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Best Practices in using a Balanced Scorecard

Sumati Sidharth, Ph.D.

The Balanced Scorecard • What is it? Definition: The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.

The Balanced Scorecard • Balances financial and non-financial measures • Balances short and long-term measures • Balances performance drivers (leading indicators) with outcome measures (lagging indicators) • Should contain just enough data to give a complete picture of organizational performance • Leads to strategic focus and organizational alignment.

The Balanced Scorecard Why do it?

• • • • • • • •

To achieve strategic objectives. To provide quality with fewer resources. To eliminate non-value added efforts. To align customer priorities and expectations with the customer. To track progress. To evaluate process changes. To continually improve. To increase ability

The Strategy Focused Organization • Mission – What we do • Vision – What we aspire to be • Strategies – How we accomplish our goals • Measures – Indicators of our progress

The Strategy Focused Organization The Five Principles •

Translate the strategy to operational .

•

Align the organization to the strategy

•

Make strategy everyone’s job.

•

Make strategy a continual process.

•

Mobilize change through executive leadership

The Balanced Scorecard

Strategic Planning Mission and Vision Balanced Scorecard

• • • • • • • • • • • • • • •

Activity Based Costing Economic Value Added Forecasting Benchmarking Market Research Best Practices Six Sigma Statistical Process Control Reengineering ISO 9000, 13485 Total Quality Management Empowerment Learning Organization Self-Directed Work Teams Change Management

The Balanced Scorecard History • First created in 1987 at Analog Devices • “The Balance Scorecard” book published in 1996 • Adopted by many companies in the 90’s • More popular in Europe • Popular with Government organizations • Widely used in Education

Diffusion of a New Idea • “The Balanced Scorecard:

Measures that Drive Performance” (Robert S. Kaplan and David P. Norton, Harvard Business Review, February 1992)

• About 35% of Fortune 2000 firms have adopted a balanced scorecard, 55% of those firms are very satisfied with it. (R. D. Banker, C. Konstans and S. Janakiraman; January 2000)

The Balanced Scorecard

The Balanced Scorecard Financial Measures • Funding/cost • Magnitude • Resources produced/unit cost • Percent change from last period • Risk assessment • Cost / Benefit Deming #4:

Cease doing business on price tag alone.

The Balanced Scorecard Customer Measures • Customer/potential customer groups (market segments) aligned with products & services used • Satisfaction: prompt, courteous, expert • Complaint tracking and trending • These are leading indicators: dissatisfied customers will quickly find other suppliers

The Balanced Scorecard Process Measures • How well are internal processes running? • Do products/services conform to customer requirements: dependable, accurate, complete • Designed by those who know processes most intimately • Mission-oriented and focused on process improvement

Deming #3: Cease dependence on mass inspection. Deming #5: Continual improvement of process. Deming #11: Eliminate numerical quotas.

The Balanced Scorecard Learning/Growth (People) Measures • In a learning organization, people are the main resource • Individual and institutional learning: hiring, training, technical tools, mentoring and development • Communication

Deming #6: Institute training on the job. Deming #7: Institute leadership. Deming #13: Institute a program of self-improvement.

The Balanced Scorecard • Part of a spectrum of Quality Improvement activities – – – – –

Starting with Deming Through Quality Circles and TQM Phil Crosby: “Quality College” Tom Peters: “In Search of Excellence” Ending with Six Sigma and Lean Today

• All focused on the customer, process improvement and part of continuous improvement efforts

Deming’s 14 Points 1. Constancy of Purpose 2. Adopt the new philosophy 3. Cease dependence on mass inspection 4. Cease doing business on price tag alone 5. Continual improvement of process 6. Institute training on the job 7. Institute leadership

8. Drive out fear 9. Break down barriers between departments 10. Eliminate slogans, exhortations, and targets 11. Eliminate numerical quotas 12. Allow pride in workmanship 13. Institute a program of self-improvement 14. Do it

The Balanced Scorecard

An Example

Balanced Scorecard Example FINANCIAL

PEOPLE

We deliver tremendous medical value in a responsible, predictable manner

Creating device leadership using our most valuable assets

KEY STRATEGIES:

•

• •

•

•

KEY STRATEGIES:

Increase revenue through innovative device Hire, develop, and maintain appropriate technology resources to achieve mission, vision, Metric: strategic intent and objectives. Quarterly sales in devices Metrics: Deliver devices with minimal resources 1) % Training current (headcount and dollars) Metric: 2) % Development plan completion Total headcount and dollars

Accurately predict financial expenses Metric:

Adherence to Internal and External expense Plan and Capital Spend Plan.

Maintain a work environment that is attractive to of the team. Metrics:

1) Employee Satisfaction (quarterly survey)

Provide devices that are profitable and consistent 2) % positions 3 yrs in role with corporate FMC targets Metric: 3) Safety Record Adherence to Internal and External expense Plan and Capital Spend Plan Provide device technology with the lowest total manufacturing cost to our customers

Metric:

COPS by product – supplier/site, depreciation, overhead

The Balanced Scorecard CUSTOMER

Meet both external and internal customer needs with the best products in their class

KEY STRATEGIES: Provide the best device in its class to maximize customer satisfaction and market share. “Perception of poor quality will never be the reason a customer does not use our device”.

METRICS: • • • • •

Post launch survey results (customer preference and perception of quality) Complaints per Million for marketed products Average days for complaint response to customer. % on time in full Customer satisfaction SixSigma results

BUSINESS PROCESS

Create and deliver superior devices by meeting unmet customer needs .

KEY STRATEGIES:

Create and deliver superior devices by integrating unmet customer needs with innovative technology.

METRICS: • • • • • • • •

# of patents submitted and approved # of projects on schedule # of New Product Introductions Average Cycle times # of manufacturing improvements Yield improvements # of Non-conformances Quality backlog, nonconformances per lot, % Japan defects.

The Balanced Scorecard for The Women’s Store Employed in the Experiment Percent Better than Target

Measure

Target

Actual

Financial: 1. Sales margins 2. Sales growth per store 3. Inventory turnover 4. Debt-to-assets ratio

60% 15% 6 < 20%

67.02% 16.75% 6.59 18.07%

11.70% 11.67% 9.83% 9.65%

+7% 80% $30,000 8,000

7.79% 88.44% $33,090 8,911

11.29% 10.55% 10.30% 11.39%

Internal Process: 1. Brand recognition rating 2. Number of stock-outs

80% < 3 times

87.60% 2.66

9.50%

3. “Mystery Shopper” audit rating 4. Time to process customer returns

85% < 4 min.

93.47% 3.54

Learning and Growth: 1. Employee satisfaction 2. Employee suggestions per year

80% 2.5 times

87.96% 2.74

3. Store computerization 4. Hours of training invested in brand managers each year

60% 80 hours

66.24% 89.10

Customer: 1. Price relative to competitors’ price 2. Customer satisfaction rating 3. Sales per square foot of retail space 4. Number of credit card customers per store

11.33% 9.96% 11.50%

9.95% 9.60% 10.40% 11.38%

Metropolitan Bank’s Balanced Scorecard Strategic Objectives

Strategic Measures

Learning

Internal Customer

Financial

Lag Indicators

Lead Indicators

 Improve Returns to Stockholders  Broaden Revenue Mix

 Return on Investment  Revenue Mix  Revenue Growth

 Increase Customer Satisfaction  Knowledgeable People  Convenient Access  Superior Service

 Customer Retention  Depth of Relation (Sale of Multiple Products to a Customer)

 Customer Satisfaction Survey

 Understand Our Customers  Create Innovative Products  Cross-Sell Products

 Share of Segment  Revenue from New Products  Cross-Sell Ratio

 Product Development Cycle  Hours with Customers

 Instill a Selling Culture o Build Strategic Information o Develop Strategic Skills o Align Incentives

IHW 2005

 Revenue per Employee  Employee Satisfaction Survey Balanced Scorecard

 Strategic Information Availability  Strategic Job Coverage  Personal Goals Alignment 21

Linking the Balanced Scorecard to Strategy A Strategy Is a Set of Hypotheses About Cause and Effect Financial

Return on Capital Employed

Customer

Customer Loyalty

Customer

On-time Delivery

Internal Process

Learning & Growth

Process Quality

Process Cycle Time

Employee Skills

To Implement a Balanced Scorecard The organization must • Define and develop measures for its primary strategic objectives. • Understand how different business processes contribute to its strategic objectives. • Identify the drivers of performance on strategic objectives. • Develop a set of measures to monitor drivers of strategic objectives. • Communicate its beliefs about how processes create results.

So, A Balanced Scorecard… • Is much more than a collection of indicators of key success factors. • Is a flight simulator, not a dashboard of instrument dials. • Integrates performance measures with a unique strategy. • Incorporates cause-and-effect relationships, including leads, lags and loops.