A Critical Evaluation of the Balance Scorecard

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Introduction

Economic turbulence and globalisation has immensely increased challenges that managers of organisations face and therefore, organisations try to get the right tools so as to face and tackle these challenges with the appropriate performance and management measuring tools (Hoque, 2014). Consequently, the balance scorecard (BSC) has become one of the most successful and widely used performance measurement and management tools. This, as Kaplan and Norton (1992) explains, is because it builds balance between organisation and non-organisation, financial and non-financial performance measures, and thus, suggests a more comprehensive evaluation methodology Furthermore, it translates strategic objectives of an organisation into a single set of performance measures that are distributed among four perspectives; (a) financial, (b) customer, (c) internal business process, and (d) learning and growth (Kaplan and Norton, 1992). However, despite success achieved by BSC, a review of literature has noted some deficiencies of BSC. As such, this essay will critically discuss BSC as a measurement and management tool and evaluate issues with its implementation.

Balanced scorecard (BSC) as a performance measurement and management tool

The BSC is presented theoretically as an excellent system and initiative that has made it possible to link performance measures and management to an organisation’s mission and strategy. Firstly, according to Kaplan and Norton (1996a) the BSC transforms strategic plan of an organisation from an attractive passive document into marching orders for organisation daily basis. It is a platform that provides not only performance measures and management but also helps planners to identify what should be undertaken, measured and executed. Hoque (2014) also viewed the BSC as a system whereby an organisation assesses its performance measures from the perspectives of performance in financial, customers, internal business process, learning and growth. According to him, these four perspectives are means by which it is expected every member of staff that perform key function measure their job performances especially contribution they make to organisation goals.

Similarly, Kaplan and Norton (1996a) affirms that the BSC philosophy creates strategic focus by translation of visions and strategies of an organisation into both operation objectives and also performance measures for discernable perspectives. Consequently, it can be deduced that the BSC is an important measurement technique because of its vital ability to incorporate financial and non-financial variables to measure organisation’s performance.

Secondly, Zizlavsky (2014) debates that the BSC approach provides management of an organisation with set of measures that combine to give comprehensive but quick assessment of the business. This view is echoed by Madsen and Stenheim (2015) who debates that the BSC meets the manager’s information needs by combining many elements of a firm’s competitive agenda in one performance measurement report, and prevents sub optimization by managers, since they should consider all significant performance measures of their organisations.

Thirdly, Ozturk and Coskun (2014) states that the BSC as a strategic management system considering tangible-financial indices and intangible non-financial indices, is capable of enforcing achievement of organisations strategies as there exists causal relationship between performance of organisation and effective management of dynamics of the four perspectives. Moreover, Madsen and Stenheim (2015) showed that the BSC implementation leads to improved operation performance, and better management of the intangibles including human capital and capabilities. Also, BSC adoption influences allocation of resources, reward for performance and support innovation and thus position an organisation competitively, function effectively and also efficiently in competitive environment. This view is in consonance with Kaplan and Norton (1996a) submission that the BSC is capable of linking measures to organisation’s reward system, thereby aiding in promoting hard work and performance among staff. Further, Tominac (2014) and Madsen and Stenheim (2015) in their separate case studies on translation of BSC in organisations, reported that when well implemented, the BSC is an initiative capable of enhancing a company’s performance and has also capabilities to adopt in many different cultural settings.             

Fourthly, Lin et al. (2014) concedes that the BSC‘s most important aspect to project managers is transforming projects tasks into performance measures that are tangible. BSC thus helps project managers track progress of projects execution, tasks requiring more resources, tasks behind schedule and tasks requiring more skills to carry out. Lueng and Julner (2014) also shares this view by putting forth that BSC is vital in project management as it provide a comprehensive picture of projects outside traditional objectives of cost, risk, time and safety.

Despite the success of the Balance scorecard as a performance measurement and management tool, its shortcomings have been noted. Firstly, Malgwi and Dahiru (2014) and other notable researchers have pointed out that causality relationships between BSC areas of measurement are too simplistic and unidirectional. Similarly, some scholars posits that there lacks a cause-and –effect relationship between suggested areas of performance measurements, and BSC has in some cases depended on relationship between customers loyalty and the financial performance (Malgwi and Dahiru, 2014). Consequently, Awadala and Allam (2015) argues that lack of this cause-and-effect relationship is important since invalid assumptions in feed-forward control system causes firms to anticipate faulty performance indicators.

Secondly, Malgwi and Dahiru (2014) opine that BSC reliance on just four measures become disadvantage when wrong numbers are selected for BSC. This point of view argues that the BSC lacks mechanisms for maintaining relevance of the defined measures. This according to Ozturk and Coskun (2014) leads to BSC being less valid and increases possibility to miss other critical measures. In sum, BSC has good coverage of dimensions of performance, but provides no mechanism to maintain relevance of defined measures.

Thirdly, Kadarava et al. (2015) concedes that BSC helps organisations in transforming their strategies into tangible performance measures. However, he maintains that by limiting the performance measures into just four incentives, it introduces rigidity by forcing the managers to measure their organisation’s success by only those four incentives. This as they argue limits an organisation’s view as it leaves no room for cross-analysis that combined effect on the strategy execution. Furthermore, there is danger of organisation neglecting other success indicators not falling into the four categories. Tominac (2014) shares this view by further explaining that the four categories risk fostering confirmation bias, where managers only concentrate on what they want to measure/ assess but ignore external business environment changes.

Fourthly, Hoque (2014) explicates that different from other strategic management and performance measurement systems such as Porter 5F analysis, Benchmarking, PEST analysis, SWOT analysis and others, the BSC include only shareholder and clients but does not considers other important interest groups. In the same vein, Zizlavsky (2014) advises that it would be more feasible to use performance prism methodology as possible source for addition of other interest groups to BSC framework.

Issues the management should consider when implementing the BSC

Despite the benefits and limitations of the BSC as a performance measurement and management tool mentioned above, some issues that the management of an organisation should consider when implementing the BSC are;

To start with, Kopecka (2015) elucidates that BSC adoption process is complex and requires commitment of both resources and time to check progress, continuous learning, and adjustments. Similarly, Lueng (2015) buttressed this view by holding that setting up the BSC system is expensive especially when measured in terms of time needed in employees training, additional costs for software licence, testing and installation, and  maintenance labour.

Secondly, Lueng (2015) emphasizes that the management should be fully committed to BSC initiative in order for it to be successful as a performance measurement and management tool. This stand point is collaborated by Arash and Zairi (2014) who adds that lack of executive sponsorship will lead to BSC showing mediocre results and harm BSC initiative. As such, he advises that the top management should fully stand behind the BSC initiative and explain it to members of the organisation. In sum for the BSC to gain credibility, the top management must fully support it, trust it and strongly believe that it will improve the organisation’s performance. Lastly, Lueng (2015) postulates that for an organisation to implement the BSC properly and benefit fully from this initiative, the management and employees should be educated about it.  Lin et al. (2014) notes that after deciding to adopt BSC, some managers thinks that because of its seemingly simplicity on paper, it can be successfully implemented without much learning. Conversely, he advises that the management must spend time and resources in order for BSC to be successful.

Conclusion

This essay has noted that BSC’s most innovative aspect is its ability to generate strategic growth through providing a vision of organisation performance and favouring understanding of objectives of an organisation, minimising information overload by limiting number of measures used to just four incentives and as result, provides a comprehensive understanding of a firm performance. However, some limitations of BSC include too simplistic and unidirectional causality relationship with its areas of measurements, rigidity and lack of including other important groups such as suppliers.

Presuming the BSC can be perfect is unrealistic. However, it is possible and vital to identify BSC areas which can be designed better to address its purpose. Its limitations notwithstanding, it remains a vital tool for performance measurement and management and its success is evident by its acceptance by organisations globally.

References

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