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The Balanced ScorecardSuperfactory Excellence
Programwww.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

• Introduction to the Balanced Scorecard
• What is it?
• Why do it?
• Balanced Scorecard Fundamentals
• The Four Perspectives
• Measures, Targets and Initiatives
• Roles and Responsibilities
• Using the Balanced Scorecard as a Management
  System
• Issues and Challenges with the Balanced Scorecard
• Implementing the Balanced Scorecard

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The Balanced Scorecard 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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The Balanced Scorecard 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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The Balanced ScorecardWhat 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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The Balanced Scorecard 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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The Balanced Scorecard Why do it?

• It works!
• In just 90 days, Sandia Labs was able to redirect
  190,000 in savings by dropping initiatives that
  didnt 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 dont overreact nearly as much as we used to.

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

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Management Process Linkages
The management process of discovering, defining
and implementing business activities that will
result in a value-enhanced future of the firm
Business Strategy
Business Processes
Performance Measurement System
Stakeholder Value Propositions
A business process is a collection of linked
business activities that enable or deliver goods,
services, information or money
A management process that is used to monitor
business activities and thereby facilitate
achievement of the firms objectives
Descriptions of the give and get relationships
between the firm and each of its stakeholders,
relative to alternatives
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Environmental Scan
Strengths Weaknesses
Opportunities Threats
A Model for Strategic Planning
Values
Mission Vision
Strategic Issues
Strategic Priorities
Objectives, Initiatives, and Evaluation
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The Strategy Focused Organization

• The Five Principles
• Translate the strategy to operational terms.
• Align the organization to the strategy.
• Make strategy everyones job.
• Make strategy a continual process.
• Mobilize change through executive leadership

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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The Balanced Scorecard

• Focuses on a few measurements
• Reflects mission and strategies
• Provides a quick, but comprehensive, picture of
  the organizations 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
• 8020 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
Value-linked measurements for business strategy,
stakeholder needs, process attributes and the
business environment
Sophistication of Measurement Systems
Balanced scorecard Economic value added
Quality-related operating measures Activity-based
costing
Operating measures Traditional accounting measures
Time
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The Balanced Scorecard

• 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

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

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Strategic Direction Create Environment For Change
Strategic Performance Management System
Communicate Strategies Define Objectives Implement
BSC
Balanced Scorecard Measure Performance Improve
Processes
Evaluate and Adjust Continuous Improvement Redefin
e Initiatives
Linking it all together.
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The Balanced Scorecard
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
To achieve our vision, what customer needs must
we serve?
Possible Performance Measures

• Customer Satisfaction (Average)
• Satisfaction Gap Analysis (Satisfaction vs.
• Level of Importance)
• Satisfaction Distribution ( of each area scored)

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Financial / Regulatory Perspective
To satisfy our constituents, what financial and
regulatory objectives must we accomplish?
Possible Performance Measures

• Cost / Unit
• Unfunded Requirements or Projects
• Cost of Service
• Budget Projections and Targets

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Internal Perspective
To satisfy our customers, in which business
processes must we excel?
Possible Performance Measures

• Cycle Time
• Completion Rate
• Workload and Employee Utilization
• Transactions per employee
• Errors or Rework

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Learning and Growth
To achieve our goals and accomplish core
activities, how must we learn, communicate and
work together?
Possible Performance Measures

• Employee Satisfaction
• Retention and Turnover
• Training Hours and Resources
• 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 dont know where youre going, youre
  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 divisions 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
Financial Perspective
Revenue Growth Strategy
Productivity Strategy
Shareholder Value ROCE
Build the Franchise
Increase Customer Value
Improve Cost Structure
Improve Asset Utilization
New Revenue Sources
Customer Profitability
Asset Utilization
Cost per Unit
Product Leadership
Customer Intimacy
Customer Value Proposition
Operational Excellence
Image
Relationship
Product/Service Attributes
Customer Perspective
Relation- ships
Function- ality
Brand
Service
Price
Quality
Time
Internal Perspective
Learning Growth Perspective
Source Kaplan Norton, The Strategy Focused
Organization
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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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Potential Problems with the BSC

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

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Potential Problems with the BSC

• Some of the goals are hard to create metrics for
• Manage requirements?
• Who get to say were 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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Potential Problems with the BSC

• 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 its
  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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Potential Problems with the BSC

• 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

• Dont reinvent the wheeldig 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 employees perspective
• They represent most organizations greatest
  source of value
• Dont 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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Suggested Readings
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