Balanced Scorecard

Balanced ScorecardBalanced ScorecardA general overview

How many companies use the How many companies use the Balanced Scorecard?Balanced Scorecard?

Gartner Group suggests that over 50% of large US firms have adopted the BSC

Bain & Co finds that about 44% of organisations in North America use the BSC

Germany, Switzerland, and Austria - 26% of firms use BSCs

The widest use of the BSC approach can be found in the US, the UK, Northern Europe and Japan

http://www.ap-institute.com/Balanced%20Scorecard.html

Why?Why?

The balanced scorecard is for everyone in the organization. This means that the balanced scorecard should be cascaded to all departments/business units and teams – both operating and support units. This is the only way to ensure successful strategy execution...

Sandy Richardson, Strategy Focused Business Solutions Inc.

historyhistory

developed in 1992 - Robert Kaplan and David NortonTranslating corporate vision and strategy into a set of

strategic objectives that drive behavior and performance

built upon the premise that measurement motivates and that measurement must start with a clearly described strategy

pioneering work of General Electric on performance measurement reporting in the 1950’s and the work of French process engineers (who created the Tableau de Bord – literally, a "dashboard" of performance measures) in the early part of the 20th century

http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx

The Balanced Scorecard and the The Balanced Scorecard and the Strategic Management systemStrategic Management system

establishing the linking between Balanced Scorecard and the Strategic Management system

BSC not linked to the Strategic management turns from the fundamental system into just the collection of the isolated indicators which do not have any influence on the strategic development of the company

What are the Key Benefits of What are the Key Benefits of using Balanced Scorecards? using Balanced Scorecards?

Better Strategic Planning –powerful framework for building and communicating strategy

Improved Strategy Communication & Execution –strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally

Better Management Information ◦ –forces organisations to design key performance indicators for their

various strategic objectives◦ Research shows that companies with a BSC approach tend to report

higher quality management information Improved Performance Reporting –create meaningful

management reports and dashboards to communicate performance both internally and externally

Better Strategic Alignment –align their organisation with the strategic objectives

Better Organisational Alignment –help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities

Building & Implementing a Balanced Scorecard: Building & Implementing a Balanced Scorecard:

Nine Steps to SuccessNine Steps to SuccessTMTM

Developed by the Balanced Scorecard Institute Step One: Assessment Step Two: Strategy Step Three: Objectives Step Four: Strategy Map Step Five: Performance Measures Step Six: Initiatives Step Seven: Automation Step Eight: Cascade Step Nine: Evaluation

http://www.balancedscorecard.org/BSCResources/TheNineStepstoSuccess/tabid/58/Default.aspx



Developed by the Balanced Scorecard Institute

Step One: Assessment- BSC Development Plan◦ assessment of the organization’s Mission and Vision,

challenges (pains), enablers, and values◦ Preparation of a change management plan for the

organization◦ conducting a focused communications workshop to identify

key messages, media outlets, timing, and messengers Step Two: Strategy - Customer Value

◦ Strategic Results, Strategic Themes, and Perspectives, are developed -focus attention on customer needs and the organization’s value proposition

Step Three: Objectives- Strategy Action Components ◦ Strategic Objectives are first initiated and categorized on

the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages (Strategy Maps)




Developed by the Balanced Scorecard Institute

Step Four: Strategy Map-Cause-and-Effect Links◦ the cause and effect linkages between the enterprise-

wide Strategic Objectives are formalized in an enterprise-wide Strategy Map

Step Five: Performance Measures◦ Develop Performance Measures are for each of the

enterprise-wide Strategic Objectives◦ Lead and lag measures are identified◦ Determine targets and thresholds, and ◦ Develop baseline and benchmarking data

Step Six: Initiatives

◦ Strategic Initiatives are developed that support the Strategic Objectives




Developed by the Balanced Scorecard Institute Step Seven: Automation

◦ Software ◦ Performance Reporting ◦ Knowledge Sharing

Step Eight: Cascade-key to organization alignment ◦ Cascading a balanced scorecard means to translate the corporate-wide

scorecard (referred to as Tier 1) down to first business units, support units or departments (Tier 2) and then teams or individuals (Tier 3)

◦ Cascading translates high-level strategy into lower-level objectives, measures, and operational details

◦ Determine performance measures at each level – more operational and tactical

Step Nine: Evaluation◦ Strategy Results ◦ Revised Strategies


Business Management ProcessBusiness Management Process

The Balanced Scorecard is just one of three levels in the business management process:

Top level: Company-wide Strategy maps Middle Level: Balanced Scorecard Bottom Level: Initiatives

The Balanced Scorecard: From The Balanced Scorecard: From Strategy to Performance Strategy to Performance MeasuresMeasures

Exh.10-11

What customers dowe want to serve andhow are we going towin and retain them?

FinancialHas our financial

performance improved?

CustomerDo customers recognize that

we are delivering more value?

Internal Business ProcessesHave we improved key business processes so that we can deliver

more value to customers?

Learning and GrowthAre we maintaining our ability

to change and improve?

Performance Measures

What are ourfinancial goals?

What internal busi-ness processes arecritical to providing

value to customers?

Vision and

Strategy

http://www.managerialaccounting.org/Balanced%20Scorecard.htm

The Balanced ScorecardThe Balanced Scorecard

Translates a company’s mission and strategy into a comprehensive set of performance measures

Financial and nonfinancial aspects

How to define How to define strategic goalsstrategic goals

Who are your stakeholders? What do your stakeholders need?

What are their strategic goals? Create a Strategy Map-identify your

prioritiesConsider the four perspectives-

Business Processes, Customer Relationship, Education and Growth, and Finance

Elements Elements

strategy map view◦articulates the strategy in a series of linked

objectives representing the most important priorities for the organization

scorecard view◦Gives specific measures and targets ◦represent the yardstick and expected level of

success◦the strategic initiatives or action programs that

are the ways to achieve targets outside of current capabilities.

http://www.lenskold.com/content/articles/rigatuso_aug07.html

PerspectivesPerspectives

The Learning & Growth Perspective◦includes employee training and corporate cultural

attitudes related to both individual and corporate self-improvement

The Business Process Perspective◦refers to internal business processes

The Customer Perspective◦the importance of customer focus and customer

satisfaction in any business◦Lead indicators

The Financial Perspective

Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (January-February 1996): 76.

Early BSCEarly BSC

Perspectives of BSCPerspectives of BSC

Organization & Learning: people, teams, training and recruiting

Internal Process: business process, automation, technology & plant infrastructure

Customer: marketing, value proposition, and product/service in the eyes of the customer

Financial: revenue, growth, earnings, corporate governance, shareholder value

Modern BSCModern BSChttp://www.ap-institute.com/resources_whitepapers.asp

http://www.torontospin.com/torontospin/events/doc/presentations/20041124-MarkKozak-Holland.pdf



DataData

historical internal (company) data (from operational systems)

historical external data (from third parties) forecast external data (from third parties) forecast company internal data (financial

and non-financial) target values (eg EPS targets, Sales

Quotas, etc) Data availability – existing vs. to be

collected

Target valuesTarget values

Decreed by executive management Negotiated between the operational and

line management Selected from an industry benchmark Selected from competitors known (or

assumed) values Selected as % change over last years

historical value

Key Performance IndicatorsKey Performance Indicators

Key Performance Indicators ◦reflect the critical success factors of an organization◦must be quantifiable

stay with the same definition from year to year

set targets for each Key Performance Indicator

identify everything that is easy to measure and count

collect and report the data on everything that is easy to measure and count

Key Performance Indicators Key Performance Indicators (KPIs)(KPIs)

help organizations understand how well they are performing in relation to their strategic goals and objectives

Show whether the organization is on track or not

serve to reduce the complex nature of organisational performance to a small number of key indicators

Example KPIExample KPI

Good Key Performance Indicators vs. Bad Bad:

◦ Title of KPI: Increase Sales ◦ Defined: Change in Sales volume from month to month ◦ Measured: Total of Sales By Region for all region ◦ Target: Increase each month ◦ What needs to be corrected?

Good: ◦ Title of KPI: Employee Turnover ◦ Defined:no of employees resigned + no of employees terminated due to performance number of employees at the beginning of the year◦ Measured: information available at human resources◦ Target: Reduce Employee Turnover by 5% per year

Key performance indicators and Key performance indicators and BSCBSC

Who should design your indicators? ◦ Strategist and a line manager

Do you have good indicators? ◦ indicators should not repeat each other, but taken together, they should describe

90% of your company or business unit Are your indicators easy to measure?

◦ should be easy to understand and measure How many indicators?

◦ three or four indicators in each category. If you have more, you are overloading your scorecard

http://www.ap-institute.com/downloads/100608%20How%20to%20design%20Key%20Performance%20Indicators.pdf

Marr, B. (2010) How to design Key Performance Indicators, Management Case Study, The Advanced Performance Institute (www.ap-institute.com).

KPIKPI

Type of data◦Raw ◦Progress◦Change

Source of dataFrequency of dataTarget performancegraphs

http://www.enterprise-dashboard.com/2007/04/05/difference-between-balanced-scorecard-and-enterprise-dashboard/

Effect on the organizationEffect on the organization

Culture changeHuman resources

◦tasks, responsibilities◦Performance appraisal, bonuses

Measurement and data collectionInformation management

Some sourcesSome sources

http://www.scorecardtrainings.comhttp://www.balancedscorecard.orghttp://www.bscdesigner.com

Human Resource KPIHuman Resource KPI

1. Recruitment KPI2. Training KPI3. Health and safety KPI4. Performance KPI5. Employee loyalty KPI6. Working time KPI7. HR efficiency KPI8. Compensation KPI9. Labor relation KPI10. Regulation compliance KPI11. Employee satisfaction KPI

• Attitude about compensation and benefits.• Attitude about coworkers.• Attitude about supervisors / managers.• Attitude about promotions, training.• Attitude about work tasks.

12. HR budget KPI13. Job leaving KPI

◦ 1. Job leaving ratio per year.◦ 2. Job leaving ratio per department.◦ 3. Average age of employees that retire.◦ 4. Percentage of early retirements

14. Workforce information KPI

http://www.humanresources.hrvinet.com/recruitment-key-performance-indicators-kpi/

Sales KPISales KPI

1. Customer care KPICustomer care KPIs include KPIs such as frequency impact to customers, the rate of service charges /

profits etc.2. Customer appraisal KPIThey are KPIs related to appraisal customer such as number of new customers, average sale per VIP

customer etc.3. Complaints of customer KPIThey include KPIs such as Complaints are resolved in the first time, the rate of complaints by sector

etc.4. Market share KPIThey are KPIs related to market share of company such as market share of the company compared

with the entire market, relative market share etc.5. Customer loyalty KPIThese KPIs measure customer loyalty of company. Some KPIs are total customer lost, the rate of lost

customers lost after purchasing first time etc.6. Shops and supermarkets KPISome KPI of this sector such as the rate of profit / per shop, sales turnover / location. These KPIs

measure effectiveness of sale channel of shop or supermarket.7. Sales contact by telephone KPIThese ratios relate to effectiveness of contacting by telephone of salesman.8. Sales rep KPIThese ratios relate to effectiveness of sales representative staff such as the rate of response / total

sent, time to answer a request by customers.

http://www.humanresources.hrvinet.com/sales-kpi/

Marketing KPIMarketing KPI

1. Public relations KPIPR KPI include KPIs related to appraisal indicators of Public relations

such as effective PR items, press releases, conducting survey, the level of awareness of the enterprise through the public relations did etc.

2. Promotion KPIPromotion KPI include KPIs related to appraisal indicators of promotion

activities in marketing such as the rate of sales in promotion period and before the promotion, percentage of sales in promotion and after promotion etc.

3. Advertisement KPIAdvertisement KPI include KPIs related to appraisal indicators of

advertisement activities in marketing such as the cost of advertising on the 1000 target audiences, the level of awareness of the product etc.

4. E-marketing KPIE-marketing KPI include KPIs related to appraisal indicators of E-

marketing in marketing such as the rate of new visitors, number of page views / visitors etc

http://www.humanresources.hrvinet.com/marketing-kpi/

General production KPIsGeneral production KPIs

1. Manufacturing cycle timeMeasured from the Firm Planned Order until the final production is reported. It usually takes

into account the original planned production quantity verses the actual production quantity.2. Defects per million opportunities (DPMO)DPMO is a Six Sigma calculation used to indicate the amount of defects in a process per one

million opportunities.Calculation: Total Number of Defects / Total Number of Opportunities for a Defect. Then

multiply the answer by 1 Million.3. Average production costs of itemsAverage production costs of items produced within measurement period.4. Mean-time between failure (MTBF)The average time between equipment failures over a given period i.e. the average time a

device will function before failing. It is the reliability rating indicating the expected failure rate of equipment.

5. Loss ratio of material per orderThis is lost ratio of material per order. The rate is usually 3 – 5% custom types orders.6. Rate of material defect by causes of material itselfBy total material defect due to the nature of that material, measured by the number and value

of money.7. Rate of damaged material by error of workersBy total material damage because of worker error, measured by the number and/or value of

money.8. Scrap value %Scrap value as a percentage of production value

http://www.humanresources.hrvinet.com/production-kpi/

Purchasing / Procurement KPIPurchasing / Procurement KPI

1. Delivery on time• Formula: the number of delivery on time / total delivery.

• Apply this formula to each provider and entire company every month.2. Delivery is not enough quantity, quality• Formula: with the total number of delivery with enough quality/ quantity / the number of total

delivery .3. Quantity bought over required• This rate determine the number of products using in actual in comparison with quantity

planned.• This rate determines the effectiveness of the purchasing order.• The rate may be identified in quantity or money.

5. Purchasing cost• By value of purchasing / sales value

• Compare this with the percentage rate as planned.6. Cost of purchasing units• This rate is total purchase cost / total sales.7. Transaction cost unit of purchasing• Formula = (Total cost of purchasing – a total cost of goods) / sales turnover.

• You can compare this rate with different goods in order to view transaction costs a high or low

8. Suppliers rating.• Number of suppliers accounting for 80% of the value of goods

• The number of suppliers of goods per year• Number of suppliers be removed per year..• Number of new suppliers per year..

http://www.humanresources.hrvinet.com/purchasing-procurement-kpi/

Financial KPIFinancial KPI

General Financial KPIs1. Weighted Average Days PaidWeighted Average Days Paid in Receivables Management2. Weighted Average Days Past DueAverage days past due for open AP invoices weighted by open amount3. Weighted Days Delinquent Sales OutstandingWeighted Days Delinquent Sales Outstanding in Receivables Status dashboard4. Weighted Terms OutstandingWeighted Terms Outstanding in Receivables Status dashboard5. Receipts AmountReceipts Amount in Receivables Management6. Revenue (P&L)Revenue KPI in Profit and Loss Analysis Dashboard7. T&E per HeadTravel and entertainment expenses / Headcount8. Total ReceiptsTotal Receipts (Rolling 30 Days) in Receivables Status dashboard9. Unapplied ReceiptsUnapplied Receipts Amount10. Weighted Average Days DueSum of days until due weighted by invoice amount for open AP invoices

http://www.humanresources.hrvinet.com/financial-kpi/

General Accounting KPIsGeneral Accounting KPIs

1. Operating income: Operating Income equals Gross Profit minus SG&A Expenses. It is the income from current operations.

2. Gross profit: Gross Profit equals Revenue minus Cost of Goods Sold. It identifies the amount available to cover other operating expenses.

3. Gross profit margin: Gross Profit Margin equals Gross Profit divided by Revenue, expressed as a percentage.

4. Cost of goods sold (COGS): Cost of Goods Sold includes all expenses directly associated with the production of goods or services the company sells (such as material, labor, overhead, and depreciation). It does not include SG&A.

5. Operating margin: Operating Margin equals Operating Income divided by Revenue, expressed as a percentage.

6. Goodwill: Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities.

7. Total Assets: Total Assets are everything of value that is owned by a company.8. Accounts Payable: Money owed (payable) to suppliers for goods or services purchased on

credit that must be paid within a year.9. Long-Term Debt: Long-Term Debt represents the amount of borrowings due more than one

year from the date of the balance sheet.10. Total Liabilities: Total liabilities represent the sum of all monetary obligations of a business

and all claims creditors have on its assets.11. Cumulative Annual Growth Rate (CAGR):12. Cash Flow Return on Investments (CFROI): This is similar to ROI, but the only difference

is CASH is used inplace of Profit.13. SG&A expenses: Selling, General, and Administrative Expenses include all salaries, indirect

production, marketing, and general corporate expenses.14. Net profit margin: Net Profit Margin equals the Total Net Income divided by Revenue,

expressed as a percentage.15. Shares Outstanding: Shares Outstanding is the outstanding number of shares of the class

of common stock that is most actively traded.

General Accounting KPIsGeneral Accounting KPIs

16. Total Equity: Total Equity equals Preferred Stock Equity + Common Stock Equity.17. Total Current Assets: Total Current Assets equals Cash and Equivalents + Receivables +

Inventories + Other Current Assets.18. Other Current Assets: Other Current Assets includes prepayments, deferred charges,

and amounts (other than trade accounts) due from parents and subsidiaries.19. Inventories: Inventories is merchandise bought for resale or supplies and raw materials

purchased for use in revenue producing operations.20. Net Receivables: Net Receivables are amounts owed to the company, net of any

provisions for bad debts.21. Cash: Cash consists of cash and may include cash-like items such as short-term

investments that can be quickly converted to cash.22. Net Change in Cash: Net Change in Cash is the difference between the Cash and Cash

Equivalents at the beginning of the reporting period minus the amount at the end of the reporting period.

23. Common Stock Equity: Common Stock Equity is the amount of shareholders’ equity attributable to common stock.

24. Preferred Stock Equity: Preferred Stock Equity is the amount of shareholders’ equity attributable to the preferred stock issued by the parent company.

25. Other Noncurrent Liabilities: The liabilities that are not assigned to Long-Term Debt or deferred Income Taxes.

26. Short-Term Debt: Short-Term Debt represents the amount of borrowings (principal and interest) that must be paid in the near future.

27. Other Noncurrent Assets: Assets that are not assigned to Net Fixed Assets or intangibles.

28. Total Current Liabilities: Total Current Liabilities equals Accounts Payable + Short-Term Debt + Other Current Liabilities.

29. Other Current Liabilities: Other Current Liabilities includes all other liabilities not assigned to Short-Term Debt or Accounts Payable.

30. Net Fixed Assets: Net Fixed Assets are the assets of a company that are of a relatively permanent nature and are not intended for resale, such as property, plants, and equipment.

http://www.humanresources.hrvinet.com/sample-kpi/

Balanced Scorecard

Documents

strategic management

strategic development

balanced scorecards

strategic prioritiesbuilding

set of strategic objectives

risk management

strategy mapstep

performance measuresstep