Balanced scorecard

BALANCED BUSINESS SCORECARDS – BUILDING,

IMPLEMENTING, ALIGNING AND SUSTAINING

CHARLES COTTER

3-6 NOVEMBER 2014

Introduction and Background

Defining the fundamental concepts

Defining the 4 perspectives of the Balanced Scorecard (BSC)

Building a business case for BSC

Diagnosis of Best Practice guidelines

Applying the 9-step, BSC building and implementing process

Sustaining the BSC

TRAINING PROGRAMME OVERVIEW

It was originated by Drs. Robert Kaplan & David Norton (Harvard BusinessSchool) as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to givemanagers and executives a more 'balanced' view of organizationalperformance.

These non-financial metrics are so valuable mainly because they predict futurefinancial performance rather than simply report what’s already happened.

Their article (1996), describes how the balanced scorecard can help seniormanagers systematically link current actions with tomorrow’s goals, focusingon that place where, in the words of the authors, “the rubber meets the sky.”

Predecessors to the BSC:

Tableau de Bord (Dashboard) Early Metric-Driven Incentives (MDIs)

ORIGIN AND HISTORY OF THE BSC

The “new” balanced scorecard transforms an organization’s strategic plan froman attractive, but passive document into the "marching orders" for theorganization on a daily basis.

It provides a framework that not only provides performance measurements, buthelps planners identify what should be done and measured. It enablesexecutives to truly execute their strategies.

Given the insight and wisdom provided by Kaplan & Norton, the balancedscorecard is a management system (not only a measurement system) thatenables organizations to clarify their vision and strategy and translate them intoaction.

It provides feedback around both the internal business processes and externaloutcomes in order to continuously improve strategic performance and results.

When fully deployed, the balanced scorecard transforms strategic planning froman academic exercise into the nerve center of an enterprise.

MODERN APPLICATION OF THE BSC

BSC MEASURES

Enables organizations to clarify their vision and strategy and translate theminto action.

Aligns business activities to the vision and strategy of the organization

Provides a balanced view of the organizational value and performance

Enables business planners to identify what should be done and measured,thus enabling effective execution of business strategies

Provides feedback around both the internal business processes andexternal outcomes in order to continuously improve strategic performanceand results

Monitors organization performance against strategic goals

OBJECTIVES OF THE BSC

The balanced scorecard suggests that we view the organization from four (4) perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

Learning, Innovation and Growth

Business (Internal) Processes

Customer

Financial

BSC PERSPECTIVES/DIMENSIONS

ILLUSTRATION: BSC PERSPECTIVES/DIMENSIONS

Strategic question:

“To achieve our vision, how will sustain our ability to change and improve?”

Examples (measurable indicators):

Time to develop new generation of products Life cycle to product maturity Time to market versus competition Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities

Value Outcome:

Organizational knowledge and growth capacity

LEARNING, INNOVATION AND GROWTH PERSPECTIVE

COMPONENTS OF LEARNING, INNOVATION AND GROWTH

Strategic question:

“To satisfy our shareholders and customers, what business processes must we excel at?”


Cycle time Unit cost Yield New product introductions Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation

Value Outcome:

Efficiency

BUSINESS (INTERNAL) PROCESS PERSPECTIVE

Strategic question:

“To achieve our vision, how should we appear to our customers?”


Percent of sales from new products On time delivery Share of important customers’ purchases Ranking by important customers Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate

Value Outcome:

Customer satisfaction

CUSTOMER PERSPECTIVE

Strategic question:

“To succeed financially, how should we appear to our shareholders?”


Cash flow Sales growth Operating income Return on Equity (RoE) Return On Investment (ROI) Return on Capital Employed (RoCE) Financial Results (Quarterly/Yearly)

Value Outcome:

Financial performance/profitability

FINANCIAL PERSPECTIVE

Balanced Scorecard (BSC)

Strategic Planning

Strategic Plan

Strategic Management and Execution

Steps in Strategic Planning and Management

Strategy Mapping

DEFINING FUNDAMENTAL CONCEPTS

Articulate the business's vision and strategy

Identify the performance categories that best link the business's vision and strategy to itsresults (e.g., financial performance, operations, innovation, employee performance)

Establish objectives that support the business's vision and strategy

Develop effective measures and meaningful standards, establishing both short-termmilestones and long-term targets

Ensure company-wide acceptance (ownership) of the measures

Create appropriate budgeting, tracking, communication, and reward systems

Collect and analyze performance data and compare actual results with desiredperformance

Take action to close unfavourable gaps

PURPOSES OF THE BSC

Clarify or update a business's strategy

Link strategic objectives to long-term targets and annual budgets

Track the key elements of the business strategy

Incorporate strategic objectives into resource allocation processes

Facilitate organizational change

Compare performance of geographically diverse business units

Increase company-wide understanding of the corporate vision and strategy

STRATEGIC UTILITY AND FUNCTIONAL VALUE OF BSC’S

4-STEP STRATEGIC MANAGEMENT PROCESS

Strategy maps are communication tools used to tell a story of howvalue is created for the organization.

They show a logical, step-by-step connection between strategicobjectives (shown as ovals on the map) in the form of a cause-and-effect chain.

Generally speaking, improving performance in the objectives found inthe Learning & Growth perspective (the bottom row) enables theorganization to improve its Internal Process perspective Objectives(the next row up), which in turn enables the organization to createdesirable results in the Customer and Financial perspectives (the toptwo rows).

STRATEGY MAPPING

ILLUSTRATION: STRATEGY MAP

Refer to page 25 in Learner Guide

By means of a cost-benefit analysis, develop a business casefor BSC.

Viability

Feasibility

Sustainability

Present a summary of group discussion

SYNDICATE GROUP LEARNING ACTIVITY 1

#1: BSC is aligned with organization’s strategic business plans

#2: BSC is future-focused, adopting a strategic, medium to long-term approach

#3: BSC is pro-active, sensitive and responsive to (internal and external)environmental change and trends

#4: BSC enjoys company-wide acceptance (ownership) of the measures andprocesses

#5: BSC is organized, well-coordinated and systematic approach

#6: BSC is a collaborative and partnering effort (managers have co-optedbusiness partners to the process)

#7: BSC is integrated (with other business management and administrative)and cohesive process

BEST PRACTICE GUIDELINES FOR BSC

#8: BSC generates meaningful business intelligence which informs businessplanning and supports strategic decision-making

#9: BSC integrates both scientific (metrics and analytics) and artistic (planning)principles

#10: BSC utilizes cutting-edge and innovative technology and software

#11: BSC is continuously monitored, reviewed, evaluated and adapted

#12: BSC yields a positive business ROI, with tangible/demonstrable outcomesand impact – creates sustainable competitive advantages and organizationalchange

#13: BSC incorporates strategic objectives into resource allocation processese.g. financing/budgeting

#14: BSC is a logical and rational process making use of cause-effect logic

BEST PRACTICE GUIDELINES FOR BSC


Critically evaluate your organization’s current BalancedScorecard processes and systems against the best practicecriteria.

Identify gaps and recommend improvement strategies.



The balanced scorecard is a strategic planning and management system thathelps everyone in an organization understand and work towards a sharedvision.

Starting at high “strategic altitude”, Mission, Vision, and other planningelements are translated into desired Strategic Results.

The organization’s “Pillars of Excellence”, or Strategic Themes, are selectedto focus effort on the strategies that matter the most to success.

Strategic Objectives are used to decompose strategy into actionablecomponents that can be monitored using Performance Measures.

Finally, Strategic Initiatives translate strategy into a set of high-priorityprojects that need to be implemented to ensure the success of strategy.Once the strategic thinking and necessary actions are determined, annualprogram plans and projects can be developed and translated into budgetrequests.

HIERARCHY OF BALANCED SCORECARD COMPONENTS

ILLUSTRATION: HIERARCHY OF BALANCED SCORECARD COMPONENTS

THE 9-STEP BSC BUILDING AND IMPLEMENTING PROCESS

Step one of the scorecard building process starts with an assessment of theorganization’s Mission and Vision, challenges (pains), enablers and values.

The following strategically-relevant items form the scope to be scrutinized bybusiness managers:

The company's mission statement The company's strategic plan/vision The financial status of the organization How the organization is currently structured and operating The level of expertise of their employees Customer satisfaction level

Tools:

SWOT Analysis PESTEL Analysis

STEP 1: ASSESSMENT - INTERNAL AND EXTERNAL STRATEGIC ASSESSMENT

THE NATURE OF THE BUSINESS ENVIRONMENT – V-U-C-A

CAPITALIZE ON STRENGTHS

MINIMIZE WEAKNESSES

EXPLOIT OPPORTUNITIES

COUNTERACT THREATS

A WINNING STRATEGY

Refer to pages 32-34 in Learner Guide

By utilizing a SWOT Analysis Matrix and PESTEL analysis, perform anenvironmental scan/analysis of both the internal and external environments foryour organization. Internally, identify organizational strengths and weaknessesand externally identify opportunities and threats.

In particular, focus on the following key organizational factors:

Strategy (plan, vision and mission) Finances Customer Internal business processes Learning and growth (people and skills)



In Step Two, elements of the organization’s strategy, includingStrategic Results, Strategic Themes and Perspectives, aredeveloped by managers to focus attention on customer needsand the organization’s value proposition.

STEP 2: STRATEGY - CUSTOMER VALUE, STRATEGIC THEMES AND RESULTS

Strategic themes are the main, high-level business strategies that form the basis for theorganization’s business model.

Reference to themes as “pillars of excellence”.

The strategic themes are very broad in scope.

They apply to every part of the organization and define what major strategic thrusts theorganization will pursue to achieve its vision.

A strategic theme is an area in which your organization must excel in order to achieveyour vision.

Themes also represent deliberate strategic directional decisions made by the leadershipteam.

Taken together, one can look at the proposed set of strategic themes and ask thisquestion: “If we excel in these 3-4 areas, will we achieve our vision?” and receive aresounding answer of “Yes!”

STRATEGIC THEMES

Each theme has a “strategic result” associated with it - this is a statement of a desiredend-state.

The result is stated in such a way that you will clearly recognize success when you see it.

Strategic results are measurable and explicitly defined using outcome language.

Examples include:

Business Growth Operational Excellence Customer Service Excellence Innovation Sustainability

The strategic differentiator lies in the strategic result - the specificity of the result givesguidance to organizational transformation.

Can be measured by compound measures of current and future-looking indicators.

STRATEGIC RESULTS


Refer to the preceding learning activities. Apply step 2 of the BSCBuilding and Implementing process by developing a strategic valueproposition for your organization.

Concentrate on the following key dimensions:

Strategic Themes

Associated strategic results



The strategic elements developed in Steps one and two aredecomposed into Strategic Objectives, which are the basicbuilding blocks of strategy and define the organization'sstrategic intent.

Metrics must also be aligned with the company's strategic plan.

The metrics set up also must be S-M-A-R-T

STEP 3: OBJECTIVES - STRATEGY ACTION COMPONENTS


Refer to the preceding learning activities. Apply step 3 of theBSC Building and Implementing process by formulatingstrategic objectives for your organization. Ensure that theseobjectives comply with the SMART criteria.



In Step Four, the cause and effect linkages between the enterprise-wideStrategic Objectives are formalized in an enterprise-wide Strategy Map.

The previously constructed theme Strategy Maps are merged into an overallenterprise-wide Strategy Map that shows how the organization createsvalue for its customers and stakeholders.

Apply cause-effect logic

A Strategy Map highlights that delivering the right performance in the oneperspective (e.g. financial success) can only be achieved by delivering theobjectives in the other perspectives (e.g. delivering what customers want) -basically creating a map of interlinked objectives

It allows companies to create a truly integrated set of strategic objectiveson a single page.

STEP 4: STRATEGY MAP - CAUSE-EFFECT LINKS

EXAMPLE: STRATEGY MAP

EXAMPLE: STRATEGY MAP


Refer to the preceding learning activities. Apply step 4 of theBSC Building and Implementing process by crafting a 1-pagestrategy map for your organization. Ensure that the strategymap uses cause-effect logic and establishes interdependentlinkages.



Leading and lagging measures are identified

Lagging indicators are typically “output” oriented, easy to measure buthard to improve or influence

Leading indicators are typically input oriented, hard to measure and easy toinfluence

Expected targets and thresholds are established

Baseline and benchmarking data is developed

Key Performance Indicator (KPI) and Performance MeasureDevelopment

STEP 5: PERFORMANCE MEASURES -MEASURES AND TARGETS

Provide a way to see if our strategy is working

Focus employees' attention on what matters most to success

Allow measurement of accomplishments, not just of the work that isperformed

Provide a common language for communication

Are explicitly defined in terms of owner, unit of measure, collectionfrequency, data quality, expected value (targets), and thresholds

Are valid, to ensure measurement of the right things

Are verifiable, to ensure data collection accuracy

GOOD PERFORMANCE MEASURES

5 STEPS TO FIND THE RIGHT MEASURES


Refer to the preceding learning activities. Apply step 5 of theBSC Building and Implementing process by developingperformance measures for your organization. Ensure thatthese performance measures comply with the criteria for goodmeasures.



Strategic Initiatives are developed that support the StrategicObjectives.

To build accountability throughout the organization, ownershipof Performance Measures and Strategic Initiatives is assignedto the appropriate staff and documented in data definitiontables.

Development of strategic project plans

STEP 6: INITIATIVES - STRATEGIC PROJECTS

STRATEGIC PROJECT ACTION PLAN (TEMPLATE)

Refer to pages 49-50 in Learner Guide

Refer to the preceding learning activities. Apply step 6 of theBSC Building and Implementing process by developinginitiatives (strategic projects) for your organization. Utilize theprovided Action Plan template.



The implementation process begins by applying performancemeasurement software to get the right performanceinformation to the right people at the right time.

Automation adds structure and discipline to the system andhelps people make better business decisions.

STEP 7: PERFORMANCE ANALYSIS -SOFTWARE, PERFORMANCE REPORTING AND

ANALYSIS


Demonstration of the software applications for step 7 of theprocess.

Present a summary of learning sights of software applications.


The organizational level scorecard (the first Tier) is translated into businessunit or support unit scorecards (the second Tier) and then later to teamand individual scorecards (the third Tier).

Cascading translates high-level strategy into lower-level objectives,measures and operational details and is the key to organization alignmentaround strategy.

The organization alignment should be clearly visible through strategy,using the strategy map, performance measures and targets, and initiatives.

Scorecards are used to improve accountability through objective andperformance measure ownership and desired employee behaviours areincentivized with recognition and rewards.

STEP 8: ALIGNMENT - CASCADING TO UNIT AND INDIVIDUAL SCORECARDS

3-TIER BALANCED SCORECARD CASCADING


Refer to the preceding learning activities. Apply step 8 of theBSC Building and Implementing process by cascading Tier 1strategies to Tiers 2 and 3 for your organization.



During this evaluation, the organization tries to answerquestions such as:

Are our strategies working?

Are we measuring the right things?

Has our environment changed?

Are we budgeting our money strategically?

STEP 9: EVALUATION - STRATEGY RESULTS AND REVISED STRATEGIES

STRATEGY EVALUATION – BSC FRAMEWORK


Refer to the preceding learning activities. Apply step 9 of theBSC Building and Implementing process by evaluating theBalance Scorecard for your organization. Ensure that thefundamental evaluation questions are addressed.



Critical implementation success factors

Applying the control process

SUSTAINING THE BSC

Balanced Scorecard is a transformation journey and change initiative, not aonce off project - ensure that you have designed a Change Managementplan which should run parallel to the Balanced Scorecard.

Maintain a committed and engaged leadership - change should be drivenfrom the top

Develop an organizational culture based on results by establishing astrategy management office

Focus the organization on strategy by holding review meetings organizedaround strategy

Enhance individual accountability for results through objective ownership

10 CRITICAL IMPLEMENTATION SUCCESS FACTORS

Align the organization, systems and employee performance aroundstrategy through a rewards and recognition programme

Create a performance, results oriented culture

Link budget formation, cost accounting and performance results

Emphasize continual improvement

Link key organization initiatives to the balanced scorecarddevelopment process

10 CRITICAL IMPLEMENTATION SUCCESS FACTORS

APPLYING THE CONTROL PROCESS


Refer to the preceding learning activities. Describe how youwill ensure sustainability and continuous improvement of theBSC Building and Implementing process for your organization.Ensure that you include the critical success factors and thecontrol methods and process that will be followed.



Summary of the key learning points

Questions

Conclusion

Good luck with the building, implementing, aligning andsustaining your BSC.

CONCLUSION

CHARLES COTTER

084 562 9446

[email protected]

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