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Accounting

Balanced Scorecard Theory

Key performance indicators, financial assessments, return on investment, project schedules, budget estimates and a plethora of other tools and metrics are used to measure quantitative and qualitative variables in performance.  While there are key performance indicators and other metrics to manage, understand and provide data to make informed decisions there is still a need to have a more granular view on what is expected of the group being measured and the expected outcomes of the performance.  There are multiple areas that can be measured and analyzed to provide the data required to make informed business decisions.  These areas can be defined as financial, external, internal and growth.  By applying metrics across a broad spectrum of opportunities each area of the business can be measured and compared between each other.  This scorecard method allows insight into key metrics of the organization and allows a concise and focused effort that ultimately aligns the strategic intent of the organization to the defined measurements of the organization. 

Balanced Scorecard Definition

The objective of the balanced scorecard is to provide a quick and powerful tool so that anyone in the organization that has the need to know or understand the performance of their specific function can view and gain the perspective needed (Kaplan, R. and Norton, D).  This visual assessment allows for the managers and leaders of the organization to make informed business decisions to take the appropriate actions.  These actions taken by leadership would drive the change in the organization based upon achieving the performance standards outlined on the balanced scorecard (Monk, E., and Wagner, B).  This tool is used as a planning tool that aligns those actions on the tactical business operations level to the strategic intent of the business.  Prior to the utilization of the balanced scorecard theory businesses relied heavily on financial measurements to drive actions within the organization (Kanaracus, C.).  While this did provide a certain level of validity to the management decisions it did not provide the full picture required to make those tough business decisions in an ever changing and dynamic environment.

The early implementation of the balanced scorecard, although not officially named balanced scorecard until the 1990’s, was used by the General Electric Company in the 1950’s (Cooper, D. F., Grey, S., Raymond, G., and Walker, P).  The General Electric Company was driving toward a new and innovative way to align what was happening in the business and how to make changes in the manufacturing process to impact the final results of their process.  By measuring different variables in the organization the sourcing buyers, engineers, manufacturing team leaders and other members of the manufacturing and sourcing supply chains could make decisions based on these financial and non-financial key performance indicators to better their metrics.  Each change was then compiled into a scorecard to determine the strategic health of the organization.  The intention of the balanced scorecard has remained the same over the years but the ability to define metrics, measure variables and report results have become increasing intricate and beneficial across multiple business units in virtually all industries.

Balanced Scorecard Perspectives

The essence of the Balanced Scorecard Theory is to provide a fair and balanced approach that deviated from the original metrics associated with the business decisions.  The balance comes from defining metrics that work in a complimentary fashion as opposed to a financial centric focus that was previously used.  There were some inherent weaknesses and opaque perspectives that came from the pure financial view and the balanced scorecard approach provided a balance to the over strategic performance of the organization.  The balance also is seen as taking a different perspective on the company as noted before.  The four areas encapsulate the business in unique ways and can provide insight and vision into an area of the business that would be completed overlooked by other functions of the business (Leach, L).  The first are is the financial portion.  While this has always been included in the views and analysis of companies since the beginning of trade, the financial perspective is crucial to business decisions.  The question on what should be measured is based on how the success of the company is view by the shareholders of the company.  Financially, what is important to those with a vested interest in the success of the company?  The answers to this question will help drive the metrics needed to drive the objectives, measures, targets to the measures and the projects or programs that will drive these changes.

While the financial portion is aligned, measured and analyzed there are three other areas that need to be taken into account.  The next is the customer’s view.  This could be customers within the same organization or those customers in the traditional sense that are utilizing the final good or service as intended by the organization’s business model.  The leaders of the business must have a vision on what the organization will do in the future.  This could be growth in certain sectors of the business or expansion into new markets or product opportunities.  The vision is established by leadership so that the projects, objectives and efforts of the organization can drive the results required.  With the customer section of the balanced scorecard, the focus is centered on the ability to achieve the vision of leadership and how the customer measures that success.  These objectives are viewed as key performance indicators from the perspective of the customer. These objectives could be increased efforts for after hour support or availability of web-based applications.  These types of focus areas would drive the objectives, metrics and actions of the organization to meet the criteria outlined by the customer’s perspective.  This external view of the organization can shed light onto areas that may be neglected based on the mere fact that those creating the metrics and defining key targets do not have the external focus necessary to drive those types of changes.  Also without metrics based on these external focuses the business is not as likely to allocated resources to those types of projects considering they do not have the support or focus needed to be successful.  Without a measurement it is hard to determine progress or definitive results and benefits from a project (Prencipe, Davies, and Hobday).

After looking externally to drive results, the next area is internally focused based on processes, procedures and core capabilities.  The internal focus looks at the business functions that provide value to the organization, product or service that are seen as critical to satisfy the shareholders, customers, leadership and other entities that are reliant or collaborative with the business processes.  In order to satisfy those requirements, what business processes and functions are needed to run at the optimal performance level?  This question will drive the goals and objectives as well as the level of the target assigned to that objective.  Another area of focus for the balanced scorecard is neglected most of all in terms of a pure financial analysis of the company.  This area is the growth of the organization.  This growth is more than real estate, capital, work force or markets but it focuses on talent, agility, change management, functional expertise, adaptability and learning.  These areas are measured by their ability to improve the organization and change to meet the vision of the organization.

With all four areas the objectives there is a focus on building the objectives, measurements, target metrics and the projects.  Each perspective of the balanced scorecard will result in the definition of key requirements of the perspective.  These areas start with the objectives of the perspective.  These objectives are the outlined end states that are required from each perspective.  The end state is the deliverable or result of the business.  Within the objectives there are examples for each perspective.  The customer perspective could entail the view that each customer should have access to their accounts regardless of the core business hours.  This objective is from the customer’s perspective but does not have a definitive measurement around it.  The objectives tie into the measureable statistic of that objective.  For this example the measurement could become the amount of time the system is available each day.  This is the measurable aspect of the objective.  The metric is simple, measureable, attainable, relevant and simple.  These criteria should be present in all the measurable metric criteria on the balanced scorecard.  With the objective identified and the key performance measure outlined there must be a line or target established so that the person or group reviewing the balanced scorecard know how they are performing against the outlined indicators.  This target is established and provides that much needed sanity check for the team.  This target drives actions.  The actions required by the business lead to projects or other initiatives of the organization so that they can make the necessary adjustments to meet the objectives, measures and targets of the organization.

Alignment and Benefits

The vision and strategy is in the epicenter of this balanced scorecard.  Since the business has an overall view of the internal processes, external customer centric view, financial health and metrics of the organization and the growth metrics assigned there is an overall view of the business and its performance.  The crucial portion of all those metrics is how they measure the health of the organization, the progress toward the business’ vision and the success of maintaining those efforts to ensure a sustainable operating model.  The vision of the business and the results of the business’s financial and operational actions are linked together through the actions taken based on the balanced scorecard.  This strategic mapping of tactical actions to the vision of the organization is facilitate by the insight and guidance offered by the balanced scorecard.

As the objectives lead to metrics and the metrics establish targets which ultimately lead to the initiatives and projects of the organization there is a logical and deliberate map from the smallest enhancement project to the overall vision of the organization.  This linkage is one of the major benefits of the balanced scorecard and its application to business.  The actions on the lowest level of the organization have a direct correlation to the successful implementation and intent of the leadership of the organization.  Not only is the purpose and intent of those actions attached to the vision the actions are also measured and reported upon with the visibility required to garner the support and input by the key leadership positions.

The benefits of the using the balanced scorecard are just as varied as the inputs of the perspectives.  The overall objective and benefit of the balanced scorecard includes the ability to monitor, track and align the actions of the organization with definitive deliverables align to the vision of the organization.  Strategically aligning these actions allows the limited resources of time, funding and people to be adequately and effectively allocated to the project and programs that benefit the organization in the most impactful manner.  This alignment of key performance indicators aligns all levels of the organization and instills a sense of purpose knowing that the operation of a specific functional area of the organization is executing has purpose and direction.  The alignment of the vision to the operationalize functions also creates an opportunity for increased communication and collaboration between units since their scorecard metrics are also aligned with the vision of the organization.  This increased opportunity lends itself to increased creativity and innovation to solve real world issues and still understand what the end state must be and what key performance indicators are measuring success (Highsmith, J. A., & Highsmith, J.).  This clear picture of what success is and what areas require focus can facilitate the problem solving aspect of business and allow the ingenuity and innovation of the organization to solve those problems.

The balanced scorecard, if executed correctly, can create value within itself that could potentially create a competitive advantage.  This advantage comes from the inherent ability to create the translation between the vision of the leadership to the concrete and achievable actions throughout the organization.  The balanced scorecard also creates the opportunity to improve business processes, make informed decisions on business tactics and reduce the amount of noise in the data analysis and alignment process.  This is accomplished by analyzing already established business metrics that are continually reported upon and the variations from one reporting cycle to the next can be traced by to specific actions that occurred through the projects outlined in the scorecard.  Clarity and visibility into the key functions of the operations that are driving the key performance indicators allows a greater command and control upon the inputs of the operation and the manipulation of the expected results.  Understanding the needs of the company and how they align to the organizational vision can create that much needed clarity advantage throughout the organization (Kaplan, R. and Norton, D).

While the benefits of the balanced scorecard include the visibility into four different areas of the business including finance, internal business processes, customer or external focus and growth as well as the alignment to the vision of the organization there are still some potential disadvantages to the scorecard.  To execute the balanced scorecard there is a tremendous amount of preparation and planning to effectively and efficiently implement the use of the balanced scorecard.  The vision of the organization must be firm and established and the objectives of the organization must be clear and understood by those developing the balanced scorecard.  The balanced scorecard is also not the only tool needed to run the business.  While the tool is very useful it is not an all-encompassing metric and analysis tool to base all business decisions upon.

Case Study

Through the understanding of what the balanced scorecard stands for and looking to implement the tool into the organizational culture, the case study hits on some of the key fundamentals of the advantages and disadvantages of the balanced scorecard theory.  The advantages are sought out by the company to create that strategic alignment and visibility needed to be successful but the forethought and effort for the development of those metrics; deliverables and targets were not fully vetted and aligned with the vision of the company.  The Young, Martinez and Cheung (YMC) firm developed a set of strategic objectives which are aligned with the position of the firm and their core values.  The first step is complete but there still needs to have a measureable assigned to each strategic goal.  With each objective listed below there is a corresponding measure for that objective.

Financial

  1. Steadily increase the firm’s revenues and profits

Measure: 

  1. Determine the operating profit of the organization
  2. Determine the Revenue generated by services by function
  3. Determine Earnings before interest and tax            

Customer

  1. Understand the firm’s customers and their needs.

Measure:

  1. Count the number of customer complaints
  2. Count the types of services used by the customer
  3. Quantify the services provided by function
  4. Value customer service over self-interest.

Measure:

  1. Calculate work level for core operations
  2. Calculate Pro-Bono effort

Internal Business Process

  1. Encourage knowledge sharing among the legal staff

Measure:

  1. Track knowledge management inputs
  2. Track knowledge management views
  3. Calculate knowledge transfer/exchange session held
  4. Communicate with each other openly, honestly, and often

Measure:

  1. Count the number of brown bag lunch sessions
  2. Determine number of round table discussions held
  3. Count the number of closed door offices
  4. Empower staff to make decisions that benefit clients

Measure:

  1. Review quantity of decision review boards
  2. Quantify types of decisions being reviewed up the chain of command
  3. Measure the dollar amount associated with each decision type

Organizational Learning

  1. Maintain an open and collaborative environment that attracts and retains the best legal staff.

Measure:

  1. Count employee turnover
  2. Calculate case winning percentage
  3. Calculate settlement winning percentage
  4. Quantify attendance and sick leave
  5. Seek staff diversity

Measure:

  1. Calculate education
  2. Calculate experience in core business functions

While these measures are not all encompassing of the metrics required they are specific to each one of the objectives and are aligned with the vision of the company.  From those metrics a target will be established and from that target the company would know how to allocate their resources to fund and support the initiatives needed to meet those targets.

            The law firm can use the balanced scorecard to evaluate staff and make key business decisions regarding their performance and what the expectation are regarding their level of effort in different areas of the business.  With each different perspective there are measureable areas that can help guide the staff and provide a visual cue into what success looks like.  The balanced scorecard is utilized as more than a dashboard to key metrics.  The balanced scorecard allows the staff to determine the actions, efforts and level of performance required to meet the targets set forth by the organization.  These targets would provide the baseline measurement on the performance of the staff.  While the balanced scorecard can encapsulate what is required by the staff it must also be understood that many intangible assets of an employee must also be taken into consideration by the evaluating team.

Performance Based Incentives

When reviewing staff based upon the balanced scorecard there is a by-product of that analysis.  There is an inherent prioritization or rack-and-stack of staff on how well they execute the tasks outlined in the metrics of the balanced scorecard.  The question then becomes how to reward the high performers and how to raise the performance of those on the opposite end of the spectrum.  The balanced scorecard is an effective way to tie performance indicators from multiple different perspectives to the performance results of the staff.  This correlation provides a framework for tying compensation to the balanced scorecard results.  With the metrics that are individually based and focused this is possible but there are also other metrics that must be met as a group or functional area of the organization that cannot be tied back to a specific individual.  This could be a great way to promote incentive pay to user change in the organization but there is a fine line between driving results and pay for performance.  These types of decisions will also need to incorporate the culture of the organization and the type of environment the organization is trying to build.  The metrics will drive the actions of the organization and that can have a positive or negative impact depending on the end state deliverable.

Application

As previously discussed the application of the balanced scorecard is focused on the strategic alignment with the vision of the organization and the actions of the staff to achieve that vision.  The arduous part of utilizing the balanced scorecard is the preparation and implementation of the management tool.  There are key areas that must be taken into consideration for the implementation of the tool.  The first is the buy-in from leadership of the organization. The balanced scorecard is a top down implementation that requires the foundation to be laid and supported by leadership.  The success of the balanced scorecard hinges upon the correlation between the actions derived from the projects and the vision of the organization. To employ the balanced scorecard there must be an understanding of what results the organization wants to achieve from the implementation of the scorecard.  The objectives, metrics, targets and projects that result from the implementation of the scorecard are the real drivers of the change and the scorecard is the vessel into the visibility of that change.  The effort to commercialize the idea throughout the organization will also provide the opportunity to garner feedback and critical information on what to measure, how to measure it and what the intended results are.

            The balanced scorecard is a tool that will allow the strategic mapping of the vision developed by leadership to the key performance indicators that visually depict what success looks like for the organization.  The alignment of key functional actions throughout the organization will provide a synergistic approach to achieving success.  The balanced scorecard is the management tool that can provide that guidance and feedback needed to allocate resources to achieve the outcomes outlined by leadership in the vision.

Works Citied

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Highsmith, J. A., & Highsmith, J. Agile project management, creating innovative products. Addison-Wesley Professional. Print.

Kanaracus, C. Survey finds erp software project overruns ‘distressingly common’. 22 June. 2013. Web. http://www.cio.com/article/710777/Survey_Finds_ERP_Software_Project_Overruns_39_distressingly_Common_39_?taxonomyId=3009

Leach, L. P. “Critical chain project management”. Norwood, MA: Artech House, INC. 2005. Print.

Magal, S. R., and Word, J. (2011). Integrated business processes with erp systems. RRD/Jefferson City: Wiley. 2011. Print.

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Monk, E., and Wagner, B. Concepts in enterprise resource planning. (3 ed.). Boston, MA: Course Technology Cengage Learning. 2009. Print.

Prencipe, A., A. Davies, and M. Hobday. The business of systems integration. Oxford University Press, USA, 2007. Print.

Project Management Institute. “A Guide to the Project Management Body of Knowledge (PMBOK Guide) Fourth Edition.” Project Management Institute. Newtown Square, PA. (2008). Print.

Kaplan, R. and Norton, D. “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January-February 1996): 76. Print.

Wheelen, T. L., and Hunger, D. Strategic management and business policy, achieving sustainability. (12th ed.). Upper Saddle River, NJ: Pearson College Div. 2010. Print.