The Balanced Scorecard

The Balanced Scorecard has emerged during the last 25 years. It integrates strategic planning,
incents management, and is useful in performance measurement.

The following is from the Balanced Scorecard Institute

[Link]

Balanced Scorecard Basics

The balanced scorecard is a strategic planning and management system that is used extensively
in business and industry, government, and nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals. as a
performance measurement framework that added strategic non-financial performance measures
to traditional financial metrics to give managers and executives a more 'balanced' view of
organizational performance.

The Balanced Scorecard uses measures on four different perspectives:

Learning and growth perspective
Customer perspective
The internal business process perspective
The financial perspective

The goal is for the organization to determine the outcomes for each perspective that it wants to
measure. Financial measures are usually considered lagging measures of performance, but
measures related to learning and growth, customers, and business process usually are leading
measures of performance.

A key underlying premise: Lead indicators of performance are used to
communicate with, motivate, and evaluate individuals such that the
employees' current actions will result in improvement of the company's
significant lag measures.

Lead indicators are measures that guide management actions today, actions
that will have positive, future effects on the organization.

Lag indicators measure the outcome of earlier management actions.

Revenue growth, improved cash flow, and increased profitability from the
preceding illustration are examples.

A major goal of the balanced scorecard is to broaden employees

perspective so they look at the diverse requirements needed to
produce a competitive business rather than only a very limited set of
success factors.

Companies that are successful in the use of balanced scorecards

have scorecards that are linked to the organization's strategy.
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Chapter 12 Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard 515

by a company are shared with the workers who helped accomplish the improvements. For
example, suppose an Internet retailer reduced its returns due to late shipment by 2 percent
for a savings of $100,000. A gain-sharing formula might call for 25 percent of the savings
to be shared with the employees in the distribution center.

The Balanced Scorecard

Managers of the most successful organizations do not rely on either financial or nonfinan-
Learning Objective 12-7
cial performance measures alone. They recognize that financial performance measures
summarize the results of past actions. These measures are important to a firms owners, Describe the balanced score-
creditors, employees, and so forth. Thus, they must be watched carefully by management card concept and explain the
as well. Nonfinancial performance measures concentrate on current activities, which will reasoning behind it.
be the drivers of future financial performance. Thus, effective management requires a bal-
anced perspective on performance measurement, a viewpoint that some call the balanced
scorecard perspective.
To illustrate the balanced scorecard, we will explore its use by Forest Home
National Bank (FHNB), located in Boise, Idaho. The banks balanced scorecard, which
is depicted in Exhibit129, integrates performance measures in four key areas: financial,

How do we Exhibit 129

Financial Perspective
look to the Balanced Scorecard: Forest
rms owners? Goals Measures Home National Bank

Financial growth Profit growth %

Revenue growth %
Return on assets

How do our In which

customers activities must
see us? we excel?

Customer Perspective Internal Business Process Perspective

Goals Measures Goals Measures

Satisfying the customer Customer satisfaction Transaction % of automated transactions

survey efficiency Response time for online
% customer retention transactions
% profitable customers % of manual transaction errors
Customer complaints per Cost per customer transaction
month Loan processing Average loan-processing time
Market penetration Market share in coverage efficiency Loan approve/reject ratio
area

How can we Learning and Growth Perspective

continually
improve and Goals Measures
create value?
Motivated and % participation in voluntary
prepared continuing-education programs
employees Number of employees in required
training programs
Employee suggestions per month
Employee suggestions adopted
Innovative banking New services introduced by
services FHNB
Customer suggestions adopted

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Chapter 12 Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard 519

Exhibit 1210
Selected Performance
Financial Perspective Measures Used in Balanced
Earnings Cash flow Scorecards
Earnings per share Cash flow from operations
Customer Perspective
Customer contacts Customer satisfaction (surveyed)
Repeat customers Customer complaints
New customers Market share
Internal Business Process Perspective
Product quality/defect rates Finished products per day per employee
Number of vendors Floor space per finished product
Cycle time Cost of inventories held
Throughput Number of common parts
Machine downtime Number of part numbers
Learning and Growth Perspective
Employee training hours New processes
Employee promotion rate Employee suggestions
New products or services Employee retention

the many service-industry firms that have developed a balanced scorecard are Bank of
America, CIGNA, Citigroup, Duke Childrens Hospital, Fannie Mae, JPMorgan Chase,
Northwestern Mutual, and UPS. Retailers too have made use of the balanced scorecard.
Among them are Ann Taylor, IKEA, and Tesco.
Among the well-known manufacturers making use of the balanced score card con-
cept are Anheuser-Busch, Apple, Caterpillar, Chrysler, ExxonMobil, General Motors,
Microsoft, Motorola, Phillips Electronics, and Pfizer. Finally, governmental units also
have benefited from a balanced scorecard, among them the city of Charlotte, North Caro-
lina, the state of Washington, and the U.S. Department of Defense.

Linking the Balanced Scorecard to Organizational Strategy

A key to making successful use of the balanced scorecard is linking the scorecards
lead and lag measures to the organizations strategy. As depicted in the diagram in Defining our [balanced
Exhibit1211, the organizations vision and strategy drive the specification of both goals scorecard] measures, align-
and metrics in the scorecards financial, customer, internal business process, and learning ing our initiatives, and pro-
and growth perspectives.7 viding greater visibility into
The precise form of the linkage between strategy and the goals and measures in the our performance objectives
balanced scorecard will, of course, depend on the nature of the organization and its strat- has enabled us to make bet-
egy. However, the linkage can be visualized as a chain of cause and effect between the ter management decisions
companys scorecard elements and its strategy and goals. The chain of cause and effect for our future growth. (12h)
occurs because an important change may not directly result in the companys reaching Columbia Sportswear
its strategic goal. Instead, that change may be necessary before another type of orga-
nizational change can occur. And the second change may be the one that leads to the
strategicgoal.8

7
Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization: How Balanced Scorecard Companies
Thrive in the New Business Environment (Boston: Harvard Business School Press, 2001). See also Raef Lawson,
William Stratton, and Toby Hatch, Scorecarding Goes Global, Strategic Finance 87, no. 9 (March 2006), pp. 3541.
8
This material is based on Peter Brewer, Putting Strategy into the Balanced Scorecard, Strategic Finance 83, no.
7 (January 2002), pp. 4452. Further development is found in Wilhelm Schmeisser et al, 5: Balanced Scorecard as
an Indicator System, Controlling and Berlin Balanced Scorecard Approach (Munich: Oldenberg Verlag, 2011) pp.
6894.

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520 Chapter 12 Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard

Exhibit 1211
Linkage between the Financial
Balanced Scorecard and
Organizational Strategy

Internal
Vision and
Customer Business
Strategy
Process

Learning and
Growth

Using the balanced scorecard model, we can define the chain of cause and effect
by following the sequence of lead or lag relationships in the scorecards measures. For
example, Sears once confronted challenges to its strategic profitability goals by construct-
ing a balanced scorecard to measure the links between employee training and profits. The
path to the profitability goal flowed through a chain of cause and effect: an increase
in employee training hours (learning and growth) led to an increase in service quality
(internal business process), which led in turn to increased repeat customers (customer)
which finally led to the strategic goal of profitability (financial).9 Notice that the learn-
ing and growth measure of increased employee training did not lead directly to increased
profits: training so many employees cost a lot of money, so its direct effect was actually
to reduce profits! But through the chain of cause and effect it eventually helped the com-
pany achieve its strategic profitability goals.
The following case in point explores this linkage for [Link], Inc., which is
arguably one of the most successful companies of our time.

LINKING THE BALANCED SCORECARD TO ORGANIZATIONAL STRATEGY

M anagement One key to successfully using the balanced scorecard is linking the scorecards lead and
A ccounting lag measures to the organizations strategy. According to the [Link], Inc., website,
P ractice the companys strategy is to be Earths most customer-centric company; to build a place
where people can come to find and discover anything they might want to buy online.10
[Link] Leaving aside the issue of whether there might be a more customer-centric company
on another planet elsewhere in the universe, [Link] strategy of providing unpar-
alleled customer service via its online-only sales model drives the companys efforts in
each of the perspectives that comprise a balanced scorecard.

(continues)

9
Anthony J. Rucci, Steven P. Kirn, and Richard T. Quinn, The Employee-Customer-Profit Chain at Sears,
Harvard Business Review, JanuaryFebruary 1998, pp. 8297.
10
This example is derived from [Link] mission and strategy. For more information, refer to the Investor
Relations section of the [Link] website at [Link]

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Chapter 12 Responsibility Accounting, Operational Performance Measures, and the Balanced Scorecard 521

Improved
Amazon Learning Success
internal
.com's and for the
processes
strategy growth company,
and Higher
of success initiatives as
Drives Leading to operations Leading to customer Leading to
through such as measured
such as satisfaction
customer employee in financial
customer
service training terms
return
handling

The following selected balanced scorecard measures are among those relevant for
[Link] to successfully implement its strategy. Notice the frequency of the word
customer in these measures. [Link] strategy and its relevant balanced scorecard
measures are dominated by its customer-focused online sales business model.

Profit (in relation to assets invested)

Cash flow
Financial
Revenue growth by customer segment
Gross margin by customer segment

Average revenue per customer

Customer satisfaction survey score
Customer
Number of customer complaints received
Percent of customers subscribing to "Prime" service

Return rate due to [Link] error

Internal business Percent of orders delivered on time
process Order-to-shipment cycle time
Number of customer-focused process innovations

Training expenditures per employee

Employee turnover rate
Learning and Number of new patents that protect [Link]'s online sales
growth business model
Employee satisfaction survey score

[Link]'s vision and strategy

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