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management accountant's role


Linna Ye and Will Seal report on their CIMA-backed research into the effectiveness otthis enduring strategic performance management tool at a multinational bank.
In 1998 the balanced scorecard (BSC) was estifTiated to be used by 600 of the Fortune 1.000 companies in the US and throughout Europe'. Although it remains a popular tool for guiding the formulation, communication and implementation of strategy, it has come in for criticism. Some empirical studies have ciaimed that problems such as budget overruns, resistance from empioyees and management failures have resulted in the termination or partial implementation of BSC projects. Tbere has also been scepticism about how balanced the scorecard actually is - and about the validity of its central assumption of a causeand-effect reiationship between the financial and non-financial aspects of a business. We bore these criticisms in mind during our recent study of a BSC system in a UKbased multinational bank, which had 70,000 employees and assets of !353bn at the end of 2007. The bank, which we can't name for confidentiality reasons, has been widely seen as a relatively safe pair of hands throughout the financial crisis. Crucially, the system was introduced with the CEO's enthusiastic support. Designed to improve the execution of strategy, it devolves responsibility for performance to the operating units, clarifying accountability at ail levels. The bank modified and expanded the conventional four-perspective BSC framework to the following five: customer; financial outcomes; franchise growth and operational development; leadership and people development; and risk management. Even before the credit crunch, the bank added the last perspective to reflect the particular regulatory and mar1<et pressures

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that characterise its industry. And it introduced the peopie perspective in the belief that the behaviour of individuals v^^ould maximise the contribution made by their teams and units. As a result, the business's BSC has been translated into individual scorecards, which effectively convert corporate objectives into personal ones. This approach has replaced the old appraisal system, which lacked balance. Saies staff now have a number of non-sales objectives, while other employees are working to some growth-orientated targets. The new system has been embedded in a formal and robust way. Staff who meet their BSC objectives are suitably remunerated. Those who exceed them will receive an extra bonus. Individuals who fait to meet their objectives are given support through a documented performance improvement plan, BSC performance results also affect people's promotion prospects. The merits of the BSC were well recognised in some departments. For example, a senior manager from the central HR function told us: "The finance community looks at the profit, HR iooks at HR things and the risk team looks at the risk bits. It's only when you have the BSC that you bring all those various areas together as one and decide things as a business. It's easy to make a profit this year and totally destroy the business, so if you purely look at profit you don't really know whether you're doing well or badly. The balanced scorecard does give you a chance." An FD from the wholesale and investment department added: "It gives everyone dayto-day clarity on what they need to do." But in other departments there was a lack of clarity about how to set measures. Some interviewees saw the implementation of the BSC as a useless, time-consuming process. "The problem we always have is that we set these things at the start of the financial year. A few months later there's so much other stuff the business then decides it wants to do that things change rapidly," said one line manager. "That makes it difficuit to stay focused on what's on the scorecard when you're trying to deliver everything else that's going on in the business." Furthermore, in some business units the BSC measures were simplified and rewards tended to be linked only to financia! outcomes rather than giving sufficient weight to the other four perspectives. Although the financial and non-financial indicators seemed to be placed according to a "balanced" view, the former were still seen as the dominant element. Despite these criticisms, the bank has used a manageable number of objectives and metrics to measure performance at both individual and business-unit level. The BSC appears to be dynamic and to interact effectively with the budgeting system. A key assumption of the BSC is that each performance measure is part of a causeand-effect relationship linking strategy formulation to financiai results. Measures of organisational learning and growth are assumed to be drivers of internai business processes. Measures of these processes are in turn assumed to be drivers of measures in the customer perspective. In turn, these measures are drivers of the financial perspective. Many interviewees believed in the basic logic of the BSC in the sense that "if we want to do X, we have to do Y", These beliefs are based not on a quantitative test of relationships among the different BSC perspectives but on perceived links. Indeed, the popular analogy comparing the BSC to a pilot's cockpit indicators seemed to hold for the bank's employees. So, while there may be no general cause-and-effect relationship between the direction of an aircraft and its fuel consumption, the pilot knows that both indicators are significant to the flight. In spite of some grey areas, we have found that the BSC has helped the bank to articulate and implement its strategy. Overall, most the respondents agreed that the BSC compared well with other performance measurement systems they had known. They said that it had led to "greater clarity", "greater structure" and "greater focus". The bank's relative success in the recent turbulent conditions may not be attributed directiy to the BSC. But its balance of financial and non-financial metrics and focus on risk management may have controlled the over-exuberant "chase for yield" and associated behaviour of the sort that helped to inflate the worldwide credit bubble. Will Seal is professor of management accounting and Linna Ye is a PhD student at Loughborough University.

Reference 1 S Silk, "Automating the balanced scorecard", Management Accounting. Vol 11, No 17, 1998.