Balance ScoreCard

THE BALANCED SCORECARD
Why businesses need a balanced scorecard

1 The balanced scorecard was developed by US academics Robert Kaplan and David Norton in response to the shortcomings of traditional financial measures. • Traditional financial measures are one-dimensional. By definition, they only look at the financial aspects of a business. • Traditional financial measures are historical. They tell us nothing about what may happen to the business in the future. There are many examples of businesses that have achieved rising profits, as measured by historical financial results, at the same time as there were underlying problems. Eventually the problems have led to a downturn or even a business failure. • Conventional financial statements do not explain variances from the expected outturn. Why did things go wrong? There are not necessarily any clues in the figures themselves. To understand the problems, some other perspectives on the business are needed other than the purely financial. • Financial measures can be manipulated. There are several notorious examples of where preparers of financial statements have deliberately set out to mislead - Enron is simply a recent example. Even where there is no blatant intention to mislead, there is considerable subjective judgment involved in the preparation of financial statements. This also allows the preparers to manipulate the figures. Kaplan had already discussed some of these issues in a book, 'Relevance Lost', written with T Johnson in 1987. 'Relevance Lost' argued that traditional management accounting had failed to keep pace with changes in IT and new ideas about business. Kaplan and Norton based their ideas about the balanced scorecard largely on a study, 'Measuring Performance', sponsored by accountants KPMG. This study looked at how businesses measured performance in practice. They came across several examples of how businesses used measures other than purely financial ones. In one business, the quality manager had pushed the CEO to include quality metrics at the top of a weekly management meeting agenda as well as financial metrics, which had always been the first item on the agenda in the past. Since Kaplan and Norton published the first article about the Balanced Scorecard in the Harvard Business Review in 1992, the concept has become adopted widely throughout industry.

Developing performance objectives 2
There are several steps in preparing a Balanced Scorecard, as follows: • Define a vision for the organisation • Develop performance objectives • Develop appropriate measures • Report using the Balanced Scorecard. The first step is to define a vision for the organisation. Such visions are more than just dreams - they are based on strategic choices about what the organisation is in business to achieve. These choices are not arbitrary - they depend on the interplay between (a) stakeholder objectives, (b) the resources available to the organisation and (c) an analysis of the market in which the organisation is operating. The vision for the organisation might typically take a form such as 'We want to be known as the top recruitment agency in the South-East for filling jobs in accounting and finance'.