balanced scorecard english 0705

7/30/2019 Balanced Scorecard English 0705

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CONTROLLER STATEMENTS

Tools

International Controlling

Association

The Address for Controlling Expertise

BalancedScorecard


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Contents

Balanced Scorecard

1. What is a balanced scorecard? 3

2. The tasks to be fulfilled by the balanced scorecard 5

2.1 Defining objectives 5

2.2 Measuring achievement of objectives with ratios 8

3. The principles of the balanced scorecard 10

3.1 Consistent focus on objectives 10

3.2 Balanced involvement of all stakeholders 113.3 Combining simple structures 12

3.4 Transparency with ratios 13

3.5 Concentrating on the essentials 13

4. Differences in the practical application of the

balanced scorecard 14

4.1 How is the balanced scorecard linked with the

companys strategy? 14

4.2 How are people involved in developing strategiesand in their implementation? 14

4.3 How is the balanced scorecard integrated into overall

business operations and reporting? 15

5. Implementation of the balanced scorecard 17

5.1 The balanced scorecard in businesses structured more

along functional lines 17

5.2 The balanced scorecard in more process-oriented

businesses 21

6. Conclusion and recommendations for controllers 28

7. Cited literature and further references 31


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1. What is a balanced scorecard?

The balanced scorecard originally came into being at the beginning of the

1990s as a tool for implementing strategies in day to day business. Two

Americans Robert S. Kaplan and David P. Norton developed the idea.Translate strategy into action was their motto. Their approach could not be

simpler.

Measuring and evaluating performance in businesses is too one-sidedand

unclear.

One-sided, because we primarily look at financial performance, such asturnover, profit and utilisation of capital. However, turnover, profit and

capital utilisation only tell us whether we were successful in the past ornot. They do not tell us about building close customer relationships, the

target-oriented approach of committed employees through learning and

growth, the effective consolidation of internal business processes,

guaranteeing stable financial situation to ensure financial soundness

with respect to investors in the long term.

And unclear, because we are flooded by multiple ratios and can no longerdifferentiate what is important from what is not. Why do we not do the

same as in the world of sport? All the essential data are displayed on one

single display board (in the stadium) and on one scorecard (e.g. in golf).

Thus at a glance we can see where we are, which tasks have already

been completed and what remains to be done.

That is how the idea of the scorecard, the clear scorecard was born. And

given that not only the outcomes, but also the actions which lead to success

are important, all of the major aspects (referred to by Kaplanand Nortonas

perspectives) of a business should be presented in a balanced way

precisely as the balanced scorecard.


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Fig. 1 Balanced scorecard according to Kaplan/Norton with 4 future perspectives

In the mid-1990s in this basic form of the combination of

- objectives - targets and

- ratios - initiatives

for the four perspectives / development areas / future perspectives

- finances - internal business processes and

- customers - learning and growth

the balanced scorecard became known to the wider public also in the Germanspeaking countries.

(In the course of the practical implementation it turned out that the German

word Perspektiven was not always understood particularly by non-

controllers due to its ambiguity. As it was the development of future

prospects in terms of shaping potential that was meant, the term

development areas was also introduced.)


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2. The tasks to be fulfilled by the balancedscorecard

While using the balanced scorecard we want to transform strategies into

action. That is its real mission. This is how this concept is to overcome theserious weak point of many others: the fact that strategic objectives are not

embedded in day to day business life.

2.1 Defining objectives

The balanced scorecard fulfils its mission mainly because it gives our

objectives a clear structure.

In most cases this is usually done by drawing up a strategic matrix, which

can help us to choose from amongst a wide variety of possible actions thosethat appear to be the most strategically justified.

The mission statement and main objective form the single roof under which

we wish to place all our activities. These should be derived from the

philosophy and culture of the business to the greatest possible extent and

describe a business purpose (mission) and target orientation (vision) for a

clearly defined period (strategic horizon) (cf. also the Strategische Planung

[Strategic Planning] statement of business).

The mission statement and main objective should help us answer the

question: Why are we abusiness and what sort of abusiness are we?

In this context we want to use the mission statement to show which image

primarily customers should have of us:

What could induce customers also in the future to spend their money onour services?

Who is actually to be our customers in the future?

What are our customers' criteria of success (the benefit that they gain fromit) with reference to the services offered by us?

And with the main objective we want to make it clear primarily to the

employees in the company what we consider to be the potential, which is

crucial for our sustainability in the near future and which we wish to develop.


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S 1 S 2 S 3

[Partners] E5

[Employees] E2

[Finances & contr] E4.

[Business rocesses] E3

[Customers] E1

Strate ic themes

Development

areas

Main objective

Mission statement

Using the development areas / perspectives we describe the most important

potentials (possibilities and capabilities) to be developed for shaping our

future. In this context we should not have a schematic approach, but rather

take into account the specific conditions of our business. This already begins

at the stage of identifying the development areas / perspectives. Who is thecustomer of a pharmaceutical company for example: the patient? The

physician? the pharmacist? the health insurance fund? Here it can be useful

to define four customers or partner areas (perspectives) to properly

capture strategic goals.

This also applies to the number of development areas / perspectives. In

practice we find examples with three just as much as with six or seven

development areas / perspectives. It is always a question of the usefulness for

practical action and not of executing a formal diagram!

Fig. 2 Strategic options matrix


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Using the strategic themes we define the most important tasks that we want to

master in the years to come. This can be developing a new area of business

or reorganising the sales organisation or restructuring the whole organisation,

for example. In this context we should not include too many strategic themes

in order not to get bogged down.

The option matrix provides us with a strategic co-ordinate system, which we

can use to search for suitable goals and actions for all the major development

fields (a combination of strategic theme and development area / perspective).

We must then transfer such strategy- focused actions to suitable structures in

order to be able to organise work effectively. We have tried and tested

structures at our disposal for this purpose, for example projects. The

preparation and controlling of projects is consequently closely linked with

designing a balanced scorecard. However, they are not its subject matter and

will therefore not be dealt with further in this statement.

At the same time the strategic co-ordinate system allows us to verify whether

existing initiatives or projects or new ideas are target- oriented or not.

However, this is contingent on our consistency: if we cannot integrate an

initiative into the co-ordinate system then we have to decide whether we want

to omit it or allow ourselves to include it as a luxury or if the matrix has to be

redesigned! Without the courage to take decisions even the best strategic co-

ordinate system is not much use to us.

A further point should be taken into account in connection with the formulation

of a strategic goal system: the balanced scorecard is not suspended in a

vacuum. It cannot transform strategic objectives into actions without paying

attention to the constraints or degree of freedom that put limits on our actions.

The top management of a corporation with global operations will develop

other goal structures to the management of an owner managed medium-

sized business. And they will have to ask different bodies (supervisory boards,

management boards, shareholders meetings) or institutions (banks, state

organisations) for consent.


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This applies analogously to the objectives of strategic business units or areas

/ departments within larger enterprises.

And at the same time we have to come to an understanding about the subject

matter of the balanced scorecard. The mission as originally formulated by

Kaplanand Norton consisted in translating strategies into concrete actions.Since then the name balanced scorecard also subsumes overcoming

operational problems or designing major projects. These tasks should,

however, be strictly separated, as mixing them up would be

counterproductive.

2.2 Measuring achievement of objectives with ratios

Designing an option matrix for strategically goal- oriented actions is only one

aspect dealt with by the balanced scorecard. The other consists in the

consistent application of relevant ratios in order to be able to measure the

achievement of objectives. You cant manage what you cant measure!

In this context there are two different points of reference:

On the one hand, we are dealing with the concrete actions of thestakeholders. We want to get from a given ACTUAL state to a desired

TARGET state.

Concrete action requires concrete goals. General targets such as 12.8%

return on capital employed do not help much here. Firstly, because most

managers and employees cannot understand them and secondly because

such targets do not say anything about the concrete actions that are

needed to fulfil them.

In these terms the balanced scorecard requires more specific ratios that

are directly linked to particular activities in order to guide the actions of

people involved in the processes of producing and marketing goods andservices. Here the ratios predominantly support communication on the

effective organisation of joint work.


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However, using specific ratios alone to manage concrete processes is notenough. In todays work sharing world we normally use many resources

together with others. These can be raw materials, money or

just time, which we devote to particular tasks. Decisions about the

distribution of these means especially if these are scarce resources -aretaken by people who are not directly involved in the processes subject to

change: top management teams of a group, supervisory boards, bankers

or analysts, for example.

And due to the fact that these persons are not involved in the processes

their responsibility is focused on the distributionof resources and not on

their concrete consumption they need reports, which are as clear as

possible, so that they can get an idea of the course and outcomes of our

actions and take decisions on that basis.

In this context the balanced scorecard predominantly requires ratios linked

to the use and utilisation of the applied means as well as comparison

(benchmarking) with other business units. The actual, concrete actions are

not the main focus here.

The effectiveness of the ratios of a balanced scorecard depends on a large

extent on how far they successfully deal with both aspects. Only when we

combine both aspects do we obtain a universal tool for shaping the

sustainability of our business.


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Expenditure of money

Money inflowInflow of potentials

Securing liquidity

Utilisation of partners

Personnel deployment

Quality assurance

Capacity utilisation

Order receipt

Order processing

Investor relationships

Developing partners

Personnel development

Quality development

Capacity development

Marketing

Customer relationships

Potentials

[possibilities and capabilities]

develop utilise

strategic operational

3. The principles of the balanced scorecard

The following principles should be followed when drawing up and

implementing a balanced scorecard:

3.1 Consistent focus on objectives

Consistent focus on objectives with reference to putting goals into practice

primarily means that we understand and take into account the difference

between operational and strategic action.

Fig. 3: Focus on objectives

We generally associate operational with short-term and strategic with long-

term. Operational matters must be dealt with immediately, strategic issues

can wait. Unfortunately, this is a fallacy.

Operational and strategic matters are not questions of time scale. Both

have something to do with the potentials that are available to us.

Operational issues refer to the utilisation of the available potentials, e.g.completing orders. Tangible results are the outcome, which in most cases

result in money inflow.


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Strategic issues mean developing new capacities, which will result inmoney inflows (hopefully!) in the future. In this context only an inflow of

potentials takes place, not yet a cash flow (cf. also the statement

Wertorientierte Unternehmensfhrung [Value- oriented business

management].

Consequently, we should only use operational ratios, such as turnover, profit

or utilisation of capital to measure the goals of strategic initiatives if we are

aware of the associated incongruities.

Example:

Lets take for example the objective: Increase the share of new customers,

for example. Usually, this is measured using the share of turnover, although in

many sectors often a long period of time elapses between the initial contact

with a prospect and the first turnover sometimes up to three years. Would it

not make more sense to use Number of meetings with prospects as the ratio

for related strategic activities, as the relationship between the initial contacts

and customer acquisition is known in all sectors?

3.2 Balanced involvement of all stakeholders

Objectives are put into practice by people not by ratios! In this context all the

major forces in a company should be integrated into the definition of goalsand their implementation in a balanced way by means of a balanced

scorecard.

However, in order to prevent the situation where the numerous actions of the

often wide variety of people result in chaos, the stakeholders need specific,

that is, measurable objectives that facilitate their co-operation. Ratios, which

facilitate a defined setting of goals help with this. These are ratios, which are

designed in such a way that we can use them to measure the course of

actions or outcomes with reference to the targeted goals.

We refer to this approach as the OAR principle (Objective Action Ratio).

The OAR principle does not only apply to actions in the narrower sense of the

term. It applies to each set goal within the scope of the balanced scorecard

strategic themes, development areas / perspectives, actions and projects.

Due to the need to define measurable ratios we have no choice but to be

specific about what we want.


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Objective

Action

Ratio

Strategic themesDevelopment areas

Fig. 4: Management with ratios the OAR principle

3.3 Combining simple structures

Combining simple structures first and foremost means: remaining

understandable. It is not much use to us to reflect the complexity of the real

world as closely as possible if the models created on this basis can only be

understood by a handful of experts. If we want to take people with us on our

strategic and operational path then we have to make ourselves understood.

For this purpose we need simple, clear structures, even if simple means also

simplification and- consequently- lack of precision. As the saying goes Its

better to be 60% correct than 100% misunderstood!


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3.4 Transparency with ratios

Here emphasis is placed on the word transparency. However, in this context

we should differentiate for what purpose and for whom the transparency is

intended:

With respect to actions it is predominantly a question of translating the setgoals into concrete terms. Thus first and foremost this refers to inward

transparency transparency for the persons carrying out the actions.

And it is also about self -controlling. This is because these are our own,

jointly selected objectives, the achievement of which we wish to measure

using corresponding ratios. Such ratios must be understandable, specific

and easy to follow for the business team.

With respect to the distribution of the available resources first of all it is aquestion of the story that we wish to tell external partners about our

actions. Ratios can lend credibility to these stories. Thus in this context the

main emphasis is on outward transparency - on being understood by

people that do not directly experience the events within the organisation or

the organisational unit.

At this point we should pay attention to the specific tasks of these people.

They mostly take decisions about the division of commonly usedresources, such as time and capital. They therefore need ratios that make

a comparison between the various entitled parties possible in order to

facilitate decision making.

3.5 Concentrating on the essentials

Concentration consists in the art of focusing ones attention on one point.

Therefore, concentrating on the essentials means leaving out what is less

important or postponing it. The problem is not determining the main focuspoints, but rather deciding what is to be left out. Having the real courage to

concentrate has a decisive impact on the success of a balanced scorecard!

The balanced scorecard is thus not only a tool that generates additional costs.

Concentrating on the essentials also makes it possible to save resources.


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4. Differences in the practical applicationof the balanced scorecard

In practice there are many types of balanced scorecards. The differences

can basically be linked to three criteria:

4.1 How is the balanced scorecard linked with thecompanys strategy?

The name balanced scorecard is often equated with a system of ratios.

When applied in practice it usually leads to a mere grouping of operational

and strategic ratios particularly with respect to software solutions. Such

approaches are in conflict with Kaplan / Nortons original idea: Balanced

scorecards should not only be collections of financial and non-financial ratios integrated into four perspectives. The best balanced scorecards reflect an

organisations strategy.

However, it is only possible to reflect strategies if an organisation has them!

Consequently a balanced scorecard which does not build upon a major

strategy only has a slightly clarifying effect. We can avoid this if we formulate

a strategy before a balanced scorecard is drawn up before or during this

process. If considerable time is required, this is a point in favour of formulating

the strategy in advance. A factor supporting the linking with the balanced

scorecard is the specific impression of our strategy that we gain in this way.

4.2 How are people involved in developing strategiesand in their implementation?

Translate strategy into action this is the task of the balanced scorecard as

originally formulated by Kaplan / Norton: the practical implementation of

strategy on a day to day basis and developing potentials as our daily task. In

this context it is obvious that this depends on how people concerned are

involved in the process. And here cases of application in practice differ

considerably.


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The range stretches from the strict setting of strategic guiding principles by

the boss or a very narrow circle of selected managers to an open dialogue

on individual and common objectives and translating them into a strategy

supported by all participants. At one extreme the balanced scorecard is

integrated into an environment characterised by hierarchical structures andtends to be reduced to a strategic planning and control system. At the other

extreme the balanced scorecard forms a framework for organising open

structures around a common goal.

4.3 How is the balanced scorecard integrated intooverall business operations and reporting?

The balanced scorecard as a strategic system of ratios is often attributed to

controlling. In this way it extends the palette of controlling tools already

available, however, it does not serve as a central leadership tool for

management.

In this context there are seriously intended solutions using the balanced

scorecard to calculate the future. For this purpose mathematical links are

constructed between the ratios for the actions, the so-called critical success

factors and the main objective. This can lead to dangerous illusions,

because we can actually extrapolate sales, turnover and cost figures orcan model with detailed scenarios, however, we cannot use this to

understand the development of the potentials, which are needed;

because we quickly lose sight of the fact that each calculation is based onassumptions, which are hidden behind coefficients and constants and

whose plausibility and constancy are normally not verified;

because in conventional mathematical models we assume that there are

linear correlations between cause and effect and thus we do not evenbegin to sufficiently comprehend the detailed complexity of a changing

organisation; without even mentioning the delays in terms of time and

space;

because computer calculations simulate an apparent accuracy andobjectivity, which is not provided.


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However, we have a tendency to conceal our subjective accountability behind

objective calculations. The result is setting false courses of action with often

disastrous effects. Consequently, we should not succumb to this self-

deception.

Kaplan / Norton therefore refer to the fact that in their experience the

balanced scorecard does not consist of a system of ratios, but rather it is

about every company and institution that has demonstrated the greatest

successes and which have built up a new management system using the

balanced scorecard. This is a management system, which has enabled them

to create a strategy- focused organisation.

The more the balanced scorecard is organically integrated into the overall

management and reporting system, the more the practical implementation of

a companys objectives is successful in its customers, employees and

partners day to day activities.

In line with this the balanced scorecard is a tool for both management and

controlling, i.e. its effectiveness is contingent upon the co-action of both

areas. The balanced scorecard is to be integrated into controlling as a

process in the form of this interrelationship and to be supported by the

controlling department.


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5. Implementation of the balanced scorecard

The practical benefits of a balanced scorecard are largely influenced by the

extent to which its structure corresponds to the character of the business.

Companies of technical profile with a traditional function- orientedorganisation (for example: businesses in raw resources industry) need a more

hierarchically structured balanced scorecard, whilst technologically advanced

, knowledge- oriented companies (for example: information and

communications industry) would rather benefit from structures that are

oriented to the needs of intellectual capital.

5.1 The balanced scorecard in businesses structuredmore along functional lines

Hierarchically- oriented balanced scorecards place financial capital at the

centre of attention. Utilising capital employed is the absolute top objective. In

this context the mission, core values, vision and strategy of the organisation

(of the business) form the starting point. The strategy describes the game

plan of the organisation and the balanced scorecard- its implementation. The

goals of the people are corresponding to their function subordinate to the

organisations goals.

The financial perspective is consequently the top level of a hierarchically

structured balanced scorecard. Here the question to be answered is: How

should we act with respect to the shareholders in order to achieve financial

success? The focus is on the definition of goals for growth and productivity

and the identification of any sources from which growth and productivity can

be obtained.

The customer perspective comes next, and it should describe the value

proposition that is made available to the market (cf. the Kunden-orientiertes

Vertriebscontrolling [Customer- oriented sales controlling] statement). The

question is How should we approach our customers in order to realise our

vision?. The description of target customers and their demands is the focus.

This must be reflected in the objectives and the corresponding ratios, against

which the value proposition and customer satisfaction can be measured with

reference to these demands.


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The organisations value chain is presented in the lower positioned

perspective of internal business processes (see fig. 5). The value chain

encompasses all activities which are needed to create the value proposition

for customers and to transform them into growth and profitability for the

shareholders. We ask ourselves In what business processes must we be thebest in order to satisfy our customers? Goals should be formulated for

innovation, customer management, operational processes and integration into

the environment. In this context it is above all a matter of setting standards

with respect to usage characteristics, timeliness and costs, against which we

can measure the quality of our processes.

Finally, the learning and growth perspective forms the foundation; it defines

the intangible values which are needed to lift business activities and customer

relationships to a higher level. How can we foster our change and growth

potentials in order to achieve our goals? This is about combining

development objectives for strategic capabilities (knowledge and skills of the

employees), strategic technologies (information systems, networks, etc.) and

an activity- oriented atmosphere (motivation, empowerment of employees).

The questions in the individual perspectives should be answered on a theme

by theme basis. Kaplan / Nortondifferentiate four categories:

1. Building up market power,

2. Increasing customer benefit,

3. Achieving operational proficiency,

4. Development to a socially responsible organisation.


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High potential customersIncreasing turnover per

customer

Cost reduction per

customer

Learningand

growth

Customers

F

inances

Internalbusiness

processes

Profit maximisation Cost reduction

per customer

Acquisition and retention

of high potential

customers

Turnover growth

Increasing turnover

per customer

Internal turnover

growth

Constructing and

implementing

cost effective

marketing

programmes

Developing excellent

services

Constructing andimplementing cost

effective sales tools

Establishing

alliances with third

parties

Rationalising

manual processes

Cost management

of alliances

Motivating key

employees

Increasing management

competence with respect

to technical re uirements

Continous development

of business organisation

and culture

Fig. 5: Strategy map (according to Kaplan / Norton)

The steps to generate a balanced scorecard of this kind are usually the

following in most cases:

First of all the formulated strategy is presented using a strategy map. Theobjectives of the organisation are placed in a grid (option matrix)

consisting of strategic themes and the four perspectives.Then the various goals are linked together via cause and effect chains.

In this context the cause and effect chains first and foremost are meant to

communicate the strategy throughout the company and not to construct a

calcuable measurement system.

However, these impart a simplistic illusion of linear interrelationships and

hinder the understanding of the long- range effects of our actions. It does

make presentation easier at first; however, it can be counterproductive forstrategic thinking if we forget about these restrictions.


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In a second step the objectives from the strategy map are transferred to

the balanced scorecard perspectives. Here Kaplan / Norton do not

recommend mathematical linking together the cause and effect chains for

the aforementioned reasons.For each goal a ratio, ratio targets and mostly quite generally held

initiatives are established in order to make it possible to translate them into

concrete terms for various structural units in the further course of the

process.

In a third step projects and action programmes are derived from thebalanced scorecard initiatives. Here the projects are strictly linked to the

hierarchical structure of the perspectives (and thus to the functionally

linked hierarchical structures of the enterprises).

Fig. 6 Integration of projects in the balanced scorecard

(according to Kaplan / Norton)

However, this finance- oriented structure does not work for non-profit

organisations. Therefore, in such application scenarios modifications must be

made by placing mission at the top of the balanced scorecard hierarchy.

Otherwise, the path is the same. Also, the subordination of personal goals to

the organisations goals is retained.


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5.2 The balanced scorecard in more process orientedbusinesses

In more process-oriented, technology-rich businesses intellectual capital is

the focus of attention. It is produced by:

the people operating within the company (the knowledge and skills of theemployees as well as the culture of interpersonal relationships)

the people associated with the company (the type of relationships with ourpartners (customers, suppliers, investors, etc.) and- in consequence-

access to their knowledge and skills),

the companys structures (to link up the possibilities and capabilities of thecompany and the knowledge of people with the capacities of the

machinery / means of production, raw materials, communications devices

and organisational structures), and

the social resources deployed by the company (e.g. the public educationsystem, the Internet or the environment, which also represent potentials

for us).

Intellectual capital is constantly gaining importance as a factor in our global

economy. Financial capital on its own is no longer the engine of growth, but

also knowledge and the ability to apply it. Against this background the

personal goals of people involved form the starting point for a companys oran organisations balanced scorecard.

Fig. 7 Integration of individual goals

Company

philosophy

Company

culture

Working together (formalprocesses and structures

rea men o eac o er(informal

interpersonal relationships)

Common values

Companypolicy

Individualgoals


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Starting from their individual strengths and wishes people seek values and

goals that they share with other employees and values that shape the real

culture within the business. This mostly occurs completely by instinct, it is

hardly ever a conscious process. And the degree of commonality experiencedin this context has a decisive impact on what role we allot to the company in

our lives.

It is at this point that the decision is taken to what extent we are

committed to the company or not as the case may be.

As a consequence this point is very important for every company policy,

which relies on the commitment of the people involved!

It is like a band, for example a jazz band: all the musicians may be fairly good

as individual artists, however, the music is only created if they play together.

Thus something really special comes into being, something that is greater

than the sum of its parts. And all the players quickly understand that their own

success is dependent upon the quality of their cooperation. As long as this

remains to be the case, they will give their best to their organisation with

respect to the skills they can contribute. This is the basis for the success of

the jazz band; personal commitment represents an important competitive

advantage.

Technology-rich businesses should likewise provide their creative and

committed employees with a stage where they can achieve and present

successes. Thus companies can bind the part of intellectual capital that

employees hold in the form of acquired qualifications and expertise. Thus

knowledge does not go astray.

Ensuring financial stability in the long-term in this context becomes more of

an existential basis than an objective. Naturally, the principle still applies that

more money can be spent than money flows in. And if investors are neededfor this, then they can expect a commensurate return on their deployed

financial capital.

However, the goal of intellectual capital consists in more than the utilisation of

deployed financial resources. First and foremost this consists in providing the

space for developing the persons involved and the structures used by them.

Accordingly, technology-rich businesses tend to have open structures, which

are oriented to tasks and process chains and not to functional hierarchies.


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I. Defining goals

(formulating the mission

statement and main objective)

II. Developing strategiccoordinates

Completing strategic

coordinates with actions

IV. Structuring and

implementing strategic

projects based on action

ideas

V. Reporting with the

balanced scorecard

VI. Organising the learningprocess

Communication

In this respect the balanced scorecard should not show any hierarchical

structures for such companies, to which the goals of the people involved must

be subordinated. On the contrary, people structure the balanced scorecard

fully in line with the specific characteristics of their own purposes and

processes. And then there is no methodological difference between thebalanced scorecard of a profit- oriented and a non-profit organisation.

The generation and implementation of such a balanced scorecard occurs in

six steps:

Fig.8: Drawing up a balanced scorecard for a more of a process-oriented business.

The six steps in detail:

I. Formulating the mission statement and mainobjective

The mission statement and main objective should be formulated so that as

many employees as possible can identify with them. To achieve this we can

try to put the commonalities down on paper: by formulating values (e.g. for a

logistics company that has split off from a group of companies:

Independence, reliability and sustainability are the inalienable values of our

business.); or a mission (The supreme purpose of our business is to provide

and further develop an effective logistics network on the European scale); or


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a vision (The name of our firm is the European embodiment for an effective

logistics platform, because we set the standards).

Apart from these commonalities we must, however, also take into account the

specific working conditions under which we operate. It is only then that wecan formulate a mission statement and main objective, which is feasible and

therefore acceptable to the majority. This makes it possible to generate a

balanced scorecard which motivates a large number of employees to be

committed.

II. Developing strategic co-ordinates

The orientation to personal commitment of all stakeholders as outlined above

is continued when drawing up the strategic co-ordinate system.

Here the focus is on the joint construction of development fields based on

strategic themes and development areas, which most effectively contribute to

producing a mission statement and main objective. This means that we

should not let ourselves be confined by the targets with respect to the number

and content of development areas and strategic themes. However, it should

always be taken into account that restricting ourselves to only a few

development areas (3 to 5) and strategic themes (2 to 4) helps us to

concentrate on the essential focal points as part of our practical actions within

the period to be organised.

III. Completing the strategic co-ordinate system withaction ideas

The development fields defined when establishing a co-ordinate system

serve as a point of reference for deriving specific actions and grouping them

to form overarching projects. In practical terms in brainstorming sessions one

should try to allocate goal- oriented actions to these development fields,

which provide both horizontal (the development area) and vertical (thestrategic theme) support. The OAR method described above supports the

goal-oriented description of actions and helps to achieve mutual

understanding. Usually a few hours of concentrated work result in more than

100 ideas for goal- oriented actions.


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Setting up and ex-

panding a European

logistic subsidary

Living networkConcerning an ecologically-

orientes logistic network

S 1

Internationalising of the range

of services offered

S 2

Setting up and operating a

network platform

S 3

Combining logistics and

environmental management

turnover potential per

subsidary []

Logistic transactions processed

[#]Milestones

Rating [grade]

New customers

Integrated partners [#]

System Integration

Financial & Controlling

External financial soundness

New customers with turnover potential [#]

Internal business processes

Standardised partners [#]

Identifying with the company

Employees

Cooperation in the ideas forums [%]

Developing an extended customer base

Partners

Joint logistic projects [#]

Group customers

Innovations with reliable partners

Process security

Strategic themes

with:

Objective

Theme

Ratio

Development

areas with:

Objective

Area

Ratio

Main objective:We want to establish our position as an independent logistics company

on the European market

Mission statement:

We support your processes with our l ogistics network

Ratio:

partners with turnover potential involved in the logistics network [#]

Fig. 9 The strategic co-ordinate system of Logistics-Service AG

IV. Structuring and implementing strategic projectsbased on action ideas

Whether 50 or 250 OARs were formed they should be summed up in order to

be able to feasibly organise activities. Naturally this can be done based on

pre-set criteria (e.g. spheres of responsibility). In practice, it has turned out to

be more expedient to combine action ideas that go together in groups,

which can be used as the basis for strategic projects that are to be structured.These action groups are initially the result of a brainstorming session and still

need to be moulded or redesigned so that they can be tackled as a strategic

project. According to proven practice the task of this redesigning should be

given to small interdisciplinary teams. Here classical project management

techniques should be used.

The controlling department is to be involved, too, as the relevant project

budgets need to be set up before a final decision on the implementation of

these projects is taken.


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Target Actual Deviation Target Actual Deviation

2003

2004

2003

2004

2003

2004

2003

2004

2003

2004

Utilising potentialsDeveloping potentials

Employee satisfaction [%]Controlling discussions by

management with employees [#]

Execution of training plan [%] Attendance ratio [%]

Employees

Ratios overview

Framework contracts [number]Profit contribution by new

customers [grade] [%]

Response time [minutes]Standardised processes [number]

Turnover potential of know-how-

projects [million ]Cash flow [millions ]

Customers

Finances and Controlling

Internal business processes

An analogous approach (steps II to IV) is advisable with respect to

propagating the balanced scorecard in other areas of the business, in which

the mission statement and objective should apply uniformly throughout the

organisation.

V. Reporting with the balanced scorecard

Simultaneously, a reporting structure is developed. Within this structure ratios

are summed up in a report scorecard, which first and foremost reflects

inwards the achievement of strategic objectives of sectors of the business.

Effective feedback can be developed on the basis thereof, which facilitates

sustainable learning.

Fig. 10: Internal report scorecard of Logistics-Service AG

As reporting structures primarily support decision making on the effectivedeployment of resources in a business, we should also include operational


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ratios in addition to strategic ones in the report scorecard. It is more useful if

these are ratios, which reflect the result of utilising potentials, which have

been developed in the course of strategic actions.

For individual areas of the report scorecard notes should be providedaccording to conventional controlling practice, which present our positions and

aims with respect to the ratios applied. Further report scorecards support

traditional reporting outwardly for investors, bankers, supervisory boards,

etc.

VI. Organising the learning process

No business operates in a vacuum. As a consequence the changes initiated

by us evoke reactions everywhere. And we must react to changes in our

environment that is we must be willing to learn.

Here it is not a question of whether we are implementing projects correctly,

but also rather whether we have initiated the right projects and whether we

consider the right sub-objectives to achieve our main objective. Doing the

right things right! And even if we apply as much expertise in the process of

formulating our strategic goals as in their implementation, we should still ask

ourselves at least once a year whether we need to react to altered

environmental conditions (we have to, as surely at least a few strategic

projects have already been completed!).

Organising this learning process, beginning with supporting the strategic

project management through the organisation of workshops up to reworking

the balanced scorecard system of objectives is the crucial task of the

controlling department.


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6. Conclusion and recommendations forcontrollers

If the balanced scorecard is successfully integrated into day to day business

life, it can be developed into a comprehensive and universal tool. It is a toolthat provides all activities with a strategic framework and ensures more clarity

and consistency for all parties involved to help them in formulating,

communicating and implementing their strategy. It supports implementation,

which makes it possible to understand strategic action in terms of it being a

daily task and to realise it as such, as well as to link it with operational action.

In line with this, Kaplan / Norton place their balanced scorecard within the

framework of an overarching concept of the strategy- focused organisation.

This impacts its content as both a management and a controlling system:

Design your balanced scorecard on the basis of a communicated strategy and at the same time use the balanced scorecard to communicate your

strategy. Make it clear to management in advance how much the

effectiveness of the balanced scorecard tool depends on its being

embedded in strategy.

Design your balanced scorecard jointly with all major forces within acompany. These do not only include the entire management team, but

also innovative lateral thinkers, members of the works council or friends

of the family, who bring less company insiders blindness, but instead

the view from outside.

Design your balanced scorecard using your own ideas and those of yourcolleagues. In this context moderated workshops and external help can be

useful during implementation. However, the content and the emotion

should always come from the stakeholders themselves. This is because

they will have to live with the consequences the external party will no

longer be around once they have finished their assignment.

Design your balanced scorecard in line with the specific circumstances ofyour business. Success is born out of the combination of quality and

acceptance. Therefore, design your balanced scorecard so that it can be

accepted by all the parties involved. This also includes convincing the

management of the advantages of the balanced scorecard tool. The

balanced scorecard will make more rapid inroads into day to day business

life, the more concretely it is understood and experienced as a practical

competitive advantage.


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Design your balanced scorecard in clear structures with respect to goals,the choice of appropriate actions, the organisation of practical work and

reports. The balanced scorecard tool can only display the effectiveness

that you anticipate from it if there is the interplay of the various structures.

So pay attention to transparency.

Design your balanced scorecard with the courage to be consistent.Transparency only makes sense if it leads to decisions. Therefore use

your balanced scorecard in such a way that decisions can be taken and

implemented. Here this is a matter of decisions about changing your

company as well as distributing the resources needed for this purpose.

And take into consideration the fact that decision makers must understand

what they are supposed to decide upon. You also have to take into

account that people that take decisions about concrete actions operate

within a different context to those that have to decide about the division of

jointly used resources.

Design your balanced scorecard so that it can be integrated into yourmanagement and controlling system as seamlessly as possible. This

includes project management and controlling just as well as flexible

planning and budgeting and the relevant strategic and operational reports.

In this context ensure that the ratios in your reports do not become self

evident and a formal shell. The balanced scorecard is more than a

measurement system. However, ratios can force us to say what is to beachieved in concrete terms, as these are measurable outcomes. And if

these are linked with accountability, they foster practical action in terms of

mutual objectives.

Design your balanced scorecard with enduring patience; as all experienceto date teaches: the introduction of a balanced scorecard is relatively easy

to follow; however, living with the balanced scorecard is a complex,

continual process. In this process you should not link the ratios with the

incentive system too early. For this first of all sufficient experience andabove all trust in the balanced scorecard are needed.

Design your balanced scorecard so that there is enough time forcommunication, as only this can serve as a learning basis for the company

and the basis for business success.

And above all: Get on with it!


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And above all: Get on with it!

Do not wait for the ideal circumstances and pre-conditions, otherwise you

might wait forever. Put the balanced scorecard to use as soon as possibleand learn how to operate with it, in order to better place your company

amongst the competition.

In this context, no-one can guarantee success. You cannot foresee the future.

However, you can develop the possibilities and capabilities today, which will

put you in a position tomorrow to deal with future risks and opportunities to

your advantage. And that is a whole lot better than waiting to see what fate

has in store.


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7. Cited literature and further references

Ehrmann, Prof. Dr. Harald Kaplan, Robert S.; Norton, David P.

Kompakttraining Balanced Scorecard

[Compact Training Balanced Scorecard],Friedrich Kiehl Verlag [publisher], 2000,

ISBN 3-470-51761-4

Balanced Scorecard,

Verlag Schffer-Poeschel [publisher],1997,

ISBN 3-7910-1203-7

Eschenbach, Rolf;

Haddad, Tarek (Editor)

Kaplan, Robert S.; Norton, David P.

Die Balanced Scorecard

Fhrungsinstrument im Handel, ein

Handbuch fr den Praxiseinsatz [The

Balanced Scorecard A Management

Tool in Commerce, a Handbook forApplication in Practice],

Servicefachverlag [publisher],

Wien 1999,

ISBN 3-854-28398-9

Die strategiefokussierte Organisation,

[The Strategy-Focused Organisation],

Verlag Schffer-Poeschel [publisher],

2001,

ISBN 3-7910-1802-7

Friedag, Herwig R.;

Schmidt, Dr. Walter

Weber, Prof. Dr. Jrgen;

Schffer, Dr. Utz

Balanced Scorecard at work

Haufe-Verlag [publisher], Freiburg 2003,

ISBN 3-448-05570-0

Balanced Scorecard & Controlling,

Theodor Gabler Verlag [publisher],

Wiesbaden, 1999,

ISBN 3-4091-1518-8

Horvth, Prof. Pter and Partner Wolter, Olaf

Balanced Scorecard umsetzen

[Implementing the Balanced Scorecard],

Verlag Schffer-Poeschel [publisher],

2000,

ISBN 3-7910-1507-5

TQM-Scorecard

Hanser Fachbuchverlag [publisher],

2000,

ISBN 3-446-21280-9

Compiled by:

Herwig Friedag, Berlin-Brandenburg work group

Walter Schmidt, Founding Member of the Ideas Workshop and Head of the

Berlin- Brandenburg work group

Mark Richter, Head of the Mecklenburg-Vorpommern work group

With the cooperation of:

Hubert Tretter, Manfred Blachfellner and Albrecht Deyhle.

Version as of July 2006


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