In such a strong competing business world today, every company's objective is to maximize profits while minimize costs of expenses. Therefore, to evaluate performance from time to time, there are several financial measurement tools available for companies to measure their performances such as Return on Investment (ROI), Residual Income (RI), Economic Value Added (EVA) and many others. However, these financial measurements are merely evaluating financial perspective which generated the final outcome of the company's performance. In addition, a company is doing well in its financial performance does not mean that the company has achieved high satisfactory from its customers and suppliers. So, what if the company itself faced shortage of employees? Does it create serious impact towards the productivity and the income of organization? Well, we all know that these financial measurement tools are mainly focus about organization's growth regardless of the process from responsibility centre such as production cost centre, revenue centre, profit centre, investment centre as well.
Hence, to embark on both financial and non-financial measurements, the company has to implement another performance measurement tool called Balance Scorecard (BSC), this tool was introduced by Robert. S. Kaplan and David P. Norton in 1992 (Punniyamoorthy and Murali 2008). BSC consists of four main key perspectives (as shown in Figure 1): (1) Financial perspective, (2) Internal perspective, (3) Customer perspective, and (4) Innovation & Growth perspective. Subsequently, the author will elaborate more on BSC approach and its effectiveness towards performance evaluation as well as other performance measurement used called Business Value Scorecard (BVC) approach and finally conclusion will be provided based on these two approaches.
2.0 Balanced Scorecard
Horngren et al (2008) defined BSC as a performance measurement and reporting system that strikes between financial and non-financial measures, links performance to rewards, and gives explicit recognition to the diversity of organizational goals. Besides, Hanson et al (2008) also provided that BSC is a framework that firms can use to evaluate whether or not they have implemented both financial and strategic controls to assess their performance, and BSC approach can also apply to corporate-level strategies. For instance, the four main key perspectives of BSC framework: (1) financial (concerned with profitability, and risk), (2) customer (concerned with the amount of value customers perceive was created by the firm's products); (3) internal business processes (focuses on the priorities for various business processes that create customer and shareholder satisfaction), and (4) innovation and growth (emphasized with the firm's effort to create a climate that supports change, innovation and growth).
Furthermore, BSC provides a balanced perspective to firm on how it looks to shareholders (financial perspective), how do customers see the firm (customer perspective), what the firm must excel in (internal business processes perspective), and can the firm continues to improve and creates value (innovation and growth perspective). For example, customers who enter a restaurant, obviously they are not interested to know how well the restaurant's profitability performance is, but likely to emphasize the taste of the foods and the environment of the restaurant. BSC is an ideal framework which concerns both factors in the example that maintain or enhance profitability performance while served impressive foods in a comfortable environment and gain customers' satisfaction (Hanson et al, 2008).
By the way, Kaplan and Norton believe that the four key perspectives can eventually help an organization meets its financial objective. Thus, each key perspective of BSC must be evaluated individually from time to time to ensure that every progress for each perspective has been well-evaluated by top managers.
Performance Measures
*Figure 1, extracted from (Garrison et al, 2008, page 440)
What are
our financial
goals?
Financial
"Has our financial performance
improved?"
What customers do we want to serve and how are we going to win and retain them?
Customer
"Do customers recognize that we
are delivering more value?"
Vision
and Strategy
What internal business processes are critical to providing value to customers?
Internal Business Processes
"Have we improved key business processes so that we can deliver more value to customers?"
3.0 Effectiveness of BSC approach
Innovation and Growth
"Are we maintaining our ability to change and improve?"
On the other hand, in order to produce a 'balanced performance' of an organization, Kaplan and Norton introduced four key perspective of BSC to resolve such circumstance as shown in Figure 1. For instance, financial perspective measures financial performance and point out whether or not the organization's strategy, execution, and implementation are contributing to bottom-line improvement. Apparently, all sales and revenue are attributable from customers, and therefore customer perspective is a top priority for management. Hence, the BSC requires that managers translate their general mission statements on customer service into specific measures that resolve the factors which is really matter to customers (Jr. et al, 2009). For internal business processes perspective, Hilton (2009) discussed that excellent customer performance results from internal business decision, processes, and actions throughout organizations in a coordinated fashion, and managers must emphasize on those critical internal operations that enable them to satisfy customer needs. As for innovation and growth perspective, knowing that organization's ability to do better from innovation and learning perspective is more dependent on its intangible assets: human capital (knowledge, skill and talent), information capital (networks and information systems), as well as organization capital (culture, and leadership). Furthermore, Hilton (2009) suggested that new product must be introduced and developed to replace those products that become obsolete and these processes must continually be developed to improve the efficiency of the production. Usually, when top managers come out a particular decision, they must be planning, monitor and control the decision from time to time so as to focus out of the scope of that particular decision. As such, BSC approach able to guide top managers to implement strategic decisions by linking up its four perspectives.
3.0 Effectiveness of BSC
As mentioned above, Kaplan and Norton introduced BSC approach which is a mechanism to convert both financial aspect (i.e. for the view of shareholders, investors) and non-financial aspect (i.e. for the view of stakeholders, and managers) into so-called four key perspectives as a result to apply strategic plans into day-to-day operations. Indeed, it requires a lot of time which is uncertain to accomplish the strategic plans that is delegated by top managers. In order to boost such achievement, managers have to motivate and reward to those employees who have hit certain target set by top managers. Besides motivate employees, the collaboration and cooperation among different levels within organizations is essential as top level strategy and middle management level actions are appropriate focused and clearly connected. Instead, BSC provides a 'balance view' to managers as it integrates four perspectives into single entity rather than simply focusing on a specific area of performance, usually financial perspective. In relation to financial perspective, managers tend to emphasizing more on employee development, customer experience, and retention and process efficiency. This could indirectly prevent the problems that can arise when the performance in one area is improved simply sacrificing other areas, which does not represent sustainable solution eventually. Kaplan and Norton (1992) cited that one of the benefits or BSC is to break down strategic measures towards lower levels, so that managers, operators, and employees, will see what is required at their level to achieve excellent overall performance.
4.0 Critiques of BSC
Every performance measurement model have been developed, there is none of an ideal model applicable across all industries. Thus, there are several critiques of BSC in term of time-lag, human behavior, and cause-and-effect relationship. In order to implement BSC, organizations need to focus on four key perspectives individually to meet its financial objectives. However, it requires a lot of times when the actions are being taken by the organization. NǾrreklit and Mitchell (2007) pointed out that time lager are not well understood or modeled within the BSC and the directions of causality are not always clear, and the linkage between the different perspectives may be non-linear. Logically thinking, the longer the implementation takes, the higher the costs, and therefore, it is impossible to complete BSC within a short period of time.
Meanwhile, human behavior also plays an important role in organizations (i.e. lack of communication, lack of supportive equipment available in organizations and etc). To be frank, human is the toughest thing to manage within an organization because human have various type of characteristics which cannot be measured by any formula or whatsoever it is. As such, this could slow down the organization's movement towards its financial objectives. Moreover, Jazayeri and Scapens (2008) argued that BSC measures cause-and-effect relationship that is a statement of an empirical relation in which it is more complex and ambiguous. According to NǾrreklit and Mitchell (2007), they argued that Kaplan and Norton confuse cause-and-effect relationships with both logical relationships and means-ends, which is also called 'finality' relationships (NǾrreklit and Mitchell 2007, cited Jazayeri and Scapens 2008).
5.0 Other performance measurement used
By referring the article written by Jazayeri and Scapens (2008), they are writing another alternative of performance measurement tool namely 'Business Values Scorecard (BVS)' which is used by a UK aerospace company called 'BAE Systems'. In fact, BAE Systems adopted and modified BSC concept into their own tool, that is how BVS comes in. For instance, BVS has five perspectives which link to the five key values in the culture change project: (1) performance, (2) partnership, (3) customer, (4) people and (5) innovation and technology. Particularly, the BVS is evolved out of its previous system called 'traffic light' reporting. To maximize the usefulness of BVS, what was important was ensuring that all measures fitted together in a coherent way and the different perspectives were all pursued simultaneously. For example, the different perspectives have to fit together in a coherent way in order to coordinate and integrate the actions of the various activities and functions of the business as a whole, and each perspective has to be monitored and action taken as necessary, and yet they have to be seen as an entity, rather than as individual parts (Jazayeri and Scapens, 2008, pg.62). There is, on the other hand, similar to Kaplan and Norton's (1996a) idea of a chain running through their BSC approach whereby well-trained employees lead to better business processes, which attributable to more satisfied customers and then to improve financial performance of an organization.
6.0 Conclusion
No doubt BSC is a good model, but not all organization must apply BSC approach as its performance measurement tool whereas they can create their own performance measurement systems. By comparing performance measurement tools (i.e. BSC and BVS) as mentioned above, they both have a wide range of different uses and it can mean many different things to different people. That is the reason why BSC provide an opportunity for those appropriate organizations to translate strategy into operation, but not all organization. However, it is all depending on suitability of different organization all around the world. For example, not everybody in the world can eat beef because of some religion issues, cultural issues, and so on.
Looking at BVS approach, it aims to reinforce a cultural change project. Nothing to worth at this point where cultural change project is not part of the issue of what an organization is considering. By the way, it is very difficult to implement all five key values of BVS in a coherent way. For example, the top and bottom management level may have several barriers such as communication, knowledge, and language. However, implementation of BVS seems efficiency but it does not consider the factor of step-by-step because things get worse when a lot of interrelated things are messed up and it tends to create time consuming to resolve the unwanted matters that happened within an organization.
In a nutshell, none of performance measurement tools provide accurate outcomes because things are always deal with uncertainty and ambiguous, therefore, whether or not to implement BSC approach within organizations is depends on the suitability.
7.0 References
Garrison, R.H., Norean, E.W. and Brewer, P.C., 2008, Managerial Accounting - 12th Edition, New York, McGraw-Hill/Irwin.
Hanson, Peter J., Michael A., Duane R., and Robert E., 2008, Strategic Management: Competitiveness & Globalisation, South Melbourne, Thomson.
Hilton, R.W., 2009, Managerial Accounting: Creating value in a Dynamic Business Environment - 8th Edition, New York, McGraw-Hill/Irwin.
Horngren C.T., Sundem G.L., Stratton G.L., Burgstahler D. and Schatzberg J., 2008, Introduction to Management Accounting - 14th Edition, New Jersey, Pearson Prentice Hall.
Jazayeri, M. and Scapens, R.W. 2008, 'The Business Values Scorecard within BAE systems: The evolution of a performance measurement system', The British Accounting Review, 40 pp48-78.
Jr, D.J.K., Eisner, A.B., Dess, G.G., and Lumpkin, G.T., 2009, Strategy: 2008-2009, New York, McGraw-Hill/Irwin.
Kaplan, R.S., and Norton, D.P., 1996a, The Balanced Scorecard - Translating Strategy into Action, Boston, Harward Business School Press.
Malmi, T., 2001, 'Balanced scorecard in Finnish companies: a research note', Management Accounting Research, Vol.12 No.2, pp.207-220.
NǾrreklit, H., Mitchell, F., 2007, The Balanced scorecard: Issue in Management Accounting, Harlow, Prentice-Hall.
Punniyamoorthy M. and Murali R. (2008), 'Balanced score for the balance scorecard: a benchmarking tool', Benchmarking: An International Journal, Vol.15 No.4, pp.420-443.
