ACCTG 533, Section 1: Module 1: Balanced Scorecard. [Slide Content]: Balanced Scorecard. [Jeanne H. Yamamura]: Balanced Scorecard.

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1 ACCTG 533, Section 1: Module 1: Balanced Scorecard Balanced Scorecard Balanced Scorecard. Balanced Framework Offers multidimensional approach Incorporate balanced set of measures o Address needs of multiple stakeholders o Linked to strategic objectives Examples o SMART pyramid o Results/Determinants Matrix o Performance Prism o Balanced Scorecard A proposed solution to inadequate performance measurement systems is the balanced framework. The balanced framework offers a multidimensional approach instead of one focused solely on financial measurement. It incorporates a balanced set of measures that address the needs of multiple stakeholders and are linked to the entity s strategic objectives. Examples of balanced frameworks include: the SMART pyramid, the Results/Determinants Matrix, the Performance Prism, and the Balanced Scorecard. As a practical note, a framework is very helpful when you are creating a new measurement system. It provides organization and common terminology and helps to make sure that you remember to include everything. Balanced Scorecard In the Beginning Kaplan and Norton in 1990 s Lord Kelvin If you cannot measure it, you cannot improve it Traditional financial measures lacking o Backward looking o Control oriented

2 We ll start with the Balanced Scorecard. It was first proposed by Robert Kaplan and David Norton in the 1990 s. They cited a British scientist, Lord Kelvin, who said: If you cannot measure it, you cannot improve it. They believed that traditional financial measures were too backward looking and were biased toward control purposes. Balanced Scorecard In the Beginning What is needed o Track and guide performance o Enable action o Forward looking o Broader based o Focused on future value creation What organizations really needed was measures to help them track and guide performance: something that enabled you to know exactly what you needed to do as soon as you saw the measure. These measures would need to be forward looking and broader based. They would need to be measures which concentrate on future value creation. And, in order to be successful at future value creation, the needs of stakeholders would have to be considered and incorporated into the organization s future strategies and plans. Balanced Scorecard Today Full strategic planning and management system o Info to act upon o Specific objectives and performance measures The Balanced Scorecard today is promoted as a full strategic planning and management system. It doesn t simply offer measurements. Instead it provides the information that will enable you to act, actions that get you further toward your strategic objectives. It does this by providing specific objectives and performance measures (all linked to strategic objectives, of course) that become the daily marching orders for the organization. Four Perspectives

3 [Diagram Shown] Multiple stakeholders are incorporated into the Balanced Scorecard through four perspectives: Customer, Internal Business Processes, Learning and Growth, and Financial. The four perspectives are then used to develop an action plan to accomplish the organization s vision and strategy. Perspective Questions [Diagram Shown] The best way to understand these four perspectives is to ask the following questions: For the financial perspective: To succeed financially how should we appear to our shareholders? Internal business processes: To satisfy our shareholders and customers, what business processes must we excel at? Learning and growth: To achieve our vision, how will we sustain our ability to change and improve? And, customer: To achieve our vision, how should we appear to our customers. Customer Perspective Howe do customers see us? Focus on customers Understand customer needs Problem is soft measures o Qualitative, judgmental, subjective, biased Substitute hard measures o Quantitative, objective, easier to obtain Let s take a closer look at the customer perspective. How do customers see us? In order to keep customers satisfied, you must focus on them and understand their needs. Customers are essential to every organization but their importance is often ignored in performance measurement. Why? Because customer satisfaction measures are soft measures, qualitative, judgmental, subjective,

4 and based on perceptual data. We tend to select hard measures (quantitative, objective) they re easier to obtain and at least we know what we have measured. Internal Process Perspective What do we need to excel at? Internal business processes How well is business doing Are products and services meeting customer requirements Internal business processes perspective: What do we need to excel at? Meeting customer needs requires that your internal business processes work and work well. That means the critical internal processes need to be identified so you can focus management attention on them. Managers must know how well the business is operating and if products and services are meeting customer requirements. Learning and Growth Perspective Can we continue to improve and create value? Often missing Requires investment in people, technology, information systems, and facilities Learning and growth perspective: Can we continue to improve and create value? This area is the one most commonly missing in organizations appreciating and measuring the organization s ability to learn and grow, to innovate and improve in response to market, technology, and other changes. Improvement and value creation require investment in people as well as technology, information systems, and facilities. Financial Perspective

5 How have we served our shareholders? Traditional financial measures o Profitability o Growth o Shareholder value Other financially-related data, e.g., risk assessment The financial perspective: How have we served our shareholders? This question returns us to the traditional financial measures addressing profitability, growth and shareholder value. Responses to this question may also incorporate other financially-related data such as risk assessment. Each Perspective Strategic objectives Key performance indicators (measures) Targets Initiatives [Diagram Shown] Each perspective contains: strategic objectives linked to the organization s vision and strategy, key performance indicators (measures) that capture the actions needed to successfully carry out the organization s vision and strategy, targets that identify performance expectations, initiatives (key action programs) needed in order to accomplish objectives. Perspectives Interrelated [Diagram Shown] The perspectives are interrelated. Strategy sets financial objectives. In order to meet the financial objectives, customers must be satisfied. Meeting financial objectives and satisfying customers require efficient and quality operations. Maintaining this performance in the long-run requires that learning and innovation occur within the organization.

6 The entire process is iterative, leaving room for continual improvement and change. The organization must stop periodically and evaluate whether or not the strategies are working, whether the right things are being measured, and whether funds are being budgeted strategically. Example Vinfen Corporation [Table Shown] Here s an example, Vinfen Corporation, which is a private, non-profit, human services organization that is based in Massachusetts. Taking a look at just two of their objectives and perspectives: In the learning and growth perspective, we have the goal of recruiting and retaining a highly skilled work force. The specific objective that they have identified for this is to retain best qualified staff. The measurement, the key performance indicator or the measure, that they re planning to use is the turnover rate and the target that they have set is that the turnover rate should not exceed 24% on an annualized basis. Another example is from the internal perspective and we look at improve business practices and efficiencies. The objective that they ve set is to maintain the physical quality and appearance of their group homes. The measure that they re planning to use is the average response time to complete a work request and their target is to simply improve from the previous fiscal year. Too Many Measures 1. Growth in key performance indicators Which ones do you work on? No guidance n prioritization Again, there is no perfect system. The Balanced Scorecard has been criticized for the following: Number one: Too many measures. With multiple perspectives, the number of performance indicators grows from 1 or 2 to 10 to 30. With so many to look at, how do you select which ones you re going to work on? You can only maximize one variable at a time. When there are so many, managers have a difficult time identifying the ones they want to focus on or the ones they need to focus on. Also the framework doesn t offer any guidance on how to trade off the different indicators when needed.

7 Inappropriate Use 2. Frequent use as support for incentive payments Not designed for that purpose Manages choose easiest measures Number two: Inappropriate use. The Balanced Scorecard is frequently used to support incentive payments. When used for that purpose which is, by the way, a purpose that it was not designed for, managers select the easiest measures to achieve. The results, as you might imagine, are less than wonderful and the Balanced Scorecard ends up taking the blame. Failure to Launch 3. Trial and error nature of implementation Iterative process More than one try needed Number three: Failure to launch. Those adopting the Balanced Scorecard often fail to understand the trial and error nature of the implementation process. Remember we mentioned earlier that it was an iterative process. It is HARD to come up with the right measures. So you should expect it to take more than one try to get it right. Top Down Model 4. Supposed to heavily use bottom-up suggestions and feedback Centralized prescriptive model beginning at the top 26 month timeline Too cumbersome to react and adapt quickly Number four: A top down model. Despite the designers belief that the Balanced Scorecard should heavily incorporate bottom-up suggestions and feedback, the Balanced Scorecard is based on a centralized prescriptive model that begins with management s vision and strategy. When you add the long timeline required for implementation (Kaplan & Norton suggested 26 months), doubt sets in regarding the organization s ability to quickly react to any bottom-up ideas. That,

8 in turn, suggests that the Balanced Scorecard model is too cumbersome to enable rapid responses or adaptation to environmental changes a requirement for success in an increasingly dynamic environment. Too Internally Focused 5. Innovation of the future a collaborative effort Model not able to address and provide for new paradigm Number five: Too internally focused. It has been suggested that the Balanced Scorecard is too internally focused. The emergence of open standards and open source programs and products enables innovation to become the result of the collaborative efforts of many. The Balanced Scorecard looks heavily at internal processes and requirements. It currently does not appear to be able to address and provide for the needs of this new organizational paradigm.