When is a balanced scorecard abalanced scorecard?

Marvin SoderbergAlberta Union of Public Employees, Edmonton, Canada, and

Suresh Kalagnanam, Norman T. Sheehan andGanesh Vaidyanathan

Edwards School of Business, University of Saskatchewan, Saskatoon, Canada

Abstract

Purpose – The Balanced Scorecard (BSC) is widely applied as a performance measurement andstrategy implementation tool by organizations. Research has revealed that the term “balancedscorecard” may be understood differently by managers both within as well as across organizationsimplying that the performance measurement systems implemented in organizations may not besimilar to the construct envisioned by Kaplan and Norton. Using Kaplan and Norton’s BalancedScorecard construct as a basis, the paper aims to develop and test a five-level taxonomy to classifyfirms’ performance measurement systems.

Design/methodology/approach – A Balanced Scorecard taxonomy is validated using a largesample of professional accountants working in Canadian organizations.

Findings – The five-level taxonomy is used to categorize the performance measurement systems of149 organizations. It is found that 111 organizations’ (74.5 percent) performance measurement systemsmet the criteria to be classified as a Basic Level 1 BSC, while 61 (40.9 percent) organizations havestructurally complete Level 3 BSCs, and 36 (24.2 percent) organizations have fully developed Level 5BSCs. The paper also discusses differences between Level 1 and Level 5 BSC organizations.

Research limitations/implications – While many researchers assume that organizations’performance measurement systems are similar in implementation level and use, the paper demonstratesthat organizations are at different levels of BSC implementation and use, a factor that should be taken intoconsideration when designing empirical studies to test the efficacy of Kaplan and Norton’s BSC.

Practical implications – The five-level BSC taxonomy scheme provides managers working withKaplan and Norton’s BSC with a tool to plan their implementation steps and then benchmark theirprogress towards implementing a fully developed Level 5 BSC.

Originality/value – In developing and empirically validating a BSC taxonomy, the paper builds onand extends previous research on BSC implementation and its potential implications.

Keywords Performance measurement (quality), Balance scorecard, BSC taxonomy, Control systems

Paper type Research paper

When properly designed, performance measurement systems communicate desiredresults, enhance motivation, and provide feedback on past performance (Neely, 2004). Aftersurveying several popular performance measurement systems, Paranjape et al. (2006, p. 5)

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1741-0401.htm

The authors would like to thank the journal’s reviewers for their insightful comments plusreviewers and seminar participants at the 2007 American Accounting Association AnnualMeeting and The Performance Measurement Association Conference for their feedback. Theywould also like to thank Margaret Shackell, Brooke Dobni, and Glen Kobussen for their helpfulcomments. They owe a special debt of gratitude to Bill Langdon and CMA Canada for their helpadministering the survey.

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Received August 2010Revised December 2010Accepted January 2011

International Journal of Productivityand Performance ManagementVol. 60 No. 7, 2011pp. 688-708q Emerald Group Publishing Limited1741-0401DOI 10.1108/17410401111167780

write that “the BSC is the most popular, least criticized and widely implemented”. Given itswidespread acceptance and use by practitioners, the BSC is well-entrenched in themanagement accounting teaching literature (Eldenberg and Wolcott, 2005; Hilton et al.,2007; Merchant and Van der Stede, 2007; Anthony and Govindarajan, 2007; Horngren et al.,2010) and frequently researched by academics (e.g. Chan and Ho, 2000; Hoque and James,2000; Lipe and Salterio, 2000; Malina and Selto, 2001; Ittner and Larcker, 2003; Banker et al.,2004; Othman, 2008; Wiersma, 2009; Greiling, 2010).

Kaplan and Norton’s (1996, 2001) BSC construct is a management tool that, whencorrectly understood and properly implemented:

. clearly communicates the organization’s strategy to its employees;

. allows employees to see how they contribute to the organization’s strategic goalsby translating these goals into specific, measurable activities;

. increases employees’ motivation by attaching well thought-out objectives andtargets to performance measures and then pays incentives when reached;

. enhances employees’ learning and accountability by measuring and providingfeedback on their actions; and

. enables managers to monitor and update their organizations’ strategies as theirenvironments change.

In short, Kaplan and Norton (1996, 2001) designed the BSC to harness the multiplebenefits of performance measurement in order to aid organizations in implementingtheir strategies. Whether the BSC, in fact, leads organizations to realize the benefitsoutlined above is an empirical question. A logical precondition for research seeking toascertain whether organizations implementing the BSC have realized these benefits isthat the construct is consistent with that proposed by its originators. Is thereconsistency among the organizations that have implemented the BSC? This empiricalquestion is the impetus for our research.

The question is prompted by the fact that despite the widespread literature on theBSC, there is little agreement regarding what a Balanced Scorecard is. Lawrie andCobbold (2004) report that the most frequent question posed on a performancemeasurement discussion board was “What is a Balanced Scorecard?”. As an exampleof confusion among practitioners, a CMA Canada study (CMA Canada, 1999) foundthat the term “balanced scorecard” may be understood differently by managers acrossorganizations or even those in the same organization. Lawrie and Cobbold (2004) notethat while Kaplan and Norton (1996, 2001) were effective in motivating managers toadopt a Balanced Scorecard and describing how to use it, they were not helpful withrespect to operationalizing the BSC. Marr (2005) agrees with this statement, noting thatorganizations have different interpretations of what a BSC is, while Franco-Santos et al.(2007) argue that there is a lack of consensus among both managers and researchers onwhat constitutes a BSC. The implication is that the transformation from concept to toolis non-trivial and challenging for practitioners and researchers alike.

Why should managers’ lack of agreement of what is a BSC concern researchers?Researchers studying the BSC’s efficacy across firms are vulnerable to a potentialconfound if they do not control for differences in implementation and use across firms.Franco-Santos et al. (2007) argue that this potential confound is retarding progress in thefield of performance measurement as it limits the comparability and generalizability of

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research studies. This paper seeks to establish the existence of this confound byempirically demonstrating that there are differences in firms’ BSC implementation anduse. Awareness of these differences should help researchers control for these in futureBSC studies and thereby enhance progress in the field of performance measurement.

Why should practitioners care if managers have differing conceptions of a BSC?Bourne (2008) and Pforsich (2006) argue that one reason firms are not getting the fullvalue from their BSCs is that they are not implemented and used properly, which islargely due to the difficulty managers have in properly operationalizing Kaplan andNorton’s BSC. The aforementioned CMA Canada study (CMA Canada, 1999) reportedthat many managers believe that any performance measurement system that includesboth financial and non-financial measures, reported across multiple dimensions, is aBSC. More recently, Bourne (2008) noted that due to the newness of the field ofperformance measurement some firms devised their BSCs by simply taking theirexisting key performance indicators and then divided these into four perspectives. Theexistence of such disparate understandings of the BSC among managers points to theneed for a taxonomy of Kaplan and Norton’s BSC construct. Such a BSC taxonomywould provide managers a common language, which they can use to ascertain wheretheir organization is relative to Kaplan and Norton’s BSC construct, and what they stillneed to do to reach full implementation of a Kaplan and Norton BSC.

This study develops a five-level taxonomy that operationalizes Kaplan and Norton’sBSC construct and then applies this BSC taxonomy to a large sample of Canadianfirms. There have been cross-sectional studies of BSC usage in Austria, Switzerland,Germany (Speckbacher et al. 2003), Norway (Stemsrudhagen, 2004), and the USA(Marr, 2005), but to our knowledge there has not been a similar study of BSC usage in abroad cross-section of Canadian firms. While the Canadian context is similar to theAmerican context, there are subtle differences between the countries (Boys et al., 2005)that may impact the implementation and use of the BSC, including differing laws andregulations, such as labor and tax laws that impact compensations systems, differingfinancial reporting standards which impact the amount and type of financial datacollected, managers’ attitudes towards governmental intervention in the economy, anda higher level of social support systems.

The rest of the paper is organized as follows: The next section of the paperoperationalizes the unique attributes of Kaplan and Norton’s Balanced Scorecard into ataxonomy and introduces the study’s research questions. The paper then discusses theresearch methods, presents the results, and concludes with a discussion of the study’sfindings.

Operationalizing the Balanced ScorecardThere are two unique sets of attributes of Kaplan and Norton’s (1996, 2001) BSC:

(1) The first set relates to the structure of the scorecard, which describes the designof the BSC. The paper describes three structural elements.

(2) The second set of attributes relates to BSC use, and describes how the scorecardis intended to be used to manage the organization. The paper describes two useelements.

Firms that have a BSC containing each of the three structural elements and the two useelements are considered to have a fully developed BSC.

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Structural attributes of the BSCKaplan and Norton’s BSC has three key structural features:

(1) its measures are derived from strategy;

(2) there is balance among measures; and

(3) the measures are causally linked.

Measures derived from strategy. Given that the primary purpose of the BSC is to helpimplement strategy, Kaplan and Norton (1996, 2001) argue that its metrics mustmeasure those activities which lead to strategy implementation. This idea is consistentwith Nanni et al.’s (1992) integrated performance measurement system whereinstrategy drives the selection of measures. Similarly, McNair et al. (1990) strategicmeasurement system framework also emphasizes that the measures must have astrategic focus. This leads us to posit that if the organization’s performance measuresare not derived from its strategy, the organization’s performance measurement systemcannot be called a Balanced Scorecard. Consequently, the direct relationship betweenstrategy and performance measures is a minimum requirement for an organization’sperformance measurement system to be classified as a BSC organization.Organizations not meeting this criterion are labeled as non-BSC organizations. Sinceestablishing a connection between strategy and the performance measures is aprecursor for any subsequent variants of BSC implementation, we classifyorganizations with a BSC with this attribute as a Level 1 BSC organization.

Balance among measures. The second element of “structure” is balance in terms ofthe number of perspectives of performance, and the number and type of measures ineach perspective, (e.g. each perspective should have a similar number of indicators andthere should be a balance between driver and outcome indicators, and financial andnon-financial measures) (Kaplan and Norton, 1996)[1]. Hayes (1977) and Kaplan (1982)have argued that an over-reliance on traditional financial measures promotes a myopicview of organizational performance. The noted shortcomings of financial measurementmyopia later prompted scholars and practitioners to argue for reporting non-financialmeasures (e.g. Young and Selto, 1991; Feltham and Xie, 1994). In response to calls formeasuring multiple dimensions of performance (e.g. McNair et al., 1990; Fitzgeraldet al., 1991; Nanni et al., 1992), Kaplan and Norton (1996) introduced three additionalperspectives of performance beyond the financial dimension:

(1) learning and growth;

(2) internal business processes; and

(3) customer.

Together, these four dimensions encourage organizations to clearly communicate thestrategic objectives they want to achieve and how they plan to achieve them. Thisexplicit linkage between the desired results and the processes needed to achieve theseresults is reflected in the third element of structure, causal linkages betweenperspectives.

Measures are causally linked. The third element of “structure” pertains to thelinkages between the different measures within each performance dimension as well asacross the four performance dimensions. According to Kaplan and Norton (1996, 2001),measures should be linked together in a series of driver (leading indicators) and

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outcome (lagging indicators) relationships, which ultimately culminate in the financialdimension. These cause and effect linkages describe how the organization will createvalue for its shareholders and stakeholders as reflected in the firm’s strategy map(Kaplan and Norton, 2001). Not all measures have to be linked to measures in otherdimensions; however, at least one measure in each dimension must be linked to ameasure in another dimension. Empirical evidence suggests that organizations thathave causally linked measures are more successful than those that do not (c.f. Malinaand Selto, 2001; Ittner and Larcker, 2003).

In the context of our development of the taxonomy, we envision that anorganization’s progress from a Level 1 BSC (i.e. its measures are linked to strategy), tothe next level will depend on whether its performance measurement system contains atleast one of the two structural attributes:

(1) balance; and

(2) causal linkages.

Those Level 1 BSC organizations whose measurement systems only include theattribute of balance are classified as Level 2a BSC organizations, while those Level 1BSC organizations whose measurement systems only include the attribute of causallinkages are classified as Level 2b BSC organizations. Ideally, an organization wouldlike its performance measurement system to have both balance and causal linkagesattributes. Organizations with BSCs containing both attributes balance and causallinkages attributes are classified as Level 3 BSC organizations – these organizationsare considered as having structurally complete BSCs. Our decision to define Levels 2aand 2b separately from Level 3 was due to the fact the literature on implementation ofthe BSC in organizations does not provide unambiguous guidance on the issue ofwhether balance and causal linkage are independent concepts. Consequently, we havechosen to leave it as an empirical question to verify or refute the assumption.

Use attributes of the BSCKaplan and Norton (1996) state that the BSC should be the foundation for everyorganization’s management system. They argue the BSC should be used as a device forgathering feedback on the firm’s progress, enhancing organizational learning,communicating the firm’s strategy, and motivating its employees. In order to achievethese goals, Kaplan and Norton (1996, 2001) propose that there are two “use” elementsthat a firm’s BSC must possess:

(1) double-loop learning, and

(2) tie-in to compensation.

Double-loop learning. Double-loop learning (Argyris, 1991) is at the heart of a dynamicprocess that updates the organization’s strategy as its external environment changes.Double-loop learning, which is similar to Simons’ (1995)interactive control lever, is theprocess of questioning the assumptions underlying the organization’s strategy, asreflected in the linkages and measures of the BSC, when the organization’s actualresults differ from the expected results. If its performance is lower than expected, theorganization’s managers should consider if they should revise the organization’sstrategy and/or revise its scorecard. Level 4a in our BSC taxonomy represents the“double-loop learning” element of the scorecard.

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Tie-in to compensation. Tying compensation to the BSC increases employees’awareness of the activities they need to execute in order to implement theorganization’s strategy and enhances their motivation to complete them effectively(Otley, 2003). Kaplan and Norton (1996) state that tying compensation to the BSC is animportant implementation step as once compensation is tied to achieving the BSC’sobjectives, the BSC is more likely to be the cornerstone of the performancemanagement system. Given that Kaplan and Norton do not recommend using the BSCas part of the compensation system until the BSC has been fully tested, tying the BSCto compensation is a strong indication of the BSC’s maturity and importance. Level 4bin our BSC taxonomy represents the “tie-in to compensation” element of the scorecard.

Organizations that use their performance measurement systems to enhancelearning, update their strategy, and link employees’ compensation to theirmeasurement systems are classified as Level 5 BSC organizations. We considerLevel 5 BSC organizations as having fully developed BSCs – their performancemeasurement systems are structurally complete and are used appropriately to steer theorganization towards the fulfillment of their strategic plans.

The BSC taxonomy can be summarized as follows (see Figure 1); each level denotesa progressively more complete implementation of the BSC by an organization:

. Level 1 BSC – performance measures are derived from the organization’s strategy;

. Level 2a BSC – Level 1 plus the attribute of balance;

. Level 2b BSC – Level 1 plus the attribute of causal linkages;

. Level 3 BSC – Level 1 plus the attributes of both balance and causal linkages;

. Level 4a BSC – Level 3 plus the attribute of double-loop learning;

. Level 4b BSC – Level 3 plus the attribute of linkage to compensation; and

. Level 5 BSC – Level 3 plus the attributes of double-loop learning and linkage tocompensation.

Figure 1.BSC classification scheme

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Research questionsThere are two research questions that we investigate in our study. First, we ask “Whatattributes of a Kaplan and Norton BSC are present in organizations’ performancemeasurement systems?”. This question speaks to the previously noted disparity in theunderstanding of the BSC concept by managers in various organizations. Usingthe five-level classification scheme to classify organizations that have implemented theBSC, we are able to provide a description of the nature of the BSC implementation inour sample of organizations. The act of classifying the firms participating in ourresearch enables us to examine the characteristics of the organizations at each level ofBSC implementation as well as the differences between organizations across variouslevels of BSC implementation. Thus our second research question asks, “What are thecharacteristics of organizations that have adopted BSCs of a particular level and howdo these organizations differ when compared to organizations with different levels ofBSC adoption?”.

Relationship of this study to prior researchAlthough there is considerable research on the balanced scorecard, to our knowledgeonly two studies have attempted to empirically study the extent to which anorganization’s BSC conforms to the specifications of the Kaplan and Norton construct.Firstly, Stemsrudhagen (2004) surveyed 83 Norwegian organizations to explore thedegree to which their performance measurement systems include the structuralproperties of Kaplan and Norton’s BSC. The study also investigated whether theproperties of the performance measurement systems in BSC companies were differentfrom the properties found in non-BSC organizations. To determine BSC usage,respondents were asked to specify whether they had any knowledge of BSCs (yes orno), and whether they were using a BSC (yes or no). The respondents were also askedto what extent each measure (35 measures provided in a list) was used to manage theirorganization. Stemsrudhagen (2004) reported that the performance measurementsystems included many of the measures found in Balanced Scorecards, irrespective ofwhether the companies had implemented a BSC. While Stemsrudhagen’s study addedto our knowledge of the BSC, one potential weakness of Stemsrudhagen’s study is thatit asked respondents themselves to classify whether their organizations had a BSC.The study’s BSC taxonomy was driven by binary responses to two questions, whichmay help to explain the finding that BSC and non-BSC organizations share manyperformance measures. This study overcomes this weakness by using a variety ofsurvey questions to discern what level of BSC an organization is using.

The second study, to which our research closely resembles, is Speckbacher et al.’s(2003) survey of German, Swiss and Austrian publicly-traded firms’ usage of theBalanced Scorecard. Similarly to our study, they classify Balanced Scorecards intothree different levels of implementation (Speckbacher et al., 2003, p. 363):

. Type I BSC: “A specific multidimensional framework for strategic performancemeasurement that combines financial and nonfinancial measures”.

. Type II BSC: “A Type I BSC that additionally describes strategy by usingcause-and-effect relationships”.

. Type III BSC: “A Type II BSC that also implements strategy by definingobjectives, action plans, results and connecting incentives with BSC”.

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They found that 39 percent of the organizations surveyed had at least started toimplement a BSC system. They also found almost all of the organizations in their studyused three of the four Kaplan and Norton Balanced Scorecard perspectives –i.e. financial, customer and internal business. They also found that a high proportion oforganizations using a BSC reported the following as expected benefits of using thescorecard:

. improved alignment of strategic objectives with strategy;

. stronger consideration of non-financial drivers of performance;

. developing a consistent system of objectives in the company;

. supporting the shareholder value-based management system; and

. improved company results in the long-term (Speckbacher et al., 2003, p. 377)

Although our study is similar to that of Speckbacher et al.’s (2003) study in that both ofour studies develop and apply a BSC taxonomy to categorize organizations that haveimplemented BSCs, the studies differ with respect to their classification schemes. Ourstudy’s taxonomy differs from the typology employed in the Speckbacher et al. (2003)study in three ways: Firstly, we do not believe Speckbacher et al.’s Type I BSC capturesthe essence of Kaplan and Norton’s BSC. Speckbacher et al.’s (2003, p. 363) Type I BSCemphasizes the mix of financial and non-financial measures –an attribute that thisstudy labeled “balance”, whereas we define our Level 1 BSC as a performancemeasurement system that derives its measures from strategy. We believe that ourdefinition of a Level 1 BSC is superior as it is the link to strategy that is the definingfeature of Kaplan and Norton’s (1996, 2001) Balanced Scorecard. In addition, theSpeckbacher et al. Type I BSC includes both our Level 1 and Level 2a classifications.This leads to a second key difference; our study’s BSC taxonomy is a richeroperationalization of Kaplan and Norton’s BSC. For example, the Level 2a classificationoperationalizes balance as more than just financial and non-financial measures; it alsoincludes outcome and driver measures.

The Type II BSC of the Speckbacher et al. (2003) study introduces cause and effectrelationships to enrich the BSC implementation, which appears to be similar to ourLevel 2b BSC. Our BSC taxonomy views balance and causal linkages as beingindependent of one another, whereas Speckbacher et al.’s scheme indicates a sequentialprogression from balance (in terms of financial and non-financial measures) to causallinkages. Their Type II BSC is equivalent to our Level 3 BSC. Finally, the Type III BSCin the Speckbacher et al. study, which focuses on the use of the BSC for implementationof strategy, resembles our Level 5 BSC. Notably, however, it differs from our Level 5BSC in one important way; the concept of double-loop learning is absent from theirclassification scheme.

Research methodologyThis research uses descriptive research methods for which a large survey is consideredthe most appropriate data gathering methodology (Babbie, 1990). We developed aweb-based survey consisting of seven sections. In the first four sections of the surveyparticipants were asked to respond to questions about the structural and use attributesof performance measurement system, which allows us to classify organizations asnon-BSC and Level 1 through five BSC organizations. Specific questions (summarized

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in Figure 2) were used as gate(s) to assist in classifying the responding organizations.The fifth section of the survey invited participants to self-report their organization’sperformance along five dimensions:

(1) customer satisfaction;

(2) product/service quality;

(3) return on equity (ROE);

(4) sales margin; and

(5) market share.

Sections six and seven of the survey sought the organization’s demographics as well asoptional respondent information. A multi-step process was used to develop the surveyincluding pre-testing it at different stages, which allowed us to develop a survey thatwas clear and easily understood by respondents.

CMA Canada, the second largest professional accounting body in Canada,administered the web-based survey on our behalf to a sample of 2,297 certifiedmanagement accountants (CMAs) who met three criteria:

(1) they were working in profit-seeking organizations employing at least 51 people;

(2) they held the title of Supervisor, Assistant Controller, Controller, ChiefAccountant, Treasurer, Chief Financial Officer, Consultant, Manager, GeneralManager, Director, Executive, Vice-President, President, Principal, or ChiefExecutive Officer; and

(3) they had their e-mail addresses registered on CMA Canada’s member database.

Of the 2,297 e-mails sent on our behalf by CMA Canada, 79 of the e-mails wereundeliverable, leaving a sample size of 2,218.

An e-mail, along with a cover letter, was sent by CMA Canada to all eligible CMAsasking individuals to respond to the web-based survey. Subsequent to this, CMACanada sent two reminder e-mails to all 2,218 potential respondents (as we had noknowledge of the identities of the respondents). We received 152 complete surveyresponses, but three responses were from not-for-profits, which left 149 useableresponses resulting in a 6.7 percent response rate.

The survey method poses some threats to the validity and generalizability of ourfindings. For example, the low response rate raises the issue of non-response bias.Unfortunately, given that we did not have access to the universe of respondents andthat the survey was administered by a third party, it was not possible to identify thenon-respondents, or to fully ascertain if there were multiple respondents from the samefirm. Fifty out the 152 respondents provided their contact information including thename of the organization. Although one organization is featured twice in this list therespondents are from different business units, one located in Central Canada and theother located in Western Canada. We mitigated the risk that more than one individualin the same organization (business unit) may complete the survey by requesting CMACanada only send a survey to the most senior ranked individual in that organization.An analysis of the early and late respondent groups revealed no significant differences.However, when compared to the survey population, the respondent group issignificantly different in the following ways. We found that our sample consisted of a

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Figure 2.Alignment of survey

questions to the BalancedScorecard classification

scheme

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higher proportion of controllers (p # 0:001) and a lower portion of managers (p # 0:10)and supervisors (p # 0:005). Moreover, the sample consisted of a higher proportion ofmanufacturing organizations (p # 0:001).

ResultsResearch Question 1To answer the first research question we used our five-level taxonomy to classify each ofthe responding organizations. We classified 111 of the 149 organizations (74.5 percent) asLevel 1 BSC organizations – they had a well-developed strategy and their performancemeasurement systems were derived from their strategies. The remaining 38organizations (25.5 percent) were classified as non-BSC organizations. We furtheranalyzed the 111 Level 1 BSC organizations with respect to the presence of otherstructural and use attributes. Of the 111 Level 1 BSC organizations, only 16 (10.7percent)[2] did not have any additional BSC elements in their performance measurementsystems, while the performance measurement systems of the remaining 95 organizations(63.8 percent) contained attributes which allowed them to be classified as either BSCLevel 2a, 2b, 3, 4a, 4b, or 5 (see Figure 3 for a summary of the results).

We found that the performance measurement systems of 74 organizations (49.7percent) contained elements of balance, while 82 (55.0 percent) had elements of causallinkages. The performance measurement systems of 61 organizations (40.9 percent)contained the elements of both balance and causal linkages. This means that 13 (74-61)organizations are classified as Level 2a BSC organizations, meaning that theperformance measurement systems of these organizations are derived from strategyand they contain only the attribute of balance. Twenty-one organizations (82-61) areclassified as Level 2b BSC organizations, meaning that the performance measurementsystems of these organizations are derived from strategy and they contain only theattribute of causal linkages. The remaining 61 organizations have Level 3 BSCs; weconsider these as having structurally complete BSCs.

Of the 61 Level 3 organizations, 40 organizations (26.8 percent) contained elementsof double-loop learning, while 55 (36.9 percent) had elements of linking compensationto the measurement system. The performance measurement systems of 36

Figure 3.BSC classification results

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organizations (24.2 percent) contained both double-loop learning and tie-in tocompensation. This means that four (40-36) organizations are classified as Level 4aBSC organizations, meaning that the performance measurement systems of these arestructurally complete and contain only the double-loop learning attribute of BSC use.Nineteen (55-36) organizations are classified as Level 4b BSC organizations, meaningthat the performance measurement systems of these are structurally complete andcontain only the linkage to compensation attribute of BSC use. The 36 organizationswhose BSCs contained both “use” elements consequently are Level 5 Level 5 BSCorganizations with fully developed BSCs that exemplify the BSC construct asdeveloped by Kaplan and Norton.

Research Question 2To answer Research Question 2, we examined differences between the 111 BSC and 38non-BSC organizations, and between the BSC organizations classified at differentlevels, along various performance measurement system factors: strategy, performancemeasurement system implementation, budgeting, performance dimensions, goals ofthe performance measurement system, and performance.

In examining the demographic data we found significant demographic differencesbetween the BSC and non-BSC organizations. We found that a significantly higherproportion of large organizations (employing over 500 employees) were classified as BSCorganizations (p # 0:05). Using a different measure of size we found that a significantlyhigher proportion of smaller organizations (sales below $250m) were classified asnon-BSC organizations (p # 0:05). Finally, we found that an equal proportion of both theBSC and non-BSC organizations were evaluated as profit centers.

Percentages of responding firms undertaking certain management control andperformance measurement practices at differing levels of the BSC taxonomy arepresented in Table I. A test of proportions was used to assess statistical significance(Johnson, 1984). According to the results presented in Table I, there are significantdifferences between the responses from the BSC and non-BSC groups in terms of thesenior management involvement in BSC implementation; prevalence of inappropriateperformance measures in the management system and/or measures not linked incause-effect relationships; linkage of budgeting system with the performancemeasurement system; perceived success of the performance measurement system;perception of financial success relative to competition; and own perception of whetherthe performance system was a BSC or not. We also find significant differences betweenthe responses from the Level 1 (basic) and Level 5 (advanced) BSC organizations alongsome of the management control and performance measurement practices.

Although we did not formulate a priori hypotheses concerning how BSCorganizations would differ from non-BSC organizations in regard to each of the sixfactors of comparison, the descriptive findings reported in Table I show a pattern thatex post are entirely consistent with management practices and performance results onewould expect in organizations with a structured, well articulated performancemeasurement system as compared to those lacking these attributes. Seniormanagement involvement is often critical in implementing complex systemsregardless of whether they deal with performance measurement, organizationalchange, costing systems, or an information technology system. Our results show ahigher level of senior management involvement among the BSC organizations

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Table I.Proportion oforganizations responding“agree/strongly agree” or“yes” to each survey item

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700

compared to the non-BSC ones (p # 0:001)[3]. The second part of Table I in which wepresent the percentage of organizations reporting senior management involvement bylevel of BSC implementation also indicates an increase in senior managementinvolvement corresponding with the presence of multiple attributes of Kaplan andNorton’s BSC. For example there is a marked difference between organizations at Level1 and those at Level 5 (p # 0:005)[4].

On average, we found that 36 percent of the BSC organizations, versus 55 percent ofthe non-BSC organizations, indicated that their performance measures wereinappropriate and/or performance measures were not linked in cause-effectrelationships; this difference was also statistically significant (p # 0:005). Thisdifference was significant when comparing Level 1 and Level 5 BSC organizations(p # 0:05). Having appropriate measures, i.e. those that are aligned with theorganization’s goals/strategies is important to ensure that organizations derivemaximum benefits from the implementation of a performance measurement system.Similarly, having performance measures that are linked in cause-effect relationships isalso a critical element of a well developed BSC.

Budgeting has been, and still is, considered as an important component of anorganization’s management control system, with many organizations spendingsignificant time and resources on this activity (Simons, 1987; Jensen, 2001). Kaplan andNorton (2001, 2008) note that a company’s budgeted process should ideally be closelyaligned to its BSC. Our results show that budgeting systems in BSC organizations aremore likely to be linked to the performance measurement system versus non-BSCorganizations (p # 0:001).

It is not reasonable to assume that higher level of senior management involvement,lower proportion of inappropriate measures and/or measures not linked in cause-effectrelationships and a higher level of linkage between budgeting and performancemeasurement system will likely lead to a perception that the performancemeasurement system will lead to the organization achieving desirable outcomes. Weobserved that a significantly higher proportion of BSC organizations positively ratedthe success of their performance measurement system given the goals selected by them( p # 0.001). One interpretation of this is that a BSC type performance measurementsystem provides more relevant (and perhaps valuable) information with respect to theorganization’s performance vis-a-vis its goals compared a non-BSC type performancemeasurement system. We also found a significant difference between Level 1 and Level5 BSC organizations along this aspect (p # 0:005).

Another interesting aspect of this study was to ask respondents to evaluate theirperformance, against their competitors, along five measures:

(1) customer satisfaction;

(2) product/service quality;

(3) return on equity (ROE);

(4) sales margin; and

(5) market share.

The only significant difference we found pertained to the ROE measure. Only 8 percentof the BSC organizations rated themselves as having a below average ROE whencompared to rivals, whereas 29 percent of the non-BSC organizations rated themselves as

When is a BSCa BSC?

701

having a below average ROE. This difference is significant (p # 0:001); however,readers must be careful when drawing conclusions from self-assessed performance data.The lack of significant differences on the other dimensions of comparison might be dueto the construct validity problems. Customer satisfaction or product quality are difficultto measure for organizations and use for comparing against competitors. Respondentsmight have had this in mind when answering the questions on the survey. Sales marginand market share are performance variables closely correlated in principle with customersatisfaction and consequently it should not be a surprise that our data failed to identifysignificant differences on these performance measures. Overall, we find some importantdifferences between BSC and non-BSC organizations, as well as between organizationsplaced at the two extreme levels within the BSC taxonomy (Level 1 and Level 5).

Comparison with results in prior literatureIn light of our earlier discussion of the similarities and differences between the BSCtaxonomies of this study and that of Speckbacher et al. (2003) and Stemsrudhagen(2004), we examine if the results of our study are substantively different from those twostudies. First, we applied the Speckbacher et al. (2003) classification scheme to oursurvey data. Employing their three-level typology led us to classify 75 organizations(50.3 percent) as BSC organizations; this number is much lower than the 111 (74.5percent) according to our classification scheme. There are two main reasons for thisdifference. First, our criteria for labeling an organization’s performance measurementsystem as a Balanced Scorecard is that the measures should be derived from strategy,whereas Speckbacher et al.’s criteria include the additional component of balance.Second, in their study, the respondents self-classified themselves as BSC organizations,whereas in our study, we labeled organizations as BSC or non-BSC based on theirresponses to specific questions. However, if we were to use only those respondents thatself-classified themselves as BSC organizations, our numbers are very similar to theirs(23 percent versus 24 percent). Interestingly, a higher proportion of their BSCorganizations are Type I, whereas ours are Type III. We present a comparativesummary of our results versus Speckbacher et al.’s using their typology in Table II.

A critical difference between the two studies is the use of the term “balancedscorecard” in the survey questionnaire. Speckbacher et al.’s (2003) study explicitly usedthe term “balanced scorecard” in the survey, which we did not. In order not to bias theresults, we positioned the following question near the end of the survey: “Do you think

This study

Speckbacher et al. (2003) All respondents

Respondents who indicatedtheir performance

measurement system was aBSC

n

Percentageof BSCusers

Percentageof all

respondents n

Percentageof BSCusers

Percentageof all

respondents n

Percentageof BSCusers

Percentageof all

respondents

Type 1 21 50 12 14 19 9 2 6 1Type 2 9 21 5 6 8 4 0 0 0Type 3 12 29 7 55 73 37 33 94 22

42 100 24 75 100 50 35 100 23

Table II.Comparative summary ofresults

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your performance measurement system is a balanced scorecard?”. Finally, and moreimportantly, respondents to Speckbacher et al.’s survey self-identified themselves as aBSC organization, whereas this study used the respondent’s answers to several surveyquestions in order to classify the level of implementation of their performancemeasurement systems. Given these differences, we believe that our study is not areplication of Speckbacher’s study, but rather it is an improved approach to reach ashared research objective of better understanding what a BSC is.

One interesting result was the answer to the final question in the survey where weasked respondents whether they believed that their organization’s performancemeasurement system was a balanced scorecard. As classified by the BSC taxonomy,only 41 percent of the BSC organizations indicated they thought they had a BSC,whereas 16 percent of the non-BSC organizations thought they had a BSC; thisdifference is statistically significant (p # 0:01). Although 41 percent appears to be alow number of organizations self-identifying as BSC organizations, it is comforting tonote that it is significantly higher compared to the non-BSC organizations. We suspectthat the difference is due to an awareness of best practice in the area of performance,but lack of awareness of the term BSC. There are competing frameworks such as Nanniet al.’s (1992) integrated performance measurement system and Neely et al.’s (2002)performance prism, or even books which outline BSC-like measurement systemswithout specifically mentioning the BSC.

Fifty-six percent of the Level 5 BSC organizations versus 31 percent of the Level 1BSC organizations stated that they thought their performance measurement systemwas a Balanced Scorecard; this difference is not statistically significant (p $ 0:10).However, there is a strong linear correlation (r . 0:80) between BSC levels andpercentage of respondents stating that they thought their performance measurementsystem was a BSC. This may be interpreted to suggest that mature BSC organizationsappear to understand the different attributes of Kaplan and Norton’s BalancedScorecard and are consciously adopting them.

Stemsrudhagen (2004) compared the two contrasting views of performancemeasurement systems of Malmi (2001) and Simons (1990). Malmi (2001) suggests thatfor a measurement system to be a BSC, it needs to be have been implemented through aplanned, well-structured implementation process and cover all the elements outlinedby Kaplan and Norton. Whereas, Simons (1990) suggests that the performancemeasurement systems should emerge through interactions between managers anddisparate sources of information employed by managers. The resulting systems mayhave structures that are identical to those prescribed by the BSC, without theorganization actually designing a BSC. The results of this study suggest that both theplanned and emergent approaches to implementing a BSC are likely. It appears that asorganizations move up the BSC levels, many make a conscious decision to implement aBSC, while almost as many do not (56 percent of the Level 5 BSC organizations saidthat their performance measurement system was a BSC).

ConclusionKaplan and Norton (1996, 2001) argue that the Balanced Scorecard is not just anotherperformance measurement system, but rather it is a holistic strategic performancemeasurement and management system – a tool that management can use to assist theorganization in reaching its vision/mission and strategy. They argue that firms

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contemplating implementing a BSC require commitment from senior management andthat unless the firm’s performance measurement system is tied to its strategy, thepotential benefits of the BSC are unlikely to be realized. Further, organizations that failto link performance measures in cause and effect relationships, or have measurementsystems with a paucity of non-financial measures, are also likely to be unsuccessful.While the performance measurement community awaits empirical findings thatsupport the presence of these benefits in the organizations that have implementedadvanced BSCs, there is an implicit assumption in many empirical studies that allfirms that have implemented a BSC, have done so in similar ways. Although there isresearch showing there is no agreement as to what a BSC is, or when an organizationmight be considered as a BSC organization, no research has sought to empiricallyvalidate this assumption. Our research attempts to address this gap in the performancemeasurement literature. We developed a taxonomy for describing organizations withBSCs that do not fully conform Kaplan and Norton’s BSC construct. The study thenposited two research questions aimed at describing:

(1) the BSC implementation landscape in terms of the classification scheme wedeveloped; and

(2) the distribution of the BSC firms along the five levels of our classificationscheme and the characteristics of those firms.

If firms were clustered at any particular level of BSC implementation, this wouldinform future researchers regarding what may be expected with respect to the level ofBSC implementation in organizations. If the characteristics of the firms differeddepending on the level of BSC implementation, this too would be relevant toresearchers since testable hypotheses about the effect of the BSC on performance couldbe localized at a given level of BSC implementation.

Based on our study’s BSC taxonomy we found that 24.2 percent had fully developedBSCs (Level 5), and an additional 16.8 percent had structurally complete BSCs with atleast one use attribute (Level 3 plus 4a and 4b). We found that senior managementinvolvement in the implementation process was higher in BSC firms; a smaller numberof BSC firms reported their performance measurement systems as being contaminatedwith inappropriate measures and/or measures not linked in cause-effect relationships;more BSC firms reported explicit links between traditional management controlssystems like the budget and the BSC; more BSC firms tended to view their performancemeasurement systems as a success; and finally, fewer BSC firms tended to perceivetheir ROE performance as inferior to their competitors. These results provide someindirect support to the conclusion that BSC firms are more likely to experience thebenefits envisioned by Kaplan and Norton from adopting the BSC, since thecharacteristics of comparison between the BSC and non-BSC firms are very likelycorrelated with success. For example, it is difficult to contemplate how a firm canachieve success in implementing strategy and monitor performance without theattention and commitment of senior management. Nonetheless, we remind the reader tointerpret this finding with caution. Improved organizational performance is likely afunction of several factors; a performance measurement system aligned with theorganization’s strategy may be just one of the factors (Bourne et al., 2005). Moreover,there may be significant differences among the performance measurement systems ofsample firms; these differences might pertain to the actual performance metrics, the

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nature of the incentives tied to performance, the length of time BSC has been in place inthe organization and the acceptance of the BSC within the organization.

Our study’s results reveals some clustering along the five levels of BSCimplementation, with about a third of the sample firms with a BSC reporting a Level 5BSC implementation. When we examine the firms in each level it would seem that themajor differences are between Level 1 and Level 5 organizations. The most markeddifference being for the senior management involvement, inappropriate performancemeasures and/or measures not linked in cause-effect relationships, and success of theperformance measurement system. These results seem to make sense. If organizationswish to progress to higher levels of BSC implementation greater involvement of seniormanagement is needed; and as organizations strive to implement a BSC with all of thenuances of the Kaplan and Norton construct, there is a greater requirement for theorganization to ensure that traditional control systems like the budget is made toarticulate with the BSC. The small sample sizes in each cell precluded us from carryingout tests of significance for differences (except for the Level 1 and Level 5organizations). This study points to the need for further research in the area ofinvestigating differences between organizations with lower level BSCs and those withfully complete BSCs. Future studies may focus on BSC use in other countries and innot-for-profit industries (c.f. Greiling, 2010).

The study’s primary contribution for practitioners is its description of currentperformance measurement system practices in Canadian organizations, which allowsmanagers to guide and gauge their organization’s BSC implementation progress ascompared to the BSC taxonomy.

This study is not without its limitations. A sincere attempt was made to ensure thatthe survey link was not sent to multiple professional accountants employed in a singleorganization (business unit); nonetheless it is possible that more than one person in anorganization received and answered the survey. This could have occurred if theindividual had changed employers and not updated their member profile, or if theperson receiving the survey link forwarded it to one or more people in the organization.If so, then each response cannot be considered to be an individual organization. Theanonymity of the survey meant that the possibility of more than one response from anorganization could not be verified.

A second limitation is that the low response rate may limit the generalizability of theresults. Added to this is the fact that our sample is somewhat biased in terms of the typeof respondents (e.g. higher proportion of controllers) and the industries (bias towardsmanufacturing organizations). Nonetheless, the absolute number of responses is largeenough to provide results that offer some consistency and validation of the taxonomy. Afinal potential limitation may be the lack of clarity of certain questions or specific termsused in the questionnaire. We attempted to mitigate this by pre-testing the survey withseveral academics and three professional accountants before finalizing it.

Notes

1. Kaplan and Norton (2001, p. 375) later reported that firms should typically have 25 measuresdivided among the four perspectives: 22 percent in the financial perspective, 22 percent in thecustomer perspective, 22 percent in the learning and growth perspective, and 36 percent inthe internal business process perspective.

2. All percentages are calculated based on the 149 responding firms.

When is a BSCa BSC?

705

3. We also found a greater presence of a cross-functional involvement in the BSC organizationscompared to the non-BSC organizations (not reported in Table I).

4. We compare only the Level 1 and Level 5 BSC organizations; Level 1 represents a basic BSC,whereas Level 5 represents a fully developed BSC.

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About the authorsMarvin Soderberg, BComm, MSc, CMA, is a Human Resources Advisor with the Alberta Unionof Public Employees. He received his Bachelor of Commerce and Master of Science from theEdwards School of Business, University of Saskatchewan. He previously has taughtmanagement and financial accounting at various colleges in Canada.

Suresh Kalagnanam, PhD, CMA, CGA, is an Associate Professor at the Edwards School ofBusiness, University of Saskatchewan. He received his PhD in Business from the University ofWisconsin-Madison. His teaching and research areas are management accounting, managementcontrol and performance measurement. Suresh Kalagnanam is the corresponding author and canbe contacted at: kalagnanam@edwards.usask.ca

Norman T. Sheehan, BComm, MBA, PhD, CGA, CMA, is an Associate Professor at theEdwards School of Business, University of Saskatchewan. He received his PhD in Strategy fromthe BI Norwegian School of Management and Copenhagen Business School. He teaches, publishesand advises in the areas of strategy formulation, strategy implementation/performancemeasurement, and risk management.

Ganesh Vaidyanathan, PhD, CGA, CMA, is Head and Associate Professor at the EdwardsSchool of Business, University of Saskatchewan. He received his PhD in Management Sciencesfrom the University of Waterloo. His current interests are in business performance management,internal control, and accounting information systems. He also has interests in finance andstrategic management. He has co-authored two textbooks – in statistics and in managementaccounting – and has published several articles in scholarly journals, including Journal ofApplied Corporate Finance, Qualitative Research in Accounting and Management, and Issues inAccounting Education.

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