors, the most common goal for profit-seeking enterprises is a considerable increase in shareholder value. These organizations increase their economic value through two basic approaches productivity and revenue growth. A revenue growth strategy, in general, has two components: increase sales to existing customers by deepening relationships with them and build the franchise with revenue from new products, new markets, and new customers. A productivity strategy also has two major components: utilizing assets more efficiently by decreasing the level of the working and fixed capital required to support a given level of business and improving the cost structure by lowering direct and indirect expenses.
Customer Perspective
The center of any organization’s strategy is the customer-value proposition, which incorporates the unique mix of price, product, service, image and relationship that a company offers. It defines how the business differentiates itself from other competitors to retain, attract and deepen relationships with targeted customers. The value proposition is critical because it helps the business to connect its internal processes to improve outcomes for its customers. Businesses differentiate their value proposition by selecting among operational excellence, customer intimacy, and product leadership. Sustainable strategies are based on standing out in one of the three while upholding threshold standards with the other two. After recognizing its value proposition, a business understands which types and classes of customers to target.

Businesses that specifically pursue a strategy of operational excellence need to do extremely well at product quality, competitive pricing, lead time, product selection and on-time delivery. For customer intimacy, a business must stress the quality of its dealings with customers, including outstanding service, and the suitability and completeness of the solutions it provides to individual customers. Businesses that pursue a product-- leadership strategy should concentrate on the features, functionality and performance of products and services. The customer perspective also recognizes the intended outcomes from providing differentiated value propositions. Such would comprise account share with targeted customers, market share in targeted customer segments acquisition, customer profitability, and retention of customers in the targeted segments.
Internal Process Perspective
Once a business has a clear picture of its financial and customer perspectives, it can determine how to achieve the differentiated value proposition for productivity and customers improvements for its financial objectives. The internal business perspective captures four high-level processes in the organization: Building the franchise by encouraging innovation in the development of new products and services and to enter new markets and customer segments, increasing customer value by expanding and deepening customer relationships, Achieving operational quality by improving internal processes, supply-chain management, resource capacity management, asset utilization and other processes and Becoming a good corporate citizen by developing effective relationships with external stakeholders.
Many businesses that espouse a strategy calling for the development of value-adding customer relationships or innovation misguidedly choose to evaluate their internal business processes by putting more focus solely on the quality and cost of their operations. These organizations have a complete disengagement between their strategy and its measurement. Not surprisingly, businesses encounter complexity in implementing growth strategies when their key internal measurements stress on process improvements, not enhanced customer relationships or innovation. The benefit as a result of improved business processes usually occur in stages. Process improvements and operational efficiencies result to cost savings from increases in short-term benefits. Enhanced customer relationships ensure revenue growth from accrues in the intermediate term. Better innovations result in long-term revenue and margin improvements. Hence, a complete strategy ought to create returns from all three high-level internal processes.
Learning and Growth Perspective
Learning and growth perspective is the final region of a strategy map in and is the foundation of any strategy. From this perspective, managers define the skills and capabilities of organization’s employees and corporate climate needed to support a strategy. The objectives allow a firm to align its information technology and human resources with the strategic requirements of its differentiated value proposition, critical internal business processes and customer relationships. Organizations have a complete strategy map with linkages across the four major perspectives when they address the learning and growth perspective.
Strategy maps are powerful diagnostic tools, used for the detection of flaws in businesses Balanced Scorecards. Business managers compare the scorecards being used by its business units to find units with no measure or objective for dealers, from immediately obvious from looking at its strategy map. The authors note that numerous numbers of organization organizations claim to have a Balanced Scorecard when they make use of a mixture of nonfinancial and financial measures. The systems are certainly more "balanced" than those that use financial measures alone. Yet, the philosophies and assumptions underlying the scorecards are rather different. The authors observe that two other types of scorecards commonly used are the key performance indicator scorecard and the stakeholder scorecard.
Using the balanced scorecard to manage performance in organizations
From this study, only eight of the 48 governmental organizations surveyed indicated use of the balanced scorecard. Views were collected pertaining to the interviewees on the basis for identifying its perceived benefits. Eight respondents varied in their ratings when asked to rate the overall usefulness of the balanced scorecard into their organizations. According to the authors, the mean rating of 4 gives a strong suggestion that users of a balanced scorecard perceived the tool to be highly useful in their organization. The research was carried out using interview and Open-ended survey responses.
From the analysis, the balanced scorecard approach provides focus and clear lines of accountability together with the ability to measure the achievement of agreed outcomes. Secondly, the approach provides the management with a concise set of information to measure performance and direct improvements. Thirdly, the approach enabled more comprehensive reporting to stakeholders including the employees as to how successful the organization has been.
Another benefit identified during the study is that the balanced scorecard acts as a multiple stakeholder perspective management tool capable of helping in the clarification of key measures which can inform if a strategy is working. Respondents' also pointed out performance measurement to be the core perceived benefit of the use of the approach, followed by strategic management and reporting.
All three Balanced Scorecard users noted its effectiveness for measuring the performance both employee and unit performance in the follow-up interviews. Majority of questionnaire responses also indicated that employee performance measures are built into organizations scorecard. The study also found that the introduction of scorecards to measure individual performance was supported by employees since the tool provided clear goals regarding what the management viewed as important. The employees linked these activities to bonus payments where they made easy the understanding of bonus performance expectations.
Additionally, the authors note that the lack of linkage between the balanced scorecard and the employee reward system contributed to balanced scorecard failure. Governmental organizations that use staff performance scorecards appeared to be successful implement the tool. According to the article, the dominant use of the balanced scorecard approach as a performance measurement tool is in line with the use of the "first generation" balanced scorecard. The authors also reckon that the use of a balanced scorecard as performance management is evident in the literature. The evolution has come with experience in Balanced Scorecard application over time together with the maturity of the organization’s strategy.
The authors state that prior the longer the use of the Balanced Scorecard by an organization, the more comprehensively it can utilize the tool. Of the three governmental organizations, two had used it for more than four years while one had implemented for less than one year. The different experience of these organizations with the tool may have accounted for their different focuses on management and performance measurement according to the authors.
Further, the authors state that the use of the Balanced Scorecard to ease reporting requirements was cited by current users as another reason for its implementation. The tool had a greater applicability to governmental organizations as an external reporting tool. Its implementation has the potential to improve accountability and transparency when used as the basis of reporting to the public.
Factors that contribute to successful implementation of a balanced scorecard
According to the article, the survey responses revealed two critical factors as contributing to successful implementation of a balanced scorecard. The first was the modification of the balanced scorecard to fit the organization’s needs. The second was the appropriate learning before and during its implementation. The follow-up interviews with three users revealed that each organization was in the process of developing its balanced scorecard system as it became more experienced in its use, signifying that its use offered a platform for future learning in addition to the immediate, complete performance management tool. For example, one organization that began to use the balanced scorecard in a single unit would then take an incremental approach towards implementing the balanced scorecard so as to learn from every stage and transfer the lesson to other unit applications. On the other hand, the organizations that had implemented the balanced scorecard within the previous one year were better placed.
Barriers to successful balanced scorecard implementation
According to the authors, 81.3 percent of the governmental organizations that responded to the questionnaire had never implemented the balanced scorecard. The finding implied that there existed barriers to its implementation. When questioned regarding the failure of the implementation, the respondents' answers fell into two categories. Many respondents indicated the Use of alternative systems as the measure of performance. Many respondents noted that their organization used other available tools or had developed its own, non-balanced scorecard performance measurement system. Other respondents cited Small organizational size as a reason for not implementing the approach.
Resourcing problems was also a factor that had contributed to the non-implementation of appropriate systems to capture the relevant information. In another perspective, the lack of resources to support information gathering was also an obstacle to implementing the tool.
Some managers cited the Lack of time considering themselves too busy with more immediate concerns to spend time on developing the approach. Lack of top management support essential for promoting the tool, provide the resources to sustain its use and encourage others to engage with it was also cited as a concern. Other issues that emerged in the second category of responses were problems with recognizing and incorporating meaningful relationships between KPIs within the different BSC dimensions and challenges in adapting the Balanced Scorecard structure. (Northcott and Tuivaiti 2012)
Realizing the power of the balanced scorecard
The authors note that the balance scorecard approach acts like an airplane's control panel to help the managers to steer their organization by providing a comprehensive picture of their performance. It picture is built with financial and nonfinancial measurements including quality, revenue, customer loyalty and employee knowledge. The accurate view of such contributing elements allows managers to evaluate the overall performance of the organization rather than focusing on bottom-line, short-term results. According to the article, an estimated 60% of Fortune 1,000 companies surveyed have or are experimenting with a Balanced Scorecard. The percentage signifies a lack of their enterprise-wide application to necessitate automation of the daily processes to feed a scorecard application. The authors note that Business Intelligence, Internet technology, and text processing are the foundations of automated Balanced Scorecard systems. (Atkinson and Epstein, 2000)
Balanced scorecards vs. Executive Information System
According to the article, most managers have implemented Executive information systems solutions in their businesses to compensate for the balanced scorecard approach. However, the authors argue that Balanced Scorecards differ from traditional Executive Information system solutions in that they constantly change based on how people meet their goals. On the other hand, EIS systems contain much hard-coded information that demands significant maintenance. Such systems focus on measuring lagging indicators such as financials while a Balanced Scorecard measures both lagging and leading indicators. The authors note that Balanced Scorecards are designed for today's networked world, consolidating it at the corporate level, gathering information from thousands of people on the front lines and redeploying it so all employees in the company can benefit. More important the tools provide communication, feedback and performance management and measurement to supports strategy execution.
Automating the balanced scorecard
In the ultimate Balanced Scorecard environment, there is a variety of scorecards for everyone in the business and the business itself. Users should view the business' strategic goals on their computers and drill into the goal to give more detail. Much of the data should come from individual employees on what’s happening on the front lines into personalized scorecards. The scorecards also inform them on how their performance matches their goals.
Business Intelligence, Internet technology, and text processing are the foundations of automated Balanced Scorecard systems. Business Intelligence systems take quantitative data such as sales delivery times, figures, calls, length of customer service and translate them into a Balanced Scorecard summary to show which goals the organization is and is not achieving. Text processing integrates detailed explanations and feedback to provide qualitative assessment capabilities. The importance of Internet technology is to make the system accessible to anyone in the business from anywhere. The authors, organizations should build a Balanced Scorecard application by setting goals in four quadrants: internal business processes, customer satisfaction and loyalty, financials and learning and growth. Measurable metrics should then be assigned to each goal. The goal obtains a pass or fails grade that Business Intelligent systems calculate by extracting and processing data from existing systems.
However, the authors note that the work that goes into channeling data into each of the four quadrants is significant because data is scattered throughout firm. The authors suggest several key elements in launching a successful automated Balanced Scorecard. The balanced scorecard must be easy to use, deployable, have open network architecture, provide comprehensive analytics and provide centralized security. (Atkinson and Epstein, 2000)
Conclusion
The Balanced Scorecard has used as to help any business to measure progress toward its strategies better. While non-financial measures have been solely used for long, their link to financial results and strategy has been vague at best. The Balanced Scorecard offers a more 'balanced view' by looking at both financial and non-financial concerns such as internal business processes, growth, customers, and learning. The financial perspective focuses mainly on historical financial measures and goals directed at the bottom line performance. The customer dimension focuses on attracting and retaining customers through quality and service objectives. The internal perspective zeros in the essential components of internal operations to ensure success in the financial and customer perspectives. The learning and growth perspective focus on the elements of the business that can dictate future sustainability, such as research and development and employee skills. Objectives for the internal dimension are often derived from looking at the other perspectives to determine gaps that exist in the organization, in terms of skills and innovation.

References
Atkinson, A., and Epstein, M. 2000, “Measure for measure: Realizing the power of the balanced scorecard”. CMA Management, 74(7), 22-28. accountid=11809
Northcott, D and Tuivaiti Ma'amora Taulapapa 2012, “Using the balanced scorecard to manage performance in the organizations” The International Journal of Public Sector Management 25(3), 166-191 n integrative approach to performance evaluation” Healthcare Financial Management, 55(5), 42-6.

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