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Balanced Scorecard An Integrated Approach to Performance Management Creating competitive advantage through our people. Presentation by M Nguwi Group Human Resources Manager. BALANCED SCORECARD. LINKING STRATEGIES TO ACTIONS. LINKS FOUR PERSPECTIVES:. Growth & Profitability.
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Balanced ScorecardAn Integrated Approach to Performance ManagementCreating competitive advantage through our people Presentation by M Nguwi Group Human Resources Manager
BALANCED SCORECARD LINKING STRATEGIES TO ACTIONS LINKS FOUR PERSPECTIVES: Growth & Profitability Human Capital Clients Operational Excellence SOURCE: KAPLAN AND NORTON
What is a Balanced Scorecard • At the highest level, it is a framework that helps organisations translate strategy into operational goals/objectives that drive both behaviour and performance. ORIGIN • Concept developed by Robert Kaplan & David Norton • Essentially A Strategic Management system • Also a Corporate Performance Management System
The Balanced Scorecard • Aligns strategies, processes, resources and behaviour • Defines what to measure • Identifies lag and lead indicators metrics • Defines how to measure • Provides objective and feedback to each employee • Operationalise the measures
The Premise Measurement Communicates Values, Priorities And Direction The Conclusion Measurement Must Be Linked To Strategy Strategy BalancedScorecard Measurement To Communicate, Not To Control The Premise Behind the Balanced Scorecard Is that Measurement Motivates Behavior
1. The economic model of key levers driving financial performance The Balanced Scorecard 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. The value proposition of target customers Customer Perspective Value Proposition Quality Function Image Relatio-ship Price Time Internal Process Perspective 3. The value chain of core business processes “Build the Brand” “Make the Sale” “Deliver the Product” “Service Exceptionally” 4. The critical enablers of performance improvement, change and learning Learning & Growth Perspective Technology Infrastructure Staff Competencies + + Climate for Action
Internal Capabilities We Use the Scorecard to Articulate Strategic Hypotheses in Cause-effect Terms And Realize the Vision Financial Results To Drive Financial Success... Customer Benefits Needed to Deliver Unique Sets of Benefits to Customers... To Build the Strategic Capabilities.. Knowledge, Skills, Systems, and Tools Equip our People...
Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Statement of what strategy must achieve and what’s critical to its success How success in achieving the strategy will be measured and tracked Strategic Theme: Operating Efficiency The level of performance or rate of improvement needed Key action programs required to achieve objectives Financial Profitability Fewer planes More customers Customer Flight Is on time Lowest prices Goals Measurement Target Initiative Internal • On Ground Time • On-Time Departure • 30 Minutes • 90% • Cycle time optimization • Fast ground turnaround Fast ground turnaround Learning Ground crew alignment BSC Terminology
Some of the Indicators of Good Balanced Scorecard 1. Executive InvolvementStrategic decision makers must validate and own the strategy and related measures 2. Cause-and-Effect RelationshipsEvery objective selected should be part of a chain of cause and effect linkages that represent the strategy A good Balanced Scorecard will “tell the story” of your strategy in actionable terms. 3. Balance between outcome and leading measuresThere should be a balance of outcome measures and leading measures to facilitate anticipatory management 4. Financial LinkageEvery objective can ultimately be related to financial results 5. Linkage of Initiatives and Measures: Each initiative should be based on a gap between baseline and target.
Some Goals of the Balanced Scorecard • Provide a generic framework to translate strategy into operational terms • Create a systems approach to form an integrated Strategic Management Process • Provide a clear line of sight to the vision and strategy of the company • Provide a tool for communicating the : • strategy, and • processes and systems required for implementing the strategy • Draw a cause and effect roadmap to stakeholder value – shareholder, customer, and employee.
How Does the Scorecard Benefit Your Organization? • Improves management effectiveness by having a shared and actionable view of the strategy • Optimizes and ensures strategic outcomes for a given set of resources • Enables employees to work in a coordinated, collaborative fashion towards organizational goals • Speeds time to value through faster more informed decision-making on time and resource allocation • Accelerates the approach, and its accuracy to the strategic destination
CONCEPT • Imagine entering the cockpit of a jet airplane and observing that that there is only a single instrument • ability to exploit intangible assets has become far more decisive than their ability to invest in and manage physical assets • Most companies operational and management control systems are built around financial measures and targets • The scorecard introduces four new management processes that contribute to linking long term strategic objectives with short term actions
What is on the dashboard? “The financial success of our organisation increasingly depends on intangibles:- • our relationship with clients • our organisational effectiveness • our ability to attract, leverage and retain the best people
Guiding Principles of Performance Management • Develop and Articulate a Clear Strategy • Create a Continuous, Flexible Performance Management Process • Actively Communicate Performance Goals and Targets • Establish Specific, Ambitious Targets Based on Benchmarks • Identify and Focus on the “Vital Few”: • Establish a Balanced Measurements Portfolio • Monitor Resultsat Specific, Regular Intervals to Assess Progress • Align Reward Systems with Measures to Reinforce Desired Behaviours
Why is Performance Important? • PERFORMANCE is about RESULTS… measurable results • Need for the organisation to benchmark performance against world class standards • Enables efficient and effective use of resources • Motivate high performers • Identify inadequate performance early
CREATING A WINNING STRATEGY Critical Questions: Are we doing the right things? Are we doing it right.
Plot your Value Chain First • Identify your customers and what they want? • What is the process to satisfy customer’s wants? • What kind of input to the process do you need? • And who supplies that? • Everyone must understand who our customers are and what their requirements are.
What is our Value Proposition? Existence of our business relies on two important elements; • The value proposition that we offer different stakeholders(clients, shareholders, employees etc.) • The ability to deliver that value, both in the short and long term
“If you don’t know where you want to go, it does not matter what root you take.”
Translating the vision • Clarifying the vision • Gaining consensus Communicating & Linking Feedback & Learning • Articulating the shared vision • Supplying strategic feedback • Facilitating strategy review and learning • Communicating & educating • Setting goals • Linking rewards to performance measures Balanced Scorecard Business planning • Setting targets • Aligning Strategic initiatives • Allocating resources • Establishing milestones Managing Strategy: Four processes
Four Barriers to Strategy • Vision Barrier – strategy not understood by those who must implement it … and not translated into objectives/goals • People Barrier – personal goals are not linked to strategy implementation • Management Barrier – Management systems are designed for operational control and not strategy • Operational Barriers – key processes are not designed to leverage the drivers of business strategy
Client Operational Excellence “To satisfy our shareholders and customers, what business processes must we excel at?” Vision and Strategy What is the customer Value Proposition That will create the financial rewards we are seeking Objectives Measures Measures Targets Targets Goals Human Capital What do wee need to change in our Infrastructure or intellectual capital to achieve Our operational excellence goals Objectives Measures Targets Translate a Strategy into Operational Terms Financial/Profit & Growth “To satisfy our stakeholders, what financial objectives must we accomplish? Measures Targets Goals
The Four Perspectives Feedback / Results Strategy Implementation Financial or Profit & Growth To satisfy our stakeholders, what financial objectives must we accomplish? Strategy Deployment Clients What is the customer Value Proposition That will create the financial rewards we are seeking Operational Excellence In which internal business processes must we excel in order to deliver our value proposition as described in the client perspective and finally reach the goals in the financial perspective Human Capital What do wee need to change in our Infrastructure or intellectual capital to achieve Our operational excellence goals Actions
Balanced Scorecard: Evolved Framework The Vision & Strategy Financial To satisfy our shareholders, what financial objectives must we accomplish? Effect Customer Results To achieve our financial goals, what customer needs must we satisfy? Internal Business Process Cause To satisfy our customers, in which internal business processes must we excel? Innovation, Learning & Growth Actions To achieve and maintain a competitive position, how must the organization learn and improve?
To satisfy our shareholders we must…... How do we wish to be perceived by our customers? What must we excel at? How can we continue to grow and create value? A Good Balanced Scorecard Tells The Story of Strategy Financial Perspective Returnon Investment Reduce Costs / Improve Productivity Increase Revenue Streams Customer Perspective Price Quality Time Functionality Image Relations Internal Process Perspective Make the Sale Setup the Service Service the Customer Build the Brand Learning and Growth Perspective Staff Competencies Technology Infrastructure Change Agenda Critical Success Factors and Measures need to be developed across the four perspectives
Figure 5.3 Strategy Interpretation – Simplified Business Model of FSC Management Actions - Cause Business Results Required - Effect Improvement &Learning Perspective Internal ProcessPerspective Customer Perspective Financial Perspective Increase Employee skills and productivity Cross - sell productsand services throughlifetime relationships Build up largecustomer portfoliowith more salesand customers Achieve dramaticsales goal Technologyenabledrevenue growth Dealing withmembers efficientlyand effectively High CustomerSatisfaction Achievelower cost ratiovs competition Learn and embedcompliance disciplines Develop full rangeof competitive products Increase value ofmembers fund in linewith all share index Innovative approachto maximiseinvestment returns
Balanced Scorecard Benefits • Improved Long-Term Financial Performance • Improved Level of Customer Satisfaction • Focused Communications on What’s Important • Improved Level of Employee Satisfaction Based on Better Understanding of Value of Individual’s Contributions • Improved Mechanism to Identify Performance Variances of Key Processes
Financial Perspective • This indicate if company strategy, implementation and execution are contributing to the bottom line. • Measurement of operating income, returns on capital or more recently EVA. • Strategic themes include revenue growth and mix, cost reduction and, asset utilisation and investment strategy. • Our revenue normally grow from finding new sources or by increasing the client/customer value proposition • Looks at things like; • Revenue growth • Increase market share • Improve cost structure • Reduce admin costs
Client Perspective • This is the most important one because it’s the one that facilitates the funding of all others • Some of the most valuable Customer Propositions are; • Product leadership • Customer intimacy • Measure performance in growth and identified market segments: - customer satisfaction. - customer retention. - new customer acquisition. - fast credit approval. - market and account share in targeted segments. - specific measures on the value proposition that the company will deliver to customers in targeted market segments e.g.. short lead times, on time delivery, innovative products and services, anticipation of emergency needs, new products.
Operational Excellence • Identify critical internal process in which the business must excel to enable: -delivery of the value proposition that will attract and retain customers in targeted market segments. -satisfy shareholder expectations of excellent financial returns. • The measure should focus on internal processes that will have the greatest impact on customer satisfaction and achieving an organisations financial objectives. • Traditional approaches attempt to monitor and improve existing business processes. The scorecard will usually identify new processes at which the organisation must excel to meet customer and financial objectives (innovation).
Human Capital Identifies the infrastructure that must be built to create long term growth and improvement. • Three principle sources: • people - reskilling • Management skills compensation competitiveness • systems - enhance IT (real time, accuracy) • organisational procedures - retention, training, skill, satisfaction. ** Unlike buildings and machinery support functions are intangible assets worth nothing unless they succeed in their mission.
Financial/Profit & Growth Return On Investment Revenue growth percentage Economic Value Added Market Share Client Customer satisfaction Customer Retention & referrals maintaining highest reputation Value Customer payment patterns Some examples of Key BSC themes & measurements
Operational Excellence Error, waste & rework Reducing Cycle time Yield On-time delivery Project Deadlines Human Capital Core Competence deployment rates Employee Satisfaction Employee turnover Training Rewards, Recognition & Compensation patterns Quality Improvement rates Key BSC themes & measurementsExamples
There is an important sequence between the four perspectives Financial/Profit and Growth – (Make a profit) Clients(By satisfying your customers needs) Operational Excellence(through being able to deliver value) Human Capital (by having the necessary knowledge and tools available) The Cause & Effect Relationship in the BSC
Linkages to the Group Balanced Scorecard Influences Financial/Profit & Growth Financial/Profit & Growth Client Service Client Service Operational Excellence Operational Excellence Human Capital Human Capital Group BSC RFH Business Unit BSC RBF, RFS, RDH,RSB Support Functions Teams & Individuals
Alignment using the Balanced Scorecard SBU’s Corporate Individual Financial/Growth & Profitability Financial/Growth & Profitability Client Client Key Result Areas Operational Excellence Operational Excellence Strategic Capability- Human Capital Strategic Capability- Human Capital
Translating Group Objectives for each Level • Step 1 – a group scorecard defines overall strategic priorities and context • Step 2 – Each SBU develops a develop BSC consistent with the corporate strategic agenda • Step 3 – Each support department develops a scorecard to support the internal customers • Step 4 – Teams and individuals develop scorecards consistent with their SBU and group strategy
Linking • Objectives/goals may cross over more than one perspective. • We usually start at the top with outcomes and work our way down, looking at what enables (drives) the outcome.
Strategic Goals • Establishing strategic goals is the first step in building the Balanced Scorecard. • Strategic goals establish direction in concrete terms. For example: “By the year 2003, we will grow revenues by 45%.” • Strategic goals anchor the rest of the process. • Strategic goals should fit with the vision and mission of the organization.
Set Goals for Each Strategic Perspective Strategic Perspective Goals Measures Targets Client Service delivery and demonstrating value to our clients Develop effective client care meetings Client feedback Average rating of 4 5% of the employees to have gone for customers service training Human Capital Develop and utilize resources intelligently Devote substantial time to people development No: of people trained in essential skills Financial Achieving profitable revenue growth Grow revenue By 45% Revenue growth Operational Excellence Developing and driving improved common business processes Time frame Handover to be effected by end of March 2002 Ensure smooth handover of spectrum
Strategic Goals • Goals need to be expressed in concrete terms • You can look at past performance or future performance to establish goals • Goals need to be agreed upon and communicated within the organisation.
“If you don’t know where you’re going any road will take you there.” Goals are Roadmaps to the Vision
‘Measuring the success(or “failure” of your strategy” • Measure - How performance against set goals is monitored • For each strategic Goal, you need one measurement. • Measurement provides us with feedback on meeting the strategic goals • Most organizations will use many of their existing measurements. • Organizations requiring major change should include driver type measurements.
Measurements • A good balanced scorecard should consists both outcome and driver measures • Financial and Customer will have mostly outcome type goals • Operational Excellence and Learning & Growth may include several driver type goals
Measurements • Outcome measures • Advantage - objective and easy to capture • Disadvantage - focused on the past, not current • Drivers • Advantage - Predictive and leading the organisation • Disadvantage - Difficult to drive and support
Lead/Lad Measures Leading and lagging indicators only makes sense relative to one particular strategic goal. A lagging measure for one goal may therefore be used as a leading indicator for another objective
Targets • The term used to describe what is expected for the measured results/required level of performance • Once you establish measurements, you need to set a target for each measurement. • Targets push the organization to a required level of performance. • Targets put focus on the goal, expressing the specifics of the goal. • When an organization hits its targets, then it has successfully achieved its goals.