• operation costing
• environmental/full cost accounting
• target costing
• transfer pricing
The goal of upper managers is to choose cost management approaches that are compatible with their culture and provide usable outcomes. Companies with significant cost distortion problems that leave millions of dollars on the table each year may benefit by working with an external resource that can per- form a high-level review of their management accounting sys- tem and recommend an affordable, customized solution.
The top managers start to build a BSC from the company’s vision and strategies. This is the vision statement portion of BSC. Then, they lay out key success factors. These are the pri- orities of the strategic plan. Since you can’t improve what you can’t measure, performance metrics must be developed based on these priorities. Processes are then designed to collect infor- mation relevant to these metrics and reduce it to numerical form for storage, display, and analysis. This integration of met- rics with vision is a primary feature of BSC.
BSC’s next innovation is to force management to evaluate the company from four perspectives:
• innovation/learning
• customer
• business processes
• financial
This step away from relying solely on financial measure- ments helps establish throughout the company a common
Feedback Loop
In traditional manufacturing since about 1920, quality control was a matter of inspection and testing at the end of the
production line.The problem with this approach, as pointed out by W.
Edwards Deming in the late 1940s, is that it didn’t identify the true causes of defects: all you would know is that there was a defect.
Deming saw that variations can enter at every step in a production process and that the causes of variation need to be identified and fixed.With that approach, defects go down sharply and product quality can be improved almost indefinitely.
Deming emphasized that all business processes should be part of a system with feedback loops. Managers should monitor the feedback data to determine the causes of variation, find the processes with sig- nificant problems, and then fix those processes.This single observation replaced procedures that had been in place for a couple of genera- tions and led to countless more innovations.
Deming is one of the giants of management practice. Study his career and contributions to understanding the behavior of costs and you will be a far more effective manager.
understanding of goals. It also becomes the way to account for and measure performance and completes the double feed- back loop.
The value of these metrics lies in their ability to give a factu- al basis for decision-making. Strategic feedback comes from the spread across four perspectives. Diagnostic feedback for individual processes is also available. The feedback from the measurement methods themselves helps indicate which provide useful data. That the vision has been expressed through data also means that quantitative inputs are available for various forecasting and modeling decision support systems. All this can be said to result in management by fact.
Some critics maintain that BSC and similar inclusive manage- ment systems are nothing more than what good businesses do regularly and you shouldn’t have to go through all the froufrou. In one sense they are correct. Successful organizations often come to such practices through trial and error. BSC just lays out the all
the dance steps on the floor for you to follow.
Quick-Start BSC Checklist
• Start with the vision for each of the four perspectives. Where is the organization going?
• Identify strategies to get you there.
• Define critical success factors.What are you going to have to do well?
• Define how you will measure performance.What metrics will you use?
• Evaluate your scorecard. How do you know you’re measuring the right things?
• Create action plans for reporting and operating the scorecard. How do you manage the scorecard? Who should get reports? What should the reports look like?
– Implement – Evaluate – Calibrate – Execute
• Repeat evaluation and calibration on a regular basis to ensure that you sustain the vision.
Typically, a balanced scorecard has a set of objectives for each perspective and the initiatives needed to reach those objectives. There are targets for each objective and measure- ments to be taken at specified intervals.
Let’s say that the managers place a high value on consistent refresher training and developing advanced skills for the
employee learning and growth perspective. Thus, the managers may be reluctant to cut training funds. They feel that better- trained employees will be able to improve their business processes. Improved business processes lead to greater cus- tomer satisfaction. Customer satisfaction improves financial results. Improved financial results mean more funds are avail- able for training. Individual managers have performance score- cards based on aspects that they control or influence.
The Learning and Growth Perspective
This perspective includes employee training and corporate cultur- al attitudes toward both individual and corporate self-
BSC Measures
Under BSC, managers use several operational perform- ance measures to replace or supplement standard costs.
These measures can include the following:
• Quality control as measured by the percentage of defects
• Material control through inventory lead times or scrap loss
• Inventory control measured by turnover
• Machine performance as a percentage of downtime
• Delivery performance as the percentage of on-time deliveries
• Manufacturing cycle efficiency plus or minus value added time
• Fewer customer returns or warranty claims
• Reducing help desk calls
Some of these might be individual cost control items under other cost accounting systems.With the emphasis of BSC, the objective of reducing help desk calls could lead to initiatives for designing better products, writing clearer instruction manuals, setting up understand- able self-help menus for common problems, or graduated training for help desk personnel.This broader search might not happen without the BSC net stretched over all aspects of the business.
improvement. In knowledge organizations, people are the main resource. The current climate of rapid technological change forces knowledge workers into a continuous learning mode.
The 50-year-old programmer may have started out on Basic Assembly Language and IBM 360 OS. Through the years she’s added FORTRAN and COBOL. There was a stretch of RPG and then a switch to MS-DOS, BASIC, and Pascal that suddenly accelerated in Windows through C and C++ and blew past HTML. She’s currently doing JavaScript Web pages while wait- ing for the XML class to start.
Management and employees face a strong challenge to keep pace with this level of change. Businesses and govern- ment agencies find themselves unable to hire technical workers for the skills new technology demands. Employees are often not offered training because of the expense and the fear that they would leave if they upgraded their skills. Many companies meet their needs through outsourcing with contract programmers through companies in India, Eastern Europe, and Russia. This phenomenon is extending from programmers to many other jobs and professions. An accountant in Calcutta, given the proper software and documentation, can prepare tax returns as effectively as one in Chicago. The BSC manager in Chicago has to make sure the metric performance set stresses using training funds to add value to the accountant’s job performance.
Learning and growth form the success foundation for any knowledge-worker organization. It remains to be seen how well the surge to outsourcing will play in the long run. It looks to be effective as long as the companies managing the contract work- ers pay similar attention to the well-being of their employees.
The growth perspective is not only met through formal classes. It also includes things like mentors and tutors within the organization. How well the organization facilitates cross-com- munication among employees and with managers can also increase job satisfaction and loyalty. Thus, employee turnover and the cost of training new hires may rank as large metrics for first- and second-level supervisors.
The Business Process Perspective
This perspective is closest to the traditional cost accounting view. It looks at internal business processes. These metrics let managers know how well the business is running. Designing these metrics takes some care, since senior managers want to be sure that they are measuring the extent to which their prod- ucts and services are meeting customer requirements. In addi- tion to the strategic management process, two kinds of business processes may be identified—mission-oriented processes and support processes. Mission-oriented processes are the core business operation: manufacturing or selling a product or pro- viding services. Support processes are more repetitive and hence easier to measure and benchmark using generic metrics.
In this instance, what we are looking at is analogous to one of the costing methods and overhead allocation.
The Customer Perspective
Customer focus and satisfaction measures continue to grow in importance to successful businesses. In some instances, this emphasis has also been extended to vendors. Many cost accounting systems make it routine now to calculate customer acquisition cost and the lifetime value of a customer. Customer satisfaction metrics should include direct feedback from the customer, if at all possible. Ask them how you are doing. If you have given value, they will tell you their level of satisfaction. If the perceived value is low, they may be like the restaurant guest who never returns. Unsatisfied customers will find other suppli- ers to meet their needs. Poor performance from this perspective is a leading indicator of future decline, no matter how good things look now.
The Financial Perspective
All the newer management accounting systems recognize the need for traditional financial data. Timely and accurate financial statements will always be a priority. This perspective can
include other financial-related data, such as risk assessment and cost/benefit data. With BSC, managers should get a clearer
understanding of how those numbers translate into real-world performance. The widespread current emphasis on only past financial performance leads to an unbalanced situation with regard to other perspectives.
Benefits
The principal benefit of implementing a balanced scorecard is to align key performance measures with a clear strategy at all levels of the organization using a double feedback loop of inter- nal and external data. Management works from a forward-look- ing, comprehensive picture of business operations. BSC
methodology gives an easily understood common structure that makes personal communications clearer. It also helps people at all levels of the organization understand business goals and strategies.
While your organization may not use BSC, there are certain- ly several useful concepts that can apply to management activi- ties within a more traditional cost structure.