Alance Scorecard Is Criticized For Its Lack Of Attention Accounting Essay

Category: Accounting

Balance scorecard is evolved in the passed decade as a performance measurement system. Introduced in 1992 by Kaplan and Norton, the balance scorecard then expanded into an organization-wide strategic management system, which enables the managers to break down their organizational strategy into operational initiatives for constituent business units within each of the four perspectives. An initial intention of the balance scorecard was to reduce managerial bias towards financial measures in performance evaluation.

On 1996 research study, conduct by Kaplan and Norton, they revealed that the balance scorecard is evolving from "an improved measurement system to a core management system". Focusing on that balanced scorecard was intended to support the management implementation of business strategy, Kaplan and Norton further described the use of this development of the balanced scorecard as the central element of a "strategic management system". Lawrie and Cobbold (2004) stated that balanced scorecard has helped managers to organize their strategic management process but it is not completely perfect as it does not removes the separation between formulation and implementation of strategy.

Chavan (2009) tried to conclude all the research studies of balanced scorecard up until now, as saying that the purpose of the balanced scorecard is to guide, control and challenge an entire organization towards realizing a shared conception of the future. Within the perspectives the vision is expressed as a number of more specific objectives. Measures and targets are set and the organization then puts in place action plans to meet the set targets. Nielsen, S. and Nielsen, E.H. (2008) described the final goal of the balance scorecard is to be able to control the operational performance of the company, thus securing the competitiveness of the company and increasing the value of the company in the long run.

There are twenty journals being reviewed in recent ten years with emphasis given on some area of development in balance scorecard that can prove my hypothesis that balanced scorecard method is more practical than any other performance measurement system available, by giving example of it in various industry, analysis of its advantages and disadvantages, while ignoring some balanced scorecard dependency towards other performance measurement system available, for example benchmarking. Expected result would be balanced scorecard is a system that is more practical than other performance measurement systems available today and possibility of my hypothesis being accept is high.

This research is a descriptive study type, with interpretive epistemology principle philosophy mainly qualitative method, will be given emphasis when analyzing throughout the journals for the study.

2. Balance Scorecard: Problem with Implementation.

There are a number of problems arise due to implementation of the balance scorecard in the organization. While balance scorecard was helpful in setting out a wider project plan, they are light on the detail about how the design choices would actually be made. This in turn has triggered a number of books and articles that attempt to fill the gap.

There are a number of issues arising due to implementation of the system in the organization. While these were helpful in setting out a wider project plan, they are light on the detail about how the design choices would actually be made. Also, the managers need to weight or balance their four perspectives that are financial perspective, customer perspective, internal business processes, and learning and growth and measures in it by which to prioritize their daily actions since it is unlikely that all are equally important for business strategy and the confusion to which are the key measures to act up on.

There is no fixed system to follow in implementing it, thus a depth understanding about the system is required before it can be implement in the organization. If the organization gives the wrong balance scorecard it will give bad impact to the overall management.

The non-financial performance measures in balance scorecard give off a lot of problems. For example, throughout the development of the organization, their balance scorecard should also be changes in response to the particular development in the company. But the changes can be ad-hoc and undirected and the old measures may not be discontinued. Managers must make a trade-off decision between cost measure and quality measure. Some measures lack integrity as data used to calculate performance measures may be gathered in a variety of ways either by manually, computerized or by external party. And because the accuracy of the data may be difficult to verify compared to financial data recorded in the accounting system, there is potential for manipulation and error. And some measures can not be easily translated into financial outcomes.

There is ambiguity in balance scorecard that makes it harder for management team to translate the business strategy into specific and tangible strategic objectives. A broad consensus at top management level is required for the balance scorecard to be serve as organization framework for a wide range of team based management processes (CIMA, 2001).

Some measures turn out to be counter-productive. Data gathering can takes a lot of time and some data are impossible to obtain that do not permit the performance evaluation.

The system itself is not accepted by the managers because they scared their autonomy power and comfort-zone would be threatened. The balance scorecard can changes peoples' behavior by required them to make it happen. Users and the needs of departments must be taken into account for the system to be successful.

Balance Scorecard is criticized for its lack of attention to the demands of stakeholders that also claims their significant feature of the modern business environment or complex ecosystem (Neely et al., 2002). Its four perspectives only give attention on investors and customers' wants and needs, leaving those of employees, suppliers, alliance partners, regulators, local communities and pressure groups unrequited (Marr, B. and Adams, C., 2004).

Biases is also a problem that can never been one hundred percent eliminated. Even if the balance scorecard is designed and implemented in such a way that comply with the latest academic and practitioner literature, it will still requires human interpretation, but human experience creates preconceptions and biases which can lead to a manager unconsciously weighting the performance measures (Frederickson et al. 1999). Rich, V. (2007) tried to reduce the impact of biases on performance measurement by conducting an experiment on fourth-eight IBM's Global Business Services managers and leave a questions on how and why experienced managers weight balance scorecard measures in his experiment and how initial balance scorecard design or the use of decision aids can lessen the impact of such subjective judgment.

Human behaviour factor is also a problem that should not be overlook in a balance scorecard as it can creates a dilemma for the employees as they literally being treated as an object to fit in the system (Johanson et al., 2006). Andersen and Born (2001) concluded it by giving the responsibility of this factor for the manager by feeling empathy towards their employees. They quoted as saying: "The manager has to provide the employee the possibility to give. In today's semantics the manager has to create possibilities of development of the employee, flexible conditions, and delegation. In return it is expected that the employee exploits this new space of possibilities to show responsibility, flexibility, initiatives and creates results".

3. Characteristics of a Good Balance Scorecard

Balance scorecard is proven to be useful tool in providing guidance for the employee to make them understand about how they can contribute to the organization. It can be used for employees to see the consequences of their actions or decisions. It can also provide executives an effective tool to translate a company's vision and strategy. Witcher and Chau (2007) stated that all three; vision, mission, and values can influenced the balanced scorecard's objectives and measures and should be used together for organizations to grasp the whole context of business, and the balance scorecard's objectives and its relevance.

Profit is the 'bottom-line' for every company, but the most important thing now in this harsh competitive environment is the sustainability of the company in the market. The longer the company can survive the better it is in term of competitiveness. For this, balance scorecard is essential for the company as a survival tool for long-term operations.

A good balance scorecard should have a mix of outcome measures (lagging indicators or the results from past efforts) and performance drivers (leading indicators or the measures that drive future performance) that are specifically derived from the organization's strategy. Normally, it is suggested that there are four to five measures for each perspective.

The scorecard need to be linked to strategy and goals of the organization to promote goal congruence and encourages the employees to focus in the right direction. The scorecard can not be too complicated and within a reasonable target goal. Become too complicated and the employee will have difficulty to interpret it. Employees must be able to understand how the measure was calculated and what they need to do to improve their performance in the area of measure. A good design with graphic display can help employees identify their performance measures and motivate them for further improvement.

Performance measures should be reported as close as possible to the time period to which they are related. This gives immediate feedback to employees and managers, allows timely corrective action to be taken. The scorecard must have some sort of standard or benchmark to be included in order to meet a high expectation of the customers. The measures must be seen by employees as fair and not difficult to achieve that can encourage their participation. Employee's empowerment also is given for more freedom of their routines work. Employees are more motivated to follow performance measures if they are linked to reward systems. For example, company design the loose measure to the employee so that the employee would not perceived it as too difficult and to motivated them to achieve the measure. Over time, when there is a room for improvement, the measure will be set to a more challenging measure to provide a new improvement cycle for the employee. Reward such as incremental on wages should be provided for those who are competent enough.

Causality concept is a critical issue in managing performances in balance scorecard. It can help managers making a decisions in investment, because causal can helped us to recognize the medium and long-term causality and linkages on performances measures (Dror, S., 2007). The causal model also can helped employees to avoid confusion and misunderstanding about the strategy and helping them to provide necessity information about the balance scorecard. It can also helped managers to grasp the whole idea when they want to implementing the balanced scorecard system. The importance of it is proven when managers tried to develop non-financial measures, developing an action plan of the strategy and the process of cascading the scorecard to lower levels of the organization it was becoming difficult for them (Othman, R., 2006). The concept of causality is presented graphically to show visual linkages between the strategic objectives with causality linking across the perspectives toward key objectives relating to financial performance. This causality graphic was called as a "strategic linkage models", but recently become famous as "strategy maps" name.

A good balance scorecard must align with organization's strategy and can get everyone on the organization to understand the strategy and fit them into it with necessary behavioral changes to achieve performance breakthroughs (Anon., 2006). If the balanced scorecard is implemented successfully, it can help the organization in an evaluation of the strategic plan and avoid planning errors. While balanced scorecard has received a lot of criticism, many of it represents problems of practical application rather than fundamental flaws (Atkinson, H., 2006).

4. Balance Scorecard in Various Sectors

Different industry required different balance scorecard because of the nature of the business itself that give priority to which measurement come first from each perspectives.

I will demonstrate how they are different by three examples below, suitable for both public and private sector.

4.1 Balance Scorecard in Academic Administration

Academic interpretation of the four perspectives will be modified like replacing "customer", with "student" to suit their institution's goal. Benchmark is set from the competitor to compare institution's performance in the industry and aim for the top. Benchmark is vital for this sector so it can identify which measure must be given priority first. The institution must decide what it will benchmark and what performance it will measure. The balanced scorecard located key strategic elements of performance indicators to ensure that decision is based on strategic objectives, while meeting accountability expectations and legislative requirements. Both sources of income and value of the assets must be maintained so that the company can continue to operate.

Example of a balance scorecard in academic administration's management (Dorweiler, V.P. and Yakhou, M., 2005):

Customer perspective:

- Level of satisfaction, starting from student, employees, faculty, alumni, and then parents.

- Faculty reputation, quality of service.

Internal business perspective:

- Teaching excellence, faculty performance improvement.

- Curriculum excellence and innovation.

- Service efficiency and effectiveness.

- Risk and crisis management, for example, students' successful rate in curriculum.

- Performance evaluation based on goals and objectives.

- Plans for growth and long-term survival.

- Board assessment system.

Innovation and learning perspective:

- Teaching and learning development, tied with reward system.

- Faculty improvement, fast-adopting of technology in computer network system.

- Advanced program in curriculum and faculty.

- Unique, for example, distance learning program or flexible study time.

- Enriching academic reputation.

- Human resources investment for long-term planning.

- Value-added learning, lifelong learning.

- Quality improvement in facilities.

- To maintain a high level of quality in all intellectual contributions (McDevitt et al., 2008).

Financial perspective:

- Capital raising, revenue from operations, revenue from other sources.

- Long-term and short-term income management.

- Public relationships, maintaining a good image.

This balance scorecard must be monitored regularly, for any weaknesses and changes accordingly. Balanced scorecard must be updated regularly to reflect new developments.

4.2 Balance Scorecard in Services Sector

Important area for services sector need to focus is customer perspective, mainly looking for customer satisfaction, customer complaints and customer feedback or comments. Example of a balance scorecard in services industry:

Financial perspective:

- Sales target and acquisition from customers.

- Improvement of revenues and investments.

Customer perspective:

- Services were fast, efficient and accurate, for example, customer queuing time for services and instant response on customer's request.

- Availability for attendance.

- Confidentiality on customers' personal details.

- Advocacy and retention of customers.

Internal business perspective:

- Advanced machine and equipment using for servicing customers.

- System availability, maintenance system, for example, automatic teller-machine.

- Standard employee behaviour, especially for those who was assigned to attend the customer (Jones, C. R., 2004).

Innovation and learning perspective:

- Improving training staff.

- Enhance employee motivation and empowerment, develop culture of improvement.

- Encourages customers' feedback and reflect on it wherever needed.

All of this measures will be compared against benchmark to ensure competitiveness and competent of the overall company's performance. For multi-national company, a headquarter balance scorecard will be synchronized to their branches. Adjustment to suit locals' needs is made accordingly.

4.3 Balance Scorecard in Hospitality

Example of a balance scorecard in hospitality industry:

Financial perspective:

- Volume growth by key service line.

- Number of out-patient visits.

- Number of contracts received, pounds generated from new contracts.

- Supply expense and pharmacy expense, personnel cost, etc.

Customer perspective:

- Patient waiting time, discharge timeliness, hospital food.

- Accurate diagnosis and test rate, zero incidents.

Internal business perspective:

- Call centre response time, patient complaints management.

- Risk management, for example, infection rate, medication error per dose, restraint usage, serious incidents, occupational incidents, etc (Gurd, B. and Gao, T., 2008).

Learning and growth perspective:

- Staff's management training for skills and knowledge.

- Number of new research projects.

- Quality of the new services being offered and further improvement.

- Computer networking system and work design development.

- Enhance employee motivation and empowerment, develop culture of improvement.

5. Development of Balance Scorecard

There is quite an improvement in balance scorecard recently to fill any weaknesses that were discovered in previous researches. Othman emphasis the used of 'scenario planning' to enhancing the current balance scorecard, and there is a trend in software development of balance scorecard.

5.1 Scenario Planning

Scenario planning is a development of a strategic plan that is robust across different scenarios. This ensures that the strategy implemented using the balanced scorecard is linked to external conditions and takes into consideration the expected changes in the environment into the scorecard (Othman, 2008).

Cause and effect of temporal aspect in a causal model is needed to improve understanding of sequence events for future desired outcome. Scenario planning is the process for assessing future environment situations and describing the path from the present to the future (Othman, 2008). There are two forms of scenario planning i.e. future-forward planning and future-backward planning (Ratcliffe, 2000). Scenario planning is different from forecasting in that forecasting is concerned with what will happen whereas scenario planning is more concerned with how things will happen.

Mercer (1995) identified six steps that are common in many discussions of scenario planning:

1. Decide the drivers for change. This is an analysis of the environment to determine which variables are influential in shaping the future. The analysis at this stage can include an examination of the political, economic, social and technological factors (O'Brien, 2004).

2. Bring identified drivers into a viable framework. This involves sensing and identifying patterns from the data obtained. It would typically involve categorizing and organizing the drivers into some logical groupings.

3. Produce mini-scenarios. And then develop a description of mini-scenarios. The generation of multiple scenarios helps managers understand the range of uncertainties that can be expected (O'Brien, 2004).

4. Reduce the mini-scenarios into two to three scenarios. This is to be debate among participants in the process and should conclude which scenarios that are capable of containing the insights generated from the whole process. Mercer (1995) argues that managers can cope effectively with only two or three scenarios.

5. Write the scenarios in a way that would make it usable by those who are going to use them.

6. Identify issues arising and reflect from it by future development.

Once insights generated in identifying pathways to the future of external condition is decided, organization can start formulating the organization's strategy map to implement in the balance scorecard. This then can provide a basis for aligning an organization's objectives and internal capabilities with external conditions. By linking the strategy maps to a sequence of events that constitutes a pathway, manager will be able to develop a more realistic understanding of the sequence of events leading to the desired future state. This can then be used to develop a more accurate scorecard of their strategy.

5.2 Software Development

Some software companies like CorVu Corp., Gentia Software Inc., and Peoplesoft Inc. has developed balance scorecard software to fulfill the demand of the market. Of all of this company's software, Gentia Software Inc. product is stands out a bit because it was co-developed by David Norton and his consulting firm. While Gentia's software is more focusing on company's objective and its structure, CorVu's software is more into numbers and tends to be less subjectivity. CorVu's software doesn't follow the standard balanced scorecard measurement perspectives.

Peoplesoft Inc. software is still being in altering stage, but currently being used by Consolidated Freightway Company in the trucking business (Gautreau, A. and Kleiner, B. H., 2001).

6. Conclusion

Balanced scorecard is a system that enables organization to convert their strategy into action. It translates an organization's strategy into performance measures that provides overall view of an organization's strategy. By incorporating financial and non-financial measures in a single report, balanced scorecard can provide managers with information about activities they are managing than if by given financial measures alone. Combination of both financial and non-financial measures also (Kim and Hatcher, 2009) can broaden the boundaries of organizational performance and integrates intangible as well as tangible aspects, for example, relationship with stakeholders. It enables the companies to develop a framework of their operations and identified all operating and investment activities from long-term to short-term strategic objectives. Balanced scorecard also provides a clear prescription as to what companies should measure in order to "balance" the implications in all the functional areas, arising out of the strategic intent (Punniyamoorthy and Murali, 2008).

My hypothesis that balanced scorecard method is more practical than any other performance measurement system available by ignoring balanced scorecard dependency on other performance measurement is wrong and seems impossible to do it so. Balanced scorecard should be depends on other performance measurement system for example benchmarking and work in synch together for it to become relevant and suitable to be implemented in an organization. All in all, overall research proven my hypothesis that balance scorecard is an ultimate performance measurement system available today for organizations' strategic mission and survival in a competitive market.

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