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Dissertation report-on-putting-hr-on-balanced-scorecard-a-case-study-of-verizon1


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Dissertation report-on-putting-hr-on-balanced-scorecard-a-case-study-of-verizon1

  1. 1. A Dissertation Report On “Putting HR on Balanced Scorecard” (A Case Study of Verizon) (SUBMITTED TOWARDS PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN MANAGEMENT) (Approved by AICTE, Govt. of India) ACADEMIC SESSION (2008-10) Under the guidance of: Submitted by: Supervisor Name Your Name Lecturer (college name) Roll: - PGDM-08/012 College Address College Logo
  2. 2. PREFACE There is a famous saying “The theory without practical is lame and practical without theory is blind.” Alignment of the Human Resource with the overall strategy of the company is a very big and toughest challenge for the company. Human resource is an important part of any business and managing them is an important task. Our institution has come forward with the opportunity to bridge the gap by imparting modern scientific management principle underlying the concept of the future prospective managers. To the emphasis on practical aspect of management education the faculty of College Name has with a modern system of practical training of repute and following management technique to the student as integral part of PGDM.
  3. 3. ACKNOWLEDGEMENT “It is not possible to prepare a project report without the assistance & encouragement of other people. This one is certainly no exception.” On the very outset of this report, I would like to extend my sincere & heartfelt obligation towards all the personages who have helped me in this endeavor. Without their active guidance, help, cooperation & encouragement, I would not have made headway in the project. I am ineffably indebted to Supervisor Name for conscientious guidance and encouragement to accomplish this assignment. I am extremely thankful and pay my gratitude to my faculty guide Guidance Name, College Name for her valuable guidance and support on completion of this project in its presently. I extend my gratitude to College Name for giving me this opportunity. I also acknowledge with a deep sense of reverence, my gratitude towards my parents and member of my family, who has always supported me morally as well as economically. At last but not least gratitude goes to all of my friends who directly or indirectly helped me to complete this project report. Any omission in this brief acknowledgement does not mean lack of gratitude. Thanking You Your Name
  4. 4. CERTIFICATE FROM THE FACULTY GUIDE This is to certify that the project work entitled “Putting HR on Balanced Scorecard: A Case Study of Verizon.” is a bonafide work carried out by Your Name, a candidate of the PGDM (2008-2010) College Name under my guidance and direction. Signature of the Guide Guidance Name
  5. 5. TABLE OF CONTENTS TABLE OF CONTENTS.........................................................................................................4 1.LINK ITS SELECTION AND PROMOTION DECISIONS TO VALIDATED COMPETENCY MODELS..................................................................................................................................9 .................................................................................................................................................65 FINDINGS OF THE STUDY................................................................................................65 LIMITATIONS OF THE STUDY........................................................................................67 CONCLUSION.......................................................................................................................68 RECOMMENDATIONS.......................................................................................................69 REFERENCES.......................................................................................................................71 TABLE OF FIGURES FIGURE 1: HR ARCHITECTURE STRATEGIC COMPONENTS.................................8 FIGURE 3:- THE MAIN FRAMEWORK OF BALANCED SCORECARD..................30 FIGURE 4:- MODEL FOR IMPLEMENTING HR’S STRATEGIC ROLE..................35 FIGURE 5: A HIGH PERFORMANCE WORK SYSTEM..............................................37 FIGURE 6: SIMPLE STRATEGY MAP.............................................................................39 FIGURE 7:- INITIAL MODEL USED TO ALIGN HR STRATEGY TO BUSINESS STRATEGY............................................................................................................................54 FIGURE 8:- THE PEOPLE REQUIREMENT AND BUSINESS DRIVER DETERMINATION PROCESS...........................................................................................56 FIGURE 9:- THE HR SCORECARD STRATEGY MAP.................................................58 FIGURE 10: HR SCORECARD IMPLEMENTATION ARCHITECTURE..................64
  6. 6. 1. INTRODUCTION The new economic paradigm is characterised by speed, innovation, quality and customer satisfaction. The essence of the competitive advantage has shifted from tangible assets to intangible ones. The focus is now on human capital and its effective alignment with the overall strategy of organisations. This is a new age for Human Resources. The entire system of measuring HR’s contribution to the organisation’s success as well as the architecture of the HR system needs to change to reflect the demands of succeeding in the new economy. The HR scorecard is a measurement as well as an evaluation system for redefining the role of HR as a strategic partner. It is based on the Balanced Scorecard framework developed by Kaplan and Norton and is set to revolutionise the way business perceives HR. Based on various studies, it can be concluded that firms with more effective HR management systems consistently outperform the competition. However, evidence that HR can contribute to a firm’s success doesn’t mean it is now effectively contributing to success in business. It is a challenge for managers to make HR a strategic asset. The HR scorecard is a lever that enables them to do so. Implementing effective measurement systems for intangible assets is a very difficult task and demands the existence of a unified framework to guide the HR managers. It is this difficulty that has been the prime reason why managers tend to avoid dealing with intangible assets as far as possible. In the process firms under-invest in their people and at times invest in the wrong ways. Another difficulty is, managers cannot foresee the consequences of their investments in intangible human assets in a well-defined measurable manner and they are not willing to take the risk. Thus, the most effective way to change this mindset is obvious – to build a framework just like the balanced scorecard, which has sound measurement strategies and is able to link HR functions, activity and investment with the overall business strategy. The HR scorecard framework was specifically designed for these purposes. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 1
  7. 7. 2. RESEARCH METHODOLOGY 2.1.Research Objectives 1. To highlight the importance of Balanced Scorecard as a measurement tool. 2. To find out the need of Balanced Scorecard in today’s competitive environment. 3. To find out how Balanced Scorecard is useful for developing the Human Resource as a strategic partner. 4. To find out how Balanced Scorecard can be implemented to Human Resource. 2.2.Type of Research- Exploratory Research 2.3.Data sources: The research is based on secondary data and the data is collected from various websites, Journals, Magazines, Articles and Research Paper. 2.4.Data Analysis: The research is divided into the six sections. The First section deals with the overall introduction of the research and the Second section highlights the Human Resource as a strategic partner and the traditional human resource and the human resource in present and the future of the human resource. Third section explains in detail the HR Architecture as a strategic asset which contains the hr function, hr system and the employee behavior. Fourth section explains the background and the concept of balanced scorecard, need of the balanced scorecard in today’s competitive environment, and defines the balanced scorecard as a measurement tool. Fifth section explains how balanced scorecard can be implemented into the human resource to develop the HR as a strategic partner. Sixth section contains the case study of Verizon and explains how Verizon has implemented the balanced scorecard to human resource to generate the value through the intangible asset. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 2
  8. 8. 3. LITERATURE REVIEW 1. Is the balanced scorecard HR's ticket to the board? Nelson, Paul. Personnel Today, 3/5/2002. Most thoughts comprised of some combination of “BC is a wonderful tool to allow HR to show its value to a firm”, “BSCs will only work with senior management buy-in” and “BSCs alone will not bring a firm closer to its goal, contributing to the overall business will”. 2. HR Performance Scoring Demonstrates Results. McKewen, Darren. 2004. Career Accessed from website. The first part of this article gives numbers on the popularity of BCs throughout industry. From the article: “According to a recent survey by the Balanced Scorecard Collaborative and the Society for Human Resource Management, about one-fourth of HR organizations have adopted the Balanced Scorecard approach. However, virtually all of the 1,300 respondents have explored the possibility.” The rest of the article has no relation to balanced scorecards. 3. The Balanced Scorecard: Creating a Strategy-Focused Workforce. Frangos, Cassandra. A synopsis of three scholars’ (Jac Fitz-enz, David Norton, and Helen Drinanwork) in the field of HR metrics and analysis, by way of selling the author’s upcoming Net Conference. 1. Fitz-enz evaluates a firm’s HR process by cost, duration, accomplishment, error rate, employee satisfaction, matricing these five over three distinct tasks: acquiring talent, developing talent, and retaining it. 2. Norton developed the "Human Capital Readiness Report," which provides a snapshot of an organization's human capital relative to its strategic requirements. It documents the strategic requirements, then shows, through its measures and programs, how human capital is being developed. 3. Drinan had been working on a profile of HR leaders AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 3
  9. 9. “So what is the profile of outstanding HR leaders? Among other things, they derive their agendas from enterprise business objectives; they stay in touch with the workforce; think "customer focus," not "customer service"; and concentrate on a few strategic priorities.” 4. “A Balanced Scorecard Changes HR Mgmt From Art to Science”. Human Resource Department Management Report. January, 2003. Issue 1-03, p. 1. Objective:- Reasons for and application of using the BSC as a way to measure HR productivity and effectiveness. Biggest reason: a move to measuring tangible assets, and a need to turn the intangibility of HR into something more measurable. Case: Alterra Health Care in Milwaukee, which used HR as the centerpiece of a larger strategic transformation that targeted the firm’s 145% turnover rate. 5. “Understanding the Balanced Scorecard: An HR Perspective”. ICG Research. 2003. Objective:- How to implement the Balanced Scorecard to Human Resource. 1. “Building the Balanced Scorecard should be a team effort at the executive level and functional heads must not create their bits of Scorecard in isolation. Therefore, HR can be “custodians” but not owners of the learning and growth perspective.” 2. “Implementation is a bigger issue than scorecard design”. “The difficulty of cultural change that accompanies Scorecard implementation is typically underestimated. One of the biggest problems is the (legitimate) fear that the Scorecard will be used to “beat up people.” 3. “The HR Scorecard must make visible the link from what staff does to strategic outcomes. Cascading goals, which may be done through the ten-step process, is one element of successfully creating the link.” AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 4
  10. 10. 6. “Secrets to Success with Balanced Scorecards”. HR Focus. October, 2001 Vol. 78, no. 10, p. S3. Summarizes the “10 Commandments of Performance Management” from a book by William Abernathy: Managing Without Supervising: Creating an Organization- Wide Performance System. Some of these commandments: 1. “No one should design his or her own incentive plan” 2. “The frequency of measurement feedback is as important as the amount” 3. “Measure only controllable job outputs” 7. “Avoiding performance measurement traps: ensuring effective incentive design and implementation”. McKenzie F.C. & Shilling M.D. July/August, 1998. Compensation and Benefits Review. Vol. 30 (4), p. 57-65. Details methods of performance measurement and the traps associated with each. Measurements evaluated include: Traditional accounting methods (ROI, EPS, RONA), Value-Based, such as Economic Value Added, and the Balanced Scorecard. Traps associated with the BSC are as follows: 1. Assuming the Balanced Scorecard is a perfect tool for compensation. 2. Reduced focus on performance management 3. Using measures that are difficult to quantify 4. Contradicting goals or benchmarking 5. Getting tied-up in implementation Nine guidelines for effective performance management are outlined: 1. Emphasize a few measures. 2. Focus on measures that participants can control. 3. Avoid “all-or-nothing” programs. 4. Balance accuracy and simplicity. 5. Include an appropriate subjective element. 6. Mind the corporate culture. 7. Communicate up-front, then keep communicating. 8. Revisit the program design often. 9. Integrate with long-term incentives. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 5
  11. 11. 4. HUMAN RESOURCES AS A STRATEGIC PARTNER– THE PRESENT AND THE FUTURE The general scenario in most companies is as follows. HR management teams have well- developed visions of their departments, their roles and responsibilities. But, the senior management is generally skeptical of HR’s role in the firm’s success. They generally consider HR to just be another necessary appendage but not something that can contribute to the success of the company. Even if the senior management does believe that human capital is their most prized possession and asset, they cannot understand how the HR team can make this belief come alive. There is one reason for all of this. Human capital is an intangible asset and HR’s influence on firm performance is difficult to measure. The standard elements of a firm’s resource architecture that are measured include total compensation, employee turnover, cost per hire, percentage of employees that undergo performance appraisals and percentage employee satisfaction. The question to be asked is: Are these the measures crucial to implementing the firm’s strategy? This is clearly not the case. Interesting attributes would include a committed workforce, competency development programs, etc. But, it is very difficult to imagine measures for these quantities. Hence, in the current state of HR there is a clear rift between what is measured and what needs to be measured. As mentioned in the introduction, the role of HR is no more just administrative. It has a much broader, connected and strategic role to play. But, these statements must be substantiated. The reasons why HR must be considered as a strategic asset must be highlighted. A strategic asset is something difficult to trade or imitate. They are normally a set of scarce, special or even exotic resources and capabilities that bestow a firm its competitive advantage. An unlikely paradox is that the very intangibility of human capital that makes it so difficult to measure and evaluate, also proves to be the one quality that makes it a strategic asset. Consider the difference between being able to align employee efforts with the company’s strategic goals and instead having innovative policies of performance appraisals. The latter is a policy. It is visible to competitors and can be easily copied. The former on the other hand is a strategic move. It is not easy to imitate since it is a very circumstantial effort, which depends on the specific firm, its goals and its people. This proves to be a strategic asset i.e. something that competitors cannot see but that can be utilised to gain a competitive advantage. It is thus AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 6
  12. 12. important to align the HR strategy to the overall business strategy signifying a top-down approach as opposed to a bottom-up approach where each division such as marketing, HR etc. performs its standard individual roles without a clear outlook towards the firm’s strategy. Many firms have realised this and have made efforts to measure HR’s influence on the firm’s performance. However, most of these approaches seem to focus on the individual, as it is believed that if one can achieve an improvement in individual employee performance, it would automatically enhance the performance of the organisation. The point that is missed is the fact that organizational units, be it individuals or teams, do not function in isolation. The stress is on streamlining and cooperatively working towards a common goal. 5. THE HR ARCHITECTURE AS A STRATEGIC ASSET AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 7
  13. 13. The focus of corporate strategy is to create sustained competitive advantage whereas that of HR strategy is to maximize the contribution of HR towards the same goal. Thinking about HR’s influence on the overall strategy of the company requires one to look at all aspects of the HR architecture. The HR architecture describes the relationship of the HR function, the HR system and the employee behaviour. Figure 1: HR Architecture Strategic components 5.1.The HR function The foundation of a value-creating HR strategy is a management infrastructure that understands and can implement the firm’s strategy. The professionals in the HR function would be expected to lead this effort. This clearly implies that HR managers and professionals need to get a deeper understanding of the HR function. There are two basic functional categories in HR management. The first is technical. It includes delivery of HR basics such as recruiting, compensation and benefits. The second is strategic. It involves delivering the above mentioned services in a way that directly supports the implementation of the firm’s strategy. Most HR managers are proficient enough in the technical aspect but rarely do they even know about the strategic aspect. Thus, the competencies that the HR managers need to develop and the ones that have the largest impact on organisational performance are the business and strategic competencies. 5.2.The HR system AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 8
  14. 14. In an effective high performance HR system, each element is designed to maximise the overall quality of human capital throughout the organisation. To build and maintain a set of talented human capital, the HR system should:- 1. Link its selection and promotion decisions to validated competency models 2. Develop strategies that provide timely and effective support for the skills demanded by the firm’s overall strategy implementation. 3. Enact compensation and performance management policies that attract, retain and motivate high-performance employees. Basically, the firm needs to structure all the elements of its HR system in a way that supports a high-performance workforce. However, systemic thinking implies stress on the interrelationships of the HR system components and the link between HR and the larger strategy of the firm. The laws of system thinking imply the following: 1. Problems of today are most likely due to past decisions. It is thus important to look at the causal nature of past solutions and current problems. 2. One should think twice before taking the easy way out or deciding to go with standard solutions to any problem as this will most likely lead to a crop of new problems in the future. 3. Cause and effect are not closely related in time. There is a lag between cause and effect and HR’s influence on firm performance is normally much less direct than that of other performance drivers. This can make it hard to measure as well as be misleading. It is thus important to look at the leading indicators and not just the lagging indicators. Typical financial performance measures are lagging indicators and in an attempt to solve financial problems, the first step is normally to cut costs. It is more important to actually pinpoint the cause of the problem and look to long-term benefits than short term ones. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 9
  15. 15. 4. The best strategies are often unobvious. Small changes in how HR drivers are managed can slowly gather momentum and work their way through the strategy implementation process. 5. It is important never to dissect the system and view each of its parts independently. One must look at the system as a whole and the connections between the individual parts is normally the vital place to look at for a solution to any of the problems. Firms with high performance work systems tend to devote considerably more resources to recruiting and selection. There is a strong emphasis on training and performance management and compensation is tied to performance. Teamwork is encouraged, there is generally less unionization and they have a large and effective HR team. It is important to note, that all these factors in tandem, not in isolation, lead to better performance, once again showing the systemic nature of HR’s role in performance enhancement. The effects of these measures are lower employee turnover, more retention, greater sales per employee and a greater market value for the firm. It is also important for the HR system to constantly check for alignment of all its parts i.e. how much they reinforce or conflict with each other. An example of misalignment is a policy that encourages teamwork but rewards individual contributions. In the service sector, the employee-customer relationship is very obvious and visible and so the impact of value creation is unmistakable. But, in many firms, the value is derived from the operational processes and quality of work that the employees generate. This is less obvious to competitors and it cannot be imitated. It is especially in these kinds of firms that the alignment of HR strategy and policy with the overall strategy of the firm matters the most. The alignment process begins with a clear understanding of what kind of value the organisation is supposed to generate and how it should be generated. In the Balanced Scorecard, this is referred to as the ‘strategy map’ that stresses the relationship between the ultimate goals and the key success factors at the four important levels of customers, internal operations, people and systems. Once the firm has a clear understanding of the value-creation process, it can then design an implementation model that specifies needed skills and AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 10
  16. 16. competencies and employee behaviours throughout the firm. The HR management section can then be directed towards generating these necessary competencies and behaviours. The stress is not just on the creation of sound HR policies and strategies. How these are implemented is also very important. There has to be a strong alignment with the firm’s competitive strategy. A high performance HR system will also tend be unique. This is because it depends on the particular organisation, its goals, people and strategy. Hence, it proves to be a strategic asset. 5.3.Employee Behaviours As mentioned above the final results of the strategies are mapped to required employee behaviours. It is important that each employee be trained not just to do his or her job but also to have a substantially clear understanding of where he or she stands in the big picture of the overall strategy of the firm. Strategic behaviours are productive behaviours that directly serve to implement the firm’s strategy. There are two basic categories. Core behaviours are behaviours that are considered fundamental to the success of the firm, across all business units and levels. Situation-specific behaviours on the other hand, are more circumstantial behaviours. These are not required all the time but are absolutely necessary in certain scenarios. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 11
  17. 17. 6. THEORY BEHIND THE BALANCED SCORECARD 6.1.Background of the Concept of Balanced Scorecard Throughout the history of contemporary management theories starting from the ones that were introduced by the intrusion of the mass production in the beginning of the 20th century and until today, all the gurus of management have been trying to find uniform solutions on more efficient allocation and use of very limited resources available to businesses. Those paths in seeking the Holy Grail of operational efficiency have brought up several new management theories. In the dawn of the century, Frederick W. Taylor established the very concepts of resource allocation in his Principles of ScientJlc Management. In 1920-ics it went around assembly line and motion studies as the first experience from systematic mass production had given theorists quite a lot of materials to be analysed from the point of view of using traditional blue-collar employees more efficiently. In the I 930-ies, the main topic was motivation of employees, as it turned out that human nature does not enable to work long hours on a repetitive tasks without frustration level getting so high enough to diminish productivity. In the l940-ics and 1950-ies, the first statistical and linear methods were introduced in trying to measure logistics of the operations management and its implications to overall company success in financial-analysis side. In the beginning of 1980-ics, partly because of introduction of electronic data processing equipment and quick development of computers, the whole array of management techniques were initiated. The particular reasons for the vast development of the new theories were catalyzed mainly by ever growing competition generated through more systematic use of computers, and of course also by rapid growth of the importance of human capital. Today’s companies are in the midst of a revolutionary transformation. Industrial age competition is shifting to information age competition. During the industrial age, roughly from 1850 to about 1975, companies succeeded by how well they could capture the benefits from economies of scale and scope. Technology mattered, but, ultimately, success accrued to companies that could embed the new technology into physical assets that offered efficient, mass production of standard products. During the industrial age, the financial control systems were developed in major companies to facilitate and monitor efficient allocations of financial and physical capital. A summary financial measure such as return-on-capital-employed AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 12
  18. 18. (ROCE) could both direct a company’s internal capital to its most productive use and monitor the efficiency by which operating divisions used financial and physical capital to create value for shareholders. The emergence of the information era, however, in the last decades of the 2O century, has made obsolete many of the fundamental assumptions of industrial age competition. The information age environment for both manufacturing and service organisations requires new capabilities for competitive success. The ability of a company to mobilise and exploit its intangible assets has become far more decisive than investing and managing tangible, physical assets. Industrial age companies created a sharp distinction between two groups of employees. The intellectual elite — managers and engineers — used their analytical skills to design products and processes, select and manage customers, and supervise day-to-day operations. The second group was composed of the people who actually produced the products and delivered the services. This direct labour work force was a principal factor of production, which performed its tasks under supervision of the first group. Today automation and productivity have increased the number of people performing analytic functions: engineering, marketing, management and administration. Therefore, the people are more viewed as problem solvers, not as variable costs. In other words, information age has brought about the concept of knowledge management. The shift to successful knowledge management has introduced a variety of improvement initiatives: 1. Just-in-time 2. Total quality management, 3. Lean enterprise, 4. Business process re-engineering, 5. Time-based competition, 6. Customer-focused organization, AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 13
  19. 19. 7. Activity-based cost management, 8. Employee empowerment, 9. Living company and many others. Some of those programmes have meant in practice real breakthrough and improvement, others have proven to be in the best case just a short-time disturbance, but in the worst cases total failures resulting in disarray or even bankruptcy of a particular company. The main reason for that lies in five main implementation problems: 1. current performance measurement systems are based on the traditional financial accounting model, which does not enable to objectively analyse information-age companies; 2. if some non-financial performance measurement even is made, it is solely based on employees’ tactical performance, not on strategic performance; 3. majority of management and employee salary-based motivation schemes arc only short-run profit oriented, that does not enable to align towards long-run goals; 4. overall company strategy is not closely linked to organisational and personal improvement programmes; and 5. strategy is not generally linked to resource allocation, which results in under- financing some of the crucial parts of organisation’s development. As for today, superior financial performance and efficiency in production are just not enough to gain sufficient competitive advantage, but more and more attention needs to be paid to intangible sides of business. For at least 15 years, the leading management journals have published articles about how to build up a mechanism that would enable to control all the aspects of a company’s performance. One of the most versatile tools for that purpose is Balanced Scorecard. The long-term success of any organization is determined by the capabilities and the competencies it has developed. Today’s businesses require a better understanding of their AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 14
  20. 20. customers (both existing and potential ) and their needs, better streamlined processes and highly skilled people for ensuring future survival and sustainable growth. This innovative tool “Balanced Scorecard” developed by Robert S Kaplan and David P Norton in 1992 is unique in two ways compared to the traditional performance measurement tools. They are:- 1. It considers the financial indices as well the non-financial ones in determining the corporate performance level and 2. It is not just a performance measurement tool but is also a performance management system The aim of the Balanced Scorecard is to direct, help manage and change in support of the longer-term strategy in order to manage performance. The scorecard reflects what the company and the strategies are all about. It acts as a catalyst for bringing in the change’ element within the organization Balanced Scorecard uses a balanced measurement system that comprises of “the old” financial side and four “new” perspectives of: 1. Financial Perspective - How do we look at shareholders? 2. Customer Perspective - How should we appear to our customers? 3. Internal Business Processes Perspective - What must we excel at? 4. Learning and Growth Perspective - Can we continue to improve and create value? Hence, from the above lines we can say that this tool has considered not only the financial results to be important but also those factors which actually drive an organization towards future successes as mentioned earlier. The tool has given stress on the other areas which are required to “balance” the financial perspective in order to get a total view about the organizational performance and improve the same. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 15
  21. 21. The framework tries to bring a balance and linkage between the — 1. Financial and Non-Financial Measures, 2. Tangible and the Intangible measures, 3. Internal and the External aspects and 4. Leading and the Lagging indicators. The Balanced Scorecard emphasises the importance of measuring business performance from the perspective of strategic implementation, rather than relying solely on financial results. Senior managers tend to pay far too much attention to the financial dimensions of performance and not enough attention to the driving forces behind those results. Financial measures are lagging indicators i.e. backward looking. They are designed to rectify or change past results. Performance drivers on the other hand are within the control of the management in the present and the Balanced Scorecard methodology encourages management to look at these leading indicators as well. By specifying the important process measures, assessing them, and communicating the firm’s performance based on these criteria to the employees, the managers can ensure that the entire organisation participates actively in the strategy implementation process. It is a unifying tool in strategy implementation. To achieve strategy alignment, firms must engage in a two-step process. As mentioned before, first the managers must understand the details of how value is created in their firm. Once this is done, they can design a measurement system based on their understanding. The first step focuses the organisation on two dimensions of the strategy implementation process namely breadth and causal flow. Breadth refers to the fact that companies must study more than just financial results as outcomes of strategy implementation. It must also focus on other key performance drivers. Causal flow refers to the series of linkages between financial and non-financial determinants of firm performance. This gives the managers a deeper perspective of why certain financial results are the way they are. It allows them to link the financial measures to the non-financial measures of success. The second point is the design of a measurement system. This involves attaching metrics to the financial and non-financial determinants. The Balanced Scorecard identifies four key perspectives that directly and completely define strategy measurement and analysis. They include the financial perspective, AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 16
  22. 22. the customer perspective (e.g. customer loyalty and satisfaction), the internal processes perspective (e.g. process quality and process cycle time) and finally learning and growth perspective (e.g. employee skills) that is the leading indicator. The next important step is communication. The top management that has done the above analysis must communicate their findings and decisions to the middle and front-line managers, who in turn must communicate it to the other employees. In this way, everyone in the organisation is made aware and can participate in the strategy implementation process. This also helps allocate resources intelligently and guides employees’ decisions. The Balanced Scorecard model recognises the importance of both tangible and intangible assets and of financial and non-financial measures. It focuses on the complex connections among the firm’s customers, operations, employees and technology and places an important role for HR. The BSC framework highlights the differences between leading and lagging indicators. Lagging indicators include financial metrics, which typically reflect only what has happened in the past. Such metrics accurately measure impacts of past decisions but don’t help in making current decisions or guaranteeing future outcomes. The leading indicators are the unique indicators for each firm. They include process cycle time, customer satisfaction or employee strategic focus. These indicators assess the status of key success factors that drive the implementation of the firm’s strategy and hence emphasise the future rather than the past. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 17
  23. 23. 6.2. Defining Critical Success Factors and Measures Four Perspectives 1. Financial Perspective - How do we look at shareholders? From all the measurement perspectives of a Balanced Scorecard, the financial perspective needs to be introduced the least as the main financial measurement systems have been analysed during the past years very thoroughly The particular financial performance measures for any Balanced Scorecard should define long-run financial objectives for the organisation. While most of the organisations would emphasise profitability objectives, other possibilities may also be considered. Businesses with many products in the early stage of their life cycle can stress rapid growth objectives, and mature businesses may emphasise maximising cash flow. Norton and Kaplan recommend to simplify the financial perspective measurement selection pool to identify first the organisation’s stage, which would mainly be one of the three: I. “rapid growth” organisations - are at the early stages of their life cycle. They may have to make considerable investments to develop and enhance new products and serviccs, to construct and expand production facilities, to build operating capabilities, to invest in systems, infra-structure, and distribution networks that will support relationships, and to nurture and develop customer relationships. II. “sustain” organisations — organisations that still attract investment and reinvestment, but are required to cam excellent returns on their invested capital. These businesses are expected to maintain their existing market share and perhaps grow it somewhat. Investment projects will be more directed to relieving bottlenecks, expanding capacity, and enhancing continuous improvement. III. “harvest” organisations - have reached a mature phase of their life cycle, where the company wants to harvest the investments made in the earlier to stages. These businesses no longer warrant significant investment — only enough to maintain equipment and capabilities, not to expand or build new capabilities. Any investment AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 18
  24. 24. project will have to have very short and definite payback periods. The main goal is to maximise cash flow back to the organisation. The financial objectives for businesses in each of these three stages are quite different. Financial objectives in the growth stage will emphasise sales growth; sales in new markets and to new customers; sales from new products and services; maintaining adequate spending levels for product and process development, systems, employee capabilities; and establishment of new marketing, sales, and distribution channels. Financial objectives in the sustain stage will emphasise traditional financial measurements, such as return on capital employed, operating income, and gross margin. Investment projects for businesses in the sustain category will be evaluated by standard, discounted cash flow, capital budgeting analyses. Some companies will employ newer financial metrics, such as economic value added and shareholder value. These metrics all represent the classic financial objective---earn excellent returns on the capital provided to the business. The financial objectives for the harvest businesses will stress cash flow. Any investments must have immediate and certain cash paybacks. The goal is not to maximise return on investment, which may encourage managers to seek additional investment funds based on future return projections. Virtually no spending will be done for research or development or on expanding capabilities, because of the short time remaining in the economic life of business units in their “harvest” phase. Some of the objectives together with a measurement measures Objectives Measures Survive Cash Flow Prosper Increase in Market Share Profitability Return on Equity Cost Leadership Unit Cost AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 19
  25. 25. 2. Customer Perspective - How should we appear to our customers? The customer perspective addresses the question of how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet the financial objectives. Generally, customers view the firm in terms of time, quality, performance, and cost. Most customer objectives fall into one of those four categories. In the customer perspective of the Balanced Scorecard, 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 genetic outcome measures include customer satisfaction, customer retention, new customer acquisition, customer profitability, and market and account share in targeted segments. While these measures may appear to be generic across all types of organisations, they should be customised to the targeted customer groups from whom the business unit expects its greatest growth and profitability to be derived. I. Market and Account Share Market share, especially for targeted customer segments, reveals how well a company is penetrating a desired market. For example, a company may temporarily be meeting sales growth objectives by retaining customers in non-targeted segments, but not increasing its share in targeted segments. The measure of market share with targeted customers would balance a pure financial signal (sales) to indicate whether an intended strategy is yielding expected results. When companies have targeted particular customers or market segments, they can also use a second market-share type measure: the account share of those customers’ business (some refer to this as the share of the “customers’ wallet”). The overall market share measure based on business with these companies could be affected by the total amount of business these companies are offering in a given period. That is, AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 20
  26. 26. the share of business with these targeted customers could be decreasing because these customers are offering less business to all their suppliers. Companies can measure- customer by customer or segment by segment-how much of the customers’ and market segments’ business they are receiving. Such a measure provides a strong focus to the company when trying to dominate its targeted customers’ purchases of products or services in categories that it offers. II. Customer Retention Clearly, a desirable way for maintaining or increasing market share in targeted customer segments is to retain existing customers in those segments. Research on the service profit chain has demonstrated the importance of customer retention. Companies that can readily identify all of their customers-for example, industrial companies, distributors and wholesalers, newspaper and magazine publishers, computer on-line service companies, banks, credit card companies, and long-distance telephone suppliers- can readily measure customer retention from period to period. Beyond just retaining customers, many companies will wish to measure customer loyalty by the percentage growth of business with existing customers III. Customer Acquisition Companies seeking to grow their business will generally have an objective to increase their customer base in targeted segments. The customer acquisition measure tracks, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business. Customer acquisition could be measured by either the number of new customers or the total sales to new customers in these segments. Companies such as those in the credit and charge card business, magazine subscriptions, cellular telephone service, cable television, and banking and other financial services solicit new customers through broad, often expensive, marketing efforts. These companies could examine the number of customer responses to solicitations and the conversion rate- number of actual new customers divided by number of prospective inquiries. They could measure solicitation cost per new customer acquired, and the ratio of new customer revenues per sales call or per dollar of solicitation expense. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 21
  27. 27. IV. Customer Satisfaction Both customer retention and customer acquisition are driven from meeting customers’ needs. Customer satisfaction measures provide feedback on how well the company is doing. The importance of customer satisfaction probably cannot be over-emphasised. Recent research has indicated that just scoring adequately on customer satisfaction is not sufficient for achieving high degrees of loyalty, retention, and profitability. Only when customers rate their buying experience as completely or extremely satisfying can the company count on their repeat purchasing behaviour. V. Customer Profitability Succeeding in the core customer measures of share, retention, acquisition, and satisfaction, however, does not guarantee that the company has profitable customers. Obviously, one way to have extremely satisfied customers (and angry competitors) is to sell products and services at very low prices. Since customer satisfaction and high market share are themselves only a means to achieving higher financial returns, companies will probably wish to measure not just the extent of business they do with customers, but the profitability of this business, particularly in targeted customer segments. Activity-based cost (ABC) systems permit companies to measure individual and aggregate customer profitability. Companies should want more than satisfied and happy customers; they should want profitable customers. A financial measure, such as customer profitability, can help keep customer-focused organisations from becoming customer-obsessed. The customer profitability measure may reveal that certain targeted customers are unprofitable. This is particularly likely to occur for newly acquired customers, where the considerable sales effort to acquire a new customer has yet to be offset from the margins earned by selling products and services to the customer. In these cases, lifetime profitability becomes the basis for deciding whether to retain or discourage currently unprofitable customers. Newly acquired customers can still be valued, even if currently unprofitable, because of their growth potential. But unprofitable customers who have been with the company for many years will likely require explicit action to cope with their incurred losses. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 22
  28. 28. VI. Beyond the Core: Measuring Customer Value Propositions Customers’ value propositions represent the attributes that supplying companies provide, through their products and services, to create loyalty and satisfaction in targeted customer segments. The value proposition is the key concept for understanding the drivers of the core measurements of satisfaction, acquisition, retention, and market and account share. For example, customers could value short lead times and on-time delivery. They could value a constant stream of innovative products and services. Or they could value a supplier able to anticipate their needs and capable of developing new products and approaches to satisfy those emerging needs. While value propositions vary across industries, and across different market segments within industries, Kaplan and Norton have observed a common set of attributes that organises the value propositions in all of the industries where we have constructed scorecards. These attributes are organised into three categories.  Product/Service Attributes  Customer Relationship  Image and Reputation Product and service attributes encompass the functionality of the product/service, its price, and its quality. The image and reputation dimension enables a company to pro- actively define itself for its customers. The customer relationship dimension includes the delivery of the product/service to the customer, including the response and delivery time dimension, and how the customer feels about the experience of purchasing from the company. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 23
  29. 29. In summary, the customer perspective enables business unit managers to articulate their unique customer and market-based strategy that will deliver superior future financial returns. Some of the objectives together with a measurement measures Objectives Measures New Product % of sales from new product Customer Relationship % of retained customer Responsive Supply On time Delivery 3. Internal Business Processes Perspective - What must we excel at? AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 24
  30. 30. Internal business process objectives address the question of which processes are most critical for satisfying customers and shareholders. These are the processes in which the firm must concentrate its efforts to excel. In the internal business process perspective, executives identify the critical internal processes in which the organisation 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 customer satisfaction and achieving the organisation’s financial objectives. The internal business process perspective reveals two fundamental differences between traditional and the Balanced Scorecard approaches to performance measurement. Traditional approaches attempt to monitor and improve existing business processes. They may go beyond just financial measures of performance by incorporating quality and time-based metrics. But they still focus on improving existing processes. The Balanced Scorecard approach, however, will usually identify entirely new processes at which the organisation must excel to meet customer and financial objectives. The internal business process objectives highlight the processes most critical for the organisation‘s strategy to succeed. The second departure of the Balanced Scorecard approach is to incorporate innovation processes into the internal business process perspective. Traditional performance measurement systems focus on the processes of delivering today’s products and services to today’s customers. They attempt to control and improve existing operations - the short wave of value creation. But the drivers of long-term financial success may require the organisation to create entirely new products and services that will meet the emerging needs of current and future customers. The innovation process-the long-wave of value creations, for many companies, is a more powerful driver of future financial performance than the short-term operating cycle. But managers do not have to choose between these two vital internal processes. The internal business process perspective of the Balanced Scorecard incorporates objectives and measures for both the long-wave innovation cycle as well as the short-wave operations cycle. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 25
  31. 31. Some of the objectives together with a measurement measures Objectives Measures Manufacturing Excellence Cycle Time per Unit Safety incidence Index Number of Accidents Increased design Productivity Engineering Efficiency Increased Product Launch Days Actual Launch Days Vs Plan 4. Learning and Growth Perspective - Can we continue to improve and create value? Learning and growth metrics address the question of how the firm must learn, improve, and innovate in order to meet its objectives. Much of this perspective is employee- centered. The fourth Balanced Scorecard perspective, Learning and growth, identifies the infrastructure that the organisation must build to create long-term growth and improvement. The customer and internal business process perspectives identify the factors most critical for current and future success. Businesses are unlikely to be able to meet their long-term targets for customers and internal processes using today’s technologies and capabilities. Also, intense global competition requires that companies continually improve their capabilities for delivering value to customers and shareholders. Organisational learning and growth come from three principal sources: people, systems, and organisational procedures. The financial, customer, and internal business process objectives on the Balanced Scorecard will typically reveal large gaps between existing capabilities of people, systems, and procedures and what will be required to achieve targets for breakthrough performance. To close these gaps, businesses will have to invest in re-skilling employees, enhancing information technology and systems, and aligning organisational procedures and routines. These objectives arc articulated in the learning and growth perspective of the Balanced Scorecard. As in the customer perspective, employee-based measures include a AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 26
  32. 32. mixture of generic outcome measures- employee satisfaction, employee retention, employee training, and employee skills- along with specific drivers of these generic measures, such as detailed indexes of specific skills required for the new competitive environment. Information systems capabilities can be measured by real-time availability of accurate customer and internal process information to front-line employees. Organisational procedures can examine alignment of employee incentives with overall organisational success factors, and measured rates of improvement in critical customer-based and internal processes. Some of the objectives together with a measurement measures Objectives Measures Technology Leadership Time to develop new product Manufacturing Learning Time to new process maturity Product Focus % of product representing 80% of sales 6.3.The Four Perspectives: Cause and Effect Relationship AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 27
  33. 33. The four perspectives as mentioned above are highly interlinked. There is a logical connection between them. The explanation is as follows If an organization focuses on the learning and the growth aspect, it is definitely going to lead to better business processes. This in turn would be followed by increased customer value by producing better products which ultimately gives rise to improved financial performance. Figure 2: The Cause and Effect relationships among the four perspectives 6.4.The Balanced Scorecard Model AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 28
  34. 34. Explanation: Following steps are to be taken so as to utilize the Balanced Scorecard as a strategic management tool: 1. The major objectives are to be set for each of the perspectives. 2. Measures of performance arc required to be identified under each of the Objectives which would help the organization to realize the goals set under each of the perspectives. These would act as parameters to measure the progress towards the objectives. 3. The next important step is the setting of specific targets around each of the identified key areas which would act as a benchmark for performance appraisal. Hence, a performance measurement system is build around these critical factors. Any deviation in attaining the results should raise a red signal to the management which would investigate the reasons for the deviation and rectify’ the same. 4. The appropriate strategies and the action plans that arc to be taken in the various activities should be decided so that it is clear as to how the organization has decided to pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is often referred to as a blueprint of the company strategies. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 29
  35. 35. Figure 3:- The Main framework of Balanced Scorecard AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 30 To achieve our vision, how will we sustain our ability to change and improve? Learning and Growth Objectives Measures Targets Initiatives Vision and Strategy To achieve our vision, how should we appear to our customers? Customer Objectives Measures Targets Initiatives To Satisfy our shareholders and customers, processes must we excel at? Internal Process Objectives Measures Targets Initiatives To succeed financially, how should we appear to our shareholders? Financial Objectives Measures Targets Initiatives
  36. 36. 6.5.Balanced Scorecard as a Measurement Tool To illustrate the use of today’s main measurement tools, Kaplan and Norton bring the following example: Imagine entering the cockpit of a modern jet airplane and seeing only a single instrument there. How would you feel about boarding the plane after the following conversation with the pilot? Q: I am surprised to see you operating the plane with only a single instrument. What does it measure? A: Airspeed. I am really working on airspeed this flight. Q: That’ good. Airspeed certainly seems important. But what about altitude? Would an altimeter be helpful? A: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I have to concentrate on proper airspeed. Q: But I notice you do not even have a fuel gauge. Wouldn’t that be useful? A: You are right; fuel is significant, but I cannot concentrate on doing too many things well at the same time. So on this flight I’m focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of flights. We suspect that you would not board the plane after this discussion. Even if the pilot did an exceptional job on airspeed, you would be worried about colliding with tall mountains or running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of guiding a complex vehicle like a jet airplane through crowded air spaces with only a single instrument. Skilled pilots are able to process information from a large number of indicators to navigate their aircraft. Yet navigating today’s organisations through complex competitive environments is at least as complicated as flying a jet. Why should we believe that executives need anything less than a full battery of instrumentation for guiding their companies? Managers, like pilots, need instrumentation about many aspects of their environment and performance to monitor the journey toward AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 31
  37. 37. excellent future outcomes. 7. IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE 7.1.Integrating HR into the performance measurement system To integrate HR into a business performance measurement system, managers must identify the points of intersection between the HR and the organisation’s strategy implementation plan. These points are commonly called the HR deliverables. They are the outcomes of the HR architecture that serve to execute the firm’s strategy. This is in contrast to the aspects of HR that focus on HR efficiency and activity. The deliverables can be classified into two groups, namely the performance drivers and the enablers. Performance drivers are core people- related capabilities or assets such as employee productivity and satisfaction. There is no single correct set of performance drivers. Each firm needs to identify its own set based on its unique characteristics. Enablers reinforce performance drivers. E.g. Preventive maintenance can be considered an enabler of on-time delivery, which is a performance driver. A performance driver can have several enablers. Most of the time, each enabler separately may seem rather mundane but it’s the cumulative effect that has strategic importance. Performance Drivers: HR managers tend to focus on performance drivers in an attempt to demonstrate their strategic impact. However, in most cases although they do stress on these drivers they are unable to make a solid case for it since they do not have the right measures. Without measures one cannot display HR’s actual contribution to the overall mission. Most of the measures used are very simplistic and it undermines HR’s credibility in the organisation. This credibility is very important since it is what matters when a manager is faced with a conflict between financial and non- financial reports. For example, if people measures are good but financial measures are bad, the manager will go for the solution that supports the credibility AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 32
  38. 38. of finance or HR. In most cases it is finance and the immediate decision is reducing bonuses etc. as the CFO might feel it is not warranted when there is no proof of performance. The point that is being missed is that the CFO is looking at the lagging indicators. Balanced performance needs one to look at the leading indicators such as HR measures as well since these are the ones that create value in the organisation. High HR scores in the face of low finances actually signal improved finances in the future (provided other leading indicators are also on the positive side). Similarly, strong financial measures and weak leading measures such as HR measures are indicative of a financial problem in time to come. Thus, managers must interpret these measures in a balanced manner looking at the past and into the future. Identifying HR performance drivers can be very challenging since it is unique to the firm. It is important to identify the performance drivers and integrate them directly into performance criteria giving them equal weight with the more traditional performance measures. For example, one half of the bonus pays can be based on the financial results while the other half is based on the employee’s adherence to the value behaviours. HR enablers: HR enablers reinforce the core performance drivers. If employee productivity is identified as a performance driver, re-skilling and training can be considered an enabler. Some enablers might be specifically HR focused i.e. they enhance the effectiveness of HR performance drivers. There might also be some HR enablers that do have profound positive effects with respect to the other perspectives as well, such as customers, operations and the financial segment. It is important to identify these and keep them up to date with the current goals of the organisation. Without the properly aligned enablers, it is not possible to implement new strategies. The systemic aspect of HR once again comes to the forefront, whereby the entire HR system can influence employee behaviour from different points. Thus, HR managers should evaluate the degree to which their firm’s system of enablers support the HR as well as non-HR performance drivers as listed in their Balanced Scorecards. By identifying the links between enablers and universal performance drivers, the HR team can play a much larger role and suggest ideas that can affect other sectors in the firm as well. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 33
  39. 39. 7.2.The Seven-Step Model for Implementing HR’s Strategic Role Ulrich et al. discuss a seven step model for formalising the strategic role of HR. They are summarised below: AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 34
  40. 40. Figure 4:- Model for implementing HR’s Strategic Role 1. Defining Business Strategy: HR managers should focus on implementation of strategy. By doing so, they can facilitate discussion about how to communicate the firm’s goals throughout the organisation. When strategic goals are not developed with an eye towards the implementation detail, they tend to be too generic and abstract. These vague goals will tend to confuse employees and they would not know how exactly to implement the strategies. The important thing for HR managers is to state the AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 35 Periodically test HR measures against the firm’s strategy map and adjust as required
  41. 41. goals in such a way that the employees understand what exactly their role in the organisation is and thus the organisation knows how to measure success in achieving these goals. 2. Building a case for HR as a strategic asset: Once a firm clarifies its strategy, HR professionals need to build a clear case for the strategic role of HR. In concrete terms, they must be able to explain how and why HR can support the strategy. It is important to look at as much of case histories and internal as well as external research while going through this phase. Although it is not wise to imitate others, one can learn a lot by looking through past experiences of others. Basically, the direct impact on the HR systems’ high performance characteristics is non-linearly related to the increase in market value. This is because in the lower ranges of performance, increase in market value is basically because HR stops making mistakes it used to make in the past. It is almost like it is getting out of the way and avoids blunders and wrong practices that worsen the situation. In the middle range of performance, HR starts consolidating its efforts. It is learning from its mistakes and in the process does not actually add much to the market value of the employees and the company, but once a certain threshold is crossed indicating that the firm has adopted the appropriate HR practices and implemented them effectively, the market value soars exponentially. This is mainly because the HR system starts getting integrated into the overall strategic system of the firm. Basically, the firms must consolidate the appropriate HR policies and practices into an internally coherent system that is directly aligned with business priorities and strategies that are most likely to create economic value. This can lead to significant financial returns to the company. It is this plan that must be made concrete and shown as a strong case to make senior management believe in HR’s potential. It is important to note however, that simple changes in an HR practice do not make a difference. The HR measures describe the whole HR system and changing the system to cross the threshold mentioned above needs time, effort, insight and perseverance since results are not directly proportional. This clearly indicates the requirement of an HR transformation rather than a change. It is this very character AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 36
  42. 42. of transformation, which is difficult and time-consuming to achieve, that makes HR a strategic asset. Figure 5: A High Performance Work System Along with value creation, there must also be a strong case for HR’s role in strategy implementation. Strategy implementation rather than strategy content separates the successful from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement one. This once again shows the strategic nature of HR’s role in performance improvements. Successful strategy implementation is driven by employee strategic focus, HR’s strategic alignment and a balanced performance measurement system. The most important HR performance driver is a strategically focused workforce. Effective knowledge management combined with the above-mentioned factors creates a strategically focused organization. 3. Creating a Strategy Map: AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 37 Knowledge Management System Strategic Alignment System Performance Measurement System Employees who are strategically focused The Firm’s capacity to implement the Strategy The Overall performance of the firm A High Performance Work System
  43. 43. The first two steps clarify the firm’s strategy. This paves the way for the implementation process. But, before this is done, the firm must get a clear understanding of its value chain. The value chain is the complex cumulative set of interactions and combinatorial effects that create the customer value in the products and services of the firm. It is important that the firm’s performance management system must account for each of the links and dependencies in the value chain. The Balanced scorecard framework refers to this process and creating a strategy map. These are basically diagrams that show the links in the value chain. It shows how different components in different layers interact. It is what provides managers and employees the big picture of how their tasks affect the other elements in the firm and how it affects overall strategy. This process should involve managers from all over the organisation, not just HR. The broad participation is required to improve the quality of the strategy map. It also allows each member of the team who is an expert in his or her domain to provide his or her own insights into what is accomplishable. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 38
  44. 44. Learning and Growth Internal/Business Processes Customer Financial Figure 6: Simple Strategy Map The following questions have been identified as the key ones to be asked during the strategy map creation process:- 1. Identify the critical strategic goals from the generic ones. 2. Identify the performance drivers for each goal. 3. Think about how one can measure progress towards these goals. 4. Identify barriers to the achievement of each goal. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 39 Customer Loyalty On-time Delivery Return on the capital employed in the business Process Quality Process cycle time Employee skills
  45. 45. 5. Recognise the employee behaviours needed to ensure that the company achieves its goals. 6. Identify missing employee competencies and check if HR is providing the necessary competencies. 7. Finally, decide what needs to change. These basic questions generate a wealth of information about how well a firm’s HR has been contributing to the success of the organisation. Along with these discussions, it is useful for the company to conduct surveys within the organisation to identify the extent to which each employee understands the organisational goals. Once the whole picture of the firm’s value chain is highlighted, the firm can then translate the information into a conceptual model using language and graphics that make sense to the members of the organisation. The model should then be tested for understanding and acceptance amongst the leaders and the employees. The strategy map essentially contains predictions about which organisational processes drive firm performance. The company can validate these hypotheses only after achieving the goals set for each of the performance drivers and then measuring their impact on overall firm performance. The graphical nature of the strategy map helps the senior management as well as the employees have more confidence in the strategy implementation plan. 4. Identifying HR deliverables within the strategy map: HR creates much of its value at the points of intersection between the HR system and the overall strategy implementation system of the organisation. Thus, to leverage this to the maximum possible extent it is important that there is a clear understanding of both sides of this intersection. In the past, HR managers lacked the required amounts of knowledge about the business side and general managers did not fully understand the HR side. It is AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 40
  46. 46. HR’s responsibility to depict HR deliverables including performance drivers as well as HR enablers in the strategy map of the firm. Performance drivers such as employee competence, motivation and availability are very fundamental and so it might be difficult to locate these precisely on the strategy map. It is important to identify those HR deliverables that support the firm-level performance drivers on the strategy map. The focus should be on the kind of strategic behaviours that depend on competencies, rewards and work organisation. E.g. Employee stability improves R&D cycle time, the latter being a firm-level performance driver. Thus, employee stability becomes an important HR enabler. Once this enabler has been identified, the firm can design policies such as bonus schemes etc. that would encourage R&D staff to continue working for the firm. 5. Aligning the HR architecture with the HR deliverables: The above-mentioned steps encourage the top-down thinking approach, whereby strategy decides what HR deliverables the firm needs to focus on. It is also important to consider how the HR system made up of the rewards, competencies; work organisation etc. needs to be structured to provide the deliverables that are identified in the strategy map. This step enhances the value creation aspect of the firm by aligning the HR system with the firm’s larger strategy implementation system. For this, internal alignment and external alignment are important. Internal alignment refers to the aligning components within the HR system. External alignment refers to the alignment of the HR system with the other elements in the firm’s value creation process. These two are not isolated processes. They are closely related. Internal alignment is necessary but not sufficient in itself for external alignment to occur. Basically, highly cohesive HR strategies will work as long as they are aligned well with the overall strategy of the company. It will fail if it is not periodically reshaped so as to align it with the overall strategy. However, for a particular fixed overall strategy, all firms need an internally aligned HR strategy in order to achieve the overall goals. Misalignment between AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 41
  47. 47. the HR system and the strategy implementation system can destroy value. In fact, the wrong measurement system can have the exact opposite effect than intended. 6. Designing the Strategic HR measurement system: The above steps guide the development of the HR architecture and lay the groundwork necessary to measure the performance relationship between HR and the firm’s strategy. The next step is to design the measurement system itself. This requires a new, modern perspective on measuring HR performance. It also requires HR to resolve several new technical issues that it might not be familiar with. To accurately measure the HR-firm performance relationship, it is imperative that the firm develops valid measures of HR deliverables. This task has two dimensions.  Firstly, HR has to be confident that they have chosen the correct HR deliverables. This requires that HR have a clear understanding of the causality in the value chain for effective strategy implementation.  Secondly, HR must choose the correct measures for those deliverables. During this process of developing the HR scorecard, the firm might go through several stages of increasing sophistication. The first stage is normally the traditional category of measures. These mainly include operational measures such as cost per hire, activity counts etc. These are not exactly strategic measures. In the second stage, HR measures have a strategic importance but they don’t help much in making a case for HR as a strategic asset. Firms may declare several people measures such as employee satisfaction as strategic measures and these might be included directly into the reward systems. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 42
  48. 48. In this stage, there tends to be a balance between financial and non-financial measures but there is less of an agreement on how exactly they combine together to implement the strategy. These are normally hasty decisions and the firms might have not gone through all the previous steps mentioned above. The next stage represents a transition point whereby the firm includes non- financial measures such as HR measures into its strategic performance measurement system. The links between the various measures are also identified i.e. they are placed appropriately in the strategy map. The HR measures now actually track HR’s contribution to strategy implementation. In the final stages, the HR measurement system will enable the firm to estimate impacts of HR policies on firm performance. If the value chain is short and the strategy map is relatively simple, the complete impact of HR on the overall performance can be measured. For more complex value chains, the impact can be more accurately measured on local segments or sectors of the strategy map. These local impacts can then be assimilated to give a good measure of the total impact on the firm’s performance. Thus, each level of sophistication of the measurement system adds value to the non-financial measures and forces in the firm and enables a better performance appraisal. 7. Implementing the strategy by using the measures: The previous step completes the HR scorecard development process. The next step is to use this powerful new management tool in the right way. This tool not only helps the firm measure HR’s impact on firm performance, but also helps HR professionals have new insights into what steps must be taken to maintain HR as a strategic asset. It helps the HR professionals dig deeper into the causes of success and failure and helps them promote the former and avoid the latter. Implementing the strategy using the HR scorecard requires change and flexibility as well as constant monitoring and re-thinking. The process is not a one-time event. HR professionals must regularly review the measures and their impacts. They must review the HR deliverables identified as important and see to it that the drivers and enablers and internally as well as externally aligned. Special reviews of the HR enablers must be conducted as these have the maximum direct impact on AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 43
  49. 49. specific business objectives. Enablers that do not tend to play a positive role should be replaced. 8. BENEFITS OF THE DEVELOPING HR SCORECARD The HR Scorecard offers the following benefits: 1. It reinforces the distinction between HR do-ables and deliverables: The HR measurement system must clearly distinguish between the deliverables that influence strategy implementation and do-ables that do not. Policy implementation is not a deliverable until it has a positive effect on the HR architecture and creates the right employee behaviours that drive strategy implementation. An appropriate HR measurement system will encourage HR professionals to think both strategically as well as operationally. 2. It enables cost control and value creation: HR is always expected to control costs for the firm. At the same time, HR has to fulfill its strategic goal, which is to create value. The HR scorecard helps HR professionals balance the two and find the optimal solution. It allows HR professionals to drive out costs where appropriate, but at the same time defend investments in intangibles and HR by outlining the benefits in concrete terms. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 44
  50. 50. 3. It measures leading indicators: Just as there are leading and lagging indicators in the overall balanced performance measurement system, there are drivers and outcomes in the HR value chain as well. It is thus important to monitor the alignment of the HR decisions and systems that drive the HR deliverables. Assessing this alignment provides feedback on HR’s progress towards these deliverables and lays the foundation for HR’s strategic influence. 4. It assesses HR’s contribution to strategy implementation: The cumulative effect of the HR Scorecard’s deliverable measures provides the answer to the question regarding .HR’s contribution to firm performance. All measures have a credible and strategic rationale. Line managers can use these measures as solutions to business problems. 5. It lets HR professionals effectively manage their strategic responsibilities: The scorecard encourages HR managers to focus on exactly how their decisions affect the successful implementation of the firm’s strategy. This is due to the systemic nature of the scorecard. It provides a clear framework to think in a systemic manner. 6. It encourages flexibility and change: The basic nature of the scorecard with its causal emphasis and feedback loops helps fight against measurement systems getting too standardised. Standardisation is good for things that don’t tend to have a dynamic nature but firm performance is a dynamic phenomenon. Every decision needs to be taken based on the past and future scenarios. One of the common problems of measurement systems is that managers tend to get skilled to AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 45
  51. 51. obtain the right numbers once they get used to a particular measurement system. The HR scorecard engenders flexibility and change because it focuses on the firm’s strategy implementation, which constantly demands change. With this framework, measures simply become indicators of the underlying logic that managers accept as legitimate. It helps them look at the bigger picture and since there are no perfect numbers it makes it easier for managers to change direction when needed. “We see talent as the emerging single sustainable competitive advantage in the future. To capitalize on this opportunity, HR must evolve from a Business Partner to a critical ‘asset manager’ for human capital within the business. The HR scorecard is designed to translate business strategy directly to HR objectives and actions. We communicate strategic intent while motivating and tracking performance against HR and business goals. This allows each HR employee to be aligned with business strategy and link everyday actions with business outcomes.” – Garrett Walker, Director HR Strategic Performance Measurement, GTE 9. CASE STUDY: VERIZON To clarify the HR Scorecard framework it is important to summarise a case study. This section explains the details of the HR scorecard developed by Verizon, a leading telecommunications provider in the United States. 9.1.Introduction: Verizon Verizon HR has effectively designed and implemented a strategic management system, which is based upon the balanced scorecard model of Dr. David Norton and Dr. Robert Kaplan of Harvard Business School. The HR Balanced Scorecard was conceived with new economy organisational dynamics in mind. The AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 46
  52. 52. scorecard uses a broad range of leading and lagging indicators which include overall strategy, operational processes, customer perceptions, and financials to evaluate the effectiveness of HR initiatives to the bottom line. The HR Balanced Scorecard provides the means to monitor workforce indicators, analyse workforce statistics, diagnose workforce issues, calculate the negative financial impact, prescribe solutions, and track improvements. Verizon believed that in the coming years the primary source of competitive advantage for their business would continue to increasingly focus on the talent within the organisation, which meant that the ability to effectively manage the employee talent within the organisation was critical. While management tends to make decisions about how to invest in human capital, few companies have an effective process to measure the value created by this most valuable asset. In Verizon, they believed that HR could effectively manage the value created by thorough investments in employees. Managers knew was how much was paid to reward, hire, train, develop, and provide benefits to employees. What managers needed to know, however, was where the investments were most effective and valuable. Some of the questions that did not have answers at that time were: 1. Should the business expand the incentive pay program? 2. Should they outsource safety administration? 3. What is the most effective use of training dollars? 4. How much should be spent on recruitment? 5. Should employee services be in-sourced, out-sourced, or co-sourced? 6. Should executive bench strength be built or bought? 7. What is the cost in human capital terms to break into a new market? 8. Is the acquisition target a good fit and does it add or dilute the competitive advantage in terms of talent? 9. Do the current investments in employees match the strategic objectives of the business? 10. Is the HR organisation a partner with the business to manage our employees as assets? AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 47
  53. 53. To answer these questions, management needed more information not just simple cost figures. Management needed to track the financial results while monitoring progress in developing human capital and acquiring the talent and capabilities needed for business success. The Balanced Scorecard was developed by Kaplan & Norton, 1996 and provided the ideal system that leverages the traditional financial and efficiency measures that were available for Human Resources with metrics of performance from three additional perspectives namely, customers, internal business processes, and learning and growth. In 1996, J. Randall MacDonald, Executive Vice President–Human Resources of GTE Corporation (now known as Verizon), was facing the biggest challenge of his career—to create the HR strategy and plans to support GTE’s workforce through a major business transformation. The Telecommunications Act was transforming the regulated world of protected markets and established profit margins into a highly competitive business environment for the telecommunications giant. Historically, GTE had emphasised a focus on infrastructure quality and customer service. GTE’s senior business leaders were preparing to transform the company into a market-focused organisation that would be the communications provider of choice to targeted customer markets. Significant emphasis on new markets and additional services was part of the strategy. The telecommunications world following deregulation was turbulent. Technology acceleration, emerging customer needs, and data and video transmissions were changing how business operated. GTE’s customers were becoming price sensitive and could now demand superior service and advanced support. The competition was in price, products, and technology. New mergers and partnerships were beginning to occur; brand preferences and aggressive tactics from non-traditional competitors were all part of the mix. GTE Business Strategies were global in scope and translated directly to clearly communicate targeted business results. Additionally, the workforce environment was dramatically different and highly competitive. GTE faced the lowest United States’ unemployment in 24 years. The employer–employee relationship had changed; employees were less likely to remain with a single employer; specialised talent was hard to find; employees expected more work/life balance; and the diverse talent pool most sought had differing interests and needs. Creating AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 48
  54. 54. the value proposition to acquire the talent to drive the business was more difficult to define and changed rapidly. 9.2.HR Challenge & Strategy The Human Resource Challenge was to translate the new business strategies and targeted business results into human capital needs. Recognising that GTE’s employees were a critical component in achieving the business goals, GTE HR leaders inventoried the current skills and abilities that would provide value both in the short-term and into the future. HR professionals then identified the critical people imperatives necessary to grow that talent to increase the value delivered by the workforce. GTE would need new behaviours, actions, and capabilities to drive the business results. To focus the HR organisation on the achievement of these people imperatives, GTE developed a new HR strategy to support the specific people requirements of the business strategy. This HR strategy was defined in five strategic thrusts: 1. Talent:  enlarge the talent pool  invest in employees’ development  ensure diversity 2. Leadership:  establish a system to assess high-potential employees  provide coaching and development  establish accountability and rewards for leadership behaviour 3. Customer Service & Support:  create an environment that fosters employee engagement  increase business intelligence within the workforce  provide solutions to retention issues 4. Organisational Integration:  create better systems for knowledge management  enhance union partnerships AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 49
  55. 55. 5. HR Capability:  develop core HR competencies  identify key talent for growth and development  invest in technology  invest in employee self-service  better understand the relationship of HR actions to business outcomes The biggest problem was communicating and reinforcing the linkage between HR actions and business results. The business had a clear strategy and targeted business results. The HR Strategy was directly linked to the needs of the business and expressed in terms of HR strategic thrusts. The prime objective was to effectively communicate and execute on strategic intent, motivate and track performance against organisation and business goals, and to align HR actions with business results. 9.3.The Team A newly formed HR Planning, Measurement, and Analysis team was created to design and implement a tool that would quantify HR’s contribution to the business. The Balanced Scorecard model, which was at the time a leading edge corporate performance assessment tool, was selected as the framework to adapt and build an HR Measurement model. J. Randall MacDonald served as the senior executive for the HR measurement initiative. This role was critical to the success of the project. Randy MacDonald actively influenced his senior leadership team within HR to secure their buy-in and to hold them accountable for supporting the project. The newly formed Planning, Measurement, and Analysis team included a director and four employees solely dedicated to the design, development, implementation, and operation of the HR Measurement System. An HR Measurement core team included eight subject matter experts representing each of the functions within HR and the business units. The core team members were instrumental in assuring alignment of the measurement model and communicating and training HR departments on the applications and uses of the HR Scorecard. The Balanced scorecard model complements financial measures of past AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 50
  56. 56. performance with measures of drivers of future performance. Unlike other accounting models, the Balanced Scorecard incorporates valuation of organisations’ intangible and intellectual assets such as high-quality products and services, motivated and skilled employees, responsive internal processes and innovation and productivity. The HR Scorecard approach used slightly modified the initial Balanced Scorecard model, which at the time was most commonly used at the corporate level. The approach, however, remained focused on long-term strategies and clear connections to business outcomes. The core team members were selected on the following criteria:  Common link: Selected by functional VP  Knowledgeable on key processes within your HR functional area  Dedicated to building awareness and accountability toward achieving better outcomes  Focused on measuring what matters to enable better decision making and resource allocation Their key responsibilities included  Attend Core Team meetings  Communicating to your function the message of why we are measuring HR  Establish SMEs within your function  Identify key processes within your function  Establish key performance indicators/measures reflecting key processes  Submit data within designated timeframe  Responsible for overseeing target setting process for your functional area The HR Balanced Scorecard includes four perspectives: 1. Strategic Perspective AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 51
  57. 57. Measures success in achieving the five strategic thrusts. Since the basis for the HR Balanced Scorecard is achieving business goals, the aligned HR Strategic objectives are the drivers for the entire model. 2. Operations Perspective Measures HR’s success in operational excellence. The focus was primarily in three areas: staffing, technology, and HR processes and transactions. 3. Customer Perspective Includes measures of how HR is viewed by the key customer segments. Survey results were used to track customer perceptions of service as well as assess overall employee engagement, competitive capability, and links to productivity. 4. Financial Perspective Addresses how HR adds measurable financial value to the organisation,including measures of ROI in training, technology, staffing, risk management, and cost of service delivery. 9.4.The Process A deliberate approach to the project was clearly defined and communicated to each member of the team and to the HR organisation. The project was established and organised into four major components: Planning and Alignment, Assessment, Development, and Implementation. 1. Planning and Alignment set the foundation for the project. Project plan objectives, and milestones were established. Team education and training was imparted on business performance management, the balanced scorecard methodology, and its application to HR measurement. 2. Assessment focused on understanding what was used at that time as measure to evaluate HR performance and to assess the relative value to the business. 3. Development began the actual process of designing the HR measurement model. Defining the measurement criteria and scorecard measures, establishing targets, defining the process for collecting and tracking AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 52
  58. 58. results, and creating the communications strategy were the key deliverables in this phase. 4. Implementation operationalised the HR Scorecard from the drawing board to a management tool for HR to assess performance and value added to the business. Data collection, results reporting, evaluation, and analysis all came together as the scorecard was implemented. Communications and training were delivered to the HR organisation as the HR Scorecard rolls out. Once the team was selected, and the mission and objectives were established and communicated, the work to link Business Strategy to HR Strategy began. Fig.7 illustrates the initial model used to align Business Strategy to HR Strategy and Actions and lists the specific outputs within each step. AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 53
  59. 59. Figure 7:- Initial model used to align HR strategy to business strategy Beginning with a clear understanding of the business strategy and goals, the HR team worked with the business leaders and HR leaders to determine the key questions to be answered for the business and to determine what key drivers of the business would translate into clear people requirements. The outcome was an AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 54 Undestanding the Business Output Clearly defined business goals Undestanding the Business Output Clearly defined business goals Identifying Detailed Metrics Output Metrics Model Metrics Map Clearly defined business goals Identifying Detailed Metrics Output Metrics Model Metrics Map Clearly defined business goals Determining HR Deliverables Output Competitive Capability Requiremnents Determining HR Deliverables Output Competitive Capability Requiremnents Translating HR Deliverables into HR Strategy Output Clearly defined business goals Translating HR Deliverables into HR Strategy Output Clearly defined business goals
  60. 60. understanding of what questions need to be answered and of the competitive capabilities required for current and future business success. This provided the detail to build a strategy map, which would support the design and development of the HR Balanced Scorecard. The people requirements defined the HR Strategy that then translated into specific HR initiatives that should directly support the attainment of HR Strategy. Having this alignment allowed Verizon to develop a strategy map, which illustrated the cause and effect linkage between HR Strategy and business objectives. Using the strategy map as the guide, they were then able to evaluate the strategic objectives in terms of measures and outcomes (Fig 9.). They could then further refine these into lagging measures (which tell how well a company has already done) and leading measures (which are indicators of future performance). AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 55 Understanding the Business HR puts together a business strategy document capturing the major insights and points gathered during the acquisition of business intelligence
  61. 61. Figure 8:- The People Requirement and Business Driver Determination Process AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 56 Result: List of HR Deliverables HR draws up list of total people and services requirement that provide the basis for the measurement model Comparison and Consolidation of HR and Line Input HR checks for overlaps and contradictions between its own and the line’s input HR conducts “reality check”: do the required outcomes /deliverables map back to business strategy? HR brainstorming Session “What people outcomes must be produce to help the business deliver against its strategy and goals?” Line Survey HR conducts a survey of line executives, asking “What kind of people, skills and services do you need from HR?” List of HR Outcomes HR draws up a list of the skills needed in the organization now and in future. List of HR Performance Requirements Line provides a series of questions that captures how the line will assess whether HR is delivering value
  62. 62. In addition to aligning the scorecard measures to the business objectives, they developed causal links between the objectives and the measures. For example, one of the financial objectives, Minimise HR Cost, was expected to be an outcome of the HR Strategy. To create a clear line of sight across the perspectives, they linked Minimise HR Cost back to objectives in the Customer, Operations, and Strategic Perspectives that were performance drivers for these outcomes. This cause and effect relationship described that if HR integrated the organisation, implemented technology enablers and optimised service delivery through streamlined processes the costs for service delivery would decrease and reduce overall HR expense. Financial AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 57 Contribute to Corporate Shareholder Value