The Balanced Scorecard is described as the instrumentation that managers need to navigate to success.

It is seen as a new framework for integrating measures derived from strategy. It develops from selected financial measures of past performance and the organisational mission and strategy - the drivers of future performance. These drivers encompass customers, the internal business process, growth and learning and the final measurement is the progress from an explicit and rigourous translation of the organisations strategy. As would be professional accountants, possibly already holding down a degree of responsibility in an organisation, it is pertinent to ask what was wrong with previous measures of performance. After all, good financial management and control were an integral part of the success of the industries that grew out of the Industrial Revolution (Johnson and Kaplan 1987). However, critics argue that there is an over emphasis on financial performance which centres on excessive short-termism. This alleged short-term approach has led to the exclusion of anything that does not provide a quick return. Obvious examples are R&D or in the recent (mid-1999) case of Wisconsin Central, even new fixed assets to develop a new acquisition and increase its long-term market share. Critics support their arguments by pointing to the lead that Japan has developed over its western competitors and point to the greater emphasis on a long-term approach favoured by the Japanese. The four aspects of the Balanced Scorecard The Balanced Scorecard has four basic perspectives:

financial; customer; internal business process; learning and growth. Financial As accountants, we can breathe a sigh of relief. The voluminous monthly brochure is replaced by a number of key financial measures. For some bizarre reason, prominence is given to Return on Capital Employed (ROCE). Scepticism arises from the excellent review provided by Wilson and Chua (1993). While ROCE, or as they put it, ROI (Return on Investment) is generally accepted and readily understood, it must not be forgotten that:

there is still a lack of consensus on the definition of both the numerator and the denominator; it is susceptible to short-term manipulation; when used on a divisional basis, there is the risk of preference being given to local divisional
performance at the expense of overall group performance;

the problems of measuring businesses that have either a low cost base, or a low asset base.
As a result of this latter drawback, ROCE/ROI can actually provide misleading information and lead to incorrect decision making. Critics of accounting and finance obsessed management decisions, such as those alleged at Wisconsin Central will point to the increased investment resulting in short-term decline in ROCE. It is also worth noting that Wilson and Chua emphasise that ROCE/ROI is only one measure. Almost in anticipation of the logic behind the Balanced Scorecard, they warn that business problems are multivariate, and cannot be reduced to univariate status. As such, they enthusiastically advocate the use of many measures which will include using non-financial information. Mercifully, ROCE is not seen as the all inclusive financial measure. Another key financial measure is cash flow. A business must generate cash. In a strategic context, the student should be familiar with the Boston Grid and the importance of the cash cow the product that has recovered all its development costs, requires minimal advertising and marketing costs and as such generates the vital cash to enable the business and fund new rising start products. Cash flow must be regularly monitored, and the simple quick and current liquidity ratios will easily provide that. Such ratios can be usefully compared with previous year, previous month and readily projected. More to the point, projections can be made as to when cash will be generated and when it will be expended. This will be particularly important with new projects/products. When will the outgoings be replaced by income? There has to be some form of forecast. The complexity of the business and its products/services will dictate how complicated and how detailed such a forecast should be. A well run business will know its expected

sales, what it hopes or wants to achieve. From that the gross margin and the net profit after all expenses can be readily worked out. However, there are two points that need consideration. First, how reliable are these forecasts? This will again depend upon the nature of the business. Where there is a long-term product cycle, such as in any form of capital good manufacture, the order book and delivery schedule should provide an accurate profile of the sales. Knowing the product costs and fixed expenses, a reliable forecast or budget can be produced. However, where a business is reliant on a very short-term delivery cycle, such as the retail sector, then it is less easy to predict the future. Secondly, how demanding are such forecasts or budgets. Students should recall from their studies of the behavioural aspects of budgets that a delicate balance has to be achieved between a demanding budget and an impossible one. This is where the context of the Balanced Scorecard starts to appear. A forecast must have the input of the non-financial departments and the commitment of those departments. The agreed forecast inherently commits the sales force to go out and get the business in. This means converting even the most staid and complacent organisation into one that is enthusiastic about pulling in customers and retaining and developing its existing customers. A final feature is the sales backlog. Clearly, the original proponents of the Balanced Scorecard envisage a jobbing or batch business where deliveries traditionally run late. Hopefully, such information will inspire management to ensure that the product is delivered on time and in working order. The implications for longterm strategy of this measure are quite fundamental. For example, train makers in the UK enjoyed very healthy order books in late 1999. However, one particular order for operation within Scotland due in August 1999 is running late, while a similar order for the English Midlands was delivered in the spring of 1999, but has been plagued with problems. By contrast, equipment delivered from both Canada and Spain has been on time and worked to specification almost immediately. In a world that is increasingly competitive, and where few industries can hope for any form of protection, any strategy must include timely delivery to specification. The customer must be able to literally open the box and drive it away! This list is not exhaustive. The student must look at financial performance measure, assess which favour short-term and/or long-term decisions, and identify which go beyond attention directing into the world of action motivation. Financial performance measures must no longer be about just keeping the score, but be about motivating management and the organisation to do better. The customer perspective R C Townsend, of Up the Organisation fame, always argued that marketing was the name of the game. Marketing is not a staff function for people who cannot sell, nor is it a synonym for selling. It covers all aspects of the business. Townsend saw it as a line task, with the direction coming from the top. It starts with periodic review and rethink of the business the product(s), market, price, how and in what form are customers reached. As hoteliers, are we in the business or tourist market? Do we provide family hotels? At what level of luxury (i.e., star numbers) do we operate? As volume automobile builders, how do we encourage people to spend more that $40,000? Toyota has developed the highly successful Lexus, while Ford acquired Jaguar. More recently, P&O have decided to move out of non-shipping activities. This is a major reversal of decisions made in the 1960s when passenger liners were losing out to the airlines and traditional freight under severe competition from flags of convenience and emerging national fleets. As a result, there was diversification away from traditional shipping. Now, with cruising booming, shipping activities are the major earners. In the customer perspective of the Balanced Scorecard, companies identify the customer and market segments in which they have chosen to compete. These segments represent the sources of income that will deliver the revenue component of the companys financial objectives. As such, the customer perspective enables the business to align their core customer outcome measures satisfaction, loyalty, retention, acquisition and profitablity to customers and market segments. Essential to business success is value to the customer - i.e., the ability to deliver the product/service that is valued by the customer. This could mean looking very carefully at the product and the market and identifying what the customer wants and values. In many ways, it is back to the classic rhetorical question, "What does a customer want when he pays 24,000/$40,000 for an automobile?"

Market segmentation This is the first aspect of the Customer Perspective. Kaplan and Norton provide a useful example from a US petroleum retailer. This company identified five groups: 1 High income/mileage road warriors who buy on a credit card and possibly buy other things at the gas station. 2 True blues who have high incomes, but are loyal to a particular brand and often the same gas station. 3 F3 (Fuel, Food and Fast!). Upwardly mobile young professionals under the age of 25 who drive a lot and snack heavily from convenience stores. 4 Homebodies - local people who use the local gas station. 5 Price shoppers - those who buy the cheapest fuel and shop around between offers. The analysis revealed that the Price Shoppers were 20% of the customers, and only generated 20% or less of the profits. It was the "Road Warriors", "True Blues" and F3 categories who generated the most profit 59%. Strategy was thus shifted to emphasise these particular market sectors. It is difficult to translate such an illustration to the UK and Europe. However UK students may notice two things:

price shoppers may get their fuel from supermarkets; there is one European major who is consistently higher in price than the others. Perhaps that one is
emulating the US retailer outlined above. Customer core: market share Market share reflects the proportion of business in a given market. This can be expressed in terms of number of customers, /$ spent or unit volume. The size of the market can easily be obtained from trade associations, government statistics or even something like Yellow Pages. In any trade category, how many of the businesses listed are your customers/clients? Share may not be about numbers of customers. It may be a good strategy to look at the number of customers, attempt to identify what the average income is and see if it is better to actually reduce the number and aim for the larger and more profitable ones. A customer has a certain level of cost to service. It is good business strategy to increase the ratio of service cost to revenue. Customer retention Obviously, this is only relevant where a business can readily identify individual customers. Any retailer in the High Street is one who cannot. Retention is about repeat business. There are many businesses that provide a one off good/service. Double glazing is such an example. One UK firm even trades on emphasising that since it is such a job, then potential customers should fit the best i.e., theirs. In the service sector, a substantial proportion of a solicitors work is one off and they actually quite envy the accountant with his annual accounts and tax returns. Where customers can be easily identified, customer retention can be easily measured both by the duration of their stay, and the growth of that business with individual customers. Customer acquisition Obviously, where individual customers can be identified, this can be readily measured by the absolute increase in the number of customers. Ratios can be monitored, the ratio of conversion to initial solicitation. How many cold calls? How many interested responses? How many follow ups needed? Literature requests? Existing customers can also be targets for developing related business. Students should notice how the banking and financial services sector bombards its customers with offers of additional services. Customer satisfaction This provides a vital indicator as to how well the company is doing. Recently, there has been much emphasis on both sides of the Atlantic that companies cannot rely 100% on retaining even so-called satisfied customers. As a result, many companies use customer surveys. Some write to their customers, others call

them up, others even arrange for personal interviews. The quality of the results may vary, but it is argued that valuable insight is given into what the customer wants. The cynical student may rightly express doubts about sample sizes, statistical significance, the random nature of the population and even controls. The obvious problem is not measuring the customer who has bought something, but not being able to measure the customer who did not. Students might like to think about why a customer buys from A even when he has to pass B who has the identical product on offer. A can measure his sale. The manufacturer can measure his sale, but B cannot measure his failure and try to put it right. Customer profitability Some allusion has already been made to the fact that customers have a cost and that some customers or markets are more profitable than others. It is important to be able to identify products or markets and see if they are profitable or not. This is not a new concept. A major electronics company was producing quarterly product profit and loss account back in the early 1970s. The exercise had its faults, mainly because many overheads were being apportioned rather than allocated according to cost drivers, but it was a move in the right direction. Using reliable ABC methods and correctly identifying the cost drivers will enable the profitable customers to be identified, and also the costs that do not either add value or increase the customer base. An obvious example of the latter is advertising. Not all markets require advertising, so correctly aligning cost drivers and customers will enable the age old conundrum to finally be answered, "What part of the advertising budget is worthwhile?" However, there are perhaps two caveats to this. First of all, there may be customers that of themselves are not very profitable, but they attract other customers or lead to more profitable business. Secondly, there may be customers that are initially unprofitable, but grow to be very profitable. A third point might be identifying where the money is made. The initial sale may be at a very competitive even give away price. However, after sales service may be required, perhaps as a condition of any guarantee, resulting in very expensive (and to the supplier very profitable) service support. Customer value There are a number of aspects to this. (i) Product/service attributes. This is a function of a product actually does, its price and quality. A volume car costing 10k/$16.5k will provide its owner with reliable (?) and convenient personal transport. However, a vehicle costing 24k/$40k has to do more, including saying certain unquantifiable things about the purchaser. (ii) Relationship is about knowledgeable sales staff, and staff who respond. The allusion above about going to B in preference to A for the same product may be about a superior, more responsive staff. (iii) Image is an intangible factor. It may be about what the product does for the customer. Volume cars illustrate this point very well. The purchase of a car is more than just buying convenient personal transport. It is frequently an expression of the actual customer. It is also about the level of value that the customer is looking for. If a person is successful, upwardly mobile and confident, he wants a car that will illustrate that. As a result, such people will often spend over 24k/$40k and buy a non volume or specialist car. This means the volume producers have lost a customer. Experience has painfully taught them that there is a level at which customers will not pay for a volume car, no matter what features it has. As a result, Toyota produce the non volume Lexus and Ford have acquired Jaguar. The customer has the product that gives off the right image, and the producer has retained his upwardly mobile customer. Internal business process/perspective This is about the internal value chain. This is also about an important move away from tradition. Any student who looks at, or who is involved in the preparation of traditional reports will find that there is an over emphasis on production. This is not saying that production is unimportant, rather it is arguing that the

error lies in over emphasis on production to the exclusion of two other vital factors - innovation and post sales. Innovation The student should not remember the basic tenets of the former SSAP 13 or Paragraph 5 of FRSSE (Effective March 1999). Essentially all pure research should be written off to the profit and loss account as it is incurred. Equally, development expenses should only be carried forward against recognisable projects. From the Kaplan and Johnson standpoint, this a more slavish obsession with financial accounting than the alleged misplaced veneration of total absorption costing. Traditionally, research was just written off as support cost, whereas the correct treatment should be to regard it as a critical internal process. To survive in the competitive world economy, companies must be effective, efficient and timely in the innovation process. The importance of the innovation cycle is most keenly felt where there are long design and development cycles such as in the pharmaceutical, agricultural chemicals, computer software and high-tech electronics industries. Most of the costs of such products are no longer in the production area (if they really ever were!) but in the development. What must drive efficient innovation is:

what range of benefits does the customer look for? perform the basic research to develop the new products/services; exploit existing technology to produce new products (this is important since it avoids reinventing
the wheel);

focus the development efforts on new products/services for the market.

To achieve this, there must be better control and monitoring of the research and development function. Historically, control was always lax in this area because the emphasis was on high volume low-tech products and the investment was tied up in production. Now, advantage in the market place is derived from a stream of new products. To that end, effective control can be achieved by measuring:

percentage of sales from new products; percentage of sales from proprietary (patent protected) products (especially in the pharmaceutical
industry);

new product introduction versus competitors; manufacturing process capabilities (how easy is it to make? how well does it use raw materials?); time to develop the next generation of products; development break even time.
Students will be familiar with the traditional break even analysis model. However, now consideration has to be given over time, with investment costs, sales revenue and ultimate profit monitored against time to evaluate time from inception to launch, and the revenues against costs after launch. The operations process Students who receive the bulk of their training in a manufacturing environment will be all too familiar with the traditional exercise of measuring variances, cost control exercises and analysis of labour usage. Yet this is A short-term view of value creation in modern manufacturing. What is really required is that once an order is received, it is always delivered efficiently and on time to the customer. To ensure that is achieved, measurement should be based upon quality, cycle time and certainly minimal wastage arising from rectification. Post sale (or delivery) service This final stage in the internal value chain includes warranty and repair, treatment of defects and returns and the process of payments. In a retail or consumer environment, this may include credit card administration. Automobile manufacturers, especially where the traditional culture is less powerful, have dramatically improved the image for customer service in the realms of warranty work, periodic maintenance (longer periods between services) and repairs. In pure retailing, this may take the form of how easy it might be to return goods. Monitoring becomes less and less pure financial. Speed of response is important, as is how quickly problems or calls are dealt with. When work has to be signed off as complete, and no money released until the work is signed off, then every effort must be made to minimise the delay in getting payment released.

Perhaps this area will enable students to see just how the traditional measurement systems fell short. This area must now identify the processes at which the company must excel if it is to stay ahead of its competitors. The whole internal process must be driven, not by cost savings within the existing business but by a desire to identify and satisfy the external expectations. Learning and growth In this area, the emphasis has changed. The objectives in learning and growth create the infrastructure whereby the financial, customer and internal process objectives might be achieved. It is agreed that to continue to be successful, organisations must invest in their people, their systems and procedures. Historically, such an emphasis has been seen as training and vulnerable to cuts in perceived non-value added costs. There are three principal categories for learning and growth and they go far beyond the old ideas of what constituted training. 1 Employee capabilities Students should recall McGregors basis for Theory Y. Lest we forget, it was: people do not hate work. It is as natural as rest or play; they do not have to be forced or threatened (Etzionis coercion). If they commit themselves to mutual objectives, they will drive themselves more effectively than any boss can drive them; But they will commit themselves only to the extent they can see ways of satisfying their ego and development needs. (The higher levels of Maslows pyramid). It may be worth remembering that if workers, such as those in the famous Luton study, satisfy their egos outside the firm, then nothing inside will motivate them beyond satisfying their physiological needs. Townsend boasted that he developed his people at Avis by identifying their stengths, their needs, even their weaknesses and built the organisation around them. He called it a mistake ridden, faltering application, but it worked. Three measurements have been identified for employee capabilities: (i) Employee satisfaction Townsends rule of thumb was whether or not someone would come in on Saturday rather than mow the grass. This was not to catch up on work or to cover for inefficiency, this was out of enjoyment of the job and the desire to see things through. It is not surprising that employee satisfaction is measured in ways that would be recognised if not pioneered at Avis:

involvement with decisions; recognition for doing a good job; access to sufficient information to do the job well; active encouragement to be creative and use initiative; support from the staff functions; overall satisfaction with the company. Students can see a firm basis for wanting to be involved in the job, but the involvement must be possible. There must also be a climate of credibility. If there is a lack of satisfaction due to a history of broken promises, corporate fads and pseudo involvement, then satisfaction will be very low, and any attempt to change will be an uphill struggle. (ii) Employee retention Again, we are dealing with something that is not new. It has been over 40 years since the then ICWA produced a booklet on the cost of labour turnover. The ratio advocated then still has value in measuring leavings to number of staff. A high level of labour turnover will:

create gaps in the ranks; loss of effort from those leaving and the new starters;

cost of recruitment; increased training costs; impact of lack of experience and job knowledge. (iii) Employee productivity This is a serious attempt to relate output to the employees who create it. An obvious and simple method is revenue or contribution per employee. This is readily understood, has some limitations but given the right conditions, is likely to be accepted. 2 Information systems To be effective, employees need information. We have already seen that employee satisfaction depends upon information to enable them to do their jobs well. This information must be about customers, internal processes and feedback on the consequences, particularly the financial consequences of their decisions. The obvious examples are where they eliminate waste, eliminate defects and drive out excess costs and time wastage out of the production system. This illustration is used because it is the one with which students are most likely to be familiar, and also, it bolts onto existing systems. Obviously, some form of labour control is needed to identify what amount of labour is being put in and what should be put in. At the same time, the workforce needs to know what is required of them. This is a world away from the traditional methods of measuring the work by standard hours produced and giving the worker an answer but he had no idea where it came from. 3 Motivation, empowerment and alignment Before any effective measure of motivation can be achieved, it is essential to know what motivates the employees. This can vary from department to department and from individual to individual. Obvious measures that will make employees feel good are:

number of suggestions submitted; number of successful suggestions; details of benefits from suggestions; reward structure for benefits; reduction in late deliveries, defects, scrap and absenteeism. Such ideas among others, will both motivate people to do more and give them a sense that they are part of the team, rather than just pawns in a chess game. Alignment is a little more difficult. The objectives of the business and the strategy for their implementation must be identified, agreed and communicated. The measure that will indicate success must also be identified, agreed and communicated. This communication must go right down to the operating area, the socalled coal face. At the same time, there must be a clear appreciation of all the employees. A vital key to Bob Townsends success was getting to know the people. This enables management to understand how ideas, hope and plans will be received. This is not about testing the water and withdrawing if the atmosphere seems hostile, this is about getting people and their own personal goals and aspirations on your side and working together. Conclusion Since the student reading this is close to qualifying and being turned loose on an ignorant, poorly trained and unsuspecting world with all his drive, enthusiasm and motivation, he will be gratified that his skills are still required. However, he has to leave behind much of the traditional world of bean counting and scorekeeping. He has to go beyond preparing attention directing information. The Balanced Scorecard unequivocally demands action stimulating information. The nature of this will vary from organisation to organisation and be a function of inter alia business size, culture and industry sector. The successful accountant will devise such measures that will give the business the correct control and guidance tools for a successful and progressive operation. There must be a clear understanding of the market place, of the product, the market sector(s) and what the customer wants. Controls must focus on such things as the size of the customer base, customer/market profitability and trying to find out where the money is made, and how more can be made. The newly qualified accountant must appreciate these matters and also see where his vital skills fit in.

The same rule applies in the area of both Internal Business and Learning/Growth. There is an important point about internal business. Emphasis must shift away from the traditional monitoring of production labour to the nth degree. However, before final abandonment of such a well-trod path, the question, "What is important?" must be asked. Not every business spends large amounts on new products - a double glazed window is a double glazed window. In such a low-tech environment it remains a sobering thought to remember that some 75% of the cost structure is still materials, manufacturing and installation labour. Add in direct expenses such as plant or scaffolding hire, and direct advertising, and the percentage has become 80+. Bring in the fact that the bottom line percentage is only 5% of sales, then the traditional costs regain their traditional importance. The successful accountant, armed with his management accounting skills, must be able to see how that bottom line can be improved by faster production cycles, moreefficient better trained and motivated labour and better buying of materials. Clearly then, nothing has moved away from the essential concepts of management accounting. What has changed is the view that is taken and the use of the techniques in a wider and more progressive context.