Balanced Scorecard : Brief Understanding

Balanced ScorecardWhy do we need it, and How it helps us to manage performance

Dexa Overseas Business Unit Meeting, 6 December 2010

Satrio Pramudono

CRM - AAM

Pre Work• Write down your top 5 problems in managing

performance of your team / business.

• How do you communicate the Company Vision to the team?

• What do you usually discuss in the periodical meeting?

The Picture

looks Good isn’t it?

1) Paradigm

• "The digital watch didn't come from established watch companies,

• the calculator didn't come from slide rule or adding machine companies,

• video games didn't come from board-game manufacturers Parker Bros or Mattel,

• the ballpoint pen didn't come from fountain pen manufacturers, and

• Google didn't come from the Yellow Pages"

Bob Seidensticker, Futurehype

Side notes on BSC

1. BSC should be a Thought Process and a Tool nota Religion (e.g. Excel™ vs. Budgeting)

2. BSC ≠ Appraisal3. New BSC implementations should start linking

with Budgeting right from the beginning4. The ‘proper’ BSC approach should rightly fully

be heavily customized to the organization5. ‘Strategic Planning’ trainings should be provided

before ‘BSC’ trainings6. Clear definitions for Accountability vs. Impact vs.

Influence vs. Assistance

The fundamental questions

Financial perspective

Customer perspective

Process perspective

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

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

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

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

To achieve our vision, how will we sustain our ability

to change and improve?

Balanced Scorecard is a

ManagementSystem

Not just a measurement system

You do not just measureyour heart beat

You use the heart rate monitor

to manage your exercise

In order to

Last longerFeel good

Improve fitnessControl weight

…

… and to improve learning

Rule #1: Exercise boostsbrain power

Dr. John MedinaBrain Rules

Mission statement

• tells you what the company is now

Vision statement

• outlines what a company wants to be

Strategy

• is a long term plan of action designed to achieve a particular goal, most often "winning"

A map is handy to communicate(=Strategy map)

how you plan to get(=Strategy)

from where you are(=Mission)

to where you want to be(=Vision)

Balanced Scorecard

is amanagement

tool

And should be used in management meetings

100% Management commitment

to build and use a

management system

2) Step-by-Step

Strategy

Assessment

Objectives

Strategy Map

Performance Measures

Initiatives

Automation

Cascade

Evaluation

UNDERSTAND THE TERMS

A desired future outcome of an organization

The reason of organization’s existence, what we do today to achieve vision

Standard of belief and behaviors that guide people’s actions

:

:

:VALUES

MISSION

VISION

It is a deliberate process of choosing a set of activities differently from competitors, in order to deliver a unique mix of value

:STRATEGY

STRATEGY

MAP

An interrelationship among strategy objectives in cause-effect format that reflects the “journey” of an organization’s strategy

:

STRATEGIC

OBJECTIVES

A concise statement describing the major activities that an organization must do well in order to execute its strategy. A cause-effect mapping of SO is termed as strategy map.

:

INITIATIVES/

ACTION PLAN

Specific projects that need to be implemented in order to support the achievement of strategic objectives. A project normally has a beginning and ending points.

:

UNDERSTAND THE TERMS (cont’d)

Assessment

Step One of the scorecard building process starts with an assessment of the organization’s Mission

and Vision, challenges (pains), enablers, and values.

Step One also includes preparing a change management plan for the organization, and

conducting a focused communications workshop to identify key messages, media outlets, timing, and

messengers.

1. ASSESSMENT

Developing StrategyExternal Analysis

Threats and opportunities

in environment

Key successfactors

Creation of strategyby top management

Socialresponsibility

Top managementvalues

Evaluation andchoice of strategy

Implementationof strategy

InternalAnalysis

Strengths andweaknesses oforganization

Distinctivecompetences

Macro Industry

Vision

Mission

StakeholderExpectation

2. STRATEGY

Intro: Market Discipline

"Exactly what I need"

Customized products

Personalized communications

"They're very responsive"

Preferential service and

flexibility

Recommends what I need

"I'm very loyal to them"

Helps us to be a success

"They are the most innovative"

"Constantly renewing and creative"

"Always on the leading edge"

"A great deal!"

Excellent/attractive price

Minimal acquisition cost and hassle

Lowest overall cost of ownership

"A no-hassles firm"

Convenience and speed

Reliable product and service

Product Leadership

OperationalExcellence

CustomerIntimacy

2. STRATEGY

Operational

Excellence

• Competitive price

• Error free, reliable

• Fast (on demand)

• Simple

• Responsive

• Consistent

information for all

• Transactional

• 'Once and Done'

Customer Intimacy

• Management by

Fact

• Easy to do

business with

• Have it your way

(customization)

• Market segments

of one

• Proactive, flexible

• Relationship and

consultative

selling

• Cross selling

Strategy: Value DisciplinesProduct Leadership

• New, state of the art products or services

• Risk takers

• Meet volatile customer needs

• Fast concept-to-counter

• Never satisfied -obsolete own and competitors' products

• Learning organization

2. STRATEGY

Operational Excellence(low cost producer)

Ref: The Discipline of Market Leaders, Michael Treacy & Fred Wiersema; 1995

Product Leadership(best product)

Customer Intimacy(best total solution)

Strategy: Disciplines

HP well-balanced portfolio, mass customization

Acer super lean cost structure, aggressive pricing

Apple powerful products, premium

pricing, limited range

Still Doing well in 2009

2. STRATEGY

Financial Perspective“To Succeed financially, how should we appear to our shareholders?”

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

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

Learning & Growth Perspective“To achieve our vision, how will we sustain our ability to change and improve?”

VISION &STRATEGY

Source: Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System”

Yesterday

Today Today

Future

BALANCED SCORECARD: FOUR PERSPECTIVES

3. OBJECTIVES

CAUSE & EFFECT RELATIONSHIP: FAST FOOD RESTAURANT

Profitability

CustomerLoyalty

QualityFood

FastService

EmployeeSkills &Attitude

Financial

Customer

Internal Business Process

Learning & Growth

4. STRATEGY MAP

UNDERSTANDING FINANCIAL PERSPECTIVE

4. STRATEGY MAP

THE FINANCIAL PERSPECTIVE PROVIDES THE TANGIBLE DEFINITION OF VALUE

Productivity Strategy

Improve Cost

Structure

Increase Asset

Utilization

Short Term

FinancialPerspective

Growth Strategy

Expand Revenue

Opportunities

Enhance Customer

Value

Long Term

Long-Term Shareholder

Value

• Reduce cash expenses

• Eliminate defects; improve yields

• Manage capacity from existing assets

• Make incremental investments to eliminate bottlenecks

• New sources of revenue (new products, markets, partners)

• Improve profitability of existing customers

4. STRATEGY MAP

MEASURING STRATEGICFINANCIAL THEMES

Strategic Themes

Revenue Growth & Mix

Cost Reduction/ProductivityImprovement

AssetUtilization

Sales growth rate by segmentPercentage revenue from newproduct, services, and customers

Revenue/Employee Investment (percentage ofSales)

R&D (percentage of sales)

Share of targeted customers andaccounts

Cross-sellingPercentage revenues from newapplications

Customer and product lineprofitability

Cost versus competitors’Cost reduction ratesIndirect expenses

(percentage of sales)

Working capital ratios (cash-to-cash cycle)

ROCE by key asset categoriesasset utilization rates

Customer and product lineprofitability

Percentage unprofitable customers

Unit costs (per unit ofoutput, per transaction) Payback

ThroughputBu

sin

ess

Un

it S

trate

gy

Gro

wth

4. STRATEGY MAP

UNDERSTANDING CUSTOMER PERSPECTIVE

4. STRATEGY MAP

THE CUSTOMER PERSPECTIVE -CORE MEASURES

Market Share

CustomerSatisfaction

Customer Retention

CustomerAcquisition

Customer Profitability

MarketShare

CustomerAcquisition

CustomerRetention

CustomerSatisfaction

CustomerProfitability

Reflects the proportion of business in a given market (in terms of number of customers, dollars spent, or unit volume sold) that a business unit sells.

Measures, in absolute or relative terms, the rate at which a business unit attracts or wins new customers or business.

Tracks, in absolute or relative terms, the rate at which a business unit retains or maintains ongoing relationships with its customers.

Assesses the satisfaction level of customers along specific performance criteria within the value proposition.

Measures the net profit of a customer, or a segment, after allowing for the unique expenses required to support that customer.

4. STRATEGY MAP

BUILDING THE STRATEGY MAP:STRATEGY PROPOSITION

Price Quality Time Selection Brand

Operational Excellence Strategy

Product/Service Attributes Relationship Image

Quality and selection in key categories with unbeatable prices

“SmartShopper”

Customer Intimacy Strategy

Service Relationships Brand


“TrustedShopper”

Personal service tailored toproduce results forcustomer and build

long-term relationships”

Adapted from: “The Strategy Focused Organization” Robert S. Kaplan, David P. Norton

4. STRATEGY MAP

Product Leadership Strategy

Time Functionality Brand


“The BestProduct”

Unique products andservices that “push the

envelope””

Differentiator

GeneralRequirement


BUILDING THE STRATEGY MAP:STRATEGY PROPOSITION

4. STRATEGY MAP

INTERNAL BUSINESS PROCESS PERSPECTIVE

4. STRATEGY MAP

Executive Management

THE ACCOUNTABILITY DILEMMA

PROCESS

Func Mgmt

Func Mgmt

Func Mgmt

Func Mgmt

Order Generation

Order Fulfillment

Developing New Products/Services

On-going Customer Support

CUSTOMER

4. STRATEGY MAP

IDENTIFYING STRATEGICINTERNAL BUSINESS PROCESSES

InnovationProcesses

CustomerManagement

Processes

OperationalProcesses

• Invention• Product• Development• Exploitation

(speed to market)

• Supply ChainManagement

• OperationsEfficiency: Cost,Quality, Cycle Time

• Capacitymanagement

• SolutionDevelopment

• CustomerService

• Relationshipmanagement

• Advisory Services

Strategy

ProductLeadership

CustomerIntimacy

OperationalExcellence

Strategic Practices

Meet Basic Requirements


4. STRATEGY MAP

LEARNING AND GROWTH PERSPERCTIVE (FUTURE)

4. STRATEGY MAP

AT THE END OF THE DAY,

YOU BET ON PEOPLE, NOT ON

STRATEGIES.

STRATEGIES ARE

INTELLECTUALLY SIMPLE,

THEIR EXECUTION IS NOT.

YOUR STRATEGIES WILL NOT

MAKE YOU A BETTER

COMPANY.”

Allied Signal CEO: Lawrence Bossidy

4. STRATEGY MAP

LEARNING AND GROWTH PERSPECTIVE

• Reflect strategy in learning and growth

• Consists of three principal categories:

Human Capital

Information Capital

Organization Capital

• “People aspect” in Balanced Scorecard

4. STRATEGY MAP

LEARNING & GROWTH MEASUREMENT FRAMEWORK

Results

EmployeeSatisfaction

EmployeeProductivity

EmployeeRetention

TechnologyInfrastructure

Climate forAction

StaffCompetencies

Core Measurements

Enablers

4. STRATEGY MAP

3) Examples

Before we start…

Which comes first?

1. Strategies -> KPI?

2. KPI -> Strategies?• already know our priorities, aware of all strategy

options available

• creating something UNIQUE, INNOVATIVE and DISRUPTIVE e.g. Air Asia

• conducting a business Turnaround e.g. MAS

5. MEASURES

Before we start…

Which comes first?

1. Strategies -> KPI?

2. KPI -> Strategies?• want to find out possible strategies,

• determine our priorities first thru selection of important KPIs;

• growing through ‘normal’ business, not a Turnaround.

5. MEASURES

Example: Selection of KPIs for BSC• Customer satisfaction• Customer loyalty• Market share• Customer complaints• Complaints resolved on first contact• Return rates• Response time per customer request• Price relative to competition• Total cost to customer• Average duration of customer

relationship• Customers lost• Customer retention• Customer acquisition rates• Percentage of revenue form new

customers• Number of customers• Annual sales per turnover

• Win rate (sales closed/sales contact)• Customer visits to the company• Hours spent with customers• Marketing cost as a percentage of sales• Number of ads placed• Number of proposals made• Brand recognition• Response rate• Number of trade shows attended• Sales volume• Share of target customer spending• Sales per channel• Average customer size• Customers per employee• Customer service expense per customer• Customer profitability• Frequency (number of sales transactions)

5. MEASURES

Wrong KPIs

“What is the moral of

the story?”

5. MEASURES

BANK XYZ STRATEGY MAPThe Revenue Growth Strategy“Improve stability by broadening the sources of revenue from current customers.”


CustomerPerspective

InternalPerspective

Learning & GrowthPerspective

ImproveROE

Broaden Revenue Mix

Improve OperatingEfficiency

Increase CustomerConfidence in OurFinancial Advice

Increase CustomerSatisfaction ThroughSuperior Execution

UnderstandCustomerSegements

DevelopNew

Product

Cross-Sellthe Product

Line

Shift toAppropriate

Channel

MinimizeProblems

ProvideRapid

Response

IncreaseEmployee Productivity

Access toStrategicInformation

DevelopStrategicSkills

Align PersonalGoals

The Productivity Strategy“Improve operating efficiency byshifting customers to more cost-effective channels of distribution.”

5. MEASURES

Objectives Measures Weight Target Initiatives

Financial

F1 - Improve ROEF2 - Broaden Revenue Mix

F3 - Improve Operating Efficiency

Customer

C1 - Increase Customer Confidence

C2 - Increase Customer SatisfactionThrough Superior Execution

Internal

I1 - Understand Customer Segment

I2 - Develop New Products

I3 - Cross-sell the Product Line

I4 - Shift to Appropriate Channel

I5- Minimize Problems

I6 - Provide Rapid Response

Learning & Growth

L1 - Develop Strategic SkillsL2 - Access to MISL3 - Align Personal Goals

F1a. ROEF2a. Revenue GrowthF2b. Revenue MixF3a. Cost per account

C1. Depth of Relationship

C2a. Customer Retention

C2b. Customer Satisfaction Survey

I1. Mind-share surveyI2a. New Product RevenueI2b. Product Development Cycle

I3. No products per customerI4. % new channels

I5. Service Error Rate

I6. Request Fulfillment Time

L1. Strategic Skills Training DaysL2. MIS Availability RatioL3. Personal Goal Alignment (%)

Completion

timeBudget

BANK XYZ BALANCED SCORECARD

5. MEASURES

Strategic Objectives Strategic Initiatives PIC Completion

Date

Budget Week

1 2 3 4 5 6 7 8 9 … 52

F2. Perluas jenis produk yang dijual High Sales Performance Campaign to all

branches

National

SalesDirector

Jan 30, 2003 Rp. 150,000,000

C2. Tingkatkan kepuasan pelanggan ataspelayanan

Customer Loyalty Awards (NetworkDirector)

BBD 2003 Rp. 750,000,000

Best Branch in Retention Incentives BBD 2003 Rp. 1,500,000,000

Objectives Measures PIC Period* Base line & Target Unit of

Measure

Strategic Initiative (PIC)

2001 2002 2003 2004

F1. Tingkatkan ROE F1. ROE CFO Q 8 10 12 14 %

F2. Perluas jenis produk

yang dijual

F2a. Tingkat

pertumbuhan pendapatan

Sales & Mktg

Dir

M 7.8 15 20 20 % High-Sales-Performance campaign to

all branches (National Sales

Coordinator)

(to be completed)

(to be completed)

C2. Tingkatkan kepuasan

pelanggan atas pelayanan

C2a. Retensi pelanggan Branch Banking

Director (BBD)

M 65 85 90 95 % Customer Loyalty Awards (BBD)

Best Branch in Retention incentives

(BBD)

(to be completed for the

rest of the scorecard)

FROM STRATEGY TO

MEASURES AND ACTIONS

38

Strategi Pertumbuhan Penjualan“Tingkatkan konsistensi penghasilandengan perluas produk yang dijual.”

Strategi Produktivitas“Kurangi biaya dengan meningkatkanefisiensi pelayanan.”


CustomerPerspective

InternalPerspective

Learning & GrowthPerspective

TingkatkanROE

Perluas JenisProduk yang Dijual

Tingkatkan EfisiensiOperasi

TingkatkanKepercayaan Pelanggan

Tingkatkan KepuasanPelanggan atas Pelayanan

TingkatkanKualitas

Pemasaran

BentukProdukBaru

Cross-SellJenisProduk

BentukSaluranPelayanan Baru

KurangiMasalah

TingkatkanWaktuTanggapan

TingkatkanProduktivitasKaryawan

Akses keMIS

KembangkanKetrampilanStrategis

SeimbangkanSistemPengukuranKinerja

PETA STRATEGI BSCINSTITUSI KEUANGAN: BANK XYZ

5. MEASURES

What is theStrategic

Objective?

MeasureResults?

Measurethe Results

Measure the Next Best Indicator

Y

Yes (exact)

No (proxy)

MeasureActivity?

N

Measure the Activities/Inputs thatProduce the ResultsQuantity Quality Revenue

Cost Time

Y

MeasureInitiatives?

Measure the Progress of Initiatives

N

Y

Will theAgreed

MeasuresEncourage

theRight

Behaviours?

The Process for KPI Selection Acknowledges that KPIs Can Be Developed at Three Levels

Furthest

Fit

Closest Fit

5. MEASURES

What is theStrategic Obj?

MeasureResults?

Y

Exact

Proxy

MeasureProcess?

N

Y

MeasureInitiatives

N

Y

Furthest

Fit

Closest Fit

Improve Customer Satisfaction

Customer Satisfaction Index

No. of Complains

Number of customer events

Number of Satisfaction Review Meeting

Customer Satisfaction Monitoring Systems

Implementation

Project KPIs

(Milestones)55

5. MEASURES

GUIDELINES for TARGET SETTING

• Be SMART-C:

– Specific

– Measurable

– AGREEABLE (between you and superior/team)

– REALISTIC (achievable, yet challenging)

– Time-bound

– CONTINUOUSLY IMPROVE

• Benchmark against: Last year, competitors, or best in field

• Differentiate Target and Alarm

– Target as agreed in your budget (Green threshold)

– Alarm (Red threshold), normally 80% of Target (and 120% in case of stabilization)

5. MEASURES

Process: Operations Management

Theme: Ground Turnaround

- Profitability - Market value - 30% CAGR

- Grow revenues - Seat revenue - 20% CAGR

- Fewer planes - Plane lease cost - 5% CAGR

- Attract and retain - # repeat customers - 70% - Implement CRM - $XXX

more customers - # customers - Increase system

12% annually - Quality - $XXX

- Flight is on time - FAA on-time arrival - #1 management

rating - Customer loyalty - $XXX

- Lowest price - Customer ranking - #1 program

- Fast ground - On-ground time - 30 minutes - Cycle-time - $XXX

turnaround optimization

- On-time departure - 90%

- Develop the - Strategic job - Yr. 1-70% - Ground crew - $XXX

necessary skills readiness Yr. 2-90% training

Yr. 3-100%

- Develop the support - Info system - 100% - Crew scheduling - $XXX

system availability system rollout

- Ground crew aligned - Strategic - 100% - Communications - $XXX

with strategy awareness program

- % ground crew - 100% - Employee Stock - $XXX

stockholders Ownership Plan

Initiative Budget

Action PlanStrategy Map

Objectives

Balanced Scorecard

Measurement Target

Profit and

RONAGrow

revenues

Fewer

planes

Attract and retain

more customers

On-time

service

Lowest

prices

Fast ground

turnaround

Strategic job

Ramp agent

Strategic systems

Crew scheduling

Ground

crew

alignment

Source: Strategy Maps, by Rober S. Kaplan & David Norton

5. INITIATIVES

Problems, problems and more problems…

6. AUTOMATION

6. AUTOMATION

The implementation process begins by applying performance measurement software

to get the right performance information to the right people at the

right time.

Automation adds structure and discipline to implementing the Balanced Scorecard system, helps transform disparate corporate data into

information and knowledge, and helps

communicate performance information.

In short, automation helps people make better decisions because it offers quick

access to actual performance data.

B2B/B2G BSC Matching

Revenue

Base

Retention

Share Gain Positioning Adjacent

Market

New

Business

Financial

Learning & Growth

Internal

Process

Customers

Cost Margin Cash Flow Asset

Operational

Excellence

Product

Leadership

Customer

Intimacy

Investment

Strategy

Competencies Information

Systems

Motivation,

empowerment,

alignment

Satisfaction

Customer/Client/ Government BSC

Revenue

Base

Retention

Share Gain Positioning Adjacent

Market

New

Business

Financial

Learning & Growth

Internal

Process

Customers

Cost Margin Cash Flow Asset

Operational

Excellence

Product

Leadership

Customer

Intimacy

Investment

Strategy

Competencies Information

Systems

Motivation,

empowerment,

alignment

Satisfaction

Your BSC

1. Draw your ‘customer’s’ BSC

2. Match their CP/IP with your CP

3. Identify IPs that support/conflict

7. CASCADE

Cascading

Customer Perspective

Goals Strategies Targets Direct Indirect

Base

RetentionMkt

Share Gain Mkt

New

BusinessBD

7. CASCADE

E3 – Department BSCCustomer Perspective –Marketing Department

Goals Strategies Targets CAPEX OPEX

Base

Retention

Share Gain

Budgeting

7. CASCADE

Individual MBO

Employee A – Marketing Executive

KRAs Action

Plans

Targets Weight

(%)

Score

Class A

Customer

Retention

Class B

Customer

Retention

Competition

Crossovers

Re: Base Retention

7. CASCADE

An Evaluation of the completed scorecard is done.

During this evaluation, the organization tries to answer questions such as, ‘Are our strategies working?’, ‘Are we

measuring the right things?’, ‘Has our environment changed?’ and ‘Are we budgeting our money strategically?’.

9. EVALUATION

This is not The EndBSC cycle runs continuously as the business dynamically improved

Step-by-Step SummaryNo. Activities Remarks

1 Assessment Vision, Mission, Values

2 Strategy Operational Excellence, Customer Intimacy, Product Leadership

3 Objective Objectives for each F, C, I, L perspectives

4 Strategy Map Draw a cause-effect map

5 Performance Measure SMART KPI

6 Initiatives Activities / Process / Project to support Objectives

7 Automation Tools / System / Monitoring

8 Cascade Translate company vision to individual performance

9 Evaluation Use BSC in the regular meeting for improvement plan

Post Test• How do you define

“Balanced Scorecard”?

• How do you communicate Company Vision to the team?

• How will BSC help you improve organization performance?

End of WorkshopThank You

Leadership & Management

Balanced Scorecard : Brief Understanding