Balanced scorecard, The

balanced scorecard, The

Smith, Malcolm

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.

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 nonfinancial 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-finandal 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 Mee1 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.

3 Ensure that the project is sponsored at senior management level.

4 Implement a pilot stage.

5 Introduce the scorecard gradually to each business unit once you are sure that the version you are using will serve their needs.

6 Do not use the scorecard as an extra method of hierarchical control.

7 Do not use a standardised product. The scorecard must be tailored to suit your firm’s needs.

8 Do not underestimate the need for training and communication. The ideas may seem simple, but some people will need a lot of convincing.

9 Do not overcomplicate the scorecard by striving for perfection. It will never be 100 per cent right, so don’t delay its implementation by searching for better indicators.

10 Do not underestimate the costs associated with recording, administrating and reporting.

The focus on “accounting” at the expense of “management” in management accounting research has meant that the gap between academia and practice has widened so much that the former could be seen to be out of touch with reality. A comparison of the output of the leading academic journals with the requirements of practitioners adds fuel to the fire. High on their list of preferences are studies on change management; the impact of new technology and regulations; and – most importantly – staff-related issues. Research into the HR aspects of management is needed by decision-makers in firms of all sizes, but such studies rarely grace the pages of the accounting research journals.

A serious reappraisal of the balanced scorecard is needed if its theoretical integrity is to match its practical usefulness. This would entail further research into the model’s key omissions and the generation of consistent evidence relating to its assumed causal links. Most of the research so far has tackled this through the development of new frameworks that purport to redress flaws in the balanced scorecard.

Rather than tinkering with the scorecard, perhaps we should return to a basic set of measures that appear to cover the major concerns associated with short-termism and the absence of HR features. General Electric’s framework from the 1950s might be suitable, with its focus on:

* Profitability (as measured by residual income).

* Market position (market share).

* Productivity of capital and labour compared with that of competitors.

* Product leadership (the level of product development).

* HR development (linking recruitment and training to future needs).

* Employee attitudes (motivation).

* Public responsibility (the level of ethical, environmental and community awareness).

* The balance of long- and short-range goals and strategies.

This list suggests a realistic management approach that takes a longer-term view and appreciates the importance of non-financial measures.

Despite all the uncertainty about the key relationships that underpin the balanced scorecard, it’s still the management accounting innovation that has had the biggest impact on practice over the past decade. It therefore deserves more research attention than it has attracted to date. Belatedly, empirical evidence on the specification of causal links is starting to emerge. Let’s hope for progress in the near future, because if we continue working to invalid assumptions, they are likely to lead to dysfunctional behaviour.


1 C Lewy and L du Mee. “The ten commandments of balanced scorecard implementation”. Management Control and Accounting, April 1998.

Malcolm Smith (malcolmsmith@ is professor of accounting at Leicester Business School.

Copyright Chartered Institute of Management Accountants Feb 2005

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