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Balanced Scorecards for Performance Measurement Systems

Introduction

The use of balanced score cards as an approach in the strategic planning process of management has developed over time among other statistical approaches. It particularly fuses financial and non-financial measure s of performance in a single scorecard yielding a holistic snapshot view of business performance entailing business processes, decisions and results. It is particularly useful in producing timely feedback for business control and evaluation.

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Organizations benefit from the use of balanced score cards on the basis that it enables a framework for incorporating intangible and intellectual capital perspectives that were conventionally unavailable, facilitates use of non-financial initiatives in furthering excellence, closes the void between overall strategy and employee operations, enables a lucid conceptualization of the intricate relations that exist between customers, their expectations and performance inadequacies. In addition, evaluation and review of business performance can be performed on a continuous basis as part and parcel of the strategic planning process.

Managerial environment for the application of this approach matters in the sense it is based on the manipulation of the specific success factors under credible communication systems and committed top management. Moreover, the approach embraces a long-term strategic view of business excellence and sustainability as well as embraces the traditional financial measures of profitability (Norton and Kaplan, 1996a).

The balanced scorecard is implemented in four perspectives, namely; financial, customer, internal business, and the learning and growth perspectives. In strategic management, other tools are available within the framework as economic value added approach, activity based costing, quality management, customer value analysis and action-profit linkage model approaches. Others include supply chain management and new product development approaches.

Throughout the business cycle, there arises objectives arrived at in the strategic planning process that require gradual qualitative and quantitative monitoring, that have a huge bearing on the balance sheet. They yield a scale through which to gauge progress and compare production outputs against

Building a balanced scorecard framework, the case of ABC Bank

This is an insight into the ABC Bank’s progression into the use of balanced scorecards as a strategy. It started with s SWOT analysis of the bank’s performance in serving its varied nature of clientele. Among other inadequacies arrived at were ageing workforce, low digital literacy, low responses to market changes and inadequate empowerment to decision-makers.

The top management deliberated on the mission, mapped out a strategy within a timeframe that helped to link all the elements and variables and with the objective of the organization. The bank’s internal processes showed a great correlation with non-financial variables which in effect was found to spin profitability favorably over time (Lyons et al, 2002).

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First use of balanced scorecards at Analog Devise Inc. (ADI)

ADI’s management through the implementation of their strategic planning process to address issues relating to suppliers, general public, employees, and customers with an aim to create a ‘delight’ to their stakeholders stumbled upon the discovery of the BSC, (Schneiderman, 1999). Through their examination of internal and external factors, affecting the business, and the implementation of Total Management of Quality (TMQ) through a five year plan, it become evident that certain non-financial goals required a measurement framework approach to be included in the planning process.

Successful implementation of balanced scorecard in management

Successful strategic planning involves setting multiple objectives for various participants, reviewing performance, adhering to targets and using feedbacks constructively in an ongoing process outlook. In line with that layout, the top management’s engagement with the lower ranks in education and implementation though interactive workshops and seminars. Such input yields optimally when the relevant critical success factors (CSFs) are identified and incorporated in the gearing of customer satisfaction strategies. In consumer arrangement scenarios with multiple stakeholders as governments and social as well as environmental considerations, a subtle balance need to be maintained and hence the insistence on the most fundamental CSFs.

On that basis, translating the ensuing matrices of priorities embracing and inclusive of all the other traditional accounting and financial variables, together with the non-financial functions lead to optimally aggregated and satisfactory performance, moreover, some of the main dimensions of quality-focused strategies, like those focused on knowledge sharing and cooperativeness (Seal, 2002), are difficult to quantify and, thus, may require assessment by subjective scrutiny.

Consistency is paramount in performance measurement, this call for the need to lay out measurable parameters in advance after which a step-by-step procedure is erected for the implementation of BSC as the creation of consensus and understanding of the organization and its mission, identification of relevant performance areas and establishing their metrics, implementation of the measurement framework entailing all resources, infrastructure and training and the consequent implementation of the performance management system.

Congruence between managerial performance and reward systems are important at least in theory, this conflict of agency in managerial reward schemes impact differently across firms and business organizations depending on prevalent managerial cultures, Niven, (2006). Moreover, balanced scorecards well established at al levels of the organization create substantial synergy requisite for excellence. Again, efficient communication systems promote employee cooperation, understanding and boost morale for goal attainment. In addition, the budgeting process that sets measured priorities in resource allocation and utilization is consistent with proper use of balanced scorecards approach.

A framework to review performance measurement system

Business performance is often crammed with quantitative and qualitative dynamic processes ever changing with time and situations. A flexible feedback mechanism hence enables management to systematically track the process while implementing tactical objectives. RADAR logic (Results, Approach, Deployment, Assessment and Review) entails a scoring methodology that suits many consumer oriented businesses.

Periodic evaluation of the performance measuring system is important in light of the ever changing business circumstances, Kueng et al. (2001). Continuous review of the system ensures functionality and adaptability of the system, Bourne et al. (2000). Such PMS (Performance Measurement System) are evaluated against the three basic elements as; direction, process and measures. The direction paradigm ensure adherence to strategy domain, process function entails qualitative commitment to aggregate processes and measures constitute holistic selected quantitative variables.

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Business process often influences the design and implementation of the PMS. Based on a three level of frequency review design as on going, periodic and overall evaluation schemes, strategic objectives are traceable through the inputs and outputs arising from the multistage reviews and how the three integrate or interact together constructively or otherwise. Overall, the PMS should function to challenge assumptions in the planning process, review set targets and standards, sustain validity of individual measures as circumstances change and revise its set of measured variables with time, Kurt et al (2000).

The Balanced Scorecard cushions the managers from information overload by narrowing the performance measures to only four perspectives, namely, customer, financial, internal characteristics, and learning and growth. It also protects from sub-optimization in the decision-making matrix by forcing the executives to consider the four perspectives of the firm’s performance to have a complete picture.

The actual implementation of the Balanced Scorecard is a process in which the organization’s strategic plan is translated into a set of prioritized performance indicators (Kaplan and Norton, 1996a). Slater, Alexander and Reddy (1997) argued that the Balanced Scorecard ought to be ‘unrestricted’ based on the strategy followed by the firm as such restriction would limit the statistical feedback mechanisms.

In rapidly evolving and changing business environment, strategic management practice need to recognize the need to tailor mechanisms that ensure competitiveness, flexibility and a readiness and ability to change orientation with as time dictates. Information from the operational levels becomes essential as they yield a platform for more informed repose in decisions, methods and approaches, (John et al. 2004).

Formulation of hypothesis to address emerging difficulties naturally arises from the business process within an effective BSC scheme other than carry diagnosis when in suspicion of faults in the process. To this end it is efficient as the practice mitigates the otherwise undetectable faults in the business process. Proper utilization of support tools as trends analysis tools, relationships analysis tools and regular checking of consistency within the PMS communication lead to early detection of any deficiencies and faults that often have adverse business consequences, (Paul R, 2002)

Overall review mechanism carried out at the end of an accounting period or annually ensures the validity of the mission and vision of the organization and verifies consonance between the strategic objectives in operation with the missions. Cumulatively, such reviews provide a basis for the business organization to remain proactive in real-time market configurations other than be reactive, (Najmi. 2002). All the reviews will be available and will guide the overall orientation and direction of the business.

Analytical findings have further demonstrated potential benefits from using performance measures that are subjectively consequential. A case in point is, Baiman and Carter (1995) and Alexander et al. (1994) have shown that outcome oriented measures can help to reduce distortions in managerial effort by delineating dysfunctional behavior induced by incomplete objective performance measures, as well as reduce clatter in the general performance evaluation.

Philips Electronics use of balanced scorecards

The adoption of the BSC strategy was initiated by the board in Europe and permeated to the entire organization globally by first aligning company vision at all levels. The approach adopted entailed four critical success factors (CSFs) incident upon value creation for the company products. These were Competence; in knowledge, technology, leadership, and teamwork, Process; as drivers for performance, Customers; value orientations and Financial; entailing value, growth and productivity.

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The management implemented a measurement system framework that incorporated short-term strategy with long-term strategy thus initiating operational goals and performance targets for the various divisions globally. In that framework, factors that described targets consisted of market size, customer base, innovation competencies, product equity and excellent performance, Newton et al, (2002). The incorporation of individual employee scorecard yielded a three-tier BSC as strategic review card, operations review card and individual employee review cards.

The effect of the three-tier approach was hence integrated with a three criteria metrics of Inclusion; infusing lower levels to top-level metric goals, Continuity; ensuring CSFs are connected throughout the cycles and Robustness; ensuring lower-level goals yield to the attainment or surpassing of higher-level projections. In the context, this approach was situation specific thus surmounted to an appropriate gearing.

The efficient communication system at Philips ensured adequate sustenance of cooperation and consequent successful implementation of BSC. The company employed the use of traffic-light reporting as indicators of the attainment of targets, metrics in the green, yellow and red domains were interpreted timely and solutions sought based on recorded experiences. An adequate strategic internal communication strategy greatly improves organizational performance.

The key indicators that proved successful implementation of BSC at Philips included revenue growth that showed steady profitability during the phase of the study, customer satisfaction exceeding initial levels, employee satisfaction, heightened levels to execute excellent operations within management and information technology support.

Elsewhere in other companies like Tata Steels (Tisco) of India, the uncommon achievement of excellent ranking is partly as a result of the incorporation of balanced scorecards approach in its strategic management. It is worth noting that it complemented other strategic management tools while reconciling all the approaches in the dominant organizational culture.

The Tata Steel financial performance indicates minimal gains as per available data on stock valuation; however, the economic analysis proves other factors attributable to this reality as improvement in labor productivity, high rates of raw material consumption and receding refractory costs having a negative correlation with share prices. Due to the shock and its repercussions in the public investment domain, the non-financial gains of the process only ought to be given adequate time-lag to translate into financially measurable outcomes.

Challenges in the use of balanced score cards

Like any other managerial tools BSC also faces varied setbacks in practice and in theory, in practice, the managers’ with limited cognitive abilities might prevent the attainment of full benefits of the system, moreover, needed measurable variables might vary for managerial purposes from branch to branch within an organization. In decision, unique problems to a situation tend to receive little attention while common problems tend to be over generalized; in such situations superior managers pay little attention to unique measures hence subordinate managers leave the unique variables out rightly in decisions (Holmstrom and Douglas W 1991).

Holistically, the contingency theory-based analyses point toward a need for the alignment of performance measures with quality strategy. However, they have produced only minimal, and at times mixed, findings on the relation between quality initiatives and performance measure use and their joint correlation with performance.

The implementation processes of BSC often involve the use of software and hardware that require subtle and accurate application. This in turn calls for retraining of employees, managerial workshops and seminars which yield cost burdens. The incorporation of non-financial variables complicates the practice further largely due to their being more qualitative that quantitative.

Kaplan and Norton (2000) demonstrated that employees’ understanding of strategy is crucial to the successful implementation of the Balanced Scorecard. Such understanding of the business organization’s strategy by the employees would lead to a guided choice of strategically related performance measures for gearing their decisions and practice. They are reluctant to link employees’ compensation with the Balanced Scorecard till the firms are certain about the accurate choice of measures in their performance scorecard based on their familiarity with it for substantial amounts of time (Pandey, 2001).

Meyer (2002) argued unfavorably pertaining to the Balanced Scorecard on the ground that it makes non-financial performance indicators hard to measure. The financial measures dominate as far as employee remuneration is concerned. As per Meyer, BSC do not yield adequate guidance on how to combine the chaotic measures into an overall assessment of performance. He insisted upon activity-based customer profitability analysis mechanism as a substitute.

Overall, these performance outcomes diverge from those of Lipe, Larcker, and Randall (2003) where negative deviations from the benchmark trigger no noticeable effect and positive deviations are preemptive of higher performance. However, Russell K. S (2003) only used crude indicators (either a non-realistic variable or the total weight) to reflect a business organization’s use or nonuse of non-financial measures and, consequently, like the other studies of quality initiatives, they did not distinguish among different types of non-financial performance measures.

Research finding also has proven potential regression from measurement diversity, as it is wrought with system complexity, thus taxing managers’ cognitive abilities (Ghosh and Lusch 2000; Lipe and Salterio 2000, 2002). It also increases the burden of determining relative strengths for different measures (Cobbold and Larcker 1998; Moers 2005).

Consequently, multiple measures are potentially conflicting this is illustrated in the manufacturing efficiency and customer responsiveness, leading to incongruence of goals, at least in the short run (Baker 1992; Holmstrom and Milgrom 1991), and organizational disharmony (Chee W 2002). In spite of these potential drawbacks, there is considerable factual support in line with increased measurement diversity. For example, in an analysis of time-series statistics derived from 18 hotels, Banker et al. (2000) found that when non-financial measures are included in the compensation contract, managers more closely oriented their efforts to those measures, geared toward in increased performance.

Conclusions

A cause-effect relation persists among the dynamic financial and non-financial variables incident upon the performance of businesses as entailed in the above discourse. Performance measurement mechanisms that evaluate their interplay are absolutely relevant for strategic management in business (Norreklit, 2000). As numerous case studies show, strategic statistical approaches and tools are becoming possible with increasing advancements technology. In particular information and telecommunication technology impact on management and performance measurement is paramount.

Various software and hardware are available that allow and enable the measurement of various qualitative and quantities variables incident upon the prospect of optimal business performance.

The holistic view of balanced scorecards in practice involves their utilization in performance improvement process other than an IT- propelled control system. The primary managerial functions of revenue growth and cost reduction allow adequate functionality of the BSC approaches in the long-term which is adequately satisfactory for any business organizations, (Gopal et al 1999).

Data representation largely depend on visualization, despite the optimism that characterize the statistical measurement models experienced lately as BSC, real substantial progress in practice still beg paramount concerted effort in research. There exist numerous lags between the models and contemporary economic theories competing for attention about practical efficiency.

A huge market created for software manufacturers in the field have had a pull effect for companies to adopt the approach. Moreover, the teaching of the models in college curriculum as well as adoption by major business organizations among other factors have led to the view that statistical management models is the way forward for the management fraternity.

References

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