Introduction to the Balance ScorecardMike Allen

2

Objectives of this Lecture

• Introduce the Balanced Scorecard• Understand the Basic Concepts surrounding

the Balanced Scorecard• Be able to follow the steps to build a

Scorecard• Be able to avoid the pitfalls associated with

Balanced Scorecards

3

Balanced Scorecard in 1992

The Balanced Scorecard: A Good Idea in 1992

“The Balanced Scorecard – Measures that Drive

Performance”

Harvard Business Review, 1992

3

4

A Great Idea in 2015!

50% usage in Fortune 500Harvard Business Review “Hall of Fame”50,000+ BSC on-line members

Balanced Scorecard

21 translations

17 translations

4

5

Implemented Strategies & Achieved Breakthrough Results

Saatchi & Saatchi

+ $2b

AT&T

+ $7b

Metro Bank

• 99% Merged Target Asset Retention

UPS

Southern Garden Wells Fargo

Cigna

+ $3b

Brown & Root

• #1 in growth & profitability

City of Charlotte Duke Children’s

Mobil

• Last to first• Cash flow +$1.2b• ROI 6% --> 16%

Hilton Hotels

• Least Cost Producer

3 years

• Customer Satisfaction • Market Revenue Index

• Revenues 9%• Net Income

33%

• # Customers450%

• Best Online Bank

• Customer Satisfaction = 70% • Public Official Award

• Customer Satisfaction #1• Cost/Case 33%

3 years

2-5 years 3 years

3-5 years 3 years

3 years 2 years

3 years 3 years

2-5 years

2 years

6

© 1998 Renaissance Worldwide, Inc. and Robert S. Kaplan, All rights reserved.

STRATEGY

HUMAN RESOURCES

BUSINESS UNITS EXECUTIVE TEAM

INFORMATIONTECHNOLOGY

BUDGETS AND CAPITAL INVESTMENTS

Question:How can complex organizations achieve results like this in such short periods of time?

Question:How can complex organizations achieve results like this in such short periods of time?

Alignment!Alignment!

7

A Gap Exists Between Mission/Vision/Strategy and Employees’ Everyday Actions

MISSIONWhy we exist

VALUESWhat’s important to us

VISIONWhat we want to be

STRATEGYOur game plan

EMPOWERMENT / PERSONAL OBJECTIVESWhat I need to do

TOTAL QUALITY MANAGEMENTWhat we must improve

8

The Balanced Scorecard Links Vision and Strategy to Employees’ Everyday Actions

BALANCED SCORECARDTranslate, Focus and Align

STRATEGIC INITIATIVESWhat are the priorities

MISSIONWhy we exist

VALUESWhat’s important to us

VISIONWhat we want to be

STRATEGYOur game plan

STRATEGIC OUTCOMES

SatisfiedSHAREHOLDERS

Delighted CUSTOMERS

Efficient and EffectivePROCESSES

Motivated & PreparedWORKFORCE

EMPOWERMENT / PERSONAL OBJECTIVESWhat I need to do

TOTAL QUALITY MANAGEMENTWhat we must improve

9

So what is being Balanced?

Long-term Strategic Advantages

Financial Measures

10

Four aspects of firm performance

Financials

Customers

Business Processes

Innovation & Learning

11

Financial Perspective

How do shareholders see us?• Survivors• Market Performer• Extraordinary Returns

12

Customer Perspective

How do customers see us?• Innovators• Service Quality Leader• Value

13

Internal Business Perspective

How do we see ourselves?• Innovators• Service Quality

Leader• Value

14

Innovation & Learning Perspective

What does the future look like?• Market Leadership• Adaptability• Employee

Engagement

15

Perspectives are Interrelated

Financial CustomerInternal

Business Processes

Innovation &

Learning

16

Perspectives are Interrelated

Vision & Strategy

Financial

Customer

Internal Business Processes

Innovation & Learning

18

Balanced Scorecard Strategy MapShareholder Value

Productivity Strategy Revenue Growth Strategy

Human, Information, and Organizational Capital

Price

Financial Perspective: the drivers of shareholder value

Product/Service Attributes

Strategic Competencies

Strategic Technologies

Climate for Action

Operations Theme

Customer Management

Theme

Innovation Theme

Regulatory and Society Theme

Customer Value Proposition

Quality Time Function Service Relations Brand

Relationship Image

Customer Perspective: the differentiating value proposition

Internal Perspective: how value is created and sustained

Learning & Growth Perspective: role for intangible assets – people, systems,

climate and culture

Basic Concepts

Balanced Scorecard

20

Basic Concepts

• Not just a set of measures

o Measures must relate to strategy

o Critical success factors – Key Performance Indicators

o Measures are interrelated

o Must understand how the perspectives influence each other

21

Basic Concepts

• Not a quick process

o Implementation requires

o Thoughto Analysiso Data-gatheringo Time

22

Basic Concepts

• Thought

o What is our strategy?

o What is critical to implementing the strategy?

o How can we measure our progress?

23

Basic Concepts

• Analysis

o What are the linkages between functions?

o What drives the achievement of goals?

o What measures correlate with the drivers?

24

Basic Concepts

• Data-gathering

o What data is available? What isn’t?

o How should it be gathered? Reported?

25

Basic Concepts

• Time

o Cannot be done in an afternoon

o Successful implementation may take several months

o Never-ending process

Implementation Steps

Balanced Scorecard

27

Implementation Steps

• Initiative must start at the topo Only senior management has grasp of overall

strategyo Only senior management has the authority to

make strategic decisions

28

Implementation Steps

• Requires teamwork, collaboration• Different perspectives, expertise required• Not a one-person or one-team job • Larger the group, buy-in more likely

29

Implementation Steps

• Interview senior managers to gain:o Input on strategic objectiveso Input on critical success factorso Input on possible measures

30

Implementation Steps

• Senior managers must develop tentative scorecard as a group

• Individual reactions must be heard• Suggested refinements must be worked

through• All to gain consensus!

31

Implementation Steps

• Expand consensus• Larger group refines tentative scorecard• Finishing touches• Consensus on vision, objectives, measures,

targets, implementation program, etc.

32

Implementation Steps

• Selection of metricso Must relate to strategic goalso Both leading and laggingo May not be “exact”o May come from external sourceso Not too manyo Not too few

33

Implementation Steps

• Roll-outo Link to data bases and information systemo Communicate to employeeso Develop scorecards for lower levels

34

Implementation Steps

• Periodic reviewso Has strategy changed?o Are the objectives valid?o Are the activities valid?o Are the measures valid?

• The scorecard evolves with the organization

Pitfalls – The Road to Disaster

Balanced Scorecard

36

The Road to Disaster

• Senior management not committedo No one else will be either

• Lack of consensuso Lack of commitment

37

The Road to Disaster

• Consultantso Good: Provide needed expertiseo Bad: Take over the project

38

The Road to Disaster

• Failure to communicate

• Employees don’t understand:o Strategyo Their roleso Importance of the scorecard measures

39

The Road to Disaster

• Lack of “push-down”o Lower levels operating as beforeo Operations are not tied to corporate scorecardo Scorecard is ignored at lower levels

40

The Road to Disaster

• Carve it in stoneo It won’t be perfect, evero Must evolve

• Delay implementation until perfect

Managing the Balanced Scorecard Enterprise

Balanced Scorecard

42

The Scorecard as a Change Agent

• Four stepso Translating the vision into actiono Communicating and linkingo Business planningo Feedback and learning

43

Translating the Vision

• Strategy must be reduced to a set of objectives and measures which can be operationalized

• “We want to be the best” just won’t do

44

• The Corporate Strategy is communicated to business units and agencies through key themes, opportunities for integration and synergies, and shared measures

• Cooperation and greater synergy between business units, staff and shared service functions, and across diverse organizational units becomes formalized through the Scorecard

Top-to-Bottom Strategy Alignment Unleashes Full Organization Potential

45

Translating the Strategy to Operational Terms…

Measurement is the language that gives clarity to vague concepts.

Measurement is used to communicate, not to control.

Building the scorecard develops consensus and teamwork throughout the organization

"If we succeed, how will we look to our shareholders?”

The Strategy

Financial Perspective

"To achieve my vision, how must I look to my

customers?”

Customer Perspective

"To satisfy my customer, at which processes must

I excel?”

Internal Perspective

"To achieve my vision, how must my organization learn

and improve?”

Organization Learning

46

…Makes Strategy Everyone’s Job!

Creating a Climate to Support

Strategic Change

Create Strategic Awareness

Align Personal Objectives

Align Incentive Compensation

1

2

3

• Insure that each individual has sufficient understanding of the strategy (You can’t execute what you don’t understand)

• Insure that each individual knows where they fit into the overall game plan

• Reinforce desired behavior and increase intensity of awareness

47

Communicating and Linking

• Corporate strategy must be communicated to all levels

• All levels must have objectives linked to corporate objectives

48

A Good Balanced Scorecard Tells the Story of Your Strategy

• Every measure is part of a chain of cause and effect linkages

• All measures eventually link to organizational outcomes

• A balance exists between outcome measures (financial, customer) and performance drivers (value proposition, internal processes, learning & growth)

49

Linking Compensation to the Balanced Scorecard

Experience with successful BSC users indicates that linking the BSC to incentive compensation is essential to success

Executive Perspectives Supported by Research

“People got that scorecard out and did the calculations to see how much money they were going to get. We could not have got the same focus on the scorecard if we didn’t have the link to pay.”

Brian Baker, Mobil“It would be hard to get people to accept a totally different way of measurement - which the BSC is - if you don’t reinforce that change through incentive compensation.”

Gerry Isom, CIGNA

Mercer survey of compensation practices in 214 companies (1999)

• 88% of responding companies consider the use of balanced scorecard measures linked to reward systems to be effective.

50

Business Planning

• Integrate the financial plan with the business plan

• Use the scorecard to allocate resources to critical activities

• Avoids the short-term spending mentality

51

Feedback and Learning

• Monitor short-term results to determine if progress is being made toward long-term objectives

• May need to refine measures, activities, objectives, even strategy

52

Making Strategy a Continual Process

Imbed the Strategy in Ongoing

Management Processes

Integrate Strategy with Planning and

Budgeting

Introduce the New Reporting System

Conduct the New Management

Meeting

1

2

3

• Establish stretch targets; Select initiatives, Align operational improvement programs (TQM, Six Sigma, Activity Based Management); Allocate resources to projects

• Develop systems for data collection, analysis, and reporting

• Open discussion of performance shortfalls; team problem-solving; adapting and learning

53

How are Organizations Doing on the Journey?

A survey of online members of the BSCol: 500 responses; 250 reported, “Yes, we have BSC.”50% of these: too early to tell about impact.

Of the 125 who had sufficient experience with the program:

Achieved breakthrough results 15% (n = 19)Some progress 64% (n = 80)No or limited results 21% (n = 26)

54

What Separates the Winners from the Losers?

Breakthrough Results Some Progress No ResultsExecutive Team has created a sense of urgency 84% 53% 20%Strategy translated to a strategy map and Balanced Scorecard 84% 41% 0%Corporate/Business Unit measures are linked & aligned 72% 39% 0%Employees are aware of the strategy 56% 32% 0%Individual and team goals are aligned with the strategy 42% 26% 0%The BSC is an integral part of the strategic planning process 100% 40% 0%The budget is driven by the strategy 42% 29% 0%

Building our MarketSim Strategy Map

Balanced Scorecard

56

Four aspects of firm performance

Financials

Customers

Business Processes

Innovation &

Learning

57

Balanced Scorecard Strategy MapShareholder Value

Productivity Strategy Revenue Growth Strategy

Human, Information, and Organizational Capital

Price

Financial Perspective: the drivers of shareholder value

Product/Service Attributes

Strategic Competencies

Strategic Technologies

Climate for Action

Operations Theme

Customer Management

Theme

Innovation Theme

Regulatory and Society Theme

Customer Value Proposition

Quality Time Function Service Relations Brand

Relationship Image

Customer Perspective: the differentiating value proposition

Internal Perspective: how value is created and sustained

Learning & Growth Perspective: role for intangible assets – people, systems,

climate and culture

58

Please fill out your course evaluation.

Click here:

https://www.surveymonkey.com/r/score15

We value your feedback!

Evaluations