School of Accounting Seminar – Session 1, 2012 th Celebrating the 20 Anniversary of the Balanced Scorecard: Relevance Lost or Relevance Gained and Sustained? Zahirul Hoque La Trobe University th Date: Friday 30 March Time: 3:00 to 4:30 pm Venue: Webster256 th Celebrating the 20 anniversary of the Balanced Scorecard: Relevance lost or relevance gained and sustained?* Zahirul Hoque La Trobe Business School La Trobe University, Melbourne Corresponding author: Zahirul Hoque, Professor of Accounting, La Trobe Business School, Faculty of Business, Economics and Law, La Trobe University, Melbourne, Victoria 3086, Australia; Tel (613) 9479 3433; Fax (613) 9479 3047; E-mail: [email protected] *An earlier version of this paper was presented as a keynote speech at the New Zealand Management Accounting Conference in Wellington, New Zealand, 17-18 November, 2011. I am gratefully appreciative of Professor Shahid Ansari and Professor Jan Bell for providing logistic support when developing the earlier draft of this paper during my visit at Babson College, Boston as an Exchange Scholar in July- August 2010. Page 1 of 42 th Celebrating the 20 anniversary of the Balanced Scorecard: Relevance lost or relevance gained and sustained? A B S T R A C T 2012 marks 20 years since the first publication of the article on the balanced scorecard, which was written by Robert Kaplan and David Norton. This paper critically reviews the research on the balanced scorecard over the past 20 years. My intention is to contribute to the thinking about the achievements and the relevance of the balanced scorecard in the 21st century’s complex business environment. Following this, I attempt to identify future research opportunities. The review used 114 articles published in 27 accounting academic journals and 67 articles published in 34 business and management academic journals in the twenty-year period, 1992-2011. The reviewed articles have been categorized by each article’s topic(s), setting(s), theoretical framework, research method, and data analysis techniques. My analysis reveals much diversity in existing balanced scorecard research in terms of topics, settings, methods and data analysis techniques. I conclude that the application of the balanced scorecard worldwide is on the rise and, more importantly, industries and practitioners in the public and private sectors find the balanced scorecard concept is still relevant to their organizations in the 21st century’s rapidly changing environment. Further, my review suggests that there lacks theory-driven in-depth studies in the balanced scorecard. As such, several theory-driven ideas and practical issues are developed and recommended for future research. _____________________________________________________________________ 1. Introduction The purpose of this article is to foster research for an improved understanding of performance management practices by critically reviewing 20 years of achievements of the balanced scorecard, an approach invented in 1992 by Harvard Business School’s professor Robert Kaplan and his practitioner associate David Norton. The outcomes of this review are of significant interest to both academics and businesses. The review will enable businesses to make strategic decisions when designing and implementing a balanced scorecard type performance management practice as insights from this review will demonstrate how the balanced scorecard concept has been used in organizations around the world over the past 20 years. By bringing insights from the accounting and management research literatures, the review will deliver to the academic community a range of “new” ideas for future research. 2012 marks 20 years since the first publication of the article on the balanced scorecard in the Harvard Business Review (HBR) in 1992. Based on a year-long research project within 12 companies, Kaplan and Norton disseminated their findings through a performance measurement framework, which they developed and called a Balanced Scorecard. The balanced scorecard expands on mere financial performance measures and incorporates operational performance measures categorized by three perspectives: customer satisfaction; internal business processes; and employee learning and growth. Kaplan and Norton (1992) suggest that a balanced scorecard allows an organization at all levels of the business to assess its progress towards achieving its targets and to take corrective actions, where needed. After their 1992 seminal article, and later based on their investigations into more than 300 organizations, Kaplan and Norton wrote a series of articles (Kaplan & Norton, 1993, Page 2 of 42 1996a, 1996b, 2000a, 2001a, 2001b, 2004a, 2005a, 2005b, 2006a and 2008a) and several books (Kaplan & Norton, 1996c, 2001c, 2004b and 2006b) to advance the knowledge base of the balanced scorecard. Kaplan and Norton remarked about their balanced scorecard innovation1: “just as you can’t manage what you can’t measure, you can’t measure what you can’t describe’ (Kaplan & Norton, 2004b, Preface). About fifteen years ago, in a review essay Atkinson and his associates (Atkinson, et al., 1997, p. 94) note that ‘the balanced scorecard is among the most significant developments in management accounting and thus, deserves intense research attention.’ Since then balanced scorecard has been receiving increasing attention in accounting research and in business and management research. Workshops and seminars have been devoted to the balanced scorecard and many books have been published by other scholars containing case studies of the implementations of balanced scorecards and practical guides for adopting the balanced scorecard in both the private and public sectors (see, for example, Hannabarger, Buchman, & Economy, 2007; Niven, 2002, 2008; Olve, Roy, & Wetter, 1998; Person, 2009). The popularity of the balanced scorecard as a research topic is also evident in a number of inter-country studies that demonstrate the wide implementation of the balanced scorecard in organizations across various settings (for example, see Ax & Bjornenak, 2005; Braam & Nijssen, 2004; Hoque & Adams, 2011; Hoque & James, 2000; Pere, 1999; Shiu & O’Connor, 2011; Silk, 1998). Thousands of companies across the world have adopted the philosophy of the balanced scorecard not just as a measurement system, but also as a strategic management system (Kaplan & Norton, 2004b). Academic and professional studies illustrate the ways in which the balanced scorecard is able to help organizations to be more effective. While several prior reviews of the management accounting research (e.g., Chenhall, 2010; Chenhall & Smith, 2011; Hesford et al., 2007; Hopper et al., 2001; Ittner & Larker, 1998; Malmi & Brown, 2008; Otley et al., 1995; Scapens & Bromwich, 2001; Selto & Widener, 2004; Shields, 1997; Shields & Shields, 1998; Wagenhofer, 2006) have provided useful insight on the role of performance measurement systems in organizations, these reviews have not taken the balanced scorecard as their primary focus. This paper expands upon these previous reviews by critically assessing the research on the balanced scorecard over the last 20 years. In doing so, first, this paper tabulates and synthesizes the balanced scorecard research literature in accounting and in management during the twenty-year period (1992- 2011). Second, it discusses what is special about the balanced scorecard, what specific issues and problems have to be addressed, what the nature of balanced scorecard practices is in organizations, and what has been found in the research literature. The paper then identifies those areas where we know certain things and those where we do not – that is, we investigate the gaps in the existing balanced scorecard research literature. At the end of this review, the paper identifies lessons that can be learned by studying some specific issues in organizations. Further, this paper contributes to the generation of knowledge in the balanced scorecard research by examining whether the balanced scorecard is still relevant to practice in the 21st century as it evolved 20 years ago to meet the changing needs of organizations. 1 The term “innovation” has been defined as an ‘idea, practice, or object that is perceived as new by an individual or other unit of adoption’ (Rogers, 2003, p. 11). This implies that when a new tool or practices is adopted by an organization, it is considered as an innovation to the organization and to its people even though such tool may have been long invented. In this context, the balanced scorecard is an innovative performance management tool. Page 3 of 42 2. Review framework A literature review is a voyage of gathering empirics or facts on issues surrounding a particular topic. A major problem confronting a literature reviewer is how to find reliable sources of data; it is a challenging task and a researcher needs to plan carefully before embarking on this journey; otherwise he/she may end up with a large volume of material that may not be relevant to the topic(s) under search. There are two primary ways of searching the literature. One is to choose particular discipline-focused journals in advance with a view to synthesize prior research on the chosen topic. Another approach is to carry out an exploratory search using web-based search engines such as Google Scholars and commercial databases such as ProQuest and Scopus. The former approach is more discipline-focused and it is easy to systematically develop and synthesize findings. The latter approach is fairly unfocused and it is appropriate for an exploratory type search on a general topic in the field. Since the current review focuses on a specific topic that is the balanced scorecard, it opted for the former approach. Figure 1 offers a general guideline or review framework to conducting a literature review. INSERT FIGURE 1 HERE The current review was carried out primarily by consulting 27 accounting journals (see Appendix 1) and 34 business and management journals (see Appendix 2). As a standard way of making a start, the search began using the terms ‘Balanced Scorecard’, and ‘Scorecard’ and was based on articles published by an individual journal and available on its web homepage. The results revealed several papers which bore no direct connection to the precise review requirements, as it picked up all papers which had the words ‘balanced’ or ‘scorecard’. Therefore another round of searching was carried out on these papers by typing the terms ‘balanced scorecard’, or ‘scorecard’ in the search bar in the PDF version of the article, and then manually examining all articles as to what extent they carry insights and experiences on the balanced scorecard. From the outset, the focus of the review was on publications that explicitly concentrated on the balanced scorecard. A review was also carried out on publications available on the web on the balanced scorecard to provide additional insights into the topic. For this source for the review, a relevant balanced scorecard web-based publication was one that directly relates to the research topic and has been published exclusively on the web. Newspaper articles, books, magazines, conference papers, software packages, interview transcripts, and seminars and workshop material on the balanced scorecard have not been considered. Some websites were excluded because of restricted access, for reasons such as requiring login password; connection issues, such as website or server not found; and the re-direction failure of host website. As shown in Figure 1, following Chenhall and Smith (2011) and Shields (1997), the published articles were categorized by (a) topics / issues, (b) research settings, (c) theory/theories, (d) research methods, (e) data analysis techniques, and f) results. 3. Developments of the balanced scorecard concept In the late 1980s, authors filled the professional and academic publications with recommendations to rely more on non-financial measures for both evaluating and managing organizations (Berliner & Brimson, 1988; Dixon et al., 1990; Johnson & Kaplan, 1987; Nanni et al., 1988; Rappaport, 1999). Scholars and practitioners have Page 4 of 42 expressed concerns with traditional performance measures that focus solely on financial metrics which have little relevance to practice (Atkinson et al., 1997; Ittner et al., 1997; Johnson & Kaplan, 1987; Kaplan & Norton, 1996a, 1996b, 1996c; Luft, 1997; Lynch & Cross, 1991; Shields, 1997). Performance measures that are based solely on financial numbers such as return on investment, net earnings and ex post costs have been criticized for encouraging managers to focus on short-run financial results while sacrificing long-run prospects. In the 21st century’s global markets and digital era, traditional financial measures have been considered out-of-step as they portray misleading signals for long-term strategies and continuous improvements in organizational processes and performance. In 1992, Kaplan and Norton came up with an idea about how to combine financial measures with non-financial measures in a single performance scorecard, the ‘Balanced Scorecard.’ Following their inaugural article, Kaplan and Norton have developed the concept further. Kaplan and Norton’s 1992 version of the balanced scorecard focuses on the following four perspectives (see Figure 1 in Kaplan & Norton, 1992): Customer perspective: (How do customers see us?): Customer perspective focuses on how organizations create value for customers. Some typical measures are customer satisfaction, market share, customer response time, time to market and defect level; Internal business perspective: (What must we excel at?): Internal measures stem from business processes. Companies should identify and measure their core competencies in areas such as manufacturing excellence, design productivity, new product introduction, and technology capability; Innovation and learning perspective: (Can we continue to improve and create value?): Innovation and learning measures emphasize the ability of companies to make continual improvements to existing products and services and to introduce new products with expanded capabilities. Examples include measures of employees’ capabilities and skills, technology leadership, manufacturing learning and product focus; and Financial perspective: (How do we look to shareholders?): Financial measures indicate whether company’s strategy, implementation and execution are contributing to bottom-line improvement. Typical measures include cash flow, sales growth, return on equity, and market share. In their 1993 article, Kaplan and Norton showed how this new, state-of-the-art balanced approach to performance measurement can keep companies looking and moving forward, while reliance only on financial measures leads to a backward- looking focus. In their first book on the balanced scorecard, Kaplan and Norton (1996c) show company managers how to ensure the successful adoption of a balanced scorecard by treating the scorecard as a strategic management system that integrates financial with non-financial strategic measures. Beginning as an operational performance measurement system, the balanced scorecard concept has been developed into a strategic management system to help companies manage their strategy over the long run. Kaplan and Norton (1996c, p. 19) identify four major steps in implementing a balanced scorecard strategic framework: (1) clarifying and translating the vision and strategy, (2) communicating and linking strategic objectives and measures, (3) planning, target setting and aligning strategic initiatives, and (4) enhancing strategic feedback and learning. Page 5 of 42 In their book Kaplan and Norton re-classified two of the four original perspectives developed in the 1992 article: Internal Business Perspective has been re- labeled as Internal Business Processes with an addition of the innovation element while the Innovation and Learning Perspective has been re-labeled as Learning and Growth, with an additional element of growth and the removal of innovation element (see Figure 1-1 in Kaplan and Norton, 1996c, p. 9). The 1996c version of the balanced scorecard is distinct from other strategic measurement systems in that it contains outcome measures and the performance drivers of outcomes, linked together in cause-and-effect relationships making the performance measurement system a feed- forward control system. Kaplan and Norton (1996c, p. 31) outlined the following causal relationship: measures of organizational learning → growth measures of internal business processes → measures of the customer perspective → financial measures, with the nature of relationship following the direction of the arrows. An effective balanced scorecard has a mix of outcome measures, lag indicators, performance drivers, and lead indicators (Kaplan & Norton, 1996a, 1996c). Kaplan and Norton next developed five leadership and management principles for successful strategy execution, which arose from their study of some balanced scorecard adopters (2003). The principles are: a) mobilize change through executive leadership; b) translate the strategy; c) align the organization to the strategy; d) motivate employees to make strategy their everyday job; and e) govern to make strategy a continual process. Subsequently, Kaplan and Norton (2006a) developed different types of balanced scorecard perspectives (financial synergies, customer synergies, internal process synergies, and learning and growth synergies), which they call The Enterprise Scorecard (see Figure 3, Kaplan and Norton, 2010, p. 26); this scorecard may help organizations to create corporate synergies. The recent concept of the balanced scorecard emphasizes the linkage of measurement to a strategy map; this tighter connection between the measurement system and the strategy map elevates the role of non-financial measures in strategy implementation (see Figure 2 in Kaplan and Norton, 2010, p. 22). Kaplan and Norton show how their recent work has focused on the link between strategy and operations (Kaplan & Norton, 2008a, 2008b). The 2010 article shows ‘the architecture of a comprehensive six stage closed-loop management system that links strategic planning with operational execution’ (p. 27; see Figure 4 Kaplan and Norton, 2010, p. 28). Kaplan and Norton’s six stages are: Develop the strategy, Translate the strategy, Align the strategy, Plan operations, Monitor and learn, and Test and adapt the strategy (Kaplan and Norton, 2010, p. 27). Table 1 provides a snapshot of the historical developments of the balanced scorecard concept. INSERT TABLE 1 HERE Looking at the wider diffusion of the balanced scorecard concept across the globe, the balanced scorecard certainly has attracted a great deal of attention from practitioners for its several practical benefits. Traditional measurement systems only include financial measures, while the balanced scorecard is designed to improve managers’ decision making by guiding their attention to a broader vision of the company’s operations (Kaplan & Norton, 1992). The use of the balanced scorecard leads to improved managerial decision making by aligning performance measures in the firm’s business units with the goals and strategies of the firm (Kaplan & Norton, 1996c). Page 6 of 42 The paper by Ittner et al. (2003) reinforces Kaplan and Norton’s idea of combining financial measures with non-financial measures in a scorecard by highlighting that the balanced scorecard provides causal links connecting the multiple classes of non-financial measures (“drivers of the performance”) and the financial measures (“final outcome”). Hoque and James (2000), one of the early empirical studies into the balanced scorecard, suggest that the balanced scorecard indicates which specific improvements in drivers are linked to the desired outcomes of the firm’s strategy. With the shift of the balanced scorecard from being only a performance measurement system (Kaplan & Norton, 1992) to a strategic management system (Kaplan & Norton, 1996a, 1996b, 1996c, 2001, 2004, 2006) the pattern of results on the causally linked driver and outcome measures may provide clues about the effectiveness of the strategy, which then provides companies with the capacity for strategic learning; this will then enable them to modify their strategies when necessary. The unique features of the balanced scorecard noted above, relative to less comprehensive performance measurement systems, would be expected to lead to lower rater bias in performance appraisal (Guo et al., 2007). Davis and Albright (2004) remark that an improvement in financial performance could occur after implementing a balanced scorecard. Speckbacher et al. (2003) propose three potential benefits of the application of the balanced scorecard in organizations, namely: (a) improved company results in the long term; (b) stronger consideration of non-financial drivers of performance and (c) support of the shareholder value-based management system. Banker et al.’s (2000) US study finds that the inclusion of non-financial measures in a performance measurement system is associated with improved financial performance. The review paper by Atkinson et al. (1997, pp. 93-94) suggests that “…the balanced scorecard has the potential to provide planners with a way of expressing and testing a sophisticated model of cause-and-effect in the organization, a model that provides managers with a basis to manage results.” The study by Hoque and James (2000) reported a positive impact of the use of balanced scorecard measures on firm performance. Since its introduction in the organizational world, the balanced scorecard has also received considerable criticism. For example, Butler et al. (1997) considered the concept to be too general, pointing out that it might not fit in an organization’s culture and could ignore corporate missions. In a similar vein, Laitinen (1996) considered the selection of the four basic dimensions and their interrelationships problematic, claiming that measures in practical applications appear to loosely connect to each other and unable to provide clues on which company internal factors should be developed. Atkinson et al. (1997, p. 93) expressed mixed reactions like this: ‘The name “scorecard” is misleading because the balanced scorecard is not a scorecard in the conventional accounting sense. Rather, it is a sophisticated information structure and management approach that links effects (also called organizational objectives, such as profit levels) with causes, such as customer or employee satisfaction.’ Laitinen (2003) notes that balanced scorecard in its original form may include non- critical perspectives and exclude critical ones. Other scholars (e.g. Ittner & Larcker, 1998; Otley, 1999) find that it is difficult to identify the relative importance of and the trade-offs between the balanced scorecard perspectives, as this identification is crucial when resolving the conflicts in the setting of targets on different perspectives and on the measures of the perspectives. Epstein and Manzoni (1997) question the ability of companies to agree on a strategy in such clear terms that it would enable construction of balanced scorecard and the Page 7 of 42 maintenance of systems to be laborious. Vaivio (1995) challenges the principal idea of the balanced scorecard that a handful of quantitative measures could portray the various facets of a company’s strategy. Norrelkit (2000, 2003) has been highly critical of the causal relationship between the four perspectives of the balanced scorecard and the validity of the system to serve as a strategic management tool. Norrelkit argues that the balanced scorecard has problems with some of its key assumptions and relationships. She argues that there is not a causal but rather a logical relationship among the areas covered in the balanced scorecard. In her 2000 paper, Norrelkit asserts that the balanced scorecard makes invalid assumptions, which may lead to the anticipation of performance indicators which are faulty, resulting in sub-optimal performance. Further, Norrelkit noted that the balanced scorecard is not a valid strategic management tool as Kaplan and Norton claim it to be – because the balanced scorecard does not ensure any organizational rooting and also has difficulty ensuring environmental rooting. Above criticisms challenge some key assumptions of the balanced scorecard, the notion of causality in the relationship, and the idea that it can be a strategic tool. Despite such criticisms, Kaplan and Norton (as reported in 2000, 2001, 2003, 2004a, 2004b, 2006a, 2006b, 2010) have extended and broadened the concept into a strategic management tool for describing, communicating and implementing strategy’, thus reinforcing Kaplan and Norton’s original point that the balanced scorecard has practical relevance in organizational decisions. Kaplan and Norton further believe that balanced scorecard measures need to be broken down into financial and non-financial measures in such a way that information, communication and strategy at all levels of organizations could be aligned for an effective organization. Their stance echoed Grady’s (1999) statement that the strategic objective of a company ought to be broken down into critical success factors and critical actions. Kaplan and Norton’s idea of causal linkages among balanced scorecard objectives and measures led to the creation of a strategy map that links a firm’s intangible assets and critical processes to the value proposition and customer and financial outcomes (See Figure 2, Kaplan & Norton, 2010, p. 22). Further, Kaplan and Norton (2010, p. 21) assert that a balanced scorecard project should build a strategy map of organizational objectives first and only afterwards select metrics for each objective.2 4. Balanced scorecard research 4.1 Studies in accounting journals This section examines the 114 articles published by accounting journals that deal with the nature and practice of the balanced scorecard. In so doing, the first subsection presents the frequency distribution of publications. This is followed by the classification of publications by various categories as outlined in Figure 1. 4.1.1 Frequency distribution of publications by accounting journals Table 2 presents the frequency distribution of papers on the balanced scorecard published by journals. 114 papers were published in 27 leading accounting journals in the period 1992-2011. As can be seen from Table 2, during the two decades under study, most of the accounting papers (98 of 114) on the subject were published in the second half (2002- 2011). The highest number of publications appeared in Management Accounting 2 For details about the theoretical roots and motivations of the original and subsequent development of the balanced scorecard, see Kaplan and Norton (2010). Page 8 of 42 Research (MAR), one of the premier journals in management accounting, followed by Financial Accountability & Management (FAM). A sizeable number of papers appeared in other journals: experimental research and surveys in Accounting, Organizations and Society (AOS), interview studies and descriptive papers in Critical Perspectives on Accounting (CPA), descriptive and literature reviews in Journal of Accounting Education (JAEd) and interview studies in Journal of Accounting & Organizational Change (JAOC). No papers were published in other leading journals including Accounting & Finance (A&F), Accounting & Business Research (ABR), Journal of Accounting and Economics (JAE), Accounting Horizon (AH), Journal of Accounting Auditing and Finance (JAAF), Journal of Business Finance and Accounting (JBFA), Review of Accounting Studies (RAS), and International Journal of Accounting (IJA). INSERT TABLE 2 HERE 4.1.2 Distribution of topics/issues Table 3 provides the frequency distribution of balanced scorecard papers by topics/issues studied. As presented in Table 3, most of the papers were published in the areas of performance measurement (27), implementation (24), designs (20), and system outcomes encompassing its use effectiveness and benefits (11), respectively. 12 papers were of review/analytical nature, while some others focused on the balanced scorecard in general (8), behavioral effects (4), incentive plans (3), and diffusion (3). While future research might continue exploring these issues further in different contexts, there might also be increasing interest in linking these topics with other organizational strategies or processes such as total quality management (Hoque, 2003), supply-chain relationships, business-process-management, and value chain analysis. INSERT TABLE 3 HERE 4.1.3 Distribution of settings Table 4 presents the frequency distribution of balanced scorecard publications by research settings. Table 4 shows that the popular choice for balanced scorecard studies was services, manufacturing, retail, and publicly traded firms. A further noteworthy observation was that nearly one-third of the papers did not explicitly mention the research settings. This group mainly included review and descriptive papers. Balanced scorecard is also widely diffused in the public sector. Table 4 shows that 21 papers focusing on the public sector were published in the period 1992-2011. To deal with financial constraints and increasing demand on accountability, government administrators have begun implementing modern management tools in their organizations. In addition to adopting reporting guidelines, municipal administrators have tried to enhance accountability through refinement of their organization’s own performance measurement system (Poister & Streib, 1999). Poister and Streib (1999) reported that most of the US municipalities studied in their survey were working from organizational missions, goals and objectives, a result consistent with the prescribed use of the balanced scorecard. However, the municipal managers' efforts also tended to rely on available data, a problem which, if persistent in the longer run, may lead to low validity and hence low decision relevance. Page 9 of 42