Saturday, 22 October 2011

Balanced scorecard - a brief note

Balanced scorecard is hierarchic strategic performance management system. Specifically, it measures an enterprise's operating  performance as well as highlight performance drivers. There are two main characteristics about balanced scorecard: (a) it is balanced and (b) it is a scorecard. For (a) balanced scorecard measures both finanical and non-financial aspects of the performance of a business; it is also balanced in the sense that it deals with both short-term and long-term aspects of business performance. For (b), it is a scorecard because it mainly deals with several main performance indicators for each perspective of a balanced scorecard per scorecard. In my view, scorecard is only an analogy on the user-interface design of such a system. Balanced scorecard, in my view, is a kind of executive information system in Management Information System term. In this case, the manager making use of the balanced scorecard is able to focus on key performance indicators in a scorecard, and not a very bulky report. I want to highlight the key topics as related to balanced scorecard here; to learn the balanced scorecard methodology, you need to do more indepth interature review.

First of all, the four main perspectives of balanced scorecard are (Kaplan and Norton, 1996):
(a) financial: specific financial measures to be adopted depend on the stage of business life cycle reached by the company concerned.
(b) customer: examples of measures  are customer  satisfaction, customer profitability, etc.
(c) internal business process: the focus is on business processes that have high strategic significance.
(d) learning and growth: performance measures are mainly related to human resource, information systems capability and company procedure system.

Each perspective covers a few key performance measures; Kaplan and Norton (1996) mention that these performance measures should be derived from a company's business-unit strategy. A company's balanced scorecard system can be computer-based (see http://www.balancedscorecard.org/Software/BalancedScorecardSoftware/tabid/61/Default.aspx.)

Second, performance measures of these four perspectives can be related together to form a cause -and-effect map; the such a map, some performance measures are lead indicators and some are lag indicators (see http://ianjseath.wordpress.com/2009/08/26/lead-vs-lag-indicators/). This balanced scorecard  map is called strategy map. In general, the cause-and-effect relationship of variables flows from learning & growth perspective realm, to the internal business process perspective domain, and then to the customer perspective domain, finally reaching the financial perspective domain (Kaplan and Norton, 1996).

Third, the cause-and-effect map of the balanced scorecard tells the story of a business strategy to its managers in the form of a hierarchic systems dynamic model. It is expected to be able to effectively support organization-wide strategy planning, implementation and control effort.

The key characteristics of balanced scorecard are summarized in the following diagram:

Financial <------> Customer <--------> Internal business process <--------> Learning & growth
(End-point in strategy map)                                                    (Start-point in strategy map)
Generic criteria <--------------------------------------------------------> Idiosyncratic criteria
Performance outcome measures <---------------------------> Performance driver measures
Lag indicators <---------------------------------------------------------> Lead indicators
Effect related <-------------------------------------------------------------> Cause related

There are some challenges and concerns of using balanced scorecard, e.g. the validy of the cause-and-effect relationships are difficult to establish and balanced scorecard appears to be difficult to employ at the corporate level. It can also be argued that the balanced scorecard should consider other perspectives such as supply chain perspective and environmental management perspective, etc. Recent development in balanced scorecard approaches has been addressing some of these concerns. For example, Kaplan et al (2010) discuss how balanced scorecard can be employed to manage corporate alliances. Figge et al (2002) discuss how balanced scorecard can be enhanced to incorporate environmental and social aspects in its application to become a sustainability balanced scorecard. Their main approach is to add one more perspective to the balanced scorecard, namely, the non-market perspective.

Finally, I want to point out that the balanced scorecard approach has contributed to studies in other Management Accounting topics. For example, the Intellectual Capital valuation model of Tayles et al (2002) shares certain key characteristics with the balanced scorecard approach, e.g. using  cause-and-effect map linking financial and non-financial variables with the financial perspective being the top-level perspective in their model. [I also note that Tayles  et al (2002) maintains that their model "avoid the categorisation of the BSC [Balanced Scorecard]"].


Related lecture notes
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Note 6





References
  1. Figge, F., Hahn, T., Schaltegger, S. and Wagner, M. (2002) "The sustainability balanced scorecard - linking sustainability management to business strategy", Business Strategy and the Environment 11, pp. 269-284.
  2. Kaplan, R.S. and Norton, D.P. (1996) "Linking the balanced scorecard to strategy", California Management Review Vol. 39(1), pp. 53-79.
  3. Kaplan, R,S. and Norton, D.P. (1996) The Balanced Scorecard, Harvard Business School Press.
  4. Kaplan, R.S., Norton, D.P. and Rugelsjoen, B. (2010) "Managing Alliances with the Balanced Scorecard", Harvard Business Review, Jan-Feb., pp. 114-120.
  5. Lead vs lag indicators: http://ianjseath.wordpress.com/2009/08/26/lead-vs-lag-indicators/
  6. Niven, P.R, (2005) Balanced Scorecard Diagnostics: Maintaining maximum performance, Wiley.
  7. Tayles, M., Bramley, A., Adshead, N. and Farr, J. (2002) "Dealing with the management of intellectual capital", Accounting, Auditing & Accountability Journal Vol. 15(2), pp. 251-267.
  8. A brief introduction on balanced scorecard: http://www.netmba.com/accounting/mgmt/balanced-scorecard/
  9. A blog note related to the notion of balance in Balance Scorecard: http://josephho33.blogspot.hk/2012/10/a-discussion-on-balance-in-balance.html

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