Transcript BALANCED SCORECARD: AS A METHOD FOR PERFORMANCE ASSESMENT

BALANCED SCORECARD: AS A
METHOD FOR PERFORMANCE
ASSESMENT
Semih AKKERMAN
Murat ALTUN
2
Agenda
Strategic Planning Consciousness, Failure and Incredible Facts
Performance Measurement
Balanced Scorecard
The Aim for Using BSC
Applying of BSC step by step
Case Studies
3
Strategic Planning Consciousness
Do you really think that the executives look like they are conscious
about strategic planning ?
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Incredible Facts
Graph Showing the Employee's
Awareness About their Company's
Strategy
5%
Most of the workforce
does not understand
their company’s
strategy.
95%
Percentage of
employees
understanding their
company's strategy
Percentage of
employees having
no idea about what
their company's
strategy is
5
Incredible Facts
Graph Showing the Executive's
Strategy Understandings
25%
Most of the
managers don’t have
incentives linked to
strategy.
75%
Managers having
incentives linked
to strategy
Managers having
attitude of
behaving
randomly
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Incredible Facts
Graph Showing the Percentage of
Organisations Linking Their
Budgets to Strategy
40%
Organisations don’t
have ability of
linking their budgets
to strategy.
60%
Organisations
linking their
budgets to
strategy
Organisations not
linking their
budgets to
strategy
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Incredible Facts
Graph of Percentages Wheather
the Executive Teams Spend
More Than One Hour per Month
Discussing Strategy or not
Executive teams
don’t spend
enough time for
discussing strategy.
Executive teams
spend less than one
hour per month
discussing strategy
14%
86%
Executive teams
spend more than
one hour per month
discussing strategy
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Strategic Planning Failure
Paul R. Niven declaration about strategic failure;
• Vision barrier
• People barrier
• Resource barrier
• Management barrier
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Performance Measurement
“ I often say that when you can measure what you are
speaking about, and express it in numbers, you know
something about it; but when you cannot measure it, when
you cannot express it in numbers, your knowledge is of a
meager and unsatisfactory kind. ”
William Thomson Kelvin
“If you can’t measure it, you can’t manage it.”
“If you can’t measure it, you can’t improve it.”
Robert Kaplan and David Norton
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Initial Step Toward Balanced Scorecard
General Electronics(1955) conducted a project to develop
performance measures for GE’s decentralized business units:
Profitability
Personnel development
Market share
Employee attitudes
Productivity
Balance between short-range
Product leadership
and long-range objectives
Public responsibility
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Initial Step Toward Balanced Scorecard
Not worked: corporate pressure for short-term profits led unit
managers to compromise long-term objectives and their public
responsibilities
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Prominent Step Toward Balanced Scorecard:
Japanese Management Movement (1975-1990)
• Japanese innovations in quality and just-in time production (such
as Total Quality Maagment,Just in Time,Short Cycle Time) shoke
Western leadership in many industries.
• US corporations had become obsessed with short-term financial
measures and had failed to adapt their management accounting and
control systems to the operational improvements from successful
implementation of total quality and short-cycle-time management.
Because, traditional western performance measurement are short
term and financial performance oriented
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Managing with information from financial accounting systems impedes
business performance today because traditional cost accounting data do
not track sources of competitiveness and profitability in the global
economy. Cost information, perse, does not track sources of competitive
advantage such as quality, flexibility and dependability. […] Business
needs information about activities, not accounting costs, to manage
competitive operations and to identify profitable products.
(Johnson, 1980, 44-5).
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Steps Toward Balanced Scorecard
The US Government introduced Malcolm Baldrige National Quality Award in
1987 to promote quality awareness, recognize quality achievements, and
publicize successful quality strategies.
The initial set of Baldrige criteria:
▫ financial metrics (profits per employee),
▫ customer-perceived quality metrics (market cycle time, late deliveries),
▫ internal process metrics (defects, total manufacturing time, order entry
time, supplier defects) and
▫ employee metrics (training per employee, morale).
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Mother of Balanced Scorecard
• A semiconductor company, Analog Devices described how executives at the top of the
organization benefited from seeing nonfinancial information and introduced a highly successful
quality management system, which included an innovative quality improvement metric.
• Analog’s vice president, an experienced Baldrige Award examiner,translated the Baldrige criteria
into an internal corporate scorecard for his executive team.
• The scorecard includes:
▫ high-level financial metrics
▫ customer quality metrics, such as on-time delivery, lead time, and customer measured defects
▫ manufacturing process metrics, such as yield, part-per-million defect rates, and cycle times
▫ employee metrics, such as absenteeism and lateness.
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Balanced Scorecard
Kaplan and Nortan (1992) developed
a superior performance measurement
tool called Balanced Scorecard that
uses both financial and non-financial
measures for long-term performance.
Four Perspective of Initial BSC
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Balanced Scorecard
After implementation of tool and feedback of BSC users (1993),
Balanced Scorecard is not only measuremet system but also a core of
management.BSC depends on management whether to be a record
keeping instrument or a tool to focus on strategy to enchance
organizational performance.
(Larry D. Brady,FMC Corporation)
Therefore,measures on balanced scorecard must be specifically designed to
fit firm’s vision, mission,strategy, technology, and culture.
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Balanced Scorecard
Short term actions with long-term strategies?
an improved measurement system to core strategic management system
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Balanced Scorecard
with Balance Scorecard link
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Strategic Map in Balanced Scorecard
Describe the cause-effect relationships between strategic objectives
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Strategic Management System
• Mobilize change through executive leadership
• Translate the strategy into Operational Terms
• Align the organization to the strategy
• Motivate employees to make strategy their everyday job
• Govern to make strategy a continual process
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Balanced Scorecard
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Balanced Scorecard
The balanced scorecard is centered on four performance metrics or perspectives:
▫
Customers
▫
Internal processes
▫
Financial
▫
Learning and growth
When implemented properly, each one of these perspectives contains four subparts
consisting of
• Objectives - what the strategy is to achieve in that perspective
• Measures - how progress for that particular objective will be measured
• Targets - refer to the target value that the company seeks to obtain for each measure
• Initiatives - what will be done to facilitate the reaching of the target
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Balanced Scorecard
The term “scorecard” signifies quantified performance measures and
“balanced” signifies the system is balanced between:
▫ Short-term and long term objectives
▫ Financial and non-financial measures
▫ Lagging and leading indicators
▫ Internal and external performance perspectives
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BSC for Non-Profit Organization
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The Aim for Using BSC
Statistical data taken from Bain & Company Guide;
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The Aim for Using BSC
Organizations use BSC mainly because;
• Clarifying strategy and standing as the basic guideline
• Describing strategic position and directions schematically
• Including statements about strategic objectives and annual budget
• Standing as the link between key component for reaching the long
term target
• Making any strategic upgrades possible and easy
• Presenting the key elements in business strategy
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The Aim for Using BSC
Organizations use BSC mainly because;
• Allocating resources in the most efficient manner
• Simplifying the understanding of strategy
• Giving advantage of comparing performance of different business
units in the same framework
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Applying of BSC
Wallace’s three phases;
• Phase 1: The Strategic Foundation
• Phase 2: The Critical Components
• Phase 3: Deployment
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Applying of BSC
Phase 1: The Strategic Foundation
Step 1: Strategic Allignment
• Determination of a clearly defined strategy, objective and target
• Telling people what to do (objective) and what is expected
(target)
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Applying of BSC
Examples;
• Thanks to new drilling machines, we will increase the ratio of
winning soil work tenders by %50 in next 10 years.
• The time consumed for training employees will be decreased by %50
up to New Year through the implementation of new staff trainee
software system.
• We will decrease the cost and the time consumed up to % 15 through
the implementing of new mobile concrete mixing equipment and the
income will increase by % 20 in 6 months.
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Applying of BSC
Phase 1: The Strategic Foundation
Step 2: Communicating the Plan
• Transmitting the information by using appropriate
communicating tools
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Applying of BSC
Examples;
• Presentations, handouts or meetings for Executive Members
• E-mail, newsletters or town hall meetings for Employees
• Team meetings or Status memos for Project Teams
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Applying of BSC
Phase 1: The Strategic Foundation
Step 3: Strategic Areas
• Analyzing more than one perspective in one framework
Four main ares frequently used by managers;
• Financial
• Customer
• Process
• Employee’s learning and growth
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Applying of BSC
Other areas used depending on the business;
• Efficiency
• Safety
• Innovation
Or
• Philantrophy
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Applying of BSC
Examples;
Strategic Goal
Strategic Area
Thanks to new drilling machines, we will
increase the ratio of winning soil work tenders
by %50 in next 10 years.
Financial
The time consumed for training employers will
be decreased %50 up to New Year through the
implementation of new staff trainee software.
Employee’s learning
and growth
We will decrease the cost and the time consumed
up to % 15 through the implementing of new
Process
mobile concrete mixing equipment and the
income will increase by % 20 in 6 months.
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Applying of BSC
Phase 1: The Strategic Foundation
Step 4: Strategic Grids
• Connecting all the strategic objectives together within the light of
determined strategic goal.
• Investigation of the factors determining the strategy one by one
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Applying of BSC
Example;
Expanding the customer population
Customer
Address to more customer
Give the lowest prices
Financial
Decrease the production costs
Increase the production efficiency
Process
Use the workers efficiently
Employee's
Learning and
Growth
Train workers
Set workers time
schedule in the most
efficient way
Use material efficiently
Decrease prodigality
Use right tools with
right employees
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Applying of BSC
Phase 2 : Three Critical Components
Step 5: Measurements
• Determining whether the organization moves to the target or not
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Applying of BSC
Wallace suggestions;
• Ability of being linked with a strategic objective
• Being repeatable
• Standing as the indicator of long term targets or performance
• Being accountable, reliable, verifiable and accurate
• Being available when needed
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Applying of BSC
Phase 2 : Three Critical Components
Step 6: Targets
• Association of measurements with reasonable targets for
achieving the performance improvement
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Applying of BSC
Examples;
Strategic Goal
Thanks to new drilling machines, we will increase the ratio of winning soil work tenders by %50 in next 10
months.
Year
1
2
3
4
5
6
7
8
9
10
Number of Soil Work Tenders Gained
12
12
13
13
14
14
15
16
17
18
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Applying of BSC
Strategic Goal
The time consumed for training employers will be decreased %50 up to New Year through the implementation of
new staff trainee software.
Year
The Time
Consumed for
Training the
Employers per
Month (Hours)
March
(Today)
April
May
36
34
32
June July
30
28
August
September
October
November
December
26
24
22
20
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Strategic Goal
We will decrease the cost and the time consumed up to % 15 through the implementing of new mobile concrete
mixing equipment and the income will increase by % 20 in 6 months.
Month
1
2
3
4
5
6
Time consumed for mixing
concrete per one truck
(minutes)
17 (20 before
installation
17
17
17
17
17
Yearly Income ($)
200000
210000
220000
230000
235000
240000
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Applying of BSC
Phase 2 : Three Critical Components
Step 7: Programs
• Tools used for achieving the strategic objective
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Applying of BSC
Phase 3 : Deployment
Step 8: Launch
• Performing of last checks
• Feedback request and evaluation
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Applying of BSC
The functionality of BSC lives with the
absolute adoptance by audience!
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Case Studies
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Case:Private Sector
Balanced Scorecard for Insurance Companies in Turkey
Financial Measures
Mean
Customer Measures
Mean
Accounting Profit/ Equity
2.0225
Customer Satisfaction
2.1795
Technical Profit/Premium Received
3.6410
Market Share
4.0514
Loss Ratio
4.0510
Customer Loyalty
4.4615
Banded Rates
4.8205
Rate of New Customer Acquisition
4.5128
Accounting Profit / Premium Received
5.0769
Customer Profitability
4.7949
Equity / Technical Provisions
5.1026
Customer Complaints
4.8462
Premium Received / Equity
5.4359
Retention Rate
5.5385
Brand Recognition
5.1538
Profit Before Tax / Premium Received
5.5641
Number of Customers
5.2564
Agency Claims /Equity
5.5897
Total Cost to Customer
5.3077
Liquid assets /Total assets
5.5897
Agencies Performance
5.5641
Liquid assets /Short term Liabilities
5.6154
Customer Loss
5.6667
Compensation /Payment Rate
5.6154
Adds Cost as a Percentage of Sales
5.6923
Expense Ratio
5.6667
Cancellation Rate of Sales
5.8462
Profitability of Insurance Funds
5.6667
Frequency (Number of Sales Transactions)
5.9744
Net assets/ Insurance Funds
5.8462
Premium Reinsurance Receivable/ Total Assets
5.8718
Total Loans/ Total Assets
5.9231
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Case:Private Sector
Balanced Scorecard for Insurance Companies in Turkey
Internal Business Measures
Mean
Customer Database Availability
3.3846
Employee Benefit Rate
3.8718
Number of Positive Media Stories
4.6154
Consistency of Claim to Compensation
4.6410
Business Mix to Marketing Segments
4.8718
Community Involvement
5.0256
Frequency of Claim to Compensation
5.2051
Frequency (Cancellation of operations)
5.4359
Quality of The Policies
5.5897
Loss Ratio
5.6154
Learning and Growth Measures
Employee Satisfaction
Invest in Training Employee
Motivation
Reward and Incentive
Communication Between Employee and
Departments
Employee Offers
Quality of The Work Environment
Employee Improvement
Employee Productivity
Time for The Training of Employees
Ethics Violations
Leadership Development
Absenteeism
Support Operating System
Turnover Rate
Employee Participation in Professional or Trade
Associations
Too many measures decreases the efficiency of BSC !!!
Mean
4.0256
4.2821
4.7692
4.7949
4.9231
4.9744
5.0000
5.0256
5.2821
5.4359
5.5641
5.6154
5.7179
5.8718
5.8974
6.9487
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Case :Private Sector
Balanced Scorecard for Insurance Companies in Turkey
Efficient Balanced Scorecard
Financial Measures
Mean
Customer Measures
Mean
Profitability of Insurance Funds
5.6667
Customer Loss
5.6667
Net assets/ Insurance Funds
5.8462
Adds Cost as a Percentage of Sales
5.6923
Assets
5.8718
Cancellation Rate of Sales
5.8462
Total Loans/ Total Assets
5.9231
Frequency (Number of Sales Transactions)
5.9744
Internal Business Measures
Mean
Learning and Growth Measures
Mean
Frequency of Claim to Compensation
5.2051
Absenteeism
5.7179
Frequency (Cancellation of operations)
5.4359
Support Operating System
5.8718
Quality of The Policies
5.5897
Turnover Rate
5.8974
Premium Reinsurance Receivable/ Total
Employee Participation in Professional or Trade
Loss Ratio
5.6154
Associations
6.9487
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Case : Balanced Scorecard of A and S
Construction Private Limited (ASPL)
Background Information :
• a small size family construction firm established in India,1975
• 100 employees(4 top management,30 mid-level management,rest is
skilled or unskilled operatives and supervisors
• Focus on infrastructure projects of central government(85%of
revenue) and real estate projects(15% of revenue)
• steady growth rate of 12%
• High demand: 5 times than firms capacities minimizing the rivalry
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Case : Balanced Scorecard of A and S
Construction Private Limited (ASPL)
Problems:
• Delays occur due to
▫ poor internal and external communication,
▫ poor site management
▫ ineffective planning and scheduling
• 5% tender success rate
• Lock-up mone
▫ Higher raw material price
▫ Delay in salary
▫ Decrease in manpower turnover
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Case : Balanced Scorecard of A and S
Construction Private Limited (ASPL)
• Data gathered:financial statements(2004-2006), summary of offers made to the clients by
ASPL and its competitors, and summary of offers received by ASPL from its suppliers.
• Education on balanced scorecard for top management: concept, its usefulness in strategy
communication, and implementation and success stories of application
▫ Seperate session would be conducted for lower management in local language later.
• Vision and mission constructed
▫ Vision : the most trusted construction firm of their government clients as well as the
private-sector clients
▫ Mission : We commit ourselves to contribute to the development of the country by
constructing roads, bridges, industrial and commercial real estate of customer-defined
quality and time-frame at competitive prices. We will achieve this through continuous
cost reduction and productivity improvement. We will share our wealth with our
employees.
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Case : Balanced Scorecard of A and S
Construction Private Limited (ASPL)
• Possible scorecard objectives and measures was collected
▫ Low price
▫ Project completion on time
▫ Effective communication
▫ Effective planning and scheduling
▫ Increase in tender success rate
▫ Higher quality
▫ Client expectation
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!!! Problematic Learning Perspective:
participants of construction projects are ‘joined’ temporarily until the completion of the project
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Case: Performance Measurement of Korean
Construction Companies with BSC Approach
• Target 34 of 500 top Korean construction companies included 19 building constructionoriented companies, 10 civil and plant business-oriented companies, and 5 both.
• Determine performance criteria according to
▫ Interview with 15 construction companies(5 large,5 mid-size and 5 small size) for goals
and vision
▫ Lituraturized management strategies for construction companies
▫
long-term master plans of construction companies
• Collect data by questionnaire survey and by interviews carried out in February–May 2005
and financial data from annual report
• Estimate weight for performance criteria by 12 experts via survey
57
Case: Performance Measurement of Korean
Construction Companies with BSC Approach
Perspective/Objective
Measurement
Scoring Rubrics
Assesment Method
Profitability
Return on equity (ROE)
Common percent scale
Annual Report
Growth
Net sales growth rate
Relative ranking
Annual Report
Stability
Debt ratio
Multiple scale
Annual Report
External customer satisfaction
State of award
Strict EA limits
Questiannaire
Internal customer
Employee turnover rate
Distribution range
Questiannaire
Market share
New orders received
Relative ranking
Questiannaire &Annual Report
R&D
R&D expenses(% of sales)
Distribution range
Questiannaire &Annual Report
Technological capability
Intellectual property
Strict EA limits
Questiannaire &Annual Report
Business efficiency
G&A expenses(% of sales)
Common percent scale
Questiannaire
A. Financial
B. Customer
C. Internal business process
D. Learning and growth
HR development
% of employees with advanced degrees Distribution range
Questiannaire
Organization competency
Quality of knowledge management
5-point rating scale
Questiannaire
Informatization
Level of informatization
5-point rating scale
Questiannaire
58
Case: Performance Measurement of Korean
Construction Companies with BSC Approach
Perspective/Objective
Measurement
A. Financial
Weight
Mean Score
0.333
3.14
Profitability
Return on equity (ROE)
0.170
3.29
Growth
Net sales growth rate
0.078
2.94
Stability
Debt ratio
0.086
3.03
0.187
2.88
B. Customer
External customer satisfaction
State of award
0.060
2.41
Internal customer
Employee turnover rate
0.036
3.53
Market share
New orders received
0.091
2.94
0.211
3.06
C. Internal business process
R&D
R&D expenses(% of sales)
0.070
2.56
Technological capability
Intellectual property
0.057
2.71
Business efficiency
G&A expenses(% of sales)
0.083
3.74
0.270
2.91
D. Learning and growth
HR development
% of employees with advanced degrees
0.070
2.75
Organization competency
Quality of knowledge management
0.111
3.09
Informatization
Level of informatization
0.089
2.82
Total Score : 3.02
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Case: Quality Balanced Scorecard in
Construction Industry
60
Case: Visual Balanced Scorecard:Hydro Group
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