CEIBS EMBA 2012

Management Accounting
End of Course Individual Assignment
1 May 2012

Adenike Alabi

INTRODUCTON
Traditional approaches to performance management have relied on financial indicators as the main measurement tools for assessing the performance of an organisation. However, with the rapid changes that the business environment witnessed from the last quarter of the 20th century onwards, it has become a challenge to continue to rely on these indicators for performance measurement. A clear example of the rapid changes has been the utilisation of information technology. According to Forrester Research, it is predicted that by 2015, the number of personal computers in use worldwide will reach 2 billion, 34 years after the introduction of the IBM's first PC. Furthermore, the internet has totally transformed the way in which every business sector in the world is carried out. The (business) world has indeed become a global village and we are now in the technological age. Gone are the days of the industrial age when the supplier dominated the customer and determined what was available, competition was localised and product development happened at snail speed. It is therefore evident that conventional management accounting measures which have their origins in the industrial age cannot cope with the requirements of this new environment. Moreover, these management accounting measures have a number of drawbacks: Using accounting reports may encourage dysfunctional behaviour by some managers. For instance, using wrong asset valuation methods by management as was the case in Enron or the inappropriate accounting methods that Olympus Corporation used to cover losses on investment. Financial reports are historical; the information derived from them is prepared AFTER the events have occurred be it monthly, quarterly or annually. Accounting indicators do not represent the full range of a company's objectives, neither are they able to link long term strategies with short term actions. The measures are tied to a financial reporting cycle rather than a product/service life cycle and are usually too inward looking as they focus on the internal workings of an organisation and therefore, disregards external factors such as suppliers, customers' requirements and competitors' actions.

The implication of this is that for an organisation to achieve long term excellence, it has to take a broad and holistic approach to measuring performance and not focus solely on the financial measurements, but access both the financial and non-financial information. The realisation that an organisation requires more than the financial measurements led to the development in 1992 of the Balanced Scorecard by Kaplan and Norton, two Harvard University professors. The Balanced Scorecard is a multidimensional measurement that translates an organisation's mission and strategy into performance measures (Kaplan and
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Norton, 1992, 1996,). It thus provides a set of performance targets and approach to the performance measurements that stresses meeting all organisations' objectives (Atkinson et al, 2001). Simply put, it a set of principles and analytical techniques that aims to measure and improve an organisation's four key drivers of an organisation generally referred to as PERSPECTIVES:

The idea is that each of the perspective builds on the previous one. The perspectives are further illustrated as follows:

Adapted from Robert S. Kaplan and David P. Norton, Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review (January-February 1996): 76.

The four perspectives can be summarised as follows: DIMENSIONOF BSC FINANCIAL

MEASURES Operating profit, revenue growth, revenues from new products, gross margin percentage, cost of reductions in key areas, economic value added (EVA, return on investment Market share, customer satisfaction, customer retention percentage, time taken to fulfil customers request.

CUSTOMERS

INTERNAL BUSINESS PROCESS

Innovation process- manufacturing capabilities, number of new products or services, new product development times, number of new patents. Operations process yield, defect rates, time taken to deliver product to customers, percentage of on-time deliveries, average time taken to manufacture orders, set-up time, manufacturing down time After-sales-service time taken to replace or repair defective products, hours of customer training for using the product. Employee education and skills levels, employee satisfaction scores, employee turnover rates, information system availability, percentage of process with advanced controls, percentage of employee suggestions implemented, percentage of compensation based on individual and team incentives

LEARNING AND GROWTH

Source: (Adapted from Horngren et al 2005, p.796).

BENEFITS
The development of the Balanced Scorecard is based on certain premises and therein lies its strengths. The first is that financial measures, on their own are not enough to determine the overall health of an organisation and that measuring financial performance alone could greatly
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undermine an organisation in the long run. Financial measures are lagging indicators as they tell what has already happened. A key assumption made in traditional management accounting is that all value added to an organisation can be measured in financial terms. However, some sources of value are intangible, for instance, the experience and motivation of employees, the reputation of its brands or the existence of a culture of innovation. A Balanced Scorecard focuses primarily on process and not metrics. They also provide leading indicators which tell how well things are going as well as the lagging indicators. Therefore, it is forward looking asking questions such as how to retain customers as opposed to backward looking financial measurements like what the annual net profit was in the last financial year. Moreover, being an analytic framework for translating an organisation's visions and strategies into specific, quantifiable goals and for measuring performance against these goals, the organisation is able to break down the "top-down" strategies into "bottom-up" objectives, measurements, targets and initiatives. This will enable the organisation to identify those which are most important to each segment and will enable the employees to see how the objectives relate to one another. For example, in the Southwest Airlines Co. ground crew scorecard shown below relates the ground crew's performance to company profitability:

For instance, it reflects how fast ground turnaround reduces costs (lower ground fees) and ensures on-time flights (leading to customer satisfaction). This feeds into increased revenue and overall profitability for the company. It therefore allows the employees to understand how each objective feeds into the other, ultimately bringing value to the shareholders. It assists the increased understanding, awareness and alignment about operations across the entire management team. There is the improved understanding of the various parts of the chain that make up an organisation's operations. There is wider consultation during the

design and implementation of the scorecard and therefore, means that target settings are easier and performance appraisals are better measured and monitored across the board. Balanced Scorecard also brings together in a single report many of the disparate elements of a company's business and strategy (Simon, 2000). Often, large multinationals such as Sony Corporation have divisions with excellent products, but because each division is trying to protect its own individual interests, the company has a whole as unable to come together to produce an end-to-end service, missing out on great innovations such as Apple's iTunes This means that it guards against sub-optimisation so that improvement in one division is not achieved at the expense of another division. Jon (2000) reports how by using the Balanced Scorecard at the Duke Children's Hospital, losses of $11million were turned around to a profit of $4 million in a four year period to 2000. A reduction of costs of $29million over four years was achieved without staff cut backs.

DRAWBACKS
Developing and implementing a balanced scorecard is labour intensive because it is a consensus-driven methodology (Jon, 2000). In the example of Duke Children Hospital, the process required a pilot project, a top-down reorganisation, development of a customised information system and systematic work design. Its use also requires a change in the orientation of employees who are often, difficult to convince. It usually takes a lengthy process of persuasion, persistence and reassurance to get some employees to buy into the process. There are also inconsistencies in the literature as to the relationships between the four perspectives. While some researchers argue that there is a causal relationship between the perspectives, whereby the learning and growth perspective drives the internal business process, which in turn drives the customer perspective. All three perspectives drive the financial perspective (Kaplan and Norton, 1996). However, others are of the opinion that rather than there being a causal relationship, there exists an interdependent relationship. Therefore, the influence between the measures is not unidirectional (Nrreklit, 2000). The process as prescribed by its authors has four perspectives, although they concede that further perspectives may be needed (Kaplan and Norton, 1996). They do not identify how these additional perspectives will be placed in the existing framework. This means that there could be organisations who selectively use these perspectives and incorporate further perspectives (Bedford et al, 2006). It may be possible that the balanced scorecard to be misused. It is possible that the scorecard will identify the wrong things to measure which can waste a lot of corporate resources. It may also result in employers focusing their attention solely on what is measured (Holloway et al, 1995). This means that emphasis is only placed on these areas to the detriment of other unmeasured, but equally important areas.
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DESIGN OF THE BALANCED SCORECARD FOR VILLA VITTORIA GUEST HOUSE, JOHANNESBURG, SOUTH AFRICA.
Villa Vittoria Guest House is a 20 room 3 star guest house in Hyde Park, Johannesburg, South Africa. The establishment which used to be the British Consulate has been refurbished and expanded over the last nine years. Till date, traditional accounting measures have been used to measure performance of the establishment. There is often the assumption that the design and implementation of the balanced scorecard need the resources and manpower of a large organisation to be successful. However, a small business like Villa Vittoria does not have the complexities of a larger one and can therefore focus on creating a strategic vision and set of objectives which can then be easily and clearly shared not only by management, but also by the employees and external stakeholders. Moreover, the owners will have a better understanding of these performance measures as they are more practical and visual as opposed to financial measures, which most business owners are often, uncomfortable with.

FIRST STAGE: DEFINING VILLA VITTORIA'S STRATEGIC DESTINATION: THE VISION

A strategic destination statement provides the answer to how an organisation will want to look like in the next three to five years. It is important to understand the vision of the establishment as this will provide the framework from which the balanced scorecard will be designed and implemented, ensuring that the scorecard is customised to the expectations of the management of Villa Vittoria. Based on a series of interviews with the owners, the vision of Villa Vittoria Guest House could be defined as follows: "To offer a personalised service for guests in an upmarket, central location, providing excellent customer service, modern facilities and offering our guests value for their money."

SECOND STAGE: DESIGN THE STRATEGY MAP

The Strategy Map shows the overall goals and competencies based on the four perspectives of the Balanced Scorecard. A competency can be defined as simply the resource or ability that is required by an organisation in order to achieve a particular goal. Competencies are essential and can be referred to as the critical success factors since the presence or absence of these can influence the success or failure of an organisation. In other words, a strategy map is a framework that can be used to describe the strategies of an organisation. They work in a top-down way, translating the corporate mission into operational actions and outcomes (Venohr, 2007). According to Kaplan (2004), the benefits of the strategy map are: Executive consensus and accountability - building the map eliminates ambiguity and clarifies responsibility Educate and communicate - builds awareness and understanding of organisation strategy across the workforce Ensure alignment - each sub-unit and individual link their objectives to the map Promotes transparency - communicate with and educate constituents, partners, oversight bodies and the general public.

From the vision of Villa Vittoria stated above, a strategy map was designed reflecting the objectives required to achieve the strategy. The strategy map is illustrated below:

VILLA VITTORIA STRATEGY MAP

Financial Perspective:
How does Villa Vittoria create value for its owners?

Maximise Net Profit

Maximise Income

Minimise Expenses

Customer Perspective:
How does Villa Vittoria wish to be perceived by its customers?

Paying great attention to detail

Excellent value for money

Friendly, efficient and thoughtful service

Internal Business Process Perspective:

What does Villa Vittoria want to excel in?

5 Guest Cycle* performed to 5-star establishment standards

Personalised service for each guest.

Learning & Growth Perspective:

How does Vila Vittoria harness the skills of its employees to achieve its goals and objectives?
Provision of continuous employee training especially in custmer services and technology skills. Motivating and rewarding staff to take responsibility for providing excellent services and amenities for guests

* Five stages of guest cycle are: 1. 2. 3. 4. 5. Pre-arrival - enquiry, reservation and confirmation of booking Arrival Stay - Check-in, transfer to room, room occupation Departure - Check-out Post-Departure

THIRD STAGE: DEVELOP THE KEY PERFORMANCE INDICATORS (KPIs)

The KPIs are the metrics that measure that can be used to track the progress of an organisation in achieving the pre-determined goals and objectives. When these indicators are achieved, it provides evidence that the designed competencies are relevant which in turn, implies that the perspective goals are being reached and therefore, wealth is being generated to the shareholders. As with each of the previous stages, it is imperative that KPIs must be linked to one another to ultimately provide value for the shareholder. For instance, a high percentage of employees with technological skills will be able to achieve excellent guest check-in/checkout service, providing positive customer satisfaction. A satisfied guest is likely to patronise the establishment again and recommend the guest house to other people. Ultimately, all of this should culminate in increase in revenue and profit. The selected KPIs must be quantifiable and should follow the SMART (specific, measurable, attainable, relevant and time bound). Once we have developed the KPIs to be used, targets are then established for each KPI. Targets push the organisation to achieve its KPIs and ultimately, the objectives and goals. When determining the target levels, a benchmarking process will be required to measure the outcome of the KPIs. For instance, actual results may be measured against pre-set targets, industry averages may be used as the benchmark and actual results compared against these or period on period comparisons may be the basis of comparison. Based on the strategy map above and recognised hospitality KPIs, the following three KPIs have been selected for Villa Vittoria: FINANCIAL Gross revenue per room Gross/Net Margin Average spend per guest

CUSTOMER Number of positive feedbacks from guests Repeat customers as a % of total customers Number of complaints received

INTERNAL BUSINESS PROCESS Average check in/check-out time Average time to service a room % of rooms with maintenance issues

LEARNING AND GROWTH Staff Turnover Number of training sessions provided in the period Technological competence of staff

VILLA VITTORIA 'S OBJECTIVES MATCHED WITH THE IDENTIFIED KPIs

PERSPECTIVES
Financial

OBJECTIVES
Maximise Revenue Minimise Costs Maximise Net Profit Great attention to detail Excellent value for money Friendly, efficient & thoughtful service

MEASUREMENTS
Gross Revenue @ room Gross/Net Margin Average spend per guest

TARGETS
Actual x x x Pre-set Level x x x x x x x x x x x x

Customer

Number of complaints received x Repeat customers as a % of total customers x Number of positive feedbacks from guests x Average check-in/checok-out time Average time to service a room % of rooms with maintenance issues x x x x x x

Internal Business Process Excellent performance of Guest Cycle

Learning and Growth

Provision of employee training Number of training sessions provided Motivation and reward of employees Staff Turnover New technological innovation introduced Technological competence of staff

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FINAL STAGE: DETERMINE INITIATIVES FOR THE TARGETS

There are action programmes that must be introduced to ensure that the targets are achieved. Initiatives are primarily meant to facilitate the execution of the key performance indicators. Examples include quality improvement programmes and marketing initiatives. In order to be effective, initiatives should have designated start and end times, progress milestones and require resources such as defined budget and time hours to implement them.

BALANCED SCORECARD FOR VILLA VITTORIA GUEST HOUSE

PERSPECTIVES
Financial

OBJECTIVES
Maximise Revenue Minimise Costs Maximise Net Profit Great attention to detail Excellent value for money Friendly, efficient & thoughtful service

MEASUREMENTS
Gross Revenue @ room Gross/Net Margin Average spend per guest

TARGETS
Actual x x x Pre-set Level x x x x x x x x x x x x

INITIATIVES

Customer

Number of complaints received x Repeat customers as a % of total customers x Number of positive feedbacks from guests x Average check-in/checok-out time Average time to service a room % of rooms with maintenance issues x x x x x x

Customer Feedback Programme Standardised Guest Cycle Programme Recognised Hospitality Courses

Internal Business Process Excellent performance of Guest Cycle

Learning and Growth

Provision of employee training Number of training sessions provided Motivation and reward of employees Staff Turnover New technological innovation introduced Technological competence of staff

CONCLUSION
It is important to note that the design of the balanced scorecard is only as useful as how well it is implemented. The design was based on input by the management and employees of Villa Vittoria. It is therefore important that the implementation will be done across the board and there will be ownership for the performance measurements by all. The balanced scorecard also needs to be reviewed and updated regularly to take on board new developments and innovation in the hospitality industry

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REFERENCES:
2GC Active Management (2009). FAQs - Can I apply Balanced Scorecard to my small business? Retrieved from http://www.2gc.co.uk/pdf/2GC-FAQ10-090216.pdf 2GC Active Management (2008). FAQs - What are the main benefits of a Balanced Scorecard? Retrieved from http://www.2gc.co.uk/pdf/2GC-FAQ2-080901.pdf Anderson, H., (May 2001), Balanced Scorecard Implementation in SMEs: Reflection on Literature and Practice. Paper presented at 4th SME-SME International Conference, Denmark. Retrieved from www.qa.au.edu/page2/research/BSCInSMEPaper.pdf Anthes, G. (Feb 13, 2003) ROI Guide: Balanced Scorecard. Retrieved http://www.computerworld.com/s/article/78512/ROI_Guide_Balanced_Scorecard from

Atkinson, A.A., Banker, R.D., Kaplan, R.S. & Young, S.M. (1997). Management Accounting Prentice Hall, Upper Saddle River, NJ Holloway, J., Lewis, J. and Mallory, G. (1995) Performance Measurement and Evaluation Sage Publications, London Horngren, C.T., Bhimani, A., Datar, S.M. & Foster, G. (2005). Management and Cost Accounting (3rd Ed) Pearson Education, Essex Jon, M. (2000). Saving Money, Saving Lives. Harvard Business Review, 78(6), 57-62 Kaplan, R.S. and Norton, D.P. (1992). The Balanced Scorecard: Measures that Drive Performance. Harvard Business Review, 70(1), 61-66 Kaplan, R.S. and Norton, D.P. (1996). Using the Balanced Scorecard as a Strategic Management Accounting System. Harvard Business Review, 74(1), 75-85 Nrreklit, H. (2000). The Balanced of the balanced scorecard - a critical analysis of some of its assumptions. Management Accounting Research, 11, 65-88 Simon, R. (2000) Performance Measurement and Control Systems for Implementing Strategy Prentice Hall, Upper Saddle River, NJ Toogood, A. (May,2009) Management Accounting - Business Strategy. CIMA Study Notes 5051

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Venohr, B. (2007). Strategic Leadership [PowerPoint slides]. Berlin, Germany: IMB Institute of Management Berlin. Worldwide PC Adoption Forecast 2007 - 2015 (2007). Forrester Research. Retrieved from http://www.forrester.com/Worldwide+PC+Adoption+Forecast+2007+To+2015/fulltext/-/ERES42496?objectid=RES42496 Yu, L., Perera, S., Crowe, S. (2008) Effectiveness of the Balanced Scorecard: The Impact of Strategy and Causal Links, JAMAR, 6(2), 37-41

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