CIMA P2 Syllabus C. Managing Performance Of Organisational Units - Balanced Scorecard - Notes ^{3 / 4}

The Balanced Scorecard

The Balanced Scorecard was popularised by Robert Kaplan and David Norton in 1992. 

The rationale for the development of the Balanced Scorecard was a growing dissatisfaction with traditional, financial measures of performance.  

The balanced scorecard approach emphasises the need to provide management with a set of information which covers all relevant areas of performance in an objective and unbiased fashion.

The scorecard designed by Kaplan and Norton contains four key groupings of performance measures. 

These four groupings, called ‘perspectives’ by Kaplan and Norton, were considered sufficient to track the key drivers of both current and future financial performance of the firm. 

The perspectives focused on the achievements of the firm in four areas:

1. The financial perspective 

   - concentrates on how the firm appears to its shareholders and considers what the firm’s financial objectives are. 

   The measures used to assess whether these objectives are being achieved typically include, profit, sales, ROI, cash flow or economic value added (EVA).

2. The customer perspective 

   - focuses on the question, what must the firm do to satisfy its customers so as to achieve its financial objectives? 

   Outcome measures for the customer perspective generally include measures of customer satisfaction, market share, customer retention and customer profitability. 

   These outcome measures can be sub-divided into driver measures, such as measures relating to lead times, on-time delivery, product quality and product cost.

3. The internal business perspective 

   - considers the question, what must the firm do well internally in order to support the product/market strategy and to achieve its financial objectives? 

   Typical outcome measures include those relating to innovation (product and process) and operations (cycle times, defect rates).

4. In the learning and growth perspective

   - the measures focus on the question what infrastructure must the firm build to create long-term growth and improvement? 

   In other words, what capabilities must be improved or acquired to achieve the long-term targets for the customer and internal business process perspectives? 

   Outcome measures may include metrics on employee satisfaction, training and retention.

The following is an example of a balanced scorecard

Advantages

The balanced scorecard approach to performance measurement offers several advantages:

1. it measures performance in a variety of ways, rather than relying on one figure

2. managers are unlikely to be able to distort the performance measure - bad performance is difficult to hide if multiple performance measures are used

3. it takes a long-term perspective of business performance

4. success in the four key areas should lead to the long-term success of the organisation

5. it is flexible - what is measured can be changed over time to reflect changing priorities

6. 'what gets measured gets done' - if managers know they are being appraised on various aspects of performance they will pay attention to these areas, rather than simply paying 'lip service' to them.

The main difficulty with the balanced scorecard approach is setting standards for each of the KPIs. This can prove difficult where the organisation has no previous experience of performance measurement. Benchmarking with other organisations is a possible solution to this problem .

The Building Block Model

Fitzgerald & Moon (1996) consider performance measurement in service businesses. 

Their work attempts to overcome the problems associated with performance measurement of service businesses. 

The following characteristics of service distinguish them from goods:

• Inseparability/Simultaneity (production and consumption of the service coinciding)

  Services often cannot be separated off the provider, for example having dental treatment.

• Perishability (the inability to store the service)

  The services of a doctor exist only for periods of time.

  If they are not consumed, they 'perish'. They cannot be used later.

• Heterogeneity (lack of consistency)

  Variability of quality occurs because of the large number of variables involved.

  The quality of the service may depend on who it is that delivers the service. (e.g. hairdresser)

• Intangibility (of what is provided to and valued by individual customers)

  Intangibility refers to the lasck of substance which is involved with service delivery.

  Unlike goods, there is no physical aspects to a service - no taste, feel, visible presence.

• Ownership

  Services do not result in the transfer of property.

  The purchase of a service only gives the custome access to or the right to use a facility, not ownership.

Dimensions

Dimensions an be divided into two sets: -

• The results, measured by financial performance (profitability, capital structure) and competitiveness (sales growth, market share)

• The determinants (what determines competitive and financial performance): - 
  1. Quality of service
  2. Flexibility
  3. Resource utilization
  4. Innovation

1. Standards

These are ownership, achievability and equity.

1. Employees need to participate in the budget and standard-setting processes. They are then more likely to accept the standards.

2. Standards need to be set high enough to ensure that there is some sense of achievement in attaining them, but not so high that there is a demotivating effect because they are unachievable.

3. Equity is seen to occur when applying standards for performance measurement purposes.

2. Rewards

If the performance measurement system is to operate successfully; clarity, motivation and controllability are required.

1. Objectives need to be clearly understood by those whose performance is being appraised.

2. Individuals should be motivated to work in pursuit of the organisation's strategic objectives.

3. Managers should be accountable for their areas of responsibility. For example they should not be held responsible for costs over which they have no control.

How to answer Performance Measurement questions

• Present calculations in a referenced list.

• Don’t consider any one piece of information or number in isolation.

• Use headings wherever possible and avoid writing ‘a sea of words’.

• When you are writing a statement, e.g. ‘sales have increased by 1.3%’ always ask yourself the question ‘why do I care?’. This will help you make a meaningful point and take a thought through to its logical conclusion.

• Read all the requirements and make sure that you don’t start talking about, e.g. requirement (b) in requirement (a), as you will then find that you have nothing to say when you get to requirement (b).

• Use the marks available as a guide as to how much to write. There are no set marking rules such as ‘one mark per valid point’. Marks vary from question to question.