Balance Scorecard Deloitte

Strategy & Operations

Performance Management and Balanced Scorecard CFO Services Self-Study Guide

Deloitte Consulting LLP

Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Table of Contents TABLE OF CONTENTS......................................................................................................I INTRODUCTION................................................................................................................1 MODULE 1: BALANCED SCORECARD BASICS ............................................................2 Module Objectives: ........................................................................................................................................ 2 Objective 1: Explain the business imperative to improve performance management ................................ 2 Objective 2: Describe how Balanced Scorecards create strategic focus.................................................... 3 Objective 3: Explain what a Balanced Scorecard is and understand the multiple Balanced Scorecard perspectives ............................................................................................................................ 4 Objective 4: Describe how Balanced Scorecards can be applied to different industries ............................ 7 Objective 5: Explain the concept of “cascading” performance measures utilizing the Balanced Scorecard methodology ............................................................................................................................ 7

MODULE 2: TRANSLATING STRATEGY INTO ACTION—THE STRATEGY MAP ........9 Module Objectives ......................................................................................................................................... 9 Objective 1: Explain the purpose of a Strategy Map ................................................................................... 9 Objective 2: Describe techniques and approaches to creating Strategy Maps......................................... 10 Objective 3: Discuss a variety of Strategy Map examples ........................................................................ 11 Objective 4: Explain the key success factors for creating Strategy Maps................................................. 14

MODULE 3: DEVELOPING BALANCED SCORECARD PERFORMANCE MEASURES .........................................................................................................................................16 Module Objectives ....................................................................................................................................... 16 Objective 1: Develop Balanced Scorecard performance measures ......................................................... 16

MODULE 4: THE BALANCED SCORECARD PROCESS..............................................20 Module Objectives ....................................................................................................................................... 20 Objective 1: Describe the end-to-end Balanced Scorecard process ........................................................ 20

MODULE 5: INTEGRATING THE BALANCED SCORECARD INTO THE INTEGRATED PERFORMANCE MANAGEMENT FRAMEWORK .........................................................22 Module Objectives ....................................................................................................................................... 22 Objective 1: Explain how Balanced Scorecards fit into the overall Integrated Performance Management (IPM) Framework........................................................................................................................................ 22

MODULE 6: BALANCED SCORECARD CASE EXAMPLES .........................................24 Module Objectives ....................................................................................................................................... 24 Objective 1: Discuss, in general, Balanced Scorecard case examples .................................................... 24

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Objective 2: Discuss a leading private sector Balanced Scorecard case example .................................. 26 Objective 3: Discuss a leading public sector Balanced Scorecard case example .................................... 28

MODULE 7: IMPLEMENTING BALANCED SCORECARDS..........................................34 Module Objectives ....................................................................................................................................... 34 Objective 1: Describe high-level implementation approaches for Balanced Scorecard projects.............. 34 Objective 2: List the tools available to support Balanced Scorecards ...................................................... 36

MODULE 8: BALANCED SCORECARD REFERENCE MATERIAL ..............................37 Module Objectives ....................................................................................................................................... 37 Objective 1: Locate Balanced Scorecard reference material .................................................................... 37

SUMMARY.......................................................................................................................38

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Introduction One of the key responsibilities of executives and managers in any organization is to formulate strategy and execute on it. Despite the importance of this function, the evidence shows that this widely accepted core competency of successful organizations is generally done extremely poorly. A Fortune magazine article, based on a survey of management consultants, found that less than 10% of strategies were successfully executed. This has led many individuals to ask the question, “If executing strategy is so important, why don’t more organizations do a good job of it?” While there can be no doubt that strategic planning remains a challenging task, the last decade has seen this process enhanced by the proliferation of rich information sources enabled by new technology, the development of new methodologies, and organizations brimming with MBAs and former management consultants. What many organizations have come to realize is that actually formulating strategy is, at best, only half the job. Where many companies are failing is that they cannot translate these high-level strategies into tangible, actionable objectives for their organizations. And, if the strategy is not translated into action, what good is it? Too many organizations still find that the strategic planning process ends with binders filled with Microsoft® PowerPoint® slides detailing grand strategic visions for the future that never leave the confines of the executive offices. Pick an organization at random and ask managers and staff how their actions support the organization’s strategic objectives. The most common response is one of bewilderment or references to a vague mission statement. Lower organizational levels are left to rely on systems designed based on tactics or financial reporting, not strategy. The greatest strategy work in the world can become meaningless if it is never actually implemented. Leadings organizations have come to see that executing strategy is about more than strategic planning—it is about creating an organization focused on strategy. In other words, it is about managing performance. One of the groundbreaking advancements in performance management was the development of the Balanced Scorecard, first advocated by Robert Kaplan and David Norton in a seminal 1994 Harvard Business Review article titled “Translating Strategy into Action, The Balanced Scorecard” and since developed through literally thousands of implementations and expanded upon in numerous books and articles. Almost a decade after its first conception, Balanced Scorecards are widely used as a key component of an overall performance management framework. Approximately 50% of the Fortune 500 companies use Balanced Scorecards and that percentage continues to grow. Those who currently use Balanced Scorecards also report that they are working to improve their current processes by utilizing new technologies, expanding the scope, drilling down more deeply into the organization, and integrating these processes more closely with other key management processes.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 1: Balanced Scorecard Basics Module Objectives: After completing this module, you will be able to: 1. Explain the business imperative to improve performance management 2. Describe how Balanced Scorecards create strategic focus 3. Explain what a Balanced Scorecard is and understand the multiple Balanced Scorecard perspectives 4. Describe how Balanced Scorecards can be applied to different industries 5. Explain the concept of “cascading” performance measures utilizing the Balanced Scorecards methodology Objective 1: Explain the business imperative to improve performance management Michael Porter has described the foundation of strategy as the selection and execution of literally hundreds of activities within an organization. The logical conclusion of this definition is that strategy cannot be limited to a few key executives but rather must permeate the entire organization. In other words, the everyday activities of everybody in the organization must be somehow aligned to the organization’s strategy. For this to happen, organizations must have some method of communicating strategy to the organization and translating high-level strategic objectives into meaningful day-to-day objectives. The role of performance management is to align the organization with its strategy and measure the success of the organization’s execution of those objectives. Performance Management Model

Description of the elements • The domain represents the sphere of control and/or responsibility for a manager or organization

Manager or Organization Domain

• This is a person or organization responsible for managing a portion of the business

A MANAGER or ORGANIZATION UNIT has

• The objectives can be strategic, operational, technical etc. • The objectives represent what the individual is trying to achieve • The objectives provide context and relevance to the measures selected and define what success looks like in the end state

OBJECTIVES and monitors performance using

• The measures are the way that the manager or organization is achieving the objectives that it initially set out to accomplish

MEASURES • The manager or organization scorecard represents an ongoing place to capture and communicate the objectives and measures of the organization

Manager or Organization Scorecard

Figure 1.1

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Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Traditional performance management systems have often proved to be ineffective in this task. In many companies, high-level strategic planning is done only at the senior executive level and, other than a few vague mission statements, never makes it far out of the corporate boardroom. The rest of the organization focuses its efforts on a massive annual budgeting process which focuses primarily on incremental year-onyear improvements. This budget is only tenuously linked to strategy and is often unrecognizable after the final negotiations, iterations, and cuts. Therefore, in many companies, performance management centers largely on traditional financial targets that are derived from the annual budgeting process. This information is usually obtained from accounting systems designed to support external GAAP financial reporting and, as such, is dependable and available. The problem is that this information is focused only on financial outcomes and provides no guidance as to the sort of actions or activities that will be needed to achieve them. Nor does it account for the other, nonfinancial elements of the firm’s strategy that are as important, if not more so, to the successful execution of strategy. Finally, financial measures tend to be lagging indicators. They do an adequate job of telling the organization what has happened in the past, but are usually poor as predictors of future results and emerging trends. In recent years, some new performance management frameworks have increasingly focused on quality, shareholder value, customer satisfaction, and core business processes. While these are positive steps in expanding the strategic footprint outside of pure financial results, they still represent only a narrow segment of the broader strategic goals of the organization. As such, many organizations have a need to improve performance management in order to improve the execution of strategy and provide decision makers with more robust analysis of whether strategic goals are being met or not. Objective 2: Describe how Balanced Scorecards create strategic focus The message of the Balanced Scorecard is that it is no longer enough to focus on doing things well, it is now necessary for successful organizations to focus on doing the right things well. As such, the Balanced Scorecard is a central element in the strategic feedback loop within an organization. Clarifying and Translating the Vision and Strategy •Clarifying the vision •Gaining consensus

Communicating and Linking •Communicating and educating •Setting goals •Linking rewards to performance measures

Balanced Scorecard

Strategic Feedback and Learning •Articulating the shared vision •Supplying strategic direction •Facilitating strategy review and learning

Planning and Target Setting •Setting targets •Aligning strategic initiatives •Allocating resources •Establishing milestones

Figure 1.2

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Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

The premise of the Balanced Scorecard is that strategy is everybody’s business—from the CEO to the line worker—and that a performance management system is only useful if it supports this objective. In other words, a performance measure is only useful if it can be explicitly tied to an agreed strategic objective. In fact, Balanced Scorecards are often referred to as strategy implementation tools.

The Balanced Scorecard Financial

Strategic Vision and Goals

Internal Business Process

Customer

Tactical actions enabling strategy execution

Learning and Growth

Figure 1.3

Source: Deloitte

Objective 3: Explain what a Balanced Scorecard is and understand the multiple Balanced Scorecard perspectives In the early 1990s, a research group of senior executives from twelve major companies, led by Dr. Robert Kaplan of the Harvard Business School and Dr. David Norton of the Nolan Norton Institute, developed a new corporate performance management framework. The outcome of this work was summarized in a series of articles and then a best selling book, “Translating Strategy into Action, The Balanced Scorecard.” From these early writings a wave of interest in implementing the Balanced Scorecard was born and it has since become an extremely popular approach to performance management. A Balanced Scorecard is an approach to performance management that cascades strategic objectives into measurable targets. The scorecard translates the vision and strategy into a tool that communicates the strategic intent, and then tracks performance against the established goals. The basic principles of the Balanced Scorecard, since refined through literally thousands of implementations, are that the role of performance management should be to translate strategy into action. In order to accomplish this objective, the Balanced Scorecard focuses on: •

All performance measures being explicitly linked to strategic objectives

•

Leading rather than lagging performance indicators

•

A combination of measures relating to financial, customer, process, and employee value

•

Performance measures that cascade down through the organization

•

A small number of measures that are the most significant for implementing strategy

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

The premise behind Balanced Scorecards is that financial information alone is not sufficient to successfully manage a leading organization. Nor can leading organizations succeed by focusing only on business process, or quality, or shareholder value, or any number of other equally important areas. Rather, successful companies must be able to focus on a holistic view of strategy execution. In other words, they must be able to focus on all these different dimensions of business performance at the same time. For a moment, think about all the key elements of a successful strategy. For most organizations this strategy would have to include financial goals, whether these are expressed in traditional accounting terms like Return on Investment (ROI) or using shareholder value measures like Economic Value Added (EVA®) and Cash Flow Return on Investment (CFROI®). Even non-profit organizations would be very concerned about financial issues as they relate to funding, budget deficits, revenue generation, and financial stability. As important as the financial component is, successful strategies would certainly not stop there. After all, how is the company going to achieve its financial goals if it does not consider how it will continue to add value to its customers? If customers are not buying the good or service, then the financial results will certainly suffer. What about the business processes that actually produce the goods and services? Surely a successful strategy would need to articulate which business processes the organization must excel at and describe how those processes would be valued (for example, quality, cost, or speed). Or consider the skills and attitudes of the people that work in the organization. A good strategy would need to consider the necessary skills of the people that will actually execute the strategy so that recruiting and training programs can be aligned. It would also have to consider the types of tools and information that employees will need in order to fulfill their objectives. Regardless of the company’s industry or strategic objectives, any successful strategy would have to include these elements. Yet, as discussed above, many performance management frameworks focus on only one or two elements of the overall strategy rather than understand how they fit together. The standard Balanced Scorecard therefore requires measures to be spread across multiple perspectives including financial performance, customer satisfaction, internal business processes, and organizational learning. F in a n c ia l P e rfo rform rm aan nccee

“T o su cceed fin an cially, h ow succeed finan shou sh ould w e ap pear p ear to ou r shareh lders? sh arehoold ers?”

In te ss P s se tern a l B Bu ussin inees P ro ccees s es

C u s to m e r S a tis fa c tio n

“T o ach ieve ou r visio n , how sh ou ld w e ap p ear to ou r shou app cu sto m ers? ”

V isio n & S trateg y

“T o satisfy o u r sh areho ld ers and an d cu sto m ers, w h at b u sin ess p ro cesses m u st w e excel at? ”

O rg a n iza tio tion naal L e a rn rnin ing g

“T o ach ieve ou r visio n, n , how w ill w e sustain su stain o u r ab ility to ch ang e and im p ro ve?” Figure 1.4

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Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Each of the standard perspectives includes different elements of the overall strategy: Financial – the strategy for growth, profitability, and risk viewed from the perspective of the organizational stakeholders. Customer – the strategy for creating value and differentiation from the perspectives of the customer. Internal Business Process – the strategic priorities for various business processes, which create customer satisfaction. Learning and Growth – the priorities to create a climate that supports organizational change, innovation, and growth. The financial perspective remains useful in summarizing the economic consequences of past actions. These performance measures help managers to understand whether the strategy is being successful in generating shareholder value. The customer perspective focuses on measuring whether the organization is successfully executing on its value proposition to customers. It can also help to measure whether the organization is being successful in those segments of the market that it has targeted. The internal business perspective identifies the business processes that are critical to success. This forces managers to focus more of their attention on the processes critical to a given strategy. The learning and growth perspective defines the internal structure and skills that will allow the firm to grow and improve. By viewing all of these critical components in a single place, managers can better understand how the performance of one area impacts the performance of another area. The four perspectives detailed above constitute the “standard” perspectives suggested by Kaplan and Norton. Many organizations choose to modify these perspectives to better fit their specific needs. This is accomplished by either modifying the perspectives or adding or subtracting perspectives. For example, the City of Calgary uses six perspectives in their Corporate Scorecard—the traditional four perspectives as well as Employee Satisfaction and Environment. These perspectives were added over time, due to specific strategic requirements. First, the City determined that improving employee moral was a specific focus area and so chose to separate Employee Satisfaction from Learning and Growth in order to increase management attention on this area. Next, they determined that environmental concerns were a leading issue with their citizens and so they added this perspective to measure how well the needs of the citizens were being met in this area.

Figure 1.5.

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Source: City of Calgary

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

There is no absolute answer as to the number of perspectives that a Balanced Scorecard should have. The basic four perspectives will apply to most businesses. Some organizations may want to add a few perspectives to align the Scorecards with their specific strategic objectives. As a general rule, most organizations that use Balanced Scorecards use at least four perspectives and no more than eight. Objective 4: Describe how Balanced Scorecards can be applied to different industries Much like strategy and performance management are ubiquitous to all industries, so too is the Balanced Scorecard. There are numerous examples of Balanced Scorecard programs being successful in financial services, energy, health, consumer products, telecommunications, and most other industries. The basic principles of strategy execution and performance management apply to all of these industries. The non-profit sector has also begun to use Balanced Scorecards successfully. Again, the basic principles of strategy execution and the importance of performance management apply equally strongly to these sorts of organizations. In other words, the Balanced Scorecard methodology is not confined to any particular industry or set of industries. Like performance management, Balanced Scorecards are ubiquitous to all industries. Objective 5: Explain the concept of “cascading” performance measures utilizing the Balanced Scorecard methodology

2

3

Define Corporate strategic map and measures

Align Corporate and Division Vision, Themes and Objectives

Determine best measures and align between corporate and Division levels

Define Division strategic map and measures

Strategic Vision Strategic Themes Strategic Objectives Strategic Measures

Determine best measures and align between Division and BU levels

Figure 1.6

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Align Division and BU Vision, Themes and Objectives

BU

1

Strategic Vision Strategic Themes Strategic Objectives Strategic Measures

Division

Corporate

One of the major elements of the Balanced Scorecard methodology is cascading high-level strategic targets down through the organization in the form of operational targets. This process should be viewed as a communication process rather than a method of control. Obviously, the exact way that measures will flow down through the organization will be partially dependent on the specific nature of the corporate hierarchy.

Define BU strategic map and measures

Strategic Vision Strategic Themes Strategic Objectives Strategic Measures

Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

There are a number of key considerations for successfully cascading a company-wide Balanced Scorecard capability throughout an organization: •

Each organization should go through a process of creating a corporate vision, themes, objectives, and measures

•

Vision, themes, objectives, and measures should cascade into the organization (that is, Corporate to Division to Business Unit)

•

The Balanced Scorecard should stop at the point where strategy is no longer articulated

•

The best possible measures for monitoring the strategic measures of each organization, division, or business unit should be identified

Since the process of cascading strategy down through the organization is such a fundamental element of the Balanced Scorecard process, organizations must ensure that they have a recurring process in place at each level to enable it. For example:

Corporate

Communicate corporate objectives

Business Unit/ Function Executives

Communicate preliminary corporate strategies and measures

Revise and finalize corporate strategies, measures, targets

Review strategies, measures and targets

Review & Approve

Corporate and Business Unit alignment

Approve finalized strategies, measures, targets

Business Unit and Division alignment

Business Unit/ Function Planners

1 Identify Business Unit/ Function objectives

2

Communicate horizontally and align objectives to other Business Unit/ Function

3

4

Communicate corporate/ Business Unit / Function direction to Division execs & planners

Division Executives

Division Planners

Finalize targets for measures

Review & approve

Identify Division proposed objectives, strategies, measures and targets with input from subDivisions

Figure 1.7

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5

Identify Business Unit strategies, measures and targets, aligning to Corporate strategy map

Ensure alignment with Business Unit objectives

Finalize targets for measures

Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 2: Translating Strategy Into Action—The Strategy Map Module Objectives After completing this module, you will be able to: 1. Explain the purpose of a Strategy Map 2. Describe techniques and approaches to creating Strategy Maps 3. Discuss a variety of Strategy Map examples 4. Explain the key success factors for creating Strategy Maps Objective 1: Explain the purpose of a Strategy Map The Strategy Mapping methodology translates high-level strategic vision into measures, and ensures alignment of objectives throughout the organization. As discussed previously, the ability of organizations to create these explicit linkages is one of the key success factors in implementing Balanced Scorecards. In fact, according to a survey by the Balanced Scorecard Collaborative, 84% of companies that prepared a Strategy Map reported bottom line benefits from the exercise while companies that implemented the Balanced Scorecard without Strategy Mapping reported no bottom line benefits. Strategy Maps begin with several explicit strategic themes and then breaks these themes down into a series of tactical objectives. Each of these objectives is mapped to both a strategic theme and a Scorecard perspective (for example, customer, financial, process, learning and growth). Each of the objectives on the Strategy Map is related to each other in a web of cause and effect relationships. This creates a coherent and holistic view of the tactical objectives needed to support the strategic themes. Each tactical objective then has a measure (or measures) assigned to it and this populates the performance measures found in the Balanced Scorecard. The use of the Strategy Map can be a very powerful tool enabling managers to work through which performance measures actually support their stated strategy and therefore should form the basis for their Balanced Scorecard. It also ensures that performance measures selected are complementary to each other via cause and effect relationships. The creation of Strategy Maps guards against many managers’ automatic inclinations to populate their Scorecards with a hodgepodge of existing measures. The Balanced Scorecard is not a repository for a selection of existing key performance indicators. It is a focused instrument to plan, measure, and track the successful execution of strategy. The rigorous use of Strategy Maps is a key technique in accomplishing this. Major benefits of Strategy Mapping include organizational alignment and accountability: Translates Corporate Objectives – Provides a forum for managers to agree on corporate strategies and measures while aligning organizational strategies. Communicates and links the strategy – Depicts the coordinated strategies throughout the organization. Employs a rigorous management tool – Strategic objectives are translated into performance scorecards that are used to manage the business and provide the standard for strategic feedback and review.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Establishes criteria for successful performance – Influences behavior to focus on both the success of corporate strategy and direct line of influence. Balances the financial and non-financial perspectives – Establishes a rigorous business management system that goes beyond traditional financial measures to leading indicators of performance. Objective 2: Describe techniques and approaches to creating Strategy Maps A Strategy Map is a generic format for describing strategy in concrete terms. The major strategies for the organizational unit are listed across the top while the various Balanced Scorecard perspectives are listed along the left hand side. This creates two of the essential elements of a successful Strategy Map: the explicit formulation of strategy and the use of multiple perspectives. In order to actually construct the map, managers must work through a cause and effect chain that originates from the strategic themes and flows through each of the tactical strategic objectives that support it. Each tactical objective in turn has at least one performance measure assigned to it. As illustrated below, a Strategy Map is both a powerful pictorial representation of strategy and a concrete stepping stone between abstract strategy and tangible performance measures. Strategic Vision

The The vision vision represents represents the the overall overall strategic strategic focus focus of of the the organization organization

Vision

Strategic Strategic themes themes support support the the overall overall vision vision and and provide provide areas areas of of emphasis emphasis for for the the organization organization to to focus focus its its activities activities

Strategic Themes

Financial The The strategic strategic objectives objectives further further break break down down the the vision vision and and themes themes into into more more actionable actionable elements elements and and in in aggregate aggregate should should represent represent the the overall overall organizational organizational focus focus

Customer Strategic Objectives

Internal Business Processes

Organization & Learning

Measures Measures are are linked linked to to the the organization’s organization’s individual individual strategic strategic objectives objectives

Market

Figure 2.1

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

The The Framework Framework helps helps to to ensure ensure aa balanced balanced emphasis emphasis among among leading leading indicators indicators of of value value creation creation (employee (employee performance performance and and internal internal business business process process measures) measures) and and lagging lagging indicators indicators (financial (financial and and customer customer satisfaction satisfaction measures) measures)

Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Objective 3: Discuss a variety of Strategy Map examples Strategy Maps can best be understood by looking at several successful examples. Example One: Software Company

Figure 2.2

Source: Balanced Scorecard Collaborative, 2003

In the case of this software company, the organization identified increasing shareholder value as their ultimate strategic objective. As such, the Financial Perspective was placed at the top of their Strategy Map. In order to achieve this objective, they felt that they needed to obtain three distinct financial goals: •

Be a leader in strategic markets

•

Diversify their revenue base

•

Be predictably profitable

In turn, they saw the need for three distinct operational strategies to achieve these interrelated financial objectives: •

Customer Intimacy

•

eBusiness Solution Excellence

•

Operational Excellence

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Each of these three strategic themes is broken down in a cause and effect chain from a customer, internal business process, and learning and growth perspective. In this way, the actions and outcomes that will be required to obtain the overall strategic objectives can be clearly articulated. Each of the objectives displayed in the Strategy Map must in turn be mapped to performance measures that will gauge whether these objectives are actually reached. Managers can understand how reaching their specific performance goals will directly tie to the achievements of the organization’s goals. Example Two: Public Sector

Figure 2.3

Source: Balanced Scorecard Collaborative, 2003

Although Balanced Scorecards were initially created with private sector organizations in mind, the basic concepts of the Balanced Scorecard have proven to be very effective in the public sector as well. In fact, given that the public sector is less affected by normal market forces, it has been argued that the Balanced Scorecard approach is even more suited for the public sector than for profit oriented businesses. Many public sector organizations have created Balanced Scorecards successfully. Strategy Maps in the public sector are created in the same way as for private sector companies. Obviously the types of strategies will often be different, but the basic techniques and tools of the Balanced Scorecard process remain the same. Many public sector organizations choose to put the Customer Perspective at the top of the Strategy Map rather than the Financial Perspective. This reflects the fact that, for many of these organizations, providing legislated services to the public is their overarching objective.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Example Three: Functional Unit Strategy Maps are often focused on those organizational units that are most involved in the creation and implementation of strategy. In practice, this has meant that many Balanced Scorecard efforts are focused on corporate and the operational business units. While this is the correct focus of many Balanced Scorecard initiatives, there are other business areas that can also benefit from the creation of Strategy Maps and Balanced Scorecards. Specific examples of this are shown below and relate to the IT and finance functional units. In many organizations these functions may be held in shared services units.

Figure 2.4

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

Source: Balanced Scorecard Collaborative, 2003

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Example 4: Finance Organization

Figure 2.5

Source: Balanced Scorecard Collaborative, 2003

Once again, the basic principles of applying the Strategy Maps are the same. Objective 4: Explain the key success factors for creating Strategy Maps There are several key considerations to remember when creating Strategy Maps: •

Start with the strategy. In a perfect world, organizations would have clearly defined strategies that are well understood down to the operational unit level. In practice, this strategic insight is often lacking. This does not preclude the use of Balanced Scorecards or the Strategy Map technique, but it does require that organizations take some time at the beginning of the process to actually map out what the strategic objectives are for each business unit that will have a Scorecard. In fact, many organizations report that using Strategy Maps to build Balanced Scorecards actually had the positive follow-on effect of improving their strategic planning process.

•

Focus on the cause and effect chain. A Balanced Scorecard is a collection of performance measures that, in aggregate, provide a holistic view of strategy. It is not a repository for an ad hoc collection of key performance indicators that may or may not be related to one another. The Strategy Map is a key way to ensure that performance measures used in the Scorecard are actually related to one another and can be tied to agreed strategic objectives.

•

Do not jump to conclusions. There is often a tendency for managers to want to jump to the “right answer” and therefore bypass much of the Strategy Mapping exercise. This is often driven by the desire to work backwards from existing measures already in use or from areas where existing information is

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

abundant. The point of Strategy Mapping is to take a fresh look at organizational strategy and performance measurement, not to merely dump existing Key Performance Indicators (KPIs) into a new format. •

Get the right people involved. To be successful, the Strategy Mapping exercise and the performance measures that it spawns must have buy in from both senior management and the managers who will actually be held responsible for the results. Strategy Maps must be created in conjunction with the right team of people from the organization. Strategy Maps are generally the most effective when created in a series of workshops with relevant managers and perfected through a series of reviews with key stakeholders. Project teams should avoid creating Strategy Maps with only consultants or project staff involved. This will often be seen as imposing a solution on the business and so buy-in will be hampered.

Strategy Maps should be viewed as living documents that will evolve over time. They will never be perfect the first time but rather must be refined with experience over time. In fact, a good measure of a successful Balanced Scorecard program is that the measures used do change over time. If measures remain static, the organization has likely lost interest in the program and no continuous improvement is taking place.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 3: Developing Balanced Scorecard Performance Measures Module Objectives After completing this module, you will be able to: 1. Develop Balanced Scorecard performance measures Objective 1: Develop Balanced Scorecard performance measures The previous module explained how Strategy Maps can be used to cascade strategy and to develop clearly articulated strategic objectives. The next step in the Balanced Scorecard methodology is to actually develop performance measures that are tied to each of these strategic objectives. Balanced Scorecard performance measures should be evaluated using several core principles: •

Identify measures that drive performance for each strategy

•

Analyze measures to include both leading and lagging indicators

•

Find the most important measures and eliminate superfluous measures

•

Look at the overall Scorecard and avoid any unbalanced, “game-able” measures

All performance measures should meet a number of key criteria: •

Relevant: Directly linked to critical objectives and strategies

•

Reliable: Verifiable and free from subjective judgment or bias

•

Valuable: Able to help management make decisions and take actions

•

Timely: Available before it loses its capacity to influence decisions

•

Cost Effective: Benefits of using measure outweigh the costs of collecting and reporting the information

•

Availability: Data to support the performance measure is available.

Throughout this process it is critical to focus on leading as well as lagging indicators. Well-chosen leading indicators foreshadow success or failure well before financials can reflect them. As part of this process, it is important to consider two things: •

Look to measure important business processes, not just results. An important aspect of the Balanced Scorecard approach is to focus on outcomes, rather than just inputs or activities. At the same time, it is important to have a blend of different types of measures to capture business performance from a variety of angles. For example, a result may be a lagging indicator while the process that drives the result may be a leading indicator of performance.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

•

−

Example: Inventory turnover is a result measure while set-up time reduction is a process measure.

−

Example: Market share is a result measure while product development lead time is a process measure.

Conduct an analysis to determine the cause and effect relationship between measures and identify the best indicator of performance. In many cases, a measure can be predicted by one or more other measures. Conducting a cause and effect analysis will help management to understand the full set of potential measures and choose the most appropriate measures to drive and measure performance. −

Example: Customer satisfaction may be predicted by on-time delivery rates and quality ratings.

Figure 3.1 is an example of how common strategic objectives can be translated into process measures.

O p e ra tio n a l S tra te g ie s

S a m p le P ro c e s s M e a s u re s

“D iffe re n tia te th e p ro d u ct” o r “S im p lify th e p ro d u ct”

•

“S e rve th e cu sto m e r a s a first p rio rity”

•

“D e ve lop te c hno lo gica lly a d va n ce d p ro d u cts in a n effe ctive m anne r”

•

“P ro cu re m a te ria l e ffe ctive ly”

•

•

N um b e r o f p ro d u cts o r se rvice s N um b e r o f p a rts

L e n g th o f th e o rd e r fu lfillm e n t cycle • Le n g th o f th e m anufa ctu rin g cycle • N um b e r o f d istrib u tio n p o in ts P rod u ct d e ve lo p m e n t le a d tim e N um b e r o f e n g in e e rin g ch a n ge s • N um b e r o f n e w p a te n ts •

•

Ite m s pa ssin g qua lity sta nda rd s U n it co st

N um b e r o f p ro fit ce n te rs • N um b e r o f ban k re la tion sh ip s • N um b e r o f in vo ice s

“E sta b lish a lo w -co st ad m in istra tive stru ctu re ”

•

“D e ve lo p o u r h u m a n re so u rce a sse ts”

• •

T ra in in g h o u rs a ch ie ve d C oun se lin g fre quen cy

Figure 3.1

Source: “Implementing Your Strategies”, Keegan, Jones, Eiler

For many companies, careful analysis can drive out the right performance measures to support the strategic objective enunciated in the Strategy Mapping process. In other cases, organizations may choose to take a more formal approach to determining the final performance measures. As shown in Figure 3.2, the Cause and Effect Diagram (also called the Fishbone or Ishikawa diagram) is a tool used to help identify all the possible or probable sources of a given problem. Once developed, this list of potential causes can be narrowed down to root causes using other methods, such as Pareto Analysis. The basic tool uses a graphic that allows potential sources of variation or defect to be developed and recorded using categories of causes such as the “Five M’s”: Man (resources), Machine (or equipment), Methods (procedures), Materials, and Measurement.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Example Cause and Effect Diagram

How to Use

C o n fo rm a n c e

•

Define the problem to be solved, record on the left side of the diagram

R e lia b ility

• • •

List the “5 M’s” as categories (or develop your own more specific categories) listing each on a separate thread or bone

R e la tiv e p u r c h a s e p ric e

P ro d u c t m e e ts e x p e c a tio n s

P e rfo r m a n c e

•

C o s t to m a in ta in

C o s t to o p e ra te

P ro je c te d R O I

P ro d u c t m e e ts needs

C o s t to u s e

P ro d u c t Q u a lity

Brainstorm potential causes, listing them under the appropriate category

C o s t to a q u ire

P ric e C u s to m e r S a tis fa c tio n S e r v ic e Q u a lity

Add additional branches or bones to capture causes related to one another

D e liv e ry

S e rv ic e m e e ts needs

A rriv e s w h e n p ro m is e d

S e rv ic e m e e ts e x p e c ta tio n s

Review the resulting list to identify others not yet captured.

A rr iv e s w h e n needed

F le x ib ility

O n -tim e d e liv e r y

R e s p o n s iv e n e s s L e a d tim e s

Figure 3.2

Source: “Challenge Your Balanced Scorecard”, Graham

The standard Fishbone diagram often results in a large number of potential measures being generated. One of the key elements of successful Balanced Scorecards is that they contain relatively few measures to ensure that management is focused on the major drivers of strategy. As a rule of thumb, Kaplan and Norton recommend 25 measures or less for a Balanced Scorecard. In addition to the standard performance measure criteria discussed previously, there are several other factors to consider when reducing the number of measures to be used: •

Eliminate measures that are poor indicators of performance. Measures should only be chosen if they provide a good indication of future performance. The previously discussed Fishbone diagram can be used to help evaluate various measures in this regard.

How to Use • In defining the leading and lagging indicators, a cause and effect diagram has been drawn. • For each cause, indicate the level of influence on the effect –

•

High Effect: has high influence over the result

–

Medium Effect: Some influence over the result

–

Low Effect: Little influence over the result

Remove all measures that have a low effect on the result along with its entire branch: –

Example: in the example diagram, “Product Quality” would be removed along with its entire branch (“product meets needs”, “product meets expectations”, etc.)

Example Cause and Effect Rating Diagram Conformance Reliability

Cost to operate

H H

Performance

Cost to maintain

Product meets expecations

Relative purchase price

H

L

Projected ROI

L

M Product meets needs

Cost to use

M

Cost to aquire

L M Product Quality

M

H

Price

H

L

Customer Satisfaction

M L

Service Quality

Service meets needs

M Flexibility

M Delivery

M

H

H

Service meets expectations

H

Arrives when promised

Arrives when needed

Responsiveness

L

H

On-time delivery

Lead times

Source: “Challenge your Balanced Scorecard”, Graham

Figure 3.3

•

Delegate measures to lower level Scorecards. Executive-level Scorecards focus on processes that require executive-level attention, while Scorecards for lower-level managers should focus on processes in their sphere of responsibility.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

•

Focus on measures that can be externally benchmarked. When choosing between measures, preference should be given to those that can be benchmarked to external sources. This helps the organization to avoid internal bias.

•

Ensure that measures work together holistically. A Scorecard should be balanced in breadth of metrics and avoid sub-optimization (optimizing a portion of the enterprise at the expense of the whole). To make sure that the measures are balanced, ask the following two questions: −

Can I take an action that would improve performance of the measure but be bad for the company?

−

For each of these actions, is there another measure that would prevent me from taking it?

Answering “yes” to either of the above questions would indicate that measures are not balanced. Finally, it is critical to evaluate each and every performance measure to ensure that the data to support the measure is readily available and cost effective to collect. A common error in Balanced Scorecard implementations is that organizations select measures that they would like to measure but do not have the capability to support. This can quickly lead to disillusionment with the entire process. In the event that some desired information is unavailable, proxy measures should be considered. Alternatively, organizations may have to accept using less desirable performance measures until the information gap is closed. Throughout this process, the organization should always be aware that the performance measures selected are not set in stone. In fact, the mark of successful Balanced Scorecard organizations is that they continuously refine the performance measures used based on experience and to reflect changing strategic objectives.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 4: The Balanced Scorecard Process Module Objectives After completing this module, you will be able to: 1. Describe the end-to-end Balanced Scorecard process

Objective 1: Describe the end-to-end Balanced Scorecard process The Balanced Scorecard process links performance measurement to strategy execution. Combining the elements discussed earlier in this training material, Figure 4.1 illustrates the end-to-end Balanced Scorecard process: Sample “Bus Unit A” Strategy Map Corporate Objectives

Bus Unit A Objectives

Financial Strategies

Sample Bus Unit A Strategies

Objectives support the overall vision and provide areas of emphasis for the organization to focus its activities

Best Best return return on on information information technology technology(RoIT) (RoIT)

Simple Simple and and rewarding rewarding experiences experiences

World World -class -class cost cost structures structures

Focused Focused Innovation Innovation

Capture Capture the the XYZ XYZ market market potential potential

Build Build direct direct business business capabilities capabilities

Protect Protect Supplies Supplies Business Business

Establish Establish company company as as aa leader leaderin in specific specific product product area area

Maximize market share while meeting current year revenue & profit commitments

Customer Strategies

Improve brand performance

Operational Excellence Strategies

Develop effective, sustainable marketing programs

Employee Strategies

Sample Bus Unit A Balanced

Develop new products / solutions

• Revenue / Total market • Operating profit

•Brand recognition rating •New product ramp rates •New product revenue/Total revenue

Scorecard

•Marketing spend / Revenue •% increase in marketing reach

To monitor progress, targets are set for each measure in given time period. Targets should be based off the strategic planning financials and assumptions.

•Global diversity rating •Meeting employee retention plans

Attract the diversity, skills and competencies we need

BSC Development

Strategy Mapping Primer

Measures are directly linked to strategies of the organization and should include all major performance drivers for each strategy.

-

Measures should be: • Timely, accurate, focused and relevant • Leading indicators of performance • Linked to controllable events • Cost effective to collect and compute • Easy to communicate broadly to the organization

Strategies break down the objectives into more actionable elements and in aggregate should represent the overall organizational focus.

Figure 4.1

Source: Deloitte

This example shows how corporate strategy is first cascaded down into strategic objectives at the business unit level. The Strategy Map is used to generate specific performance objectives linked to these strategies and distributed across multiple perspectives. These objectives are then broken down into specific performance measures that are reported in a Scorecard format. Performance monitoring requires clear targets for each of the measures as well as periodic reporting of actual results. This demonstrates the feedback loop that Balanced Scorecards create.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

To further illustrate this point, Figure 4.2 breaks out the step from Strategy Map to operational plan.

Business Unit Strategies

Sample Bus Unit A Strategy Map

Business Unit Objectives Financial Strategies Customer Strategies Operational Excellence Strategies

Capture Capture the the XYZ XYZ market market potential potential

Build Build direct direct business business capabilities capabilities

Protect Protect Supplies Supplies Business Business

Sample Balanced Scorecard

Maximize market share while meeting current year revenue & profit commitments Improve brand performance

Develop new products / solutions

Develop effective, sustainable marketing programs

Employee Strategies

Attract the diversity, skills and competencies we need

Financial Tactics

Improve product availability and inventory costs

Business Management System

• Revenue / Total market • Operating profit

• Brand recognition rating • New product ramp rates • New product revenue/Total revenue

• Marketing spend / Revenue • % increase in marketing reach

• Global diversity rating • Meeting employee retention plans

Business Unit Tactics

Sample Bus Unit A Operational Plan

Sample Operational Dashboard

Customer Tactics Operational Excellence Tactics Employee Tactics

Improve partner and customer support satisfaction Implement new Value Delivery System to reduce SC costs

Financial

Implement segmented product/pricing solutions Consolidate CRM/customer data assets

Timely and wellcommunicated roll-out of new training programs

Customer

Operational Excellence

Employee

Figure 4.2

Kiosk revenue % of MFP revenue through direct Win rate on deals requiring direct assets XYZ leads/month SMB Hosting quota Inventory turnover ratio On time delivery Lead times Return rates Customer service expense per customer Response time per request % revenue from new customers Forecast accuracy Warranty claims Cost excess capacity Rework Training hours Training evaluation ratings On time evaluations Requisitions open past requisition date Turnover rate

Source: Deloitte

Again, this demonstrates how the various facets of the Balanced Scorecard process fit together into an integrated performance management framework.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 5: Integrating the Balanced Scorecard into the Integrated Performance Management Framework Module Objectives After completing this module, you will be able to: 1. Explain how Balanced Scorecards fit into the overall Integrated Performance Management (IPM) Framework.

Objective 1: Explain how Balanced Scorecards fit into the overall Integrated Performance Management (IPM) Framework Balanced Scorecards should be seen in the context of the overall Integrated Performance Management (IPM) process.

Organization Alignment and Accountability

Reward Results

Strategic Planning

Monitor Individual Results

Business Planning

Planning, Budgeting & Forecasting

Shareholder Value Budgeting

Analysis

Reporting & Performance Measurement

Performance Measurement

Forecasting Reporting (Financial & Operational)

Figure 5.1

Source: Deloitte

Organizations that have been the most successful with Balanced Scorecards have viewed them as an integrated part of the larger IPM process. Ultimately, a successful Balanced Scorecard program will impact every part of the Integrated Performance Management framework, particularly Business Planning and Performance Management.

Business Planning: Balanced Scorecards are critical to translating overall strategic objectives into tangible business objectives. As discussed previously, a key differentiating factor in the Balanced Scorecard approach is that all performance measures on a given scorecard should be explicitly linked to strategy.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

A huge deficiency in the IPM process in many organizations is the gap between high-level strategic planning and the operational budget. The former is often long-term in nature and focused on quantum leaps to new levels of performance. The latter is usually focused on the details of the next fiscal year and incremental improvement. Balanced Scorecards help bridge this gap by linking performance targets directly to longer term strategic goals. Many organizations have used Balanced Scorecards to decrease the financial detail in the budgeting process by focusing managers on meeting the targets outlined in the Scorecards.

Performance Management and Organizational Alignment: Organizations with established Balanced Scorecard processes often link incentive pay to meeting performance targets outlined in the Scorecards. This further solidifies the Scorecard performance measures as being vital to the decision-making process of the managers. Depending on the level that the Scorecards have been pushed down into the organization, employees can receive incentive pay based on the achievement of group or individual targets. It is important to stress that the Balanced Scorecard is just one of many management elements within the Business Planning and Performance Management segments of the Integrated Performance Management framework. Balanced Scorecards should not be viewed as the “only” source of performance management information available to managers, but rather should be seen as one important piece of a large holistic information system. Strategy Formulation Industry Industry Analysis Analysis Customer Customer Analysis Analysis

Business Planning

Market Market Event Event Triggers Triggers

Strategies Strategies

High High Level Level Operating Operating Plans Plans

Business Business Model Model Analysis Analysis Strategic Strategic Performance Performance Scorecard Scorecard (Balanced (Balanced Scorecard) Scorecard)

Initiatives Initiatives

Detailed Detailed Op. Op. Plans Plans

Financial Financial Plan Plan

People People Plans Plans

Initiative Initiative Performance Performance Scorecard Scorecard

Operating Operating Performance Performance Scorecard(s) Scorecard(s)

Financial Financial Performance Performance Scorecard Scorecard

People People Performance Performance Scorecard Scorecard

Customer Customer Plans Plans

Customer Customer Performance Performance Scorecard Scorecard

Partner Partner Plans Plans

Partner Partner Performance Performance Scorecard(s) Scorecard(s)

Individual Individual Performance Performance Plans Plans

Performance Management

Corporate View Division-level View Business Unit-level View

Figure 5.2

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

Source: Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 6: Balanced Scorecard Case Examples Module Objectives After completing this module, you will be able to: 1. Discuss, in general, Balanced Scorecard case examples 2. Discuss a leading private sector Balanced Scorecard case example 3. Discuss a leading public sector Balanced Scorecard case example

Objective 1: Discuss, in general, Balanced Scorecard case examples There are a wide variety of private sector organizations that have successfully implemented Balanced Scorecard (BSC) programs. A sample of these organizations are shown in Figure 6.1: Company

Description

BSC Objectives

Results

Technology Hardware Manufacturer

Implemented a BSC in one of three divisions to strengthen management processes and develop a set of metrics to gauge the health of the organization. An on-line management tool was developed for reporting and visibility

• Strategy and measures linked • Monitor the strategic success of the division

• Performance measures linked to key business strategies and management goals

• Performance management streamlined

• Enterprise wide performance mgmt streamlined and integrated

Implemented a BSC in 2000 to integrate four entities under one common umbrella. Used the scorecard in conjunction with the Baldrige criteria framework and its TQM system.

• Integrate 4 entities under common objectives and measures

• Executive team able to understand business more holistically

Implemented a BSC for the IT group (ITG), a $1 billion cost center

• Organization aligned under common goals and measures • Cost reduction

• Cut costs by 20% with same level if service

Implemented a BSC in 1993 for a division with $20bn in revenue. The scorecard was put in place to help the company move from a centralized to a decentralized organization. The scorecard was linked to executive compensation

• Employees understand the corporate strategy and how they fit in

• Moved from last place to first in industry profitability and maintained it for 5 years

Cigna

Implemented a BSC in 1993 to help manage the transformation from a moneylosing generalist to a top-quartile specialist

• Return to Profitability

• Returned to profitability within 2 years that was sustained for 4 consecutive years

Chemical Retail Bank (Chase)

Implemented a BSC in 1993 to help assimilate an acquisition, introduce more integrated financial services, and accelerate the use of electronic banking

• Strategic priorities defined

• Profitability increased by a factor of 20 over 3 years

AT&T Canada

Microsoft

Mobil

• Executives able to efficiently identify and address low performance areas

• Broad understanding of strategy

• Number of employees reporting that they understand the strategy went from 20% to 80%

• Budgeting and strategy linked

Sources •“OnBalance”, CFO, February 2001 •“Building a strategy-focused organization”, Kaplan and Norton •Deloitte Consulting

Figure 6.1

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

The first two examples in the chart above can be expanded into more detail in Figures 6.2 and 6.3:

Case Study: Technology Hardware Manufacturer ƒ Global enterprise with divisions representing major categories CONTEXT

ƒ Divisions typically create siloed solutions that overlap and compete ƒ Aggressive, centralized management style ƒ Recently shifted leadership through the retirement of several key executives

Results

OBJECTIVES

ƒ Relies on a mix of channel relationships and direct sales force ƒ Link strategy and measures ƒ Assure the strategic health of the division is measurable ƒ Streamline performance management ƒ Implemented a scorecard in 2001 for one of the three major divisions ƒ Developed a customized portal for the leadership team with access limited to key executives and direct reports APPROACH

ƒ Modified the measures over time to reflect changes in the business

ƒ Performance measures linked to key business strategies and management goals ƒ Enterprise wide performance management streamlined and integrated

ƒ Uses a portal, spreadsheet and existing databases to manage measures, data and reporting ƒ Linked about 1/3 of the measures to existing systems with the other 2/3 representing “softer” measures ƒ Supported by finance and the strategy office ƒ Use scorecard in conjunction with the monthly leadership reviews of the business

Figure 6.2 Sources:

“OnBalance”, CFO, February 2001 “Building a strategy-focused organization”, Kaplan and Norton Deloitte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

CONTEXT

Case Study: AT&T Canada ƒ Moved four separate organizations to one major organization in June 2000 ƒ Organization managed by service category ƒ Strong, integrated leadership team with seasoned executives

Results

ƒ Distributed leadership and control

OBJECTIVES

ƒ Large install base of customers ƒ Integrate 4 acquired entities under common objectives and measures ƒ Common understanding amongst executives on what the major business drivers were and how the pieces fit together ƒ Executives met for four hours once a month to review results on the scorecard

APPROACH

ƒ Used in conjunction with the Baldrige criteria framework and its TQM system ƒ Modified the measures over time since 2000 to reflect changes in the business

ƒ Over time, the scorecard has helped the executive team understand the business more holistically and how all the elements interact ƒ Have become more efficient in its use over time and typically drill down on poorly performing areas quickly during the executive meeting

ƒ Corporate team responsible to provide the methodology for measurement and limited consulting services to business units who are responsible for developing their own scorecards ƒ Uses Excel to manage measures for a majority of the business ƒ Developed a customized web-enabled report card ƒ Linked the scorecard to compensation for individuals variable pay element (33% customer, 33% revenue, 33% EBITDA)

Figure 6.3

Sources: “OnBalance”, CFO, February 2001; “Building a strategy-focused organization”, Kaplan and Norton; Deloitte

Objective 2: Discuss a leading private sector Balanced Scorecard case example A more detailed private sector example is shown in Figure 6.4: Vision Objectives

Objective Description:

The The company company provides provides premier premier technical, technical, management, management, and and directly directly related related services services to to develop, develop, manage, manage, engineer, engineer, build, build, and and operate operate installations installations for for our our customers customers worldwide worldwide Maximize Maximize Performance Performance Delivering value to stakeholders through every aspect of the business by earning a fair return on our delivered value

Deliver Deliver Customer Customer Value Value Understanding and exceeding customer expectations so that we fully satisfy every customer on every job

Figure 6.4

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

Develop Develop People People

Promoting development and challenge in a healthy and positive work environment

Become Become Global Global

Tailoring our planning & resource allocation, developing strong local ties, and building a multicultural workforce to secure a global marketplace

Source: Deloitte, 2002

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Of key importance is that the overall vision statement is broken down into a series of more concise strategic objectives. The next step was to create a Strategy Map to translate these objectives into clearly defined objectives spread across multiple perspectives. The The company company provides provides premier premier technical, technical, management, management, and and directly directly related related services services to to develop, develop, manage, manage, engineer, engineer, build, build, and and operate operate installations installations for for our our customers customers worldwide worldwide

Vision Objectives

Maximize Maximize Performance Performance

Strategies

Financial Strategies

Deliver Deliver Customer Customer Value Value

Develop Develop People People

Become Become Global Global

Earn Sustainable, Predictable, Acceptable Profit

Customer & Business Partner Related Strategies

Develop Business and Customer Relationships

Manage Business Partners

Satisfy Customer Needs

Internal Business Process Strategies

Perform Work

Make Continuous Improvement

Be Safe and Ethical

Standardize EPC Processes

Organization and Learning Objectives

Develop and Apply Technology

Attract and Retain the Best People

Build Teams and Leaders

Develop Technical Infrastructure

Figure 6.5

Source: Deloitte, 2002

This organization then translated these objectives into a series of performance measures that form the basis of their Balanced Scorecards. Strategies 1. Earn Sustainable, Predictable, Acceptable Profits

Strategic Measure 1.1. New Work Booked OP / Plan OP 1.2. Work-off OP / Plan OP 1.3. (Obtain Economic Value Added input) 1.4. Working Capital Balance 1.5. Aggregated Total Cost and Schedule Performance Factor 1.6. Aggregate Risk (by country/customer/receivable, etc)

1.7. Receivables as a % of Principal Revenue 1.8. (Unallowable OH$ + NR$) / OP (BSII only) 1.9. Fee Efficiency (Fee - Non-reimbursable - cost for project working capital) / Fee (BSII only) 1.10. Cash Margin 2. Satisfy Customer Needs 2.1. NPV as defined by customer 2.2. Repeat Customers as a % of New Work Booked 2.3. Ethics (Customer Survey) 2.4. Customer Survey and Evaluations 3. Manage Business Partners 3.1. Business Partner Survey 3.2. Ethics (Business Partner Survey) 4. Develop Business and Customer Relationships 4.1. % of New Work Booked Operating Profit from Strategic Customers 4.2. % of New Work Booked Operating Profit working with Target Business Partners 4.3. % of New Work Booked Operating Profit working from BEn

Figure 6.6

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Source: Deloitte, 2002

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard Strategies 5. Perform Work

6. Make Continuous Improvement

7. Be Safe and Ethical

8. Standardize EPC Processes

9. Develop and Apply Technology

Strategic Measure 5.1. Cost Performance Factor (forecast/budget) 5.2. Scheduled (in weeks - ahead, on target, behind) 5.3. Construction Performance Factor (earned/budget) 5.4. Engineering Performance Factor (earned/budget) 5.5. Materials and Subcontractor Performance Factor (cost/budget) 5.6. Total Installed Cost Reduction 6.1. Return on Human Capital (OP / non-manual hours) 6.2. OP / non-manual total employee cost 6.3. Kase Quality Gates (success rates of reviews or attendance of players) (can vary by Division) 6.4. 7.1. OSHA lost time accidents (U.S.) 7.2. OSHA recordable rate (U.S.) 7.3. Ethics (employee survey) 7.3. Sustainable Development (Obtain measures) 8.1. Work Process Quality (# of audit findings) 8.2. % of bulk procurement on client paper 8.3. 8.4. 8.5. 9.1. Return on Technology Investment (Division specific) 9.2. % of prospects on strategic plan

Strategies

Strategic Measure

10. Attract and Retain the Best People

10.1. Mobility of workforce 10.2. Employee turnover 10.3. Skill and Grade mix of people 10.4. # of outstanding recs / total HC 10.5. Employee Satisfaction Survey 10.6. Total HC (by sub-Division or Division etc.) 11.1. Local vs. Expat project mix (Project) 11.2. Local vs. Expat project mix (Overhead) 11.3. Diversity (EEOC filings U.S.) 12.1. Technical Infrastructure Performance Factor (current forecast / current budget) 12.2. Current Schedule (+,0,-) 12.3. Quality Assessment (+,0,-)

11. Build Teams and Leaders

12. Develop Technical Infrastructure

Figure 6.6 (continued)

Source: Deloitte, 2002

Objective 3: Discuss a leading public sector Balanced Scorecard case example In 1994, the City of Charlotte became the first municipality to implement the Balanced Scorecard. Prior to this, Charlotte had used a Management by Objectives system since the 1970s. This previous performance measurement process had focused on a large number of metrics to report on the day-to-day activities within the city. While this process had been accepted in Charlotte for many years, in the early 1990s, city management no longer felt that it met the needs of a changing city. In particular, Charlotte in the early 1990s faced a rapid growth in population with a resultant increase in the demand for city services. Adding to the demands on city management was a political environment which prohibited material tax increases. Charlotte quickly realized that the process of reinventing how their organization functioned could not be accomplished while depending on a performance system that focused entirely on day-to-day operational metrics. In particular, city management felt that many of the existing measures were backward-looking rather than forward-looking. Generally the process worked much more as an audit and control tool rather than a planning process. Finally, management felt that the system caused a concentration of effort on improving the cost, quality, and cycle time of existing processes. While this had

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

served the city well in a more stable operating environment, in order for Charlotte to take on the challenges ahead, it knew that they needed a process that was forward-looking and would help the city rethink the context of all of their operating processes, not just continue to improve on what they had done before. In brief, Charlotte came to realize that the existing process was a control tool. What they needed now was a management tool. In other words, Charlotte needed a process that would help them communicate the new strategy throughout the organization and to create a feedback loop to understand if that strategy was being executed effectively. Leaders within the Charlotte organization began to research the Balanced Scorecard approach and came to realize that this process fit the needs for their new performance management process. Specifically, they needed a system that would translate strategy into tangible objectives that could be measured, would be forward looking, and would be focused on outcomes rather than inputs/outputs. The Balanced Scorecard fits these requirements perfectly. Charlotte has created a tightly integrated process that cascades strategic themes developed by the City Council all the way through the organization. As such, it creates a context for strategy.

V is io n C it y ’s v is io n s t a t e m e n t

F o c u s A re a s C o u n c il c o m m u n ic a t e s t h e m e s t o L e a d e r s h ip

S tra te g y L e a d e r s h ip d e t e r m in e s r e s p o n s e

C o rp o ra te S c o re c a rd R e s p o n s e b e c o m e s s t r a t e g ic o b je c t iv e s

O r g a n iz a t io n O r g a n iz a t io n im p le m e n t s Figure 6.7

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

Source: City of Charlotte, 2003

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Strategic Themes

Balanced/Corporate Scorecard

Key Business Unit Scorecard

Division Scorecard

Employee PRD

Figure 6.8

Source: City of Charlotte, 2003

Charlotte first created a number of strategic focus areas tied to the overall City strategy. These themes are then decomposed into a number of objectives across the four traditional Balanced Scorecard perspectives in order to form the basis of the Corporate Scorecard.

Figure 6.9

Source: International City/County Management Association (ICMA), “Putting Strategy first in Performance Management”, April, 2001

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Each of the strategic objectives on the Corporate Scorecard is in turn translated into a specific performance measure. For example:

Figure 6.10

Source: ICMA, “Putting Strategy first in Performance Management”, April, 2001

Each department then determines which of the Corporate Scorecard objectives apply to their operations. The Charlotte Department of Transportation (CDOT) serves as an example of this (Figure 6.11).

Figure 6.11

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

Source: ICMA, “Putting Strategy first in Performance Management”, April, 2001

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

In turn, each of the objectives at the department level are driven through to final performance measures, as shown in Figure 6.12.

Figure 6.12

Source: City of Charlotte

Using Charlotte’s process, all departmental performance measures can be explicitly linked to the city’s overall strategic objectives. An example of a final departmental scorecard for CDOT is found in Figure 6.13.

Figure 6.13

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Source: City of Charlotte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Many of the departments now cascade Department Performance Measures all the way down to the individual level, as shown in Figure 6.14.

Corporate

Transportation KBU

DELIVER COMPETITIVE SERVICES

DELIVER COMPETITIVE SERVICES Develop Competition Plan (KI) Total dollars subjected annually to competition, optimization, or benchmark (KM) Meet MOU requirements and produce savings (KT)

Street Maintenance

Field Operations Supervisor

DELIVER COMPETITIVE SERVICES Develop and Implement an Optimization Plan for all 3 Districts (DI) Produce audit reports that report cost and measure work produced against standards (DM) Meet or exceed standards contained in MOU (DT) DELIVER COMPETITIVE SERVICES Assist with Implementation of Optimization Plan (EI) Ensure materials used, quantities of work produced and labor hours reported daily and accurately (EM) Complete all paperwork and reports and present to Audit within 8 weeks after close of previous quarter (ET)

Figure 6.14

Copyright ©2004 Deloitte Development LLC. All Rights Reserved.

C=Corporate K=KBU D=Division E=Employee I=Initiative M=Measure T=Target

Source: City of Charlotte

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 7: Implementing Balanced Scorecards Module Objectives After completing this module, you will be able to: 1. Describe high-level implementation approaches for Balanced Scorecard projects 2. List the tools available to support Balanced Scorecards

Objective 1: Describe high-level implementation approaches for Balanced Scorecard projects The exact nature of the implementation plan will be dependent on the precise needs of the clients and scope of the project. Figure 7.1 is a high-level roadmap that provides a generic approach to these types of engagements.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

SOLUTIONS & TOOLS

MAJOR ACTIVITIES

OBJECTIVES

SUMMARY

ASSESS ASSESS

DEFINE DEFINE

ƒ Deploy the performance management framework across enterprise, program areas and administrative areas ƒ Use performance data integrated with planning, budgeting and operational control ƒ Extend performance reporting to various stakeholder groups

ƒ Monitor operations and validate that the performance management framework: ƒ Demonstrates visible improvements ƒ Provides reliable and relevant information to executives and line managers ƒ Meets the information requirements of stakeholders (current status & action plan) ƒ Links agency program and administrative operations to outcomes ƒ Meets the legislative and regulatory requirements

ƒ Analyze casual linkages of all performance drivers ƒ Design detailed structure of performance measures ƒ Map the “as-is” and design the “to be” performance management process flows including data sources, report presentation, and frequency ƒ Develop implementation plan for moving the agency to the new processes

ƒ Install performance measurement system and implement data integration with other systems ƒ Implement new processes - including executing communications plan and training users ƒ Conduct unit/integration/regression tests and test system implementation and transition to production ƒ Develop review framework

ƒ Conduct system and process review studies ƒ Assess systems use patterns by staff ƒ Establish a regular program monitoring process to ensure continuous improvement of the system

ƒ Understanding of agency’s mission and goal linkages to enterprise, program and administrative outcome and outputs ƒ Identifying the optimal starting point in the performance management implementation continuum ƒ Assessing areas of strengths and weaknesses ƒ Developing key focus areas for agency in terms of demonstrating results ƒ Identifying extent to which current performance framework can be leveraged

ƒ Validate/refresh agency mission with agency leadership ƒ Identify agency strategic opportunities/threats ƒ Align agency goals and objectives to long term outcomes and operational outputs ƒ Factor stakeholder expectations and influences ƒ Develop performance drivers and cascaded set of measures ƒ Develop targets for performance – absolute measures and relative to peers

ƒ Status of current performance management framework ƒ Readiness assessment ƒ Coverage and capability assessment ƒ Linkage of outcome/output measures between mission/goals and enterprise, programs and administrative processes ƒ Reconcile stakeholder expectation to strategy ƒ Priorities for results and performance ƒ Performance framework audit vis-à-vis legislative requirements (e.g. CFO Act) ƒ Assess budgeting processes linking budgets to performance plan

ƒ Mission,/goals/strategy linkage in terms of: ƒ Integration between enterprise, program areas and administrative operations ƒ Key stakeholder perspectives ƒ Define agency specific performance objectives ƒ Define mandatory reporting requirements ƒ Define macro-level measures/standards ƒ Develop peer groups and conduct performance benchmark analysis ƒ Develop current performance baselines (cost, program performance, etc.)

Stakeholder StakeholderAnalysis Analysis StrategyPrint StrategyPrint

ƒ Performance Framework Assessment Report ƒ Agency Readiness and Capability Map ƒ High-level Improvement Plan

ƒ ƒ ƒ ƒ ƒ

Stakeholder and goal alignment analysis Refined strategy and high-level scorecard Agency specific performance drivers Baseline and benchmark analysis Transformation plan and major components

This phase involves developing, testing and implementing a pilot version of the technical solution. I parallel, the process and change management initiatives are carried out.

ƒ Develop and test performance measurement system ƒ Develop and test interfaces to other systems ƒ Refine new process details to reflect new system characteristics ƒ Develop detailed systems integration and refreshed change management plan

Change ChangeLeadership Leadership

COTS COTSSolutions Solutions

Value ValueBased BasedManagement Management

BI/DW BI/DWSolutions Solutions

InformationPrint InformationPrint

eTI eTIMethodologies Methodologies

Benefits BenefitsTracking Tracking Change ChangeLeadership Leadership

Performance PerformanceMonitor Monitor Stakeholder StakeholderAnalysis Analysis

IndustryPrint IndustryPrint

ƒ Detailed performance measurement architecture ƒ Process reengineering plan ƒ Management control framework ƒ High-level change management plan ƒ Software solution recommendation ƒ Performance management program components, business cases and implementation plan

ƒ ƒ ƒ ƒ ƒ

Conference room pilot software solution Detailed change management initiatives Detailed process redesigns Detailed management control framework Integration plan

Figure 7.1

Copyright ©2004 Deloitte Development LLC. All Rights Reserved..

MONITOR MONITOR Monitor and Manage

ƒ Develop the performance measurement ƒ Implement a pilot of the performance structure management framework, including: ƒ Identify sources of data and defining data ƒ An integrated performance acquisition strategy including data ownership management system ƒ Develop a management control plan ƒ Performance thresholds and possible ƒ Perform software selection managerial actions ƒ Develop process change, change ƒ Process and people related changes management and leadership development to support the new performance plan management culture ƒ Develop the business case and program ƒ Implement a conference room pilot for implementation plan performance management systems solution

This phase involves designing the detailed structure of performance measures, the control mechanisms, and data acquisition strategy. Process, technology and people related issues are considered in an integrated fashion.

Strategy Scenario StrategyAssessment Assessment&&ScenarioScenario-based basedStrategic StrategicPlanning Planning

IMPLEMENT IMPLEMENT&&INTEGRATE INTEGRATE

This phase involves monitoring the new framework in operation and in effect, conducting a post implementation review to identify potential areas for improvement.

This phase involves articulating and linking the organization’s vision, mission, goals and objectives. Enterprise, program outcomes and administrative outputs are defined and linked to a broad management control framework.

Performance PerformanceDiagnostic Diagnostic

DEVELOP DEVELOP

This phase involves implementing all the aspects of the performance management framework and integrating it to the normal operational processes of the organization. New management controls would be operationalized.

This phase involves a quick, highhigh-level assessment of the organization’s performance management framework in terms of current status, and the overall organizational readiness and capabilities to implement and integrate a performance management framework

Activity ActivityBased BasedCosting Costing DELIVERABLES

DESIGN DESIGN

ƒ A operating performance management framework ƒ Implementation of supporting processes ƒ Operational guidelines ƒ Design and delivery of educational programs ƒ Design and delivery of training programs

ƒ ƒ ƒ ƒ

Detailed performance framework review Stakeholder analysis Lessons learned Set of improvement initiatives

Source: Deloitte, 2002

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Objective 2: List the tools available to support Balanced Scorecards There are a wide variety of tools available to support Balanced Scorecard implementations. Figure 7.2 illustrates some of the major types of tools. Note that this list is not exhaustive and that the tools themselves can change rapidly in relatively short periods of time. Balanced Scorecard Tool Vendors: 2002 Update Corporate Performance Management Suites

Broad

SAP PeopleSoft Oracle, InPhase Technologies QPR Software, Procos, Prodacapo

Degree of Integration

Hyperion Comshare SAS

Project Scope

Panorama Business Views, ShowBusiness ActiveStrategy Narrow More than 20 small vendors Balanced Scorecard Applications Low

Closed Loop

Cognos CorVu (Gentia)

Alphablox Business Objects MicroStrategy ProClarity

Analytical

BI Platforms/ Enterprise BI Suites

Level of IT Support

Figure 7.2

High Source: Deloitte, 2002

Corporate Performance Management suite. Typically these tools offer a range of functionality, applications, and technology integrated with the underlying ERP environment. BI Platforms/Enterprise BI Suites. These tools typically are more generic in their approach to measurement and can be customized and configured to meet the data reporting requirements. Balanced Scorecard Applications. Typically these tools feature robust analytic capabilities to support the balanced scorecard methodology.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Module 8: Balanced Scorecard Reference Material Module Objectives After completing this module, you will be able to: 1. Locate Balanced Scorecard reference material

Objective 1: Locate Balanced Scorecard reference material There is a wide variety of reference material available on the topic of Balanced Scorecards. Some of the most useful books and articles on the subject include the following: •

Kaplan, Robert and Norton, David, “The Strategy Focused Organization”, Harvard Business School Press, 2001.

•

Kaplan, Robert and Norton, David, “The Balanced Scorecard”, Harvard Business School Press, 1996.

•

Kaplan, Robert and Norton, David, “The Balanced Scorecard – Measures that Drive Performance”, Harvard Business Review, Jan–Feb 1992.

•

Niven, Paul, “Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results”, John Wiley & Son, 2002.

•

Olve, Nils-Goran, “Performance Drivers: A Practical Guide to Using the Balanced Scorecard”, John Wiley & Son, Jan–Feb 1992.

In addition, The Balanced Scorecard Collaborative is a professional services firm created by Robert Kaplan and David Norton to share best practices in Balanced Scorecards with organizations around the world. Their Web site contains significant useful information: www.bscol.com The above list of reference material is a sample of the rich sources of information available on this subject and should not be viewed as exhaustive.

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Global CFO Services Curriculum Self-Study Guide: Performance Management and the Balanced Scorecard

Summary Performance management is increasingly a “top of mind” issue for the CFO and other senior executives. This is driven by the need for executives to manage more and more complex businesses successfully. The essence of performance management is the creation of a feedback loop which communicates strategy down into the organization and then measures the success of that strategy as it is executed. One of the leading methodologies for approaching performance management is the Balanced Scorecard. The Balanced Scorecard approach is a flexible methodology that focuses organizations on a small number of performance measures, which cross multiple perspectives and are explicitly tied to strategic objectives. Approximately 50% of Fortune 500 companies use Balanced Scorecards in some way. This points to the benefits that organizations have enjoyed by implementing the Balanced Scorecard as well as the fact that it can be applied to any type of business in any industry.

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