Benefits of Balanced Scorecard Implementation

Benefits of Balanced Scorecard Implementation Introduction Business organizations are facing increasingly complex markets, customers and suppliers, and fierce global competitive pressures. In such competitive environment, access to the right information is important to ensure high quality decision making and thus, the success of the organization. Resulting from the changing needs of information in a competitive environment, pressure was put on accounting information to increase its relevance. Extensive and exclusive use of financial measures has been criticised due to their historic nature. Financial measures reveal a great deal about an organisations past actions but nothing about its future alertness. Exclusive reliance on financial indicators could promote behaviour that sacrifices long term value creation for short term performance (Dearden, 1969). Indeed, an overemphasis on achieving and maintaining short term performance can cause a company to overinvest in short term fixes and underinvest in sustainable value creation, which would be detrimental to its future success. In an attempt to remedy the shortcomings of financial performance measures, Kaplan and Norton (1992) devised the Balanced Scorecard which integrates financial and non financial strategic measures. The Balanced Scorecard will be discussed in this paper focusing on what the Balanced Scorecard is, the theory underlying it and how it is being practiced. The manner in which the Balanced Scorecard is practiced in two companies, namely Metro Bank which is adapted from Kaplan and Norton (1996) and Asia Telecom, a telecommunication company whose name is disguised to preserve confidentiality is also discussed in this paper. What is the Balanced Scorecard? The Balanced Scorecard is a tool, which systematically expands the measurement areas traditionally involved in accounting. It provides a system for measuring and managing all aspects of a companys performance. The scorecard balances financial measures of success with non financial measures of drivers of future performance. These non financial measures include measures on customer satisfaction, internal processes, the organisations innovation and improvement activities. The Balanced Scorecard measures organizational performance across four different but inter-related perspectives: financial, customer, internal and learning and growth perspectives (Atkinson, Kaplan and Young, 2004). The Balanced Scorecard, as devised by Kaplan and Norton (1992), is thus a balanced performance measurement system that enables companies to track financial results while simultaneously monitoring how they are building their capabilities with customers, internal processes, employees and systems for future growth and profitability. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results (Kaplan and Norton, 1996). The Balanced Scorecard is a comprehensive framework that translates a companys vision and strategy into a coherent set of performance measures. It is an integral part of an organizations strategy execution process that emphasizes communicating strategy to employees and providing feedback to help attain objectives. The scorecard can be used at different levels of an organization. For each level, the Balanced Scorecard approach identifies the key components of operations, sets goals for them, and finds ways to measure progress toward achieving these goals. Taken together, the measures provide a holistic view of performance both inside and outside the organization, and allow each constituent of the organization to see how his or her activities contribute to attaining the organizations overall mission (Von Bergen and Benco). Essentially, the Balanced Scorecard measures are used to translate vision and strategy into concrete directions for action by people throughout the organization. The measures prescribe a plan for strategic execution and create focus for the future. The measures communicate important messages to all organizational units and employees and thus, influence their actions. To take full advantage of this power, companies soon integrated their new measures into a management system (Kaplan and Norton, 2001). Thus, the Balanced Scorecard concept evolved from a performance measurement system to a strategic management system. The strategic management system focused the entire organization on implementing long term strategy by aligning and supporting key processes. The essence of the above discussion can be summarized using Atkinson, Kaplan and Youngs (2004) definition. The Balanced Scorecard is a strategic management system that translates an organizations strategy into clear objectives, measures, targets and initiatives organized by four perspectives. These four perspectives and other principles underlying the Balanced Scorecard will be discussed in the next section of this paper. The Balanced Scorecard: Theory The Balanced Scorecard is based on several underlying premises. The first is that financial measures alone inadequately measure the health of a company and that a single-minded pursuit of financial objectives could lead to long-term ruin. The second is that Balanced Scorecard focuses on process, not metrics. As such, it is forward-looking (e.g., How can our organization retain its best customers?) rather than backward-looking (e.g., What were our organizations earnings per share last quarter?). The third is that the scorecard is an analytic framework for translating a companys visions and business strategies into specific, quantifiable goals and for monitoring performance against those goals (Von Bergen and Benco). The Balanced Scorecard framework consists of four perspectives of which the organizations performance is measured. Across organizations, the relevant Balanced Scorecard components vary depending on the organizations specific goals and circumstances. There is no theory that four perspectives are necessary and sufficient for an effective balanced scorecard. However, there is some agreement that a typical BSC would include the following four components in some form (Horngren, Foster, Srikant, 2000): Learning and growth perspective: Can the firm continue to improve and create value for customers? Internal business process perspective: In which capabilities must the firm excel? Customer perspective: How do customers see the firm? Financial perspective: How does the firm look to providers of financial resources? The financial perspective Kaplan and Norton do not disregard the traditional need for financial data. Indeed, the ultimate objective for profit-seeking companies is a significant increase in shareholder value. Financial performance measures indicate whether the companys strategy, implementation and execution are contributing to its profitability. Financial objectives typically relate to profitability and measured, for example, by economic value added, return on investment or net profit. Companies increase economic wealth through two basic approaches revenue growth and productivity. Revenue growth comes from either growing wider (new products, markets and customers) and/or from growing deeper by achieving more price or volume from existing relationships. Productivity comes from reducing the cost structure, and/or the fixed and working capital required to support the business. The customer perspective The customer perspective is about the identification of the customer and market segments in which the company will compete and the measures of the companys performance in these targeted segments. Typical core measures of the successful outcomes from a well-formulated and implemented strategy include customer satisfaction, customer retention, new customer acquisition, customer profitability and market and account share. Beyond these measures, the companies must also identify the objectives and measures for customer value proposition, which describes the unique mix of product, price, service, relationship and image that a company offers its targeted group of customers. Customer value proposition that defines how company meets the needs of its customers vis-Ã  -vis its competitors is essentially a differentiation strategy. There are three generally acknowledged generic value proposition: Operational Excellence is characterized and differentiates itself by a combination of products/services that provide quality, selection, and competitive prices, and order fulfillment capability that is fast and timely. Customer Intimacy is characterized and differentiates itself by the quality and personalization of its relationship with its customers. Product Leadership is characterized and differentiates itself by the functions, features, and overall performance of its products and services. The value proposition is crucial because it helps an organization connects its internal processes to improved outcomes with its customers. The internal business process perspective Once the financial and customer perspectives are identified, the critical internal processes in which the organization must excel to achieve its objectives are defined. These processes enable the organization to deliver the value propositions that will attract and retain customers in targeted market segments and achieve productivity improvements for the financial objectives. Since organizations perform many different processes, it is useful to group the processes into four groups: Build the franchise by spurring innovation to develop new products and services and penetrate new markets and customer segments. Increase customer value by expanding and deepening relationships with existing customers. Achieve operational excellence by improving supply-chain management, internal process, asset utilization, resource-capacity management and other processes. Become a good corporate citizen by establishing effective relationships with external stakeholders. Measures of these processes allow managers to evaluate how well their business is running, and whether its products and services conform to customer requirements (the mission). The learning and growth perspective This perspective describes the infrastructure necessary for the achievement of the objectives identified in the other three perspectives. Under this perspective, objectives for the people, systems and organizational alignment that create long term growth and improvement are identified. The objectives for these three components normally lie in the following areas: Employees capabilities Does the employees possess the appropriate level of skill and knowledge to perform the work/function required to achieve strategy? Information system and database Is the information system and database available to provide excellent information to employees for process improvement required? Organization alignment Corporate culture and climate Do employees have the awareness and understanding of the vision, strategy and cultural values needed to execute strategy? Goal alignment Are goals and incentives aligned with the strategy at all level? Knowledge sharing Do employees and teams share best practices and other knowledge relevant to strategy execution? This perspective ultimately emphasizes the role of intangible assets people, system, climate and culture in driving organizational capabilities for learning and long term growth. Strategy Map A strategy map is a comprehensive visual representation of the linkages among objectives in the four perspectives of the Balanced Scorecard. Each objective in the four perspectives is portrayed in a cause and effect relationship where gains in the learning and growth perspective lead to improvements in internal business processes, which in turn lead to higher customer satisfaction and market share, and finally to superior financial performance. The strategy map tells the story of the companys strategy. It identifies for employees and management the importance of each perspective as a feeder of success into the next perspective. It also identifies and makes explicit the hypotheses about the cause and effect relationship between outcome measures (lag indicators) for example, customer satisfaction and return on investment, and performance drivers (lead indicators) for example, motivated and skilled employees, short cycle time processes and product development processes (Atkinson, Kaplan and Young, 2004). Lagging indicators indicate whether the strategic objectives in each perspective are achieved while leading indicators represent how the outcome should be achieved. The causal link between lagging and leading indicators not only occurs within the individual perspectives, but also across the four perspectives of the Balanced Scorecard (Figge, Hahn, Schaltegger Wagner, 2002) Organizations build strategy map from the top down, starting with the destination and then charting the routes that lead there. The vision and mission of the company provides a picture of the companys overall goal. The strategy of achieving the companys vision and mission, when translated into objectives and measures in each of the perspectives provide more meaning and clarity to employees. Measures describe how success in achieving an objective will be determined and thus give clarify to the objective. Typically, the objectives in the four perspectives of a strategy map lead to 20-30 measures. However, the number of measures is irrelevant when these measures are viewed as inter-dependent measures that are instrumental for achieving a single strategy. The multiple measures on the Balanced Scorecard are linked together in a cause and effect network that describes the business strategy. Targets are set for each measure. A target establishes the level of performance or rate of improvement required for a measure. Level of performance required should represent excellent performance. Companies identify initiatives, that is, short term programs and action plans that will help companies to achieve targets. Initiatives that will not have a major impact on one or more scorecard objectives should be de-emphasized (Kaplan and Norton, 2004). The Balanced Scorecard: In practice Having discussed the theory and principles underlying the Balanced Scorecard, we will look at the manner in which the measures of the Balanced Scorecard are developed and communicated in the corporate world by taking the case of Metro Bank and Asia Telecom. Metro Banks case adapted from Kaplan and Norton (1996) is used to illustrate revenue growth strategy whilst Asia Telecom is used to illustrate both revenue growth and productivity strategy. Metro Bank case Metro Bank, a retail banking division of a major bank was facing problem of excessive reliance on a single product. The revenue growth strategy is undertaken to resolve this problem, that is, to reduce earning volatility by broadening sources of revenue with additional products for current customers. In the process of developing the Balanced Scorecard, the strategy is translated into objectives and measures in the four perspectives. The financial objective to support revenue growth strategy was to broaden the mix of revenue. The financial measure is the percentage increase in year to year revenue (lag indicator) and revenue mix (lead indicator). The existing customers of the bank however do not view their banker as the logical source for a broader array of products such as mutual funds, credit cards and financial advice. The banks executive concluded that if the banks new strategy were to be successful, they must shift customers perception of the bank from that of a transactions processor of checks and deposits to a financial adviser. With this, the customer objective was to increase customer confidence in the banks financial advice and increase customer satisfaction. This is done by building long term relationship with targeted customers so that the bank can sell them multiple financial products and services. The measures are share of customer segment i.e. number of Metros customers in targeted segment (lag indicator) and depth of relationship (lead indicator). Internal activities that need to be mastered if the strategy were to succeed were identified as 1) understand customers, 2) develop new products and services and 3) cross-sell multiple products and services. Each business process would have to be redesigned to reflect the demands of the new strategy. For example, the selling process had traditionally been dependent on institutional advertising of the banks services. The bank did not have a selling culture. The bank personnel were reactive. A major reengineering program was launched to redefine the sales process into one which is relationship based. Measures introduced were cross-sell ratio (lag indicators) which measured selling effectiveness and hours spent with customers (lead indicators) to send signal to salespersons of the new culture required by the strategy In order to improve employee effectiveness in implementing the revenue growth strategy, the learning and growth component of the scorecard identified the need for 1) salespersons to acquire a broader set of skills (to become a financial counselor with broad knowledge of the product line), 2) improved access to information (integrated customer file), and 3) realignment of the incentive systems to encourage the new behavior. The lag indicators included a productivity measure, average sales per salesperson, as well as the attitudes of the work force as measured by an employee satisfaction survey. The lead indicators focused on the major changes that had to be orchestrated in the work force. These indicators are 1) the upgrading of the skill base and qualified people i.e. strategic job coverage ratio, 2) access to information technology tools and data i.e. strategic availability ratio, and 3) the realignment of individual goals and incentives to reflect the new priorities i.e. personal g oal alignment. Asia Telecom Asia Telecom, a telecommunication provider strives to grow business profitability and improve operating efficiency in a highly competitive environment. The company embarked on the following strategy: Growth strategy: expand new business while defending the traditional fixed line business Productivity strategy: improve efficiency by managing new capital investment and increase asset utilization In the Balanced Scorecard development process, the strategy is translated into objectives and measures in the four perspectives. Prepared and motivated work force Productivity strategy Growth strategy Defend traditional business Expand Regionally Grow New Business Manage Capital Expenditure Increase Asset Utilization Improve cost efficiency Improve returns Delight the customer Exceptional value services One stop solution Enduring relationship Synergy with Partners Ensure win-win partnership Innovation Process Develop alternative channels Develop product services offerings/bundles Operations Process Focus on operational efficiency Optimize deployment of shared services Improve Strategic Skills Competencies Create conducive organization climate Access to strategic information Customer Perspective Internal Perspective Financial Perspective Learning Perspective Figure 1 The Asia Telecom Strategy Map Growth strategy is pursued by: 1) defend traditional business, 2) expand regionally and 3) grow new business. Productivity is increased by: 1) manage capital expenditure, 2) optimize asset utilization and 3) improve cost efficiency. The company intends to grow new business and expand regionally (acquisition of other business) while defending its traditional fixed line business. Asset utilization and capital expenditure management is important as telecommunication assets are costly, require high investment and can quickly become obsolete with the advent of new technologies. Operating costs efficiency is targeted to reduce costs in running the business. Financial measures are earning per share, return on investment, revenue growth, operating costs per staff and EBITDA (earnings before interest, tax, depreciation and amortization) (lag indicators) and strategic business support (lead indicator). Asia Telecom offers a variety of products and services to customers and builds enduring relationship with its customers. The customers are valued as always right. The company aspires to improve service quality in its outlets to retain and satisfy its customers. A Mesra Pelanggan Project was launched to strengthen necessary capabilities and capacities, strengthen and build on customer relation basics and ultimately, delight the customers. The customer measures identified are 1) one stop solution, 2) enduring relationship, 3) exceptional value services, and 4) ensure win-win partnerships. The measures are service level agreement compliance, customer and partner satisfaction index and customer retention and acquisition (lag indicators) and service level agreement and satisfaction survey (lead indicator). In order to achieve the above objectives, internal business processes identified are 1) create product and services offerings/bundles, 2) develop alternative channels, 3) focus on operational efficiency and 4) optimize deployment of shared services. Business processes needs to be redefined and changed to reflect the needs of the new strategy. For example, product development process has been designated to a small group of product development personnel. The rest of the marketers are not involved in product development even though they have direct contact and interaction with customers. A change in mindset was instigated to encourage every personnel to spend more time talking with customers to learn about their emerging needs and to think of innovative solutions to these needs. The measures include new product revenue, new channel ratio, expense ratio and cost savings (lag indicators) and product and channel development cycle and cost control (lead indicators). These measures clarify w hat needs to be done in order to achieve the objectives identified. The work force must be motivated and prepared to produce the level of effectiveness required to support the objectives in the three other perspectives. In order to foster long term growth and improvement, there is need to 1) improve strategic skills and competencies, 2) create conducive organization climate and 3) provide access to strategic information. Positive work culture including integrity, sense of urgency, teamwork and group interest was instilled to improve quality of the work force. Employee innovativeness is encouraged to create employees that are capable of applying knowledge to produce new products and services. The outcome measures are competency index, employee satisfaction index and climate survey index. The lead indicators which are organized to create change in the work place are staff development vs. plan, employee survey, organization climate survey and strategic systems availability vs. plan. Figure 2 Asia Telecoms Balanced Scorecard Strategic Objectives Measures Outcome Measures (Lag) Performance Drivers (Lead) Financial Defend traditional business Expand regionally Grow new business Manage capital expenditure Optimize asset utilization Improve cost efficiency Earning per share, EBITDA Return on investment Revenue growth Operating costs per staff Strategic business support Customer One stop solution Enduring relationship Exceptional value services Ensure win-win partnerships Customer satisfaction index Customer retention acquisition Partner satisfaction index Service level agreement compliance Customer satisfaction survey Customer satisfaction survey Partner satisfaction survey Service level agreement Internal Create product and services offerings/bundles Develop alternative channels Focus on operational efficiency Optimize deployment of shared services New product revenue, % of contribution to profit New channel ratio Expense ratio Cost savings Product development cycle Channel development cycle Cost control Learning Improve strategic skills and competencies Create conducive organization climate Access to strategic information Competency index Employee satisfaction index Climate survey index Staff development vs. plan Employee survey Organization climate survey Strategic systems availability vs. plan Figure 2 summarizes the objectives and measures for Asia Telecoms Balanced Scorecard. The scorecard and strategy map (Figure 1) describes a system of cause and effect relationships, incorporating a mix of leading and lagging indicators, all of which eventually point to improving future financial performance. Based on the above cases, it can be seen that the Balanced Scorecard framework translates and communicate strategy to the whole organization. In the case of Asia Telecom, employees understand what needs to be done in order to achieve the companys strategy to increase productivity. The measures in place such as competency index send signals to employees of what is required and focuses change efforts. There is shared understanding of the companys vision. From the cause and effect relationship inherent in the scorecard model, employees are able to see how they contribute to the companys success. Balanced Scorecard as a Strategic Framework for Action Companies also use the Balanced Scorecard as the framework around which the management processes and programs are built. By identifying the most important objectives on which an organization should focus its attention and resources, the scorecard provides a framework for a strategic management system that organizes issues, information, and a variety of vital management processes. These processes are: Clarify and translate vision and strategy Communicate and link strategic objectives and measures Plan, set targets and align strategic initiatives Enhance strategic feedback and learning (Kaplan and Norton, 1996) By using the case of Asia Telecom, the manner in which the strategic framework is put into action is discussed next. Clarify and translate vision and strategy The Balanced Scorecard process starts with the senior management team working together to translate the business units strategy into specific strategic objectives. When translating the strategic into objectives in the four perspectives discussed above, the management must ensure that there is consensus on what objectives should be prioritized and what measures, targets and initiatives should be used. Consensus is important to ensure that everyone in the company is pursuing the same agenda. In Asia Telecom, sales and marketing has traditionally been regarded as important as they bring in revenue. However, as business becomes more competitive, the traditional fixed line business comes under attack, eating up the companys bottom line. There is increasing need for innovation to create new products and services to retain and win customers. New business needs to be developed and nurtured. In developing the scorecard, this strategy is agreed upon and translated into objectives in the four p erspectives. The development of the scorecard enables the management to agree, prioritize and be accountable for the objectives of the business. Communicate and link strategic objectives and measures The Balanced Scorecards strategic objectives and measures are communicated via company newsletters, bulletin boards, video conferencing and groupware to all levels of organizational constituents. The communication serves to signal to all employees the critical objectives that must be accomplished if the companys strategy is to succeed. The communication process enables the alignment of goals throughout the organization. Once employees understand the high level objectives and measures, they can establish local objectives that support the companys objectives. In Asia Telecom, the Balanced Scorecard is cascaded down to all levels and more than 180 Balanced Scorecards were developed at various levels of the company. The Balanced Scorecards reflect each organizational units objectives in achieving the overall objectives. These scorecards can be accessed online using a Balanced Scorecard system developed in house by the company. Plan, set targets and align strategic initiatives Managers should establish the following to use the scorecard in an integrated long range strategic planning and operational budgeting process: Set long term, quantifiable and stretch targets for the scorecard measures. Identify initiatives (investments and action programs) and resources for these initiatives which will enable the achievement of targets. These initiatives are intended to close the gap between targets set for strategic measures and current performance on those measures. Link to annual resource allocation and budgets i.e. formulate specific short term targets for the scorecard measures. This will allow managers to determine whether their strategy is valid and enable progress monitored. In Asia Telecom, the customer satisfaction index is targeted at more than 90% in 2006. The initiative to achieve the target is via the Mesra Pelanggan Project and customer relationship management. Resource allocation required to achieve the target is included as part of the business plan. Any deviation from the initial target can be picked up during the business plan review. This is also available in the Balanced Scorecard system which links strategy, business plan and performance. It also makes all strategic initiatives and resources congruence to Asia Telecoms Strategy. Enhance strategic feedback and learning The Balance Scorecard enables managers to monitor and adjust the implementation of their strategy, and if necessary, make fundamental changes in the strategy itself. The learning process is of two types: Single loop learning process: feedback about whether the planned strategy is being executed according to plan Double loop learning process: feedback about whether the planned strategy remains a viable and successful strategy. This learning process will prompt managers to question their underlying assumptions and reflect on whether the strategy under which they are operating remains valid in consideration of the current evidence, observations, and experience. The strategic feedback and learning process feeds into the next vision and strategy process where objectives in the various perspectives are reviewed, updated, and replaced in accordance with the most current view of the strategic outcomes and required performance drivers for the upcoming periods. Suppose that the data reveal that the organizations employees and managers have delivered on the performance drivers employees skills and competencies has been improved, tools and technology are available, new products and services have been developed and introduced on schedule. Now, th