The Balanced Scorecard as a Performance Management Tool - Case Study Example

Running header: The balanced scorecard Student’s name: Instructor’s name: Subject code: Date of submission: The BSC is a performance management tool that could help organizations achieve superior financial performance Introduction The balanced scorecard is broadly defined as an incorporated set that includes financial as well as non-financial procedures that firm’s employ in their strategy executing procedures that underline the communication strategy with the organization members and for feedback provision for the organization’s goals attainment. As such, the balanced score card is an effective performance management tool that is quickly gaining popularity due to its ability to align employees actions and goals with the organization’s strategy. It is worth noting that the BSC was developed because of the fact that the traditional control and performance management strategies were increasingly becoming irrelevant owing to their failure to link the organization’s performance management to its strategic initiatives. The strategies also emphasized on accounting aimed at external reporting as opposed to accounting geared towards internal decisions making (Davis and Albright, 2004). The strategies also failed to account for advances in technology which for instance altered how manufacturing firms operated. This was further worsened by the fact that there was increasing prominence of services industries meaning global competition was further increasing thus calling for alternate controls and performance strategies which gave rise to the balanced score card. As stated above, the balanced scorecard has solved nearly all the shortcomings associated with the traditional control and performance management strategies. This is because of the fact that it incorporates assessment of success in both financial as well as non-financial measures. The BSC has thus been described as leading to organizational success through ensuring that the organization succeeds in all its four perspectives that are both financial and financial. For instance, the organizational learning and growth perspective takes consideration of such issues as the organizational cultural attitudes as relates to the individual and organizational self-improvement and employee training thus ensuring that the organization is a learning organization to ensure continuous improvement as far as knowledge is concerned. The internal business perspective allows the management to continually evaluate how well the organization is run and whether the organizations offerings conform to the customer needs and requirements (George etal, 2013). This perspective includes such issues as after sale services, innovation and operational processes. Third perspective is the customer perspective which seeks to ensure customer focus and satisfaction. This perspective includes such measures as market share, customer satisfaction and retention percentages. The final perspective is the financial perspective that includes such measures as net income, return on investment as well as economic value added. In other words, tis perspective seeks to measure the organization’s financial soundness. As has been seen above, the four perspectives are all round and hence success in all of them would ensure wholesome organizational success and hence improved financial performance. It is for this reason that it has been stated that the balanced scorecard is a performance management tool that can help organizations achieve superior financial performance. But is this usually the case? This paper seeks to examine the above statement with the aim of establishing its truthfulness. In so doing, the paper will examine both the merits and demerits that organizations would accrue from relying on the use of the balanced scorecard (Kumari, 2011). The paper will then present two case studies of organizations that have made use of the balanced scorecard and the effect this has had on their financial performance. This will inform the paper’s conclusion on whether or not the BSC is performance management tools that capable of helping organizations achieve superior financial performance. What financial performance gains accrue to organizations that make use of the balanced scorecard? Proponents of the balanced scorecard cite a lot of gains that businesses will derive through use of balanced scorecard hence enhancing their financial as well as overall performance. According to George etal (2013), use of balanced scorecard drives better performance. This is because it looks at all aspects of the organizational performance whether financial or non-financial which results in solid feedback that enhances performance at every level of the organizational units given that people and groups throughout the organization are continually aware of how they are performing and what needs to be improved upon for better performance. The balanced scorecard also translates the organizational strategy into concrete terms hence helping the organization track its implementation since the balanced scorecard is designed in a manner that specifically directs organizational attention to its strategy and future direction. Kumari (2011) states that the balanced scorecard is by nature consciously and purposely constructed. In its building, the organization develops a logical structure that helps all actors within the organization know what ought to be measured and what does not belong to the balanced scorecard. Thus, the balanced scorecard encourages balanced performance since its design keeps the right balance of all the operational and strategic factors on the organization’s radar screen. The balanced scorecard is designed to offer a comprehensive view of the enterprise performance and the strategic direction it is heading to. This would help the management see whether any key factors are missing or the gaps stand out. In essence, this encourages good management since it makes it possible to monitor all the measures in a complex organization. It encourages more regular reviews that are more thorough thus leading to better management. According to Terry (2012), the balanced score card helps the organization to tell the full story of their performance thus helping the organization present a compelling picture of performance undistorted by focus on individual issues. It is worth noting that the focus of the balanced scorecard is four fold i.e. how the customers see the organization, what the organization must excel at, whether the organization can go on improving and creating value and how the organization ought to look to shareholders. According to George etal (2013) this balanced view of the organization definitely creates synergy that would result in better financial performance. Critiquing the use of the BSC The use of the BSC may not necessarily mean enhanced financial performance for the organization after all. Critiques of the balanced scorecard argue that the cause and effect relationship between its various measures from its four perspectives is problematic since it is measured at the same time ignoring any time lag that might exist. Though the balanced scorecard is aimed at helping the business improve the four perspectives at the same time, their effects will appear at different times. For example, the effect of introduction of a more efficient business process on the level of customer satisfaction may be noticed within four months. However, its effect on the organizational financial performance may not be noticed until after a number of years (Terry, 2012). Thus, ignoring the time effect on the balanced scorecard makes it hard to determine the effect of the cause and effect relationship envisaged by the balanced scorecard. Critiques also argue that it is hard and even impossible for the enterprise to find performance measures for new and inexperienced actions. It is also hard to measure the effect in business where innovation is very crucial and significant to the organizational competitiveness and even the effect of change in technology on the overall organizational performance. Balanced scorecard has been faulted for ignoring competition and technological developments hence making it to be a static rather than a dynamic tool. It is as a result of these problems that it becomes hard to directly relate the balanced scorecard to the organizational improvement in financial performance. Case studies This paper presents two case studies that are aimed at examining the statement that the balanced scorecard is performance management tools that can help organizations achieve superior financial performance. This together with the discussion above will inform the conclusion on whether there is any relationship between implementing of the balanced scorecard at an organization and its financial performance. Case study 1 Davis and Albright (2004) conducted a research aimed at evaluating the consequence of introduction of the BSC on an organization’s performance. The study is conducted on the banking industry on a bank in the Southeastern USA. The bank studied had 14 branches in different localities each with different characteristics. These branches had been divided into the Northern division as well as Southern division and every division has seven branches. The bank’s southern division through its division president introduced the balanced scorecard with an aim of enhancing its financial performance. The company’s balanced scorecard had four perspectives as outlined below; i) Financial perspective objectives- these were based on nine key financial measures (KFMs) seen to be important for the bank’s performance. These included such measures as volume of loans, document exceptions ,cost of funds volume of non-interest deposits, percentage of loan yields, amount of non-interest income, net-interest expense, amount of net-interest income, net charge-offs, , and revenue/salary expense. The nine measures are the determinant of a given branch’s level of bonus for a given year. Branch’s performance on the KFMs is pooled into a composite (amalgamated) Key Financial Measure (CKFM) in determining the branch’s overall performance financially. ii) Customer perspective- this aims at building relationship with its customers in a bid to ensure enhanced customer bank relationship. The measurable BSC activities includes greetings every customer their names, sending them thank-you message cards, calling them to inform them of new products as well as provision of quality advice to all customers. iii) Internal business processes perspective – this included the cross-sell/referral process with outcome measures including number of successful cross-sells and the referrals numbers. iv) Learning and growth perspective – this included activities aimed at continuously educating and empowering employees to achieve the above perspectives. The measures in this objective are levels of employee satisfaction and retention levels as well as productivity. It is worth noting that the balanced scorecard as only applied to some branches with those branches where it was not applied acting as the control branches. The effect of the implementation of the implementation of the BSC on the CKFM was measured starting 1999. At the beginning of the implementation of the BSC in 1999, the control branches had a CKFM score of 3.51 while the experimental branches had a CKFM score of 2.17. However, over a 24 study period, the control branch performance had gradually declined to 2.26 while that of experimental branches had improved to 6.00. After statistical manipulation of the data, the study revealed that financial performance of branches that had introduced the BSC had significantly improved compared to the control branches whose financial performance had actually declined. As a result, Davis and Albright (2004) concluded that implementation of the balanced scorecard in organizations could actually help them improve their financial performance. Case study 2 Kumari (2011) presents the case study on the implementation of the BSC at Apple Computer Company in the IT industry. The management was introducing the balanced scorecard in an attempt to reverse the company’s dwindling fortunes in its industry of operation. The balanced scorecard introduction at Apple aimed at focusing the managers on strateges which would expand performance reviews beyond the traditional gross margins, market share and return on equity. The project was spearheaded by a steering committee that came up with four perspectives as follows. i) Customer perspective- The perspective was aimed at orienting the employees towards a customer driven approach as opposed to the traditional technology products driven approach. The measures introduced included customer’s level of satisfaction as well as retention and were measured through regular surveys by the company as well as by J.D. Power & Associates, the company contracted by Apple for the same purpose. ii) Core competencies – the perspective was aimed at enabling employees set their eyes on a number of key competencies that included powerful software, architectures user friendly interfaces, as well as effective distribution systems. iii) Employee commitment and alignment – in this regard, the company regularly conducts comprehensive employee survey involving the level of employees understanding Apple’s strategy and whether their results are consistent with strategy. iv) Financial perspective- this is both in terms of market share and shareholder value and includes traditional measures of profitability, gross margin and sales growth. After introducing the above measures, the company’s fortunes have turned around as can be seen in its financial performance perspective with increasing sales levels and profitability (Terry, 2012). As such, Apple is considered a case of successfully implementing the BSC and is in line with the statement that the balanced scorecard is performance management tools that can help organizations achieve superior financial performance. Conclusion Based on the above discussion as well as the case studies, it is clear that if carefully implemented, the balanced scorecard is performance management tools that can help organizations achieve superior financial performance. The essay has demonstrated the benefits that organizations stand to gain by implementing the balanced scorecard. It has been established that the BSC concerns itself with the all-round performance of the organization. In addition, the cause and effect relationship between the various perspectives imply that when all the non-financial measures improve, they will certainly lead to improvement in financial performance (Abdulsattar, 2012). The two case studies above have also been used to demonstrate that successful implementation of the BSC tool in an organization would lead to improved financial performance for the organization. However, this will not be the case if companies fail to realize the need of using the non-financial measures to drive financial performance. There ought to be validation of the linkages between the non-financial measures to the future financial results. In addition, there should be a link between the strategies and performance measures identified in the balanced scorecard is it is to lead to improved financial performance for the organization. References Davis, S and Albright, T2004, An investigation of the effect of Balanced Scorecard implementation on financial performance, Management Accounting Research, 15, 135- 153. George, G, Andrew, H, Ehsan K&, Stephanie, C2013, The use of the balanced scorecard in small companies, International Journal of Business and Management, vol.8, No.14, pp. 1-22. Kumari, N2011, Balanced score for superior organizational performance, European Journal of Business and Management, vol.3, no. 5, pp. 73-88. Terry, J2012, Performance management: Improving and sustaining performance in rural hospitals, Rural Minesota Journal, vol. 2, no. 2, pp. 113-127. Abdulsattar, E2012, The evaluation of the impact of using balanced scorecard on strategic performance in small and medium enterprises, Galway-Mayo Institute of Technology. Read More