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ADissertation Report
On
Putting HR on Balanced Scorecard
(A Case Study of Verizon)(SUBMITTED TOWARDS PARTIAL FULFILLMENT
OF POST
GRADUATE DIPLOMA IN MANAGEMENT)
(Approved by AICTE, Govt. of India)
ACADEMIC SESSION
(2008-10)
Under the guidance of: Submitted by:
Supervisor Name Your Name Lecturer (college name) Roll: -
PGDM-08/012
College Address
College Logo
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PREFACE
There is a famous saying The theory without practical is lame
and practical
without theory is blind.
Alignment of the Human Resource with the overall strategy of the
company is a
very big and toughest challenge for the company.
Human resource is an important part of any business and managing
them is an
important task.
Our institution has come forward with the opportunity to bridge
the gap by
imparting modern scientific management principle underlying the
concept of the
future prospective managers.
To the emphasis on practical aspect of management education the
faculty of
College Name has with a modern system of practical training of
repute and
following management technique to the student as integral part
of PGDM.
ACKNOWLEDGEMENT
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It is not possible to prepare a project report without the
assistance &
encouragement of other people. This one is certainly no
exception.
On the very outset of this report, I would like to extend my
sincere & heartfelt
obligation towards all the personages who have helped me in this
endeavor.
Without their active guidance, help, cooperation &
encouragement, I would not
have made headway in the project.
I am ineffably indebted to Supervisor Name for conscientious
guidance and
encouragement to accomplish this assignment.
I am extremely thankful and pay my gratitude to my faculty guide
Guidance
Name, College Name for her valuable guidance and support on
completion of
this project in its presently.
I extend my gratitude to College Name for giving me this
opportunity.
I also acknowledge with a deep sense of reverence, my gratitude
towards my
parents and member of my family, who has always supported me
morally as
well as economically.
At last but not least gratitude goes to all of my friends who
directly or indirectly
helped me to complete this project report.
Any omission in this brief acknowledgement does not mean lack of
gratitude.
Thanking You
Your Name
CERTIFICATE FROM THE FACULTY GUIDE
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This is to certify that the project work entitled Putting HR on
Balanced
Scorecard: A Case Study of Verizon. is a bonafide work carried
out by Your
Name, a candidate of the PGDM (2008-2010) College Name under
my
guidance and direction.
Signature of the Guide
Guidance Name
TABLE OF CONTENTS1. INTRODUCTION 1
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2. RESEARCH METHODOLOGY
3. LITERATURE REVIEW
4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE
FUTURE
5. THE HR ARCHITECTURE AS A STRATEGIC ASSET
5.1. THE HR FUNCTION5.2. THE HR SYSTEM5.3. EMPLOYEE
BEHAVIOURS
6. THEORY BEHIND THE BALANCED SCORECARD
6.1. BACKGROUND OF THE CONCEPT OF BALANCED SCORECARD6.2.
DEFINING CRITICAL SUCCESS FACTORS AND MEASURES6.3. THE FOUR
PERSPECTIVES: CAUSE AND EFFECT RELATIONSHIP6.4. THE BALANCED
SCORECARD MODEL6.5. BALANCED SCORECARD AS A MEASUREMENT TOOL
7. IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE
7.1. INTEGRATING HR INTO THE PERFORMANCE MEASUREMENT SYSTEM7.2.
THE SEVEN-STEP MODEL FOR IMPLEMENTING HRS STRATEGIC ROLE
8. BENEFITS OF THE DEVELOPING HR SCORECARD
9. CASE STUDY: VERIZON
9.1. INTRODUCTION: VERIZON9.2. HR CHALLENGE & STRATEGY9.3.
THE TEAM9.4. THE PROCESS9.5. EARLY RESULTS9.6. COMMUNICATING THE HR
SCORECARD9.7. WEB-BASED IMPLEMENTATION AND GRAPHICS (FRONTEND AND
BACKEND)
FINDINGS OF THE STUDY
LIMITATIONS OF THE STUDY
CONCLUSION
RECOMMENDATIONS
REFERENCES
TABLE OF FIGURES
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Figure 1: HR Architecture Strategic components
Figure 3:- The Main framework of Balanced Scorecard
Figure 4:- Model for implementing HRs Strategic Role
Figure 5: A High Performance Work System
Figure 6: Simple Strategy Map
Figure 7:- Initial model used to align HR strategy to business
strategy
Figure 8:- The People Requirement and Business Driver
Determination Process
Figure 9:- The HR Scorecard Strategy Map
Figure 10: HR Scorecard Implementation Architecture
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1. INTRODUCTION
The new economic paradigm is characterised by speed, innovation,
quality and customer
satisfaction. The essence of the competitive advantage has
shifted from tangible assets to
intangible ones. The focus is now on human capital and its
effective alignment with the
overall strategy of organisations. This is a new age for Human
Resources. The entire system
of measuring HRs contribution to the organisations success as
well as the architecture of the
HR system needs to change to reflect the demands of succeeding
in the new economy. The
HR scorecard is a measurement as well as an evaluation system
for redefining the role of HR
as a strategic partner. It is based on the Balanced Scorecard
framework developed by Kaplan
and Norton and is set to revolutionise the way business
perceives HR.
Based on various studies, it can be concluded that firms with
more effective HR management
systems consistently outperform the competition. However,
evidence that HR can contribute
to a firms success doesnt mean it is now effectively
contributing to success in business.
It is a challenge for managers to make HR a strategic asset. The
HR scorecard is a lever
that enables them to do so. Implementing effective measurement
systems for intangible
assets is a very difficult task and demands the existence of a
unified framework to guide
the HR managers. It is this difficulty that has been the prime
reason why managers tend to
avoid dealing with intangible assets as far as possible. In the
process firms under-invest in
their people and at times invest in the wrong ways. Another
difficulty is, managers cannot
foresee the consequences of their investments in intangible
human assets in a well-defined
measurable manner and they are not willing to take the risk.
Thus, the most effective way to
change this mindset is obvious to build a framework just like
the balanced scorecard, which
has sound measurement strategies and is able to link HR
functions, activity and investment
with the overall business strategy. The HR scorecard framework
was specifically designed
for these purposes.
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2. RESEARCH METHODOLOGY
2.1.Research Objectives
1. To highlight the importance of Balanced Scorecard as a
measurement tool.
2. To find out the need of Balanced Scorecard in todays
competitive environment.
3. To find out how Balanced Scorecard is useful for developing
the Human Resource as
a strategic partner.
4. To find out how Balanced Scorecard can be implemented to
Human Resource.
2.2.Type of Research- Exploratory Research
2.3.Data sources: The research is based on secondary data and
the data is collected from various websites, Journals, Magazines,
Articles and Research Paper.
2.4.Data Analysis: The research is divided into the six
sections. The First section deals with the overall introduction of
the research and the Second section highlights
the Human Resource as a strategic partner and the traditional
human resource
and the human resource in present and the future of the human
resource. Third
section explains in detail the HR Architecture as a strategic
asset which contains
the hr function, hr system and the employee behavior. Fourth
section explains
the background and the concept of balanced scorecard, need of
the balanced
scorecard in todays competitive environment, and defines the
balanced scorecard
as a measurement tool. Fifth section explains how balanced
scorecard can be
implemented into the human resource to develop the HR as a
strategic partner.
Sixth section contains the case study of Verizon and explains
how Verizon has
implemented the balanced scorecard to human resource to generate
the value through
the intangible asset.
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3. LITERATURE REVIEW
1. Is the balanced scorecard HR's ticket to the board? Nelson,
Paul. Personnel Today, 3/5/2002.
Most thoughts comprised of some combination of BC is a wonderful
tool to allow HR to
show its value to a firm, BSCs will only work with senior
management buy-in and BSCs
alone will not bring a firm closer to its goal, contributing to
the overall business will.
2. HR Performance Scoring Demonstrates Results. McKewen, Darren.
2004. Career
Journal.com Accessed from website.
The first part of this article gives numbers on the popularity
of BCs throughout industry.
From the article: According to a recent survey by the Balanced
Scorecard Collaborative and
the Society for Human Resource Management, about one-fourth of
HR organizations have
adopted the Balanced Scorecard approach. However, virtually all
of the 1,300 respondents
have explored the possibility. The rest of the article has no
relation to balanced scorecards.
3. The Balanced Scorecard: Creating a Strategy-Focused
Workforce. Frangos,
Cassandra.
A synopsis of three scholars (Jac Fitz-enz, David Norton, and
Helen Drinanwork) in the field
of HR metrics and analysis, by way of selling the authors
upcoming Net Conference.
1. Fitz-enz evaluates a firms HR process by cost, duration,
accomplishment, error rate,
employee satisfaction, matricing these five over three distinct
tasks: acquiring talent,
developing talent, and retaining it.
2. Norton developed the "Human Capital Readiness Report," which
provides a snapshot
of an organization's human capital relative to its strategic
requirements. It documents
the strategic requirements, then shows, through its measures and
programs, how
human capital is being developed.
3. Drinan had been working on a profile of HR leaders
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So what is the profile of outstanding HR leaders? Among other
things, they derive
their agendas from enterprise business objectives; they stay in
touch with the workforce;
think "customer focus," not "customer service"; and concentrate
on a few strategic priorities.
4. A Balanced Scorecard Changes HR Mgmt From Art to Science.
Human
Resource Department Management Report. January, 2003. Issue
1-03, p. 1.
Objective:- Reasons for and application of using the BSC as a
way to measure HR
productivity and effectiveness.
Biggest reason: a move to measuring tangible assets, and a need
to turn the intangibility of
HR into something more measurable. Case: Alterra Health Care in
Milwaukee, which used
HR as the centerpiece of a larger strategic transformation that
targeted the firms 145%
turnover rate.
5. Understanding the Balanced Scorecard: An HR Perspective. ICG
Research.
2003.
Objective:- How to implement the Balanced Scorecard to Human
Resource.
1. Building the Balanced Scorecard should be a team effort at
the executive level and
functional heads must not create their bits of Scorecard in
isolation. Therefore, HR
can be custodians but not owners of the learning and growth
perspective.
2. Implementation is a bigger issue than scorecard design. The
difficulty of cultural
change that accompanies Scorecard implementation is typically
underestimated. One
of the biggest problems is the (legitimate) fear that the
Scorecard will be used to beat
up people.
3. The HR Scorecard must make visible the link from what staff
does to strategic
outcomes. Cascading goals, which may be done through the
ten-step process, is one
element of successfully creating the link.
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6. Secrets to Success with Balanced Scorecards. HR Focus.
October, 2001 Vol.
78, no. 10, p. S3.
Summarizes the 10 Commandments of Performance Management from a
book by William Abernathy: Managing Without Supervising: Creating
an Organization- Wide Performance System. Some of these
commandments:
1. No one should design his or her own incentive plan
2. The frequency of measurement feedback is as important as the
amount
3. Measure only controllable job outputs
7. Avoiding performance measurement traps: ensuring effective
incentive design
and implementation. McKenzie F.C. & Shilling M.D.
July/August, 1998.
Compensation and Benefits Review. Vol. 30 (4), p. 57-65.
Details methods of performance measurement and the traps
associated with each.
Measurements evaluated include: Traditional accounting methods
(ROI, EPS, RONA),
Value-Based, such as Economic Value Added, and the Balanced
Scorecard. Traps associated
with the BSC are as follows:
1. Assuming the Balanced Scorecard is a perfect tool for
compensation.
2. Reduced focus on performance management
3. Using measures that are difficult to quantify
4. Contradicting goals or benchmarking
5. Getting tied-up in implementation
Nine guidelines for effective performance management are
outlined:
1. Emphasize a few measures.
2. Focus on measures that participants can control.
3. Avoid all-or-nothing programs.
4. Balance accuracy and simplicity.
5. Include an appropriate subjective element.
6. Mind the corporate culture.
7. Communicate up-front, then keep communicating.
8. Revisit the program design often.
9. Integrate with long-term incentives.
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4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE
FUTURE
The general scenario in most companies is as follows. HR
management teams have well-
developed visions of their departments, their roles and
responsibilities. But, the senior
management is generally skeptical of HRs role in the firms
success. They generally
consider HR to just be another necessary appendage but not
something that can contribute to
the success of the company. Even if the senior management does
believe that human capital
is their most prized possession and asset, they cannot
understand how the HR team can make
this belief come alive.
There is one reason for all of this. Human capital is an
intangible asset and HRs influence
on firm performance is difficult to measure. The standard
elements of a firms resource
architecture that are measured include total compensation,
employee turnover, cost per hire,
percentage of employees that undergo performance appraisals and
percentage employee
satisfaction. The question to be asked is: Are these the
measures crucial to implementing the
firms strategy? This is clearly not the case. Interesting
attributes would include a committed
workforce, competency development programs, etc. But, it is very
difficult to imagine
measures for these quantities. Hence, in the current state of HR
there is a clear rift between
what is measured and what needs to be measured.
As mentioned in the introduction, the role of HR is no more just
administrative. It has a much
broader, connected and strategic role to play. But, these
statements must be substantiated.
The reasons why HR must be considered as a strategic asset must
be highlighted. A strategic
asset is something difficult to trade or imitate. They are
normally a set of scarce, special
or even exotic resources and capabilities that bestow a firm its
competitive advantage. An
unlikely paradox is that the very intangibility of human capital
that makes it so difficult
to measure and evaluate, also proves to be the one quality that
makes it a strategic asset.
Consider the difference between being able to align employee
efforts with the companys
strategic goals and instead having innovative policies of
performance appraisals. The latter
is a policy. It is visible to competitors and can be easily
copied. The former on the other
hand is a strategic move. It is not easy to imitate since it is
a very circumstantial effort,
which depends on the specific firm, its goals and its people.
This proves to be a strategic
asset i.e. something that competitors cannot see but that can be
utilised to gain a competitive
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advantage. It is thus important to align the HR strategy to the
overall business strategy
signifying a top-down approach as opposed to a bottom-up
approach where each division
such as marketing, HR etc. performs its standard individual
roles without a clear outlook
towards the firms strategy.
Many firms have realised this and have made efforts to measure
HRs influence on the firms
performance. However, most of these approaches seem to focus on
the individual, as it is
believed that if one can achieve an improvement in individual
employee performance, it
would automatically enhance the performance of the organisation.
The point that is missed is
the fact that organizational units, be it individuals or teams,
do not function in isolation. The
stress is on streamlining and cooperatively working towards a
common goal.
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5. THE HR ARCHITECTURE AS A STRATEGIC ASSET
The focus of corporate strategy is to create sustained
competitive advantage whereas that of
HR strategy is to maximize the contribution of HR towards the
same goal. Thinking about
HRs influence on the overall strategy of the company requires
one to look at all aspects of
the HR architecture. The HR architecture describes the
relationship of the HR function, the
HR system and the employee behaviour.
Figure 1: HR Architecture Strategic components
5.1.The HR function
The foundation of a value-creating HR strategy is a management
infrastructure that
understands and can implement the firms strategy. The
professionals in the HR function
would be expected to lead this effort. This clearly implies that
HR managers and
professionals need to get a deeper understanding of the HR
function. There are two basic
functional categories in HR management. The first is technical.
It includes delivery of HR
basics such as recruiting, compensation and benefits. The second
is strategic. It involves
delivering the above mentioned services in a way that directly
supports the implementation
of the firms strategy. Most HR managers are proficient enough in
the technical aspect
but rarely do they even know about the strategic aspect. Thus,
the competencies that the
HR managers need to develop and the ones that have the largest
impact on organisational
performance are the business and strategic competencies.
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5.2.The HR system In an effective high performance HR system,
each element is designed to maximise the
overall quality of human capital throughout the organisation. To
build and maintain a set of
talented human capital, the HR system should:-
1. Link its selection and promotion decisions to validated
competency models
2. Develop strategies that provide timely and effective support
for the skills demanded
by the firms overall strategy implementation.
3. Enact compensation and performance management policies that
attract, retain and
motivate high-performance employees.
Basically, the firm needs to structure all the elements of its
HR system in a way that
supports a high-performance workforce. However, systemic
thinking implies stress on the
interrelationships of the HR system components and the link
between HR and the larger
strategy of the firm. The laws of system thinking imply the
following:
1. Problems of today are most likely due to past decisions. It
is thus important to look at
the causal nature of past solutions and current problems.
2. One should think twice before taking the easy way out or
deciding to go with standard
solutions to any problem as this will most likely lead to a crop
of new problems in the
future.
3. Cause and effect are not closely related in time. There is a
lag between cause and
effect and HRs influence on firm performance is normally much
less direct than
that of other performance drivers. This can make it hard to
measure as well as be
misleading. It is thus important to look at the leading
indicators and not just the
lagging indicators. Typical financial performance measures are
lagging indicators and
in an attempt to solve financial problems, the first step is
normally to cut costs. It is
more important to actually pinpoint the cause of the problem and
look to long-term
benefits than short term ones.
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4. The best strategies are often unobvious. Small changes in how
HR drivers are
managed can slowly gather momentum and work their way through
the strategy
implementation process.
5. It is important never to dissect the system and view each of
its parts independently.
One must look at the system as a whole and the connections
between the individual
parts is normally the vital place to look at for a solution to
any of the problems.
Firms with high performance work systems tend to devote
considerably more resources to
recruiting and selection. There is a strong emphasis on training
and performance management
and compensation is tied to performance. Teamwork is encouraged,
there is generally less
unionization and they have a large and effective HR team. It is
important to note, that all
these factors in tandem, not in isolation, lead to better
performance, once again showing the
systemic nature of HRs role in performance enhancement. The
effects of these measures are
lower employee turnover, more retention, greater sales per
employee and a greater market
value for the firm.
It is also important for the HR system to constantly check for
alignment of all its parts i.e.
how much they reinforce or conflict with each other. An example
of misalignment is a policy
that encourages teamwork but rewards individual
contributions.
In the service sector, the employee-customer relationship is
very obvious and visible and
so the impact of value creation is unmistakable. But, in many
firms, the value is derived
from the operational processes and quality of work that the
employees generate. This is less
obvious to competitors and it cannot be imitated. It is
especially in these kinds of firms that
the alignment of HR strategy and policy with the overall
strategy of the firm matters the
most.
The alignment process begins with a clear understanding of what
kind of value the
organisation is supposed to generate and how it should be
generated. In the Balanced
Scorecard, this is referred to as the strategy map that stresses
the relationship between
the ultimate goals and the key success factors at the four
important levels of customers,
internal operations, people and systems. Once the firm has a
clear understanding of the value-
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creation process, it can then design an implementation model
that specifies needed skills and
competencies and employee behaviours throughout the firm. The HR
management section
can then be directed towards generating these necessary
competencies and behaviours.
The stress is not just on the creation of sound HR policies and
strategies. How these are
implemented is also very important. There has to be a strong
alignment with the firms
competitive strategy.
A high performance HR system will also tend be unique. This is
because it depends on the
particular organisation, its goals, people and strategy. Hence,
it proves to be a strategic asset.
5.3.Employee Behaviours
As mentioned above the final results of the strategies are
mapped to required employee
behaviours. It is important that each employee be trained not
just to do his or her job but also
to have a substantially clear understanding of where he or she
stands in the big picture of
the overall strategy of the firm. Strategic behaviours are
productive behaviours that directly
serve to implement the firms strategy. There are two basic
categories. Core behaviours are
behaviours that are considered fundamental to the success of the
firm, across all business
units and levels. Situation-specific behaviours on the other
hand, are more circumstantial
behaviours. These are not required all the time but are
absolutely necessary in certain
scenarios.
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6. THEORY BEHIND THE BALANCED SCORECARD
6.1.Background of the Concept of Balanced Scorecard
Throughout the history of contemporary management theories
starting from the ones that
were introduced by the intrusion of the mass production in the
beginning of the 20th century
and until today, all the gurus of management have been trying to
find uniform solutions on
more efficient allocation and use of very limited resources
available to businesses. Those
paths in seeking the Holy Grail of operational efficiency have
brought up several new
management theories.
In the dawn of the century, Frederick W. Taylor established the
very concepts of resource
allocation in his Principles of ScientJlc Management. In
1920-ics it went around assembly
line and motion studies as the first experience from systematic
mass production had given
theorists quite a lot of materials to be analysed from the point
of view of using traditional
blue-collar employees more efficiently. In the I 930-ies, the
main topic was motivation
of employees, as it turned out that human nature does not enable
to work long hours on a
repetitive tasks without frustration level getting so high
enough to diminish productivity.
In the l940-ics and 1950-ies, the first statistical and linear
methods were introduced in
trying to measure logistics of the operations management and its
implications to overall
company success in financial-analysis side. In the beginning of
1980-ics, partly because of
introduction of electronic data processing equipment and quick
development of computers,
the whole array of management techniques were initiated. The
particular reasons for the
vast development of the new theories were catalyzed mainly by
ever growing competition
generated through more systematic use of computers, and of
course also by rapid growth of
the importance of human capital.
Todays companies are in the midst of a revolutionary
transformation. Industrial age
competition is shifting to information age competition. During
the industrial age, roughly
from 1850 to about 1975, companies succeeded by how well they
could capture the benefits
from economies of scale and scope. Technology mattered, but,
ultimately, success accrued
to companies that could embed the new technology into physical
assets that offered efficient,
mass production of standard products. During the industrial age,
the financial control systems
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were developed in major companies to facilitate and monitor
efficient allocations of financial
and physical capital. A summary financial measure such as
return-on-capital-employed
(ROCE) could both direct a companys internal capital to its most
productive use and monitor
the efficiency by which operating divisions used financial and
physical capital to create value
for shareholders.
The emergence of the information era, however, in the last
decades of the 2O century, has
made obsolete many of the fundamental assumptions of industrial
age competition. The
information age environment for both manufacturing and service
organisations requires
new capabilities for competitive success. The ability of a
company to mobilise and exploit
its intangible assets has become far more decisive than
investing and managing tangible,
physical assets.
Industrial age companies created a sharp distinction between two
groups of employees. The
intellectual elite managers and engineers used their analytical
skills to design products
and processes, select and manage customers, and supervise
day-to-day operations. The
second group was composed of the people who actually produced
the products and delivered
the services. This direct labour work force was a principal
factor of production, which
performed its tasks under supervision of the first group. Today
automation and productivity
have increased the number of people performing analytic
functions: engineering, marketing,
management and administration. Therefore, the people are more
viewed as problem solvers,
not as variable costs. In other words, information age has
brought about the concept of
knowledge management.
The shift to successful knowledge management has introduced a
variety of improvement
initiatives:
1. Just-in-time
2. Total quality management,
3. Lean enterprise,
4. Business process re-engineering,
5. Time-based competition,
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6. Customer-focused organization,
7. Activity-based cost management,
8. Employee empowerment,
9. Living company and many others.
Some of those programmes have meant in practice real
breakthrough and improvement,
others have proven to be in the best case just a short-time
disturbance, but in the worst cases
total failures resulting in disarray or even bankruptcy of a
particular company. The main
reason for that lies in five main implementation problems:
1. current performance measurement systems are based on the
traditional financial
accounting model, which does not enable to objectively analyse
information-age
companies;
2. if some non-financial performance measurement even is made,
it is solely based on
employees tactical performance, not on strategic
performance;
3. majority of management and employee salary-based motivation
schemes arc only
short-run profit oriented, that does not enable to align towards
long-run goals;
4. overall company strategy is not closely linked to
organisational and personal
improvement programmes; and
5. strategy is not generally linked to resource allocation,
which results in under-
financing some of the crucial parts of organisations
development.
As for today, superior financial performance and efficiency in
production are just not enough
to gain sufficient competitive advantage, but more and more
attention needs to be paid to
intangible sides of business.
For at least 15 years, the leading management journals have
published articles about how to
build up a mechanism that would enable to control all the
aspects of a companys
performance. One of the most versatile tools for that purpose is
Balanced Scorecard.
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The long-term success of any organization is determined by the
capabilities and the
competencies it has developed. Todays businesses require a
better understanding of their
customers (both existing and potential ) and their needs, better
streamlined processes and
highly skilled people for ensuring future survival and
sustainable growth.
This innovative tool Balanced Scorecard developed by Robert S
Kaplan and David P
Norton in 1992 is unique in two ways compared to the traditional
performance measurement
tools. They are:-
1. It considers the financial indices as well the non-financial
ones in determining the
corporate performance level and
2. It is not just a performance measurement tool but is also a
performance management
system
The aim of the Balanced Scorecard is to direct, help manage and
change in support of the
longer-term strategy in order to manage performance. The
scorecard reflects what the
company and the strategies are all about. It acts as a catalyst
for bringing in the change
element within the organization
Balanced Scorecard uses a balanced measurement system that
comprises of the old
financial side and four new perspectives of:
1. Financial Perspective - How do we look at shareholders?
2. Customer Perspective - How should we appear to our
customers?
3. Internal Business Processes Perspective - What must we excel
at?
4. Learning and Growth Perspective - Can we continue to improve
and create value?
Hence, from the above lines we can say that this tool has
considered not only the financial
results to be important but also those factors which actually
drive an organization towards
future successes as mentioned earlier. The tool has given stress
on the other areas which
are required to balance the financial perspective in order to
get a total view about the
organizational performance and improve the same.
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The framework tries to bring a balance and linkage between
the
1. Financial and Non-Financial Measures,
2. Tangible and the Intangible measures,
3. Internal and the External aspects and
4. Leading and the Lagging indicators.
The Balanced Scorecard emphasises the importance of measuring
business performance
from the perspective of strategic implementation, rather than
relying solely on financial
results. Senior managers tend to pay far too much attention to
the financial dimensions of
performance and not enough attention to the driving forces
behind those results. Financial
measures are lagging indicators i.e. backward looking. They are
designed to rectify or change
past results. Performance drivers on the other hand are within
the control of the management
in the present and the Balanced Scorecard methodology encourages
management to look at
these leading indicators as well. By specifying the important
process measures, assessing
them, and communicating the firms performance based on these
criteria to the employees,
the managers can ensure that the entire organisation
participates actively in the strategy
implementation process. It is a unifying tool in strategy
implementation.
To achieve strategy alignment, firms must engage in a two-step
process. As mentioned
before, first the managers must understand the details of how
value is created in their firm.
Once this is done, they can design a measurement system based on
their understanding. The
first step focuses the organisation on two dimensions of the
strategy implementation process
namely breadth and causal flow. Breadth refers to the fact that
companies must study more
than just financial results as outcomes of strategy
implementation. It must also focus on
other key performance drivers. Causal flow refers to the series
of linkages between financial
and non-financial determinants of firm performance. This gives
the managers a deeper
perspective of why certain financial results are the way they
are. It allows them to link the
financial measures to the non-financial measures of success. The
second point is the design
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of a measurement system. This involves attaching metrics to the
financial and non-financial
determinants. The Balanced Scorecard identifies four key
perspectives that directly and
completely define strategy measurement and analysis. They
include the financial perspective,
the customer perspective (e.g. customer loyalty and
satisfaction), the internal processes
perspective (e.g. process quality and process cycle time) and
finally learning and growth
perspective (e.g. employee skills) that is the leading
indicator.
The next important step is communication. The top management
that has done the above
analysis must communicate their findings and decisions to the
middle and front-line
managers, who in turn must communicate it to the other
employees. In this way, everyone in
the organisation is made aware and can participate in the
strategy implementation process.
This also helps allocate resources intelligently and guides
employees decisions. The
Balanced Scorecard model recognises the importance of both
tangible and intangible assets
and of financial and non-financial measures. It focuses on the
complex connections among
the firms customers, operations, employees and technology and
places an important role for
HR. The BSC framework highlights the differences between leading
and lagging indicators.
Lagging indicators include financial metrics, which typically
reflect only what has happened
in the past. Such metrics accurately measure impacts of past
decisions but dont help in
making current decisions or guaranteeing future outcomes. The
leading indicators are the
unique indicators for each firm. They include process cycle
time, customer satisfaction or
employee strategic focus. These indicators assess the status of
key success factors that drive
the implementation of the firms strategy and hence emphasise the
future rather than the past.
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6.2. Defining Critical Success Factors and MeasuresFour
Perspectives
1. Financial Perspective - How do we look at shareholders?
From all the measurement perspectives of a Balanced Scorecard,
the financial perspective
needs to be introduced the least as the main financial
measurement systems have been
analysed during the past years very thoroughly
The particular financial performance measures for any Balanced
Scorecard should define
long-run financial objectives for the organisation. While most
of the organisations would
emphasise profitability objectives, other possibilities may also
be considered. Businesses
with many products in the early stage of their life cycle can
stress rapid growth objectives,
and mature businesses may emphasise maximising cash flow.
Norton and Kaplan recommend to simplify the financial
perspective measurement selection
pool to identify first the organisations stage, which would
mainly be one of the three:
I. rapid growth organisations - are at the early stages of their
life cycle. They may
have to make considerable investments to develop and enhance new
products and
serviccs, to construct and expand production facilities, to
build operating capabilities,
to invest in systems, infra-structure, and distribution networks
that will support
relationships, and to nurture and develop customer
relationships.
II.sustain organisations organisations that still attract
investment and
reinvestment, but are required to cam excellent returns on their
invested capital.
These businesses are expected to maintain their existing market
share and perhaps
grow it somewhat. Investment projects will be more directed to
relieving bottlenecks,
expanding capacity, and enhancing continuous improvement.
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III. harvest organisations - have reached a mature phase of
their life cycle, where the
company wants to harvest the investments made in the earlier to
stages. These
businesses no longer warrant significant investment only enough
to maintain
equipment and capabilities, not to expand or build new
capabilities. Any investment
project will have to have very short and definite payback
periods. The main goal is to
maximise cash flow back to the organisation.
The financial objectives for businesses in each of these three
stages are quite different.
Financial objectives in the growth stage will emphasise sales
growth; sales in new markets
and to new customers; sales from new products and services;
maintaining adequate
spending levels for product and process development, systems,
employee capabilities; and
establishment of new marketing, sales, and distribution
channels. Financial objectives in the
sustain stage will emphasise traditional financial measurements,
such as return on capital
employed, operating income, and gross margin.
Investment projects for businesses in the sustain category will
be evaluated by
standard, discounted cash flow, capital budgeting analyses. Some
companies will employ
newer financial metrics, such as economic value added and
shareholder value. These metrics
all represent the classic financial objective---earn excellent
returns on the capital provided to
the business.
The financial objectives for the harvest businesses will stress
cash flow. Any investments
must have immediate and certain cash paybacks. The goal is not
to maximise return on
investment, which may encourage managers to seek additional
investment funds based on
future return projections. Virtually no spending will be done
for research or development or
on expanding capabilities, because of the short time remaining
in the economic life of
business units in their harvest phase.
Some of the objectives together with a measurement measures
Objectives Measures
Survive Cash Flow
Prosper Increase in Market Share
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Profitability Return on Equity
Cost Leadership Unit Cost
2. Customer Perspective - How should we appear to our
customers?
The customer perspective addresses the question of how the firm
is viewed by its customers
and how well the firm is serving its targeted customers in order
to meet the financial
objectives. Generally, customers view the firm in terms of time,
quality, performance, and
cost. Most customer objectives fall into one of those four
categories.
In the customer perspective of the Balanced Scorecard, managers
identify the customer and
market segments in which the business unit will compete and the
measures of the business
units performance in these targeted segments.
The customer perspective typically includes several generic
measures of the successful
outcomes from a well-formulated and implemented strategy. The
genetic outcome measures
include customer satisfaction, customer retention, new customer
acquisition, customer
profitability, and market and account share in targeted
segments. While these measures may
appear to be generic across all types of organisations, they
should be customised to the
targeted customer groups from whom the business unit expects its
greatest growth and
profitability to be derived.
I. Market and Account Share
Market share, especially for targeted customer segments, reveals
how well a company
is penetrating a desired market. For example, a company may
temporarily be meeting
sales growth objectives by retaining customers in non-targeted
segments, but not
increasing its share in targeted segments. The measure of market
share with targeted
customers would balance a pure financial signal (sales) to
indicate whether an
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intended strategy is yielding expected results.
When companies have targeted particular customers or market
segments, they can
also use a second market-share type measure: the account share
of those customers
business (some refer to this as the share of the customers
wallet). The overall
market share measure based on business with these companies
could be affected by
the total amount of business these companies are offering in a
given period. That is,
the share of business with these targeted customers could be
decreasing because these
customers are offering less business to all their suppliers.
Companies can measure-
customer by customer or segment by segment-how much of the
customers and
market segments business they are receiving. Such a measure
provides a strong focus
to the company when trying to dominate its targeted customers
purchases of products
or services in categories that it offers.
II. Customer Retention
Clearly, a desirable way for maintaining or increasing market
share in targeted
customer segments is to retain existing customers in those
segments. Research on
the service profit chain has demonstrated the importance of
customer retention.
Companies that can readily identify all of their customers-for
example, industrial
companies, distributors and wholesalers, newspaper and magazine
publishers,
computer on-line service companies, banks, credit card
companies, and long-distance
telephone suppliers- can readily measure customer retention from
period to period.
Beyond just retaining customers, many companies will wish to
measure customer
loyalty by the percentage growth of business with existing
customers
III.Customer Acquisition
Companies seeking to grow their business will generally have an
objective to increase
their customer base in targeted segments. The customer
acquisition measure tracks,
in absolute or relative terms, the rate at which a business unit
attracts or wins new
customers or business. Customer acquisition could be measured by
either the number
of new customers or the total sales to new customers in these
segments. Companies
such as those in the credit and charge card business, magazine
subscriptions, cellular
telephone service, cable television, and banking and other
financial services solicit
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new customers through broad, often expensive, marketing efforts.
These companies
could examine the number of customer responses to solicitations
and the conversion
rate- number of actual new customers divided by number of
prospective inquiries.
They could measure solicitation cost per new customer acquired,
and the ratio of new
customer revenues per sales call or per dollar of solicitation
expense.
IV. Customer Satisfaction
Both customer retention and customer acquisition are driven from
meeting customers
needs. Customer satisfaction measures provide feedback on how
well the company is
doing. The importance of customer satisfaction probably cannot
be over-emphasised.
Recent research has indicated that just scoring adequately on
customer satisfaction is
not sufficient for achieving high degrees of loyalty, retention,
and profitability. Only
when customers rate their buying experience as completely or
extremely satisfying
can the company count on their repeat purchasing behaviour.
V. Customer Profitability
Succeeding in the core customer measures of share, retention,
acquisition, and
satisfaction, however, does not guarantee that the company has
profitable customers.
Obviously, one way to have extremely satisfied customers (and
angry competitors)
is to sell products and services at very low prices. Since
customer satisfaction
and high market share are themselves only a means to achieving
higher financial
returns, companies will probably wish to measure not just the
extent of business
they do with customers, but the profitability of this business,
particularly in targeted
customer segments. Activity-based cost (ABC) systems permit
companies to
measure individual and aggregate customer profitability.
Companies should want
more than satisfied and happy customers; they should want
profitable customers. A
financial measure, such as customer profitability, can help keep
customer-focused
organisations from becoming customer-obsessed.
The customer profitability measure may reveal that certain
targeted customers are
unprofitable. This is particularly likely to occur for newly
acquired customers, where
the considerable sales effort to acquire a new customer has yet
to be offset from
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the margins earned by selling products and services to the
customer. In these cases,
lifetime profitability becomes the basis for deciding whether to
retain or discourage
currently unprofitable customers.
Newly acquired customers can still be valued, even if currently
unprofitable, because
of their growth potential. But unprofitable customers who have
been with the
company for many years will likely require explicit action to
cope with their incurred
losses.
VI. Beyond the Core: Measuring Customer Value Propositions
Customers value propositions represent the attributes that
supplying companies
provide, through their products and services, to create loyalty
and satisfaction
in targeted customer segments. The value proposition is the key
concept for
understanding the drivers of the core measurements of
satisfaction, acquisition,
retention, and market and account share. For example, customers
could value short
lead times and on-time delivery. They could value a constant
stream of innovative
products and services. Or they could value a supplier able to
anticipate their needs and
capable of developing new products and approaches to satisfy
those emerging needs.
While value propositions vary across industries, and across
different market segments
within industries, Kaplan and Norton have observed a common set
of attributes that
organises the value propositions in all of the industries where
we have constructed
scorecards. These attributes are organised into three
categories.
Product/Service Attributes
Customer Relationship
Image and Reputation
Product and service attributes encompass the functionality of
the product/service,
its price, and its quality. The image and reputation dimension
enables a company
to pro- actively define itself for its customers. The customer
relationship dimension
includes the delivery of the product/service to the customer,
including the response
and delivery time dimension, and how the customer feels about
the experience of
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purchasing from the company.
In summary, the customer perspective enables business unit
managers to articulate their
unique customer and market-based strategy that will deliver
superior future financial returns.
Some of the objectives together with a measurement measures
Objectives Measures
New Product % of sales from new product
Customer Relationship % of retained customer
Responsive Supply On time Delivery
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3. Internal Business Processes Perspective - What must we excel
at?
Internal business process objectives address the question of
which processes are most critical
for satisfying customers and shareholders. These are the
processes in which the firm must
concentrate its efforts to excel.
In the internal business process perspective, executives
identify the critical internal processes
in which the organisation must excel. The critical internal
business processes enable the
business unit to deliver on the value propositions of customers
in targeted market segments,
and satisfy shareholder expectations of excellent financial
returns. The measures should be
focused on the internal processes that will have the greatest
impact on customer satisfaction
and achieving the organisations financial objectives.
The internal business process perspective reveals two
fundamental differences between
traditional and the Balanced Scorecard approaches to performance
measurement. Traditional
approaches attempt to monitor and improve existing business
processes.
They may go beyond just financial measures of performance by
incorporating quality and
time-based metrics. But they still focus on improving existing
processes. The Balanced
Scorecard approach, however, will usually identify entirely new
processes at which the
organisation must excel to meet customer and financial
objectives. The internal business
process objectives highlight the processes most critical for the
organisations strategy to
succeed.
The second departure of the Balanced Scorecard approach is to
incorporate innovation
processes into the internal business process perspective.
Traditional performance
measurement systems focus on the processes of delivering todays
products and services to
todays customers. They attempt to control and improve existing
operations - the short wave
of value creation. But the drivers of long-term financial
success may require the organisation
to create entirely new products and services that will meet the
emerging needs of current and
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future customers. The innovation process-the long-wave of value
creations, for many
companies, is a more powerful driver of future financial
performance than the short-term
operating cycle. But managers do not have to choose between
these two vital internal
processes. The internal business process perspective of the
Balanced Scorecard incorporates
objectives and measures for both the long-wave innovation cycle
as well as the short-wave
operations cycle.
Some of the objectives together with a measurement measures
Objectives Measures
Manufacturing Excellence Cycle Time per Unit
Safety incidence Index Number of Accidents
Increased design Productivity Engineering Efficiency
Increased Product Launch Days Actual Launch Days Vs Plan
4. Learning and Growth Perspective - Can we continue to improve
and create
value?
Learning and growth metrics address the question of how the firm
must learn, improve, and
innovate in order to meet its objectives. Much of this
perspective is employee- centered.
The fourth Balanced Scorecard perspective, Learning and growth,
identifies the infrastructure
that the organisation must build to create long-term growth and
improvement. The customer
and internal business process perspectives identify the factors
most critical for current and
future success. Businesses are unlikely to be able to meet their
long-term targets for
customers and internal processes using todays technologies and
capabilities. Also, intense
global competition requires that companies continually improve
their capabilities for
delivering value to customers and shareholders.
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Organisational learning and growth come from three principal
sources: people, systems, and
organisational procedures. The financial, customer, and internal
business process objectives
on the Balanced Scorecard will typically reveal large gaps
between existing capabilities of
people, systems, and procedures and what will be required to
achieve targets for
breakthrough performance. To close these gaps, businesses will
have to invest in re-skilling
employees, enhancing information technology and systems, and
aligning organisational
procedures and routines. These objectives arc articulated in the
learning and growth
perspective of the Balanced Scorecard. As in the customer
perspective, employee-based
measures include a mixture of generic outcome measures- employee
satisfaction, employee
retention, employee training, and employee skills- along with
specific drivers of these generic
measures, such as detailed indexes of specific skills required
for the new competitive
environment. Information systems capabilities can be measured by
real-time availability of
accurate customer and internal process information to front-line
employees. Organisational
procedures can examine alignment of employee incentives with
overall organisational
success factors, and measured rates of improvement in critical
customer-based and internal
processes.
Some of the objectives together with a measurement measures
Objectives Measures
Technology Leadership Time to develop new product
Manufacturing Learning Time to new process maturity
Product Focus % of product representing 80% of sales
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6.3.The Four Perspectives: Cause and Effect Relationship
The four perspectives as mentioned above are highly interlinked.
There is a logical
connection between them. The explanation is as follows If an
organization focuses on the
learning and the growth aspect, it is definitely going to lead
to better business processes. This
in turn would be followed by increased customer value by
producing better products which
ultimately gives rise to improved financial performance.
Figure 2: The Cause and Effect relationships among the four
perspectives
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6.4.The Balanced Scorecard Model
Explanation:
Following steps are to be taken so as to utilize the Balanced
Scorecard as a strategic
management tool:
1. The major objectives are to be set for each of the
perspectives.
2. Measures of performance arc required to be identified under
each of the Objectives
which would help the organization to realize the goals set under
each of the
perspectives. These would act as parameters to measure the
progress towards the
objectives.
3. The next important step is the setting of specific targets
around each of the identified
key areas which would act as a benchmark for performance
appraisal. Hence, a
performance measurement system is build around these critical
factors. Any deviation
in attaining the results should raise a red signal to the
management which would
investigate the reasons for the deviation and rectify the
same.
4. The appropriate strategies and the action plans that arc to
be taken in the various
activities should be decided so that it is clear as to how the
organization has decided
to pursue the pre-decided goals. Because of this reason, the
Balanced Scorecard is
often referred to as a blueprint of the company strategies.
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To achieve our vision, how will we sustain our ability to change
and improve?Learning and GrowthObjectives Measures Targets
Initiatives
To achieve our vision, how should we appear to our
customers?Customer Objectives Measures Targets Initiatives
To Satisfy our shareholders and customers, processes must we
excel at?Internal Process Objectives Measures Targets
Initiatives
To succeed financially, how should we appear to our
shareholders? Financial Objectives Measures Targets Initiatives
Vision and Strategy
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Figure 3:- The Main framework of Balanced Scorecard
6.5.Balanced Scorecard as a Measurement Tool
To illustrate the use of todays main measurement tools, Kaplan
and Norton bring the
following example:
Imagine entering the cockpit of a modern jet airplane and seeing
only a single instrument
there. How would you feel about boarding the plane after the
following conversation with the
pilot?
Q: I am surprised to see you operating the plane with only a
single instrument. What does
it measure?
A: Airspeed. I am really working on airspeed this flight.
Q: That good. Airspeed certainly seems important. But what about
altitude? Would an
altimeter be helpful?
A: I worked on altitude for the last few flights and Ive gotten
pretty good on it. Now I have
to concentrate on proper airspeed.
Q: But I notice you do not even have a fuel gauge. Wouldnt that
be useful?
A: You are right; fuel is significant, but I cannot concentrate
on doing too many things well
at the same time. So on this flight Im focusing on airspeed.
Once I get to be excellent at
airspeed, as well as altitude, I intend to concentrate on fuel
consumption in the next set of
flights.
We suspect that you would not board the plane after this
discussion. Even if the pilot did an
exceptional job on airspeed, you would be worried about
colliding with tall mountains or
running low on fuel. Clearly, such a conversation is a fantasy
since no pilot would dream of
guiding a complex vehicle like a jet airplane through crowded
air spaces with only a single
instrument. Skilled pilots are able to process information from
a large number of indicators to
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navigate their aircraft. Yet navigating todays organisations
through complex competitive
environments is at least as complicated as flying a jet. Why
should we believe that executives
need anything less than a full battery of instrumentation for
guiding their companies?
Managers, like pilots, need instrumentation about many aspects
of their environment and
performance to monitor the journey toward excellent future
outcomes.
7.IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE
7.1.Integrating HR into the performance measurement system
To integrate HR into a business performance measurement system,
managers must identify
the points of intersection between the HR and the organisations
strategy implementation
plan. These points are commonly called the HR deliverables. They
are the outcomes of the
HR architecture that serve to execute the firms strategy. This
is in contrast to the aspects
of HR that focus on HR efficiency and activity. The deliverables
can be classified into two
groups, namely the performance drivers and the enablers.
Performance drivers are core
people-related capabilities or assets such as employee
productivity and satisfaction. There
is no single correct set of performance drivers. Each firm needs
to identify its own set
based on its unique characteristics. Enablers reinforce
performance drivers. E.g. Preventive
maintenance can be considered an enabler of on-time delivery,
which is a performance driver.
A performance driver can have several enablers. Most of the
time, each enabler separately
may seem rather mundane but its the cumulative effect that has
strategic importance.
Performance Drivers:
HR managers tend to focus on performance drivers in an attempt
to demonstrate their
strategic impact. However, in most cases although they do stress
on these drivers they
are unable to make a solid case for it since they do not have
the right measures. Without
measures one cannot display HRs actual contribution to the
overall mission. Most of the
measures used are very simplistic and it undermines HRs
credibility in the organisation. This
credibility is very important since it is what matters when a
manager is faced with a conflict
between financial and non-financial reports. For example, if
people measures are good but
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financial measures are bad, the manager will go for the solution
that supports the credibility
of finance or HR. In most cases it is finance and the immediate
decision is reducing bonuses
etc. as the CFO might feel it is not warranted when there is no
proof of performance. The
point that is being missed is that the CFO is looking at the
lagging indicators. Balanced
performance needs one to look at the leading indicators such as
HR measures as well since
these are the ones that create value in the organisation. High
HR scores in the face of low
finances actually signal improved finances in the future
(provided other leading indicators are
also on the positive side). Similarly, strong financial measures
and weak leading measures
such as HR measures are indicative of a financial problem in
time to come. Thus, managers
must interpret these measures in a balanced manner looking at
the past and into the future.
Identifying HR performance drivers can be very challenging since
it is unique to the firm. It
is important to identify the performance drivers and integrate
them directly into performance
criteria giving them equal weight with the more traditional
performance measures. For
example, one half of the bonus pays can be based on the
financial results while the other half
is based on the employees adherence to the value behaviours.
HR enablers:
HR enablers reinforce the core performance drivers. If employee
productivity is identified as
a performance driver, re-skilling and training can be considered
an enabler. Some enablers
might be specifically HR focused i.e. they enhance the
effectiveness of HR performance
drivers. There might also be some HR enablers that do have
profound positive effects with
respect to the other perspectives as well, such as customers,
operations and the financial
segment. It is important to identify these and keep them up to
date with the current goals of
the organisation. Without the properly aligned enablers, it is
not possible to implement new
strategies. The systemic aspect of HR once again comes to the
forefront, whereby the entire
HR system can influence employee behaviour from different
points. Thus, HR managers
should evaluate the degree to which their firms system of
enablers support the HR as well as
non-HR performance drivers as listed in their Balanced
Scorecards. By identifying the links
between enablers and universal performance drivers, the HR team
can play a much larger role
and suggest ideas that can affect other sectors in the firm as
well.
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7.2.The Seven-Step Model for Implementing HRs Strategic Role
Ulrich et al. discuss a seven step model for formalising the
strategic role of HR. They are
summarised below:
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Periodicallytest HR
measuresagainst the
firms strategymap andadjust asrequired
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Figure 4:- Model for implementing HRs Strategic Role
1. Defining Business Strategy:
HR managers should focus on implementation of strategy. By doing
so, they can facilitate
discussion about how to communicate the firms goals throughout
the organisation. When
strategic goals are not developed with an eye towards the
implementation detail, they tend
to be too generic and abstract. These vague goals will tend to
confuse employees and they
would not know how exactly to implement the strategies. The
important thing for HR
managers is to state the goals in such a way that the employees
understand what exactly
their role in the organisation is and thus the organisation
knows how to measure success in
achieving these goals.
2. Building a case for HR as a strategic asset:
Once a firm clarifies its strategy, HR professionals need to
build a clear case for the strategic
role of HR. In concrete terms, they must be able to explain how
and why HR can support the
strategy. It is important to look at as much of case histories
and internal as well as external
research while going through this phase. Although it is not wise
to imitate others, one can
learn a lot by looking through past experiences of others.
Basically, the direct impact on
the HR systems high performance characteristics is non-linearly
related to the increase in
market value. This is because in the lower ranges of
performance, increase in market value
is basically because HR stops making mistakes it used to make in
the past. It is almost like it
is getting out of the way and avoids blunders and wrong
practices that worsen the situation.
In the middle range of performance, HR starts consolidating its
efforts. It is learning from its
mistakes and in the process does not actually add much to the
market value of the employees
and the company, but once a certain threshold is crossed
indicating that the firm has adopted
the appropriate HR practices and implemented them effectively,
the market value soars
exponentially. This is mainly because the HR system starts
getting integrated into the
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overall strategic system of the firm. Basically, the firms must
consolidate the appropriate
HR policies and practices into an internally coherent system
that is directly aligned with
business priorities and strategies that are most likely to
create economic value. This can lead
to significant financial returns to the company. It is this plan
that must be made concrete and
shown as a strong case to make senior management believe in HRs
potential.
It is important to note however, that simple changes in an HR
practice do not make a
difference. The HR measures describe the whole HR system and
changing the system to cross
the threshold mentioned above needs time, effort, insight and
perseverance since results are
not directly proportional. This clearly indicates the
requirement of an HR transformation
rather than a change. It is this very character of
transformation, which is difficult and time-
consuming to achieve, that makes HR a strategic asset.
Figure 5: A High Performance Work System
Along with value creation, there must also be a strong case for
HRs role in strategy
implementation. Strategy implementation rather than strategy
content separates the successful
from the unsuccessful firms. It is easier to choose an
appropriate strategy than to implement
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Knowledge Management
System
Strategic Alignment System
Performance Measurement
System
Employees who are strategically focused
The Firms capacity to implement the Strategy
The Overall performance of the firm
A High Performance Work System
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one. This once again shows the strategic nature of HRs role in
performance improvements.
Successful strategy implementation is driven by employee
strategic focus, HRs strategic
alignment and a balanced performance measurement system. The
most important HR
performance driver is a strategically focused workforce.
Effective knowledge management
combined with the above-mentioned factors creates a
strategically focused organization.
3. Creating a Strategy Map:
The first two steps clarify the firms strategy. This paves the
way for the implementation
process. But, before this is done, the firm must get a clear
understanding of its value chain.
The value chain is the complex cumulative set of interactions
and combinatorial effects that
create the customer value in the products and services of the
firm. It is important that the
firms performance management system must account for each of the
links and dependencies
in the value chain. The Balanced scorecard framework refers to
this process and creating a
strategy map. These are basically diagrams that show the links
in the value chain. It shows
how different components in different layers interact. It is
what provides managers and
employees the big picture of how their tasks affect the other
elements in the firm and how it
affects overall strategy. This process should involve managers
from all over the organisation,
not just HR. The broad participation is required to improve the
quality of the strategy map. It
also allows each member of the team who is an expert in his or
her domain to provide his or
her own insights into what is accomplishable.
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Learning and Growth
Internal/Business
Processes
Customer
Financial
Figure 6: Simple Strategy Map
The following questions have been identified as the key ones to
be asked during the strategy
map creation process:-
1. Identify the critical strategic goals from the generic
ones.
2. Identify the performance drivers for each goal.
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On-time Delivery
Customer Loyalty
Return on the capital employed in the business
Process Quality
Process cycle time
Employee skills
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3. Think about how one can measure progress towards these
goals.
4. Identify barriers to the achievement of each goal.
5. Recognise the employee behaviours needed to ensure that the
company achieves
its goals.
6. Identify missing employee competencies and check if HR is
providing the
necessary competencies.
7. Finally, decide what needs to change.
These basic questions generate a wealth of information about how
well a firms HR has been
contributing to the success of the organisation. Along with
these discussions, it is useful for
the company to conduct surveys within the organisation to
identify the extent to which each
employee understands the organisational goals. Once the whole
picture of the firms value
chain is highlighted, the firm can then translate the
information into a conceptual model using
language and graphics that make sense to the members of the
organisation. The model should
then be tested for understanding and acceptance amongst the
leaders and the employees.
The strategy map essentially contains predictions about which
organisational processes drive
firm performance. The company can validate these hypotheses only
after achieving the goals
set for each of the performance drivers and then measuring their
impact on overall firm
performance. The graphical nature of the strategy map helps the
senior management as well
as the employees have more confidence in the strategy
implementation plan.
4. Identifying HR deliverables within the strategy map:
HR creates much of its value at the points of intersection
between the HR system and the
overall strategy implementation system of the organisation.
Thus, to leverage this to the
maximum possible extent it is important that there is a clear
understanding of both sides of
this intersection.
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In the past, HR managers lacked the required amounts of
knowledge about the business side
and general managers did not fully understand the HR side. It is
HRs responsibility to depict
HR deliverables including performance drivers as well as HR
enablers in the strategy map of
the firm. Performance drivers such as employee competence,
motivation and availability are
very fundamental and so it might be difficult to locate these
precisely on the strategy map. It
is important to identify those HR deliverables that support the
firm-level performance drivers
on the strategy map. The focus should be on the kind of
strategic behaviours that depend on
competencies, rewards and work organisation. E.g. Employee
stability improves R&D cycle
time, the latter being a firm-level performance driver. Thus,
employee stability becomes an
important HR enabler. Once this enabler has been identified, the
firm can design policies
such as bonus schemes etc. that would encourage R&D staff to
continue working for the firm.
5. Aligning the HR architecture with the HR deliverables:
The above-mentioned steps encourage the top-down thinking
approach, whereby strategy
decides what HR deliverables the firm needs to focus on. It is
also important to consider
how the HR system made up of the rewards, competencies; work
organisation etc. needs
to be structured to provide the deliverables that are identified
in the strategy map. This step
enhances the value creation aspect of the firm by aligning the
HR system with the firms
larger strategy implementation system. For this, internal
alignment and external alignment
are important. Internal alignment refers to the aligning
components within the HR system.
External alignment refers to the alignment of the HR system with
the other elements in the
firms value creation process. These two are not isolated
processes. They are closely related.
Internal alignment is necessary but not sufficient in itself for
external alignment to occur.
Basically, highly cohesive HR strategies will work as long as
they are aligned well with the
overall strategy of the company. It will fail if it is not
periodically reshaped so as to align it
with the overall strategy.
However, for a particular fixed overall strategy, all firms need
an internally aligned HR
strategy in order to achieve the overall goals. Misalignment
between the HR system and the
strategy implementation system can destroy value. In fact, the
wrong measurement system
can have the exact opposite effect than intended.
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6. Designing the Strategic HR measurement system:
The above steps guide the development of the HR architecture and
lay the groundwork
necessary to measure the performance relationship between HR and
the firms strategy. The
next step is to design the measurement system itself. This
requires a new, modern perspective
on measuring HR performance. It also requires HR to resolve
several new technical
issues that it might not be familiar with. To accurately measure
the HR-firm performance
relationship, it is imperative that the firm develops valid
measures of HR deliverables.
This task has two dimensions.
Firstly, HR has to be confident that they have chosen the
correct HR deliverables.
This requires that HR have a clear understanding of the
causality in the value chain
for effective strategy implementation.
Secondly, HR must choose the correct measures for those
deliverables. During this
process of developing the HR scorecard, the firm might go
through several stages of
increasing sophistication.
The first stage is normally the traditional category of
measures. These mainly include
operational measures such as cost per hire, activity counts etc.
These are not exactly strategic
measures. In the second stage, HR measures have a strategic
importance but they dont
help much in making a case for HR as a strategic asset. Firms
may declare several people
measures such as employee satisfaction as strategic measures and
these might be included
directly into the reward systems.
In this stage, there tends to be a balance between financial and
non-financial measures
but there is less of an agreement on how exactly they combine
together to implement the
strategy. These are normally hasty decisions and the firms might
have not gone through all
the previous steps mentioned above.
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The next stage represents a transition point whereby the firm
includes non-financial measures
such as HR measures into its strategic performance measurement
system. The links between
the various measures are also identified i.e. they are placed
appropriately in the strategy map.
The HR measures now actually track HRs contribution to strategy
implementation.
In the final stages, the HR measurement system will enable the
firm to estimate impacts of
HR policies on firm performance. If the value chain is short and
the strategy map is relatively
simple, the complete impact of HR on the overall performance can
be measured. For more
complex value chains, the impact can be more accurately measured
on local segments or
sectors of the strategy map. These local impacts can then be
assimilated to give a good
measure of the total impact on the firms performance. Thus, each
level of sophistication of
the measurement system adds value to the non-financial measures
and forces in the firm and
enables a better performance appraisal.
7. Implementing the strategy by using the measures:
The previous step completes the HR scorecard development
process. The next step is to
use this powerful new management tool in the right way. This
tool not only helps the firm
measure HRs impact on firm performance, but also helps HR
professionals have new
insights into what steps must be taken to maintain HR as a
strategic asset. It helps the HR
professionals dig deeper into the causes of success and failure
and helps them promote the
former and avoid the latter. Implementing the strategy using the
HR scorecard requires
change and flexibility as well as constant monitoring and
re-thinking. The process is not
a one-time event. HR professionals must regularly review the
measures and their impacts.
They must review the HR deliverables identified as important and
see to it that the drivers
and enablers and internally as well as externally aligned.
Special reviews of the HR enablers
must be conducted as these have the maximum direct impact on
specific business objectives.
Enablers that do not tend to play a positive role should be
replaced.
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8. BENEFITS OF THE DEVELOPING HR SCORECARD
The HR Scorecard offers the following benefits:
1. It reinforces the distinction between HR do-ables and
deliverables:
The HR measurement system must clearly distinguish between the
deliverables that
influence strategy implementation and do-ables that do not.
Policy implementation is
not a deliverable until it has a positive effect on the HR
architecture and creates the
right employee behaviours that drive strategy implementation. An
appropriate HR
measurement system will encourage HR professionals to think both
strategically as
well as operationally.
2. It enables cost control and value creation:
HR is always expected to control costs for the firm. At the same
time, HR has
to fulfill its strategic goal, which is to create value. The HR
scorecard helps
HR professionals balance the two and find the optimal solution.
It allows HR
professionals to drive out costs where appropriate, but at the
same time defend
investments in intangibles and HR by outlining the benefits in
concrete terms.
3. It measures leading indicators:
Just as there are leading and lagging indicators in the overall
balanced performance
measurement system, there are drivers and outcomes in the HR
value chain as well. It
is thus important to monitor the alignment of the HR decisions
and systems that drive
the HR deliverables. Assessing this alignment provides feedback
on HRs progress
towards these deliverables and lays the foundation for HRs
strategic influence.
4. It assesses HRs contribution to strategy implementation:
The cumulative effect of the HR Scorecards deliverable measures
provides the
answer to the question regarding .HRs contribution to firm
performance. All
measures have a credible and strategic rationale. Line managers
can use these
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measures as solutions to business problems.
5. It lets HR professionals effectively manage their strategic
responsibilities:
The scorecard encourages HR managers to focus on exactly how
their decisions
affect the successful implementation of the firms strategy. This
is due to the systemic
nature of the scorecard. It provides a clear framework to think
in a systemic manner.
6. It encourages flexibility and change:
The basic nature of the scorecard with its causal emphasis and
feedback loops helps
fight against measurement systems getting too standardised.
Standardisation is good
for things that dont tend to have a dynamic nature but firm
performance is a dynamic
phenomenon. Every decision needs to be taken based on the past
and future scenarios.
One of the common problems of measurement systems is that
managers tend to get
skilled to obtain the right numbers once they get used to a
particular measurement
system. The HR scorecard engenders flexibility and change
because it focuses on
the firms strategy implementation, which constantly demands
change. With this
framework, measures simply become indicators of the underlying
logic that managers
accept as legitimate. It helps them look at the bigger picture
and since there are no
perfect numbers it makes it easier for managers to change
direction when needed.
We see talent as the emerging single sustainable competitive
advantage in the future. To
capitalize on this opportunity, HR must evolve from a Business
Partner to a critical asset
manager for human capital within the business. The HR scorecard
is designed to translate
business strategy directly to HR objectives and actions. We
communicate strategic intent
while motivating and tracking performance against HR and
business goals. This allows each
HR employee to be aligned with business strategy and link
everyday actions with business
outcomes.
Garrett Walker, Director HR Strategic
Performance Measurement, GTE
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9. CASE STUDY: VERIZON
To clarify the HR Scorecard framework it is important to
summarise a case study.
This section explains the details of the HR scorecard developed
by Verizon, a leading
telecommunications provider in the United States.
9.1.Introduction: VerizonVerizon HR has effectively designed and
implemented a strategic management system, which
is based upon the balanced scorecard model of Dr. David Norton
and Dr. Robert Kaplan of
Harvard Business School. The HR Balanced Scorecard was conceived
with new economy
organisational dynamics in mind. The scorecard uses a broad
range of leading and lagging
indicators which include overall strategy