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A Balanced Scorecard for Small Business

C. W. Von Bergen Southeastern Oklahoma State University Management and Marketing Department Durant, OK 74701-0609 Phone: 580-745-2430; Fax: 580-745-7485; e-mail: cvonbergen@sosu.edu

Daniel C. Benco Southeastern Oklahoma State University Department of Accounting and Finance Durant, OK 74701-0609 Phone: 580-745-2498; Fax: 580-745-7485; e-mail: dbenco@sosu.edu

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Abstract The balanced scorecard is a performance management system that enables businesses to drive strategies based on measurement and follow-up. Since the early 1990s the balanced scorecard has been applied in numerous large organizations resulting in many positive results that have been chronicled in the management literature. However, there are few studies addressing the use of a balanced scorecard within small companies. Hence, this paper presents a discussion of the key elements of the balanced scorecard and its applicability to small business.

The BSC approach logically links these four perspectives. Thus. linked. higher customer satisfaction and higher market share. with mixed results. While small firms may deploy measures of performance covering fewer processes. Small firms can benefit from the BSC approach by avoiding pitfalls of large firms whose BSC implementations failed. a good balanced scorecard identifies many cause-and-effect relationships within the business and helps employees and managers appreciate the roles of employee and task as well as the importance of each result to the overall corporate effort. firm size is not a barrier to the successful implementation of this important measurement and follow-up tool. customer. leading to enhanced financial results for the organization. The successful implementers of BSC agree on its usefulness for translating strategy into a coherent. internal business processes. measurable operational goals. the methodology is the same and benefits will inure to small firms willing to treat BSC as a dynamic self-improvement process. in the end.3 Executive Summary The balanced scorecard (BSC) approach helps organizations manage the implementation of their strategies. The BSC measures an organization’s performance from four key perspectives: financial. large firms have subscribed to the BSC approach. Most failures follow an inconsistent or half-hearted application of the BSC. and learning and growth. Thus. and collect less data to evaluate performance. . Improvements in employee learning and growth result in improved internal business processes. which create better products and services and. or an unwillingness to consider the BSC a dynamic process of self-improvement. For a decade. therefore. limited set of understandable.

and Daly (1996) suggest that a comprehensive performance evaluation system has greater predictive validity than one that is purely financially oriented. 1996b. Recognizing the difficulties of an overemphasis on financial measures. p. . Kaplan and Norton (1992. 180) including “…financial and nonfinancial measures relating to a company’s critical success factors” (Chow. First.. 2000). 2001). & Vollman (1990). holistic. 1993. Using the balanced scorecard (BSC) approach managers are encouraged to take a “balanced view across a range of performance measures” (Amaratunga et al. processes. Hence this paper discusses BSC as a tool applicable to small business to improve their performance and is structured in several sections. the organization and the effectiveness and efficiency of its programs. Ernst & Young (1998). Nanni. p. 1996a. Then we discuss the applicability of a BSC to small business and what it might look like for a small organization. Haddad.4 A Balanced Scorecard for Small Business Elite companies successfully apply performance measurement to gain insight into. Neely (1998). and people (Amaratunga. A summary concludes the paper. advised that long-term organizational excellence can be achieved only by taking a broad. 7). and challenges of a BSC approach. 2001. and balanced approach and not by focusing solely on financials. Next. 1997. and make judgments about. we outline the BSC approach and illustrate some applications. Studies by Dixon. Baldry. & Williamson. we present the context. & Sarshar. One criticism of such programs is their failure to measure and monitor multiple dimensions of performance by focusing almost exclusively on financial measures (Brignall & Ballantine. 1996). strengths.

. or even at the individual employee level as a “personal scorecard. and allow each constituent of the organization to see how his or her activities contribute to attaining the organization's overall mission. sets goals for them. the measures provide a holistic view of performance both inside and outside the organization. has observed. Birchard (1995) and Kurtzman (1997) report that most US companies seek improvements in the performance measurement area. 1996. 2001). not metrics. the BSC approach identifies the key components of operations. 1994). and finds ways to measure progress toward achieving these goals. It is an integral part of an organization's strategy execution process that emphasizes communicating strategy to the members and providing feedback to help attain objectives (Mendoza & Zrihen.5 The BSC The BSC is an integrated set of financial and non-financial measures. The scorecard can be used at different levels: the total organization. “What were our organization’s . p. a sub-unit. the BSC is based on several underlying notions. Taken together. “How can our organization retain its best customers?”) rather than backward-looking (e. it is forward-looking (e. As a measurement system. As such.” For each level. Vice President of Quality at Sears. This trend toward seeking better measurement systems is well documented.. The shared concern of these companies is that measurement systems that focus on the wrong aspects of performance can undermine the organization's strategic mission by perpetuating short-sighted business practices (Hoffecker & Goldenberg. As Richard Quinn. The second is that BSC focuses on process.g. 61). “You simply can't manage anything you can't measure” (Lingle & Schiemann. The first is that financial measures alone inadequately measure the health of a company and that a singleminded pursuit of financial objectives could lead to long-term ruin.g.

quantifiable goals and for monitoring performance against those goals. for guiding and evaluating the journey that information age companies must make to create future value through investment in customers. 2000): 1. The third is that the scorecard is an analytic framework for translating a company’s visions and business strategies into specific. But financial measures tell the story of past events. however. Across organizations. and finally to superior financial performance” (Horngren et . Financial perspective: How does the firm look to providers of financial resources? Inherent in this model is the idea that “gains in the learning and growth perspective lead to improvements in internal business processes. Internal business process perspective: In which capabilities must the firm excel? 3. Foster. 7). an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate. and innovation” (1996b. Learning and growth perspective: Can the firm continue to improve and create value for customers? 2. employees. which in turn lead to higher customer satisfaction and market share. p. there is some agreement that a typical BSC would include the following four components in some form (Horngren. the BSC transforms strategic planning from an academic exercise into the nerve center of an enterprise (Figure 1). the relevant BSC components vary depending on the organization’s specific goals and circumstances.6 earnings per share last quarter?”). & Datar. suppliers. However. Kaplan and Norton further describe the innovation of the BSC as follows: “The BSC retains traditional financial measures. technology. processes. When fully deployed. Customer perspective: How do customers see the firm? 4.

Frequently cited BSC measures for the learning and growth perspective emphasize employee capabilities (e. The internal business process perspective Metrics based on this perspective allow managers to evaluate how well their business is running. employee education and skill levels.g.7 al. percentage of employee suggestions implemented. and percentage of compensation based on individual and team incentives). Appropriate metrics can guide managers in focusing training funds where they can help the most. p. number of suggestions per employee. Thus.g. and whether its products and services conform to customer requirements (the mission). people— the only repository of knowledge—are the main resource and should be in a continuous learning mode. ease of communication among workers. 467). Kaplan and Norton (2000) emphasize that learning includes not only training. and technological tools. 2000... . In a knowledge-worker organization. employee satisfaction scores. and motivation and empowerment (e. but also mentoring. percentage of business processes with real-time feedback).. the BSC scheme is organized and rational and identifies for employees and management the importance of each perspective as a feeder of success into the next perspective. employee turnover rates). -----------------------------------------Insert Figure 1 about here -----------------------------------------The learning and growth perspective This perspective includes employee training and corporate cultural attitudes related to individual and organizational self-improvement.g.. percentage of front-line employees with on-line access to customer information. information systems availability (e.

With the . penetration of targeted market segments. The customer perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business (Chabrow. on-time deliveries. 2003. The financial perspective Kaplan and Norton do not disregard the traditional need for financial data. Frequently cited BSC measures for the customer perspective include market share. even though the current financial picture may look good. 2002. with firms’ unique missions these cannot be developed exclusively by outside consultants. defect rates. they will eventually find other suppliers who will meet their needs. Frequently cited BSC measures for the internal business process perspective include the innovation process (manufacturing capabilities. manufacturing down time). If customers are not satisfied. Holloway. Needleman. Poor performance from this perspective is thus a leading indicator of future decline.8 These metrics must be carefully designed by those who know these processes most intimately. customer retention percentage. In developing metrics for satisfaction. customers should be analyzed in terms of kinds of customers and the kinds of processes for which an organization is providing a product or service to those customer groups. hours of customer training for using the product). and post sales service (time taken to replace or repair defective products. Timely and accurate funding data will always be a priority. and time taken to fulfill customer’s requests. product delivery time. and number of new patents). 2003). average time taken to manufacture orders. setup time. number of new products or services. Often there is more than enough handling and processing of financial data. customer satisfaction. operations process (yield. product development times. and managers will do whatever necessary to provide it.

1994. -----------------------------------------Insert Figure 2 about here -----------------------------------------Extant BSC implementations Recent articles and books discuss the advantages of the BSC and its application in the for-profit sector (e.9 implementation of a corporate database. Brown and Root. However. & Norton. As can be seen. 1992. implying a need to include additional data such as risk assessment and cost-benefit data in this category. Migliorato. focus employees on how they fit into the big picture. economic value added. and educate them on what drives the business (Gumbus & Lyons. Natan. cost reductions in key areas. 1992. As an essential aid to communicating business strategy. tactical objectives and performance standards in support of the strategy within the four perspectives are clearly delineated giving an organization a balanced measurement system. 1996b. Intel. once the strategy is identified. the BSC works as a vehicle to create a quantitative expression of the business strategy from key financial indicators. In fact. 1993. Among the numerous successful users of the BSC are the AM & R division of Mobil Oil. 1995). Tenneco. 2002). revenue growth. An example of these four perspectives in an actual business is presented in Figure 2 (Mair. a non-BSC emphasis on financials leads to an “unbalanced” situation with regard to other perspectives. 1997. more of the processing can be centralized and automated. Kaplan & Norton. Frequently cited BSC measures for the financial perspective include operating income. 2002). 1994. and return on investment. Philips Electronics has used the BSC to align company vision. 2000. . AT&T. Maisel. Newing. Kurtzman. 1996. gross margin percentage. revenues from new products. 3Com. 1996a. and Elf Atochem. Hoffecker & Goldenberg.g..

Haddad. Frigo and Krumwiede (2000) suggest that the BSC can help remedy this situation because it requires organizations to engage in several beneficial activities. (Birchard. because of disharmony between employee and organizational strategies and goals. strengths. of California at San Diego) and governmental agencies (e. does not know his or her personal role in accomplishing the strategy and as a result does what is required. as outlined in the following section.. p. 1995) and Cigna Insurance's property-and-casualty division (McWilliams. These activities delineate the major strengths of the BSC.. 1975). 1999). 2002). employees in many organizations pursue personal rather than organizational goals. Department of Commerce) have embraced the BSC to help them become more effective (Relyea. Even non-profit organizations such as universities (e. 1995).g. and because of existing reward structures that focus on individual or sub-unit achievements rather than the achievement of corporate goals (Kerr. In addition. Allstate Corp. & Hauler. the typical employee does not understand the organization’s strategy and consequently fails to focus on the right things. not what is needed. In such a corporate environment. assuming performance is adequate. the Bank of Montreal (Birchard. organizational suboptimization is the result of sub-organizational optimization. and challenges of the BSC Context According to Abernathy (2000. and does not know how well he or she is doing or how to improve strategic results and thus. U. Mavrinac.g. 31). 1994). .10 Philips Electronics’ management team uses it to guide the quarterly business reviews worldwide in order to promote organizational learning and continuous improvement (Gumbus & Lyons. Context. Adopters in the service sector include the international accounting firm Ernst and Young (Vitale. does not try to improve. 1998. 1996).

Thus. Another advantage is the implementation of performance measures for each perspective that clearly relate to each other and to the mission of the organization. 2003). it avoids a proliferation of measures and focuses management attention on measures crucial to the successful implementation of strategy.11 Strengths The first strength the BSC approach is a focus on the company’s strategic direction. communicating the importance of each activity as a crucial link in the larger organizational chain of events offers employees an appreciation of the context in which each task is performed and the context in which each result will be evaluated. described how many companies’ performance measurement systems rewarded behaviors other than the ones they hoped to obtain from their employees (e. although the measures are necessary.. such as "How does what I . The BSC avoids the tendency to engage in the “majoring in the minors” characteristic of many organizations and managers (Busby. 1999. The BSC approach limits the number of measures of performance used. implementing the balanced scorecard is a beneficial activity because it responds to common questions raised in annual employee motivation surveys. The Nielson Group. Kerr (1975). A BSC approach helps management communicate the company's mission by linking performance measures to its mission and strategy. Finally. Thus. for example. several studies conducted over the years note that too many firms fail to implement it properly. While the idea of tailoring the company’s performance measurement system to its strategy is almost commonsensical.g. firms often hope for teamwork but reinforce individual effort).

Challenges of the BSC In many cases. Indeed. the BSC no doubt delivers improvements over what existed before. 1978) emphasized the innovation and growth perspective more . 1995) “value disciplines. Hence. many of these early BSC successes may simply be a manifestation of this phenomenon.” based on the strategy of the business. But almost any organizational intervention triggers the Hawthorne effect (Kenny. Olson. Miles & Snow. Those studies showed that attention placed on the activities being measured invariably led to performance improvements. the operationally excellent should emphasize the internal business perspective. because different strategies have different requirements for success. prospectors (organizations seeking to locate and exploit new product and market opportunities. it might be that an organization. might do better by focusing on one or more of these measures rather than having a balanced emphasis in each of the four areas. 2003). and all of the value disciplines should pay attention to the financial perspective. 49). and Reddy (1997) argued that the scorecard should be “unbalanced. p. customer-intimate companies (those that excel in customer intimacy) should emphasize the customer perspective. Slater. based on its particular strategy.” they asserted that product leaders should emphasize the innovation and learning perspective. Using Treacy and Wiersema's (1993. named for experiments conducted in the 1920s and ’30s on a group of production employees at Western Electric. Although the BSC is comprehensive in its coverage of perspectives. This “unbalanced” perspective is supported by Olson and Slater (2002) who found that as a group.12 do every day fit into the bigger picture of the company?" The BSC enables employees to understand what they need to do on a daily basis to impact results (Gumbus & Lyons. Their rationale was that each value discipline has a performance perspective that is a leading indicator of its financial performance. 2002.

2003). This is regrettable since small businesses represent more than 99% of all employers. While the four categories may have been right for Analog Devices (the first organization to use the BSC approach) at the time. This suggests that attempting to get close to their customers and pursuing innovation and market growth detracted from low-cost defenders’ quest for efficiency. and measuring progress towards corporate objectives. they are not necessarily right for all organizations in all situations. Heaney (2003) indicates that the BSC is used by over half of the companies in Fortune’s Global 1000 companies.000 companies in North America and about 40% in Europe use a version of the BSC (Gumbus & Lyons. and benefits can be derived from matching an emphasis in the scorecard to strategy type. According to a recent survey by Bain & Company. approximately 50% of Fortune 1. McAdam & O’Neill (1999) likewise suggest that the BSC method is potentially so broad that it may divert resources from those few areas that really are vital to shareholder return and does not readily weight the relative importance of the metrics it uses. High performers that have adopted this competitive strategy also placed significantly lower emphasis on both the customer perspective and the innovation and growth perspective than did low performers. a balanced approach may not be appropriate for all organizations.13 than any of the other strategy types. Thus. The applicability of the BSC to small business Many large organizations have identified the BSC methodology as their chosen approach for deploying strategic direction. These data suggest that the BSC is primarily used by large organizations. 2002). and high-performing low-cost defenders placed greater emphasis on the financial perspective than did low-performing ones. Small business . and employ more than half the private work force (American Small Businesses. communicating expectations.

is important to America and activities to improve these organizations are of critical importance. and the communication of that information within the small firm. small or local companies may have different needs. they may be more important since small companies focus mostly on financial goals. because they are often fighting for survival and it is difficult to make plans for the future when most of the effort is directed to making ends meet in the present (DeFeo. have more dispersed and varied products and processes to coordinate and monitor. However. the value of the information. then. 2000). while the scope and magnitude of performance evaluation across the firm may be less in the small firm. The smaller number of interested internal parties reduces challenges to effective communication and facilitates corporate-wide team participation. more than three million minority-owned small businesses are providing job opportunities for millions of Americans in thousands of communities across America (American Small Businesses. an effective system of performance evaluation is vital to all firms. and have more resources for undertaking change initiatives. and what works for large companies may be ineffective or unnecessary for them (Chow et al. Small business. Large international firms tend to face more turbulent and competitive environments. In comparison. Indeed. Small firms enjoy innate advantages in their ability to achieve consensus and impart to employees news of change. and the benefits of. Nonetheless. It is easier to get . the benefits of the BSC can be just as significant for small businesses. Therefore. Furthermore.. is crucial to the success of the small firm. the need for. Most small firms require lower volumes of information to carry out their operations and evaluate their performance than do their larger counterparts. 2003).14 entrepreneurs create more than two out of every three new jobs and generate about 50% of the nation's gross domestic product. 1997).

Concluding remarks The BSC emphasizes measurement in four key business areas or perspectives. The underpinnings of the BSC approach are as relevant to the small firm as to the large. but neither its importance nor its utility suffers negative consequences related to firm size. which will attract and keep satisfied customers. as a result. We believe that the BSC offers some useful generic performance measurements that apply to practically all organizations. then internal business processes will be efficient.e. Efficient operations run by effective employees should generate higher quality output. the BSC can work as well for the small firm as for the large firm. and it is easier to identify a party or parties not on board within a group of ten than within a group of ten thousand. In short. Repeat customers contribute marginally more to the firm’s bottom line than do new customers who must be wooed.15 ten people on board than it is to get ten thousand people on board. Companies. The BSC’s complexity may be diminished and its formality may be dampened in the context of a small firm. need to know how they measure up to their own goals and standards. If the employees are effective and efficient (i. The main goal for small business is to manage their overall performance so that they . Small firms have employees performing operational tasks and processes.. Incorporating these perspectives in the BSC offers a framework for translating strategic objectives into performance measurements that gauge the effects of implemented strategies and provide feedback on the performance of strategic initiatives. small or large. These four perspectives provide for a more comprehensive evaluation of the organization than the traditional emphasis on tangible and financial assets of the organization. sufficiently trained and motivated). place themselves in a better position to compete. and the BSC can give them the advantage they need to evaluate themselves accurately and.

16 make a profit. . Birch (1998) said it best when he indicated that “The key point to remember is that what get measured gets managed” (p. 45).

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21 Figure 1. Key perspectives in the balanced scorecard approach to increasing organizational excellence. Adapted from the Balanced Scorecard Institute. .

An example of a balanced scorecard at a small software company (after Mair. 2002).Figure 2. Objective Financial Department should be selfsustaining Metric Total software revenue ≥ 2 x (total Full Time Equivalent1 Employee salary + benefit costs) Number of customer requests for new or missing features Release date to marketing Target Rate 25% year 1 100% year 4 Initiatives • • Provide marketing with benefits analysis of product and support Monthly review of sales with marketing Review and analysis of requirements with marketing Review and analysis of requirements with marketing Schedule creation and review with marketing Review and analysis of issues with marketing Team defect analysis Design review process Code review process Team defect analysis Design review process Code review process In house system training in C Code review process PSP training Training of sales and marketing personnel on the benefits provided by our software Customer Deliver complete solutions Deliver timely solutions <25 per release year 1 <10 per release year 2 ±1 week of plan year 1 ±1/2 week of plan year 2 • • • Deliver timely support Days answer to customer inquiries to customer’s satisfaction Number of customer requests for bug fixes Reduce average time for defect repair Reduce defect density Code review defects found Number of engineers using the Software Engineering Institute Personal Software Process Number of sales agreements showing separate software revenue line items 1-3<1 day 1-3<3 days 1-3<2 weeks <25 per release year 1 <10 per release year 2 25% year 1 50% year 2 25% year 1 50% year 2 >90% year 1 >99% year 2 25% year 1 50% year 2 100% year 3 25% year 1 100% year 4 • • • • • • • • • • • Operational Increase quality of delivered software and support Streamline development process Learning and Growth Increase C programming language knowledge Increase software process knowledge Educate sales and marketing on our software’s value 21 .

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