The Balanced Scorecard: It Remains the Management Accountant's Benchmarking Tool of Choice Well over a Decade after Its Birth, but Is It Still Up to the Job? Malcolm Smith Tests It Out

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Management accounting information systems cannot live on financial measures alone. They require a mix of indicators to give a more balanced view of a firm's overall performance and provide current non-financials that could predict its future financial performance. A number of methods have been proposed to achieve this (see panel), but the balanced scorecard has become the most popular one with management accountants. It has been through a number of versions, yet it's worth questioning how well it meets the needs of businesses in the 21st century.

Its first incarnation in 1992 focused unashamedly on shareholders in setting a framework that addressed non-financial measures such as customer perspectives, business processes and sustainability. In essence, its four original dimensions--financial; customer; internal; and innovation and learning--have barely changed.

It has rightly been criticised for being weak in the following areas:

* Its bias towards shareholders and failure to address the contribution of employees and suppliers.

* Its silence on the selection of specific performance measures and the role of performance targets.

* Its failure to address HR issues.

* Its failure to address strategic uncertainties of the kind that we would examine with a Pest analysis.

The performance prism (2002) seeks to address one of the main oversights of the balanced scorecard by considering the value of stakeholder groups, which include customers, staff suppliers and regulators, as well as its shareholders. The prism has three dimensions: strategies, processes and "'capabilities" (ie, people, practices and infrastructure). It takes both stakeholder satisfaction and stakeholder contribution into account. The former element identifies what the key stakeholders need from the company. The latter identifies what the firm needs from these stakeholders if it is to develop its capabilities.

Some of the prism's measures of satisfaction and contribution may be subjective in nature and the model does not address the HR issues adequately. In fact, most types of scorecard fail to get to grips with HR--a dimension where one of the biggest gaps between accounting theory and practice exists.

But the following assumptions that underpin the balanced scorecard may be more significant than its omissions:

* The assumption of a causal link between non-financial performance and financial performance. The evidence for this is not strong, but some empirical studies suggest that the adoption of non-financial performance measures will improve a firm's share value.

* The assumption that effective organisational learning, internal processes and customer relations have a positive effect on financial performance. The evidence for this is thin, although one or two studies have found a link between customer satisfaction and future profitability. There seem to be logical connections among the dimensions, but no clear causal links among the specific measures. Such relationships have yet to be shown in a convincing way. Indeed, recent research on the link between customer-related measures and financial performance suggests that there is no obvious association.

In effect, the balanced scorecard is a hierarchical model of control. It cascades down the organisation with little involvement from senior managers, implying a conflict with both employee empowerment and organisational learning. The nature of these conflicts may help to explain the implementation failures that so often occur. In 1998 Claude Lewy and Lex du Mee (1) observed that as many as 70 per cent of scorecard implementations were failing, so they proposed the following "ten commandments", based on successful implementations in the Netherlands:

1 Use the scorecard as the basis for implementing strategic goals, since its visibility makes it the ideal vehicle for doing so.

2 Ensure that your strategy is in place before developing the scorecard, since ad hoc development will encourage the wrong behaviour. …