Examining Balanced Scoreboard As A Performance Management Tool Accounting Essay

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The balanced scorecard (Kaplan & Norton, 1992) was developed as a strategic performance management tool which comprises of semi-standard structured reports supported by proven design methods and automation tools that can be used by managers to keep track of the execution of activities by staff within their control and monitor the consequences arising from these actions. It is perhaps the best known of several such frameworks, and was widely adopted in English speaking western countries and Scandinavia in the initial stages of its inception. Since 2000, use of the Balanced Scorecard and its derivatives such as the Performance Prism (Neely, 2002), and other similar approaches to management, including Results Based Management have become common in organisations throughout the world, and in particular the Asian countries. In 1997, Kurtzman found that 64 percent of the companies questioned were measuring performance from a number of perspectives in a similar way to the Balanced Scorecard. Balanced Scorecards have been implemented by government agencies, military units, business units and corporations as a whole, non-profit organizations, and schools.

Many examples of Balanced Scorecards can be found via Web searches. However, adapting one organization's Balanced Scorecard to another is generally not advised by theorists, who believe that much of the benefit of the Balanced Scorecard comes from the design process itself. Indeed, it could be argued that many failures in the early days of Balanced Scorecard could be attributed to this problem, in that early Balanced Scorecards were often designed remotely by consultants. Managers did not trust, and so failed to engage with and use these measure suites created by people lacking knowledge of the organisation and management responsibility.

By combining financial measures and non-financial measures in a single report, the Balanced Scorecard aims to provide managers with richer and more relevant information about activities they are managing than is provided by financial measures alone. To aid clarity and utility, Kaplan and Norton proposed that the number of measures on a Balanced Scorecard should also be constrained in number, and clustered into four groups (Kaplan and Norton, 1992, 1993). Beyond this, the original definition of Balanced Scorecard was sparse. But from the outset it was clear that the selection of measures, both in terms of filtering (organisations typically had access to many more measures than were needed to populate the Balanced Scorecard) and clustering (deciding which measures should appear in which perspectives) would be a key activity. Kaplan and Norton proposed that measure selection should focus on information relevant to the implementation of strategic plans, and that simple attitudinal questions be used to help determine the appropriate allocation of measures to perspectives (Kaplan and Norton, 1992).

Although Kaplan & Norton's first book, The Balanced Scorecard, remains the most popular, it was lacking in guidance on how to develop strategies. Their second book, The Strategy Focused Organization, echoed work by others particularly in Scandinavia (Olve & Wetter, 1999), on the value of visually documenting the links between measures by proposing the "Strategic Linkage Model" or strategy map. This additional element improved the design process and became popular very quickly, and triggered a number of broadly similar variants. Balanced Scorecards of this type represent the most common version today. Modern Balanced Scorecard thinking has evolved considerably since the initial ideas proposed in the early 1990s and the modern performance management tools including Balanced Scorecard are significantly improved - being more flexible to suit a wider range of organisational type. They have also become far more effective as a result of design methods evolving to provide greater ease of use.

Balanced Scorecard was initially described as a simple, "4 box" approach to performance measurement (Kaplan and Norton, 1992). In addition to financial measures, managers were encouraged to look at measures drawn from three other "perspectives" of the business: Learning and Growth; Internal Business Process; and Customer, chosen to represent the major stakeholders in a business (Mooraj et al, 1999). Research has since suggested alternative headings for these perspectives, and also suggested using either additional or fewer perspectives. These suggestions were notably triggered by recognition that different but equivalent headings would yield an alternative set of measures. If users are not confident that the measures within the Balanced Scorecard are well chosen, they will have less confidence in the information it provides. As a result of this, these first generation Balanced Scorecards have largely become redundant apart from a select few organisations that still employ them.

1st Generation Scorecard

(Cobbold &Lawrie, 2002)

This is reflected in the literature, where books and articles that use more advanced representations of Balanced Scorecard are only recently appearing (Olve et al, 1999, Kaplan and Norton, 2000, Niven, 2002). But despite its huge popularity as a concept, and apparently widespread adoption, relatively few detailed case studies concerning Balanced Scorecard implementation experiences appear to exist in the academic literature. Those few that do focus primarily on the architecture of the Balanced Scorecard design (e.g. Butler et al, 1997), and associated organisational experiences (e.g. Ahn, 2001). Commercial / practitioner writing on Balanced Scorecard is more extensive (e.g. Schneiderman, 1999), but often more partisan (e.g. Lingle et al 1996). But in general the literature endorses the utility of the approach (Epstein et al, 1997) but notes weaknesses in the initial design proposition, and recommends improvements (e.g. Eagleson et al, 2000, Kennerley et al, 2000).

Since the Balanced Scorecard was popularised in the early 1990s, a large number of alternatives to the original 'four box' Balanced Scorecard promoted by Kaplan & Norton in their various articles and books have emerged. Most have very limited application, and are typically proposed either by academics as vehicles for promoting other agendas such as green issues (Brignall, 2002) or consultants to as an attempt at differentiation to promote sales of books and / or consultancy (Bourne & Bourne, 2000).

Many of the variations proposed are broadly similar and research (Cobbold &Lawrie, 2002) has attempted to identify a pattern in these variations, noting three distinct types of variation. The variations appeared to be part of an evolution of the Balanced Scorecard concept, and so Cobbold and Lawrie (2002) refer to these distinct types as "Generations". Broadly, the original 'measures in boxes' type design proposed by Kaplan & Norton in 1992 constitutes the 1st Generation Balanced Scorecard design. Balanced Scorecard designs that include a 'strategy map' or 'strategic linkage model' such as the Performance Prism (Neely, 2002) , later Kaplan & Norton designs (Kaplan & Norton, 2000) and the Performance Driver model (Olve & Wetter, 1999) constitute the 2nd Generation of Balanced Scorecard design. 3rd Generation designs are those that augment the strategy map and strategic linkage model with a separate document describing the long-term outcomes sought from the strategy known as the Destination Statement (Cobbold & Lawrie, 2002).

2nd Generation Scorecard

The practical difficulties associated with the design of 1st Generation Balanced Scorecards are significant, in part because the definition of a Balanced Scorecard was initially vague, allowing for considerable interpretation. In the mid 1990s, an improved design method emerged. In the new method, measures are selected based on a set of "strategic objectives" plotted on a "strategic linkage model" or "strategy map". With this modified approach, the strategic objectives are distributed across the four measurement perspectives, so as to "connect the dots" to form a visual presentation of strategy and measures.

Perhaps the most significant early change translated the attitudinal approach to measure selection proposed initially be Kaplan and Norton (e.g. "To succeed financially, how should we appear to our shareholders?") into a process that yielded a few appropriate key measures of performance in each perspective. A solution was the introduction of the concept of 'strategic objectives' (Kaplan and Norton, 1993). Initially these were represented as short sentences attached to the four perspectives, and were used to capture the essence of the organisation's strategy material to each of the areas: measures were then selected that reflected achievement of these strategic objectives. Although subtle, this approach to measure selection quite different from that initially proposed, since strategic objectives were developed directly from strategy statements based on a corporate vision or a strategic plan. To develop a strategy map, managers select a few strategic objectives within each of the perspectives, and then define the cause-effect chain among these objectives by drawing links between them. A balanced scorecard of strategic performance measures is then derived directly from the strategic objectives. This type of approach provides greater contextual justification for the measures chosen, and is generally easier for managers to work through.

Collectively the changes in design described here represent a materially different definition of what comprises a Balanced Scorecard compared to Kaplan and Norton's original work - we will refer to Balanced Scorecards that incorporate these developments as '2nd Generation Balanced Scorecards'. The impact of these changes were characterised by Kaplan and Norton in 1996 as enabling the Balanced Scorecard to evolve from "an improved measurement system to a core management system" (Kaplan and Norton 1996). Maintaining the focus that Balanced Scorecard was intended to support the management of strategic implementation, Kaplan and Norton further described the use of this development of the Balanced Scorecard as the central element of "a strategic management system".

Several design issues still remain with this enhanced approach to Balanced Scorecard design, but it has been much more successful than the design approach it superseded. This style of Balanced Scorecard has been commonly used since approximately 1996, and as a result of being significantly different in approach to the methods originally proposed, can be thought of as representing the "2nd Generation" of design approach adopted for Balanced Scorecard since its introduction.

3rd Generation Scorecard

In the late 1990s, the design approach had evolved yet again. One problem with the "2nd generation" design approach was that in practice it ignored the fact that opportunities to intervene, to influence strategic goals needed to be anchored in the 'present', current and real management activity. Also, the need to "roll forward" and test the impact of these goals necessitated the creation of an additional design instrument; the Vision or Destination Statement. This device was a statement of what "strategic success," or the "strategic end-state" looked like. The first Destination Statements were created as a final consensus estimate of the consequences at a particular future date (e.g. 'in three years time') of implementing the strategic objectives previously selected for the strategic linkage model. By agreeing in this statement 'how much' of key things would have been achieved by this time (e.g. headcount, revenues, customer satisfaction, quality levels etc.) the hope was it would subsequently be easier (for example) to check for (or set) a consistent set of annual targets. It was quickly realised, that if a Destination Statement was created at the beginning of the design process then it was much easier to select strategic activity and outcome objectives to respond to it. Measures and targets could then be selected to track the achievement of these objectives. Design methods that incorporate a "Destination Statement" or equivalent represent a tangibly different design approach to those that went before, and have been proposed as representing a "3rd Generation" design method for Balanced Scorecard.

(Kaplan, 2002)

It was quickly found that management teams were able to discuss, create, and relate to the 'Destination Statement' much easily and without reference to the selected objectives. Consequently the design process was 'reversed', with the creation of the 'Destination Statement' being the first design activity, rather than a final one. Further it was found that by working from Destination Statements, the selection of strategic objectives, and articulation of hypotheses of causality was also much easier, and consensus could be achieved within a management team more quickly. We will refer to Balanced Scorecards that incorporate Destination Statements as '3rd Generation Balanced Scorecards'.

In order to make rational decisions about organisational activity and not least set targets for those activities, an enterprise should develop a clear idea about what the organisation is trying to achieve (Senge 1990, Kotter 1995). A destination statement describes, ideally in some detail, what the organisation is likely to look like at an agreed future date (Olve et al, 1999; Shulver et al, 2000). In many cases this exercise builds on existing plans and documents - but it is rare in practice to find a pre-existing document that offers the necessary clarity and certainty to fully serve this purpose within an enterprise.

Criticisms of the Balanced Scorecard

The Balanced Scorecard has always attracted criticism from a variety of sources. Most has come from the academic community, who dislike the empirical nature of the framework: Kaplan & Norton notoriously failed to include any citation of prior art in their initial papers on the topic. Some of this criticism focuses on technical flaws in the methods and design of the original Balanced Scorecard proposed by Kaplan & Norton (1992), and has over time driven the evolution of the device through its various Generations. Other academics have simply focused on the lack of citation support (Norreklit, 2000). But a general weakness of this type of criticism is that it typically uses the 1st Generation Balanced Scorecard as its object: many of the flaws identified are addressed in other works published since the original Kaplan & Norton works in the early 1990s.

There are few empirical studies linking the use of Balanced Scorecards to better decision making or improved financial performance of companies, but some work has been done in these areas. However broadcast surveys of usage have difficulties in this respect, due to the wide variations in definition of 'what a Balanced Scorecard is' noted above (making it hard to work out in a survey if you are comparing like with like). Single organisation case studies suffer from the 'lack of a control' issue common to any study of organisational change - you don't know what the organisation would have achieved if the change had not been made, so it is difficult to attribute changes observed over time to a single intervention (such as introducing a Balanced Scorecard). However, such studies as have been done have typically found Balanced Scorecard to be useful (Malina & Selto, 2001).

The Future of the Scorecard

The Balanced Scorecard will probably be around but there will have been developments. The strategy map is intuitively very appealing and will be used more often in concurrence with the Balanced Scorecard. Supervisory boards will focus more and more on monitoring and guiding the strategy of a company, using the Balanced Scorecard. There will be more annual reports that are arranged according to the Balanced Scorecard. We will see better ways of measuring the data needed for the Balanced Scorecard. It is interesting to notice that neither David Norton nor I is an expert in measurement techniques. David says: "We are experts in what to measure, not in how to measure". Techniques for better measuring innovation, employee capabilities, information system alignment, climate, culture, and customer success will certainly improve in the next ten years. We will also see better information technology and a culture more geared towards using performance management because it matters more to organizations, stakeholders and society.