Balanced Scorecard Evaluation - Essay Example

?Balanced Scorecard Evaluation In order to experience continued growth and improvement, it is very critical that managers of organizations understandtheir companies from their financial and non-financial perspectives. Kaplan and Norton (1996) state that “if u can’t measure it, u can’t manage it.” This means that managers of organizations should be in a position to keep track of the way the staff execute activities that are within their control. The manager should also be in a position of monitor the consequences resulting from these actions. Every organization aims at achieving growth and a competitive advantage. This means that the performance measurement tool they use should not only give information about the past results of the firm. It should be able to in a good position to predict the future performance of the organization, and/or control and manage the organization’s strategic plan. A balanced scorecard is one of best management styles that capture this information in details. This paper gives an analysis of the purposes for non-financial performance measures. It also analyses the current performance measure adopted in Atlantic Tele-Network, Inc (ATN), the extend to which their performance measure captures the Kaplan and Norton’s balanced scorecard and its present strength and weaknesses. Purposes for non-financial performance measure Kaplan and Norton (1996) state that by analyzing the non-financial perspectives of an organization, managers are in a position to translate the strategy of an organization into actionable objectives. It also enables them to get an insight of how the strategic plan of the organization is being executed. According to Kaplan and Norton (1992), a balanced scorecard (BSC) maps the strategic objectives of an organization into performance metrics. This is done in four perspectives namely learning and growth, customers, financial and internal processes. The four perspectives of a balanced scorecard provide important feedback that explains how well the company’s strategic plan is being executed. From this feedback, managers are able to identify necessary adjustments that can be made to ensure that the company achieves its outlined goals and objectives. BSC is a financial and non-financial performance measurement tool. This means that apart from measuring the current performance of a company in terms of finances, a BSC as evaluates the efforts of a firm to make future improvements using customer, process and learning and growth metrics (Niven 2006). As noted in the above discussion, the three major perspectives that make up the non-financial performance measures/BSC of a company are learning and growth, customers and internal processes. According to Kaplan and Norton (2004), an analysis of the objectives of an organization’s internal processes helps the management of an organization to understand and choose type of process that are very important for satisfying its shareholders and most importantly, its customers. Basically, this performance measure outlines the main processes which an organization must focus its efforts for it to excel. An analysis of the learning and growth perspective of a BSC enables an organization to understand how it must learn, improve and innovate for it to achieve its objectives. A significant portion of this perspective is employee-centered. Some of the learning and growth measures will include manufacturing learning, time to market and product focus Douglas (2007). The customer perspective of a BSC enables an organization to understand how it is being viewed by its customers. It also enables it to know how well it is doing in terms of serving its target customers in an effort to meet its financial objectives. The main objectives here will be those that focus on new products, how to become a preferred supplier, becoming a responsive supplier and customer partnerships. Generally, a BSC enables a company to translate its vision into practical goals and adjust its strategy accordingly to the feedback and the learning received. The intermediate actions will be to communicate the organization’s vision and link it to the performance of each person and section of the organization. The organization also engages in a process of planning its business and index setting. Its overall importance is to determine what works and what does not work and how to deal with those that do not work then identify their alternatives. Current performance measures adopted in Atlantic Tele-Network, Inc Atlantic Tele-Network, Inc (ATN) is a United States, US-based Telecom Company headquartered in Beverly in the state of Massachusetts. The company operates digital wireless, marine and terrestrial fiber optic networks and wireline. The company serves in deserts, plains and the mountainous areas of the US. These markets are technically challenging and geographically separated. The company also extends its services to underserved areas of Bermuda and the Caribbean as well. After acquiring Alltel wireless ATN in 2010, has been operating mainly in the rural areas across North Carolina, Georgia, South Carolina, Idaho, Illinois and Ohio (Business Wire (2011). In order to know and control its performance, ATN utilizes adjusted Average Revenue Per User (ARPU) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) performance measures. EBITDA refers to the net income attributable to the stakeholders of a company before interests, depreciation, taxes and amortization (Christensen and Raynor (2003). It portrays a company’s financial performance minus expenses. Through EBIDTA, the stakeholders of ATN are able to know the operational results as well as the profit performance of the company. ATN has invested heavily on infrastructure hence the company has higher risks of reporting large losses in the statements indicating its earnings. EBIDTA therefore helps the company to determine if their new projects, for example, the new multimillion dollar fiber optic network, are going to enable it to earn profits or losses. Through EBIDTA, the management of ATN and investors are in a position to know if it the company is making profit on regular basis or not (Douglas 2007). ATN utilizes ARPU as a financial performance measure in understanding its subscriber base. According to Christensen and Raynor (2003), ARPU provides a company with an important measure of growth in its customer base. When the ARPU levels are high, it is an indication to the company that it in a god position in terms of sustaining competition. However, when the churn rates are high, the ARPU goes down. By definition, the churn rate is the rate at which customers of a business leave for its competitor. The extend to which the ATN’s performance measure captures the Kaplan and Norton’s BSC ATN’s adjusted ARPU and EBIDTA captures some elements of Kaplan and Norton’s balanced scorecard at a moderate level. As noted earlier, the customer perspective as per Kaplan and Norton’s balanced scorecard enables an organization to understand how it is being viewed by its customers and how well it is doing in terms of serving its target customers. On the side of ATN, a close monitoring of ARPU gives a clear indication of the state of its customer base. If ARPU reduces, it means the perception of customers towards the company is no longer a positive one. It is also sign of divided mind or attention. As noted in the above discussions, reduced ARPU levels are an indication of a high churn rate. This means that the company’s customers are receiving services that are more attractive and satisfying somewhere else. It could also indicate that the ATN is no longer offering services that are appealing to the customer hence the company cannot withstand the existing competition in the market. This means that the company has failed to become a responsive supplier. From the results of ARPU analysis, ATN is able to make objective focus on how to become a preferred supplier, new products and developing strategies of becoming a responsive supplier. EBIDTA functions to some extend as the learning and growth perspective of a BSC. In Kaplan and Norton’s balanced scorecard, the learning and growth is instrumental in informing an organization on how it must learn, improve and innovate for it to achieve its objectives. On the other hand, an EBIDTA is an important for informing the stakeholders of ATN Company its operational results as well as the profit performance of the company. This forms the basis of learning, innovation and improvement. From the operational results, the company will be able to know which of its operations are profiting and which ones are not, for example, if the use of fiber optic network is profitable or not. The operational results are therefore importation deciding the type of innovations that a company has to develop in order to achieve its objectives and satisfy its customers. Strengths and weaknesses in the current ATN’s performance measures Through the analysis of its ARPU, ATN is able develop strategies that will help it to achieve a high service quality trends that are aimed at mitigating high churn rates. The company is also able to come up with ways of attaining a strong marketing for its brand name. ARPU and EBIDTA enable investors to gain a deeper and meaningful understanding of the results of the core operations of a company and make comparisons with the performances of prior periods. From this, they are able to identify the distortions. The company can then embark on analyzing the actual cause of these distortions so as to mitigate them or avoid them in its subsequent operations. ARPU and EBIDTA respond well to the time and cost aspects of a company. According to Christensen and Raynor (2003), the development of each one of them does not consume considerable amounts of finances and time as compared to non-financial performance measures. This is because they do not involve the tracking of many financial and non-financial measures. The limitation in the number of attributes considered is also important in that it has lower chances of resulting to measurement disintegration. Such a thing normally arises from overabundance of measures because many attributes have the potential of diluting the effect of the measurement process. Samarajiva (2002) states that ARPU and EBIDTA are not subject to bureaucratic influences hence they maintain their relevance in helping a company to reach its strategic goals. ARPU and EBIDTA provide a consistent way of measuring the performance of company because in each one of them, there is a common denominator. There is consistency in denominating of attributes used. This means the results obtained are more reliable due to high levels of objectivity as compared to other performance measures, especially, non-financial performance measures. One of the weaknesses of ARPU and EBIDTA is that they are not able to measure the intangible assets of a company. Measures relating to employee relations, innovation, management capability, quality and brand value explain a good proportion of the value of a company. It also allows for the accounting of assets and liabilities. This means that by excluding these intangible assets, ARPU and EBIDTA can make manager relying on them to make poor and even harmful decisions. Due to their limitation in attributes used, ARPU and EBIDTA are not powerful enough in communicating the objectives of a company and providing incentives for managers to address the company’s long-term strategy. Improving or overcoming the weaknesses of ARPU and EBIDTA ARPU and EBIDTA use financial attributes of a company in determining the performance about a business and communicate information about it. It does not look into some of the things that could have contributed into this hence they do not provide a meaningful base for making adjustments. Non-financial data can give indirect and quantitative indicators the intangible assets of a firm. Some non-financial factors should therefore be added to them so that they can provide a means of making complete assessments. Conclusion Non-financial performance measurements for example a BSC are very important in capturing the intangible aspects of a business. Examples of these include how their customers view them, how well serves its target customers and how it must learn, improve and innovate. These are important because they have a strong correlation with the financial aspects of the business. On the other hand, the financial measurement tools like the ARPU and EBIDTA are important in identifying the operational results and profit performance of a company. The feedback from both financial and non-financial performance measures guide on the mitigation strategies to be taken. In most cases, there arises a dilemma concerning the best performance measurement tools to use. As a result of this, managers are sometimes forced to use a combination of two or more financial and non-financial performance measures. Generally, a good starting point in selecting the best performance measure to use is to get an insight of the company’s value drivers. References Business Wire (2011). Atlantic Tele-Network, Inc. Reports Second Quarter 2011 Results. Online: http://www.businesswire.com/news/home/20110802007323/en/Atlantic-Tele-Network-Reports-Quarter-2011-Results. Accessed on 5th July, 2011. Christensen Clayton and Raynor Michael (2003). The Innovator's Solution. Boston, MA: Harvard Business School Press. Cobbold Ian and Lawrie Gavin (2002). “The Development of the Balanced Scorecard as a Strategic Management Tool”. Performance Measurement Association Douglas Hubbard (2007). “How to Measure Anything: Finding the Value of Intangibles in Business.” John Wiley and Sons. New York. Kaplan Robert and Norton David (1992) “The balanced scorecard: measures that drive performance”. Harvard Business Review (Jan – Feb) pp. 71–80. Kaplan Robert and Norton David (1996) “Balanced Scorecard: Translating Strategy into Action” Harvard Business School Press. Kaplan Robert and Norton David (2004). Measuring the strategic readiness of intangible assets. Harvard Business Review, 82(2): 52-63. Niven Paul (2006) “Balanced Scorecard. Step-by-step. Maximizing Performance and Maintaining Results”. http://www.netmba.com/accounting/mgmt/balanced-scorecard/ Rohm Howard and Halbach Larry (2004). “Sustaining New Directions” Perform Magazine (2) pp 12-13 Samarajiva Rohan (2002). Redefining universal service: Policy and Regulatory Actions. http://www.itu.int/TELECOM/ast2002/cfp/pap5195.doc. Accessed on 5th July, 2011. Read More