Accounting Finance and Control (AFC) Dahboards and (balanced) scorecards

Paolo Maccarrone Paolo.maccarrone@polimi.it

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The problem

Intrinsic limits of traditional financial indicators (and, consequently, of management reporting based on financial information)

Two main issues:

Too aggregated measures (managers do not have sufficient degree of detail on the current state of the firm, especially on critical issues/areas/projects)

Financial indicators are generraly not able to predict future trends (backwards orientation fail in predicting future performances: whats going to happen in the future years?)

As a result, a lot of organizations gradually increased the set of indicators to be measured and reported to top management its important to define robust criteria to identify these key performance indicators (KPI)

The set of indicators shall:

- Be as more complete as possible, but at the same not too large (limited number of indicators to avoid the risk of information overload)

- Include indicators monitoring both short-term and long-term goals

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Key Performance Indicators (KPI)

Most of them are not financial

Usually quantitative (but some times also qualitative)

Can measure outputs/outcomes of processes/units (throughput, lead time, etc.) and current state of resources (for ex: quality or amount of human/technical resources)

They can measure both (firm) internal and external variables

They can be both lagging and leading indicators: Lagging indicators are typically measure actual/past performances, while leading indicators are important to predict/influence future performances (it can be said that the future value of lagging indicators depends to some extent on the current value of leading indicators). Leading indicators usually are more difficult to measure than lagging ones.

For example: For many of us a personal goal is weight loss. A clear lagging indicator that is easy to measure. You step on a scale and you have your answer. But how do you actually reach your goal? For weight loss there are 2 leading indicators: 1. Calories taken in and 2. Calories burned. These 2 indicators are easy to influence (but hard to measure). When you order lunch in a restaurant the amount of calories is not listed on the menu. And if you are me, you have no clue how many calories you burn on a given day.

The key issue is the identification of KPIs. In the following slides some approaches for the design of strategic dashboards will be illustrated

Tableu de Bord (TdB)

TdB (Epstein and Manzoni, 1998, Burguignon et al., 2004) was firstly introduced during the 1950s in France

TdB building steps:

starting from the company objectives, then translated in Key (or Critical) Success Factors (KSFs). KSF should be:

- Measurable - Controllable (i.e. which can be influenced by managers deicisions) - Sufficient to achieve strategic goals

Each KSF is then associated to one or more performance indicator(s). KPIs should be:

- deployed into the organisation (assignment of responsibilities)

- Target values must be identified (typically through benchmarking)

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An example: the identification of a set of strategic KPIs in a chemical company

Strategic goal KSFs Key Performance Indicators

Frequency

Increase in sales 1) Keeping market share in mature markets

2) Focus on Far East

A. Number and entity of speditions towards different markets

B. Purchase orders (backlog) in different markets

C. New customers engaged in Far-east markets

monthly quarterly biannual

Cost reduction 1) Exploitation of production capacity

2) Exploitation of knowledge curves

A. Total fixed costs B. Productivity C. Production capacity

saturation D. Non manufacturing

costs incidence E. Percentage of

production scraps F. Unit variable cost

quarterly monthly monthly quanrtelry. monthly monthly

Zero defects program 1) Operations quality 2) Delivery performance

A. N claims B. % late orders

monthly monthly

Increase market offer

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The value based approach: the value tree

NCF

Fixed net investments

Op. Working Capital

CF =net income + Amort/deprecia=on etc

Inventories

Receivables

Other costs

Produc=on costs

Operat. costs

Sales

Disinvestments

Payables

New Investments

Sales from exis=ng products

Sales from new products

Efficiency in raw materials purchasing

Time to market (new products)

N. of new product development processes Service level Customer sa=sfac=on degree Sales people effec=veness Market share in key segments

Internal structure efficiency

Make or buy

Development ac=vi=es

Quality and manpower turnover

Internal Quality Produc=on capacity u=liza=on

Maintenance and turnover

Days payables outstanding (average delay in payiments vs. suppliers)

Logis=cs flow characteris=cs

Plant characteris=cs

Days sales outstanding (average delay of payments by customers)

Expansion and development

Ac=vi=es dismission

Subs=tu=on of existent ac=vi=es

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The balanced scorecard

The balanced scorecard is a particular type of management dashboard

Its most famous peculiarity consists in the 4 areas:

Vision and Strategy

Objectives Measures Targets Initiatives FINANCIAL

To succeed financially, how

should we appear to our shareholders?

Objectives Measures Targets Initiatives LEARNING AND GROWTH

To achieve our vision, how will we sustain our

ability to change and improve?

Objectives Measures Targets Initiatives CUSTOMER

To achieve our vision, how should we

appear to our customers?

Objectives Measures Targets Initiatives INTERNAL BUSINESS PROCESS

To satisfy our shareholders and customers, what

business processes must we excel at?

The four perspectives

The financial perspective includes traditional (accounting/value based) corporate performance measures:

Profitability (ROE, ROI, Net Operating Income) Cash generation (net cash flow from operations, free cash flow to firm, etc)

or their proxies (ex: EBITDA)

The customer perspective includes performance measures of the output of the organisation and on the effectiveness of market strategy and the quality of value proposition (as perceived by customers):

Product range, product innovation rate, products quality, lead time/delivery time, ecc

Costumer satisfaction survey, etc. The internal process perspective includes measures which look at the efficiency

(and effectiveness) of core business processes (which, in turn, depend heavily on firms competitive strategy)

The learning and growth perspective is instead oriented at measuring the (continuous) learning and innovation capabilities of the company, also through resource and context variables (quality of human/technological resources, business intelligence systems, organisational learning mechanisms, etc 8

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The balanced scorecard characteristics

The rationale: provide (top) managers with a synthetic but nevertheless complete set of KPI of different nature which enable them to have the full control of the organisation (at the same time avoiding the information overloading effect)

Critical issues:

- Selection of the right (i.e. most appropriate) set of measures - Identification of the links and trade offs among different

parameters

Balance is good?

Rethoric Balance is good

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Reality Balance is irrelevant causality is key

Financial perspective How do we look to our

shareholder?

Customer How do our

customer see us?

Internal process What must we excel

at?

Learning & Growth Perspective

How can we continue to improve?

Vision and Strategy

Improve Returns

Revenue Mix

Product Range

Cross sell

Educate salesforce

Operating efficiency

Delivery Reliability

Reduce lead time

Ideas from Employees

Strategy Map

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Improve Profitability

Broaden Revenue Mix

Increase Product Range

Cross selling product line

Educate salesforce

Improve Operating Efficiency

Improve Delivery Reliability

Reduce lead time

Ideas from Employees

Financial Perspective

Improve stock control

Customer Perspective

Internal Perspective

Learning Perspective

Designing appropriate measures

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Improve Profitability

Broaden Revenue Mix

Increase Product Range

Cross selling product line

Educate salesforce

Improve Operating Efficiency

Improve Delivery Reliability

Reduce lead time

Ideas from Employees

Financial Perspective

Improve stock control

Customer Perspective

Internal Perspective

Learning Perspective

Revenues from new products

Margin ???

% of deliveries arriving on time

No of new products per quarter

% of products dual labeled Inventory turnover

Lead time per customer

No of salespeople attending quarterly sessions

No of new ideas implemented per quarter

Indicators Objectives

FI

C

IP

L&G

2

3 4

5

1 FI

C

IP

L&G

2

3 4

5

1

The identification of KPIs: the underlying logic

Example - Cockpit of a Balanced Scorecard

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An example of costruction: Luxottica

Example Monitoring an indicator

Increase ROCE to xx%

Revenue Growth Strategy

Enhance the Franchise (New

Business Opportunities)

Productivity Strategy

Enhance Customer

Value Improve Cost

Structure Better

Utilization of Assets

A case study: Mobil Strategy Map The Financial perspective

Non-Gasoline Revenue and Margin

Vision To be the best integrated refiner/ marketer in the US by efficiently

delivering unprecedented value to our customers.

ROCE Net Margin (vs. industry)

Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly

Maximize utilization of existing assets and integrate the business to reduce total delivered cost

Introduce new sources of non-gasoline revenue through expanded C-

Store presence

Volume vs. Industry Premium Ratio

Cash Expense (cpg) (vs. industry)

Cash Flow (vs. plan)

Increase profitability of existing customers by selling more premium

brands

Become the industry cost leader in every category

of the supply chain

Maximize utilization of existing assets

Operational Excellence

(1) Treacy & Wiersema, The Discipline of Market Leaders, Addison Wesley, 1995

Product Leadership Customer Intimacy

Operationally excellent companies deliver a

combination of quality, price, and ease of purchase

that no one else can match

Examples: Costco

McDonalds Dell Computer

Arco

Best Total Cost

A Product leadership companies pushes its

products into the realm of the unknown, the untried,

or the highly desirable

Examples: Sony J&J

Intel

Best Product

A Customer Intimate company builds bonds with

customers; it knows the people it sells to and the

products and services they need

Home Depot

IBM (1960-70) Airborne Express

Mobil

The Customer Perspective: some basic elements of strategic marketing

Different strategies need different value propositions to attract and maintain target customers

Treacy & Wiersema (1) identify three strategies focused on customers Basic idea is to excel in one dimension, maintaining competitive standards on the others

Best Total Solution

Customer Value Proposition

Customer perspective: the differentiating factors

Product/Service Attribute

Price

Quality

Time

Functionality

Relationships Service

Other Image

Operational Excellence Customer Intimacy Product Leadership

Best combination of price, quality, and ease of purchase

Meets Competition

Meets Competition

Smart Shopper

Value for Money

Unique products and services defines new ground

Meets Competition

Create the Future

Value for Money

Meets Competition

Meets Competition

Meets Competition

Personal service, tailored to produce results for customers and build long term relationships

Trusted Brand

General Requirement Differentiator

Key:

The customer perspective: the 5 customer segments

Generally higher-income middle-aged men who drive 25,000 to 50,000 miles a year, buy premium gasoline with a credit

card, purchase sandwiches and drinks from the convenience store, will sometimes wash their cars at the car

wash.

Usually men and women with moderate to high incomes who are loyal to a brand and sometimes to a particular

station; frequently buy premium gasoline and pay in cash.

(F3 - Fuel, food, and fast) Upwardly mobile men and women - half under 25 years of age - who are constantly on the go; drive a lot and snack heavily from the convenience store.

Usually housewives who shuttle their children around during the day and use whatever gasoline station is based in

town or along their route of travel.

Generally arent loyal to either a brand or a particular station, and rarely buy the premium line; frequently on tight

budgets; the focus of attention of marketing efforts of gasoline companies for years.

Road Warriors (16%)

True Blues (16%)

Generation F3 (27%)

Homebodies (21%)

Price Shoppers (20%)

The Customers perspective

Financial

Delight the Consumer

Customer

Win-Win Relationships With Dealers

Continually Delight the Target Consumer Segments by Fulfilling Their Value Propositions

Clean Safe

Quality Product Trusted Brand

General Requirement Differentiators Speedy Purchase Friendly, Helpful

Employees Recognize Loyalty

Share of Segment: RW, TB, F3 Mystery Shopper Rating

Strengthen Dealer and Distributor Relationships

Improve Dealer Profitability

General Requirement Differentiators More Consumer

Products and Services

Help Develop Business Skills

Dealer Profit Growth Distributor Satisfaction

Increase ROCE to xx%

Revenue Growth Strategy Productivity Strategy

ROCE Net Margin (vs. industry)

Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly

Maximize utilization of existing assets and integrate the business to reduce total delivered cost

Non-Gasoline Revenue & Margin

Volume vs. Industry Premium Ratio

Cash Expense (cpg) vs. Industry

Cash Flow

New Sources of Non-Gasoline

Revenue

Increase Customer Profitability through

Premium Brands

Become Industry Cost

Leader

Maximize Use of Existing

Assets

From customer to internal processes perspective

Shareholders and customers satisfaction are the business strategy results the organization implements the strategy through business processes that constitute their internal value chain

Strategic activities can be clustered in 3-4 key business processes (no more)

Innovation

Process

Marketing R&D

JV/Partnerships

Customer Management

Process

Sales Service

Relationships

Operations

Process

Inbound Logistics Manufacturing

Outbound Logistics Supplier Relations

Regulatory & Society

Health Safety

Environment Social

Customer Satisfaction

Shareholder Satisfaction

Strategy Innovation Process Customer

Management Process

Operations Process

Invention Product Development Exploitation (Speed to

Market)

Solution Development Customer Service

Relationship Management Advisory Services

Supply-Chain Management Operations Efficiency: Cost

Reduction, Quality, Cycle Time

Product Leadership

Customer Intimacy

Operations Excellence

Strategic Practices Meet Basic Requirements

The link with fundamental market strategies

Strategies should determine business processes characteristics and importance

Financial

Customer

Internal Refinery Performance Trading Optimization

Inventory Management

Learning & Growth

Return on Capital

Industry Leader in Profitability

Quality Revenue Growth

Lowest Cost at Pump Cash Flow

Asset Strategy

Productivity Strategy Growth Strategy

Share of Segment

Total Gross Profit, Split

Develop New Products &

Services Dealer Margins Alt.

Profit Centers On Spec On Time Lower Mfg. Cost

Lower Terminal Cost

Health, Safety, & Environmental Performance

Core Competencies &

Skills Organization Involvement

Access to Strategic

Information

Mystery Shopper Rating

RW TB F3

The Mobil Case: the strategy map tree

Competencies

Strategic Skills Training Levels Knowledge

Transfer

Customer Satisfaction

Shareholder Satisfaction Financial Perspective

Innovation Process

Customer Management

Process Operations

Process

Customer Perspective

Internal Process Perspective

Regulatory and Society

Learning & Growth Perspective

Technology

Strategic Systems

Strategic Databases

Strategic Networks

Climate for Action

Strategic Awareness

Morale PersonalAlignment

Strategic Management

Feedback/Review Process

Planning Process Rewards and

Incentives

The learning and growth perspective

The ability to implement strategy is finally linked with the ability to implement the organizations ability to learn, adapt and growth