10-Mar-12

Typically business use financial measures for performance to gauge success Some criticisms against over-reliance on financial measures
Not consistent with todays realities
Tangible assets no longer the primary driver for business value Employee knowledge, customer relationships, culture of innovation and change drive value

Financial measures report the past

where the business has been, not where it is headed

 Sacrifice long term thinking

In case of budget cuts, the first thing hit is employee training or employee numbers. Short term impact is positive. What about long term?

A management system that helps business set, track, and achieve its strategies and objectives It complements financial measures of past performance with measures of drivers for future performance Objectives and measures are derived from organisations vision

and strategy

Organisations performance is viewed from four perspectives

Customer Financial Internal Business Process Learning and Growth

Customer
measures customer satisfaction and their performance requirements (product leadership, long term relationship, convenience and no-frills)

Financial
tracks financial requirements and performance

Internal Business Process

measures critical process requirements and performance to add value to customers

Learning and Growth

focuses on employee training, knowledge management, and how it is used to maintain competitive edge

The 4 perspectives have to be measured, analysed, and

improved continuously together. Ignoring any perspective

leads to unbalance

Involves setting strategies, goals, objectives, and tactics to

make each perspective happen.

Strategies and tactics should be congruent. They have to work together and create a single thread, tying them together in ways that make sense.

Customers is what makes your business exist. Without customers there is no business Know your customers what they want, when they need it While looking at existing customer, also look at the future (for future customers) new trends, where is market heading, impact of technology, etc. Remember internal customers ! Balanced Scorecard strategy looks at all customer (external and internal)

Managing money is key to successful business Senior executives and financial people decide on financial measures that an organisation focuses on Financial measures (irrespective of what they are) basically look at one of the following
Earnings Profits Cash flow

Common mistakes
Leaders focusing on short term returns & quick fixes At operational & tactical level, people focusing on own performance measure without understanding the impact at organisational performance

Looks at critical processes that a business should excel at These processes enable business unit to
Deliver value that will attract and retain customers in target market segments Satisfy shareholder expectations of financial returns

Traditional approach attempt monitoring and improving existing processes for delivering todays products and services to todays customers The balanced scorecard approach will also identify new processes for future performance / value creation (example, processes to anticipate customer needs, or deliver new services / products that customers value)

Identifies infrastructure that organisations must build to create long term growth and improvement Learning and growth comes from 3 sources
People Systems Organisational procedures

Objectives from other 3 perspectives may identify gaps in current capabilities. These gaps have to be filled

The objective & measures of the BSC are derived from the top-down process driven by mission and strategy The measures are balanced between external measures (customers and shareholders) and internal measures (critical business process and Learning and Growth) BSC process starts with senior executive mgmt team working together to translate its strategy into specific strategic objectives
Financial: revenue and market growth, profitability, or cash flow Customer: which customer and market segment, what level of superior service Internal business process: which is the most critical process to achieve performance for customers and shareholder (need not be the standard stuff such as improving quality or cycle time) Learning & Growth: provide rationale for investments in re-skilling employees

BSC should be more than collection of critical indicators Multiple measures in BSC should be consist of linked series of objectives and measure that are consistent and mutually reinforcing (cause-effect relationships, outcome and performance drivers) The linkage should traverse across the four perspectives

BSC should be a mix of outcome measures (lagging indicators) and performance drivers (leading indicators) One without the other does not give the full story, nor give an early indicator on whether the strategy is being implemented properly Example
Outcome measures: Profitability, market share Performance drivers: Cycle time & part-per-million (PPM) defect rates

Performance drivers alone reflects operational improvement, but does not indicate if it is leading for better financial measures (outcomes) Outcome measures alone does not indicate what is leading to the better performance

Strategy Map is a 2D depiction of the operations (functions) and strategy of an organisation It shows financial objectives as final goal, with strategic objectives from each of the 4 perspectives connected to each other by arrows indicating links. Similar to cause effect relationships Example

Follow the PDSA cycle Plan - Plan and develop the Strategy map Do- Implement the strategy map Study During implementation, study/review continuously to ensure that they do what was intended, and ensure that no (or manage) unanticipated problems develop as things change Act Make sure that you sustain and control the implementation

BSC is done at 3 levels

Strategic
Done by senior executives Driving force for other scorecards

Operational
Done at middle manager level

Tactical
Done at line management level

The BSC across levels should tie together

Strategic
Operational Tactical
Reduce the cost of product by 75% over 3 years Quarterly goal of reducing overall defects by 25% Measuring defects per day

The BSC across levels helps your drill down or up

If a measure at tactical level is off-target, it will impact a measure at the operational level, which in turn will impact a measure at the strategic level

Strategic level scorecards involve long-term goals (3-5 year timeframes) To create the strategic level scorecard
Take a look at your market Understand where you want to be as a company Understand the impact of above two on your products, services, and customer base Compare where you stand vis--vis the competition

Operational level scorecard is for a shorter term, typically a year Contains annual operating plan goals and objectives Should tie up to the strategic level scorecard There could be multiple operational level initiatives to support strategic level scorecard; knowing how much each will contribute is key

Measures the work done to achieve the scorecard objectives & measures Is a more short term view vis--vis the operational level scorecard Provides the early warning signals for strategic and operational level scorecards