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

InitiativesTargets

CustomerObjectives

Internal Business Process

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

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