theme 13 km performance appraisal -...

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Theme 13

KM Performance Appraisal -BSC-

Sang W. KIM, Ph.D

Professor, Chungbuk National University

[email protected]

2016

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contents

1. Background

2. BSC: Balanced ScoreCard

3. Performance Measures & BSC

4. Beyond the BSC

목 차

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‘Intellectual capital’ is the principal asset of knowledge-based organizations and

their performance management systems seek to maintain and enhance the value

of this human asset base.

1. Background

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Paradigm Shift in Performance Evaluation

Traditional Focus Scorecard Focus

Objective

Context

Characteristic

Information

Control

Budget

Functional, analytical

Isolated measurement

Learning

Strategy

Team based, communicative

Objective/measure cause & effect

1. Background

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The key idea is that communicating directly forces you to translate your

strategy into a set of action-oriented performance measurements instead of

using control.

It enables you to translate the strategy into a language that’s more precise.

For example, instead of saying “let’s improve customer satisfaction,” it says,

what do you mean by customer satisfaction…..and

how do you quantitatively define it?”

From there, it forces you to ask

what skills are required to improve customer satisfaction…..and

what skills do your employees currently exists and

what is needed….

By monitoring the index, you can see how well you are closing the gap.

▣ Not Control, But Communicate & Motivate

Kaplan & Norton : BSC Inventors

1. Background

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Balanced Scorecard (BSC):

A method of implementing a business strategy by translating it into a set of

performance measures derived from strategic goals that allocate rewards to

executives and managers based on their success at meeting or exceeding the

performance measures.


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Reasons for the Need of BSC

1. Focus on traditional financial accounting measures such as ROA, ROE, EPS

gives misleading signals to executives with regards to quality and innovation.

It is important to look at the means used to achieve outcomes such as ROA, not

just focus on the outcomes themselves.

2. Executive performance needs to be judged on success at meeting a mix of both

financial and non-financial measures to effectively operate a business.

3. Some non-financial measures are drivers of financial outcome measures which

give managers more control to take corrective actions quickly.

(Example: controls in jet cockpit for pilot)

4. Too many measures, such as hundreds of possible cost accounting index

measures, can confuse and distract an executive from focusing on important

strategic priorities. The balanced scorecard disciplines an executive to focus

on several important measures that drive the strategy.


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1. Financial: How do we look to our Shareholders?

2. Customer: How do our Customers See Us?

3. Internal Business Process: What should we do that is Excellent?

4. Innovation and Learning: Can we continue to Improve and Add Value?

Balanced Scorecard Perspectives

Today, the center of value creation has shifted from tangible assets to intangibles

such as

Customer relations

Innovative products and services

High quality and responsive business processes

Information technologies and customer databases

Employee capabilities, skills and motivation


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LEARNING PERSPECTIVE

"TO ACHIEVE OUR GOALS,

HOW MUST OUR ORGANIZATION

LEARN AND INNOVATE?”

"TO SATISFY OUR CUSTOMERS,

AND SHAREHOLDERS, IN WHICH

INTERNAL BUSINESS PROCESSES

MUST WE EXCEL?”

"TO ACHIEVE OUR

FINANCIAL OBJECTIVES,

WHAT CUSTOMER NEEDS

MUST WE SERVE?”

FINANCIAL PERSPECTIVE

"TO SATISFY OUR

SHAREHOLDERS, WHAT

FINANCIAL OBJECTIVES

MUST WE ACCOMPLISH?”

INTERNAL PERSPECTIVE

CUSTOMER PERSPECTIVE


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One-dimensional to Multi-dimensional Performance Measuring

One-dimensional financial-based models measure past performance and sacrifice

long term to short term results and fail to successfully measure the performance of

today’s firm.

One of the most widespread multi-dimensional performance measurement models

is the Balanced Scorecard(BSC), which was invented in1992 by Drs. David

Norton and Robert Kaplan.


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Basic Functions of BSC


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Cycle Times Customer

Satisfaction

Customer order

fulfillment

Product assembly

cycle time

ROA

EVA

EPS

Drivers Moderators Outcomes (lead indicators) (lag indicators)

Quality

Defect rate

Scrap rate

Manufacturing

Unit Costs

BSC Chain of Causality of Performance Measures (Source: Kaplan & Norton, 1996)


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Employee Employee Growth in

Satisfaction Retention Rate Revenues

Employee Product and

Suggestions Process Innovations

Drivers Moderators Outcomes (lead indicators) (lag indicators)


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Financial Measures & BSC

Financial measures are outcomes that represent the executive’s

success at achieving strategic performance goals

Financial measures are influenced by the Stage of the Life

Cycle which reflects different strategic priorities

Sustain/Maturity

ROCE

EVA

Earn excellent

return on capital

invested

Growth Sales Growth

Revenue

Productivity

Generate new

accounts & increase

market share

Harvest/Decline

Cash Flow

Reduce Unit Costs

Obtain immediate

payback on investments

from cash cow

Life Cycle Stage


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Business Business

Inventory cycle time

Quality defect rate

Distributor satisfaction

Customer satisfaction

Distributor price margin

Business Distributor/Dealer

Customer

Different Customer Models Relevant Customer Metrics

Customer Measures & BSC

Business Customer

Customer order fulfillment cycle time

Customer satisfaction

Customer price margin


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Internal Business Process Measures & BSC

• Quality

• Yield

• Throughput

• Cycle time

• Cost efficiency

• Order Fulfillment

• Procurement

• Repair service quality/downtime

• Warranty quality

Internal Business Process Measures

Service to the

Customer

Model of Internal Business Process Logistics

Customer Need

Identified

Innovation

Process

Operations

Process

Post-Sale

Service Process

Customer Need

Satisfied

Identify

Market

Create

Product

Build

Product

Deliver

Product

Relevant

Metrics:

• Development

Cycle Time

• Quality

Defects

• MCE

• Delivery

Cycle Time

• Service

Satisfaction


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Manufacturing Cycle Effectiveness (MCE)

Processing Time Throughput Time

Throughput Time = Processing time + inspection time + movement time + waiting/storage time

MCE 0, implies inefficient process

MCE 1, implies less wasted time, greater efficiency

MCE =


Innovation

Process

Create

Product

Build

Product

• Development

Cycle Time

• Quality

Defects

• MCE

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Innovation and Learning Measures & BSC

What are employee and organization capabilities for innovation and

learning measures?

Represent ways to improve the other 3 scorecard outcomes or measures.

They nurture the other 3 areas

Learning Measures

• Employee skill levels (certification rate)

• # suggestions per employee

• Employee learning curve (time to reach acceptable level of output or quality)

Employee Measures

•Employee satisfaction

•Employee retention

•Employee productivity


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Strategy

Internal Customer Financial

Process T1 T2

T0

Learning

T3

BSC: Causal Relationships


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BSC: Cascading Goals

# Employee

Suggestions

Corporate

SBU

Department

Team

ROCE

Corporate

SBU

Customer

Satisfaction

Corporate

SBU

Retail Store


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Incentive Compensation for Executives with BSC

Executive Bonus Pool is designed as a percentage of Base Salary

The bonus pool represents potential earnings from the bonus for an

executive if all performance measures are achieved

Partial success with meeting performance measures results in the allocation

of a bonus representing a lesser amount of the total potential bonus.

Example: The bonus pool for a CEO equals 100 percent of salary. Range

of bonus equals 0 to 100 percent of salary depending on success of CEO

performance.


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Example: Automobile Company Balanced Scorecard Reward

Matrix for Bonus

Category Measure Weighting

Financial (50%) EVA 25%

Unit Profit 15%

Market Growth 10%

Customer (20%) Customer satisfaction survey 10%

Dealer satisfaction survey 10%

Internal (20%) Above average rank on

Process industry quality survey…… 10%

Decrease in dealer

delivery cycle time……….. 10%

Innovation (10%) Suggestions/employee 5%

and Learning Emp. satisfaction survey 5%


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Critical Thinking Questions

1. What happens to the balanced scorecard when the strategy changes?

(example: moving from a “growth” to an “extract profits” strategy)

2. How should resistance by executives or managers to new measures be

handled?

3. What if executives or managers sub-optimize and only focus on categories

in the reward matrix with the largest payoff – such as EVA and Customer

Satisfaction?

4. Beyond the BSC

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3rd Generation Balanced Scorecard is an umbrella concept that links together

organizational philosophies and management tools.

4. Beyond the BSC

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`

` Bob Kaplan and I have long believed that

dynamic systems simulation would be the

ultimate expression of an organization’s strategy

and the perfect foundation for a balanced

scorecard.

Why Dynamic BSC?

- David Norton (2000)

4. Beyond the BSC

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According to Richmond (2001) the strategy mapping system for BSC has serious

limitations which may result in strategy failure. He points out three main flaws of

this system:

• It expresses only one-way relations, cause-and-effect logic, whereas very often

factors within strategic initiatives influence each other in a feedback loop pattern.

• It may lead to incorrect conclusions about impact of strategic initiatives because

it does not capture delays, fundamental factors of dynamics in any environment. .

• Due to its static nature, the mapping system is unable to answers such questions

as ‘what will happen, if …?’. Despite much information gained through the

performance measurement activities, managers may be still unable to react

correctly to changes and discrepancies between the goal and the result of initiatives

undertaken to meet that goal.

4. Beyond the BSC

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Akkermans and Oorschot (2002, 4) point out further limitations inherent in these

flaws:

• Performance measurement based only on few indicators may lead to troubles

unless the most relevant indicators are chosen. Balanced Scorecard methodology

does not possess any mechanism, which can assess the relevance of defined

indicators.

• There are insufficient links between top level, strategic scorecard and

operational-level measures, and the Balanced Scorecard does not consider an

enterprise in the context of an extended value chain.

4. Beyond the BSC

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4. Beyond the BSC

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4. Beyond the BSC

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4. Beyond the BSC

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Our discussion will go on to ‘Theme 14. New Driving Forces –I.C.B.M’.

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