Accounting - Balanced Scorecard Concept - Case Study Example

Accounting - Balanced Scorecard Concept Table of Contents Introduction 1 Development 2 Historical Background 4 Arguments in favour of use of Balanced Score Cards in Organisations 5 Arguments against the use of Balanced Score Cards in Organisations 7 Successful Implementation of Balanced Score Cards- Analysis 10 Analysis of the use of Balanced Score Cards in the Production and Services Sector 13 Conclusion 14 References 16 Introduction The project aims to evaluate the development of the Balanced Scorecard system in organisations. It tries to find the role played by the system in the production and service organisations. A number of organisations across the globe have accepted the model as the most important instrument of strategic management. Despite being an endurable and successful management concept, it is misunderstood frequently. The project tries to evaluate the performance of the system. Firstly, it describes the system in details as developed by Kaplan and Norton. Then it presents how the system has evolved and been accepted in organisations widely. A number of arguments have been presented in favour of using the practice in organisations. At the same time a number of arguments have been presented which goes against it. To support the concept, the project provides examples of a number of firms which have successfully implemented the balanced scorecards. Finally, it makes an analysis of the use of the concept in the production and services sector in the world. Development “The Balanced Score Card is a strategic planning and management system” (Balanced Score Card Institute, 2010). It is used in businesses, industries, government and non profit organisations. The system is mainly used to align the business activities with the vision and strategies of the organisation. It is also meant to enhance both internal and external communication and monitor the performance of organisations against strategic needs of the same. The various components of balanced score cards have been presented in the following diagram. Figure 1: Four Perspectives in Balanced Scorecard (Source: Kaplan & Norton, 1996, p.5) The approach was developed by Kaplan and Norton. The concept was developed to overcome the shortcomings and ambiguity of the previous approaches in management. The speciality of the approach is that it provides a definite prescription about what organisations are required to measure to balance their financial perspective. According to this approach, organisations are viewed from four different perspectives. The learning and growth perspective includes training of employees and inculcating the cultural attitudes both for individuals as well as the corporate house. The next perspective refers to internal processes in a business. The metrics developed on this perspective helps managers to estimate the level of success and to know if the company’s products and services are conforming to the requirements of customers. The approach emphasises on the requirement of financial data for monitoring the progress of the organisation. Lastly, the customer perspective focuses on the importance of customer satisfaction in businesses (Balanced Score Card Institute, 2010). Historical Background In the initial stages, the balanced the approach was used as a simple performance management tool. Since then, new perspectives have been added to this approach to improve on its utility. Organisation’s increased responsibility towards society has elicited the investors to pressurise the organisations for addressing the issues and increasing the transparency of the management actions. Incorporating social responsibility and environmental management into the Balanced Score Card enhances the understanding of dependencies of the various business perspectives. It was felt that measuring the tangible and the intangible factors separately in business were unwise and impractical. This led to the belief that all factors would have to be measured on a common platform which consequently resulted in the application and upgrading of the system of balanced score card (CIO, 2005, p.20). Currently research is being conducted to identify the application of the concept of balanced scorecard in the field of education. Although this concept is primarily used in the corporate houses, its use is being extended to the field of education. The Ohio State University has been working towards becoming implementing this concept to become the most recognised educational institute (Stewart & Hubin, 2001, p.4). Recently research is being conducted to conjoin the SWOT matrix with the Balanced Scorecard to develop a strategic management system. The SWOT analysis identifies the critical factors towards the company’s success which can be implemented in the various aspects of the balanced scorecard (Lee & Ko, 2000, p.1). Arguments in favour of use of Balanced Score Cards in Organisations The Balanced Score Card helps organisations to have a complete knowledge of the health of the organisation. It represents the present status of the firm, and the requirements to meet the visions of the same. Firstly, it “puts an organization’s mission at the centre of its performance measurement” (Exinfm, n.d., p.5). This is done by translating the company’s mission into the tangible actions and measures. The development of the “Texas Special Education” Balanced Score Card requires the involvement of the “statewide Special Education System” for initiating and catalysing their actions and behaviours towards achieving the overall mission of the organisation (Exinfm, n.d., p.5). The balanced score card approach helps in the promotion of a forward looking proactive organisation. It is different from the conventional measurement approaches which are more reactive and punitive, and reveals what is more important when something goes wrong (Exinfm, n.d., p.5). It has made managers realise that measurement is more important than introducing new operating processes and strategies (Kaplan & Norton, 1993, p.1). Creating the system enables and fosters the growth of the measures which are used for tracking performance of that which adds towards attaining the mission of the firm. It creates accountability of the factors that are most important (Exinfm, n.d., p.5). It gives a balanced and comprehensive view of those factors which influences performance. It also allows organisations to see the relationships and trends among different perspectives as they relate to the overall development of the firm (Exinfm, n.d., p.5). It provides a framework for describing a strategy which links the intangible and the tangible assets which create value. The strategy map is an important component in the system which presents an architecture defining the interrelationship between shareholders, business processes, customers, competencies and capabilities. It gives a guideline to the strategy development, implementation and communication in the organisation and also provides a feedback for management control and evaluation of performance of the employees (Henderson, Young & Mittl, n.d., p.7). The balanced score card helps to manage performance in such a way that motivates behaviour of employees increasing their performance on a continuous basis. It helps in achieving customer satisfaction, improves flexibility and productivity, achieves process improvements and ensures satisfaction of employees (Henderson, Young & Mittl, n.d., p.7). Apart from the above advantages, the balances score card approach helps to improve the customer value. It assists in measuring the costs of tangible assets. Tangible assets like raw materials, land, buildings and equipments are measured separately and are based on the historical actual cost. It is also measured using valuation methods like market value, conventional financial, accounting mechanisms, and replacement value methods. Companies have combined and transformed the tangible resources into commodities and products which are valued above the value of their inputs (Henderson, Young & Mittl, n.d., p.3). It also helps in assigning value to the intangible assets. The intangible assets do not have any value in themselves. Making investments in any one or many such assets is not enough to realise the value of those assets. The value is actually created by linking all the assets together by a single strategy. This is done using the balanced score card. Arguments against the use of Balanced Score Cards in Organisations The balanced score card is not free of errors. There are signs which show that the system is not all perfect. Research has claimed that 70% of the times the implementation of the system fails (Wagner, 2002, p.3). The framework of the approach has its own view points. The task is modelled according to its own point of view. The question arises whether the framework developed actually meets requirements of the task both in procedural and descriptive terms. There are questions regarding the choice of perspectives of the system. There are many other perspectives, other than customer, financial, learning and internal processing which could be considered. There are also questions regarding the interdependencies of the perspectives. It is said that the approach does not differentiate between the processes, outcomes, measurement content or the higher order process measures. Moreover, by considering ‘financial and customer’ as the important domains for measurements, the model has become less suitable for implementation. This is predominantly true in organisations where these characters do not find prominence (Wagner, 2002, p.3). The key feature of any scorecard is the proper linking between various perspectives. Factors arising from a single perspective should have complete links with the factors arising from another perspective. But the BSC (Balanced Score Card) has a very strict hierarchy which reduces the relationship between the perspectives. For example, finance can get affected by the customers but not by the perspectives at a lower level. This has been represented by the following figure (Wagner, 2002, p.4). Figure 2: Relationship between the perspectives in Balanced Score Card Implementation (Source: Wagner, 2002, p.4) The BSC supports the lower level planning phases, but does not support the highest levels in strategic planning. It is also said to be just a measurement system and less of a system of strategic planning. Strategic management involves steps of planning, implementation and monitoring. However, BSC mainly focuses on measurement, considering the strategic planning to be given (Wagner, 2002, p.5). Another drawback of the system is that is that it is considered to be more of a management tool and less of a performance measurement system (Broccardo, 2007). The BSC system does not provide a quick remedy to any problem. It takes a lot of time to develop the scorecard. While the communication can be commenced within a short span of time, the implementation of the system has to be done in steps. Organisations are required to create the system and keep it ‘up to date’ even after its implementation. This proves to be costly affair (Calhoun, 2004, p.10). Store 24 was a private retailer in England which had implemented the strategy but without much success. Untimely collection of information was the key reason behind failure of the strategy (Campbell, et al., 2008). Arran Ltd., which is a financial services firm in the United States of America, has failed to implement the system. Initially there were a number of successes but eventually the firm began to move away from using the system as it began to confront failures (2GC, 2010). Another company failing to implement the system successfully was Truro, an oil company in the Middle East. The issue arising in this case was failure to design the system successfully (2GC, 2010). Successful Implementation of Balanced Score Cards- Analysis One of the most prominent examples of successful implementation of the concept of BSC was done in Arran Ltd. “Arran Ltd. is a multi-divisional retail financial services firm based in UK” (Cobbold, 2001, p.2). It was primarily implemented as a performance management tool in the organisation for the purpose of management control. The measures were based on information requirements of the senior managers. This created the standardisation of design and ensured the implementation of common measures across all levels of the organisation. The BSC was viewed by many as indicators of standard performance. The utility of the system was that it allowed continuity of activities to be monitored across all divisions of the retail sector. The standardised elements used in the “Retail Balanced Scorecard” (Cobbold, 2001, p.3) proved particularly useful to Arran Ltd. Another company worth mentioning which gained significantly from implementation of the BSC is Truro, which is a multi divisional oil company in the Middle East. Late in the 1990s, the company was in urgent requirement of a performance management system. It also required a mechanism for integrating the different tools of measurement and monitoring the company’s progress towards the attainment of goals and strategies. The BSC development process helped in identifying the new strategic priorities of the organisation. Subsequently a number of BSCs were developed in the different sub units of the organisation. They were lubricants, commercial, retail, distribution, group business services and terminal operations. These sub units were developed by mixing the commercial units, cost centres and support functions. Subsequently, the post design process which includes both usage and implementation was assisted with the introduction of balanced score card (Cobbold & Antarkar, 2001, p.2). This implementation led to the emergence of a number of learning points. While the software functioned effectively, various organisational issues related to the designing of the BSC, and the approaches which aimed at supporting the implementation of the same, reduced the value of the developed system of performance management (Cobbold & Antarkar, 2001, p.2). Crosshouse is another multinational company in Europe which successfully implemented the balanced Scorecard in the organisations. It is a multi divisional and multinational company which was confronted with a number of project and designed management challenges that were not yet addressed in any of the projects reported under the balanced scorecard system. To meet the challenges “significant advances were required of both the conceptual models that underpin the Balanced Scorecard framework and the design methods used to implement it”(Cobbold & Lawrie, 2001, p.1). The development of the strategic management system on the basis of BSC was completed successfully. The methodological and conceptual advances were also demonstrated successfully. The documentation of BSC and reporting of the measurement data was done by developing software to measure the performance (Cobbold & Lawrie, 2001, p.2). In 2004-2005, the United Nations Agency worked towards promotion and development of the BSC. However initially this methodology was found to be over complex and did not sell sufficiently at the senior level. Subsequently the decision of adopting the policy was taken up again to link the “Medium- Term Strategic Plan” (2GC Active Management, 2008, p.2). Implementation of the BSC has been able to bring about transparency of the performance and also strengthening the accountability of performance by the senior levels in the agency. It has also promoted the concept of open discussion and building consensus in the Executive Committee. It has initiated the process of performance review to be conducted by the directors. This was done to reinforce accountability of results. Along with this, it has enabled the performance improvements in the centre which has improved production and delivery at the country level. One executive has commented the BSC as “enabling the Executive Director to support and endorse the Balanced Scorecard as a useful tool for senior management” (2GC Active Management, 2008, p.5). Another executive has commented on the system as being the best ever executive retreat he had ever seen. Many believe that the management tool would continue to support the executive committee for improving the agency’s results (2GC Active Management, 2008, p.5). Thus it is apparent that most organisations across the world have been working with the system of balanced score card. In 2004, 57% of the global companies were seen to be using the system. The use of the concept has not only gained popularity in the private sector but the public sector has also benefited. The return on investment can be used for increasing sales and decreasing costs. However a manager who is not aware of the critical factors may curtain investments in such areas which would be inconsistent in maintaining the organisation’s strategies. The ROI or the residual income method is used in organisations as the financial performance measure on the balanced score card of the company (Accounting for Management, 2009). Analysis of the use of Balanced Score Cards in the Production and Services Sector The use of balanced score card finds special applications in hospitals and medical centres. Hospitals function in such an environment which demands demonstration of great care in a fiscal environment. This environment is characterised to have great competition among the talented people. This requires attention in a number of areas like clinical, operations and finance. The BSC finds particular usage in the health sector by embedding strategies having balanced focus and a performance monitoring system in the organisation culture. The “Yale-New Haven Health System” (Syed, Bresson & Moskowitz, 2007, p.1) successfully implemented the electronic BSC in its operations. Recent use of the electronic system has made the BSC more useful for users. It includes calculative matrix which makes the measurements more timely and accurate. It also promotes rapid and broad distribution of the updated measurements. It improves access to the supportive data, and analytic tools and allows managers to answer questions when the performance does not meet the expectations. The BSC has found particular significance in the financial sector. After the economic recession, the BSC has found special importance in finding the solutions in the financial sector. The new BSC has found utility in aligning risk management with the performance management. BSC has been able to integrate the two factors. It is used as the most important tool for measuring performance in the financial sector. “For each of the four main perspectives in the classic BSC, a company defines its goals and the related Key Performance Indicators (KPIs)” (Stewart, 2000, p.4). The key performance indicators allow the firm to monitor and measure its performance. The balanced score card and the key risk indictors (KRIs) are used to integrate risk management and performance (Stewart, 2000, p.4). The BSC allows translating the company’s vision and strategies into a set of financial and other objectives which are measurable. The traditional balanced score card has become the primary link between the different management levels and also between the long and short term goals. The system has found great utility in public services. The need for management and innovation in fields of control systems and planning has significantly increased the requirement of the system. In the services sector, the water services sector widely uses the system of BSC. Water utility services remain in continuous and long term operations. However, the management styles do not comply with the operations and decisions. The BSC was introduced to bring about a more visionary and future oriented leadership in the system (Seppala, 2003, p.1). Conclusion It is seen that the Balanced Scorecard Concept has gained significant popularity over the years. It has evolved as the most popular instruments of strategic management and planning in organisations across the world. This is apparent from the fact that 57% of the companies in the world were using the system in 2004. It is true that the system has immense utility in organisations, but it is not completely free from criticisms. It has been criticised on the ground that it is composed of strict hierarchies, consequently reducing the inter-relationship between different perspectives and components of the system. At times the system has also been accused of being extremely complex which makes it difficult to implement. Finally, it is worth mentioning that the system finds prominence both in the production and services sector. Its usage has been increasing in the public utility services as well. References 2GC. 2010. 2GC Balanced Scorecard and Performance Management Case Studies. [Online]. Available at: http://www.2gc.co.uk/resources-casestudies. [Accessed on December 7, 2010]. 2GC Active Management. May 2008. Case Study: United Nations Agency. [Pdf]. Available at: http://v6dev.2gc.org/pdf/2GC-C0521.pdf. [Accessed on November 19, 2010]. Accounting for Management. 2009. Return on Investment (ROI) and Balanced Scorecard:. [Online]. Available at: http://www.accountingformanagement.com/return_on_investment_and_balanced_scorecard.htm. [Accessed on December 7, 2010]. Balanced Score Card Institute. 2010. What is the Balanced Scorecard?. [Online]. Available at: http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx. [Accessed on November 18, 2010]. Broccardo, L. 2007. An empirical study of the Balanced Scorecard as a flexible strategic management and reporting tool. Economia Aziendale Online, Vol 1, No 2 (2010). [Online]. Available at: http://riviste.paviauniversitypress.it/index.php/ea/article/viewArticle/560. [Accessed on November 19, 2010]. Calhoun, B. D. October 19, 2004. Using the Balanced Scorecard to Determine Corporate Information Needs. [Pdf]. Available at: http://www.designbydi.com/documents/BalScrCrd.pdf. [December 7, 2010]. Campbell, D. February 2008. Testing Strategy with Multiple Performance Measures Evidence from a Balanced Scorecard at Store24. [Online]. Available at: http://hbswk.hbs.edu/item/5919.html. [December 7, 2010]. CIO. 2005. CIO. The Resource for Information Executives. [Online]. Available at: http://books.google.co.in/books?id=0AoAAAAAMBAJ&pg=PA20&dq=balanced+score+cards+evolution&hl=en&ei=9QPlTM7RA5DmvQPR6PTWDA&sa=X&oi=book_result&ct=book-thumbnail&resnum=3&ved=0CDsQ6wEwAg#v=onepage&q&f=false. [Accessed on November 18, 2010]. Cobbold, I. August 2001. Implementing the Balanced Scorecard – lessons and insights from a financial services firm. [Pdf]. Available at: http://v6dev.2gc.org/pdf/2GC-CS-Arran-090312.pdf. [Accessed on November 19, 2010]. Cobbold, I. & Lawrie, G. December 2001. Strategic Alignment: cascading the Balanced Scorecard in a multi-national company. [Pdf]. Available at: http://v6dev.2gc.org/pdf/2GC-CS-Crosshouse-090312.pdf. [Accessed on November 19, 2010]. Cobbold, I. & Antarkar, N. November 2001. Implementing the Balanced Scorecard – lessons and insights from a multi-divisional oil company. [Pdf]. Available at: http://v6dev.2gc.org/pdf/2GC-CS-Truro-090312.pdf. [Accessed on November 19, 2010]. Exinfm. No Date. Balanced Scorecard 101. [Pdf]. Available at: http://www.exinfm.com/workshop_files/scorecard_101.pdf. [Accessed on November 18, 2010]. Henderson, D., Young, G. & Mittl, R. No Date. Balanced Scorecards: The Integration Point between Enterprise Information and Performance Monitoring. [Pdf]. Availabel at: http://www2.sas.com/proceedings/sugi27/p157-27.pdf. [Accessed on November 19, 2010]. Kaplan, R. S. & Norton, D. P. 1993. Putting the BalancedScorecard to Work. [Pdf]. Available at: http://s336259924.initialwebsite.co.uk/app/download/3703313202/Ch+Kaplan+and+Norton.pdf. [Accessed on November 19, 2010]. Kaplan, R. S. & Norton, D. P. 1996. Using the Balanced Scorecard as a Strategic Management System. [Pdf]. Available at: http://portal.sfusd.edu/data/strategicplan/Harvard%20Business%20Review%20article%20BSC.pdf. [Accessed on November 19, 2010]. Lee, S. F. & Ko, A. S. O. 2000. Building balanced scorecard with SWOT analysis, and implementing "Sun Tzu's The Art of Business Management Strategies" on QFD methodology. [Pdf]. Available at: http://www.qa.au.edu/page2/research/BSCandSWOT.pdf. [Accessed on December 7, 2010]. Seppala, O.T. 2003. Sixth water information summit: breaking the barriers let water information flow!. [Pdf]. Available at: http://www.bvsde.paho.org/bvsacd/wisirc/sepp.pdf. [Accessed on November 19, 2010]. Stewart, T. A. February 7, 2000. A new balanced scorecard, Measuring performance and risk. [Pdf]. Available at: http://www.ey.com/Publication/vwLUAssets/A_new_balanced_scorecard-measuring_performance_and_risk/$FILE/Anewbalancedscorecard.pdf. [Accessed on November 19, 2010]. Stewart, A. C. & Hubin, J. C. 2001. The Balanced Scorecard. [Pdf]. Available at: http://oqi.wisc.edu/resourcelibrary/uploads/resources/BalancedScorecard%20-%20Beyond%20Reports%20and%20Rankings.pdf. [Accessed on December 7, 2010]. Syed, M. A., Bresson, C. & Moskowitz, M. 2007. IT Framework for the Implementation of Balanced Scorecard in Healthcare Systems. [Pdf]. Available at: http://www.nesug.org/proceedings/nesug07/ap/ap20.pdf. [Accessed on Accessed on November 19, 2010]. Wagner, C. December 31, 2002. What’s wrong with the balanced scorecard? Considerations for the design of an improved enterprise performance management system. [Pdf]. Available at: http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1500&context=amcis2002. [Accessed on November 19, 2010]. Read More