Question

EXERCISE 10-7 Creating a Balanced Scorecard LO10-4 Ariel Tax Services prepares tax returns for individual and corporate clients. As the company has gradually expanded to 10 offices, the founder Max Jacobs has begun to feel as though he is losing control of operations. In response to this concern, he has decided to implement a performance measurement system that will help control current operations and facilitate his plans of expanding to 20 offices. Jacobs describes the keys to the success of his business as follows: "Our only real asset is our people. We must keep our employees highly motivated and we must hire the crcam of the crop. Interestingly, employce morale and recruiting success are both driven by the same two factors-compensation and carecr advancement. In other words, providing superior compensation relative to the industry average coupled with fast-track carcer advancement opportunities keeps morale high and makes us a very attractive place to work. It drives a high rate of job offer acceptances relative to job offers tendered." "Hiring highly qualified people and keeping them energized ensures operational success, which in our busincss is a function of productivity, efficiency, and effectiveness. Productivity boils down to employces being billable rather than idle. Efficiency relates to the time required to complete a tax return Finally, effectiveness is critical to our business in the sense that we cannot tolerate errors. Completing a tax return quickly is meaningless if the return contains errors." "Our growth depends on acquiring new customers through word-of-mouth from satisfied repeat customers. We believe that our customers come back ycar after year because they value error-free, timely, and courtcous tax return preparation. Common courtesy is an important aspcct of our business! We call it service quality, and it all ties back to employee morale in the sense that happy employees treat their clients with care and concern." "While sales growth is obviously important to our future plans, growth without a corresponding increase in profitability is useless. Therefore, we understand that incrcasing our profit margin is a function of cost-efficiency as well as sales growth. Given that payroll is our biggest expense, we must maintain an optimal balance between staffing levels and the revenue being generated. As I alluded to carlier, the key to maintaining this balance is employee productivity. If we can achieve cost-efficient sales growth, we should eventually have 20 profitable offices!" Required: 1. Create a balanced scorecard for Ariel Tax Services. Link your scorecard measures using the framework from Exhibit 10-5 ( Indicate whether each measure is expected to inerease or decrease. Feel free to create measures that may not be specifically mentioned in the chapter, but make sense given the strategic goals of the company. 2. What hypotheses are built into the balanced scorecard for Ariel Tax Services? Which of these hypotheses do you believe are most questionable and why? 3. Discuss the potential advantages and disadvantages of implementing an internal business process measure called total dollar amount of tax refunds generated. Would you recommend using this measure in Ariel's balanced scorecard? 4. Would it be beneficial to attempt to measure each office's individual performance with respect to the scorecard measures that you created? Why or why not?

Answer 1

Answer 1:-

Financial Profit margin Revenue per employee Sales Customer Number of new customers acquired Customer satisfaction with Customer satisfaction Customer satisfaction service quality with with effectiveness efficiency Internal Business Average number of errors per tax return Processes Ratio of billable hours to total Average time needed to prepare a hours return Learning and Growth "Employee morale Percentage of job offefs accepted Amount of compensation paid above Average number of years to be industry average promoted

2.   The hypotheses underlying the balanced scorecard are indicated by the arrows in the diagram. Reading from the bottom of the balanced scorecard, the hypotheses are:

      °    If the amount of compensation paid above the industry average increases, then the percentage of job offers accepted and the level of employee morale will increase.

      °    If the average number of years to be promoted decreases, then the percentage of job offers accepted and the level of employee morale will increase.

      °    If the percentage of job offers accepted increases, then the ratio of billable hours to total hours should increase while the average number of errors per tax return and the average time needed to prepare a return should decrease.

      °    If employee morale increases, then the ratio of billable hours to total hours should increase while the average number of errors per tax return and the average time needed to prepare a return should decrease.

      °    If employee morale increases, then customer satisfaction with service quality should increase.

      °    If the ratio of billable hours to total hours increases, then the revenue per employee should increase.

      °    If the average number of errors per tax return decreases, then customer satisfaction with effectiveness should increase.

      °    If the average time needed to prepare a return decreases, then customer satisfaction with efficiency should increase.

      °    If the customer satisfaction with effectiveness, efficiency, and service quality increases, then the number of new customers acquired should increase.

      °    If the number of new customers acquired increases, then sales should increase.

      °    If revenue per employee and sales increase, then the profit margin should increase.

      Each of these hypotheses can be questioned. For example, Ariel’s customers may define effectiveness as minimizing their tax liability which is not necessarily the same as minimizing the number of errors in a tax return. If some of Ariel’s customers became aware that Ariel overlooked legal tax-minimizing opportunities, it is likely that the “customer satisfaction with effectiveness” measure would decline. This decline would probably puzzle Ariel because, although the firm prepared what is believed to be error-free returns, it overlooked opportunities to minimize customers’ taxes. In this example, Ariel’s internal business process measure of the average number of errors per tax return does not fully capture the factors that drive customer satisfaction. The fact that each of the hypotheses mentioned above can be questioned does not invalidate the balanced scorecard. If the scorecard is used correctly, management will be able to identify which, if any, of the hypotheses, are invalid and then modify the balanced scorecard accordingly.

3.   The performance measure “total dollar amount of tax refunds generated” would motivate Ariel’s employees to aggressively search for tax minimization opportunities for its clients. However, employees may be too aggressive and recommend questionable or illegal tax practices to clients. This undesirable behavior could generate unfavorable publicity and lead to major problems for the company as well as its customers. Overall, it would probably be unwise to use this performance measure in Ariel’s scorecard.

      However, if Ariel wanted to create a scorecard measure to capture this aspect of its client service responsibilities, it may make sense to focus the performance measure on its training process. Properly trained employees are more likely to recognize viable tax minimization opportunities.

4.   Each office’s individual performance should be based on the scorecard measures only if the measures are controllable by those employed at the branch offices. In other words, it would not make sense to attempt to hold branch office managers responsible for measures such as the percent of job offers accepted or the amount of compensation paid above the industry average. Recruiting and compensation decisions are not typically made at the branch offices. On the other hand, it would make sense to measure the branch offices with respect to internal business process, customer, and financial performance. Gathering this type of data would be useful for evaluating the performance of employees at each office.

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