balanced scorecard

Balanced Scorecard

Objective

• Provide a more complete and balanced view of corporate performance

• Give senior managers a concise but comprehensive view of the business

• Balanced Scorecard (BSC) approach described by Kaplan and Norton

Premise

• “Measurement motivates”

Measurable Items

• Broadened set of measurable items to complement financial measures

• Multiple measures provide balanced perspective

• Included customer, internal process, and learning and growth measures

Perspective

• Traditional financial metrics are backward-looking

• Now look at “leading indicators” that are predictors of future success

Performance Perspectives

• Customer perspective

• Internal perspective

• Innovation and learning perspective

• Financial perspective

Use of BSC

• BSC is deployed in more than half the Fortune 500 companies*

Intelligent Enterprise, July 2002

What is the BSC?

InitiativesTargetsMeasuresObjectives

FinancialTo succeed financially, how should we appear to our shareholders?

InitiativesTargetsMeasuresObjectives

Learning & Growth

To achieve our vision, how will we sustain our ability to change and improve?

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VISION AND

STRATEGY

Customer Perspective

• Who are our customers?

• What is our value proposition?– Operational excellence (Wal-Mart)– Product leadership (Nike)– Customer intimacy (Nordstrom)

Internal Process Perspective

• What are our key processes?

• Should be based on our value proposition– Operational excellence (Wal-Mart)– Product leadership (Nike)– Customer intimacy (Nordstrom)

Learning and Growth Perspective

• Do we have key skills and information systems?

• Where are the gaps?

Financial Perspective

• Profitability...

Developing Objectives - Customers

• Who are our customers, and what is our value proposition in serving them?– Customer intimacy – increase customer

retention

Developing Objectives – Internal Processes

• To satisfy our customers and shareholders, at what processes should we excel?– Customer objective processes

Developing Objectives - Financial

• What financial steps are necessary to ensure the execution of our strategy?– Cost-leadership – lower unit costs

Developing Objectives – Internal Employee Learning

• What capabilities and tools do our employees require to help them execute our strategy?– Skill gap– Information systems

Commonly Used Financial Measures

• Total assets• Total assets per

employee• Profits as a % of total

assets• Return on total assets• Revenues/total assets• Gross Margin

• Net Income• Profit as a % of sales• Profit per employee• Revenue• Revenue from new

products• ROE• ROI

Commonly Used Customer Measures

• Customer Satisfaction• Customer Loyalty• Market Share• Customer Complaints• Return rates• Response time• Direct Price

• Price relative to competition

• Total cost to customer• Customers lost• Customer retention• Customer acquisition

costs• Number of customers

Commonly Used Internal Process Measures

• Average cost per transaction

• On-time delivery• Average lead time• Patents pending• Stockouts• Labor utilization rates

• Response time to requests

• Defect percentage• Breakeven time• Cycle time• Warranty claims• Waste reduction

Commonly Used Learning and Growth Measures

• Employee participation

• Training investment• Average years of

service• Turnover rate• Employee suggestions

• Motivation index• Diversity rates• Quality of work

environment• Training hours• Reportable accidents• Ethics violations

Example

Holding Company

Subsidiary 1 Subsidiary 2 Subsidiary 3 Subsidiary 4

Subsidiary ScorecardExample

• Consolidated ROA

• Subsidiary on-time goals by month

• Subsidiary baggage handling goals by month

• Subsidiary operational dependability goal by month

Link Measurements to Strategy

• Define mission and strategy

• Determine how performance will differ if I succeed with vision

• Determine Critical Success Factors

• Determine critical measurements

Implementation

• 3-4 measures per perspective

• Frequency of measurement

• Establishing targets

• Performance measurement

• Incentive systems

Building a Balanced Scorecard

• Preparation

• Interviews (first round)

• Executive workshop (first round)

• Interviews (second round)

• Executive workshop (second round)

• Implementation

• Periodic reviews

First Generation BSC

• BSC software developed and designed as reporting or management dashboard tools

• First applications to integrate financial and non-financial reporting

• “Red, yellow, green” reporting of achievement of targets

Goal of First Generation BSC Reporting

• Quickly understand health of organization

• Focus attention on areas requiring attention

Evolution of BSC

• Use BSC to help implement and manage strategy

Strategy Map

Strategy-Focused Organization

• Executive leadership to lead change

• Translate strategy into operational terms

• Align organization to strategy

• Make strategy everyone’s job

• Make strategy a continual process

Sources

• BSCol Functional Standards– www.bscol.com/standards

• Balanced Scorecard Institute– www.balancedscorecard.org