What is the Balanced Scorecard Management System?

Performance measurement and benchmarking have spread rapidly during the last decade for many reasons including:

• A desire to be responsive to customers' expectations
• A focus on outcomes instead of processes
• An emphasis on accountability
• A desire to communicate local government's progress toward established goals
• A need to implement best practices or reduce growth in budgets.

In 1992, Robert Kaplan and David Norton¹ published the first works on Balanced Scorecard in the Harvard Business Review. It was patterned on the system used by Analog Devices, a successful technology company. Kaplan and Norton's system was designed to redirect private companies' focus on short-term "bottom line" financial measures. Kaplan and Norton felt it was important for a company's long-term financial health to track leading indicators such as customer service, process measures, staff development, and investment in growth, research and development. This system was later revised placing more emphasis on mission instead of financial position and marketed to governments.

The four strategic quadrants Kaplan and Norton recommended were:

• Financial
• Internal Business Processes
• Learning and Growth
• Customer

Figure 1 City of Charlotte, North Carolina Balanced Scorecard

Use of the Balanced Scorecard by Local Governments

A few governments have chosen the Balanced Scorecard approach. St. Charles, Illinois is one that has chosen to implement the Balanced Scorecard.² City management believes the Balanced Scorecard is effective, because improvements in all four quadrants are necessary for long-term and lasting success. Improvements in the customer service arena can lead to improvement in learning and result in improvements in internal business processes. If there are deficiencies in financial strategies, then customer service, employee development, and internal business processes will suffer. St. Charles officials believe that the Balanced Scorecard makes the city more business-friendly and encourages businesses to locate there.

The City of Charlotte, North Carolina has been using Balanced Scorecard for over a decade. The four quadrants it uses are:

• Serve the Customers
• Develop Employees
• Manage the Resources
• Run the Business

Charlotte uses the Balanced Scorecard to provide a framework for evaluating performance and providing checkpoints for planning, forecasting, and budgeting. Figure 1 illustrates how the City has added goals and objectives to the four quadrants.

Use of Balanced Scorecard by Auditors

In 2002, the Institute of Internal Auditors Research Foundation issued the results of a study to examine how the Balanced Scorecard framework could be used as a strategic performance management tool within internal auditing departments.³ Through interviews and focus groups with chief audit executives (CAEs), the benefits of Balanced Scorecards were identified including describing and clarifying internal audit strategies; communication; aligning performance measures; identifying leading indicators; identifying cause and effect linkages; enhancing the usefulness of benchmarking; focusing internal audit on the provision of value-added services; and using performance measurement as a continuous improvement tool.

Dr. Frigo recommended four quadrants for audit shops:

• Board/Audit Committee
• Internal Audit Processes
• Management and Auditees
• Innovation and Capabilities

Mark L. Frigo, Ph.D., CPA, CMA, (2002) A Balanced Scorecard Framework For Internal Auditing Departments.

Under the leadership of Lawrence F. Alwin, the Texas State Auditor's Office implemented the Balanced Scorecard in 1996.⁴ As a large legislative audit shop, it provides assurance services, management advisory services, and educational training for state agencies and universities. Balanced Scorecard was developed to track how a large number of audits were going.

The four strategic focuses adopted for this audit shop were:

• Educational Services to Related Agencies
• Improved Audit Services and Reporting
• Improved Management Advisory Services
• Appropriate Statewide Compensation Levels

From this research, it is evident that Balanced Scorecard can be used in local governments and in audit shops. I would like to propose a Balanced Scorecard that is a hybrid of the Institute of Internal Auditors' model and the City of Charlotte's model. I would also like to have the feedback of my fellow auditors. The four quadrants would be the ones the City of Charlotte uses, and the performance measurements used would be similar to many of the ones used in the ALGA benchmarking survey shown in Figure 2.

Figure 2 Proposed Balanced Scorecard to be Used by Local Government Auditors

Conclusion

The Balanced Scorecard developed by Kaplan and Norton has been a successful tool in the public and private sectors. A balanced approach is strategic in that it focuses the organization on what it takes to be successful. By linking the performance measures to the overall strategies, it makes it much more likely that we will achieve effectiveness, efficiency, and accountability in our roles as local government auditors.

¹ Robert S. Kaplan and David P. Norton (1992), "The Balanced Scorecard Measures That Drive Performance." Harvard Business Review. (January-February), pp. 71-79)
² Larry Maholland and Patrick Meutz (2002), "A Balanced Scorecard Approach to Performance Measurement," Government Finance Review, pp. 12-16.
³ Mark L. Frigo, Ph.D., CPA, CMA, (2002) A Balanced Scorecard Framework For Internal Auditing Departments.
⁴ Deborah Kerr (2003), "Accountability by Numbers, Journal of Accountancy. Vol. 195, Number 6, pp. 61-71

Martha K. Rogers, CIA, CPA, PhD is the Internal Audit Director for Guilford County. Martha has been employed by Guilford County for 19 years, most of that time in Internal Audit. She received a Bachelor's Degree in Accounting and a Master's in Business Administration from the University of North Carolina at Greensboro. In December of 2006, she received her PhD from NC State University in Public Administration. Her professional associations include the Association of Local Government Auditors (ALGA), American Institute of Certified Public Accountants, Institute of Internal Auditors, and the American Society for Public Administrators. Martha is a member of the ALGA Education Committee. She is married with two sons and five grandchildren.

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