1、The balanced scorecardBy Mark Lee Inman01 Feb 2000The Balanced Scorecard is described as the instrumentation that managers need to navigate to success. It is seen as a new framework for integrating measures derived from strategy. It develops from selected financial measures of past performance and t
2、he organisational mission and strategy - the drivers of future performance. These drivers encompass customers, the internal business process, growth and learning and the final measurement is the progress from an explicit and rigourous translation of the organisations strategy. As would be profession
3、al accountants, possibly already holding down a degree of responsibility in an organisation, it is pertinent to ask what was wrong with previous measures of performance. After all, good financial management and control were an integral part of the success of the industries that grew out of the Indus
4、trial Revolution (Johnson and Kaplan 1987). However, critics argue that there is an over emphasis on financial performance which centres on excessive short-termism. This alleged short-term approach has led to the exclusion of anything that does not provide a quick return. Obvious examples are R cust
5、omer; internal business process; learning and growth. FinancialAs accountants, we can breathe a sigh of relief. The voluminous monthly brochure is replaced by a number of key financial measures.For some bizarre reason, prominence is given to Return on Capital Employed (ROCE). Scepticism arises from
6、the excellent review provided by Wilson and Chua (1993). While ROCE, or as they put it, ROI (Return on Investment) is generally accepted and readily understood, it must not be forgotten that: there is still a lack of consensus on the definition of both the numerator and the denominator; it is suscep
7、tible to short-term manipulation; when used on a divisional basis, there is the risk of preference being given to local divisional performance at the expense of overall group performance; the problems of measuring businesses that have either a low cost base, or a low asset base. As a result of this
8、latter drawback, ROCE/ROI can actually provide misleading information and lead to incorrect decision making. Critics of accounting and finance obsessed management decisions, such as those alleged at Wisconsin Central will point to the increased investment resulting in short-term decline in ROCE.It i
9、s also worth noting that Wilson and Chua emphasise that ROCE/ROI is only one measure. Almost in anticipation of the logic behind the Balanced Scorecard, they warn that business problems are multivariate, and cannot be reduced to univariate status. As such, they enthusiastically advocate the use of m
10、any measures which will include using non-financial information.Mercifully, ROCE is not seen as the all inclusive financial measure. Another key financial measure is cash flow. A business must generate cash. In a strategic context, the student should be familiar with the Boston Grid and the importan
11、ce of the cash cow the product that has recovered all its development costs, requires minimal advertising and marketing costs and as such generates the vital cash to enable the business and fund new rising start products. Cash flow must be regularly monitored, and the simple quick and current liquid
12、ity ratios will easily provide that. Such ratios can be usefully compared with previous year, previous month and readily projected. More to the point, projections can be made as to when cash will be generated and when it will be expended. This will be particularly important with new projects/product
13、s. When will the outgoings be replaced by income?There has to be some form of forecast. The complexity of the business and its products/services will dictate how complicated and how detailed such a forecast should be. A well run business will know its expected sales, what it hopes or wants to achiev
14、e. From that the gross margin and the net profit after all expenses can be readily worked out. However, there are two points that need consideration.First, how reliable are these forecasts? This will again depend upon the nature of the business. Where there is a long-term product cycle, such as in a
15、ny form of capital good manufacture, the order book and delivery schedule should provide an accurate profile of the sales. Knowing the product costs and fixed expenses, a reliable forecast or budget can be produced. However, where a business is reliant on a very short-term delivery cycle, such as th
16、e retail sector, then it is less easy to predict the future.Secondly, how demanding are such forecasts or budgets. Students should recall from their studies of the behavioural aspects of budgets that a delicate balance has to be achieved between a demanding budget and an impossible one. This is wher
17、e the context of the Balanced Scorecard starts to appear. A forecast must have the input of the non-financial departments and the commitment of those departments. The agreed forecast inherently commits the sales force to go out and get the business in. This means converting even the most staid and c
18、omplacent organisation into one that is enthusiastic about pulling in customers and retaining and developing its existing customers.A final feature is the sales backlog. Clearly, the original proponents of the Balanced Scorecard envisage a jobbing or batch business where deliveries traditionally run
19、 late. Hopefully, such information will inspire management to ensure that the product is delivered on time and in working order. The implications for long-term strategy of this measure are quite fundamental. For example, train makers in the UK enjoyed very healthy order books in late 1999. However,
20、one particular order for operation within Scotland due in August 1999 is running late, while a similar order for the English Midlands was delivered in the spring of 1999, but has been plagued with problems. By contrast, equipment delivered from both Canada and Spain has been on time and worked to sp
21、ecification almost immediately. In a world that is increasingly competitive, and where few industries can hope for any form of protection, any strategy must include timely delivery to specification. The customer must be able to literally open the box and drive it away!This list is not exhaustive. Th
22、e student must look at financial performance measure, assess which favour short-term and/or long-term decisions, and identify which go beyond attention directing into the world of action motivation. Financial performance measures must no longer be about just keeping the score, but be about motivatin
23、g management and the organisation to do better.The customer perspectiveR C Townsend, of Up the Organisation fame, always argued that marketing was the name of the game. Marketing is not a staff function for people who cannot sell, nor is it a synonym for selling. It covers all aspects of the busines
24、s. Townsend saw it as a line task, with the direction coming from the top. It starts with periodic review and rethink of the business the product(s), market, price, how and in what form are customers reached. As hoteliers, are we in the business or tourist market? Do we provide family hotels? At wha
25、t level of luxury (i.e., star numbers) do we operate? As volume automobile builders, how do we encourage people to spend more that $40,000? Toyota has developed the highly successful Lexus, while Ford acquired Jaguar. More recently, P there is one European major who is consistently higher in price t
26、han the others. Perhaps that one is emulating the US retailer outlined above. Customer core: market shareMarket share reflects the proportion of business in a given market. This can be expressed in terms of number of customers, /$ spent or unit volume. The size of the market can easily be obtained f
27、rom trade associations, government statistics or even something like Yellow Pages. In any trade category, how many of the businesses listed are your customers/clients?Share may not be about numbers of customers. It may be a good strategy to look at the number of customers, attempt to identify what t
28、he average income is and see if it is better to actually reduce the number and aim for the larger and more profitable ones. A customer has a certain level of cost to service. It is good business strategy to increase the ratio of service cost to revenue.Customer retentionObviously, this is only relev
29、ant where a business can readily identify individual customers. Any retailer in the High Street is one who cannot. Retention is about repeat business. There are many businesses that provide a one off good/service. Double glazing is such an example. One UK firm even trades on emphasising that since i
30、t is such a job, then potential customers should fit the best i.e., theirs. In the service sector, a substantial proportion of a solicitors work is one off and they actually quite envy the accountant with his annual accounts and tax returns.Where customers can be easily identified, customer retentio
31、n can be easily measured both by the duration of their stay, and the growth of that business with individual customers.Customer acquisitionObviously, where individual customers can be identified, this can be readily measured by the absolute increase in the number of customers. Ratios can be monitore
32、d, the ratio of conversion to initial solicitation. How many cold calls? How many interested responses? How many follow ups needed? Literature requests? Existing customers can also be targets for developing related business. Students should notice how the banking and financial services sector bombar
33、ds its customers with offers of additional services.Customer satisfactionThis provides a vital indicator as to how well the company is doing. Recently, there has been much emphasis on both sides of the Atlantic that companies cannot rely 100% on retaining even so-called satisfied customers. As a res
34、ult, many companies use customer surveys. Some write to their customers, others call them up, others even arrange for personal interviews. The quality of the results may vary, but it is argued that valuable insight is given into what the customer wants. The cynical student may rightly express doubts
35、 about sample sizes, statistical significance, the random nature of the population and even controls. The obvious problem is not measuring the customer who has bought something, but not being able to measure the customer who did not.Students might like to think about why a customer buys from A even
36、when he has to pass B who has the identical product on offer. A can measure his sale. The manufacturer can measure his sale, but B cannot measure his failure and try to put it right.Customer profitabilitySome allusion has already been made to the fact that customers have a cost and that some custome
37、rs or markets are more profitable than others. It is important to be able to identify products or markets and see if they are profitable or not. This is not a new concept. A major electronics company was producing quarterly product profit and loss account back in the early 1970s. The exercise had it
38、s faults, mainly because many overheads were being apportioned rather than allocated according to cost drivers, but it was a move in the right direction. Using reliable ABC methods and correctly identifying the cost drivers will enable the profitable customers to be identified, and also the costs th
39、at do not either add value or increase the customer base. An obvious example of the latter is advertising. Not all markets require advertising, so correctly aligning cost drivers and customers will enable the age old conundrum to finally be answered, “What part of the advertising budget is worthwhil
40、e?“However, there are perhaps two caveats to this. First of all, there may be customers that of themselves are not very profitable, but they attract other customers or lead to more profitable business. Secondly, there may be customers that are initially unprofitable, but grow to be very profitable.
41、A third point might be identifying where the money is made. The initial sale may be at a very competitive even give away price. However, after sales service may be required, perhaps as a condition of any guarantee, resulting in very expensive (and to the supplier very profitable) service support.Cus
42、tomer valueThere are a number of aspects to this.(i) Product/service attributes. This is a function of a product actually does, its price and quality. A volume car costing 10k/$16.5k will provide its owner with reliable (?) and convenient personal transport. However, a vehicle costing 24k/$40k has t
43、o do more, including saying certain unquantifiable things about the purchaser.(ii) Relationship is about knowledgeable sales staff, and staff who respond. The allusion above about going to B in preference to A for the same product may be about a superior, more responsive staff.(iii) Image is an inta
44、ngible factor. It may be about what the product does for the customer. Volume cars illustrate this point very well. The purchase of a car is more than just buying convenient personal transport. It is frequently an expression of the actual customer. It is also about the level of value that the custom
45、er is looking for. If a person is successful, upwardly mobile and confident, he wants a car that will illustrate that. As a result, such people will often spend over 24k/$40k and buy a non volume or specialist car. This means the volume producers have lost a customer. Experience has painfully taught
46、 them that there is a level at which customers will not pay for a volume car, no matter what features it has. As a result, Toyota produce the non volume Lexus and Ford have acquired Jaguar. The customer has the product that gives off the right image, and the producer has retained his upwardly mobile
47、 customer.Internal business process/perspectiveThis is about the internal value chain. This is also about an important move away from tradition. Any student who looks at, or who is involved in the preparation of traditional reports will find that there is an over emphasis on production. This is not
48、saying that production is unimportant, rather it is arguing that the error lies in over emphasis on production to the exclusion of two other vital factors - innovation and post sales.InnovationThe student should not remember the basic tenets of the former SSAP 13 or Paragraph 5 of FRSSE (Effective M
49、arch 1999). Essentially all pure research should be written off to the profit and loss account as it is incurred. Equally, development expenses should only be carried forward against recognisable projects. From the Kaplan and Johnson standpoint, this a more slavish obsession with financial accounting than the alleged misplaced veneration of total absorption costing. Traditionally, research was just written off as support cost, whereas the correct treatment should be to regard it as a critical internal process. To survive in the competitive world economy, companie
