The Balanced Scorecard: A review of research drawn from the public and private sectors

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The Balanced Scorecard: A review of research drawn from the public and private sectors Zahirul Hoque Centre for Public Sector Governance, Accountability and

1 The Balanced Scorecard: A review of research drawn from the public and private sectors Zahirul Hoque Centre for Public Sector Governance, Accountability and Performance and School of Accounting, La Trobe University, Melbourne, Australia A keynote speech at the New Zealand Management Accounting Conference, Wellington, 17 November 2011

2 The Balanced Scorecard The balanced scorecard is among the most significant developments in management accounting and thus, deserves intense research attention. (Atkinson, Balakrishnan, Booth, Cote, Grout, Mali, Roberts, Uliana and Wu (1997, p. 94). Balanced scorecard has been receiving increasing attention in the literature since its emergence in 1992.

3 Table 1: Developments of the balanced scorecard concept Publication Year Differentiation between Publications 1992 (article) An introduction of BSC as a foundation for development BSC is superior performance measurement that uses both financial and non-financial measures Identify four perspectives: Financial; Customer; Internal Business Perspective; and Innovation and Learning 1993 (article) BSC is not only a measurement exercise, also a management system to motivate breakthrough improvement Measures on BSC have to be specifically designed to fit firm s mission, strategy, technology and culture 1996 (Book) BSC has evolved from measurement system to strategic management system Reclassify Internal Business Perspective and Innovation and Learning Shifting Innovation to Internal Business Processes and adding Growth element to Learning and Growth Measures (Financial; Customer; Internal Business Processes; and Learning and Growth) are linked to each other in a causal relationship model 2001 (article) Performance management to strategic performance management system Develop Strategy Map as a framework for organizing strategic objectives that is categorized into four perspectives Develop Principles of a Strategy-Focused Organization to help organizations align key management processes and system to the strategy BSC compatible with TQM, ABC and Shareholder Value Management

4 Outline Literature review Aims of the paper Review framework Review findings Lesson learned Gaps and future studies Conclusions

5 Literature review A literature review is the process of searching the existing literature a) to ascertain what has been published on the researcher s chosen research topic, b) how previous research has been conducted, and c) how this impacts on the researcher s own research problem

6 Aims of the paper To tabulate, review, synthesize and critically discuss prior studies in the balanced scorecard in the period ; To assess whether the balanced scorecard is still relevant in the 21 st century s new world to meet the changing needs of organizational managers; and To identify knowledge gaps and to discuss future research opportunities.

7 Review framework Approaches Exploratory search using Google Scholar with a broad term of the subject topic Targeted leading scholarly journals search Issues Manual search vs. electronic search Academic outlets vs. professional outlets

8 Categorisation of publications Topic(s) / issue(s) Research setting(s) Theory/theories used Methods employed Data analysis technique(s) Results

9 Target data sources 27 leading accounting journals 47 leading business and management journals Non-journal WWW publications

10 Table 2 Frequency distribution of articles published on the balanced scorecard by accounting journals ( ) Journal Total AAAJ AOS A & F ABR TAR BAR BRIA CAR JAE JAR JMAR ABACUS AH ADIAC CPA FAM IIAE JAAF JA&PP JAEd JBFA MAR RAS EAR IJA QRAM JAOC Total

11 Table 3: Frequency distribution of articles on BSC published in accounting journals by topics (area) ( ) Years/Topics Total Balanced Scorecard (BSC) (general) Design/ attributes Adoption / Implementation Causal effect Effects / impact of the BSC on people and other stakeholders Innovation / diffusion Rise / fall / success / failure System outcomes (use / effectiveness Incentive plans / compensation effects Performance measurement /evaluations Review / critical analysis Total

12 Table 4: Frequency distribution of articles on BSC published in accounting journals by research settings ( ) Years/settings Total Manufacturing Service (private sector banking, insurance, airline, telecommunication etc) Marketing and retailing Largest / medium sized firms in general / publicly traded Hospitals / healthcare Accounting firms Central / local government Government institutions / SOEs Not-for-profit / NGOs None Other Total

13 Table 5: Frequency distribution of articles on BSC published in accounting journals by theory ( ) Years/theories used Total Behavioral/Psychology Contingency Institutional theory Critical (general) Agency Stakeholder theory Actor-network Cultural (national and organizational) Economics Fad and Fashion Supply side perspective Multiple theories Historical Constructivist approach Grounded theory Other None Total

14 Table 6: Frequency distribution of articles on BSC published in accounting journals by research methods used Years/methods Total Survey Case/Field study/ interviews Behavioral experimentation Action research Archival/Historic al Analytical Multiple methods None Total

15 Table 7: Frequency distribution of articles on BSC published in accounting journals by primary data analysis technique ( ) Years Total Qualitative: Content analysis Archival analysis Interview quotes Grounded (thematic) Participation Observation Quantitative: Descriptive statistics /correlations Multiple regression/ ANOVA/MANOVA) PLS/SEM / Path analysis Other Mixed methods None Total

16 WWW based publications claimed benefits Organizations benefiting from the balanced scorecard from performance improvement Create customer-centric culture and promote improved customer relationships Vital in competing in dynamic and complex environment to correct course to success

17 Claimed benefits cont d. Revolutionary tool that motivates staff to make organization s vision, mission and strategy to happen, Applicability of the balanced scorecard in government and non-profit organizations with some adaptations to be made.

18 Negativity/pitfalls Implementation issues top down approach The integration issue of the balanced scorecard and other control systems such as budgets balanced scorecard loses its strategic focus and turns into mere reporting

19 Negativity/pitfalls cont d. Too many KPIs, Measurement of wrong things, Unbalanced scorecards, Not driving action and change in business needs,

20 Balanced scorecard in the public sector: fact or fiction? The BSC system as a strategic performance management system The BSC soon becomes a diagnostic and not an interactive tool The BSC can create performance management tensions (as well as benefits) in its own right.

21 BSC dimension Balanced Scorecard Type Performance Dimensions in Australian government departments Little or no extent Moderate extent Large and very great extent Mean Median Outputs (quantity of services provided) (BSC_OUT) 6 (13.1%) 11 (23.9%) 29 (63.0%) Cost/processes efficiency and quality measures (BSC_CEQ) Activity/process measures (BSC_ACT) Customer/community satisfaction measures (BSC_COMM) 11 (23.9%) 10 (22.2%) 14 (31.2%) 13 (28.3%) 22 (47.8%) (28.9%) 22 (48.9%) (17.8%) 23 (51.1%) Outcomes measures (BSC_OUTC) 16 (34.8%) 12 (26.1%) 18 (39.2%) Inputs - activities planned (BSC_INP) Employee learning and growth measures (BSC_ELG) 17 (37.8%) 30 (65.2%) 9 (20.0%) 19 (42.2%) (19.6%) 7 (15.2%) Overall BSC adoption (BSC_ADOPT)

22 Decision making areas Panel A: Internal use Measure program performance Manage an activity or program Balanced scorecard use in Australian government departments Little or no extent Mean Moderate extent Large and very great extent Median 10 (22.0%) 11 (24.4%) 24 (53.3%) (25.0%) 10 (22.7%) 23 (53.3%) Budget formulation 14 (35.6%) 11 (24.4%) 18 (40.0%) Taking actions based on results 17 (38.6%) 8 (18.2%) 19 (43.2%) Strategic planning 17 (38.6%) 9 (20.5%) 18 (47.8%) Punish or reward staff 36 (85.7%) 4 (9.5%) 2 (4.8%) Overall internal use of BSC Panel B: External use Satisfy legislative requirements (law, ordinance, policy, etc) Satisfy community expectations 12 (26.1 %) 7 (15.2%) 27 (58.7 %) (42.2 %) 14 (31.1 %) 12 (26.7 %) Social responsibility goals 22 (50.0 %) 10 (22.7 %) 12 (27.3 %) Environmental goals 30 (71.4 %) 8 (19.0 %) 4 (7.8 %) Satisfy professional associations 31 (76.7%) 6 (14.0 %) 2 (4.8%) Follow others 37 (88.1%) 5 (11.9 %) 0 (0.00%)

23 Research Question To what extent has the BSC concept been adopted as a performance management system in New Zealand government departments and Crown entities? Balanced Scorecard Use in New Zealand Research Findings The proposition that organisations initially use the BSC as a performance measurement tool and evolve to using the BSC as a strategic management tool is not supported, as the case organisations were not using the BSC for measurement. In all case organisations BSCs were modified to reflect the unique characteristics of the organisation. None of the case organisations scorecards have strong causal linkages or were supported by strategy maps. Two of the case organisations BSCs closely fit the stakeholder scorecard model whereas the third case organisation s BSC is closer to a key performance indicator (KPL) scorecard. How have New Zealand The scorecard is an important part of the strategy development government and implementation process and is correlated to the maturity of departments and Grown the organisation s strategy. The BSC provides a bridge between entities extended the an organisation s strategy and the annual work program. use of the BSC to a Managers and staff performance goals and compensation were Strategic management not consistently linked to BSC measures. system? None of the case organisations explicitly integrated the BSC into the strategic planning and budgeting processed, although the organisation has made substantial progress towards this objective. None of the case organisations are using the scorecard to enhance strategic feedback and learning. How are New Zealand All case organisations were using the BSC to discharge government accountability requirements to external stakeholders although departments and Crown accountability was narrowly defined in terms of the contractual entities using BSC arrangements. measures as part of their None of the case study organisations identified the capacity to external reporting provide information on the government s ownership interest as a obligations? consideration that underpinned the development of the BSC. While the BSC may have the capacity to strengthen relationships with key stakeholders, no evidence of this potential was found. John Griffiths (2003) Australian Journal of Public Administration

24 Emerged themes It is not always about developing targets, setting measures and measuring the process in the shortrun It is about developing long-term success related performance management indicators and Understanding the outcome to support the organisational needs

25 Emerged themes cont d Improved company results in the long term Developing a clear strategy allows a clear purpose to be generated which the performance can be assessed.

26 Relevance lost or relevance found and sustained? Has the BSC lost its relevance to practice in this 21 st century or has it found relevance and sustained its position in the extant field?

27 Mixed results Too general - it may not fit in the organizational culture The four dimensions appear to loosely connect to each other and unable to provide clues on which company-internal factors should be developed.

28 Mixed results cont d It is difficult to identify the relative importance of and the trade-offs between the perspectives when resolving the conflicts in the setting of targets on different perspectives and on the measures of the perspectives.

29 Mixed results cont d Construction of the balanced scorecard and the maintenance of systems are laborious. There is not a causal but rather a logical relationship among the areas analyzed in the balanced scorecard. Balanced scorecard does not ensure any organizational and environmental rooting

30 What need knowing Behavioural, cultural and socio-political contexts Institutional coercive isomorphism Persuasive rhetoric or convincing theory Actors role in the BSC network Integrating with other MCS Linking BSC dimensions with executive compensation schemes

31 Institutional contexts and the BSC in the public sector Trust in formal institutions and BSC procedures The paternalist authority relations Resource dependency The extent of formal regulation of markets The strengths of unions and other interest stakeholders

32 Innovation diffusion of the BSC To address the proinnovation bias in innovation diffusion research (using Abrahamson s 1991 typology) Proinnovation bias emerges when an innovation is assumed to benefit organisations that it should be diffused and should not be reinvented or rejected by the social system

33 Innovation attributes A broader understanding of how innovation attributes (relative advantage, compatibility, complexity, observability, trialability) associate with an organisation s desire for implementing the BSC (Roger, 1993).

34 Relational network and the BSC Who are the key actors (human and nonhuman) in the network? How do they form and shape the development of the BSC? Who supported the BSC practices and who opposed them? What was the nature of relational networks built?

35 Appreciative enquiry Shortage of positive stories in the research literature about the working of the balanced scorecard in organizations. Using appreciative inquiry (Reed, 2007) develop a narrative focusing on what works in the organization and why.

36 Concluding remarks A good aspect of the balanced scorecard is that it is a simple, systematic, and easy-to-understand approach for performance management, review, and evaluation. It is also a convenient mechanism to communicate strategy and strategic objectives to all levels of management.

37 Concluding remarks cont d 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. The BSC should be used both as a diagnostic and an interactive management control system to ensure organisational effectiveness.

38 Thank you for listening!

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