According to Bell (2013), a balanced scorecard is a methodology used by companies, corporations, governments and nongovernmental organizations to measure performance rate. In the ancient period before Dr. Robert and David proposed the balanced scorecard, companies used to measure their performance solely on the financial perspective of profit and loss matrices. The primary measure of the company performance was mostly financial aspect as a method of analysis and evaluation. In the financial perspective, companies established items of measurements like the profits, earnings per share (EPS), share price, returns on investments (ROI), and returns on equity (ROE) among other measures. The financial measurement was the primary method used to examine the company and the employees’ performance. For example, if a company had a good profit margin in the previous financial year or past quarter, the manager would be congratulated for a job well done. Conversely, if the sales go down and losses registered, the manager takes all the blames and responsibilities for loss of profits. So that in the traditional measurements of performance, bonus systems are used to give the manager and the employees rewards. Those who owned stoke shares were happier at a higher share price hence incentives and bonuses given to managers; making the financial aspect to be a major methodology to measure an organization`s performance.
- Excellent quality
- 100% Turnitin-safe
- Affordable prices
However, the financial aspect had various limitations, hence the balanced scorecard sort to solve such problems. The financial element had limitations as it lacked the long-term vision. For example, a company would work to get profits which would be shown quarterly thus incentives were given to managers and employees to meet the targets. This lacked the larger picture of the vision, mission, and objectives of the company or the prospects. Additionally, the financial aspect of measuring performance was defective as it gave a lot of weight to the top management organs of the firm (Bell, 2013).
Balanced Scorecard Institute (BSI, 2017), postulates that the balanced scorecard solves the conundrum by measuring learning and the growth perspectives, internal processes, customer and financial perspectives of the business. It measures both the qualitative and quantitative aspects of the company`s performance. To establish scorecard to a firm; clear vision, mission, and values of the organization must be established. These will, in turn, dictate the objectives, strategies, and goals. A company must, therefore, have a strategy map which would be simple to understand, and a tactical action plan that breaks down the firm`s objectives to initiatives or projects. The balanced scorecard, therefore, takes the bigger picture of the organization and subdivides the workflow to daily occurrences in the firm that results to the desired result of the company. The primary areas of concern for the balanced scorecard are four critical aspects such as, financial, customer, internal and knowledge growth perspectives.
The financial aspect considers the quantitative field that deals with financial objectives and various measures. For example, it answers the questions of how to look to the investors and shareholders examining market share, revenue growth, financial productivity, returns on the employed capital, and the returns on investments. Cooper, Ezzamel, and Qu, (2017), advances that the financial perspective helps to put the company into a real economic perspective of market trends which is the profit generation. Every investor wants to put their money in an organization that will give them back their money with profits; shareholders would want more from the shares they buy or sell. As such, the measure advanced by balanced scorecard is instrumental in analyzing the needed earnings of the company, the gaps to fill, future expansion processes and the general quantitative aspects of the money and the general running of the firm.
Maher Akwan (2014), asserts that the customer perspectives, focuses on the satisfaction of the clients. It sets to answer to the company how the customers view the firm regarding new products, new markets, and customer services, retention of the customers, their loyalty and ultimate satisfaction. The balanced scorecard is very significant in measuring the performance of a company regarding the customer. This is a qualitative measure that must be incorporated to know the ideal performance of the company. The group is formed to meet the consumer demand. In achieving these requirements, there are various trends like the customer care, communications with the clients, interaction processes like the websites where questions and answers can be posted and the general culture of the workplace employees. These factors contribute a lot in influencing the attitude of the customer to the organization, the perception, and expectations of the clients. These activities help to get customer loyalty and preference for the firm`s products. In return, the company can make profits and more customer retention. It is therefore recommended that businesses adopt more attractive customer services to make the customers comfortable. For example, accompany dealing with the online sales was making little purchases yet it had unique and best quality furniture products. The problems were that the customers had a problem to trust the source, on how to make the payments and the delivery time since the prancing was also good. When the sales manager was fired, and a new one brought in, she developed integrated customer services that were very interactive with the clients. He offered the question and answer platforms where the customers could call, email, and seek clarifications on matters concerning the products. That month, the total number of people who visited and interacted with the site was registered to be an increase of more than 50%.
Consequently, the internal processes contribute in various instances on the long-term goal of the company. It seeks to monitor or direct the quality process, and cycle time which can be used to gauge how the business is running. The internal methods include innovation processes, customer service, social and regulatory processes, and the operational management processes (Bell, 2013). The internal processes as depicted by the balanced scorecard is meant the avenues and responsibilities that are being undertaken to ensure customer satisfaction. The customer satisfaction is key to realizing the financial perspective of the organization. The innovativeness of the company and day-to-day activities must be simple and easy to do to minimize wastages in resources, time or human capital.
Maher Akwan (2014) asserts that the knowledge and growth level of the employees is another imperative aspect in the balanced scorecard to determine the performance of an organization. In particular, it is responsible for the qualifications of the employees, the skills they need to do the jobs, the requirements and the daily pieces of training on the technology and changing workplace trends. It considers factors such as human, information and organizational capital. The employee training is a vital leading indicator as it shows the performance of the company based on the work progress of the employees. For instance, if the employees are well trained and understand their jobs very well, they improve the internal efficiencies and effectiveness hence contributing to the long-term goals of customer satisfaction and more profits. The human resource aspect of the firm is critical as it determines as a lead indicator of the company`s performance the outcome of the processes and the desired objectives of the business. Qualified workforce, competent and motivated employees help in the realization of the vision of the company. As such, the management must be able to measure the efficiency of the employees and their work relationships. Responsibilities given to them must be achieved and goals attainable. Motivation concerning incentives is proper, but failure to meet the set objectives causing the company lots of money must also be punished by suspension, or even dismissal or further training.
It is essential to understand the entire concept of the balanced scorecard in that when the employees are well trained, they lead to better internal processes, with would then lead to customer satisfaction hence the financial perspective achieved. An example is the bank loaning processes. The loaning company might see frustrated customers due to lengthy processes that are involved. Assume the bank is experiencing a situation where the clients are not happy about how loans are being processed hence the need to perform better as a bank. The bank will undertake the first aspect of the balanced scorecard where they train their employees to be more efficient and process the loans more quickly. The bank can then measure the internal processes by how fast the loans can be processed hence assuring that the internal methods are suitable. The time reduced to prepare the loans will lead to customer satisfaction and the subsequent retention. A satisfied customer will lead to improved financial perspectives for the bank in return. The balanced scorecard, therefore, encourages the companies to measure performances in the business at different stages to ensure maximum outcomes. Explicitly, it advocates for responsibilities to individuals to ensure that actions are taken to meet the goals at specific levels.
Currently, various debates surrounds the concept of balanced scorecard as it is a strategic planning and a management system that most companies use to achieve multiple objectives. The companies use it to communicate their achievements, to prioritize their projects, products, and services. They also use it to align the daily activities of the company with the long-term goals. It is a strategy used in organizations, NGOs, business, and industries. The Gartner group suggests that about 50% of the large companies in the US market are implementing balanced scorecard (BSC). A global research which was listed by Brain & Co. listed BSC as 5th in their top ten list of the most widely used system of management across the world.
The balanced scorecard is used beyond the financials and is very imperative in many ways. It helps organizations to have excellent customer relations to assist in the retention of the customers and loyalty (Maher, 2014). It’s useful as it also gages customer satisfaction concerning price, quality, availability of products and services. Learning and growth can also be assessed through the examination of training and knowledge resources. Is show the company how information is captured, and how employees can utilize the data to affect competitive advantage. It also helps beyond the financials to examine the processes leading to the production of goods and services to quality standards; hence the operational management can track possible shortages, bottlenecks, wastes, gaps and or delays. Therefore, there is a need for these non-financial indicators as they determine the success of the attainments of the mission, vision, and objectives of the company. For instance, the firm will be able to see the wastages and then the possible means of cutting the costs. Secondly, all the processes that do not yield needed results can be acted upon and responsibilities awarded to individuals. The non-financial indicators are very critical in determining the ultimate financial indicators. For example, a company dealing with the production of energy friendly products can only get good financial results if all the processes related to the manufacture of the products are environmentally friendly, sustainable and leads to an affordable product hence enticing many customers.
There are many arguments which have been advanced regarding the qualitative measurements. Some of the arguments against the qualitative measures are that the company is more interested in the financial profits first and foremost. The qualitative aspects give long-term goals, visions, and mission which can still be used alongside financial benefits. Additionally, it has been argued that the qualitative measurements are costly to implement regarding time consumption and human resource. The qualitative perspectives of analyses are demonstrated to be more focused on systems and processes as opposed to the products itself and the financial decision making processes. However, these arguments have been dismissed by the proponents of the balanced scorecard methodology who propose that financial measurements can only be done following the successful implementation of the qualitative aspects. For instance, they advance that knowledge and skilled workers, and in adequately functioning internal processes give the customer quality satisfaction hence the financial element is attained from the customers.
The link between BSC and the objectives of the company is an essential aspect as organizations use balanced scorecard for implementing the strategy to see where the value is added. Agencies also use the BSC for developing strategic initiatives and objectives hence BSC will help deliver quality products to satisfy the needs of the customers (Hoque, 2014). The satisfied customer will love the brands of the organization thus loyalty and increased purchases. This will also intern leads to high profitability for the company. However, the strategies used by the company should be incorporated by the balanced scorecard to ensure creativity and innovation from the employees are often evaluated. The employee skill is vital as they determine the internal processes that lead to quality of a product, time savings and cost analysis, and also influences the consumer. These employees can be motivated by incentives to meet targets, and rewards after the work. However, should they not perfume well then demotion, firing and suspension should not hesitate from the management.
In conclusion, an evaluation in the use of the balanced scorecard has indicated that majority of the large companies across the United States, Europe Africa implements the BSC system in management as a strategy. The BSC has been used to analyze operation within an organization and make recommendations to improve efficiency, effectiveness, quality, reduce wastages, and losses. Financial data like sales, income, and expenditure are used in understanding financial perspectives. The financial matrices include financial ratios, income targets, dollar amounts, and budget variations. The balanced scorecard is thus termed as a management tool as opposed to an analytical tool. The benefits of the balanced scorecard are numerous as it helps the organization in the management and planning of day-to-day activities to meet the long-term vision of the firm. Secondly, the BSC is vital as it focuses more on the results, improves communications and performance. The scorecard postulates concentrate on four critical issues, the learning, and growth to ensure employees are competent and able to deliver desired results, processes that provide the customer can be satisfied, the customer who in turn helps to establish brand and loyalty. It is, therefore, necessary to state that the balanced scorecard is an essential aspect of a business management accounting system that is used with a majority of companies to realize their visions and objectives.
- Balanced Scorecard Institute (2017). Balanced Scorecard Basics.
- Cooper, D.J., Ezzamel, M., and Qu, S.Q., 2017. Popularizing a management accounting idea: The case of the balanced scorecard. Contemporary Accounting Research.
- Hoque, Z., 2014. 20 years of studies on the balanced scorecard: Trends, accomplishments, gaps, and opportunities for future research. The British accounting review, 46(1), pp.33-59.
- Investopedia (2017). Balanced Scorecard.
- Keyes, J., 2016. Implementing the IT balanced scorecard: Aligning IT with corporate strategy. CRC Press.
- Lawrie, G., Kalff, D. and Andersen, H., 2015. Balanced scorecard and results-based management: Convergent performance management systems.
- Maher Akwan (2014). Introduction to Balanced Scorecard and Measurement tools. YouTube
- Paul R. Niven (2006). Balanced Scorecard Step-By-Step: Maximizing Performance and Maintaining Results 2e. John Wiley & Sons, Inc.
- Ted Jackson (2016). “What Is A Balanced Scorecard? (A Definition).” ClearPoint Strategy Tony Bell (2013). Balanced Scorecard – Introduction. YouTube.
- Ward, K., 2012. Strategic management accounting. Routledge.
- Zahirul Hoque (2006). Strategic Management Accounting: Concepts, Processes and Issues. Person Education Australia