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  • A P P LY I N G T H E B A L A N C E D S C O R E C A R D


    Since the late 1980s, a growing number of managers at the corporate and busi- ness unit levels have concluded that traditional management and financial accounting fails to give them complete information for managing their com- panies. Although these managers receive a prodigious flow of financial figures, they often get few of the nonfinancial figures critical to making decisions about day-to-day operations or long- term strategy. These managers have called for a revolution in performance measurement. In particular, they are calling for more measures of quality, customer satisfaction, turnaround times, pollution control, and other






    As business becomes more complex and competi-

    tive, traditional financial measures of performance

    fail to give managers all the information they

    need to make intelligent strategic and day-to-day

    decisions. A powerful new means of delivering

    this information is called the balanced scorecard,

    a mix of financial and nonfinancial indicators –

    about customers, internal processes, organiza-

    tional learning, shareholder value, quality,

    community relations, and so on. The balanced

    scorecard enables managers to accelerate continu-

    ous performance improvement, facilitate strategic

    formulation and execution, and strengthen

    internal and external accountability for creating

    value. This publication describes the concept

    of the balanced scorecard; explains the critical

    steps in implementing one; and shows how

    companies have applied scorecards to corporate



    nonfinancial factors. The result of these calls for change has been a management innovation that helps managers implement complex and nuanced corporate strategies: the balanced scorecard.

    The Nomenclature Today

    The balanced scorecard is a focused set of vital financial and nonfinancial measures of performance. The notion is simple, but the nomenclature of the balanced scorecard can be con- fusing. To many people, “balanced scorecard” refers to the model devel- oped by Robert Kaplan and David Norton in a definitive set of Harvard Business Review articles (1992, 1993, 1996c). But in practice, consultants

    Responsibility for the content of this material rests solely with The Society of Management Accountants of Canada. Applying the Balanced Scorecard is designed to provide accurate information in regard to the subject matter covered. This publication does not represent an official position of The Society of Manage- ment Accountants of Canada and is distributed with the understanding that the authors, editor and publisher are not rendering tax, legal, accounting or other professional services in the publication.

    Exhibits 2, 5 and 11 reprinted by permission of Harvard Business Review. From “Using the Balanced Scorecard as a Strategic Management System” by Robert S. Kaplan and David P. Norton. January 1996. Copyright © 1996 by the President and Fellows of Harvard College, all rights reserved.

    C O N T E N T S E X E C U T I V E S U M M A R Y



    Management Accounting Guideline

    Published by:

    C A N A D A

    Shaping the Future


  • and managers use the term loosely to refer to any set of financial and nonfinancial measures. In a study by Walker Information, 59 percent of Canadian executives and 33 percent of U.S. executives claimed familiarity with the terms “balanced scorecard” or “balanced measurement system” (Walker Information, 1998:4). The term has thus apparently gained a strong foothold as part of the management lexicon.

    To be sure, the notion of using a balanced set of measures developed over many years. As far back as 1900, managers in France began using the “tableau de bord,” or dashboard of financial and nonfinancial measures (Epstein and Manzoni 1998). In the 1980s, with the advent of total quality management, executives in the North America began to take the same approach, attempting to manage with the vital few indicators of success (The Society of Manage- ment Accountants of Canada 1994). The concept came to be increasingly associated with the term “balanced scorecard.” Thus the term is used in its generic fashion throughout this guideline.

    The term is popular for good reason. Managers have embraced the notion of “scorecard,” which suggests a simple docu- ment, a shorthand way of putting all critical variables for running the organization on one page. They have also embraced the notion of “balance” among performance measures – balance between the leading and lagging, financial and nonfinancial, inter- nal and external. Note that “balance” does not necessarily imply equivalence among all measures. It simply means balancing the single-minded focus on financial mea- sures with additional focus on nonfinancial ones.

    To Manage Within the Company

    Managers can use the balanced scorecard as a means to articulate strategy, communi- cate its details, motivate people to execute plans, and enable executives to monitor results. The advantages of using a focused set of financial and nonfinancial measures in this way are legion, as documented in many recent works (Epstein and Birchard 1999; The Society of Management Account- ants of Canada 1994; Hronec 1993; Kaplan and Norton 1996a; Lynch and Cross 1995; Rummler and Brache 1995). Perhaps the prime advantage is that a broad array of indicators can improve the decision mak- ing that contributes to strategic success,

    whether in big organizations or small, profit- focused or nonprofit, whether at the exec- utive level or the team level. Nonfinancial measures enable managers to consider more factors critical to long-term performance. These factors, flowing directly from the organization’s strategy, vary from how well the organization cares for customers to how fast it innovates.

    The gap is huge between the kinds of measures managers consider critical and the variables they actually measure. In a recent study, 63 percent of firms rated innovation as highly important, but only 22 percent measured it; 76 percent rated morale and corporate culture as important, but only 38 percent measure them; and 76 percent of firms considered core com- petencies as important, but only 36 per- cent measure them (Stivers et al. 1998:47). Although hard to quantify, variables like innovation and competencies often rank among the most pivotal measures in accu- rately gauging the success of organizational strategy.

    One of the key reasons managers yearn for more nonfinancial measurement is that financial measures, used alone, give an incomplete picture of an organization’s performance. Employees evaluated accord- ing to their ability to achieve short-term targets cannot be expected to consistently make the best possible long-term decisions. In an attempt to meet quarterly revenue targets, for example, they will fast track at least some high-value product shipments, even at the risk of breaking delivery promis- es on low-value shipments. The harm to organizational reputation will not show up in the quarterly budget but will certainly reappear later in the form of dissatisfied customers.

    Another reason managers yearn for more nonfinancial measures is that traditional financial measures give an historical view of performance – “through the rear-view mirror,” as the saying goes. The “lagging” financial figures, like sales volume, help the firm keep score for quarters and years just past. They often do not provide as much insight as forecasted data on quality and shipping performance. In other words, financial measures often don’t offer the predictive information contained in many nonfinancial metrics. They enable managers only to extrapolate from the past – clearly a risky practice in fast-paced organizations today.


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  • By incorporating new measures in a bal- anced scorecard, an organization’s managers arm themselves to compete in the 21st century: • To improve performance continuously.

    Improving financial results depends on improving upstream quality, customer satisfaction, product innovation, and other results. Managers who identify the vital few nonfinancial factors in their business will have the capability to fine- tune them to deliver reliable long-term financial results.

    • To implement more complex strategies. Many organizations today compete through highly differentiated strategies, strategies that rely on unique products, reengineered processes, premium service, superior information, a select mix of sales channels, and so on. To execute these strategies, managers need measures that define organizational objectives precisely.

    • To better run lean, decentralized organiza- tions. Today’s lean organizations rely on managers, workers, and teams with the responsibility and authority to act quickly and independently to achieve the objec- tives set by top executives. Managers most effectively empower people across the organization by providing them with precise, quantified, financial and non- financial targets to act upon.

    • To feed systems for organi