The Balanced Scorecard

Submitted in Partial Fulfillment of the Requirements for Managerial Accounting By

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Abstract In the business communities of the world, organizational leaders develop strategies, mission statements, visions and goals in an attempt to advance their organization to profitability and continuous success. Many tools and/or techniques are available in both the financial and managerial accounting fields that can assist organizations to implement and measure their success or improve on processes which are not performing as expected. The purpose of this paper is to illustrate the balanced scorecard and explain why it is one of the best available tools that leaders can use to help them drive their organizations to success. I will explain the balanced scorecard and how it can be used and also show an example of how one may looked when implemented. The Balanced Scorecard Throughout history Chief Executive Officers (CEOs) have set strategic goals for the future of their corporations only to see those plans fail. The most obvious reason for the failure is the lack of communicating the strategy down the chain to the lower level employees. Also the focus of top executives is usually on the financial bottom line and improving revenues which doesnt provide the lowest level employees a realistic set of specific goals on how to achieve those strategic goals set forth by the CEO. To ensure the lower levels are moving towards the goals of the executives, more specific operating targets are preferable for functional, departmental and unit managers (Grant, 2010). One tool that can assist in this task is the balanced scorecard. Developed by Harvard Professor Robert Kaplan and David Norton in the early 90s, the balanced scorecards methodology provides an integrated framework for balancing financial and strategic goals and cascading performance measures down the organization to individual business units and departments (Grant, 2010). Its original objective was to be used as a

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measurement tool for performance but has evolved through the years as a tool to implement the organizational strategy. It sets the strategy in motion and clarifies it for everyone within the organization in order to be able to act upon it on a daily basis. Regardless of where an organizations member stands or what function they perform they should know where their job function fits into the overall strategy and how they help implement that strategy. The balanced scorecard measures an organizations performance from four perspectives covering both financial and non-financial objectives which are: (1) financial, (2) customer, (3) internal business processes, and (4) learning and growth (Horgren, Datar, Foster, Rajan, & Ittner, 2009). Within those perspectives are four separate criteria columns in which an organization places the strategy and vision in motion which are: (1) objective, (2) measures, (3) initiatives, and (4) target. Figure 1 below illustrates the balanced scorecard.

Figure 1: Balanced Scorecard (12 Manage.com 2011)

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All four perspectives define goals based on the strategy and vision from the CEO in regards to each respective area. In this model the strategy is broken down to the lower levels in the functional areas. Unit managers and employees are able to see where they fit into the big picture and what is required at their level to achieve the top performance possible. Each perspective is unique and will be explored in the following paragraphs. The financial perspective defines the financial strategy and how the organization will appear to shareholders. This is where the traditional financial data is explored. Data such as revenue growth, cash flow, sales, return on investment, return on equity and market share are a few items that can be tracked and measured. Managers should be concerned with setting realistic objectives and targets when completing the financial strategy. The customer category is how we appear to the customers and their satisfaction levels. For any business with a product or service the customer is the key to survival. Statistics to look for in this category would be on time delivery rates, customer partnerships or contracts, the company suppliers, percentages of sales from new or returning customers and obviously the customer satisfaction rate in all aspects of the business. Third is the internal business perspective. How is the company performing in relation to its employees and internal processes? Items such as reviewing and improving on process times, machine efficiencies, employee morale and even employee satisfaction can be tracked and measured. Lastly the learning and growth perspective is the organization can improve on in regards to research and development of products, services and employees.

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With the four perspectives defined and an understanding of what each one is concentrating on helps clarify the purpose of each department. Is does not stop with each individual perspective though. By looking at figure 1, one will notice the double sided arrowed line connecting each perspective. This is meant to say each perspective leads to something in the other contributing to the strategy of all. To simply the meaning and connections organizations can develop a strategy mapping system to show how each is connected to one another and how each influences the outcomes of others. Figure 2 below depicts a fictional regional airline company with a balanced scorecard and simplified strategy map.

Figure 2: Regional Airline Balanced Scorecard (Balanced Scorecard Institute, 2008)

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By examining figure 2 it is easy to see how each perspective affects the other. By starting at the bottom with Learning and Growth their focus for Regional Airline is on the ground grew and getting them involved in stock ownership and more training. Giving the ground crew ownership and training will increase their work output. In turn, this affects the internal perspective by improving turnaround time for on-ground aircraft. With less on-ground time this leads to more on-time flights, increased customer satisfaction and lower prices in the customer perspective as well as lower costs and increased revenue in the financial perspective. As highlighted in the example it is easy to see how each of the four perspectives are designed to be integrated to achieve the organizations vision and strategy. Each perspective must have objectives and measures assigned that are deemed critical for the overall success of the organizations strategy (Beasley, Chen, Nunez & Wright, 2006). Now that the balanced scorecard and strategy map has been explained, how does an organization implement the tools in its business strategy? First and foremost implementation requires commitment and leadership from top management (Horgren, Datar, Foster, Rajan, & Ittner, 2009) and that must flow down through the organization. Meeting and interviews will need to take place between the developers and unit managers to begin developing the critical criteria for each perspective. Each developed strategy will need to be checked to ensure they fit with the overall strategy. The scorecard should be constructed like a puzzle ensuring all pieces fit together. Once a final product is agreed upon then it can be implemented, always remembering that is it a living product and not just another company project. Constant monitoring is needed to ensure survivability and updating needs to be conducted as needed to ensure accuracy of the scorecard.

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Once the scorecard is implemented, managers can begin the process of evaluating the system to determine where to turn their focus to and also see where improvements have been made. The target criteria compared to the actual results will provide mangers with the key data to observe and investigate further. If changes need to be made then proper actions will need to be taken to help improve the lacking area. Also if results in areas are above target levels then leaders can look at implementing a reward system to recognize those responsible to achieving stellar results. Balanced scorecards are a great tool that organizations can implement and benefit from. In a 2006 international study, 193 companies responded that are using the scorecard system and highlighted what attribute best came from using a scorecard. The following is a list of some of the responses: Key performance indicators (84%), actions and objectives supported by measures (83%), scorecards for different level of the organization (74%), numerous performance measures (74%), ability to graph performance measures over time (73%), and the ability to communicate vision and strategy to an organizations employees (72%) (Lawson, Stratton & Hatch, 2006). Conclusion In conclusion, I believe the balanced scorecard is a valuable tool that can be used to align an organizations strategy with all members of an organization and give everyone a piece of ownership in their respective units. With proper development and implementation an organization can achieve higher results and determine ways to improve on their bottom lines.

References

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Horngren, C. T., Datar, S. M., Foster, G., Rajan, M., & Ittner, C. (2009). Cost accounting: A managerial emphasis. (13th ed.). Upper Saddle River, NJ: Pearson Education Inc Grant, G.M. (2010). Contemporary strategy analysis. West Sussex: John Wiley & Sons Ltd. Lawson, R., Stratton, W. & Hatch, T. (March 2006). Scorecarding goes global. Strategic Finance, 35-41 12 Manage.com (2011). [image] The balanced scorecard. Retrieved from: http://www.12manage.com/methods_balancedscorecard.html Beasley, M.S., Chen, A., Nunez, K., & Wright, L. (2006). Working hand in hand: Balanced scorecards and enterprise risk management. Strategic Finance, 87(9), 49-55. Balanced Scorecard Institute. (2008). Regional airline balanced scorecard. Retrieved from http://www.balancedscorecard.org/Portals/0/PDF/Regional_Airline.pdf

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