Performance measurement frameworks - Balanced Scorecard view...

Learning Outcomes

By the end of this article, you will be able to explain the Balanced Scorecard as a performance measurement framework, describe its four viewpoints, and apply examples of appropriate performance indicators. You will also evaluate the benefits and drawbacks of using the Balanced Scorecard, and understand its role in supporting strategic and operational objectives for exam purposes.

ACCA Management Accounting (MA) Syllabus

For ACCA Management Accounting (MA), you are required to understand how organisations measure and manage performance using financial and non-financial information. The Balanced Scorecard is a key framework for assessment in exams, covering:

• The purpose and benefits of performance measurement frameworks, including the Balanced Scorecard
• The four viewpoints of the Balanced Scorecard: financial, customer, internal business process, and innovation and learning
• Suitable performance indicators for each Balanced Scorecard viewpoint
• The limitations and criticisms of the Balanced Scorecard approach
• The relationship between business objectives, key performance indicators, and strategic planning
• The role of both financial and non-financial performance measurement in achieving organisational goals

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. List the four viewpoints of the Balanced Scorecard and give one example of a performance measure for each.
2. Which viewpoint of the Balanced Scorecard typically covers measures such as innovation and staff training? a) Financial
   b) Internal business process
   c) Innovation and learning
   d) Customer
3. True or false? The Balanced Scorecard is concerned only with financial measures of performance.
4. What is one main limitation of the Balanced Scorecard framework that managers should consider when implementing it?

Introduction

Organisations rely on performance measurement frameworks to monitor progress towards their objectives and to inform decision-making at all levels. The Balanced Scorecard is a widely used model that broadens traditional financial assessment by incorporating non-financial measures, giving a more complete view of organisational performance. This article examines the key elements and purposes of the Balanced Scorecard, sets out appropriate indicators for each viewpoint, and critically assesses its practical limitations.

THE BALANCED SCORECARD: PURPOSE AND STRUCTURE

Historically, performance measurement focused almost entirely on financial metrics such as profit, return on investment, and cost control. However, relying solely on such measures can lead to short-term decision-making at the expense of long-term objectives.

The Balanced Scorecard, introduced by Kaplan and Norton, broadens assessment to include customer, internal process, and learning/innovation dimensions alongside financial ones. This multi-dimensional approach aligns day-to-day activity with long-term strategy.

Key Term: Balanced Scorecard
A strategic performance framework that assesses organisational success through four viewpoints: financial, customer, internal business process, and innovation and learning.

THE FOUR VIEWPOINTS OF THE BALANCED SCORECARD

Each viewpoint provides a different angle on performance, ensuring that attention extends beyond profit to areas essential for long-term competitiveness.

1. Financial Viewpoint

This covers traditional metrics such as profit, return on capital employed (ROCE), cash flow, and growth. These are important to shareholders and signal overall financial health.

Key Term: Financial Viewpoint
The Balanced Scorecard viewpoint that focuses on measures relating to profitability, value creation, and cost management.

2. Customer Viewpoint

This addresses how the organisation is viewed by its customers and the wider market. Typical measures include customer satisfaction, retention, market share, service quality, and brand reputation.

Key Term: Customer Viewpoint
The viewpoint that evaluates how well the organisation meets customer needs and expectations.

3. Internal Business Process Viewpoint

This area focuses on the efficiency and quality of internal processes that support both customer and financial objectives. Measures here include process cycle times, product quality, operational efficiency, and error rates.

Key Term: Internal Business Process Viewpoint
The angle that examines how well core internal activities and workflows operate to deliver value.

4. Innovation and Learning Viewpoint (Learning and Growth)

This dimension assesses how the organisation improves and adjusts over time. Metrics include employee training, skill development, knowledge sharing, staff turnover, and capacity for innovation.

Key Term: Innovation and Learning Viewpoint
The viewpoint that considers the organisation’s ability to develop, innovate, and support future improvement.

PERFORMANCE INDICATORS BY VIEWPOINT

Each viewpoint should have relevant, specific Key Performance Indicators (KPIs) linked to organisational objectives.

Worked Example 1.1

A software company introduces the Balanced Scorecard. Suggest one specific KPI for each viewpoint and briefly explain its relevance.

Answer:

• Financial: Net profit margin – indicates overall profitability
• Customer: Percentage of projects delivered on schedule – affects satisfaction
• Internal Process: Number of support calls resolved within 24 hours – reflects operational reliability
• Innovation and Learning: Annual training days per developer – shows commitment to skill development

LINKING OBJECTIVES TO THE BALANCED SCORECARD

Strategic objectives are cascaded down through targets and KPIs for each viewpoint. For effective implementation, all measures should align with the company’s overall mission.

Worked Example 1.2

A logistics provider’s mission is “To be the most reliable delivery partner.” Which Balanced Scorecard viewpoints are most closely linked to this mission, and what measures could be chosen?

Answer:
While all viewpoints matter, the internal business process (on-time delivery %, package tracking accuracy) and customer (repeat business rate, customer feedback scores) are key for reliability.

ADVANTAGES OF THE BALANCED SCORECARD

The Balanced Scorecard offers several important benefits:

• Promotes a broader, forward-looking approach to performance measurement, not limited to profit
• Encourages managers to consider customer needs, process improvement, and employee growth
• Aligns operational short-term actions with overall strategy and long-term goals
• Makes it harder to manipulate results by focusing on multiple objectives

Revision Tip When suggesting measures in exams, explain why each one is relevant to its viewpoint and how it links to organisational aims.

LIMITATIONS AND CHALLENGES OF THE BALANCED SCORECARD

While powerful, the Balanced Scorecard also has weaknesses that can impact its usefulness:

• Choosing KPIs can be subjective and may not reflect what is truly important.
• Too many indicators can overwhelm users, making the framework less effective.
• Measuring non-financial objectives (especially in areas like “innovation”) is often difficult.
• Weighting and comparing measures between viewpoints can be arbitrary or inconsistent.
• Comparison with other organisations is limited, as KPIs may not be standardised.

Exam Warning

Beware of common errors in the exam: Do not assume that the Balanced Scorecard completely replaces financial measures—it is intended to supplement, not eliminate, traditional financial analysis.

THE BALANCED SCORECARD IN PRACTICE

To use the Balanced Scorecard successfully:

• Select KPIs that genuinely support your business strategy and avoid generic or irrelevant measures.
• Limit the number of measures to those that capture the most critical objectives.
• Review and adjust KPIs regularly as business needs change.
• Assign clear responsibility for collecting and reporting the relevant data.
• Communicate the chosen performance measures and their strategic links throughout the organisation.

Worked Example 1.3

An ACCA student is asked: “List two potential downsides of using the Balanced Scorecard, and suggest a solution for each.”

Answer:

1. Subjective selection of measures — use a cross-functional team to agree KPIs.
2. Information overload — focus only on the most critical few indicators for each viewpoint.

Summary

The Balanced Scorecard is a multi-dimensional framework for assessing organisational performance. It uses financial, customer, internal business process, and innovation/learning viewpoints to create a balanced view that aligns with both strategic and operational aims. Selecting appropriate, relevant indicators for each area helps drive strategic success, but care must be taken to avoid subjectivity, complexity, and information overload. For ACCA exams, be able to explain the purpose, structure, limitations, and examples of measures for each viewpoint.

Key Point Checklist

This article has covered the following key knowledge points:

• The purpose of the Balanced Scorecard as a performance measurement framework
• The four Balanced Scorecard viewpoints and example indicators for each
• How objectives and KPIs are linked to each viewpoint
• Advantages and limitations of the Balanced Scorecard in exam-relevant situations
• Practical advice for applying the Balanced Scorecard in an organisational context

Key Terms and Concepts

• Balanced Scorecard
• Financial Viewpoint
• Customer Viewpoint
• Internal Business Process Viewpoint
• Innovation and Learning Viewpoint