Grenoble Graduate School of Business: MBA Managerial Accounting Assignment

Managerial Accounting Essay

Patrick Petit
March 2008

The purpose of this essay is to develop an understanding of both the Balanced Scorecard and
Performance Prism frameworks and develop a critical analysis of how these two frameworks
differentiate both in terms of implementation and expected benefits.
Both the Balanced Scorecard and Performance Prism performance management frameworks are about
designing and implementing performance measurement capabilities in organizations, whether these
be public, private or non-profit enterprises, in an attempt to improve performances and achieve
strategic goals.
A comparative analysis will strive to emphasize the relative importance of using a particular
framework over another in light of what Andy Neel calls the “enduring challenges of measurement”
to effectively deploy any performance measurement capabilities in the enterprise, as it appears that no
single management control system is inherently superior to another.

Introduction
Effective performance measurement requires multiple financial and non-financial performance
measures. Effective performance measures should:
1. reflect key actions and activities that relate to the goals of the organization.
2. be affected by actions of managers and employees.
3. be readily understood by employees.
4. balance long- and short-term concerns.
5. be reasonably objective and easily measurable.
6. be used consistently and regularly to evaluate and reward managers and employees.
Well-designed management control systems develop and report both financial and non-financial
measures of performance since “You can't manage something you can't measure”[is this a citation ?].
Financial measures alone often arrive too late to help prevent problems. A deficient financial outlook
often results from poor non-financial performance in the first place. For instance, the effects of poor
non-financial performance such as lack of organizational learning or low customer satisfaction, may
not show up in the financial measures until the company has lost considerable ground. Conversely, a
superior financial outlook is the logical result of superior non-financial performance (Horngren &
All., 2008 (a)). Therefore,, for many years, organizations have increasingly monitored non-financial
performance as a key element of success. In recent years, most organizations have developed a new
awareness of the importance of controlling non-financial performance areas. This essay focuses on a
popular, broad approach to performance measurement, the Balanced Scorecard, which explicitly
balances financial and non-financial measures. It also describes a second-generation performance

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measurement system, know as Performance Prism, which takes an even broader approach and
emphasis on non-financial measurement, from the perspective that the starting point of any
performance measurement system has to be driven by the stakeholders' requirements as opposed to
the organization's strategy.

The Balanced Scorecard Framework

Originally developed by Robert S. Kaplan and David Norton, the Balanced Scorecard framework has
been around for over a decade. It is the most commonly-applied framework in organizations around
the world. This the framework encompasses a set of performance measures intended to help
organizations implement their strategies more rapidly and effectively. It measures and reports
performance and strives to balance financial and non-financial measurements, link performance to
rewards, and gives explicit recognition to the diversity of organizational goals. Its performance
measurements address the four compartments of the performance pyramid as organizational learning,
business processes improvement, customer satisfaction, and financial strength from increased
profitability. Increased profitability is then re-injected at the organizational learning layer (the bottom
of the pyramid) and goes up again in a virtuous cycle. The chief virtue of the balanced scorecard,
when first presented in Harvard Business Review in 1992 and 1993, was that it advocated the
application of non-financial measures in a world that was then dominated by accounting measure
principals. Long-term financial performance is a primary focus of the framework, but it also
measures indirect causes (that is, non-financial measures) for ultimate operations performance such as
employee motivation, training and customer satisfaction. Another benefit of the balanced scoreboard
approach is that line managers can see the relationships between their own actions on the front-line,
and the financial metrics that relate to the organization's global goals.
The classic balanced scorecard developed by Kaplan and Norton includes key performance
indicators1 grouped into four inter-related categories known as the Balanced Scorecard Quadrants,
each containing objectives and measures from a distinct perspective. These perspectives are termed:
➔ Financial – Kaplan and Norton see the Financial quadrant as being the focal point of all the
objectives and measures of the other quadrants. Those objectives and performance measures
are associated with the shareholders' perception and expectation of the organization's financial
health. In commercial enterprises, the quadrant can include appropriate financial objectives
and measures such as:
➔ achieving a higher return on investment through higher return on investment (ROI)
and return on capital employed (ROCE).
➔ observing a significant revenue from new product launches through revenue growth
on selected product lines.
➔ rewarding shareholders through an increase of earnings per share, P/E ratio, or
dividend yield.
➔ Customers – the key emphasis for most executives is the customer. Many organizations
focus on customer satisfaction as the most important non-financial set of measurements. The
objectives recorded within the customer quadrant may be both contemporary and future
oriented. Examples of customer objectives and measures may include:
➔ dominating the major market through an increase of market shares
➔ Retain customer loyalty through customer satisfaction surveys

1 Measures that drive the organization to meet its goals

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➔ building customer recognition through corporate image or brand awareness polls

➔ Internal Processes – the internal business process quadrant is about execution. Objectives
and measures in this quadrant focus on the operational aspects of an organization's activity.
They may include objectives and measures of the following type:
➔ competing on product reliability through monitoring of production defect rates.
➔ continuously challenging competitor' products on the market by reducing the time to
market for next-generation products.
➔ Learning and Growth – the learning and growth quadrant looks at enabling the organization
through strategic investment in people, business processes, information systems and the
organization's culture. Some examples of objectives and measures within the learning and
growth quadrant may include:
➔ valuing staff through an employee retention index.
➔ maximizing productivity through output per head.
➔ developing a skilled workforce through a number of training hours completed per
head.
The balanced scorecard framework can be flexible and should be regarded as a sort of template that
can be adapted to better reflect each organization's specific business segments.

Performance Prism Framework

The Performance Prism, coming from the Cranfield University), is presented as an innovative second-
generation, three-dimensional performance measurement and performance management framework .
Its positioning, compared to previous frameworks, such as the Balanced Scorecard, is that
performance measurement effectiveness should recognize values from a broad spectrum of partners.
The vision underpinning the Performance Prism is that performance measurements should not derive
uniquely from strategy but from considering relationships with all stakeholders. The Performance
Prism establishes this imperative by linking an organization's strategies, processes and capabilities
with the stakeholders wants and needs and, reciprocally, the expectations an enterprise has toward its
stakeholders. Thus, the objective of the Performance Prism is to provide a flexible framework for
organizations to design, build, operate and refresh a comprehensive performance measurement system
that looks at measurements from the perspective of the stakeholders.
When deciding what to measure, managers have to first identify who their stakeholders are and what
they want and need. Only then can they begin to decide what they should measure. The defenders of
the Performance Prism claim that existing works on performance measurement fail to recognize this,
with in particular the Balanced Scorecard which mandates that measures should be derived from
strategy. Therefore,the Performance Prism states that measures should be consistent with strategy, but
they should not be derived from strategy.
The framework works in a way that is comparable to an optical prism, hence the name Performance
Prism. The operating environment context is decomposed (through the prism) into measurements for
managing stakeholder categories. These categories include the usual investor and customer categories,
and have been extended(this is new in that framework) to intermediary, employee, supplier, regulator
and community categories. The framework does this in two ways:
➔ By considering and identifying the wants and needs of the stakeholders.
➔ By identifying what the organization's expects from its stakeholders.

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Therefore, the Performance Prism establishes a two-way relationship channel between the
stakeholders and the organization. It consists of five interrelated outlooks on performance
measurement that poses the the following critical questions:
➔ Who are the key stakeholders and what are their wants and needs?
➔ What does the organization want and need from its stakeholders on a reciprocal basis?
➔ What strategies need to be put in place to satisfy these reciprocal wants and needs?
➔ What critical processes need to be put in place to enable the organization to execute its
strategies?
➔ What capabilities are required to operate and improve theses processes?

By answering these questions, organizations are supposed to be able to build a structured business
performance model. Together, these five perspectives provide a comprehensive and integrated
framework for managing organizational performance. The framework forces organizations to think
properly by exploring what strategies, processes2 and capabilities3 they will need to put in place in
order to deliver value to each of their stakeholders. Once the various groups of stakeholders based on
their specific needs are identified, the framework allows to define the strategies, processes and
capabilities relevant to each group, giving rise to what is called the success map.

The following section describes some of the framework's key points and explains why it consists of
these components.

Why is it critical to listen to the key stakeholders?

Executive opinion increasingly believes that the only sustainable way for an enterprise to survive and
thrive in the 21st century is to successfully manage its relationships with each of its principal
stakeholders. In a recent respondent program on risk management by the Economist Intelligence Unit
(EIU), reputation risk emerged as the highest ranking priority (62 per cent) above regulatory (41 per
cent) and human capital (41 per cent) risks (McKenna J., 2005). It is also the most difficult to manage
according to a recent study of the top 2000 private and public organizations in the UK (Unsworth, E.
2001). Changes in business practices arising from increasing governance, legal and regulatory
influences have made companies more vulnerable to reputation damages. Equally, the power and
intrusiveness of the media and communication industries has intensified focus on corporate reputation
with respect to unscrupulous business practices. Business reputation is hard to win but quickly lost.
Loss of confidence by any group of stakeholders can quickly lead to the decline of a company, most
strikingly in service businesses such as finance or professional services. For the majority of
enterprises it is seen as the most critical risk, as reputation is becoming a key source of competitive
advantage as products and services become less differentiated. A consensus among executives is to
state that a key element for managing reputation risk is to prompt for effective communications with
2 Processes enable an organization to perform its operations. Organizations broadly classify
business processes according to four categories: develop products and services, generate demand,
fulfill demand, and plan and manage the enterprise Processes run horizontally across and
enterprise's functional organization and are the blueprints for how work is completed. The order-to-
cash fulfillment process is an example of a business process to capture customer orders, make the
good, deliver it, and receive payment.
3 Capabilities can be defined as the combination of an organization's people, practices, technology
and infrastructure which collectively represent an organization's ability to create value through its
business processes. Customer order handling, procurement, manufacturing, distribution, credit
management are examples of capabilities.

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all categories of stakeholder including shareholders, employees, customers and suppliers.

Failure to change was rated the second larger risk. If firms fail to listen to their stakeholders, they
cannot respond to their concerns. In effect, today's consumers are different from those of the 20 th
century. They are more demanding, smarter, better informed, and more in control of their purchasing
decisions. The numerous online services available, such as online reviews, consumer forums, price
comparators and online rebates, have collectively rendered old marketing recipes based on the 1950's
advertising techniques, obsolete. The development of Internet, online communities and pressure
groups are gaining in power and influence. The decline of the music record industry is an example
that illustrates well the most destructive effects of not listening to the structural changes of the market
such as de-intermediation that is desired by customers as well as the artists stakeholders (Hiatt, H. and
Serpick, E., 2007)

Similarly, in the global economy, suppliers and alliance partners are becoming increasingly important
components of an organization as manufacturing and service outsourcing needs continue to grow.
Also, the advent of the Corporate Social Responsibility movement and stewardship for non-financial
impacts over the environment and social responsibilities, for example, are other elements of proof of
the way corporations are expected to behave and listen to regulator and community stakeholder types.

Satisfied stakeholders should not be confused with profitable stakeholders

Take for example customer stakeholders. Research data first gathered by Xerox showed that very
satisfied customers are six times more likely to repeat their purchase in the next 18 months compared
to those who are just satisfied (Thomas O. Jones, W. Earl Sasser Jr., 1995). However, other studies
showed that many customers are not profitable and even possibly loss-makers to the surprise of an
organization. In retail banking, for instance, 20 percent of customers generate 130 percent of profits.
Basically, customers don't care about being loyal or profitable. They just want great products for the
right price. The important point is that performance metrics accounting for customer satisfaction alone
can be misleading as the organization's expectations for loyal and profitable customers may be
orthogonal to the notion of satisfied customer. Of course, the same principal applies to other
stakeholders such as employees or partners.
The key message here is that for every organization-to-stakeholder relation, the performance
measurement system should support irreflexive performance metrics for the reciprocal relation.
What strategies should the organization adopt to ensure the satisfaction of the stakeholders while
ensuring that the reciprocal requirements are also satisfied ?
Serving potentially conflicting requirements can lead to inconsistent strategies. It was apparent to the
designers of Performance Prism that organizations actually do not have the choice to address
antagonist viewpoints as a blunt manifestation of a more complex business environment that are
inherent to an increasingly inter-related and global economy. The role of measurement is four-fold
and can be applied at different levels of the organization as shown in the figure below:

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Corporate Strategy
What business do we want Roles of Measurement
to be in and how shall
we build them successfuly?
1. Managers must track whether
or not the strategies they have
Business Unit Strategy chosen are actually being
What market do we want to implemented
be in and how shall we
serving them successfuly? 2. Measures should communicate
these strategies across the
organization's boundaries
Products & Services Strategy
What brands, products, and 3. Measure should encourage
services shall we offer to these incentives for implementation of
markets and how providing strategies
them successfuly?
4. Once available, data should be
analyzed and used to challenge
Operating Strategy whether strategic assumptions
Which process and capabilities are working as planned and if not
must we develop in order to why
serve these markets and provide
these products or services
effectively and efficiently?

Figure 1: Role of measurement in applied strategies at different levels of the organization

Comparative analysis
Both are frameworks used to design and build performance measurement systems. The Balanced
Scorecard framework has for principal that performance measurement should be derived from
strategy. On the opposite side, Performance Prism's main viewpoint is that strategies are in reality
reactions to opportunities and threats from an organization's operating environment standpoint.
Knowledge of stakeholders' changing requirements and how well the organization addresses them is
both the output of prior strategies and the basis of new strategies. Therefore, the starting point for
deciding what to measure should not be the organization's strategy but instead, who are the
organization's stakeholders, and what are their requirements. Therefore, the initial viewpoint on
performance measurement handled in Performance Prism is that of the stakeholder satisfaction as
opposed to the “drive your measures from your strategy” viewpoint of the Balanced Scorecard.
Performance Prism is positioned as a second-generation framework. It advertises a more holistic view
of the enterprise's stakeholders requirements. It also claims design superiority since the starting point
of design is directly geared toward the wants and needs of broader categories of stakeholders, as well
as, the reciprocity of an organization's expectations from its stakeholders. It places strategy as the
natural processing output of what seem to be the most stringent issues enterprises have to solve. That
is, gain satisfaction of key stakeholders, while maintaining their contribution at a sustainable and
profitable level for the organization.
However, while on the surface this seems sound and logical, a reality check of how performance
measurement systems are actually being implemented in the field may call for more cautious
conclusions. The point might not be about the theoretical superiority of one model versus another, but

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instead the blunt reality of why managers are seemingly struggling with implementing frameworks in
all kinds of organization, including non-profit, private and public companies. Surprisingly, academic
studies show that the wide spread of the scorecard framework receives among the lowest rating for
effectiveness and that some 90 percent of managers fail to implement and deliver their organization's
strategies. Despite the increasing popularity of scorecard, managers and employees alike do not
necessarily perceive an added value from the framework. According to other surveys on management
tools , conducted by MBA students of the Michigan-Flint university and the Illinois State University,
the scorecard is perceived as having the least impressive effectiveness ratings, especially for private
companies (Clement and All, 2007). After all, it may come as no surprise that, as David Norton said
himself ,“We are experts in what to measure, not in how to measure” (Kaplan Interview, p13)
Is it the relative comprehensiveness and granularity level of a particular model that makes
organizations successful in the implementation of their operational performance measurement model?
Chris Adams and Andy Nelly, the evangelists of Performance Prism, advocate in a Business
Performance Management article that “When measures are consistent with an organization's
strategies, they encourage behaviors that are consistent with strategies. The right measures not only
offer means of tracking whether strategies are being implemented, but also means of communicating
strategies and encouraging implementations (Adams & Neely, 2003). While there is certainly truth in
this, does it mean that an organization abiding to the prism framework would get, for sure, a more
reliable outcome than with the scorecard framework? I could not find evidence of this, nor consensual
answers about this question in the examined documents. It remains though, that other experts of the
performance management field have different perspectives on this issue. For instance, Michael
Hammer (Hammer, 2007) points that operational performance measurement remains an unsolved
problem even in 2007, and that there are a number of reasons for this failure independently of the
framework being used. These reasons are developed in what he calls the seven deadly sins of
performance measurement . In substance, he says that “there is a widespread consensus that they (the
organizations) measure too much or too little, or the wrong things and that in any event they don't use
their metrics effectively” (Hammer, 2007). The article “The 7 Deadly Sins of Performance
Measurement and How to Avoid Them” is articulated around the following ideas:
➔ Biased results or what Michael Hammer calls “vanity” which inevitably leads organizations to
present metrics and people to look good in the face of stakeholders, whether they are part the
management hierarchy or external such as investors (i.e. business analysts, Wall Street). This
is particularly the case when bonuses and other rewards are attached to results measured in
terms of performance measurements.
➔ The problem of organization silos that Michael Hammer calls “provincialism”. It creates an
environment where people, business units and departments can be successful individually, but
the enterprise as a whole may succeed only marginally or even fail. In my experience I have
seen this flow in many occasions at Sun Microsystems also known as the “Not Invent Here”
syndrome in engineering-based enterprise cultures, which leads entities within the
organization to compete against one another. A motto at Sun is to say that the worst
competitor of Sun is Sun itself.
➔ Paul Gaffney commenting the “The 7 Deadly Sins of Performance Measurement and How to
Avoid Them” article (in Hammer, 2007) pointed out that organizational silos can be defeated
by avoiding another flow Michael Hammer labels “narcissism”, which consists in measuring
performance from one's point of view, rather than from the customer's interest point of view.
For example, many companies measure the performance of order fulfillment in terms of
whether the shipment left the dock on the date scheduled. This is obviously of little interest
from the customer's perspective, who is interested in when the shipment will be received, not

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when it left the dock.

The bottom line with respect to inefficiencies of performance measurement seems to reside essentially
in the fact that organizations “do not give operational measurement the attention it needs. They [the
organizations] follow the path of least resistance, using measures they have inherited from the past or
the first metrics that pop into their heads”. Regardless of the method or framework employed “a
serious commitment to performance improvement demands an equally serious commitment to
designing and using effective operational metrics” (Hammer, 2007).

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