Performance Measurement using Balance Scorecard – A Case of Nepal

-Ghanendra Fago1, Ph. D.

ABSTRACT

Performance measurement (PM) using financial indicators as basics of performance measurement has
been failed to measure and monitor multiple dimensions of organizational performance. Being
popular in many developed countries, Balance Scorecard (BSC) assesses total business performances
from financial, customer, and internal business process and learning and growth perspectives. In
order to compare the performance of two commercial banks: BANK A and BANK B, this study applied
BCS to measure the overall organizational performance from four different but interlink
perspectives. This study concludes that out of four perspectives, the financial indicators; ROSE, EPS
and NPM explain good strategic positions. The retention rate of customers, ability to create customers
satisfaction and identify profitable customers are found the major indicators of customers’
perspective. The employee satisfaction, training and development and strategic job coverage of
commercial banks are found major strategic measures of learning and growth perspective. The
mechanism of treatment of complaints giving post sales service through service quality, operating
efficiency and responsibilities to society are found the major internal business process strategies of
Nepalese commercial banks.

Keywords: Performance Measurement, Balance Scorecard, Management by Objectives, Financial

Perspective, Customers Perspective, Internal Business Process Perspective, Learning and Growth
Perspective
Section-I
INTRODUCTION

In the past, organizations were used both financial and non-financial measures to evaluate
performance. Financial measures were used primarily to evaluate senior management’s
performances while non-financial measures were used at lower levels. However, it has been
felt that leading indicators of business performances cannot be found in the financial data
alone. Much of criticisms of traditional performance measurement (PM) from their failure is
to measure and monitor multiple dimensions of performance, by concentrating almost
exclusively on financial measures. The other criticism is historic in nature and lack futuristic
outlook. Financial measures alone in performance measurement and control system are
inadequate tools for strategic decision-making as they are unable to ensure goal congruence
between management decisions and actions. The study of Parker (1979) and Dale (1996)
found that investment analysts who considered both financial and non-financial measures
were more accurate in their earnings forecasts than those who considered only financial
indicators. Of many tools and models, Balance Scorecard (BSC) is one of the most popular
performance measurement tool devised by Kaplan and Norton first in 1992 and refined in
their later publications (Kaplan and Norton; 1993, 1996, 2001).

Since last twenty years, Balanced scorecard (BSC) has emerged as a powerful approach to
implement strategy and has been successfully adopted by many organizations in different
industries (Smith and Kim; 2005). Research suggests that of furtune1000, 60 percent of in
USA have experimented with the BSC. Approximately 50 percent of Fortune 1000
companies in North America and 40 percent in Europe used of BSC (Kaplan and Norton;
2001). The 27 percent of major Scandinavian companies have implemented this
performance measurement framework. In a similar way, the 59 percent of Canadian
executives claim familiarity with the terms “balanced scorecard” or “balanced measurement
system”. In this way, the usage rate of the Balanced Scorecard is increasing day to day

1
Faculty member, Shanker Dev Campus and College of Applied Business of Tribhuvan University; Visiting
faculty of Kathmandu University School of Management, Ace Institute of Management, Uniglobe College,
and Kings’ College, Kathmandu, Nepal

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developed western countries. However, the application of BSC to measure performances or
application in strategic formulation and implementation has not been assessed in developing
countries like Nepal. Thus, this study aims to compare the overall performance of two
commercial banks using Balanced Scorecard from four different but interlinked perspectives.

The study has been organized in five sections. Section-I deals with background of the study
while literature review and research methodology of this study are described in section II
and III respectively. Section-IV deals with empirical results of the study. At last, conclusion
and direction for future research have been explained.

Section-II
LITERATURE REVIEW

This section has been divided into three sub sections. Introduction of Balance Scorecard and
its components are described in Sub-section I. Subsection II describes the previous studies
related with performance measurement using Balance Scorecard. At the end of this section,
reasons for conducting this study have been mentioned.

Balanced Scorecard

Recently, the role of management accounting if emphasized in formulating and supporting

the overall competitive strategy of an organization. Kaplan and Norton (1992) developed
an innovative multi-dimensional corporate performance scorecard known as the Balanced
Scorecard. It protects the managers from information overload by limiting the performance
measures to only four perspectives, namely, customer, financial, internal business, and
learning and growth. It also safeguards from sub-optimization in the decision-making process
by forcing the managers to consider the four perspectives of business performance to have
a complete picture. The implementation of the Balanced Scorecard is a process whereby the
organization’s strategy is translated into a set of key performance indicators (Kaplan and
Norton, 1996a). Kaplan and Norton refined the concept of balanced scorecard in latter
publications (Kaplan and Norton; 1993, 1996, 2001) as it is a set of measures that gives
top managers a fast but comprehensive view of the business. The balanced scorecard
includes financial measures that tell the results of actions already taken. And it complements
the financial measures with operational measures on customer satisfaction, internal process,
and the organization's innovation and improvement activities - operational measures that
are the drivers of future financial performance. (Kaplan and Norton; 1992). The BSC is a
new tool that complements traditional measures of business unit performance. The scorecard
contains a diverse set of performance measures, including financial performance, customer
relations, internal business processes, and learning and growth. Advocates of the balanced
scorecard suggest that each unit in the organization should develop and use its own
scorecard, choosing measures that capture the unit's business strategy. The balanced
scorecard allows managers to look at the business from four perspectives. It provides
answers to four basic questions:
 How do customers see us?
 What must we excel at?
 Can we continue to improve and create value?
 How do we look to shareholders?

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 Financial Perspective
Goals Measures

Customer
Perspective Internal Business
Goals Measures Perspectives
Goals Measures

Innovation and
Learning Perspective
Goals Measures
Figure No 1.Balance Scorecard

Financial Perspective: Financial performance measures indicate whether the company's

strategy, implementation, and execution are contributing to bottom – line improvement.
Typical financial goals have to do with profitability, growth and shareholder value.

Customer Perspective: In customer perspective, managers identify the customer and market
segments in which the business unit will compete and the measures of the business unit's
performance in these targeted segments. The customer perspective typically includes several
generic measures of the successful outcomes from a well –formulated and implemented
strategy. The generic outcome measures include customer satisfaction, customer retention,
new customer acquisition, customer profitability, and market and account share in targeted
segments.

Internal Business Process Perspective: In the internal business process perspective,

executives identify the critical internal processes in which the organization must excel. The
critical internal business processes enable the business unit to:
 Deliver on the value propositions of customers in targeted market segments, and
 Satisfy shareholder expectations of excellent financial returns.
The measures should be focused on the internal processes that will have the greatest impact
on customers’ satisfaction and achieving the organization's financial objectives.

Innovation cycle Operational Cycle Post sales Service Cycle

Crea
Ident te Build
Customer ify the the Deliver the Service Customer
Need Need
Identified The Serv Servi Satisfied
ice Service's ce's Customer

Figure No.2: Internal Business Process

Learning and Growth Perspective: The fourth Balanced Scorecard Perspective, learning
and growth, identifies the infrastructure that the organization must build to create long-term
growth and improvement. Organizational learning and growth come from three principal
sources: people, systems, and organizational procedures.

Electronic copy available at: http://ssrn.com/abstract=2692746

Review of Previous Studies

Dinesh and Palmer (1998) concludes that the Balanced Scorecard is based on the same
philosophies as Management by Objectives (MBO). MBO has proven to be largely
unsuccessful in practice, with two key failures identified as partial implementation of the
system, and non-recognition of the need to adopt a human relations view. Thus, the study of
Gautreau and Kleiner (2001) concludes the balanced scorecard encourages employees to
act in accordance with desired goals of the company and claims that suggests about the
potential problems. According to Sim and Koh (2001), BSC can be used as a tool for
monitoring the long-term value creation process. Undoubtedly, providing training to
employees or implementing innovative techniques consumes a significant amount of
resources. The study of Campbell et al. (2002) concluded that there is no significant direct
relationship between non-financial measures of strategy implementation and the firm’s
financial performance, but shows the study reveals that financial performance is associated
with the interaction of measures of strategy implementation and employee skills. The key
problems associated with strategy implementation including communication, are the role of
middle managers and integration with existing control systems Atkinson (2006).

Kaplan and Norton; (2000 &2008) carried out a study to solve the problem facing by top
executives to implement successfully their business strategies. They point out that the reasons
of difficult to implement strategy that are they give employees only limited descriptions of
what they should do and why those tasks are important. Without clearer and more detailed
information, it’s no wonder that many companies have failed in executing their strategies.
Thus, they defined the strategy map as," that embeds the different items on an
organization’s balanced scorecard into a cause-and-effect chain, connecting desired
outcomes with the drivers of those results."

Research Gap

On the basis of the above reviews we can conclude that the balanced scorecard model is
widely applicable tool to measure overall business performance and implement strategies.
It helps to find the ways that will improve organizational performances. The widely used
balance scorecard as strategic management tools in different countries indicates the
importance of its application in global competitive business environment. However they are
practiced and implemented in developed countries context. No such studies are found in the
context of Nepal. Thus this study attempts to use Balance Scorecard in comparison of two
commercial banks for assessment of overall performances from four different perspectives:
financial, customers, internal business process and learning and growth.

Section-III
RESEARCH METHODOLOGY
This study is descriptive and exploratory research in nature. Using convenient sampling
technique, two banks (i.e. renamed Bank A and Bank B)2 have been selected from the listed
of commercial banks to meet the objectives of the study. The major source of primary data
is questionnaire survey while company website and annual reports are the sources of
secondary data. The collected data is processed using Microsoft Excel. The methods of data
analysis are percentage, growth rate, ratios and weighed average mean. They are
presented using simple graphs and tables.

2
Because of confidentiality, the names of banks are not disclosed rather they are referred as BANK A and
BANK B.

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 Section-IV
EMPIRICAL RESULTS
This is the main section of this study that compares the performances of two banks using
Balance Scorecard (BSC) - a tool of strategic performance measurement from four different
perspectives. This section has been described into four subsections: Financial, Customer,
Internal Business Process and Learning and Growth Perspectives.

4.1 Financial Perspective

Financial measures can be used assess financial strengths and weakness of a firm. Some
common financial measures: Return on Assets (ROA), Return on Shareholders’ Equity (ROSE),
Earning Per Share (EPS), Net Profit Margin (NPM), and Total Credit - Total Deposit ratio
(CDR) have been used to measure financial performance.
Table No.1
BANK A: Performance Summary – Financial Perspective
Strategic Objectives Strategic Measures 2004 2005 2006 2007 2008 Mean
Improve Financial ROA (%) 0.42 0.89 1.13 1.15 1.43 1.00
Productivity ROSE (%) 3.46 9.13 13.12 12.00 16.60 10.86
EPS (Rs.) 3.26 9.74 17.58 16.59 22.70 13.97
NPM (%) 6.17 14.20 16.26 15.52 19.61 14.35
CDR (%) 85.06 76.91 90.62 90.20 85.84 85.73
Table No 1 shows that ROA being 0.42 in year 1, it has been continuously increasing and
has maintained at one percent. ROSE of the bank is 16.6% in year 5 that was 3.46% in
year 1. Similarly, EPS 22.7% and NPM 19.61% in year-5 compared to 3.26% and 6.17%
in year-1 respectively. The CDR of BANK A is slightly decreasing fluctuating however,
average ratio been maintained at 85%.
Table No.2
BANK B: Performance Summary – Financial Perspective
Strategic Objectives Strategic Measures 2004 2005 2006 2007 2008 Mean
Improve Financial ROA (%) 1.30 1.25 1.44 1.64 1.82 1.49
Productivity ROSE (%) 18.29 20.93 19.67 24.77 26.68 22.07
EPS (Rs.) 39.56 21.70 39.50 59.35 62.57 44.54
NPM (%) 20.12 16.71 20.26 23.99 25.07 21.23
CDR (%) 74.74 63.68 73.33 79.63 72.56 72.79
According to Table No 2, BANK B has generated average ROA 1.49% whereas 22.07 %
ROSE, 44.54 EPS, 21.23 NPM and 72.79 as CDR.

From financial perspectives, BANK B is found financially strong than BANK A on the basis of
ROA, ROSE, EPS and NPM. The CDR shows that BANK- A is unable to invest its deposits in
the ratio of Bank B.

4.2 Customers’ Perspective

Using qualitative and quantitative data, firms can be compared to see their weakness and
strengths from customers’ perspective. Quantitative measures under customers’ perspective
include those variables which can be expressed in terms of number, percent or ratios. Of the
five quantitative strategic measures for customer perspective, two measures for customer
retention and loyalty, one measure each for customer acquisition, customer satisfaction and
customer profitability.

5
 Table No. 3
BANK A: Performance Summary-Customer Perspective
Strategic Objectives Strategic Measures 2004 2005 2006 2007 2008 Mean
Customer retention and Duration of a customer relationship ( year) 7 7 8 8 8 7.6
loyalty
Total deposits ( Rs. in billion) 2.51 4.81 6.27 7.77 10.56 6.38
Customer acquisition New customer from program (%) 8 9 11 13 13 10.8
Customer satisfaction Satisfied customer (%) 90 95 95 97 98 95
Customer profitability Identified profitable customer (%) 85 85 85 90 90 87
According to Table No.3, BANK A’s quantitative performance summary based on customer
perspective. Both strategic measures of customer retention and loyalty are increasing like
performance drivers of customer acquisition, customer satisfaction and customer profitability.
Hence the performance of BANK A seems healthier on the basis of customer perspective.
Table No. 4
BANK B: Performance Summary - Customer Perspective
Strategic Objectives Strategic Measures 2004 2005 2006 2007 2008 Mean
Customer retention Duration of a customer relationship( year) 9 9 9 10 10 9.4
and loyalty Total deposits (Rs. in billion) 7.92 11.53 14.26 18.93 24.49 15.43
Customer acquisition New customer from program (%) 10 12 12 15 20 13.8
Customer satisfaction Satisfied customer (%) 95 95 98 98 99 97
Customer profitability Identified profitable customer (%) 90 90 90 95 95 92
On the basis of Table No.4, Both strategic measures of customer retention and loyalty are
likely to increasing and average rate is 9.4 and 15.43 respectively. Similarly, customer
acquisition, customer satisfaction and customer profitability also shows the better
performance of BANK B. This means the bank is successfully conducting its programs to retain
its existing customers, get new customer, increase customer satisfaction and make it
profitable.
From customer perspective, average duration of customer relationship and acquisition of
new customers of BANK B are str0nger than BANK A. However, there is no big difference in
customer satisfaction between two banks. On the basis of these five quantitative
performance indicators, it can be concluded that BANK B is stronger than BANK A.
Table No.5
Comparative Performance – Qualitative Measures of Customer Perspective
Strategic Objectives Strategic Measures BANK A BANK B
Customer Satisfaction Letters of complaints Decreasing Decreasing
Feedback from marketing representatives Decreasing Decreasing
Image, reputation and brand Increasing Increasing
On time delivery\service Yes Yes
No. of customer suggestions Decreasing Decreasing
Time Waiting time for service Decreasing Decreasing
Quality Thefts, accident, fraud, embezzlement in company Decreasing Decreasing
Table No.5 shows the comparison of BANK A and BANK B on the basis of customer
satisfaction, time and quality. In both banks, the no of complaint letters, feedback from
marketing representatives, customer suggestions, waiting time for service and theft, accident,
fraud, embezzlement in both banks are decreasing indicating that the customers’ satisfaction
is increasing. Similarly both banks are satisfying their customers because there exists
increasing the trend of image, reputation and brand. However, there is no differences have
been found between two banks from qualitative measures of customers’ perspectives that
they satisfying their customers.

4.3 Internal Business Processes Perspective

6
In quantitative and qualitative measures of internal business process perspective, two
strategic measures in quantitative nature that are percentage of identified new markets and
percentage of identified emerging and latent needs of customers have been used.
Table No.6
Comparative Performance – Quantitative Measures of Internal Business Process Perspective
Strategic Strategic 2004 2005 2006 2007 2008 Mean
Objective Measures A B A B A B A B A B A B
s
Innovation New markets (%) 3 4 4 6 5 6 5 7 7 8 4.8 6.2
Process Emerging & latent needs
of customers (%) 90 95 90 95 95 96 97 97 98 99 94 96.4
Table No. 6 compares these two banks from internal business process perspective. The
identification of new market of BANK A and BANK B is continuously increasing and the
averages are 4.8% and 6.2% respectively. The capacity of BANK B also shows the better
performance to identify emerging and latent needs of customers.
Table No.7
Comparative Performance – Qualitative Measures of Internal Business Process Perspective
Strategic objectives Strategic measures BANK A BANK B
Delivery / Post sales service process Request fulfillment time NA Decreasing
Internal customer satisfaction Increasing Increasing
Treatment of complaints Yes Yes
Improve Improve service quality Yes Yes
productivity Improve operating efficiency Yes Yes
Corporate social responsibility Investment in social welfare Yes Yes
Table No.7 presents six qualitative measures for internal business prospective lead by three
strategic measures of BANK A and BANK B. Request fulfillment time of BANK A is not
available while another bank has decreasing. Internal customer satisfaction of both banks is
increasing because they adopted the mechanism of treatment of complaints giving post sales
service through service quality, operating efficiency and responsible to society. In this way,
no differences have been found between these banks on the basis of qualitative measures
of internal business process perspective.

4.4 Learning and Growth Perspective

Learning and growth is a one strategic perspective of a company that contains both
quantitative and qualitative measures for performance comparisons. In this study, the
following nine strategic measures of learning and growth perspective have been taken for
comparison of these two banks.
Table No.8
BANK A: Performance Summary – Quantitative Measures of Learning and Growth Perspective
Strategic Objectives Strategic Measures 2004 2005 2006 2007 2008 Mean
Training and development Employees with training Plan (%) 90 90 95 95 98 93.6
Team work Successful groups (%) 100 100 100 100 100 100
Effective communication Satisfied customers’ with communication (%) 80 80 75 85 90 82
Employee satisfaction Employee involvement with decision (%) 100 100 100 100 100 100
Employee recognized for doing a good job (%) 90 90 90 90 90 90

Employee retention Key employee turnover (%) 5 5 5 5 5 5

Strategic job coverage Critical jobs filled with qualified employees (%) 95 95 95 95 95 95
Motivation, empowerment Employee who achieve personal goal s(%) 80 85 85 90 90 86
and alignment
core competency and skill Leadership development plans (%) 5 6 8 8 10 7.4
Table No 8 shows BANK A’s that the bank A is giving training and creating feeling that they
are involving in decision making successfully. In addition, employees’ personal goals are

7
found met in the bank. This table also shows that the executive level jobs are filled with
qualified employees within the bank. Thus, employees’ turnover is very low. The bank is
carrying out leadership development plan to increase core competency of the bank.
Table No. 9
BANK B Performance Summary – Learning and Growth Perspective
Strategic objectives Strategic Measures 2004 2005 2006 2007 2008 Mean

Training and development Employees with training Plan (%) 95 97 97 98 98 97

Team work Successful groups (%) 100 100 100 100 100 100
Effective communication Satisfied customer with communication (%) 70 80 80 80 80 78
Employee satisfaction Employee involvement with decision (%) 95 95 95 96 96 95.4
Employee recognized for doing a good job (%) 92 92 92 93 94 92.6
Employee retention Key employee turnover (%) 1 2 2 2 2 1.8
Strategic job coverage Strategically critical jobs filled with qualified employees 80 80 90 95 95 88
(%)
Motivation, empowerment Employee who achieve personal goal (%) 60 60 70 70 70 66
and alignment

Core competency and Leadership development plans (%) 5 5 10 20 20 12

skill
According to Table No.9, BANK B has been accomplishing successful group work, nominal
employees’ turnover and strategic jobs fill with qualified employees, because of successful
training and development, team work, participative decision process and leadership
development plan.
On the basis of learning and growth perspective, there is no difference between BANK A
and BANK. However, BANK B is more stronger than BANK A on the basis of employees’
turnover, and leadership development plan whereas, BANK A found sound from the view
point of the strategic jobs fulfillment within employees, meeting personal goals of employees
and employees involvement in decision making process.

Section-V
CONCLUSIONS AND FUTURE RESEARCH
The balanced scorecard (BSC) is used to measure the overall organizational performance
from four different but interlink perspectives. Out of the four perspectives, the financial
indicators ROSE, EPS and NPM could explain good strategic positions of banks in comparison
of other indicators. Of the indicators of customers’ perspective, BANK B is more successful to
retain its customers and able to create customers satisfaction. In addition, this bank is ahead
to identify profitable customer in comparison of BANK A. Both strategic measures of internal
business process perspective favour BANK B. The coverage of training and development
program of BANK B is found more than BANK A. On the basis of employee participation in
decision BANK A is better performing to create employee satisfaction however based on
percentage of employees recognized for doing a good job the BANK B is in better position.
Strategic job coverage of BANK A is more than that of BANK B. Therefore, this study
concludes that the four perspectives of BSC showed that BANK B is found stronger than BANK
A in the overall performance measurement of banks. However, this study is limited in
comparison of two banks on the basis of survey and five years annual reports. Thus future
research can be extended by increasing number of samples firms and observations. Instead
of simple comparison, more sophisticated statistical techniques can be used in data
processing and analysis. Similarly study can be done in other different areas of business:
manufacturing, trading and services sectors for performance measurement as well as
formulation and implementation of corporate strategies.

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