en “oN Serono “The balanced scorecard is an effective tool; however, the higher levels of the organization. 1 find it much moy feascade to how they can impact the achievement of the targets and“Plose a degree of ‘motivation and team spirit.” Iain Brown, VP Finance, North America, ‘Company Background Jpeadquartered in Geneva, Switzerland, ch prbduction over the previous’ ten years with a market share of 70% in 2000, it had PATDS-wasting, and multiple sclerosis therapeutic annual sales on 2 very aggressive research and fits products were genetically engineered. After had experienced a sustained double-digit growth in ‘Of selected financial data, developed other products main} fields. It had spent more th development program. By 2 several years of slow growth, th sales. Exhibit I provides a summary “We have succt turned the comer with the outstanding financial and ast two years. We have the team in place and the ort our growth into the 2ist century. We are now ina Gpr position as one of the world’s top three biotechnology ies” (2000). tive or ine fective handling ofan administrative situation Bright © by Lawrence P. Car 2003 and licensed for publication to Harvard Business Schoo! Publishing. To order fo or request permission to reproduce material, ell (800) 45-7685 or write Harvard Business School Publishing, Bpston, MA 02163. No par of this publication may be reproduced, store ina retrieval system, used in spreadsheet, GF transmitted in any form or by any means ~ electron, mechanedl, photocopying, recording, or otherwise ~ without the permission of enpyright holders. Copying or posting is an infringement of copyright. Permissions @hbsp.harvard.edu or 617-783-7860.Strategic Mission Since taking the reins of leadership from his father in 1995, Emesto shaped and developed a new management team as well as forged the biotecl ‘was transforming the company from a focus on a ‘multiple products while building the infrastructure to support a world Emesto boldly stated five principles supporting the strategic intent of Serono # 1. As a provider of specialty pharmaceuticals, we will where Serono can contribute with innovative prodi investment in R&D to guarantee a continued flow of nel improve the quality of treatments in all the the fel operate and will develop in the future. 2. The entrepreneurial and pioneering spirit, whi to the creation and development of a new therapeutic fieldjsuch as infertility into a large and dynamic business, will be maintained and fO\ered throughout our organization, 3. Serono will remain the partner of chosen fields. However, with 01 fully leverage our scientific and other therapeutic fields. ts, physicians and payers in its edge technology, we will also dour global presence. We will futher Velopment operations around the world as well ywth potential of new markets. ative environment where success of the company. ent was the locomotive that drove the Serono train. This enabled pharmaceuticals to biotechnology. Serono was willing to make th research and development to expand globally with new research and id to improve communication processes for project selection. rch and development were equally important in this business. Once a compound had betn identified and a prototype produced, the key to success was to develop the biggstproduction capability to make the drug while concurrently securing all regulatory om authorities such as from the Federal Drug Authority (FDA) in the United States. ime from idea to approved product could be up to ten years. keting Marketing was the fuel for the Serono train. Products needed to be made available and ‘duction facilities had to run continuously to offset the large capital investment. This was done 2 Copying or posting is an infringement of copyright. Permissions @hbsp.harvard.edu or 617-783-7860,Serono “KX, on a country-by-country basis since governments played an active rol drugs and determining the level of government reimbursement for individuals under t medical plans. A local presence in each country was also very important f new products. Serono had developed a strong global marketing presence. Levé expansion in the infertility drug market, it had aggressively expanded the mi organization into new demographically attractive regions of the world to,open local By 2002, it thus spanned 100 countries with over 1,200 sales representalves, Measuring Success mark the progress the company was making in achieving its overs Wéfategic goals beyond just sd on financial results since it was critical to achieve strong financial performance in orderp have access to the world capital progress quite closely. Members ‘of the Executive Committee (“EC”), however, kne\ statements seldom captured the diverse and long standing initiatives requis achieve leadership in the biotechnology ral Problem. The R & D investment industry. Emesto was looking for a long and short-term performance whil Serono strategy. This ,would be ‘public consumption. If this measurement roll out a similar system throughout the system the EC could use to evaluate his 9 still keeping the different units focus ‘management's internal baromett of an entire operation, Ernesto and the"EC were eager to hone Serono’s strategie vision. Since both leadership and intent had changed, they thought it was important for everyone to understand Serono’s cultUf@aud entrepreneurial spirit. It was no longer business as usual. This clear vision allowed gach, diVi8igi, country, plant, section or department to identify the Key Suecess Factors (KSf} nevBisary for strategic attainment. He commissioned a sub-group of the prate will: performance measurement system. EC'to develop.a corp developedtip, capture the essence of these KSF measures. Ernesto likened this measurement sail boat race, where many other key success had to be considered in order to surements needed in a sailboat race, Emesto wanted to develop metries that ‘weigas.casy to make as those in a sailboat race and related directly to one of the KSF measures, ie balanced measurement initiative had been developed over a three-year period and Shinued to be a work in progress. A separate group was formed to manage the implementation ss headed by Andrew Gilbert from the Strategic Business Planning department. The EC Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-7860.Serono BAB closely monitored the development of the balance scorecard. They reviewed and af BSC targets and had to approve all of the measures, hheads are asked fo go away and think about and propose for review a SeQygcard for their functions that ties to the corporate scorecard. ‘The internal structure of the scorecard follows our strategic tMijes, which directly to achieve our vision. We have moved away fro 4 Kaplan and Norton quadrants. This may mean that at the func the scorecard. becomes ‘unbalanced’. For example, marketing focus ‘number one and having a superior company, and less on the tecl orm and the product launch factors.” Andrew Gilbert ‘The EC wanted the BSC measures to cas to link each individual objective with performan the organization. ‘The idea was . Te over-arching strategic themes imately, all ofthe unit measures had to luct every year to grow our existing Therapeutic such as Rheumatoid Arthritis, Crohn’s Disease and ‘Oncology. 3. We willifld a distinctive technology platform in order to generate a unique competi ge in biotechnology. superior company to work for by virlue of our processes and jgement leadership. ‘get better numbers to run the expanding company while ensuring that all with the Serono strategy. Management invested considerable time and ‘money to@gch the Scorecard program. The Executive Committee sent a clear endorsement 10 being actively involved and starting with a scorecard for itself. Some of the interesting characteristics of the program were the following: © A BSC web site was created to share and report on scorecards and to communicate concepts and principles to the organization. * The Hyperion database was used at the corporate level as much as possible to ‘ease the data collection process and maximize consistency. Local reporting data ‘was collected from a variety of sources. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783784Serono Sas K © The Serono reporting system was formalized for the first time with a and procedures for all units to follow. * Custom software was developed to accommodate the scor © Certain scorecard results were self-reported. © Certain scorecard results were estimated. Unit scorecards were established once a year during the budgefftz process and reviewed every six months, ‘Then the units had the option to change their meté@jvith EC approval. ‘The EC established all scorecard targets and reviewed all scorecards, cascade the BSC system down the organization, all unit managers were expe ier scorecards as guidelines to set individual objectives and performance reviews. The Balanced Scorecard construction mirrore structure, Exhibit 2 outlines the design. The horizontal the therapeutic areas, while the vertical axis highlight the SerOno Matrix organizational is highlighted the global strategies of ting. Supporting central services f both vertical and horizontal Fy this allowed all individuals were listed at the bottom of the matrix to signit . The intention was to fit all people in the all other targets assessed to the EC on the 20" of the month reviewed and function heads conimented on ‘were posted on the intemal website. Senior annually. A complete book of scorec following the quarterly close. ‘Ty Balanced Scorecard was weighted and the relative achievement of ed the employee's yearly bonus. The measures could be modified t sales targets was measured quarterly, while performance her targets was measured annually. Scorecards were posted on the Serono intemal website and everyone had open access to monitor achievement. formal incentive plan included over 400 Serono managers. is has led to a positive step-change in the interest people have in the ecard, and has really helped focus the organization on the key objectives Also, it has helped integrate performance management with objective setting. It has brought HR, strategic planning and the functions much closer together.” Copying or posting is an infringement of copyright. Permissions@hbep.harvard.edu or 617-783-7860,extenuating circumstances but were adamant about holding managers acco, commited performance. Deployment ‘A memo from the EC to the North America Executive Vice Pregidents of the Therapeutic, ‘Areas exemplifies BSC deployment. The following captures the essengaiof the message: “Following the message you received from the EC ou company targets for 2002, attached is the Balanced Scorecard gion (North America). In this scorecard you will see your Region targ od for: Sales by quarter by Therapeutic Area, includidy detail by product for key recombinant products. Operating expenses (Opex) by quarter for your include the relief assigned to your Rej the compared to the financial submissions. ‘The Opex target outlines the q nb quarters of the year plus it include Reductions have only. beenemal businesses providing Ferowth opportunities can continue to invest strongly in ord sales. ions have been asked to absorb a small part d fo be respected for the first two versus what you submitted. Marketing. AAs outlined, yey gre requested to validate the quarterly phasing of the targets provided in this BSG and then reflect this in the January sales forecast. For the BSC, please targets, which are not filled out in the attached template, wi 1st of the measures that are in the BSC will be discussed Business Review meetings. ‘on a four quarter rolling forecast for expenses, headcount, CapEx and sheet items quarterly, while sales were forecast monthly. The sales forecast was $t critical information since this drove the production schedule and authorized spendipg levels, All the measures in the NA Balanced Scorecard were weighted. The proportional measures and were used for calculating incentive compensation, 6 jons@hbsp.harvard.edu or 617-783-7860. Copying or posting is an infringement of copyright. PermiBing. Scrono ‘The finance IS and Canada, department ran like shared service center thet supported all functions within @ ‘They were also responsible for all North Am« Tain was focused on improving working capital managementapfeserving the integrity of the financials, and avoiding any bad surprises for Corporate. Thus security accurate product line sales forecasts was critical. He had a small team to support gre diverse organization. ‘As a shared services group, keeping cost to a minimum was fe wanted to Keep his people focused on the key value added activities and to foster a 3. This meant geting a set of shared departmental objectives. see my challenge as one of building business need to work together to establish accurate andangi Consistent with those used by the Serono finance orate CFO would want to compare the performance , scorecard implementation at the lower levels and other issues still needed to be resol Exhibit 4 shovtbe BSC for the Serono Finance Group. There is no specific BSC for NA Finance. In additiondlfigiding scale incentive compensation program is outlined below the scorecard. Oking Up from the Finance Department fiani€e department had watched the development of the Serono Balanced observed that scorecards were very popular at the beginning of the year but yef d the sales forecasts and rolling business plans drove the company. It should be. however, that in 2002 there was a clear message from the EC that performance was measured Oily against BSC and all incentive plans were clearly linked to the BSC targets, ork was done by both Finance and the TA’s to generate a bottoms-up forecast and forecasts were generally cut from the top and targets set. The EC had distinet and set very high expectations for all the operating units. 7 Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-7860.‘The second issue bothering the finance personnel is the fact that they caf offen find themselves at odds with the Business Units. As the BUs strive to ) Sales targets, Finance has to ensue that the company is adequately a sales reserve and credit risk perspective and often these con can generate some interesting debate! In addition, all TAS individual BSCs on which they are incented. Under these citcumsta tend to work in silos and you tend to lose the ‘North America” teat Indeed, if one of the TAs is not performing well, the other TAs, as their problem and would continue to focus on their 0 detrimental to the non-TA personnel in North America who overall NA performance. They would prefer to see the TAssayor the balanced i their goals. The flip side is that people get very myopic resulting i erapeutic area working more as a silo without regard to other theygpeutic areas or support units .cented on the Lisa Costantino, EipanciaController, North America el was the reward system. For we of the North America Part of the corporation and wanted to this weight of 40% was the same for agers had a better understanding of the Another troubling issue for the finance d the department, 40% of their reward was li commercial operation. Although they agreed support its performance, it was difficult to all levels in the organization. While Dir overall corporate objectives and had performance of an accountant ‘was more of a game of chance + entries was less clear. For them that 40% believe the Balanced say it has had a significant n either my behavior or my understanding of the company’s gtrafegy. do understand better how my goals are related to those ‘of my boss but Won't think this is consistent in the organization. I believe Tain explained better o were his goals and how our goals were linked to his, but I do not ether the rest of the directors and managers followed the “same proces Lisa Costantino, Financial Controller North America, Balan in 2002 Jain Regwn had a difficult time in April of 2002 with Serono’s balanced scorecard process. He t received his finance balanced scorecard for 2002, which meant he had a a less to reach whatever goals were determined. There was also confusion about how q rgets were measured on the commercial and North America BSC's. fen now we are in the process of clearly defining with Geneva (headquarters) feach of the measures on the commercial and North America Balanced Scorecards. We are now in our fourth month.” Iain Brown Copying or posting is an infringement of copyright. Permissions@hbep.harvarSerono “~, Iain needed to answer a number of other questions in addition to how targets should be = How balanced should the balanced scorecard be? In the case sgBidlortl operations, 82% of the weight was in share of market and sales-t remaining 18% covering expenses and projects such as the IT roll ® How far down should we push this system? “I think you get to a POL at which the balanced scorecard is not as relevant”. = How can we improve the linkage between corporate@Qpjectives and individual objectives? Are we really communicating the corporate an we cascade the targets down? = How can we keep the units focused on their goals -oming separate silos? How much tension should we allow between different Biiness units and between business units and support units? + Are we fitting the balanced scorecard c ith the rest of the procedures and processes that are part of the modus oper pany? To what extent do our procedures complement instead of confi ‘othgand confuse our people? + In 2002, the finance team is to a lar ‘There is a Corporate Finance Bs Finance BSC. How do I motiv: and over which they haveditile i entivized on the North America BSC. ke last year there is no North America "targets which are largely commercial ‘Thus far Serono had balanced scorecard system. U; system that had been designed cascading down to lower levels he for this process to be st systematic approach to the development of the nt had given total support for a balanced scorecard ‘company’s vision and key success factors. However, difficult and many issues still needed to be resolved What, Iain por Copying or posting is an infringomont of copyright. Permissions@hbep.harvard.edu or 617-783-7860.SUOSTT TEA ‘soi ou 9 sexe, _nse1oquy AuouW 8 s0xe} s10)9g owoDu 22N ‘98u%3 J0190) 10 "esuodig)yowou jeoueUis ‘wou Buneiodo sesuodxg Bunesodo ro, s0410 ara veos ‘sosuodg Bugeiod ‘Bren ss019 sores jo 509 ‘Sonuonoy reyoL uucou osu00r1 seqehouy 29S npg senuanays (suolllw $s 2 eyeq Je1ueuy Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617-783-7860.Serono a Exhibit 2 yD Balance Scorecard Construction O " Copying or posting is an infringement of copyright. Permissions @hbsp.harvard.edu or 617-783-7860.Exhibit 3 Corporate Balance Scoreboard > OOECTIVE @ at | Fat veer ae ve MEASURE «} (ce Poe [a Te [rive or om ci ferrari ta sonirces 2 Copying or posting is an infringement of copyright. Permissions @hbsp.harvard.edu or 617-783-7860.eInpeyog eoueuoped soueUly 7002 dIND. wuatUXS “VO ouoies Copying or posting is an infringement of copyright. Permissions@hbep.harvard.edu or 617-783-7860.