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Cost Management and Cost Systems
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Real World Application: Cost Management and Cost Systems Faizan Malik
Liberty University
March 25
th
, 2022
Cost Management and Cost Systems
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Introduction
The Balanced Scorecard (BSC) is a strategic metric planning and management system used extensively by organizations across the globe to obtain a more level (or “balanced”) view of organizational financial and non-financial performance. According to Blochar, “the concept of balance captures the intent of broad coverage, financial and non-financial, of all factors that contribute to a firm’s success in achieving its strategic goal. The balanced scorecard provides a basis for a more complete analysis than is possible with financial data alone.” A BSC typically consists of four main perspectives, which include:
Financial Performance – consisting of metrics such as sales, revenue, cash flow, etc.
Customer Perspective – used to gauge customer views of the organization in terms of metrics such as quality, price, availability, etc.
Internal Process – used to analyze organizational issues such as those that cause delays, shortages, waste, etc.
Learning and Growth – used to analyze internal training and knowledge transfer.
The use of BSC provides organizations a plethora of benefits, beginning with overall improved strategic planning and organizational communication. Acting as a framework, a BSC can help keep goals centered throughout the organization and allows for these goals to be communicated. As stated by Stefanovska and Sokleveski, “In this direction, starting from a clearly defined strategy and with the application of BSC are generated opportunities for the strategy to describe and communicate on the best possible way, making it a "navigator" for action on the organization as a whole.” When organization members are given clear and well-defined goals, the respective plan to achieve said goals more easily executed as both management and employees can see their progress in real time. As stated by Jafari et al., a BSC “provides the
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organization and its employees with a straightforward, transparent view so that they know how their jobs and activities would eventually adhere to the comprehensive organizational goals and coordinate their activities. With improved strategic planning and communication as a result of BSC utilization, organizations will also see the benefit of improved alignment within in processes and objectives. By tracking metrics such as budgets and risk management within a BSC, organizations can reduce the number of internal challenges and build a sense of consensus within their firm, which in return can . “Establishing a business model and translating it into indicators facilitates consensus for the entire company, not only of the management, but also on how to achieve it, Organizational consensus, in relation to the strategy, facilitates the consensus of the entire company by clarifying and translating the mission and strategy into manageable terms for the entire organization” (Quesdo et al., 2017).
This paper will apply the BSC methodology to Credible Behavioral Health Inc. (CBH), a behavioral health electronic health record (EHR) software company and my current employer. As one of the largest and highest ranked behavioral health EHRs in the nation, CBH’s software is used in medical practices, hospitals, counseling facilities, and non-profit as a means of documenting patient interactions, developing treatment plan, prescribing medications, and a plethora of other behavioral health related capabilities. CBH recently merged with another behavioral health EHR, Qualifacts, and has acquired smaller EHR vendors since then. The use of
a BSC methodology can be highly beneficial to the organization as it continues to grow, bring on
new employees, and add additional customers.
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Balanced Scorecard
Financial Performance
According to Russell, the financial perspective of a BSC is generally related to three main subcategories: growth, profitability, and shareholder value (Russell, 2015). Financial perspectives are typically referred to as outcomes and can be objectively measured. For CBH, the
financial perspective of a BSC would be centered around external factors such sales, revenue, and retention of their customers but can also be expanded to other internal areas such as cost savings and efficiencies. In this portion of the BSC, specifically for external factors, management
would focus areas such as sales to new customers, expansion into new territories, length and profit from contracts, increase revenue streams, and extending customer contracts. Potential targets for external financial perspectives could include expanding into two new territories each quarter and/or adding eight new customers per year, per salesman. From this, CBH could add additional targets such making all new contracts a minimum of five years and extending all customers with two or less years left on their contract. For the internal factors, CBH could focus on reduction of overhead, such as eliminating a physical office space due to remote work as a result of the Covid-19 pandemic, and moving to automated testing of its software. From this, the organization could have goals of closing one office per two-year cycle and having automated testing by the end of the fiscal year. Both the external and internal portion of the financial perspective focus on the shareholders of the organization, as they provide capital and benefit from the success of the company. As stated by Malgwi & Dahiru, “Financial measures convey the economic consequences for the actions already taken by the organization, and focus on the profitability related measures on which the shareholders verify the profitability of their investment. Therefore, under this perspective managers are required to generate measures that
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answer the question: To succeed financially, how organizations should appear to shareholders.” By focusing on continual generation of metrics such as metric streams or reduction of overhead, and the meeting of their respective goals, benefits both the shareholders and the organization.
Customer Perspective
The primary objective of the Customer Perspective portion of the BSC is to answer the question, how do our customers view the company? “How a company is performing from its customers' perspective has become, therefore, a priority for top management. The balanced scorecard demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers” (Kaplan & Norton, 2005). In most organizations, the concerns of the customers tend to fall into four categories: time, quality, performance, and service. For CBH, time can be measured in the time new features
are introduced or existing bugs are corrected within the software. Typically, most software companies aim to correct any identified software bugs within 30 days of being reported, which could be a potential goal for CBH’s BSC. Quality can also be measured in the overall usability of
the software, as new features are introduced and existing issues are corrected, the overall quality of the software should improve. Performance and service can be combined for CBH, focusing on
how the software functions and the support given to the customers with the ultimate goal of increasing value for the customer base. These metrics can be translated into specific goals, each focusing on different departments within the organization. Time and quality would be a metric for the technical departments such as development and quality assurance, with goals covering the
number of new features added and number of bugs corrected within the software. Performance and service would in return be a metric for the support team, with goals covering customer satisfaction. With many of the goals in the financial perspective directly related to our customers,
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it becomes evident how a BSC can be beneficial across multiple areas and departments within a single organization.
Internal Process
The internal process portion of the BSC for CBH will primarily revolve around how management design organizational processes, based on the strategies defined in other portions of the BSC. Having well defined internal processes can help organizations determine the value proposition to the organization’s customers, lowering costs, improving processes, and increased productivity. Doing so would allow a linking of “top management’s judgment about key internal processes and competencies to the actions taken by individuals that affect overall corporate objectives. This linkage ensures that employees at lower levels in the organization have clear targets for actions, decisions, and improvement activities that will contribute to the company’s overall mission” (Kaplan & Norton, 2005) For CBH, the organization should focus on three main
areas of processes:
Operational Process
o
Processes which define the primary activities an organization to perform in order to successfully execute its business. For CBH this can include processes for development, sales, and support of its software.
Customer Management Process
o
Processes which define how an organization carries out customer-facing activities. For CBH, this includes processes for sales and support of its software.
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Innovation Process
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Processes for developing new products and services, allowing to serve new and existing customers. For CBG, these processes would center around the development of their software.
It becomes evident that internal processes are intertwined with other portions of the BSC and amongst the various processes. Learning and Growth
The learning and growth portion of the BSC refers to the various assets’ employees must possess to maintain internal processes within the organization. As stated by Jelenic, “Within this perspective, the company treats the areas of importance to the company's ability to enhance value
by improving business processes and people. The mentioned perspective identifies the factors necessary for current and future company performances, creating such an infrastructure in which the company will be capable of generating long-term value.” Learning and growth focuses on three main types of capital which include human capital such as jobs, information capital such as
the internal system, and organizational capital such as the climate within the organization. For CBH, metrics for learning and growth can included the number of employee suggestions that are adopted throughout the organization, turnover rates of employees, hours spent for employee training and continued education, and new features released into their software. It should be noted that, despite its significance, the learning and growth portion of the BSC is often overlooked by many organizations. A study performed by Gurd & Gao, found that over 30% of BSC users had no learning and growth perspective. “This gap is disappointing since one of the most important goals for adopting the scorecard measurement and management framework
is to promote the growth of individual and organizational capabilities” (Gurd & Gao, 2008).
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Conclusion
The implementation of a balanced scorecard will be extremely beneficial to Credible Behavioral Health, as it will provide a structured and logical approach to the organization’s goals. Both leadership and employees can utilize a balanced scorecard to track a multitude of metrics and goals, with each being communicated clearly and effectively from the top down. By combing metrics related to financial performance, customer perspective, internal process, and learning and growth, CBH can track their organizational goals in a singular place, it can align all department, communicate strategy to all employees, and implement improvement measures as needed.
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Works Cited
Blocher, E., Stout, D., Juras, P., & Smith, S. (2019). Cost management: A strategic emphasis (8th ed.). Boston, MA: Richard D. Irwin, Inc.
Gurd, B., & Gao, T. (2008). Lives in the balance: an analysis of the balanced scorecard (BSC) in healthcare organizations. International Journal of Productivity and Performance Management.
Jafari, M., Shahanaghi, K., & Tootooni, M. (2015). Developing a robust strategy map in balanced scorecard model using scenario planning. Mathematical Problems in Engineering, 2015.
Jelenic, D. (2011, June). The importance of knowledge management in Organizations–with emphasis on the balanced scorecard learning and growth Perspective. In Management, Knowledge and Learning, International Conference (pp. 33-43).
Kaplan, R. S., & Norton, D. P. (2005). The balanced scorecard: measures that drive performance.
Harvard business review, 83(7), 172.
Quesado, P. R., Aibar Guzmán, B., & Lima Rodrigues, L. (2018). Advantages and contributions in the balanced scorecard implementation. Intangible capital, 14(1), 186-201.
Russell, R. H. (2015). Balanced Scorecard. Wiley Encyclopedia of Management, 1-4.
Stefanovska, L. & Soklevski, T. (2014). Benefits of Using Balanced Scorecard in Strategic and Operational Planning. Universal Journal of Management 2(4): 165-171.
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