Limitations of Conventional Financial Performance Measures

The organizations that are functioning in the current economy aim to develop a business strategy that will be helpful for increasing the efficiency of the company. The changes in the economy has compelled the organizations to implement various business and marketing strategies thereby increasing their marketing share and their competitive edge. The same thing is in mind of Central Metal Fabrication Ltd, the organization that is under consideration in this case study.

It is seen that Jason Smith, the CEO of Central Metal Fabrication Ltd has been under the impression of undertaking new concepts of financial measurement that will improve the performance evaluation technique of the organization. The company had been involved in the metal fabrication business for a number of years and it is seen that they have ten branches that are operating in various regions in New Zealand (Bhattacharya et al., 2014). The CEO attended a conference where the Robert Kaplan was the key lecturer and he delivered a speech that was relevant to the current innovations in the management techniques and performance measurement that are improving the modern firms. Mr Kaplan mainly focused on the innovative concept of Balanced Score Card as he has seen that there has been successful implication of this technique various organizations in the world.

This conference has motivated Mr Smith to implement this technique in his firm and therefore in his meeting has asked for comments that will make them understand that whether this tool will improve the financial performance measurement for the firm (Martello et al., 2016).

The paper concentrates on the comments that have been given by the senior manager and accordingly a report is required to be prepared so that a potential model can be developed that can improve the operations of the firm and can influence the senior managers to implement Balanced Score Card in their branches.

The main question that is under consideration refers to the comments that have been provided by the senior managers. It is seen that the main concern that is under consideration is seen to the use of Balanced Score Card over the traditional financial management measures. It is seen that there are various limitations of conventional financial performance measures that have been discussed below:

The organizational value creating operations in the current time not captured to their full potential in the fixed and the tangible assets of the organization. On the contrary, the value is reliable on the on the ideologies of the individuals, within the supplier and customer relationships, the in the databases of the essential information and the cultures that are relevant to the quality and innovation (Keyes 2016). The conventional financial measures were constructed to undertake a comparison of the past periods that are based upon the internal standards of the performance.  

The efforts undertaken to reduce the cost often targets the activities that are long-term value-creating in nature of the organization like the research and development, related development and customer relationship management (Simons 2013). This concentrates on the short-term gains at the cost of the long-term establishment of values that may lead to optimization of the resources of the firm.  

BSC Implementation for overcoming these limitations

In the current scenario, the teams comprising of various functional areas associating together to rectify the pressing issues and establish values in an unimagined way (Hoque 2014). The conventional financial measurement techniques have no path to compute the actual value or the cost of these associations.  

The financial measurement tools provides an excellent review of the previous performance and the eventsin the firm. This thorough financial review has no forecasting power for the future.

Balanced Scorecard method is an instrumental technique as it is a framework that is created with respect to the present realities of business. It is seen that this method tracks the financial health of the business with respect to the future financial trends of the business. Unlike the conventional practice that looked in to the past trends and the periods, Balanced Scorecard analyses the data with the future that helps the firms to understand the market and ideally undertake the steps to improve the business (Peters et al., 2013).

It is seen that conventional financial measures look into the short term goals and thereby sacrifice the long term objectives that have an impact on the progress of the firm. It is seen that in Balanced Scorecard, equal importance is given to the short term and the long term goals. The technique looks into the objectives that are long term as the long term goals determine where the company would progress in the future. The concentration on the short term goals only rectifies the current operations of the firm but it overlooks the future trends.

The conventional technique of evaluation undertakes the fictitious value and overlooks the actual value and cost of the relationships (Parmenter 2015). The overlooking of the actual value of the cost leads to inaccurate preparation of reports that has an impact on the operations of the firm. Balanced Scorecard on the other hand considers the true and the real cost value that is helpful for the determination of the actual plans that will establish an accurate operational plan.

It is seen that balanced scorecard has the ability to estimate the future operations of the management. However, the conventional financial measures do not possess this ability and therefore Balanced Scorecard is can be an effective technique for implementation in a firm.

The report has been prepared in order to answer to response that have been provided by the senior managers. It is seen that the responses that have been given out the senior managers are against the use of Balanced Scorecard.

The first response that have been given out the senior managers indicate that they feel Balanced Scorecard is nothing more than the management trend. They believe that like all the other management fashions balanced scorecard will not give out the true results that are desired by the firm. On the contrary, it is seen that Balanced Scorecard is not a technique that has risen out of the management trend (Perkinset al., 2014). It is seen that Balanced Scorecard provides a balanced view of the performance of the organization. It is seen that Balanced Scorecard provides a full picture about the fact that whether the organization is meeting their objectives. It is often seen that the company may be financially doing well, but it may have issues relating to the employee training and customer satisfaction. With respect to the scenario, it is seen that Balanced Scorecard gives specific focus on the various objectives that have been set out by the firm and thereby giving equal stress on all the issues regarding the operations of the firm thereby improving the business activities of the firm (Sainaghi et al., 2013).

Possible BSC for Wellington branch of CMF

The second comment given by the senior management reveals that they feel that Balanced Scorecard is a complex statistical model and it would involve a lot of time to collect the data. On the contrary, it is seen that Balanced Scorecard is an approach tries to provide a comprehensive and balanced model for understanding the performance of the firm from various perspectives. The model looks into the customer, financial, growth, learning and production aspects so that the management can control and supervise the activities in a more unique and innovative way (Rabbaniet al., 2014). It is not as complex as other statistical process as this method makes use of easily and simpler methods of understanding the process of the business and allocating the costs and the focus according to the importance in the firm. This process collects the data very easily and the analysis is done with ease.

The third comment discusses about the fact that the senior managers feel that balanced scorecard is actually a best guess of someone of understanding which variables are important. They feel that is method is actually a process of communicating the strategy and rather not manage it. However, it is seen that balanced scorecard is not actually a guess of any manager, but the process actually analyses the pertinent problems of the firm and then accordingly sets performance measures and objectives that will be useful for the growth and efficient functioning of the firm (Tjaderet al.,2014). The approach undertakes an analysis of the overall operations of the firm and then decides, which areas require more guidance and supervision. The senior managers have expressed that Balanced Scorecard is a process of communicating the strategy but not managing it. The idea is true but the process of communicating the strategy helps the managers to discover the areas where management and supervision is required. The managers earlier did not have the idea about the regions where performance measures and supervision is necessary. The use of this method helps the firms to understand the areas requiring development and accordingly take adequate measures to rectify the mistakes (Matthews 2015).

There are 10 branches of the company that are operating in New Zealand currently. It is known that all the ten branches provide profit for the firm and therefore the attention of the managers from the ten branches are important. It is therefore, important that every branches should agree upon the implementation of this method (Sánchez 2015). Therefore, in order to implement Balanced Scorecard it is important for the organization to train and make the managers aware about the significance of this method so that they can introduce this method in order to improve their operations.

It is important to develop a BSC model for Wellington Branch according to the comments that have been provided by Ana Sneed, the senior manager of Wellington Branch. There are various issues that are pertinent with the Wellington Branch, but the most important issue relates to the learning and growth perspective of their employees as they have been working in the firm for a very long time and their skills and talents require some changes (Hansen &Schaltegger 2016). The branch is in the idea of appointing new employees in order to improve their operations. The branch is even having the issue of relating the incentive scheme connected to the return on assets. The most important objective that have been discovered for Wellington Branch that requires to be explained and understood is the skills and educational level of the employees who are working in the firm.

Staff incentive scheme linked to BSC

It is important to understand the lead and lag indicators of the four perspectives of the Balanced Scorecard with respect to the Wellington Branch and they are discussed below:

It is seen that the strategic objective of the branch is to enhance the returns and widen the revenue mix of the branch. The lag indicators in this perspectives include the revenue mix, growth of revenue, and return on investment (Gao&Gurd 2015). It is seen that there are no lead indicators with respect to the branch.

The strategic objective in this case involves raising the level of customer satisfaction, with the help of easy access, quality and superior service and attraction of intelligent and knowledgeable people. The lag indicators in this case involves the retention of the customers and the increase in the depth in the relationship among the customers and the management (Formentini&Taticchi 2016). The lead indicators of the branch involves the survey undertaken in order to satisfaction of the customers.

The strategic aim of this aspect involves the gaining knowledge about the customers, establishing new and innovative services and products and cross-selling of products. The lag indicators in this case involves the sharing of the segment, the profit gained from the innovative service or product and ratio of the cross sales (Chang et al., 2013). The lead indicator in this case involves the product development cycle of the firm and the branch and the the hours that are spent with the customers in order to understand the level of satisfaction that they have and the demands and the changes they require. The staff incentive scheme in this process can be linked to the balanced scorecard so that a better idea about the use of incentives can be attained and that will help the organization to construct plans that will motivate the employees to perform better.

In this scenario, it is seen that the strategic aims involves the construction of strategic information, enhancement of skills and talents of employees so that they can provide better services to their customers. It is essential to concentrate on the resources so that they optimize their use. The efficiency of the employees is even important and thereby the try to improve functions of the branch (Ho et al., 2014). The lag indicators involve the employee per revenue and the degree of satisfaction among the employees. The lead indicators involve availability of strategic information, coverage of strategic job and alignment of personal goals with the objectives of the organization.  

The comments that have been provided with respect to the four perspectives reveal that these processes can be influential for the development of the firm and the branches that are involved. The focus on the lead and lag indicators can lead to the development of the firm and thereby improve the operations of the organization. The use of this framework will be influential for the growth in the skills and knowledge of the firm thereby lowering the level of attrition and the labour cost (Tseng et al., 2015). The use of the lead and lag indicators will help the management to select the measures that would help in tracking the business goals. It is seen that the management generally should focus on the lag indicators however, the significance of lead indicators should not be avoided as well.

Impediments to BSC implementation and solutions

The analysis of the case study of Wellington Branch of CMF has revealed that linking of the incentive schemes of the employees with the balanced scorecard is important. The incentive scheme associated with the balanced scorecard will be influential for the development of the operations of the branch. The scheme would work according to the level of production given out by the employees and their dedication towards their organizations. The employees will be provided with training and knowledge regarding the use of new techniques and this will enhance their productivity (Cooper et al., 2017). The balance scorecard will determine the use of equal importance to every perspective so that the incentive scheme can be implemented easily. With respect to the financial perspective, the revenue growth will be considered as growth in revenue will determine the amount of incentive that will be given to the employees. From the perspective of the customers, it is seen that customer retention strategy should be taken into consideration as it is seen that the rise in the number of customers will lead to growth in the activities of the firm so that the efficiency of the employees will be discovered with the help of their skills and talents so that the amount of incentive can be determined. The internal perspective considers the sharing of the segment so that the segment that requires more attention can be considered to bring out the best results. The learning and growth perspective has various indicators and it is seen that revenue per employee and the skills and knowledge of the employees are considered so that the best idea can be attained regarding the incentive scheme of the firm. The incentives are given over the salary with respect to the effort they have given in the performance of the firm.   

The weightage is given according to the order of importance and it is seen that skills and talents will be given 30% weightage as it would determine the incentive that would be given to the employees over their salary. The growth of revenue is given 40% of weightage as the incentive will be given depending upon the amount of revenue gained by the firm. Therefore, the incentive can be given with respect to the profit earned. The customer retention strategy is given 15% weightage as the ability of the employees to retain customers with the help of good relationship determines the incentives that will be given to the employees. 10% weightage is given to revenue per employee as the profit that is generated with the output of each employee is fundamental for the determining how much incentive will be given to each employee. 5% weightage is given to sharing of the segment as sharing will be determined according to the activities given out by each department of the branch. Therefore, it can be said that allocating the weightage in this respect will improve the functioning of Wellington Branch with the help of Balanced Scorecard.

One of the major limitations of Balanced Scorecard is that this process mainly concentrates on the four major perspectives whereas there are various other perspectives like the perspective of social and managerial responsibility. This reveals this method to be an imbalanced. However, this method can be implemented in the organization if initiatives like corporate social responsibility are introduced as they will reduce the burden from method of Balanced Scorecard.

It is even seen that the organizations adopts too many indicators in the BCS method and therefore, implementing the variables that has an influence on the operations of the firm can improve the functions of the CMF.

The lack of senior management commitment towards the use of balanced scorecard within the firm is a challenge for implementation and therefore support from the senior management and the lead explaining the project as the measurement of performance can improve the process of implementation of BCS.  

It is even seen that implementing BCS only for the process of incentive and compensation to the employees has an impact on the performance of this method as this method involves implementation in the various areas of operations as then it would bring out the best results. Therefore, a support should be given to the connection between the incentive to the strategic measures when it is a portion of the method of translation of strategy in the firm and thereby will provide the appropriate results (Matthews 2015).  

It is seen that implementation of BCS becomes difficult if the process of development of the method of balanced scorecard takes too long in a firm. Therefore, the process to implement BCS effectively can be possible by keeping the process short.

It is seen that the use of these method in the firm can be influential for the development of Central Metal Fabrication Ltd from their present frame of operations.   

Conclusion:

The paper therefore, discusses about the operations of Central Metal Fabrication Ltd and then discusses about the implementation of the process of Balanced Scorecard within their operations. The paper firstly discusses about the limitations of the traditional financial performance measures and how the use of BCS will improve the operations of the firm. The report then discusses about the responses that will help to deal with the comments raised by the senior managers and satisfy the senior managers to implement this process.

The paper even explains the responses that are given out by Ana Sneed, the senior manager of Wellington Branch. The report helps to explain the issues laid out by the manger so that she becomes satisfied to implement this process. Proper weightage is given out with respect to the variables that requires importance so that the operations of the branches can be improved. The limitations that can have an impact on the implementation of the method is even discussed and the strategies that can used to improve this situation is discussed so that Balanced Scorecard can be implemented easily and thereby improving the biasness operations of Central Metal Fabrications Ltd.       

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