## **Learning Outcomes**

After reading this article, you will be able to explain the role and structure of the balanced scorecard as a multidimensional performance framework. You will identify the four main dimensions, describe how to select suitable KPIs (key performance indicators) for each, and discuss their use for linking financial and non-financial objectives in business performance measurement. You will also apply these principles to ACCA exam-style scenarios.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand multidimensional frameworks for performance measurement, with a specific focus on the balanced scorecard. In your revision for this topic, ensure you cover:

- The balanced scorecard: structure, dimensions, and strategy alignment
- The selection and interpretation of suitable financial and non-financial KPIs for each dimension
- The advantage of multidimensional KPIs over single-dimensional financial metrics
- How multidimensional frameworks address practical performance measurement and behavioural issues
- Examining the difficulties of target setting, especially in qualitative areas
- Considering external factors (stakeholders, market conditions, competitors) in performance assessment
- The application of non-financial indicators to support long-term strategic objectives

## **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. Which of the following is not one of the four standard dimensions of the balanced scorecard?
   a) Customer  
   b) Financial  
   c) Stakeholder  
   d) Internal business process

2. When setting balanced scorecard KPIs, which statement is most accurate?
   a) Only financial metrics should be used for all dimensions  
   b) KPIs must be tailored to the organisation’s objectives and strategy  
   c) All dimensions must contain a profitability ratio  
   d) The same KPIs should be used company-wide for every manager

3. True or false? The balanced scorecard can include both qualitative and quantitative indicators.

4. Briefly state why relying only on profit-based KPIs might harm long-term performance.

5. Give one example of a suitable KPI for the innovation and learning dimension of the balanced scorecard.

## **Introduction**

Organisations need to measure how well they are achieving their objectives. Traditional performance measurement relied heavily on financial indicators such as profit, return on capital, and cost efficiency. However, these financial measures only tell part of the story. They can encourage short-term thinking and may miss critical factors that drive long-term success, such as customer satisfaction, quality, or organisational learning.

To address these issues, companies use multidimensional frameworks—especially the balanced scorecard—to measure business performance more comprehensively. The balanced scorecard combines financial and non-financial indicators, allowing managers to monitor not just past results, but also the drivers of future performance.

> **Key Term: balanced scorecard**
> A multidimensional framework for business performance measurement, which incorporates both financial and non-financial KPIs across four core dimensions: financial, customer, internal business process, and innovation and learning.

## **THE BALANCED SCORECARD: STRUCTURE AND PURPOSE**

The balanced scorecard provides a structure for organising KPIs that support strategy execution. It ensures that managers look at performance from different dimensions, not just profit.

### The Four Dimensions

1. **Financial**: How do we create value for our shareholders?
2. **Customer**: What do our customers value and how do we measure this?
3. **Internal Business Process**: Which internal processes are critical to delivering customer and financial goals?
4. **Innovation and Learning**: How do we sustain improvement and growth through people, systems, and innovation?

Each dimension contains clear objectives, with one or more concrete performance measures (KPIs) for each.

> **Key Term: key performance indicator (KPI)**
> A quantifiable measure used to monitor progress towards an intended result or objective.

## **SETTING EFFECTIVE KPIs FOR EACH DIMENSION**

A good scorecard translates strategy into action. This means identifying KPIs that directly relate to the organisation's critical success factors.

- **Financial KPIs**: e.g., operating profit margin, ROCE, net cashflow.
- **Customer KPIs**: e.g., percentage of on-time deliveries, customer satisfaction ratings, customer retention rates.
- **Internal Business Process KPIs**: e.g., cycle time, defect rates, process cost per unit.
- **Innovation and Learning KPIs**: e.g., percentage of revenue from new products, staff training hours, employee turnover rates.

> **Key Term: critical success factor (CSF)**
> An essential activity or element required for an organisation to achieve its objectives and mission.

## **WHY MULTIDIMENSIONAL? LIMITATIONS OF FINANCIAL KPIs ALONE**

Relying only on profit, ROI, or cost-based measures causes several issues:

- Encourages **short-termism**: Managers may cut investment or quality to boost short-term results, harming future sustainability.
- Risks **manipulation**: If only financial metrics are rewarded, managers may attempt to 'window-dress' results.
- Lacks **alignment with strategy**: Financials show past effects but not always the current drivers of success.
- Ignores **cause and effect**: Non-financial leading indicators often predict future financial outcomes.

By combining dimensions, the balanced scorecard connects strategic vision to day-to-day activities, balancing lagging (financial) and leading (non-financial) indicators.

## **SELECTING AND INTERPRETING BALANCED SCORECARD KPIs**

The best KPIs:

- Link directly to strategic objectives.
- Are clearly understood by staff.
- Are controllable by managers being evaluated.
- Are measurable: as quantifiable as possible, but may include a few qualitative indicators if appropriate.

Each KPI should include a clear target and time frame for achievement.

### **Worked Example 1.1**

**Scenario:**  
GreenTech plc wants to introduce a balanced scorecard. Company objectives are:

- Increase return on capital employed (ROCE)
- Improve customer retention
- Reduce production defects
- Launch at least two new products each year

**Required:** Propose one KPI for each dimension.

> **Answer:**
>
> - Financial: ROCE (% achieved vs. target)
> - Customer: Repeat customer purchase rate (%)
> - Internal business process: Defect rate per 1,000 units
> - Innovation and learning: Number of new products launched per year

## **PRACTICAL BEHAVIOURAL AND IMPLEMENTATION ISSUES**

### Benefits

- **Balanced decision-making:** Ensures managers consider both short- and long-term priorities.
- **Strategy communication:** Aligns staff with key objectives.
- **Identifies trade-offs:** Conflicting demands (e.g., cost vs. quality) are openly managed.

### Difficulties

- Selecting too many KPIs can lead to information overload.
- Qualitative KPIs (e.g., staff morale) may be harder to define or measure consistently.
- Targets must be owned and accepted by staff, or the scorecard may demotivate.
- External factors (competitors, regulatory changes) can influence results—KPIs should be reviewed and adjusted appropriately.

### **Exam Warning**

> Do not simply list standard financial ratios for every dimension. In the exam, KPIs must be relevant to the specific organisation's strategy and situation given.

## **USING KPIs FOR LONG-TERM SUSTAINABILITY**

Businesses are increasingly expected to consider their impact on wider stakeholders and the environment. Non-financial KPIs may include:

- Energy or water usage per unit produced
- Staff turnover or satisfaction scores
- % suppliers meeting social/environmental standards

Including such KPIs in the scorecard supports sustainable development and helps address stakeholder concerns.

### **Worked Example 1.2**

**Scenario:**  
A manufacturing company wants to reduce its environmental footprint and improve employee retention, as well as increase profitability and market share.

**Required:** Suggest an appropriate balanced scorecard KPI for each aim.

> **Answer:**
>
> - Environmental: CO₂ emissions per unit output (internal process)
> - Employee retention: Staff turnover rate (innovation/learning)
> - Profitability: Operating profit margin (financial)
> - Market share: % market share in key segments (customer)

## **Summary**

The balanced scorecard offers a practical method for combining financial and non-financial measurement across multiple dimensions. It helps link everyday operations to strategic goals using targeted KPIs. Success relies on selecting measures relevant to what drives performance and regularly reviewing them for continued relevance.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define the balanced scorecard and its four dimensions
- Explain the need for both financial and non-financial KPIs
- Select and justify suitable KPIs for each dimension
- Outline the advantages of multidimensional measurement frameworks
- Recognise behavioural and practical implementation issues
- Understand exam requirements for relevant, explained KPIs linked to strategy

## **Key Terms and Concepts**

- balanced scorecard
- key performance indicator (KPI)
- critical success factor (CSF)


Non-financial and multidimensional frameworks - Balanced scorecard dimensions and KPIs