AFM The Balanced Scorecard By Isuru Manawadu B.Sc in Accounting Sp. (USJP), ACA

Content  Understand the importance of modern Management Accounting Practices  Introduction to the Balanced Scorecard with history What is it? Why do it?  Balanced Scorecard Fundamentals The Four Perspectives Measures, Targets and Initiatives  Benefits and limitations of BSC

The Balanced Scorecard What 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 Scorecard What 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 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 Organization Cont….

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 Organization Cont….

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

THE BALANCED SCORECARD

Financial / Regulatory Perspective  Revenue growth  ROE  Cost / Unit Possible Performance Measures Possible objectives  Growth  Profitability  Cost leadership

Customer Perspective Possible objectives  Market share  Customer acquisition  Customer satisfaction  Customer retention  Customer 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 process  Operational process  Post sales service process

Innovation process Possible Measures  % of sales from new products  New product introduction Vs competitors  Time to develop next generation of the products

Operational process Possible Measures  Reducing process time  Increasing process efficiency  Increasing process quality  Reducing process cost  Cycle time measures  Manufacturing 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 Growth Kaplan and Norton identify three principal categories;  Employee capabilities  Information system capabilities  Motivation, Empowerment and alignment Possible Performance Measures Employee capabilities - Employee satisfaction - Employee retention - 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 planning  Improved strategy communication and execution  Better management information  Improved performance reporting  Better strategic alignment  Better organizational alignment

Limitations of the BSC  The omissions of importance factors  The scores are not based on any proven economic or financial theory  No empirical studies