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 16.8
~
ADVANCED MANAGEMENT~

2. The perfon:nance measurement system should measure the most critical

~
differentiators oforganisation perfonnance. These aspects give the organisati ~ or
• . Th- . th 'b on tts unin...
abilities to achieve its primary objecttve. 1s is e readth requirement ofbeing~
The focus of the balanced scorecard is a system of performance measurements that .
dons uses to track performance on its primacy and secondary objectives. In this sense, the :rgan~sa.
tion's planning am! strategy, which defines ~hat relationships th~ o~anisation must devet:Ow:
its employees, its supr,liers, and the communrty to be successful with its targeted customers, defines
the focus and scope of the balanced scorecard.

PERSPECTIVES (FACTOR~) IN BALANCED SCORECARD

The Balanced Scorecard is a set of performance targets and results relating to four dimensions
of _performance-financial, customer, internal process and innovation. It recognises that organisa-
tions are responsible to different stakeholder groups, such as employees, suppliers, customers, com-
munity and shareholders. The balanced scorecard shows an organisation's perfonnance in meeting
its objectives relating to stakeholders. Sometimes different stakeholders have different wants. For
example, employees depend on an organisation for their employment. Sharehold:rs depend on an
organisation to maintain their investment The organisation must balance those competing wants.
Hence, the concept of a balanced scorecard is to measure how well the organisation is doing in view
of competing stakeholder wants.
Most organisations use four perspectives or four categories of performance measures as Ex-
hibit J62 shows. The financial perspective indicates whether the company's strategy and operations
add value to shareholders. For organisations that do not have shareholders, the financial perspective
indicates how well the strategy and operations contribute to improving the organisation's financial
health. The customer perspective indicates how the company's strategy and operations add value
to customers. The internal business and production process perspective indicates the ability of the
internal business processes to add value to customers and to improve shareholder wealth. Finally,
the learning and growth perspective indicates the strength of the infrastructure for innovation and
long-term growth. The balanced scorecard framework derives its power by providing a holistic view
ofbusiness value through its four perspective.
These four perspectives have been briefly discussed below:

FINANCIAL PERSPECTIVE
The balanced scorecard uses financial perfonnance measures, such as net income and return on
investment, because all for-profit organisations use them. Financial performance measures provide a
common language for analysing and comparing companies. People who provide funds to compaoie_s,
such as financial institutions and shareholders, rely heavily on financial performance measures ID
deciding whether to lend or invest funds. Properly designed financial measures can provide an ag~
gregate view of an organisation's success.
Financial measures by themselves do not provide incentives for success. Financial measures
tell a story about the past, but not the future; they have importance, but will not guide performance
in creating value.
 .10 ADVANCED MANAGeMENT Aceou
16
~~--------- ~----------_ ;_;~~NTIN G
. .,_ 7 sound approach to financial measurement is to make· sure th~
Acroidmg w .8 rown. 8 . at Yo
data base includes three types of informations: ur
u· . n.-.4 . How did we do last month, last week, this year, last year and
l . nlSIOTICQ1vu•~ ' SO On?
2. Current Dala: How are we doing right now, today?
_ Future Data: How wiU we be doing in the next few months or years?
3
·a1 standpoint, the purpose of a business is. to create wealth for its owners 0
From a fi nanc1 . k · lltput
measures or historical financial measures help an orgamzat1on eep score ?f how weJ) it is doin
at creating wealth. These data are always past-focused because they are based o~ events that hav!
already occmred: our net profit for the year versus last year, our sales revenue this year versus last
year, and our average stock price this month vers~s !ast rnon~. These are _all measures of corporate
performance that are based on history. Any financial information th~t go~s mto a report to sharehold.
ers or other stakeholders would typically fall into the category of h1stoncal data.
Another measure of today's financial results is the amount of cash the business has on hand or
the total value of its assets as compared with its liabilities. This is a good measure of an organiza.
tion 's overall financial health. These types of financial metrics should answer the question: How are
we doing today?
The third type of financial data needed in a complete set of measures is used to predict the
company's future financial performance. These forecasts are used to plan for future workload and
resource requirements. Another common future-oriented financial statistic is the amounts invested in
research and development as a ratio to sales revenue or profit. Organizations often cut back on these
costs during tough times, which may cause them to mortgage their future for the sake of short-tenn
financial gains. Growth in sales from a particular geographic region or a particular industry may also
be a future-oriented financial statistic if the company is looking to grow into new or emerging markets.

Customer Perspective
In the customer perspective of the Balanced Scorecard, managers identify the customer and
market segments in which the business unit will compete and the measures of the business unit's
performance in these targeted segments. This perspective typically includes several core or generic
measures ofthe successful outcomes from a well-formulated and implemented strategy. The core out-
come measures include customer satisfaction, customer retention, new customer acquisition, customer
profitability, and market share in targeted segments. But the customer perspective should also include
specmc measures of the value propositions that the company will deliver to customers in targeted
market segments. The segment-specific drivers of core customer outcomes represent those factors
that are critical for customers to switch to or remain Joyal to their suppliers. For example, customers
could value short lead times and on-time delivery. Or a constant stream of innovative products and
services. Or a supplier_able to anticipate their emerging needs and capable of developing new products
an~ approaches to sansfy those needs. The customer perspective enables business unit managers to
articulate the customer and market-based strategy that will deliver superior future financial re~s,
The core measurement group ofcustomer outcomes is generic across all kinds of organi:r.atlons.
The core measurement group includes measures of: .
• Market share
• Customer retention
• Customer acquisition
• Customer satisfaction
• Customer profitability.
 MANCE MEA SUR EME NT-S ALAN CED SCORECARD

~
16.1 1
11tese core measures can be grouped . m a chain of relationships causal as displayed in Exhibit 16.3.

Market
Share

Cust omer Custo mer

Reten tion Custo mer
Profltablllty Retention

Customer
Satisfaction

Market Refle cts the propo rtion of busin ess in a given marke
t (In terms of numb er of
Share custo mers, amou nt spent , or unit volum e sold) that
a busin ess unit sells.

Custo mer Meas ures, in absol ute or relative terms , the rate at
Acquisition which a busin ess unit attrac ts
or wins new custo mers or business.

Custo mer Track s, in absol ute or relative terms, the rate at which
Retention a busin ess unit retain s
or maint ains ongoi ng relationships with its customers.

Custo mer Asses ses the satisfaction level of customers along

specific perfon nance criteri a
Satisfaction within the value proposition.

Custo mer Meas ures the net profit of a customer, or a segment,

after allowi ng for the uniqu e
Profitability expen ses required to suppo rt that customer.

Exhi bit 16.3: The Customer Persp ectiv e-Cor e Measures

So11TCe: Robe rt S. Kapla n and David P. Nortion. Ibid.

Internal-business-Process Perspective
In the internal-business-process perspective, managers identify
the critical internal proc esses
in which the organization must excel. These processes enabl
e the business organizations to :
• deliv er the value propositions that will attract an~ retain
customers in targeted market
segments, and
• satisfy shareholder expectations of excellent financial
returns.
The key to excellence in any organization is control of its
processes to produce relia ble and
consistent products and services. Performing the right proce
sses in the right manner leads to cons is-
tent levels of prod uct and service quality. The
difficulty lies in finding the right process variables to
rneasure and setting the standards appropriate to performan
ce levels of each of the process meas ures.
hoeess and operational measures are leading-edge meas
ures that are more short-term-focu sed.
These are the measures that are typically monitored every day or at
least every week . Som e proc ess
"ariables are even monitored continuously to ensure the
production and deli~ery of high- quali ty
Products and services. Achieving good performance levels
on process or operational meas ures leads
to high-quality products and services, which, in tum, lead
1tad to repeat business and to satisfied ~r delighted custo mers , whic h
d . promote an organization's long-term survival and success.
Exhi bit 16 4
Cpicts this graphically. .
~ UEASUREMENT--8ALANCED SCORECARD 11.13

,n,cas meamn::s ipl'Owle Willa dae dala mccled to ,redid and CIODtn>I dae qualily of prodw:ts
- ~ Wbm • p:oblcaa ocaas llrilla a procluct orscnice.1he came is usually found by looting
- - p ~ elm. R~lls IDd ca omcs are important for all orpnmtioas. In fact, they may be
• - - impOrlmt lb.iag. .But how lhose R:SUlts are achieved -die process measures -is also very
~u,lnd.
BIOWD• finds that excellent organm,iv ns measure processes and operaliooa.l results in the
~mam er
• Cyde time for- all by p r ~ is measured..
• Rework time and/or costs are tracked foe key productioo and service delMI)' pocesses.
• Key ~ of pri>ductivity arc identified and tracked for major processes in the
Olt)iiil DMh•lll..

• Key ~ have been identified. in each unit, function. and departmen t of the
~•zato: i. and process JDeaSlRS ba-ve been defined for each key p.ocess.
• Proce:s.s measures are andatrd directly with product/service cha.&tt:i b1ics ar perfurmaooe
facmr.. that arc of prime importance to cumxners..
• Slm:tdanh <V goals are set for all key process measures, and those standards are based
upon benchmarlt organizatioos and customer requiremen ts.
• Process measures promote a preventive approach to achieving ooosistmtl y high-quali ty
produtts :md services.
• lbe organiusio o has developed an overall safety index that is traclted at least once a month,
and consists of several output meagues like lost-time accideots, as well as a number of
prcveutivc <X behvioraJ measures..
• A few future..orientc proass measures are traclc.ed that will help emure long-mm survival
and ~ -

THE LEARNlN G AND GROWTH PERSPECTIVE

For inceutiv~ purposes. the learning and growth perspective focuses on the capabilitie s of
people. Managers would be responsible for developing employee capabilities. Key measures for
nab,ating managers• penonnano e would be employee satisfacti ~ employee n:te:n~ aod em-
ployee productivi ty.
(,) Employee Satisfaction. Employee satisfaction recognises the importance of employee
morale for improving productivity. quality, customer satisfaction and responsiYeDCSS to
situations. Managers can measure employee satisfaction by sending surveys. interviewing
employ~ or observing employees at work.
(ii) Employee Retention. Firms committed to ~ g employ~ recognise that emplo~
develop organisatio n-specific intellectual capital and provide a valuable non-financial
asset to the company. furthermor e, firms incur costs when they must find and he good
talent to replace people who leave. Firms measure employee retention as the inva'SC of
loyee turnover- the percent of people who leave each year.
(ii,) =ployee Prodadivit)'. Employee p r o d ~ ~ ~ the importance of output ptt
employee. Employees create physical output (1.e.. miles dri~ pages produced, or lawns
IDO'Wcd). or financial output (i.e., revenue per employee or profi~ per ~loyee). The
number of loans procc:ssed per loan officer per month would provide a sunple measure
ofproductivity for loan officers at a bank.
---
pERfORMANCE MEAS UREM ENT-B ALAN CED SCOR ECAR D 18.17

CHARACTERISTICS OF GOO D BALA NCE D SCO REC ARD S

Balanced scorec ards to be effect ive and useful should have the follow
ing charat eriatic s• 2 ~
1. Balan ced scorec ards should highli ght a compa ny's strateg y
by focusi ng on cause -and-e ffect
relatio nship. Assum e, Hindu stan Unile ver Ltd. aims to be a low
..cost manu factur er and
accele rate growt h. The balanc ed scorec ards should pinpoi nt specif
ic object ives artd measu res
in 'learning and growth perspe ctive' which could impro ve internal
busine ss proce sses, These.
in tum, would result into greate r custom er satisfa ction, larger marke
t share, highe r opera ting
incom e and shareh older wealth .
2. Balan ced scorec ards should help in comm unicat ing the strateg y fonnu
lated to all memb ers of
an organ isation by transla ting the strateg y into a cohere nt and
linked set of under standa ble and
measu rable operat ional targets. Subsequently, manag ers and emplo
yees take action s, based
on scorec ard, to achiev e the firm •s strategy. To facilitate decisi ons and
action s in accord ance
with scorec ards, it is prefer able to develo p scorec ards at the divisio
n and depar tment levels .
3. In profit -seeki ng comp anies, the balan ced scorecard gives
strong empha sis on financ ial
object ives and measures. Sometimes managers give too much importance
to innova tion, qualit y
and custom er satisfa ction thoug h they may not produ ce tangib le benefi
ts. A good balan ced
scorec ard consid ers non-financial measu res as a part of a strategy
or progra mme to achiev e
and impro ve future financial performance. When financial and non-fi
nancia l perfor mance
measu res are prope rly linked in balanced scorecards, many non-financia
l measu res serve as
leadin g indica tors of future financial performance.
4. The balanc ed scorec ard limits the numbe r of measures used
by identi fying only the most
critica l ones. Avoid ing a proliferation of measures focuses manag ement
's attent ion on those
that are key to the implementation of strategy.
5. The scorec ard highli ghts suboptimal tradeoffs that managers may
make when they fail to
consi der opera tional and financ ial measu res togeth er. For ex.ample,
a comp any for which
innov ation is key, could achieve superior short-run financial performance
by reduci ng spend ing
on R&D. A good balanc ed scorecard would signal that the short-run
financ ial perfor mance
may have been achiev ed by taking actions that hurt future financial
perfor mance becau se a
leadin g indica tor of that performance, R&D spending and R&D output
, has declin ed. 10
REQUISITES OF BALANCE SCORECARDS
Balan ce scorec ard requir es an adequate planning system and unders
tandin g of organ izatio n
processes to fit the organ izatio n's prima ry objectives. However, deve~o
ping and usin~ balanc e score-
cards for perfor mance measu remen ts are difficult tasks. The follow
mg are the requu ement s which
should be satisfi ed by organi zation s before adopti ng balanced scorec 13
ard.
1. Mana gemen t must define the organization :S prima ry objectiv~s. This
i~ us~all y well done
becau se most profit- seekin g organizations have a n~w primary obJ~t
lve, n~ely , to
· hareho lder wealth . In profit-seeking organ1zat1ons that have pnma ry
obJec tives
mthcreas
. . ea1 sd both social and owner wealth objectives, manag ement
lDC1U e must stipul ate how
. . Jn + fi
decision-makers should weigh each of these ob~ect ~ves. ~o,• or•profit orgam. zation s
like g-0vemments, manag ement must state its obJectwes precisely.
z. The lUlizali must under stand how stakeholders andprocesses contribute to
its prima ry
_ L . orgit
. M:anony manag ers admit that this is problematic. For example, the organ
<n>Jec rves. izatio n
behav iour literat ure is unclea r about wheth er •mcreased emp1oyeo moti f .
~ ton necessarily
lales into impro ved emplo yee and profit performance. Many otgan
mtion s, despit e
=em entin g massi ve qualit y progra ms, really do not understand
the effect of quality
16.11 ADVANCED MANAGEMENT ACCOUNTING

on pcrformance and prefer to speak in platitudes when they say, for example, "quainy · .
. . b . h " IS
not an issue, you have to have quahty JUSt to e m t e game. 3.
3. The organization must develop a set of _second~ry objectives that are the driverJ of
performance on primary objectives. This step 1s perhaps_ th~ mo~t challenging and
important in implementing the balanced scorec~rd. ~ccompl~shmg this task requires that
processes and results come together. The org~mzat1on must mvest resour~s to back the
4.
strategics that it feels will produce results: ~•s task seeks ans~ers t~ questions like how
much should be invested i~ employee ~~mg, a cust~mer sat1s~a_ct1on system, a quality
improvement system, or an unproved log1st1cal system. Such dec1s1ons should be based on
an understanding of how increased spending improves process results, such as improved
customer satisfaction, which in tum results in improved performance on the organization's
primary objectives.
4. The organization must develop a set ofmeasures to monitor performance on both primary 5.
and secondary objectives. This is the conventional role for management accounting. This
step raises issues about how to measure the variable of interest. For example, how does
the organization measure employee motivation or commitment to the organization? These
performance measures are important because they translate strategy into focus, since the
measures that people are told to manage will drive their performance. If the organization
chooses the wror.g set of measures, it wi!I motivate inappropriate perfonnance. Suppose,
for example, that the organization, lacking an ability to measure motivation, equates 1.
motivation with lavish incentive compensation and measures motivation by the amount of

S.
incentive compensation that it distributes to employees. However, incentive compensation
actually may have little incremental effect on motivation.
The organization must develop a set ofprocesses with their attendant implicit and explicit
2.
l
~
3.
contracts with stakeholders to achieve those primary objectives. Although this management
requirement is well understood, the implied level of complexity required by the balanced
scorecard is much deeper than what is done in nonnal practice. For example, based on 4.
1980s experience, many managers developed the motto of"quality at any cost." Under the 5. ~
balanced scorecard, managers would asses the costs and benefits of schemes to improve
quality. 6. J
6. The organization must make specific and therefore public statements about its beliefs
concerning how processes create results. Public statements and specific commitments to
courses of action arid expected results provide a basis for accountability. Therefore, they
represent an element of management risk since management can be questioned more
accurately about its failures. Many senior managers may find this level of risk distasteful.
7.
8.
9.
l
However, owners may find such public statements illuminating. 10.
PRECAUTIONS IN USING BALANCED SCORECARDS
Balanced scorecards are strategic, comprehensive and integral techniques of measuring the 11.
performance and managing a firm to achieve its vision and objectives. However, while implementing
a balanced scorecard, managers should exercise utmost precautions and avoid certain evils or pitfalls 12.
while executing balanced scorecards. Such precautions are as follows :
I. The cause-and-effect relationship assumed in balanced scorecard may not be as precise 13.
in reality as it has been claimed before implementing balanced scorecard. It is preferable
for the organizations to gather evidence of these linkages overtime. Attempts should be 14.
made to evolve balanced scorecards over the time rather than design or impose balanced
scorecards at the outset.
 --~M~A~N~C~E~M~EA~S
U~R~E:!M~E~N~T~---B~A
pERfO~ ~LA~N~C:E=O~S~C~O::R 1 8 .1 1
:E~C:::A:;R~D::_._ _
impr ovements in all m ____ _ _ __ . . _
easure s simultan ..-_
2' 'fhere is a need fo
r balance o r tr ad eously o r al l _of th e ti m e ~hould
eo tf across vario
emphasizing qual
ity and on-time p us st ra te g ic g o a n o t be ta rS e te d .
further improvem ei fo n n an ce b ey ls . F o r e ,u ,~ p le
ent in these obje o n d a p o in t m a
y n
,
3. Non-financial ct ives m ay b e in co o t be w~rt~wh~
measures shou n si st en t w it h p ro fi le - -
on financial perfor ld n o t be ign t m ax 1 m 1 za t1 o n
mance and measu ored. M an ag er s g en er al ly te n d .
not considered wh res. If non-finan to give m o re fo
en evaluating per cial m ea su re s a cus
scorecard as a stra formance, it w il l n d p e rf o rm a n c
tegic measuremen m in im iz e th e im p
o rt a n c e o f bala
e arc
4. Don't use only t an d m an ag em en nced
objective t to o l.
m.easures (such as op measures in the scorecard. A sc o re
erat·mg ·mcome fr ca rd m a y in cl u d
yiel. d)• as weU as om cost leadersh e b o th o b je ct iv
. su b.,ie cf1ve mea ip , m ar k et sh ar e a e
ra
offtmthgse).beWhen usm su re s (su ch as cu st n d m a n u fa c tu ri n g
nefits o f thgesu.bjecf o m er a n d e m p
and potential fior i~e meas':11'es, th lo y e e sa t1· sf ac
_nch\e~ mfonnat1o ough, m an ag em t1· o n
n these m ea su re ~ n t m u st b e c a re
rnampu at1on. p ro v id e ag ai n st fu l to tr a d e
5. Don't fail to co th e im p
nsid
technology and er b o th costs d re c is io n
research and : vb .
scorecard. Otherw
ise m enefits ofm1t.1a. t1.v_
el es su e~ as sp en d
oprnent before
result in overall lo
ng~ru:'fianganern~nltb m cl u d m g th es e in g o n information
,may focus the o o b je c ti v e s in
et a enefit s.14 rg an iz at io n o n m th e
easures that w il
l no t
\. D.S . Sink, .. A
casu
chieving
~ ~=~
REFERENCES
W o tl d•.CJ,,...