Balanced scorecard

You are part-way through your ACCA qualification and will certainly realise by now (if you hadn’t before) that accountancy is primarily a numbers-based discipline. In particular, the numbers focus on financial data: published financial statements, management accounts, financial management, tax calculations and auditing almost exclusively deal with financial information.

Of course, reliable financial information is vital for business management and survival, but reports of financial performance often show little more than historical score-keeping. Yes, sales might have increased but nothing in classical accounting explains why sales increased or suggests how sales growth can be sustained in the future. For a profit-seeking company, sustained financial success and long-term shareholder value are the ultimate objectives and the balanced scorecard of Kaplan and Norton (1992) suggests how this might be achieved.

The four perspectives

The balanced scorecard says that four sets of measurements are needed. The sets are called ‘perspectives’ and are:

  • financial perspective
  • customer perspective
  • internal business process perspective
  • innovation and learning perspective.

The financial perspective is the measurement of traditional financial performance: sales, costs, gross profit percentage, earnings per share, share price, etc. You will be familiar with these measures, but as explained above, they contain no explanation as to how the figures have been achieved.

To explain good financial performance, it is useful to look at the four perspectives as forming a hierarchy. Good financial performance depends on happy satisfied customers who return, spread the word and are happy to pay for the products or services offered.

Why do customers return? It is because the company is achieving excellence in areas that are important to customers. These areas can be listed as time, quality, performance and service (including flexibility), and cost. Customers differ in the emphasis they place on these. For example, some customers want fantastic quality and don’t worry so much about the cost. Others want very short lead times with a flexible approach. But whatever customers value, the company must deliver.

How are these customer requirements to be delivered? Of course, that will depend on the internal business process perspective, essentially the company’s capabilities to deliver what customers want. It might include long opening hours, an attractive and efficient website, high use of computer aided design or quality control procedures which ensure negligible rejected production.

So, the company might be achieving great financial results because it has a loyal band of happy customers who are buying an excellent product. But nothing in business stands still and you can be certain that customers’ tastes will change and that competitors will be trying to muscle in. Therefore, it is essential that the company pays attention to innovation and learning. It must never relax and must continually strive to keep up to date and improve its products and service. Otherwise, although current financial results are good, these will not be sustained if competitors become more successful and better at pleasing customers by delivering well on customers’ requirements.

Goals and measures

All elements of the perspectives must be reinforced by formal goals and measures. Goals define the general intentions and long-term ambitions of the business. An objective is a specific result that can be measured. For example, a company could have the goal of increasing brand awareness and one objective to achieving this goal might be to increase website visits by 20%. Or, the company’s goal under customer perspective could be to strengthen its customer base. This could be superficially measured by simply counting the number of receivables accounts but would be more usefully measured by counting the number of active sales accounts and more active sales accounts would be an objective.

Similarly, under internal business process perspective, excellent quality might be the goal, but this would need to be measured by metrics such as the number of reworked items, number of sales returns and number of warranty claims. Service industry measures can be more challenging. For example, the company might have a goal of delivering good service, but defining and measuring the various components necessary is difficult. Some sort of customer feedback is often used to assess employee performance. For example, 'Was the employee able to answer your query?', 'Did the employee seem knowledgeable?'

Without numerous performance measures across all perspectives, the balanced scorecard is pointless: no one knows what’s expected of them and no one knows if performance in each perspective is adequate. If the company thinks that an aspect of the balanced scorecard is important for sustainable success then it makes no sense to then not attempt to set targets and measure attainment – even if that is difficult to do directly. With the exception of the financial perspective, many of the measures of performance are non-financial (such as rejected items, number of customers, days to fulfil orders, number of new products launched). Many metrics also address qualities which are not easily quantifiable (such as customers’ opinions, service level, product styling, brand strength, etc). Even something as difficult to measure as employee morale is important in a service industry – no one wants to be dealt with by a grumpy employee! Possible indicators of morale are: staff turnover rate, days of employee sickness, customer feedback and complaints. These are imperfect, proxy measures of morale but are better than nothing – and if morale is important to success then attempts must be made to measure it.

Examples – success and failure

Success: Apple Inc

  • Financial perspective. Fantastically successful across every financial measure you could think of: profit, share price, cash reserves, etc.

  • Customer perspective. Held in awe by many customers as the designer and supplier of ‘cool’, high quality products that work well. Some would suggest that cost and price are not qualities that worry Apple’s customers too much as often their products are perceived to be more expensive. You can be certain that Apple knows its customers and their requirements very well. Sometime products are customised to suit particular international markets. When it seemed that iPhones were becoming too expensive for many customers Apple did not hesitate to introduce cheaper models with less functionality but still with very high quality. Customers needing high graphics functionality are particularly well-served.

  • Internal business process perspective. Products are designed by Apple but mainly manufactured by sub-contractor companies. Designs go through a rigorous testing process and the management of inventory and manufacturing is very slick. Quality is very high indeed. Apple will strike hard bargains with component manufacturers and will not tolerate poor quality. Production and distributions deadlines will be very carefully monitored.

  • Innovation and learning. The iPod, iTunes, iPhone, iPad and Apple Watch provide ample evidence for continual innovation. The operating systems are frequently updated. The company spent around $18bn on research and development for the year ended 30 June 2020. There is a carefully mapped out route timetable for new product development and release.

Advantages and criticisms of the balanced scorecard

Claimed advantages are:

  • Helps to clarify how sustained, good financial performance can be achieved: what do our customers expect? How do we deliver that well? How do we remain competitive?

  • How do different aspects of the business result in good financial performance? For example, if a new website is developed (innovation and learning), this could streamline the ordering and despatch process as these can be integrated and automated (internal business process perspective) and customers should be delighted because they can browse products, order easily and reliably receive the goods quickly.

  • Conversely, it can highlight how poor performance in any area can damage long-term prosperity.

  • All important aspects of a company’s existence are measured and monitored. Without the balanced scorecard, there is a danger that only financial results are studied. Without measurement the company is working blind.

  • Targets are set for current and future performance across a wide range of important activities and measures.

  • It helps to balance long-term and short-term objectives. Short-term objectives often take precedence over long term objectives such as when a company reduces research and development expenditure or reduces the number of customer-facing staff to achieve this year’s budgeted profit. However, those cost cuts may have adverse longer-term effects, which are picked up on customer perspective and innovation and learning measures.

Criticisms are:

  • Potential information overload. There are four perspectives and even just five measures for each will result in 20 overall. Some sort of prioritisation is certainly needed to stop managers concentrating on easy-to-achieve targets at the expense of vital objectives.

  • Picking or inventing measures can be difficult and perhaps arbitrary. As explained above, staff morale and customer satisfaction are important but will they be measured accurately?

  • Difficulty and cost in obtaining the information needed.

  • Conflict. For example, flexibility in supplying a customer with a product might adversely affect the quality of the product if it is made in a rush.

  • Too little attention to external factors such as competitor activity. It is very much our innovation, our processes, our customers.

Applying the balanced scorecard in an exam question:

ACCA PM March/July 2020 Sample CBE questions (the full question and solution can be found on the ACCA website)

Scenario 2 (extract)
Extracts from TripEvent, an influential online customer forum:

‘I love Hammocks Co; the service and attention to detail is exemplary and the resorts are always pristine. However, their competitor “Loungers” has full body driers, ionised water taps and a range of professional haircare equipment in all their rooms.’

‘Our third time back to Hammocks Co this year and we continue to be amazed by the wonderful level of service. One thing though is the menus don’t seem to have changed much from one visit to the next.’

‘We booked Hammocks Co on the spur of the moment but then found that we couldn’t get a flight. We called Hammocks Co administration centre to change our booking to another resort where we could get a flight to and were told that it would not be a problem. However, it took two more calls and three emails to get confirmation and then our credit card was charged twice in error. Of course, it was eventually all resolved, the incorrect charge refunded, a complimentary limousine provided to and from the airport and we received the most amazing customer service at the resort, but it was frustrating at the time.’

‘When I made my booking I was assured that my bed would be made with the special anti-allergenic bedding which I need for a good night’s sleep and that my favourite blend of tea would be available. When I arrived, neither of these requirements were met. To be fair to Hammocks Co though, everything was in order two hours later when I went to bed.’

Q (b)(i)
Explain TWO advantages of Hammocks Co using the balanced scorecard approach to performance management. (3 marks)

Draft answer:

Tutorial note: only 3 marks available, so not a lot needed. All the advantages listed above could be used but the important thing to note is that you must tailor this for Hammocks Co.

Implementing a balanced scorecard will help Hammock Co by:

  • Clarifying how the various classes of performance measure act together to produce good financial performance. For example, the invoicing error, though essentially trivial and eventually resolved to the customer’s satisfaction was an error in internal business processes which marred the customer’s experience. The error was made public.

  • Balancing long-term and short-term objectives. The menu is apparently successful but hasn’t changed. Developing new offerings will require experimentation and will incur immediate costs, but these should be recovered in the longer term.

Q (b)(ii)
Suggest and justify ONE goal and TWO performance measures for each of the TWO perspectives of the balanced scorecard which are not currently addressed by Hammock Co’s objectives. (9 marks)

Draft answer:

Tutorial note: 9 marks available so rather more needed. Elsewhere in the question it is clear that the company has already addressed financial and customer perspectives so the answer must address internal business process and innovation and learning perspectives. The following answer addresses only the number of elements required; others exist.

Internal business process perspective:

Goal: excellent administration so that specific arrangements made by customers (such as special bedding) are communicated and acted on.


  • Reported errors, for example on feedback forms and web pages
  • Delays in guests accessing rooms. This will indicate general housekeeping problems and investigation might uncover that some delays are caused by administration errors.


Justification: guest comments have indicated that the administration department has made a number of errors. Although not very serious, these errors do detract from customers’ perception of the business and hence its potential number of bookings and financial success.

Innovation and learning perspective:

Goal: to surpass competitors’ offerings on facilities and restaurant standards


  • Lists comparing competitors’ offerings to Hammock Co’s. This might require ‘mystery shoppers’ visiting other vacation resorts and listing facilities then comparing those to Hammock Co’s own.
  • Frequency of menu changes.

Justification: guest comments have indicated that Hammock Co’s facilities are not as good as some competitors’ and also that the menus seem staid and repetitive. If Hammock Co wants to present itself to customers as a luxury resort it has to live up to its promise and compete effectively by keeping up to date with trends and offering more variety on menus.

Written by Ken Garrett, a freelance lecturer and writer