Balanced_Scorecard.ppt

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© 2004 Superfactory™. All Rights Reserved.
The Balanced Scorecard
Superfactory Excellence Program™
www.superfactory.com

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“One of the most dangerous forms of
human error is forgetting what one is
trying to achieve.”
– Paul Nitze

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Outline
1. Introduction to the Balanced Scorecard
 What is it?
 Why do it?
2. Balanced Scorecard Fundamentals
 The Four Perspectives
 Measures, Targets and Initiatives
 Roles and Responsibilities
3. Using the Balanced Scorecard as a Management System
4. Issues and Challenges with the Balanced Scorecard
5. Implementing the Balanced Scorecard

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What is it?
Definition:
The Balanced Scorecard is a management tool that provides
stakeholders with a comprehensive measure of how the
organization is progressing towards the achievement of its
strategic goals.

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What is it?
The Balanced Scorecard:
 Balances financial and non-financial measures
 Balances short and long-term measures
 Balances performance drivers (leading indicators) with
outcome measures (lagging indicators)
 Should contain just enough data to give a complete picture
of organizational performance… and no more!
 Leads to strategic focus and organizational alignment.

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What is it?
 Origins
 Multi-company research from 1990's undertaken by R. Kaplan
& D. Norton aimed at developing alternatives to purely
financially based performance management tools (e.g.
budgets)
 Early Scorecard experimentation at Analogy Devices Inc.
documented from 1987"
 Purpose
 Originally a performance measurement tool
 Now a strategic communication and performance
measurement framework
 Underlying philosophy includes:
 The importance of clear communication of goals and priorities
 The benefits of learning & team-working

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Why do it?
• To achieve strategic objectives.
• To provide quality with fewer resources.
• To eliminate non-value added efforts.
• To align customer priorities and expectations with the
customer.
• To track progress.
• To evaluate process changes.
• To continually improve.
• To increase accountability.

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Why do it?
It works!
In just 90 days, Sandia Labs was able to redirect $190,000 in
savings by dropping initiatives that didn’t fit their overall
strategy.
“The BSC has forced our management team to focus beyond
financial measures… too often in the past we would get
sucked into short-term thinking.”
“The BSC dramatically improved our data analysis… we don’t
overreact nearly as much as we used to.”

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Mission – What we do
Vision – What we aspire to be
Strategies – How we accomplish our goals
Measures – Indicators of our progress
The Strategy Focused
Organization

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Strategic Leadership
 Clear sense of direction:
 Where is the organization headed?
 Profound understanding of the business model:
 Is the organization doing all the things it needs to be
doing?
 Ability to focus and prioritize:
 Striking the balance between long-term development
and short-term operational pressures
 Agility: flexibility driven by learning:
 Incorporating new knowledge in the strategic and
operational planning processes

Management Process Linkages
The management process of
discovering, defining and implementing
business activities that will result in a
value-enhanced future of the firm
A management process that
is used to monitor business
activities and thereby
facilitate achievement of the
firm’s objectives
A business process is a
collection of linked business
activities that enable or
deliver goods, services,
information or money
Descriptions of the “give and
get” relationships between
the firm and each of its
stakeholders, relative to
alternatives
Performance
Measurement
System
Business
Processes
Stakeholder
Value
Propositions
Business
Strategy

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Environmental Scan
Strengths Weaknesses
Opportunities Threats
Values
Mission &
Vision
Strategic Issues
Strategic Priorities
Objectives, Initiatives, and Evaluation
A Model for
Strategic
Planning

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The Five Principles
1. Translate the strategy to operational terms.
2. Align the organization to the strategy.
3. Make strategy everyone’s job.
4. Make strategy a continual process.
5. Mobilize change through executive leadership
The Strategy Focused Organization
Source: The Strategy Focused Organization, Norton & Kaplan

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Strategy vs Operational Excellence
 Strategy creates fit among a firms activities
 The success of strategy depends on doing many things well,
not just a few
 All things that are done well must operate within a close
knit system
 If there is no fit, there is no strategy
 Without fit management becomes the search for
operational excellence
 Improving operational excellence is necessary but it is not
the same as strategy
 Managing fit is “strategic management”

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Strategy vs Operational Excellence
 Operational effectiveness involves continual improvement
that have no trade off opportunities
 The operational effectiveness agenda is the proper place for
constant change, flexibility, and relentless efforts to achieve
best practices
 The strategic agenda is the place for making clear tradeoffs
and strengthening the fit between the business components
 Strategy involves the continual search for ways to reinforce
and extend a firms position and the delivery of value

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 Focuses on a few measurements
 Reflects mission and strategies
 Provides a quick, but comprehensive, picture of the
organization’s health

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Two Primary Applications of BSC
Since its introduction two distinct applications have emerged:
 Strategic Balanced Scorecards;
 Focus on what the organisation is trying to achieve
 Work out what needs to happen to achieve it
 Monitor whether it is achieved
 Operational Scorecards;
 Identify the most important processes to be monitored
 Define which aspects of the process to monitor
 Agree on what is considered best practice

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Performance Measurement Principles
 Value creation is the objective
 Performance measurement is systematic
 Measurement supports business strategy
 Sound logic underlies each performance measure
 80:20 rule applies to measure selection
 Measures performance of both business and management
processes

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Performance Measurement Principles
 Performance standards are externally driven
 A measurement culture exists
 Clear rationale for incentive compensation
 Management encourages open communication of results
 Measurement system is simple to use

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The Increasing Sophistication of
Corporate Performance Measurement
Time
Sophistication
of
Measurement
Systems
Operating measures
Traditional accounting measures
Quality-related operating measures
Activity-based costing
Balanced scorecard
Economic value added
Value-linked measurements for
business strategy, stakeholder
needs, process attributes and the
business environment

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 Ties performance measures to corporate strategy
 “Balance” includes
 short & long term objectives
 financial and non-financial measures
 external & internal measures
 various perspectives
 Purposes of the balanced scorecard include
 clarify & translate vision & strategy
 communicate & link strategic objectives & measures
 plan, set targets & align strategic initiatives
 enhance strategic feedback & learning

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Elements of the scorecard
 Perspectives
 Strategic Objectives
 Metrics
 Targets

Learning and Innovation
Perspective
Goals Measures
How do we look to shareholders?
How do customers see us?
What must we excel at?
Can we continue to improve
and create value?
Customer Perspective
Goals Measures
Financial Perspective
Goals Measures
Internal Business
Perspective
Goals Measures
The Balanced Scorecard Links
Performance Measures

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The scorecard measures are “balanced” into
four areas
 The user perspective
 The finance perspective
 The internal process perspective
 The learning and future perspective

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Rationale for the BSC:
Getting Control of the Data
 Focus
 Balance
 Assessment
 Intelligibility

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Choosing Metrics
--Reflecting Values
 What is important?
 What are we trying to accomplish?

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Choosing Metrics
--Being Practical
 Use existing measures when possible
 Use sampling
 Collect data centrally
 Minimize work by front line

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The scorecard in practice
 Experimentation and adaptation
 Varied staff reaction
 Responding to budget problems
 Revision of mission and goals

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Balanced Scorecard Variations
 The constituent scorecard
 Focused on major stakeholders
 Incomplete description of corporate strategy
 Fails to identify drivers to achieve goals
 The key performance indicator scorecard
 An outgrowth of the quality movement
 Array of measure categories
 No cause and effect relationships among measures
 The strategy scorecard
 Focuses the organization on its strategy
 Show how each measure fits in a cause/effect
sequence that drives high-level strategy outcomes
 Strategy map approach offers logic for measure
development

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The Balanced Scorecard and The Big
Picture
•Activity Based Costing
•Economic Value Added
•Forecasting
•Benchmarking
•Market Research
•Best Practices
•Six Sigma
•Statistical Process Control
•Reengineering
•ISO 9000
•Total Quality Management
•Empowerment
•Learning Organization
•Self-Directed Work Teams
•Change Management
Mission
and
Vision
Balanced
Scorecard
Strategic
Planning

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Strategic Direction
Create Environment
For Change
Strategic Performance Management System
Linking it all together….
Communicate Strategies
Define Objectives
Implement BSC
Balanced Scorecard
Measure Performance
Improve Processes
Evaluate and Adjust
Continuous Improvement
Redefine Initiatives

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FINANCIAL/REGULATORY
To satisfy our constituents,
what financial & regulatory
objectives must
we accomplish?
CUSTOMER
To achieve our vision,
what customer needs must
we serve?
INTERNAL
To satisfy our customers and
stakeholders, in which business
processes must we excel?
LEARNING & GROWTH
To achieve our goals, how
must we learn, communicate
and grow?

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Customer Perspective
o Customer Satisfaction (Average)
o Satisfaction Gap Analysis (Satisfaction vs.
Level of Importance)
o Satisfaction Distribution (% of each area scored)
Possible Performance Measures
To achieve our vision, what customer needs
must we serve?

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Financial / Regulatory Perspective
o Cost / Unit
o Unfunded Requirements or Projects
o Cost of Service
o Budget Projections and Targets
To satisfy our constituents, what financial and
regulatory objectives must we accomplish?

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Internal Perspective
o Cycle Time
o Completion Rate
o Workload and Employee Utilization
o Transactions per employee
o Errors or Rework
To satisfy our customers, in which business processes
must we excel?

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Learning and Growth
To achieve our goals and accomplish core activities, how must
we learn, communicate and work together?
o Employee Satisfaction
o Retention and Turnover
o Training Hours and Resources
o Technology Investment

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BSC Representation Methods
 “Traditional” BSC
 Four levels
 Bubbles, but no connecting lines of a map (too confusing)
 Some partitioning of functions on a horizontal scale
 There are other way to represent the BSC
 Simple lists with metrics and goals
 Quadrants with everything on one page
 A popular way is to list the objectives in a table, with metrics
 Assign portfolios of projects
 Cascade the Scorecard down to the functional manager level
 Tie “every thing” to an objective even the level of effort
projects

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Why Measure?
• To determine how effectively and efficiently the process or
service satisfies the customer.
• To identify improvement opportunities.
• To make decisions based on FACT and DATA

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Measurements
• Translate customer expectations into goals.
• Evaluate the quality of processes.
• Track our improvement.
• Focus our efforts on our customers.
• Support our strategies.

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Targets
“If you don’t know where you’re going, you’re probably not
gonna get there.”
Forrest Gump

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Targets
• Targets need to be set for all measures
• Should have a “solid basis”
• Give personnel something for which to aim
• If achieved will transform the organization
• Careful not to develop measures/targets in
a fragmented approach:
i.e. Asking people to increase customer satisfaction has to be backed up with the
knowledge, tools, and means to achieve that target.

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Setting the Targets
 Specific targets indicating full success, partial success, and
failure
 Targets that are challenging, but not impossible

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Initiatives
 Once measures and targets are established, it is the
responsibility of management to determine HOW the
organization will achieve its goals.
 Measures are used to determine the effectiveness of
strategic initiatives.

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The Leadership Team
 Develops the division’s vision, strategy and goals
 Develops organizational objectives and targets
 Provides leadership, endorsement and vision for the project
 Clears barriers to scorecard progress

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The Core Team
 Drafts the strategy map and scorecard
 Works with employees to develop measures supporting strategic
objectives
 Works with the Leadership Team to plan and implement the
Balanced Scorecard in the FAS Division

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The Balanced Scorecard as a
Management System
 BSC reviewed regularly to enhance operational decision-
making
 Success of initiatives assessed based on DATA… not
opinions
 Leading indicators evaluated to confirm accuracy of
assumptions

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The Balanced Scorecard as a
Management System
 The BSC is a “Living Document” that requires regular
revision of objectives, measures and initiatives:
 How are we doing?
 Are we measuring the right things?
 What initiatives do we need to get us where we want to
go?
 Have our organizational goals changed?

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Advantages to this Approach
 Simple to Use and Understand
 Based on Vision and Strategy
 Multidimensional
 Quantitative and Qualitative Measures
 Current and Future
 Provides Measurement of and Method for Improving our
Services
 Ties QI initiatives together
 Serves as a Communication Tool

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The Balanced Scorecard Strategy Map
Improve Shareholder Value
Revenue Growth Strategy Productivity Strategy
Build the Franchise Increase Customer Value Improve Cost Structure Improve Asset Utilization
New Revenue Sources Customer Profitability Cost per Unit Asset Utilization
Shareholder Value
ROCE
Product Leadership
Customer Intimacy
Operational Excellence
Price Quality Time
Function-
ality
Service
Relation-
ships Brand
Customer Value Proposition
Image
Relationship
Product/Service Attributes
“Be a Good
Corporate Citizen”
(Regulatory and
Environmental
Processes)
“Build the
Frnchise”
(Innovation
Processes)
A Motivated and Prepared Workforce
Strategic Competencies Strategic Technologies Climate for Action
Financial
Perspective
Customer
Perspective
Internal
Perspective
Learning &
Growth
Perspective
Source: Kaplan & Norton, The Strategy Focused Organization
“Achieve
Operational
Excellence”
(Operational
Processes)
“Increase
Customer Value”
(Customer
Management
Processes)

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Increasing Popularity of the
Balanced Scorecard
 Connects performance measurement to strategic success
 Places emphasis on the importance of all stakeholders, not
just investors
 Encourages consideration of linkages among performance
measures in all areas of the firm, and among all levels in
the hierarchy
 Recognizes the need for some measures which comment of
preparedness for future success

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Project Management and the BSC
 Traditional view of a “project”
 Defined start and end
 Defined resources, cost, and delivered value
 Customer, technology,
 Balanced Scorecard view of a “project”
 What objective of the strategy does this project support?
 If the project were implemented, what goals would be
fulfilled?
 When will the cost of the project be earned back by a
specific objective in the strategy.
 These questions and their answers are also found in project
portfolio management.

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What the BSC Does Well
 Link to strategy/overall purpose
 Concept of goal alignment
 Integrates evaluation with management
 Coverage of organizational performance aspects
 A “big picture” snapshot (plus access to details)
 Adapts nicely between for-profit & non-profit
 A nice blend of “common to all” aspects (helps with
benchmarking) and elements that are tailored to the
organization (helps with relevance)
 Marketing!!

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Potential Problems with the BSC
 Excessive centralization & rigidity
 Top-down works best when expertise is at the top
 Bottom-up/flexible works best for knowledge work
 High level of (heavily quantitative) detail - substantial set-
up costs (time & money)
 Low system agility - difficult to keep pace with turbulent
business environments

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 Deals with meeting shareholder & customers’ needs, but
ignores employees’ needs
 Testing strategic cause-and-effect assumptions = run some
correlations?!
 Weak on unintended outcomes—lack of an open-ended
element
 Any room here for emergent strategy?

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 Some of the goals are hard to create metrics for
 “Manage requirements?”
 Who get to say we’re managing requirements?
 The customer wording is too soft at times, since the metrics
for satisfaction are hard to come by in our environment
 “Strategically deploy services”
 This is a tautology
 “Deliver solutions on schedule”
 This is easy, and having a program office makes it easier
 “Keep my systems running”
 This can be measured everyday

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 Lack of time for the decision makers to focus on strategy
 Having strategy sessions on a continuous basis is
difficult
 Running the business seems to come first
 Confusion between operational efficiency and strategy
 This is a continual problem
 Always ask “do I have options?” if so then it’s strategy
 Difficulty in creating well defined metrics and connecting
them to deliverables
 Scalar metrics with defined “units of measure”
 Cascading the objectives down to the staff that can deliver
the results
 This is the hardest and where there is the most
resistance

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 Once the strategy has been defined, loosing the picture focus and
delving into the details
 Continuous re-visiting of the strategy to test the hypothesis
 Adjusting metrics and measures to increase the confidence in
the hypothesis tests
 Becoming enamored with the “pretty pictures, charts and graphs”
 The real measure is the improvement in the operational
effectiveness of the organization.
 This is the other half of strategy that needs to be delivered as
well if not better
 Facing the reality that this is much harder than it looks
 Strong convictions are needed to overcome objections
 In the end delivery of the results MUST be done

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Implementing BSC
 Designing and rolling out a any kind of Balanced Scorecard
makes little sense if it is not used to trigger behavioral
change
 Nothing will be achieved if everybody continues doing
what they have always done
 For maximum effect, the Balanced Scorecard can be used
to form the centre of an organization's strategic
management system
 Scorecards then help secure strategic alignment of
goals, initiatives, people, processes and systems
throughout an organization

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Implementing BSC
 The individuals and teams should:
 Be committed to making the scorecard process work
across all levels of the organization
 By-in has to be gained up and down the organization
 Keeping the commitment is a full time job
 Seek to close any gaps that open in the process in the
same way they manage their daily activities
 Make BSC a “project” like any other
 Plans, budget, and deliverables
 Understand that without the commitment and
dedication, not only will Balanced Scorecard fail, the
underlying business process will suffer as well.

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Implementing BSC
 The scorecard should:
 Measure performance against goals
 Determine if the goals are appropriate
 Determine if the strategy or measures should be changed
 Provide direct measurable outcomes traceable to the actions of
individuals and teams
 These measures and metrics should
 Have scalar units of measure: dollars, defects/1000,
percentiles, etc.
 Have metrics that are first order derivatives from the work
process: quality, response time, budget compliance
 Have independent variables that can be controlled which are
connected to the dependent variables

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Implementing BSC
 Don’t reinvent the wheel—dig into the lessons learned from
related approaches
 Management By Objectives (MBO)/ goal-based
evaluation
 Multi-level needs assessment/ organizational diagnosis
 Theory-based evaluation/ linkage research
 Return On Investment (ROI)/ utility analysis

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Implementing BSC
 Add the employee’s perspective
 They represent most organizations’ greatest source of
value
 Don’t go into (quantitative) detail on everything - increase
flexibility/agility
 Keep some things at “big picture” level
 Build in qualitative/mixed method rating systems
 Leave some aspects of performance open
 Allow creativity, innovation, and serendipity

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Implementing BSC
 Balanced Scorecards used at the center of the strategic
management process effectively address the key challenge
of most organizations - the need to identify, pursue and
achieve strategic goals
 They support
 A clear sense of direction
 A profound understanding of the business model
 An ability to focus and prioritize
 Organizational agility

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Kaplan, Robert and Norton, Edward. The Balanced Scorecard.
Harvard Business Publishing, 1998
Kaplan, Robert and Norton, Edward. The Strategy-Focused Organization.
Harvard Business Publishing, 2001
Buckingham, Marcus and Coffman, Curt. First, Break All the Rules
The Gallup Organization, 1999
Brown, Mark. Keeping Score. Mark Graham Brown, 1996
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