Balanced Scorecard

Faculty-Nalin Pant:nalinsan@hotmail.com

Questions?
Need for measuring performance? Whose performance needs measurement? Criteria / Parameters for measuring performance?

Faculty-Nalin Pant:nalinsan@hotmail.com

Traditional Performance Measurement Systems

Measurable Financial performance criteria (Company/SBUs/ Profit Centers) Measurable Performance Criteria (Sales / Production data) Qualitative Performance Criteria for individuals (Performance/ Skills/ attitudes etc) Limitations Emphasis largely on financial performance (myopic view) Shorter time frame (Quarterly / Annual) Dwell on the past Little or no link to building capabilities essential to strategy Weak link to strategy Poor alignment (vertically and horizontally)
Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard
Developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton Not only a performance measurement tool but a Strategic Management System Called Balanced Scorecard as covers other critical measures of performance and organizational health, beyond financial performance. (financial measures are retained) Focuses on creating future value through investment in customers, suppliers, employees, processes, technology, and innovation. Helps translate strategy (vision/mission/objectives) to action

Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard
Its a conceptual framework for translating an organizations strategic objectives into a set of performance indicators. 4 Areas / Perspectives for which goals are developed for balanced Score Card
Financial Customer, Internal Business Processes Learning and Growth.

Indicators measure :
Organizations progress toward achieving its vision; others measure the long term drivers of success.

Thus an organization monitors:

Its past performance Its current performance (finance, customer satisfaction, and business process results) Plans for improving its future performance (by improving processes, motivating and educating employees, and enhancing its ability to learn and improve.) Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard 4 perspectives

Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Perspectives

The Learning & Growth Perspective
To achieve our vision, how will we sustain our ability to change & improve? This perspective includes: Employee training Corporate cultural attitudes related to both individual and corporate Self-improvement Because: knowledge is the main resource Organizations to be in continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. Examples: Appreciation of guest needs & requirements ( Airline ground staff) Thorough understanding of new product (Sales Team) Faculty-Nalin Pant:nalinsan@hotmail.com Working knowledge of MS Excel and Word (Management Student)

Balanced Scorecard - Perspectives

The Internal Business Process Perspective
To satisfy our shareholders and customers, what business processes must we excel at?

Refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). Examples: Reducing processing time for a Demand Draft Request (Bank) Delivery Process Pizza (Dominos) Handling of billing complaints (Mobile Company) Turnaround time (Airlines)

These metrics have to be carefully designed by those who know these processes most intimately. Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Perspectives

The Customer Perspective
To achieve our vision, how should we appear to our customers?

Increasing realization of the importance of customer focus and customer

satisfaction. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. Metrics for customer satisfaction to analyze in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

Examples: Pizza Deliver with in 30 minutes (Dominos) On Time take off and landing (Airlines) Wide choice of applications on demand and easy access (Apple I Phone) Value for Money (Big Bazzar) Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Perspectives

The Financial Perspective
To succeed financially, how should we appear to our shareholders?

Kaplan and Norton do not disregard the traditional need for financial data. Current emphasis on financials leads to the "unbalanced" situation . Hence need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category. Examples: Appreciation of shareholders wealth Least Cost Producer (Tata Steel) Diversified Portfolio

Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Strategy Mapping

A communication tool to explain how value is created for the organization. They show a logical, step-by-step connection between strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain. Cascading impact of improvement in perspectives Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Perspectives

Converting Intangible Assets to Tangible Assets
(Knowledge, information and skills >>>> Products and Financial Benefits)

38% 62%

62%

85%

Intangible Assets Tangible Assets

38% 15%

1982

1992

1998

Changing Values of Intangible & Tangible Assets

Faculty-Nalin Pant:nalinsan@hotmail.com

Faculty-Nalin Pant:nalinsan@hotmail.com

Balanced Scorecard - Strategy Mapping

Faculty-Nalin Pant:nalinsan@hotmail.com

Flexibility in design & implementation

Flexibility to add perspectives beyond 4 Hong Kong Railway Operator MTR has added Safety as perspective. Courts in Singapore have community, organization and employee as perspectives Flexibility to decide hierarchy of perspectives

Faculty-Nalin Pant:nalinsan@hotmail.com

Five Principles of the Strategy Focused Organization

1. Translate the strategy to operational terms (Sub components : Strategy Maps & Balanced Scorecards) Strategy Maps & scorecards created at enterprise level and devolved levels such as functions and positions. Alignment of devolved score cards to enterprise score card essential

Faculty-Nalin Pant:nalinsan@hotmail.com

Five Principles of the Strategy Focused Organization

2. Align the organization to the strategy (Sub components : Corporate roles, business unit synergies and shared service synergies) Explain common themes rather than function specific (Vision/Mission) Example : Saatchi & Saatchis powerful client perspective create permanently infatuated clients Can put non negotiable objectives for a clear message across the organization

Faculty-Nalin Pant:nalinsan@hotmail.com

Five Principles of the Strategy Focused Organization

3. Make Strategy everyones everyday job (Sub components : Strategic awareness, Personal Scorecards and Balanced Pay checks) Concerted, ongoing educational and communication efforts Align appraisal and compensation systems to the balanced score card

Faculty-Nalin Pant:nalinsan@hotmail.com

Five Principles of the Strategy Focused Organization

4. Make Strategy a continual Process (Sub components : Link budgets and strategies, analytics and information systems and strategic learning) Short term budgeting to follow strategic plan Automate score card system for monitoring and control Periodic review and feedback for strategic learning and improvement

Faculty-Nalin Pant:nalinsan@hotmail.com

Five Principles of the Strategy Focused Organization

5. Mobilize change through executive leadership (Sub components : Mobilization, governance process and strategic management systems) CEO and senior management team to champion balanced score card system Even if CEO leaves, the system should continue

Faculty-Nalin Pant:nalinsan@hotmail.com

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Malcolm Baldrige Model

Measures performance and excellence on 7 sets of parameters. Also basis for an annual and much coveted award for organizational excellence. Winners include AT&T, Ritz-Carlton and Boeing. 1. Leadership (120 pts) 1.1 Organizational Leadership (70 pts) 1.2 Social Responsibility (50 pts) 2. Strategic Planning (85pts) 2. 1 Strategy Development (40 pts) 2.2 Strategy Deployment (45 pts) 3. Customer and Market Focus (85pts) 3. 1 Customer and Market Focus (40 pts) 3.2 Customer Relationships and Satisfaction (45 pts) 4. Measurement, Analysis, Knowledge Management (90pts) 4. 1 Measurement and Analysis of Organizational Performance (45pts) 4.2 Information and Knowledge Management (45 pts)
Faculty-Nalin Pant:nalinsan@hotmail.com

Malcolm Baldrige Model

5. Human Resources Focus (85 pts) 5.1 Work Systems (35 pts) 5.2 Employee Learning and Motivation (25 pts) 5.3 Employee Well-Being and Satisfaction (25 pts) 6. Process Management (85pts) 6.1 Value Creation Process (50 pts) 6.2 Support Processes(35 pts) 7. Business Results (450pts) 7.1 Customer Focused Results. (75 pts) 7.2 Product and Service Results (75 pts) 7.3 Financial and Market Results (75 pts) 7.4 Human Resources Results (75 pts) 7.5 Organizational Effectiveness Results (75pts) 7.6 Governance and Social Responsibility Results (75 pts)
Faculty-Nalin Pant:nalinsan@hotmail.com

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Benefits of Scorecard Usage

Attainment of financial objectives Saatchi & Saatchi came out from verge of bankruptcy and became a profitable company Tata Motors Commercial Vehicle Division saw 40% increase in revenues in 2 years and its sales grew by 44% in 2 years. Brings strong long term strategic focus Fosters a culture of performance, transparency and accountability Better cross functional team work and understanding Stronger clarity around resource allocation Strategically aligned business units Well defined accountabilities Performance Management System hardwired to strategic goals Increased customer acquisitions
Faculty-Nalin Pant:nalinsan@hotmail.com

Score Card Example

Statement of what strategy must achieve and what is critical to its success How success in achieving the strategy will be measured and tracked The level of performance or rate of improvement needed Key action programs required to achieve objectives

Objective
Financial

Measure Revenue mix

Target 10% Product X 40% Product Y 50% Product Z 95%

Action Plan

Broaden revenue mix Increase customer satisfaction Cross-sell our products Develop strategic skills

Customer

Customer retention % Revenue from new products Skill coverage

Frequent Buyers Club 15% 50% Customer Mailing Segmentation Product Training
Faculty-Nalin Pant:nalinsan@hotmail.com

Internal

2001 2002 90%

Learning & Growth

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