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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 accountability

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 terms.

Align the organization to the strategy

Make strategy everyones 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 90s
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

Demings 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 members 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 Womens 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 Banks 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
feedback loops.