Significant Benefits From A Scorecard System example essay topic

When an organization implements any management control tool, the cost / benefit balance is vital. The decision to deploy a scorecard system requires the same analysis. The costs of implementing a new tool are relatively easy to appraise, but often, there's a lack of reliable information about the benefits. This article explores the extent to which organizations have realized significant benefits from using a scorecard system. (We use the term 'scorecard system' to include both the scorecard as a control tool and the process, or technique, of integrating the scorecard system into the overall performance-achievement cycle of the firm.) Over 150 service, manufacturing, and government organizations have responded to an on-line scorecard survey sponsored by the AICPA, CAM-I, CMA Canada, IQPC, Targus Corporation, and Hyperion (web).

This article is the first in a series focusing on key themes from our findings. Almost two-thirds of the survey respondents agreed that significant benefits had been realized from using a scorecard system. During the data analysis, respondents were divided into two groups: those that reported significant benefits from scorecard implementation (the 'significant benefits group,' hereafter SBG) and those that reported no significant benefits (the 'no significant benefits group,' hereafter NSBG). Organizations can maximize the benefit they receive from a scorecard implementation by following the recommendations provided below.

These recommendations also provide a gauge by which to appraise existing scorecard systems. Impetus for Scorecard Aligning employee behaviour with organizational goals and communicating strategy throughout the organization are important objectives of the scorecard system. The SBG unanimously set these reasons as a top priority, whereas only 39% of the NSBG cited these as objectives for implementing a scorecard system. A typical comment of the respondents was, 'Perhaps the best benefits have been a disciplined approach to agreeing on what is most important to the organization and developing consensus on how to measure it. ' Thus, a careful appraisal should be made of the reasons your organization is considering a scorecard system. Organizations that have had difficulty communicating strategy and aligning behaviour should realize significant benefits from a scorecard system assuming that a lack of focus on commonly accepted goals has had debilitating effects in the organization.

A related observation is that employees in the SBG both accepted the scorecard system and used it as an effective management-control tool, whereas there was only minimal acceptance and use in the NSBG. Often, the benefits of a scorecard system are soft ones, but organizations in our survey also reported documented benefits such as a reduction in overheads of 25% in three years and 'significant improvement in employee satisfaction and the highest sales and profit ever. ' This result isn't unexpected: if communicating strategy and aligning employee behaviour with strategy aren't top priorities of a scorecard system, employees won't see value in using the system. Compensation links Employees value what's measured but too often what's measured isn't of value to the organization. The study reveals a much stronger link between measures appearing on the scorecards and the compensation and reward system for the SBG than for the NSBG. As one company noted, 'Employees throughout the organization have become more aware of business plan goals and objectives and strive for higher performance' due to scorecard implementation.

Another company noted that the system resulted in a significant improvement in employee satisfaction. As almost all agree, measures motivate - one way or another. While we recommend that you link scorecard measures to compensation and rewards, you should also exercise care in doing so. Taking a year or so to evaluate the validity and reliability of measures, as well as the cause-effect validity of the entire scorecard system, is a prudent policy. Strategic ties A frequent observation of managers in the SBG is, ' (The scorecard system) has helped to better align operational improvements with the overall strategy of the organization. ' Ties to strategy can be formal or informal.

Perhaps the strongest formal tie to strategy is to assign responsibility for strategic initiatives to people (teams, departments, etc.) and to place measures for these initiatives on related scorecards. Scorecards can also roll up to the next level in the organization, and measures and perspectives can be weighted to give priority to the most critical components of the company strategy. Enlarge 200% Enlarge 400% Table 1 PROFILE OF AN ORGANIZATION REALIZING SIGNIFICANT BENEFITS FROM ITS SCORECARD SYSTEM Extent of Agreement (1 = Strongly Agree, 7 = Strongly Disagree) Here the study revealed a startling contrast. One hundred per cent of the SBG reported some formal tie to strategy. In sharp contrast, 43% of the NSBG reported no tic at all to strategy. Be sure there is a strong formal tie to strategy.

The best way to do this is by assigning accountability for actions and placing appropriate measures on the scorecards of responsible people or groups of people. Pervasive plans Scorecards can be used for many critical functions and business areas beyond the corporate office. These include individual managers, teams, divisions, customers, functional areas, and product / service functions. Our results indicate that while almost all organizations (both SBG and NSBG) maintain scorecards at the corporate level, the SBG used them almost twice as often in other areas. The implementation method most often used by both groups was to develop a scorecard for the corporate level first and then roll out scorecards to other areas. In your implementation plan, be sure to include a pervasive application of the scorecard system in business areas that are held accountable for strategic actions.

ABC values One role of the scorecard system in management control is monitoring and reporting strategy execution. Overall strategy is set and put into motion (including targets for key performance indicators) before results can be measured and scores used for control purposes. Many measures (including all financial measures and all mixed measures such as cost per order or cost per shipment) used in targets and scores are generated by and rely upon the cost accounting system. Inaccurate cost data can have a debilitating effect on the entire control system.

Henry Morris of IDC notes, 'A balanced scorecard without activity-based models relies on error-prone allocations,' implying that activity-based costing is a key element of a scorecard implementation. To investigate the hypothesis that costing accuracy affects the success of a scorecard system, the survey asked for the use frequency of activity-based costing (ABC) systems and the value obtained (in driving the organization towards its vision) from the use of such systems. For the SBG, 60% used an ABC system and its value, on average, was rated very highly. For the NSBG, only 36% used an ABC system and its value, on average, was rated as low to medium.

Thus, there is solid evidence that the use of an ABC system in concert with a scorecard system yields significant benefits. If a company wants to deploy both better cost accounting and better performance measurement systems, but can't do both at once, it should carefully consider its needs. ABC is known to support improvements in operational efficiencies, whereas a scorecard system supports a change in strategy. However, an ABC system also has strategic benefits. As noted by Peter Drucker, 'Questions (concerning strategic alignment with objectives) can only be answered by analyzing the activities that are needed to attain objectives.

' Thus, it may not make much sense to deploy a scorecard system that relies on inaccurate cost data. It's important to evaluate the overall cost accounting system before making the decision to deploy a scorecard system. The benefits achieved will be greater if the costing system is highly accurate. It would be wise to consider deploying both systems simultaneously if resources permit. Based on the findings reported above, we have developed a short questionnaire shown in Table 1 that can be used as an assessment tool.

The attributes listed in Table 1 can be thought of as key value drivers for this management control tool. If any check marks are in the shaded boxes or if the total score is greater than 15, we highly recommend a careful review of the factors in question. While there are other factors that play a role in the successful deployment of a scorecard system, from our findings, these appear to be the most significant. Indeed, our findings strongly suggest that the absence of these drivers may result in an unsuccessful experience with the scorecard system.