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5. Balanced Scorecard Approach to Performance Evaluation

Thus far, this chapter has focused on budgets, standards, and variances to assess entity performance. However, other nonfinancial metrics should also be employed in performance evaluation. This is sometimes referred to as maintaining a balanced scorecard, meaning that performance assessment should take a holistic approach. Long-term business success will not be achieved if the focus is only on near-term financial outcomes. At the same time, financial goals are not abandoned; the goal is to achieve balance.

With the balanced scorecard approach, an array of performance measurements are developed. Each indicator should be congruent with the overall entity objectives. Further, each measure should be easily determined and understood. These measurements can relate to financial outcomes, customer outcomes, or business process outcomes. Although a balanced scorecard approach may include target thresholds that should be met, the primary mantra is on improvement. This means that all participants are continually striving to beat pre-existing scores for each measure.

Early in this chapter, you saw how responsibility accounting concepts caused performance reports to be prepared for different steps in the corporate ladder. This notion is equally applicable to the balanced scorecard approach. The overall corporate entity may have macro targets and measures. Similarly, sub-units will have their own unique goals. A scorecard approach can even be pushed down to the individual employee level. For instance, a retail store may require that tellers complete a certain number of transactions per hour. This "quota" in essence would represent a nonfinancial metric that can be scored for each employee.

5.1. The Balance Scorecard in Operation

You saw for Blue Rail Manufacturing a number of examples of financial goals that could be included in a balanced scorecard assessment. Examples include the standard cost for material, the standard labor hours per rail set, the expected production level, and so forth. But, what would be some examples of customer outcomes and business process outcomes?

• Potential Customer Outcomes:

- Results of a customer satisfaction survey

- Product returns/warranty work rates

- The frequency that customers reorder (or do not reorder)

- Estimated market share

- New customers that are based on referrals of existing customers

- Frequency that customer bids lead to customer orders

- Customer complaint/compliment rates

- Price in comparison to competitors

• Potential Business Process Outcomes

- Defect free units as a proportion of total production

- Frequency/size of product liability claims

- Time from order receipt to shipment

- Size of customer order backlogs

- Lost production days due to out-of-stock raw materials or equipment failure

- Employee turnover rate

- Employee morale survey results

- Employee accident rates/claims for workers' compensation

- Average experience level of employees

In reviewing this list of potential items for inclusion in a balanced scorecard performance appraisal, you have probably thought of some additional items for inclusion. The choice is up to management. The idea is to find those items that drive business success in a way that is consistent with the corporate philosophy. Perhaps Blue Rail has a goal of 100% customer satisfaction with respect to quality, but knows that its price will be 20% higher than competitors. Or, Blue Rail may have a goal of being the lowest cost provider and will tolerate some degree of customer discord.

The metrics are intended to measure progress toward fulfillment of the corporate objectives, and the managerial accountant is apt to be heavily involved in gathering the necessary data for inclusion in the balanced scorecard performance reports. These reports are often graphical in nature to facilitate easy use and interpretation, with particular emphasis on timely identification of trends. Sometimes, the metrics are prominently posted in the work place; perhaps you have seen a sign at a construction site noting the number of consecutive accident free work days. By prominent display of such data, employees are constantly reminded of, and vigilant to meet, key performance goals.

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