AFM 31130AFM 31130

The Balanced ScorecardThe Balanced Scorecard

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Isuru ManawaduIsuru ManawaduB.Sc in Accounting Sp. (USJP), ACAB.Sc in Accounting Sp. (USJP), ACA

Content

Understand the importance of modern Management Accounting Practices

Introduction to the Balanced Scorecard with historyWhat is it? Why do it?

Balanced Scorecard FundamentalsThe Four Perspectives Measures, Targets and Initiatives

Benefits and limitations of BSC

The Balanced ScorecardWhat is it?

Definition:

The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.

BSC - History

• Bob Kaplan published articles on this area in 1992

• “The Balance Scorecard” book published in 1996

• Adopted by many companies in the 90’s• More popular in Europe• Popular with Government organizations• Widely used in Education

The Balanced ScorecardWhat is it?• Balances financial and non-financial measures• Balances short and long-term measures• Balances performance drivers (leading

indicators) with outcome measures (lagging indicators)

• Should contain just enough data to give a complete picture of organizational performance… and no more!

• Leads to strategic focus and organizational alignment.

The Balanced Scorecard Why do it?

• To achieve strategic objectives. • To provide quality with fewer resources.• To eliminate non-value added efforts.• To align customer priorities and expectations with the customer.• To track progress.• To evaluate process changes.• To continually improve.• To increase accountability.

Mission – What we do

Vision – What we aspire to be

Strategies – How we accomplish our goals

Measures – Indicators of our progress

The Strategy Focused Organization

The Five PrinciplesThe Five Principles

Translate the strategy to operational terms.

Align the organization to the strategy

Make strategy everyone’s job.

Make strategy a continual process.

Mobilize change through executive leadership

Source: The Strategy Focused Organization, Norton & Kaplan

The Strategy Focused Organization

1. Translate the strategy into operational terms Strategy maps Balanced Scorecards 2. Align the organization to the strategy Corporate Role Business Unit Synergies Shared Service Synergies 3.Make strategy everyone’s everyday job Strategic Awareness Personal Scorecards Balanced Paychecks

The Strategy Focused OrganizationCont….

4.make strategy a continual process Link Budgets and Strategies Analytics and Information Systems Strategic Learning

5.mobilize change through executive leadership Mobilization Governance Process Strategic Management System

The Strategy Focused OrganizationCont….

The Balanced Scorecard and The Big Picture

•Activity Based Costing•Economic Value Added•Forecasting•Benchmarking•Market Research•Best Practices•Statistical Process Control•Reengineering•ISO 9000•Total Quality Management•Learning Organization•Self-Directed Work Teams•Change Management

MissionandVision

BalancedScorecard

StrategicPlanning

THE BALANCED SCORECARDTHE BALANCED SCORECARD

Financial / Regulatory Perspective

Revenue growth

ROE

Cost / Unit

Possible Performance MeasuresPossible Performance Measures

Possible objectives GrowthProfitabilityCost leadership

Customer Perspective

Possible objectives Market shareCustomer acquisitionCustomer satisfactionCustomer retentionCustomer profitability

Sale revenue

Unit sales

No of new customers referred by existing

customers

Customer Satisfaction (Average)

Satisfaction Gap Analysis (Satisfaction vs.

Level of Importance)

Satisfaction Distribution (% of each area scored)

Possible Performance Measures

Internal Business Perspective

Kaplan and Norton identify three principal internal processors;

Innovation processOperational processPost sales service process

Innovation processPossible Measures% of sales from new productsNew product introduction Vs competitorsTime to develop next generation

of the products

Operational processPossible MeasuresReducing process timeIncreasing process efficiencyIncreasing process qualityReducing process costCycle time measuresManufacturing cycle efficiency

Manufacturing Cycle Efficiency(MCE)

MCE = Processing Time

Processing time + Inspection time+ Wait time + Move time

Post sales services processes

Response time to complains

Learning and GrowthKaplan and Norton identify three principal categories;

Employee capabilitiesInformation system capabilitiesMotivation, Empowerment and alignment

Possible Performance MeasuresPossible Performance MeasuresEmployee capabilities - Employee satisfaction

- Employee retention- Employee retention- Employee productivity- Employee productivity

Information system capabilities- % of processes with real time quality- % of customer facing employee having on line information about customers

Targets

• Targets need to be set for all measures

• Should have a “solid basis”

Initiatives

Once measures and targets are established it is the responsibility of management to determine HOW the organization will achieve its goals.

Measures are used to determine the effectiveness of strategic initiatives.

Benefits of using BSC

Better strategic planningImproved strategy communication and

executionBetter management informationImproved performance reportingBetter strategic alignmentBetter organizational alignment

Limitations of the BSC

The omissions of importance factorsThe scores are not based on any proven economic or financial theoryNo empirical studies