Critical Evaluation of the Use of Balanced Scorecard as a Performance Measurement Tool

Critical evaluation of the use of Balanced Scorecard as a performance measurement tool

To meet the current requirements of corporate governance and adapt to the rapid changing economic environment, nearly all organizations measure their performance to evaluate, motivate and control the operating process. In order to convey a whole picture and view the corporation in a long-term perspective, many large corporations choose a more complete management tool, the balanced scorecard, to be the performance measurement tool (Dechow, 2012). Different from the traditional performance measurement, which is based on financial issues and provides evaluations merely on past performance, BSC not only focuses on past performance by financial aspect, but also concerns future developing trend by non-financial factors.

This essay will critically evaluate the use of balanced scorecard as a performance measurement tool, from the perspectives of its origins and rise, BSC approach and its advantages, and the limitations of BSC in real operating process.

The origins of balanced scorecard (BSC) can be tracked back to the second half of the twentieth century. After criticizing the financial based traditional performance measurement for many years, many businesses realized the increasing value of intangible assets, and the method of various performance measures developed in the 1980s (Kenneth and Wim, 2012). Intangible assets, such as goodwill, patent and trade works, began to raise more concerns than tangible assets, as intangible assets have the second or third impacts on financial results which provide a long run perspective for the corporation. Organizations’ increasing focus on intangible assets was the initiation of BSC. Then in 1990, according to Geuser, Mooraj and Oyon (2009), with the aim to implement business strategy and provide richer performance measures, Robert Kaplan, an accounting professor, and David Norton, a professional consultant, studied twelve companies for a year to explore new performance measurement methods. They believed that both tangible assets and intangible assets could generate competitive advantages for companies, after analyzing many combinations in the study, Kaplan and Norton finally settled on the scorecard measurements as customer issues, internal process, staff attitude and shareholder interests, and labelled this method as balanced scorecard in 1992 (SimHian and Koh, 2001). Over the next few years, more organizations adopted the BSC approach in practical operating, and in 1996, Kaplan and Norton formally summarized the concept of BSC as a performance measurement tool in their book ‘The balanced scorecard’ (Chavan, 2009).

Since the origin in 1992, BSC has rapidly risen to prominence and been adopted by numerous companies. Sibbet (1997) explained that as early as in 1997, BSC was regarded as an influential performance management tool, and since then BSC has been accepted by more than half of the Fortune 1000 firms (Niven, 2006). In general, BSC is a remarkable approach to measure performance.  

The success of BSC can be attributed to many factors, and the prominent factors are the obsoleteness of traditional performance measurement and rapidly changing economic environment. First of all, there are numerous problems with traditional measurement based solely on financial performance, Amaratunga, Baldry and Sarshar (2001) argued that ignoring the impacts of intangible assets, the traditional measurement only focuses on the actions have done in the past and fails to guide long-term sustainable development. Therefore, traditional performance measurement was abandoned by many companies, and provided opportunities and spaces for BSC’s prosperity. Secondly, Kaplan and Norton (1996) pointed out that the integrated economy and dynamic globalizations change the business environment rapidly, and force managers to make effective decisions quickly in the face of opportunities and risks. As a result, an effective measurement to evaluate performance and link long-term strategy with short-term actions is vital in the decision making process. Due to the poor performance of traditional measurement and the rapidly fluctuating economic environment, a more integrated method is required and therefore BSC rise to prominence as a performance measurement tool.