Harry Chapman Principal Bay Area Consulting Group LLC Hchapman@baconsulting.net (415) 971-5746

1. Introduction to the Balanced Scorecard Harry Chapman Principal Bay Area Consulting Group LLC Hchapman@baconsulting.net (415) 971-5746 14

2. Quotes from Michael Porter • “A strategy delineates a territory in which a company seeks to be unique.” • “Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.” • ““The essence of strategy is that you must set limits on what you're trying to accomplish.” • “The essence of strategy is choosing what not to do.”

3. Why Do Organizations Struggle So Hard With Strategy? “1 in 10 organizations execute their strategies successfully” Source: Fortune Magazine “Only 57% of Executives are fully attuned to the company’s strategic direction” Source:The Australian Financial Review “72% of CEOs believe that executing their chosen strategy is more difficult than developing a good strategy” Source:Malcolm Baldrige CEO Survey

4. The “burning platform” in business today Execution is the Key “The problem is….the mistaken belief that developing the right strategy will enable a company to rocket past competitors. In reality, strategy is less that half the battle. … In the majority of cases – we estimate 79% - the real problem isn’t [bad strategy].. It’s bad execution.” Source: “Why CEO’s Fail” Ram Charam and Geoffrey Colvin, Fortune

5. The VISION Barrier Strategy is not understood by those who must implement it…and not translated into objectives The PEOPLE Barrier Personal goals, knowledge building, and competencies are not linked to strategy implementation The MANAGEMENT Barrier Management systems are designed for operational control and tied to budgets, not strategy The OPERATIONAL Barrier Key processes are not developed to build a strategic advantage…and initiatives are not aligned to strategic priorities Based Upon Current Research, There Are Four Barriers To Strategic Implementation Only 5% of the employees understand the strategy STRATEGY 85% of executive teams spend less than one hour per month discussing strategy Only 25% of managers have incentives linked to strategy 60% of organizations do NOT link budgets to strategy

6. The Balanced Scorecard Addresses These Issues The Problem The Solution 1. The Vision Barrier • 1. Translating the Vision • Identify strategic objectives, linkages, measures, targets and initiatives 2. The People Barrier • 2. Linking the Organization • Communicate and align with the strategy • Define individual contribution to the strategy • Link to performance management and compensation 3. The Operational Barrier • 3. Aligning Resources with the Strategy • Prioritize strategic initiatives • Link planning and budgeting to the strategy 4. The Management Barrier • 4. Feedback and Learning • Focus management meetings on strategic priorities • Provide measurement feedback • Test strategic hypotheses

7. IT Organizational “Silos” Compliance ServiceLines Operations QualityandSafety Finance Community HR There is Little Coordination among “Silos”

8. Strategy is About Choices • There are several ways or Strategies to cross the river • Build a boat • Build a raft • Build a helicopter • Build a bridge • Dig a tunnel • Each can be successful in achieving the goal

9. The Alignment Problem • Popular “Buzz Word” • Huge Issue • Title of Kaplan & Norton’s latest book:

10. Good Organizational Alignment Vision & Goals TheGoal of Alignment Poor Organizational Alignment Vision & Goals

11. Definition of the Balanced Scorecard “The Balanced Scorecard is a framework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behaviour and performance.” The Balanced Scorecard Collaborative

12. Balanced Scorecard*What Is It? • A balanced scorecard is a management process that: • Aligns corporate strategy with strategy in operational and tactical units • Focuses the organization on objectives that enable the strategy to be implemented • Facilitatescommunications within organizations • Is the “process of processes” that oversees other management tools * originally developed by Robert Kaplan and David Norton

13. Ultimate Measures Drivers The Balanced ScorecardThe Four Perspectives • The Balanced Scorecard helps measure the impact of strategic decisions on the enterprise by factoring metrics from four key areas:

14. The Balanced Scorecard Provides a Framework to Translate the Vision and Strategy Into Operational Terms The Vision • Measurement is the language that gives clarity to vague concepts Financial Perspective "If we succeed, how will we look to our shareholders?” • Measurement is used to communicate, not to control Customer Perspective "To achieve my vision, how must I look to my customers?” Internal Perspective • Building the scorecard develops consensus and teamwork throughout the organization "To satisfy my customer, at which processes must I excel?” Organization Learning "To achieve my vision, how must my organization learn and improve?”

15. Balanced Scorecard Overview Strategy BALANCE

16. 1. Economic model of key levers driving financial performance The Balanced Scorecard Architecture Is Based on an Understanding of the Basic Building Blocks of the Strategy Financial Perspective Return on Investment Revenue Strategy Productivity Strategy Sources of Growth Sources of Productivity 2. Value proposition to target customers Customer Perspective Value Proposition Functionality Quality Time Image Relationship Price Internal Process Perspective 3. Value chain “Build the Brand” “Make the Sale” “Deliver the Product” “Service the Customer” 4. Critical enablers of performance improvement, change and learning Learning & Growth Perspective Staff Competencies Technology Infrastructure Climate for Action + +

17. The Revenue Growth Strategy The Productivity Strategy “Improve stability by broadening the sources of revenue from current customers” “Improve operating efficiency by shifting customers to more cost-effective channels of distribution” Improve Returns Financial Perspective Improve Operating Efficiency Broaden Revenue Mix Increase Customer SatisfactionThrough Superior Execution Increase Customer Confidence in Our Financial Advice Customer Perspective Internal Perspective Provide Rapid Response Understand Customer Segments Develop New Products Cross-Sell the Product Line Shift to Appropriate Channel Minimize Problems Increase Employee Productivity Learning Perspective Develop Strategic Skills Align Personal Goals Access to Strategic Information A Balanced Scorecard Is More Than a List of Measures...A Good Balanced Scorecard Tells the Story of Your Strategy

18. SVA-based decision & resource management systems Commercial Management Y2K Move from custom to COTS applications A Real-Life Example SVA Financial Non-Financial Profit Optimization Emphasis Public Policy Emphasis Profitable Growth Emphasis Shareholder Margin Management Investment Management Public Mandates Customer Retention Enhance Value of Assets New Revenue Growth “Good Business” & Community Interests Customer Profitability Grow the Business Enhance Customer Focus Secure the Base Effective Governance Efficiency & Productivity Public Support Service Excellence Market Development New Strategic Businesses & Markets Value-Added Solutions Public Support Goodwill and consent to operate Support direct customers’ value propositions Enhance value by maximizing margins in emerging markets Support BC Hydro shareholder objectives Grow customer profitability & utilization Manage assets & investments to improve cash profits Profitable growth through strategic market entry/exit Customer Balance multiple objectives Commercial Availability Deliver on promises Competitive price Targeted energy-related solutions Value Proposition Create new product ideas Issues Management (i. e. Sinkhole) Operating plans to maximize total margin Investment plans for new plants Understand customer needs and market requirements Build/invest/divest to capitalize on new opportunities Manage M&CS and T&D relationships Clear understanding of constraints and impacts [e.g. Dam Safety, WUPs] Invest/ divest/maintain assets commercially Internal Enhance Power Supply’s capabilities Partner with direct customers Build a strategic relationship with Powerex Develop and maintain Gov't and community relationships Partner with direct customers Gather customer, market and competitor intelligence Ensure fit with Power Supply’s strengths and strategic direction Define/ develop relationship with M&CS and T&D • Stakeholder input • Community • Aboriginal • Gov’t • Other Continue to strengthen operating relationship with Powerex Operating, environmental, and resource data Scan for opportunities entry/exit Understand core capabilities Commercial Resource Optimization Operational Information Strategic Tools for the Future Web-based information delivery and self-service Asset Management Leadership Build a Strong and Capable Organization Communications and Information Competencies A Strong & Capable Organization Consultative Management Relationships Aligning the Workforce Flexibility Diversity [Revised Dec. 2, 1998]

19. The Art of Strategy • “Is to Identify and Excel at the Critical Few Processes that are the Most Important to the Customer Value Proposition” Source: Strategy Maps – Robert S. Kaplan and David P. Norton

20. Consider the Timeframe for Value Creation Long-Term Growth in Shareholder Value 6-12 months 24-48months 12-24 months Operations Management Processes Customer Management Processes Innovation Processes Regulatory and Social Processes Good Citizen Product Innovation Shareholder Value Customer Management Operational Effectiveness 1 2 3 4 5 Time (Years) Source: Strategy Maps – Robert S. Kaplan and David P. Norton

21. Delivering Value from Intangible Assets Differs from Creating Value from Tangible, Physical Assets • Value Creation is Indirect – Improvements in intangible assets affect financial outcomes through chains of cause and effect relationships • Value is Contextual – The Value of an intangible asset depends on its alignment with the strategy • Value is Potential – The cost of investing in an intangible asset represents a poor estimate of its value to the organization • Assets are Bundled – Intangible assets seldom crate value by themselves – they must be combined effectively with other assets – both tangible and intangible Source: Strategy Maps – Robert S. Kaplan and David P. Norton

22. The Four Perspectives Revisited The Vision Financial – Strategy Balances Contradictory Forces – Long-term versus Short-Term Customer – Strategy is Based on a Differentiated Value Proposition Internal – Value is Created Through Internal Business Processes Learning and Growth – Value is Created through the Strategic Alignment of Intangible Assets Financial Perspective "If we succeed, how will we look to our shareholders?” Customer Perspective "To achieve my vision, how must I look to my customers?” Internal Perspective "To satisfy my customer, at which processes must I excel?” Organization Learning "To achieve my vision, how must my organization learn and improve?” Source: Strategy Maps – Robert S. Kaplan and David P. Norton

23. Long-Term Shareholder Value Financial Perspective Revenue Strategy Productivity Strategy Improve Cost Structure Expand Revenue Opportunities Increase Asset Utilization Enhance Customer Value Financial – Strategy Balances Contradictory Forces – Long-term versus Short-Term • New Sources of Revenue (new products, markets, partners) • Improve Profitability of Existing Customers • Reduce Cash Expenses • Eliminate Defects; Improve Yields • Manage Capacity from Existing Assets • Make Incremental Investments to Eliminate Bottlenecks Source: Strategy Maps – Robert S. Kaplan and David P. Norton

24. Customer – Strategy is Based on a Differentiated Value Proposition Creating a Sustainable Differentiated Value Proposition is the Heart of Strategy Long-Term Shareholder Value Financial Perspective Revenue Strategy Productivity Strategy Improve Cost Structure Expand Revenue Opportunities Increase Asset Utilization Enhance Customer Value Customer Acquisition Customer Profitability Customer Retention Market Share Account Share Partnership Price Availability Functionality Customer Perspective Service Brand Quality Selection Image Relationship Product/Service Attributes Source: Strategy Maps – Robert S. Kaplan and David P. Norton

25. Long-Term Shareholder Value Financial Perspective Revenue Strategy Productivity Strategy Improve Cost Structure Expand Revenue Opportunities Increase Asset Utilization Enhance Customer Value Relationship Image Product/Service Attributes Customer Perspective Partnership Price Availability Functionality Service Brand Quality Selection Innovation Processes Regulatory and Social Processes Operations Management Processes Customer Management Processes Internal Perspective Processes that Create New Products and Services Processes that Improve Communities and the Environment Processes that Produce and Deliver Products and Services Processes that Enhance Customer Value • Opportunity ID • RD Portfolio • Design/Develop • Launch • Environment • Safety and Health • Employment • Community • Supply • Production • Distribution • Risk Management • Selection • Production • Distribution • Risk Management Internal – Value is Created Through Internal Business Processes Creating a Sustainable Differentiated Value Proposition is the Heart of Strategy Source: Strategy Maps – Robert S. Kaplan and David P. Norton

26. Learning and Growth – Value is Created through the Strategic Alignment of Intangible Assets • The Impact of Key Intangible Assets: • Human Capital – The Availability of Skills, Talent and Know-how Required to Support the Strategy • Information Capital – The Availability of Information Systems, Networks, and Infrastructure Required to Support the Strategy • Organizational Capital – The Ability of the Organization to Mobilize and Sustain the Process of Change to Execute the Strategy Source: Strategy Maps – Robert S. Kaplan and David P. Norton

27. Learning and Growth – Value is Created through the Strategic Alignment of Intangible Assets Long-Term Shareholder Value Financial Perspective Revenue Strategy Productivity Strategy Improve Cost Structure Expand Revenue Opportunities Increase Asset Utilization Enhance Customer Value Relationship Image Product/Service Attributes Customer Perspective Partnership Price Availability Functionality Service Brand Quality Selection Innovation Processes Regulatory and Social Processes Operations Management Processes Customer Management Processes Internal Perspective Processes that Create New Products and Services Processes that Improve Communities and the Environment Processes that Produce and Deliver Products and Services Processes that Enhance Customer Value CREATING ALIGNMENT CREATING READINESS Organizational Change Agenda Strategic Job Families Strategic IT Portfolio Information Capital Organization Capital Human Capital Learning and Growth Perspective • Culture • Leadership • Teamwork • Alignment • Skills • Training • Knowledge • Systems • Databases • Networks Source: Strategy Maps – Robert S. Kaplan and David P. Norton

28. Strategic Theme: Operating Efficiency • What will drive operating efficiency?” • More customers on fewer planes • How will we do that? • Attract targeted customer segments who value price and on time arrivals • What must the internal focus be? • Fast turnaround • Will our people do that? • Educate and compensate ground crew regarding how they contribute to the firm’s success • Employee stockholder program Financial Profitability Fewer planes More customers Customer Flight Is on time Lowest prices Internal Fast ground turnaround Learning Ground crew alignment The Balanced Scorecard Should Tell the Story of the Strategy Illustrative Example: Southwest Airlines

29. Objectives • Fast ground turnaround Let’s Take a Minute to Agree Upon Some Common Vocabulary Statement of what strategy must achieve and what’s critical to its success Diagram of the cause and effect relationships between strategic objectives (Strategy Map) How success in achieving the strategy will be measured and tracked The level of performance or rate of improvement needed Key action programs required to achieve objectives Strategic Theme: Operating Efficiency Financial Profitability Fewer planes More customers Customer Flight Is on time Lowest prices Measurement Target Initiative Internal • Cycle time optimization • On Ground Time • On-Time Departure • 30 Minutes • 90% Fast ground turnaround Learning Ground crew alignment

30. A Balanced Scorecard Is More Than a List of Measures Strategic Measurements Strategic Objectives (Lag Indicators) (Lead Indicators) • Return on Investment • Revenue Growth • Deposit Service Cost Change • Revenue Mix F1 - Improve Returns F2 - Broaden Revenue Mix F3 - Reduce Cost Structure Financial C1 - Increase Customer Satisfaction With Our Products & People C2 - Increase Satisfaction “After the Sale” • Share of Segment • Customer Retention • Depth of Relation • Satisfaction Survey Customer I1 - Understand Our Customers I2 - Create Innovative Products I3 - Cross-Sell Products I4 - Shift Customers to Cost-Effective Channels I5 - Minimize Operational Problems I6 - Responsive Service • New Product Revenue • Cross-Sell Ratio • Channel Mix Change • Service Error Rate • Request Fulfillment Time • Product Development Cycle • Hours with Customers Internal • Strategic Job Coverage Ratio • Strategic Info Availability Ratio • Personal Goals Alignment (%) L1 - Develop Strategic Skills L2 - Provide Strategic Info L3 - Align Personal Goals • Employee Satisfaction • Revenue per Employee Learning

31. A good Balanced Scorecard will “tell the story” of your strategy. What Constitutes an Excellent Balanced Scorecard? Criteria For a Good Balanced Scorecard 1. Cause-and-Effect RelationshipsEvery objective selected should be part of a chain of cause and effect that represents the strategy 2. Linked to FinancialsEvery measure selected can ultimately be related to financial results 3. Performance DriversA balance of outcome measures and leading measures facilitates anticipatory management 4. Executive InvolvementStrategic decision makers must validate the strategy and related measures 5. Management SystemThe Balanced Scorecard should be used as the foundation of the management process

32. Projects, Activities, etc. Development Projects, Activities, etc. A Critical Component of the Process Is To Prioritize and Rationalize Initiatives —1— Identify All Potential Candidates for Strategic Initiative Consideration Marketing Projects, Activities, etc. Other Projects, Activities, etc. —2— Screen Candidates to Identify Those That Qualify as “Strategic” “Short” List of Strategic Initiatives —3— Prioritize Strategic Initiatives Prioritized List of Strategic Initiatives +

33. Integrating the Balanced Scorecard into the Management System • The strategy is the reference point for the entire management process • The shared Vision is the foundation for strategic learning Translating theVision • Goal alignment exists from top to bottom • Education and open communication about strategy are basis for employee empowerment • Compensation is linked to strategy • Feedback system used to test the hypotheses on which strategy is based • Team problem-solving • Strategy development is a continuous process Communicating and Linking Feedback andLearning Balanced Scorecard Business Planning • Stretch” targets are rationalized and accepted • Strategic initiatives are clearly identified • Investments are rationalized by the strategy • Annual budgets are linked to long-range plans

34. An Effective BSC Development Process Encourages Focused Participation by the Core and Executive Teams and Leverages Knowledge of the Organization The Balanced Scorecard Design Program • Workshop No. 1 • Establish leadership team consensus • Review objectives and linkages • Agree on measures development steps • Workshop No. 2 • Finalize objectives and measures • Review strategic initiatives and target setting • Workshop No. 3 • Review implementation plan • Discuss implications on management processes Leadership Team Workshops CoreTeam Analysis & Preparation Task 1 Define Scorecard Architecture Task 2 Draftthe Scorecard Task 3 Define StrategicInitiatives and Targets Task 4 Develop Implementation Plan

35. The Design of the the Balanced Scorecard Strategic Management Program Incorporates These Goals • Align the organization to the new corporate strategy from top to bottom using the Balanced Scorecard framework • Develop performance indicators of the drivers of future value • Use the Scorecard framework to prioritize initiatives and allocate resources • Develop a management process and feedback system to monitor progress and learn from implementation • Position the Balanced Scorecard as the action plan which addresses employees’ need for change • Develop an approach to link management compensation to the strategy as depicted in the Scorecard • Transfer Balanced Scorecard “know-how”; build internal, self-sufficient competencies to develop and implement Scorecards • Maximize participation at all levels to secure ownership and understanding

36. Objectives Measures Targets Initiative Assessment Initiative Plan: B Initiative Plan: A Owner: Financial Benefits: The Key is to Build a Management Process Which is Driven by the Strategy 1 Strategy Development & Planning Initiatives Management interprets results, makes decisions and evolves the strategy 2 The Balanced Scorecard articulates and communicates the strategy 3 Reporting & Analysis Initiatives are aligned to support the strategy 4 Corporate & SBUs must manage the business in support of the strategy Decision-Making & Communication

37. Quotes from Michael Porter • “A strategy delineates a territory in which a company seeks to be unique.” • “Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.” • ““The essence of strategy is that you must set limits on what you're trying to accomplish.” • “The essence of strategy is choosing what not to do.”