Performance Evaluation through Balanced Scorecard

When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.
William Thompson (Lord Kelvin), 1824-1907

Performance Measurement Systems

The goal of performance measurement system is to implement Strategy. In setting up such systems, senior management selects measures that best represent the companys strategy. These measures can be seen as current critical success factors; if they are improved, the company has implemented its strategy. The strategys success depends on its soundness. A performance measurement system is simply a mechanism that improves the likelihood the organization will implement its strategy successfully.

 Strategy defines the critical success factors; if those are measured and rewarded, people are motivated to achieve them.

Framework for designing performance management system

What counts, gets measured

What gets rewarded, really counts

STRATEGY

what gets measured, gets done

What gets done, gets rewarded

Performance measurement through balance Score card

The balance score is an example of performance measurement system. Acc to this approach, business units should be assigned goals and then measured from the following perspectives: Financial Customer Internal business Innovation & Learning

 The BSC fosters a balance among different strategic measures in an effort to achieve goal, congruence, thus encouraging employees to act in the organizations best interest. It is a tool that helps to improve the companys focus, improves communication, sets organizational objectives, and provides feedback on strategy.

 No single measures can give a broad picture of the organisations health. So instead of a single measure why not to use a composite scorecard involving a number of different measures. Kaplan and Norton devised a framework based on four perspectives financial, customer, internal processes and learning and growth. The organisation should select critical measures for each of these perspectives.

 The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic nonfinancial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.

 The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. It provides a framework that not only provides performance measurements, but helps planners identify what should be done and measured. It enables executives to truly execute their strategies.

 This new approach to strategic management was first detailed in a series of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results.

 Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."

Need For BSC

The need for BSC arises from the fact that there is a gap that exist between the mission, vision, strategy and the actions initiated by employees on a daily basis.

A Gap Exists Between Mission-Vision-Strategy and Employees Everyday Actions

MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan

TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

The Balanced Scorecard Links Vision and Strategy to Employees Everyday Actions
MISSION Why we exist VALUES Whats important to us VISION What we want to be STRATEGY Our game plan BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities TOTAL QUALITY MANAGEMENT What we must improve EMPOWERMENT / PERSONAL OBJECTIVES What I need to do

STRATEGIC OUTCOMES
Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE

What is a Balanced Score Card?

1) A measurement system 2) A strategic management system 3) A communication tool

BSC as a Measurement System

Translates mission, vision and strategy through objectives and measures Provides a framework to describe the key elements in the achievement of the strategy Measures four perspectives - Customer Relations - Financial - Internal Service Process - Learning, Innovation and Growth

The Balanced Scorecard Focuses on Factors that Create Long-Term Value

Traditional financial reports look backward Reflect only the past: spending incurred and revenues earned Do not measure creation or destruction of future economic value The Balanced Scorecard identifies the factors that create long-term economic value in an organization, for example: Customer Focus: satisfy, retain and acquire customers in targeted segments Business Processes: deliver the value proposition to targeted customers
innovative products and services high-quality, flexible, and responsive operating processes excellent post-sales support

Customers

Organizational Learning & Growth:

develop skilled, motivated employees; provide access to strategic information align individuals and teams to business unit objectives .
Processes People

BSC as a Measurement System

Financial

Customer Relations

Vision and Strategy

Internal Service Process

Learning, Innovation and Growth

The Four Perspectives

What must we do to satisfy our shareholders? Financial Perspective

What do our customers expect from us?

Customer Perspective

What internal processes must we excel at to satisfy our shareholder and customer?

Internal Perspective

How must our people learn and develop skills to respond to these and future challenges?

Learning & Growth Perspective

Answering these questions is the first step to develop a Balanced Scorecard

 Perspectives The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization. Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed.

The Learning & Growth Perspective

The Internal Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not something that can be developed by outside consultants.

The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

The Financial Perspective

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. There is perhaps a need to include additional financialrelated data, such as risk assessment and cost-benefit data, in this category.

Cause-Effect Relationship
The Scorecard measures emphasizes the idea of cause-and-effect relationships among measures. By explicitly presenting the cause-and-effect relationship, an organization will understand how nonfinancial measures(product quality) drive financial measures(revenue).

 Better selection , training, and development of manufacturing employees(measured in terms of manufacturing skills) leads to better product quality(measured in terms of first-pass yields) and better on time delivery(measured in terms of order cycle time) These improvements in turn lead to improved customer loyalty(measured through customer satisfaction surveys), which leads to enhanced sales(measured in terms of sales growth) The individual measures in the scorecard must be linked together explicitly in a cause-effect way, as a tool to translate strategy into action.

Perspective
Innovation & learning perspective

Measures Manufacturing Skills

Internal business perspective

First Pass yields Order cycle time

Customer Perspective

Customer Satisfaction Survey

Financial Perspective

Sales revenue growth

BSC as a Strategic Management System

Translates strategy into: Objectives Measures Targets Initiatives

Translating with the BSC

Mission
Vision Strategy/Goals Objectives In each perspective Measures In each perspective

Desired state Differentiating activities What must be done well to implement strategies

How strategic success is measured

LLSG Mission Statement

In the spirit of innovation and collaboration, London Laboratory Services Group (LLSG) provides the health care system with appropriate and comprehensive diagnostic, therapeutic and consultative services of the highest quality.

LLSG Goals/Strategy
The London Laboratory Services Group will:
be recognized as a centre of excellence and leader in providing diagnostic services develop an understanding of the needs of the users of our services be responsive to the needs of other health care providers communicate openly with users of our services be a leader in developing and implementing new technologies provide diagnostic and therapeutic services for the hospital, the region and beyond

LLSG Goals/Strategy contd

The London Laboratory Services Group will:
provide cost effective and efficient services provide an atmosphere of team work which is responsive to and supportive of learning collaborate with researchers to advance medical science partner with educational institutions to provide training for medical professionals develop partnerships with industry and other institutions which will enhance the range and scope of laboratory services

BSC as a Communication Tool

Describes and translates strategy to employees through clear and objective performance measures
Example Goal:
Objectives: Measures:

LLSG will provide cost effective and efficient services Reduce costs Increase productivity Supply costs Workload

Implementing a PMS
Implementation of a Performance measurement System involves four general steps: 1) Define Strategy 2) Define measures of strategy 3) Integrate measures into the management system. 4) Review measures and results frequently.

Define Strategy
The Scorecard builds a link between strategy and operational action. Therefore, the process of defining a scorecard begins by defining the organizations strategy. In this phase, it is important that the organizations goal are explicit an that targets have been developed.

 For a single industry firm, the scorecard should be developed at the corporate level and then cascaded down to functional levels & below. However, for a multi business firm, the scorecard should be developed at the business unit level. It is important that functional departments within a business unit have their own scorecards, and that the business-unit scorecard an the scorecards below that level be aligned. As a final step, for a multi-business-unit organization, a corporate wide scorecard should be developed to address, among other things, synergies across business units.

Define Measures of strategy

The next step Is to develop measures to support the articulated strategy. The organization should focus on a few critical measures at this point or management will be overloaded with measures. Also it is important that the individual measures be linked with each other in a cause-effect manner.

Integrate Measures into Management System

The scorecard must be integrated with the organization's formal and informal structures, culture, and human resource practices. For instance, the effectiveness of the scorecard will be compromised if managers compensation is based only on financial performance.

Review Measures and Results Frequently

Once the scorecard is up and running, it must be consistently and continually reviewed by senior management. The organization should look for the following: How Is the organization doing according to the outcome measures? How Is the organization doing according to the driver measures? How has the organizations strategy changed since the last review? How have the scorecard measures changed?

 The most important aspects of these reviews are as follows: They tell management whether the strategy is being implemented correctly and how successfully it is working. They show that management I serious about the importance of these measures. They keep measures aligned to ever-changing strategies. They improve measurement. These review sessions complete the four steps and provide the impetus to start the cycle again.

Benefits of BCS
1) 2) 3) 4) 5) 6) 7) 8) Consensus on the strategy at executive level. Communicates strategy to the organization Translates strategy into meaningful goals. Employees identify themselves with goals Personal Targets linked to Strategy Processes focus to achieve strategic goals. Periodic Reporting of status of strategic goals. Drives Investment/ Budget Decisions.

Consensus on the strategy at executive level

Building a BSC requires brain storming at Broad/ Higher level where discussions are held on Organizations vision and its core values. This helps in everyone getting aligned about these basics and helps executives look for growth strategies clearly. BSC discussions sets the priorities for the organization & senior executives can visualize the future more clearly.

Communicates strategy to the organization

It clearly defines the steps the organization would take to achieve its goals through well thought of strategy. The working of the strategy setting priorities in line with various internal & external constraints helps the leadership appreciate the chosen strategy & its need.

Translates strategy into meaningful goals.

Building a BSC requires determination of specific goals and targets. The organization now has clear vision of what is to be done to achieve its goals. With the priorities & the game plan clearly defined, everyone now focuses to achieve the goals.

Employees identify themselves with goals

Employees working to achieve the goals identified in the BSC can clearly identify themselves with how they are helping the organization to achieve its growth. It is very imp. That employees are explained the BSC at each possible opportunity to help them understand the way their achievements are paying path for the organizations future. Employees then feel proud to be involved in the efforts they put in on day to day basis. This further helps employees getting aligned to companys vision & mission.

Personal Targets linked to Strategy

Achieving goals identified in the BSC requires involvement of various employees & process owners on a continuous basis. Most of the time these would be stretch assignments for the employees. Goals with defined timeline require that the targets to be met within schedules. These therefore establish a suitable measurement tool for senior leaderships achievement & can help in appropriate & justified Rewards & recognition program of the organization.

Processes focus to achieve strategic goals.

Having established a BSC forces various process owners to modify the key processes of the organization to achieve identified goals. Since these processes directly affect the organizations performance, they are likely to be the key processes. With the focus concentrated on key processes. The organization meets the customers expectations more efficiently & help make the organization more competitive.

Periodic Reporting of status of strategic goals.

BSC forms the key part of management system & therefore is discussed periodically. This helps keeping everyone in the organization aligned & achieve growth through BSC.

Drives Investment/ Budget Decisions.

BSC forces the leadership to visualize the future/growth of the company & use appropriate resources & manpower to achieve the strategic goals. With wide agreement on BSC among the senior leadership, it is easy to manage the Budget provisions and invest wisely, rather than on a historical basis.

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