Creating Alignment with Non-financial Performance Measuresnealeoconnor.com/download/speaking/20150200.pdf · 1 Creating Alignment with Non-financial Performance Measures Neale O'Connor

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Creating Alignment with Non-financial Performance Measures

Neale O'Connor PhD, GDip(Acc), FCPA(Aust) Associate Professor

National University of Singapore

Email: [email protected] Home page: www.nealeoconnor.com

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Why is measurement Important?

Measurement, Management and Control – But need stories and decisions

Strategy Alignment FWK •  Focusing • Competitors • Customers

Systems Thinking • Visualizing • Strategy Map

Measurement •  Formalizing •  Implementation mistakes • Attributes • Development

Takeaway of This Session

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•  System – role of employees

•  Creating alignment with strategy

Visualizing, Formalizing the System

(Long term)

•  Employee skills, attitude, teamwork

•  Customer behavior -‐ satisfaction

Decision making (Problem Solving)

(Short term)

Outcomes •  Empowerment •  Learning •  Fun place to work •  Word of mouth marketing

Outputs •  Low employee turnover •  On-‐time delivery •  Less Errors •  Fast cycle time •  Cheques processed •  Customer return

• What do we have to do today?

• To get what we want tomorrow?

Creating alignment with non-‐financial performance measures

♣ Learning

♣ Accurate ♣ Decision ♣ Making

♣ On-Time ♣ Decision ♣ Making

♣ Goal ♣ Alignment

♣ Systems ♣ Thinking

♣ Measures

♣ Strategic ♣ Objectives

♣ SMS ♣ GOAL

The Balanced Scorecard

© Neale O'Connor 2010

What is the BSC Strategic Objectives Measurement Systems Thinking

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What decision and/or story can this measure help with? Unmetric score - Facebook popularity, fans growth rate, posts vs engagement, Twitter, follower growth rate, proactive tweets, Average reply time (source: simpliflying.com)

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Cost control 28.42% (183)

Competition 12.73% (82)

Sales growth 11.80% (76)

HR & productivity 7.92% (51)

Lower price & profit 6.21% (40)

Product Development, R& D

5.28% (34)

Technology innovation 5.28% (34)

Brand building 3.11% (20)

Maintain market share 2.64% (17)

Poor economy/ financial crisis

2.48% (16) Delivery & OM 2.33% (15)

Paradigm shift / Market uncertainty

1.86% (12)

Quality improvement 1.86% (12)

Capital/ investment 1.71% (11)

Go international 1.40% (9)

Currency Appreciation/ Depression 1.24% (8)

Management 1.24% (8)

Environmental / Sustainability issues

0.93% (6) Fake product 0.62%

(4)

Rate of expansion 0.31% (2)

Quick response to the market 0.16% (1)

Feedback 0.16% (1)

Partnership 0.16% (1)

Culture 0.16% (1)

Number one challenge among Chinese suppliers 2011 (n=644) Cost control

Competition

Sales growth

HR & productivity

Lower price & profit

Product Development, R& D

Technology innovation

Brand building

Maintain market share

Poor economy/ financial crisis

Delivery & OM

Paradigm shift / Market uncertainty

Quality improvement

Capital/ investment

Go international

Currency Appreciation/ Depression

Management

Environmental / Sustainability issues

Fake product

Rate of expansion

Quick response to the market

Feedback

Partnership

Culture

Touch screen manufacturer

HR & Productivity – Labour turnover, Min wages etc

Long term Issues are not big

♣ COPYRIGHT © 2012 Neale G. O'Connor. www.ChinaSupplier1000.com All rights reserved.

April – September 2012 (n = 342) Compe&&on 12% à 23%

Product Development 5% à 9%

Poor Economy 2.4% à 6%

Major Challenges Facing Chinese Owned Factories


What is the BSC Strategic Objectives Simulation Game Systems Thinking

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Case Example #1

CTI Ltd’s Incentive System

Appendix A

Critical factors in CTI’s strategy CTI

§  Two factors were critical to CTI’s profit growth strategy: ú  Reliance on sales of higher margin products

ú  Cash collection.

§  Incentive plan change ú  With increasing introduction of new products and growth in sales –

these two factors drove CTI to change the incentive plan to direct management effort towards these objectives.


Case Study

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Introduction n  Situation

n  Old incentive plan – sale bonus (up to 40%)… resulted in

n  Cash collection problemsà 6-‐10 months of sales in ACCREC

n  New products were being developed with increasing numbers of features that allowed CTI to gain higher margins from the units sold

n  Other problems n  How to manage uncontrollable factors – market factors? n  How to encourage communication, teamwork, n  and managerial skill development?

n  Elaborate performance measurement and incentive plan introduced

Case Study

© Neale O'Connor 2010 10

Setting of this study Quotes on the incentive plan

n  “We want people to be able to see everything. They should

not just be able to make sales, but should be able to motivate people, organize things strategically, putting down their thoughts into paper, think logically, and express themselves in a coherent fashion.”


Case Study

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Components of General multiple measure formula


Bonus compensation formula = (Employees + 1) * (General formula) + (Direct sales formula)

Direct sales formula = Products -‐ 50 cents per old product sold, 1.00 per new product sold.

General formula = 5000 + (Points – 60) * 100 Points awarded according to Objective assessment formula and Objective (Financial) Measures

(45 points)

Points awarded according to Subjective assessment and Objective (Non-‐Financial)

Measures (30 points)

Points awarded according to Subjective assessment and Subjective measures

(25-‐ 35 points)

Sales components - Cash collection (40)a - Relative branch office costs (5)a

Service level components - Execution of routine maintenance (5)b - Major incident complaint (10)b - Customer satisfaction survey (15)b

Management capability components - Regional office daily management (15) - Evaluation by VP – Teamwork, cooperativeness (10) - Evaluation by President and VP sales – proactive, innovative e.g., Making suggestions doing things beyond responsibility and solving difficult problems -‐ Bonus points (10)

Case Study

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Seminar Task

What is the Balanced Scorecard? Which of the following areas does your firm emphasize the most in communications?

-‐ Financial -‐ Customer -‐ Internal processes -‐ Learning & Growth



T

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LOW MEDIUM HIGH

Managing the Balance in measures, business system and internal and external components

Learning and Growth – People (Skills, Satisfaction)

-‐ Information system -‐  Organization culture (Norms & Values)

- Highest control over change - Change takes longer = less attention

Customer Product/Service attributes,

Relationship, Image -‐ Low control over change

-‐ Change can be fast = more attention

Financial Revenue – Costs -‐ No control

Increasing amount of control over the business model

Increasing amount of attention that is typically given by management

Internal Business Process – Innovation, Operations, Customer Service,

Regulatory requirements - Medium control over change - Change can be fast (ie BPR)



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Exhibit 2.7. Benefits to Adopters (Page 13)

Benefits to Adopters

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

Other

Increased revenues

Ability to make strategic decisionsfaster w ith better data

Decreased costs

Ability to link performance tocompensation

Understand measure and strategycause and effect

Ability to align employee behavior w ithstrategy

Organizational alignment

Increased communication

Ability to measure performance

% of Adopters



The Balanced Scorecard – Benefits

Source: Lawson, Raef, Hatch, Toby, & Denis Desroches, Scorecard Best Practices: Design, Implementation and Evaluation. Wiley 2008 15

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Strategy Alignment FWK • Focusing • Competitors • Customers

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What is the BSC Strategic Objec&ves Measurement Systems Thinking

How do we implement strategy?

Strategy Formulation

Strategy Execution

SCA

Compe

titors

Customer

Customer Internal Processes Learning & Growth

Strategy Map-‐Business Model

Benchmarking , Memory, Learning

Action Plans MKT

OP

HRM

Rank Action Date

Initiatives Measure (KPI) Target

Balanced Scorecard

Communicating People controls -Personnel -Culture

Formulation of actions + targets Action controls -Behavioral Constraint (Locks) -Preaction Reviews (Budget setting) -Action Accountability (Standard operating procedures) -Redundancy

Formulation of targets + rewards Results controls -Measure -Targets -Rewards

HRM

MKT

OP

1. Focusing 2. Visualizing 3. Formalizing

MEASUREMENT

3. Formalizing

Cannot manage what you cannot measure

Aligning (role clarity) Action controls (dos and don’ts) Results controls (incentives)


1. Strategic Objectives What is the basis for success? What is the Sustainable Competitive Advantage (SCA)?

ú  Implementation steps

ú  Why do we start with strategy? -‐ Direction of effort

ú  How do we implement?

Learn how to beat competitors and provide value to customer

Develop consensus as to the priorities and initiatives to undertake in the short

term (next 12 months)



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Takeaway of Tonight’s Session

2. Systems Thinking 系统考虑 What would success look like?

ú  Use strategy map (systems thinking) to link long term success (strategy) to daily operational success



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Systems Thinking • Visualizing • Strategy Map • Connecting the Dots

2. Systems Thinking

Strategic Theme: Customer Service at British Airways Net Yield per

Revenue Passenger Kilometer

Willingness To Recommend

Customer Satisfaction

Cabin Crew Service Employee Satisfaction

Management Practices and

Work Relationships

Leadership and Strategic

Direction

Personal Development and Growth

Departure on Time

Meal Rating

Check-in Service

+

+

+ +

+ + +

+

+

Source: “Management Learning not Management Control: The True Role of Performance Measurement” A. Neely & M. Al Najjar, Californian Management Review, Spring 2006. Vol 38, No. 3, pp 101 – 113.

What is the BSC Strategic Objectives Systems Thinking Measurement

Strategic Theme: Operations Management Rapid Ground Turnaround Time

Strategy Map

Process: Operation Management Theme: Ground Turnaround

Objectives

-  Profitability -  Grow revenues -  Fewer planes

-  Attract and retain more customers

-  Flight is on time -  Lowest price

-  Fast ground turnaround

-  Develop the necessary skills

-  Develop the support system

-  Ground crew aligned with strategy

Grow revenues

Fewer planes

Profit and RONA

On-time service

Lowest prices

Attract and retain more customers

Fast ground turnaround

Strategic job Ramp agent

Strategic systems Crew scheduling

Ground crew alignment

Balanced Scorecard

Measurement Target

-  Mark value -  Seat revenue -  Plane lease cost

-  30% CAGR -  20% CAGR -  5% CAGR

-  #repeat customers

-  #customers

-  FAA on-time arrival rating

-  Customer ranking

-  70%

-  Increase 12% annually

-  #1

-  #1

-  On-ground time -  On-time departure

-  30 minutes -  90%

-  Strategic job readiness

-  Info system availability

-  Strategic awareness

-  % ground crew stockholders

-  Yr.1-70% Yr.2-90% Yr.3-100% -  100%

-  100%

-  100%

Action Plan

Initiative Budget

-  Implement CRM system

-  Quality management

-  Customer loyalty program

-  $XXX

-  $XXX

-  $XXX

- Cycle-time optimization

-  $XXX

-  Ground crew training

-  Crew scheduling system rollout

- Communications program

-  Employee Stock Ownership Plan

-  $XXX

-  $XXX

-  $XXX

-  $XXX

Adapted from: “The Strategic Focused Organization” Robert S. Kaplan, David P. Norton (2001)


Factors leading to failure of BSC at Philips Lighting

§  Fishbone diagram

FAILURE

Unreliable and untimely information

No clear link to strategy

Information overload

A Strategy Map describes what you need to do to deliver competitive advantage

•  EXAMPLE – FAST FOOD RESTAYRANT

Financial

Customer

Internal Business Process

Learning & Growth

Profit

Customer Loyalty

Quality Food

Fast Service

Employee Skills & Attitude


Strategic Themes (The “Strategies”!)

1.  Drive Sales through fantastic coffee 2.  Improve loyalty by providing a great

customer experience 3.  Improve margins by being an efficient

business Format for a Strategic Theme – Desired “Business” Outcome [by the means to achieve it]


Financial Results

Our Customers

Our Business Process

Our People

Increase Sales Revenue

Increase Operating Profit

Reduce Operating Costs as a % of Sales

Offer a Great Coffee

Sensation!

Increase Customer Loyalty – Get the

Customers to Come Back!

Quick, Reliable & Friendly, Service- Don’t Keep Customers Waiting

Serve Customers

Facilities Management

Supply Chain Management

Product Innovation

Standardize the New Coffee Making Process

Modernize the Look of the Coffee Shop –

Refurbish With Glass & Stainless

Buy a High-Tech Italian Coffee

Machine

Change from Nescafe Instant to an Expensive

Italian Blend

Move to Purchasing Raw

Materials On-Line

Improve Inventory Management of Our

Raw Materials – Cups, Milk etc

Train Staff to get a Barista Qualification

At www.coffeeshop.com.au Develop a

Customer-Focused Culture

Train Staff to Order On-Line


Financial Results

Our Customers


Our People





Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







What is the BSC Strategic Objectives Measurement Systems Thinking Theme 1: Drive Sales Through Fantastic Coffee

Financial Results

Our Customers


Our People





Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







What is the BSC Strategic Objectives Measurement Systems Thinking Theme 2: Improve Loyalty by Providing a Great Customer Experience

Financial Results

Our Customers


Our People








Theme 3: Improve Margins by Being an Efficient Business




Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line


Financial Results

Our Customers


Our People

Increase Operating Profit Reduce

Operating Costs as a % of Sales


Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







What is the BSC Strategic Objectives Measurement Systems Thinking Theme 1: Drive Sales Through Fantastic Coffee


Financial Results

Our Customers


Our People




Sensation!


Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line










What is the BSC Strategic Objectives Measurement Systems Thinking Theme 2: Improve Loyalty by Providing a Great Customer Experience

Financial Results

Our Customers


Our People




Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







Theme 3: Improve Margins by Being an Efficient Business



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Measurement • Formalizing • Implementation mistakes

• Attributes • Development

Non-‐financial performance measures: Customer Satisfaction with MTRC Train Services and Facilities


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AIributes Importance (0-‐10) Enough space in carriages

Cleanliness and tidiness of carriages

Ventilation in trains

Reliability of Journey time

Waiting time at platform and frequency of services

Safety precaution and facilities

Announcements in trains – clear and useful to passengers

Relation between Incentive Plan, Nonfinancial Measures, and Financial Performance

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Plan

LRETURN

COMPLNTS

REVENUE

COSTS

PROFIT

+

+

+

+

+

+

-

+

-

Nonfinancial Performance

Financial Performance

1. Checklist of the criteria for excellent measures

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A. Does it have clear link to strategy?

•  Idea: design your measures at the same time you formulate your goals.

B. Is it owned by someone?

•  Idea: find a person who has enough authority to respond to the measure.

C. Can it be brought to life?

•  Idea: define the details (how to calculate it, how often and from which data) of bringing your measure to life to test its viability.

D. Are you able to track it regularly over time?

•  Idea: measure more frequently or find a lead indicator that you can measure more frequently.

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E. Does it give you more value than it costs?

•  Idea: remove waste and duplication from data collection and reporting, e.g. use sampling instead of measuring it all.

F. Do users understand it?

•  Idea: find the simplest measure that can convey the needed information.

G. Does it inspire the right behavior?

•  Idea: involve staff in designing the measures so they have more understanding and buy-in.

1. Checklist of the criteria for excellent measures

Types of Measures / Indicators

§  Key Result Indicators ú  Customer Satisfaction ú  Profitability/campaign

§  Performance Indicators ú  % Sales Increase ú  % Campaign Conversion

§  Key Performance Indicator ú  Availability ú  Delays in delivary ú  Resolution on 1st touch

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Key Result Indicator

Performance Indicator

Key Performance

Indicator

Source Key Performance Indicators. D. Pamenter

Financial Results

Our Customers


Our People





Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







Strategy Map


Financial Results

Our Customers


Our People





Sensation!




Serve Customers



Product Innovation





Machine


Italian Blend


Materials On-Line







Sales x Product Expenses/Sales %

Service Quality Index

NOPAT Net Operating Profit

After Tax Customer Satisfaction Survey Result

Sales Repeat Customers/Total Sales %

Non-Conformances to Standardized Coffee

Making Process

Install Italian Coffee Machine (Y/N?)

Cleanliness Index

% Progress Barrista Training

Staff Satisfaction Survey % Staff Trained On-Line Ordering

Number & Type of Stockouts

Refurbishment Project (On Time, On Budget, On

Spec)

% Materials Ordered On-Line


Strategy Maps – Link Measures

with Strategy

Common Mistakes Firms Make in Measuring Non-‐financial Performance


Validate the Links

Choice of Measures –

Avoid Overload

Right Targets

Measurement, Weighting & Updating

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2 3 4 5

Your Challenge

§  Take a look at a sample of measures your organisation has now, and work out which are tracking activities, which are tracking outputs and which are tracking outcomes. See if there is a sensible cause-effect relationship between them.

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•  System – role of employees

•  Creating alignment with strategy

Visualizing, Formalizing the System

(Long term)

•  Employee skills, attitude, teamwork

•  Customer behavior - satisfaction

Decision making

(Problem Solving)

(Short term)

Outcomes •  Empowerment •  Learning •  Fun place to work

•  Low turnover Outputs •  On-time delivery •  Less Errors •  Fast cycle time •  Cheques processed •  Customer return •  Word of mouth marketing

• What do we have to do today?

• To get what we want tomorrow?

Creating alignment with non-‐financial performance measures

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Why is measurement Important?

Measurement, Management and Control – But need stories and decisions

Strategy Alignment FWK •  Focusing • Competitors • Customers


Measurement •  Formalizing •  Implementation mistakes • Attributes • Development

Takeaway of This Session

♣ Learning

♣ Accurate ♣ Decision ♣ Making

♣ On-Time ♣ Decision ♣ Making

♣ Goal ♣ Alignment

♣ Systems ♣ Thinking

♣ Measures

♣ Strategic ♣ Objectives

♣ SMS ♣ GOAL

The Balanced Scorecard



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What is the BSC Strategic Objectives Simulation Game Systems Thinking

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Case Example #2

Xinan JV Balanced Scorecard

System Appendix A

Xinan JV -‐ Two Challenges

1.  Product development à Pharmaceutical Market reform by the Chinese government,

through the State Drug Product Council.

2.  Sales manager development à Sales force had an “old Chinese way of thinking” (short term) mindset.


Case Study

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Xinan JV -‐ Product development

1.  Reduced drug prices à  Reforms in the Chinese pharmaceutical market, such as the reduction of

drug prices of between 30% to 50% across the board,

2.  Increased competition à  Introduction of tendering in hospitals, which increased the competition for

the supply of drugs. For example, local generic product manufacturers were bidding between 30% and 50% below Xinan JV’s price.

3.  Speed up the development of new products à This served as a wake-‐up call for Xinan JV, which had an aging portfolio of

products that were largely protected from competition, and the challenge for the company was to speed up the development of new products.


Case Study

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Xinan JV -‐ Sales manager development

1.  “old Chinese way of thinking” mindset à Fail to develop customer relationships à Lack of motivation to develp product knowledge

Faced with these two challenges, Xinan JV set up an action plan

that focused on the development and management of its intangible assets. This included the development of new products and the restructuring and development of the skills of its sales managers.


Case Study

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Xinan JV -‐ Balanced Scorecard Implementation (2002)

§  Objective p  Strategy -‐ Making medicine accessible – To be a leader in China

branded generic business in 5 years time. p  Improve communication and control over strategy and the

associated objectives and initiatives


Case Study

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Information Capital L4. ERP system (2003)

Financial Customer

–  Desired marketplace outcomes

–  Customer benefits

Internal

–  Internal Do-Well’s

Learning and Growth

– Competencies, culture, systems

M2. Build strong brand image

M1. Increase market share

M4. Attractive core product portfolio (AB, CV, GI, CNS,OTC,etc.)

M5. Enhance Gov. relationship

M6.High service level

Operation Management Processes

I1. Improve cost of goods I7. Improve internal

operation I6. GMP updgrading

I8. National HR Policy & management

Human Capital L1. Up-grade skill of

employees

M3.Competitive prices

Organizational Capital L3. Commitment & Result

Orientated Culture L2. Improve internal &

external communication

F3. ROCE: 5%

Customer Management Processes

I4. Restructure sales & marketing team

I9. Tender management I5. Improve customer relation

Innovation Processes I2. Portfolio selection, speedy

registration & launch I3. Reengineering R&D

capability

F2. Operating margin: 10%

F1. Revenue increase annual growth rate: 10%

Long-Term Shareholder Value

Productivity Strategy

Growth Strategy


Case Study

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Problems in implementing the balanced scorecard

1.  Training and participation

2.  Frequent reviews

3.  Contingency plans were difficult to show


Case Study

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Why is measurement important? Measurement, Management and Control Stories and decision making The Balanced Scorecard •  Strategy •  Systems thinking • Measurement

Documents

Creating Alignment with Non-financial Performance Measuresnealeoconnor.com/download/speaking/20150200.pdf · 1 Creating Alignment with Non-financial Performance Measures Neale O'Connor