Budgetary Control

Budgetary Budgetary ControlControl

Concept of BudgetConcept of BudgetBudget refers to a plan relating to a Budget refers to a plan relating to a

definite future period of time definite future period of time expressed in monetary and/or expressed in monetary and/or quantitative terms. quantitative terms.

In relation to business, a budget is a In relation to business, a budget is a formal expression of the expected formal expression of the expected incomes and expenditures for a incomes and expenditures for a definite future period. definite future period.

Characteristics of BudgetCharacteristics of Budget* A budget is primarily a planning device but * A budget is primarily a planning device but

it also serves as a basis for performance it also serves as a basis for performance evaluation and control.evaluation and control.

A budget is prepared either in money or in A budget is prepared either in money or in quantitative terms or in both.quantitative terms or in both.

A budget is prepared for a definite future A budget is prepared for a definite future period.period.

Purpose of a budget is to implement the Purpose of a budget is to implement the policies formulated by management for policies formulated by management for attaining the given objectives attaining the given objectives

BUDGETINGBUDGETING – The act and entire process of – The act and entire process of preparing budget is called budgeting. preparing budget is called budgeting.

BUDGETARY CONTROL- BUDGETARY CONTROL- it is a system of it is a system of controlling costs through preparation of controlling costs through preparation of budget, which includes the preparation of budget, which includes the preparation of budgets, coordinating its departments and budgets, coordinating its departments and establishing responsibility, comparing actual establishing responsibility, comparing actual performance with the budgeted and the performance with the budgeted and the acting upon results to achieve maximum acting upon results to achieve maximum profitability.profitability.

Process of Budgetary controlProcess of Budgetary control

Establishing budgets of each function, Establishing budgets of each function, departments of the organization.departments of the organization.

Comparison of actual performance with the Comparison of actual performance with the budgeted figures in a continuous basis.budgeted figures in a continuous basis.

Analysis of variance that is, comparison of Analysis of variance that is, comparison of actual performance with the budgeted actual performance with the budgeted performance to know the results there of.performance to know the results there of.

Taking suitable remedial where necessary.Taking suitable remedial where necessary. Revisions of budget time to time in view of Revisions of budget time to time in view of

changes in conditions.changes in conditions.

Essential of effective BudgetingEssential of effective Budgeting

Support of top managementSupport of top management Participation by responsible executivesParticipation by responsible executives Reasonable goalsReasonable goals Clearly defined responsibility centreClearly defined responsibility centre Continuous budget educationContinuous budget education Adequate accounting systemsAdequate accounting systems Maximum profitsMaximum profits costs of the systemcosts of the system

Advantages of Budgetary ControlAdvantages of Budgetary Control

Budgeting compels managers to think Budgeting compels managers to think ahead – to anticipate and prepare for ahead – to anticipate and prepare for changing conditions.changing conditions.

Budgeting co – ordinates the activities of Budgeting co – ordinates the activities of various departments and functions of the various departments and functions of the business.business.

It increases production efficiency, It increases production efficiency, eliminates waste and controls the costs.eliminates waste and controls the costs.

It pinpoints efficiency or lack of it.It pinpoints efficiency or lack of it.

Budgetary control aims at maximization of Budgetary control aims at maximization of profits through careful planning and control.profits through careful planning and control.

It provides a yardstick against which actual It provides a yardstick against which actual results can be compared.results can be compared.

It ensures that working capital is available It ensures that working capital is available for the efficient operation of the business.for the efficient operation of the business.

It directs capital expenditure in the most It directs capital expenditure in the most profitable directions.profitable directions.

It instills into all levels of management a It instills into all levels of management a timely, careful and adequate consideration timely, careful and adequate consideration of all factors before reaching important of all factors before reaching important decisions.decisions.

Budgeting also aids in obtaining bank Budgeting also aids in obtaining bank credit.credit.

A budgetary control system assists in A budgetary control system assists in delegation of authority and assignment of delegation of authority and assignment of responsibility.responsibility.

Budgeting creates cost consciousnessBudgeting creates cost consciousness

Limitations of Budgetary ControlLimitations of Budgetary Control

Budget plan is based on estimates. Budget plan is based on estimates. Danger of rigidity..Danger of rigidity..Opposition from staff. Opposition from staff. Expensive technique. Expensive technique.

Classification of budgets Classification of budgets

Classification on the basis of Function Classification on the basis of Function and Scopeand Scope

Functional Budget, (ii) Functional Budget, (ii) Master BudgetMaster Budget

Classification on the basis of flexibilityClassification on the basis of flexibility Fixed Budget, Fixed Budget, (ii) (ii) Flexible BudgetFlexible Budget

Functional Budget Functional Budget

It is the one, which relates to particular functions It is the one, which relates to particular functions of the business or organization. The types of of the business or organization. The types of functional budgets are functional budgets are

Sales budgetSales budget Production budgetProduction budget Raw materials budgetRaw materials budget Labour budget etcLabour budget etc Cash budget Cash budget Capital expenditure budgetCapital expenditure budget Purchase budgetPurchase budget

Master Budget Master Budget Master or final budget is a summary budget Master or final budget is a summary budget

which incorporates all functional budgets in a which incorporates all functional budgets in a capsule form. It sets out the plan of operations capsule form. It sets out the plan of operations for all departments in considerable detail for the for all departments in considerable detail for the budget period. budget period.

Master budget require the approval of the Master budget require the approval of the Budget Committee before it is put into operation. Budget Committee before it is put into operation. It may happen, sometimes, that a number of It may happen, sometimes, that a number of master budget have to be prepared before the master budget have to be prepared before the final one is agreed upon. The budget generally final one is agreed upon. The budget generally contains details regarding sales (net), production contains details regarding sales (net), production costs, cash position, and key account balances costs, cash position, and key account balances (e.g. debtors, fixed assets, bills payable, etc). It (e.g. debtors, fixed assets, bills payable, etc). It also shows the gross and net profits, and the also shows the gross and net profits, and the important accounting ratios important accounting ratios

Fixed BudgetsFixed BudgetsA fixed budget is designed to remain A fixed budget is designed to remain

unchanged irrespective of the level of unchanged irrespective of the level of activity. activity.

This budget is prepared on the basis of a This budget is prepared on the basis of a standard of fixed level of activity. standard of fixed level of activity.

Since the budget does not change with the Since the budget does not change with the change of level of activity, it becomes an change of level of activity, it becomes an unrealistic yardstick in case the level of unrealistic yardstick in case the level of activity (volume of production or sales) activity (volume of production or sales) actually attained does not conform to the one actually attained does not conform to the one assumed for budgeting purposes.assumed for budgeting purposes.

Fixed BudgetsFixed Budgets The management will not be in a position to assess The management will not be in a position to assess

the performance of different heads on the basis of the performance of different heads on the basis of budgets prepared by them, because they can serve budgets prepared by them, because they can serve as yardsticks only when the actual level of activity as yardsticks only when the actual level of activity corresponds to the budgeted level of activity. corresponds to the budgeted level of activity.

On account of the limitation of fixed budget and its On account of the limitation of fixed budget and its inability to provide for automatic adjustments when inability to provide for automatic adjustments when the volume changes, firms whose sales and the volume changes, firms whose sales and production cannot be accurately estimated have production cannot be accurately estimated have

given up the practice of fixed budgetgiven up the practice of fixed budget..

Flexible BudgetsFlexible Budgets It is designed to change in accordance with It is designed to change in accordance with

the level of activity attained. Thus, when a the level of activity attained. Thus, when a budget is prepared in such a manner that budget is prepared in such a manner that the budgeted cost for any level of activity is the budgeted cost for any level of activity is variable, it is termed as flexible budget. variable, it is termed as flexible budget.

Such a budget is prepared after considering Such a budget is prepared after considering the fixed and variable elements of cost and the fixed and variable elements of cost and the changes that may be expected for each the changes that may be expected for each item at various levels of operations. item at various levels of operations.

Zero Base Budgeting Zero Base Budgeting It is an alternative of traditional budgeting. It is an alternative of traditional budgeting.

The traditional budgeting is based on The traditional budgeting is based on incremental and previous year figure use to incremental and previous year figure use to take into consideration. take into consideration.

But in Zero Base Budgeting figures are But in Zero Base Budgeting figures are developed with zero as the base which developed with zero as the base which means a budget will be prepared as if it is means a budget will be prepared as if it is being prepared as a new for the first time.being prepared as a new for the first time.

It is a method of budgeting where all It is a method of budgeting where all activities are revalued each time a budget is activities are revalued each time a budget is set. set.

Main Features of Zero Base Budgeting Main Features of Zero Base Budgeting All budget items, both old and newly proposed, All budget items, both old and newly proposed,

are considered totally afresh.are considered totally afresh. Amount to be spent on each budget item is to be Amount to be spent on each budget item is to be

totally justified.totally justified. A detailed cost benefit analysis of each budget A detailed cost benefit analysis of each budget

programme is undertaken and each programme programme is undertaken and each programme has to compete for scarce resources.has to compete for scarce resources.

Departmental objectives are linked to corporate Departmental objectives are linked to corporate goals. goals.

The main stress in not on ‘how much’ a The main stress in not on ‘how much’ a department will spend but on ‘why’ it needs to department will spend but on ‘why’ it needs to spend.spend.

AdvantagesAdvantages In ZBB, all activities included in the In ZBB, all activities included in the

budget are justified on cost benefit budget are justified on cost benefit considerations, which promote more considerations, which promote more effective allocation of resources.effective allocation of resources.

ZBB discards the attitude of accepting ZBB discards the attitude of accepting the current position.the current position.

In the course of ZBB process, inefficient In the course of ZBB process, inefficient and loss making operations are identified and loss making operations are identified and may be removed.and may be removed.

It adds psychological push to employees It adds psychological push to employees to avoid wasteful expenditure.to avoid wasteful expenditure.

CONTINUED…..CONTINUED….. It is an educational process and can It is an educational process and can

promote a management team of talented promote a management team of talented and skillful people who tend to promptly and skillful people who tend to promptly respond to changes in the business respond to changes in the business environments.environments.

Cost behaviour patterns are more closely Cost behaviour patterns are more closely examined.examined.

Deliberately inflated budget requests get Deliberately inflated budget requests get automatically rejected in the ZBB process.automatically rejected in the ZBB process.

DisadvantageDisadvantage ZBB leads to an enormous increase in ZBB leads to an enormous increase in

paper work and results in high cost of paper work and results in high cost of preparing budgets every year.preparing budgets every year.

Managers may oppose new ideas and Managers may oppose new ideas and changes. They may feel threatened by changes. They may feel threatened by ZBB because all expenditures are ZBB because all expenditures are questioned and need to be justified.questioned and need to be justified.

In ZBB, there is danger of emphasizing In ZBB, there is danger of emphasizing short-term gains at he expense of long-short-term gains at he expense of long-term benefits.term benefits.

It has a tendency to regard any activity not It has a tendency to regard any activity not foreseen and sanctioned in the most recent ZBB foreseen and sanctioned in the most recent ZBB as illegitimate.as illegitimate.

For introducing ZBB managers need to be given For introducing ZBB managers need to be given proper training and education regarding this new proper training and education regarding this new concept, its pros and cons and implementation.concept, its pros and cons and implementation.

It may not always be easy to properly rank It may not always be easy to properly rank decision packages and this may give rise to decision packages and this may give rise to conflictsconflicts

RESPONSIBILITY RESPONSIBILITY ACCOUNTINGACCOUNTING

INTRODUCTION INTRODUCTION

Responsibility accounting is the Responsibility accounting is the accounting system of control through accounting system of control through which the responsibilities are which the responsibilities are assigned towards the control of costs. assigned towards the control of costs. It is an accounting system to monitor It is an accounting system to monitor the performance, the individuals in the the performance, the individuals in the respective departments should be respective departments should be given adequate authority to track them given adequate authority to track them then and there. then and there.

This system does make the individuals This system does make the individuals personally responsible only at the moment personally responsible only at the moment of registering the deviations between the of registering the deviations between the actual performance and predetermined actual performance and predetermined standards. The entire system of standards. The entire system of accounting postulates the responsibility accounting postulates the responsibility for the control of costs which only rests for the control of costs which only rests upon the men not with the system .upon the men not with the system .

DEFINITIONSDEFINITIONS

““Responsibility accounting is a system of Responsibility accounting is a system of accounting that recognizes various accounting that recognizes various responsibility centres throughout the responsibility centres throughout the organization and reflects the plans and organization and reflects the plans and actions of each of these centres by actions of each of these centres by assigning particular revenues and costs to assigning particular revenues and costs to the person having the pertinent the person having the pertinent responsibility”.responsibility”.

““Responsibility accounting is a method of Responsibility accounting is a method of accounting in which costs are identified accounting in which costs are identified with persons assumed to be capable of with persons assumed to be capable of controlling them, rather than with products controlling them, rather than with products or functions”.or functions”.

CLASSIFICATION OF CLASSIFICATION OF RESPONSIBILITY CERTRESRESPONSIBILITY CERTRES

Expense CentreExpense Centre Profit Centre and Profit Centre and Investment CentreInvestment Centre

Expense CentreExpense Centre

The responsibility centre which incurs only The responsibility centre which incurs only expenses, and measures them, is know as expenses, and measures them, is know as expenses centre. The expense centres of expenses centre. The expense centres of the organization are mostly the service the organization are mostly the service centres which only usually incur centres which only usually incur expenses.expenses.

The contribution of service department The contribution of service department and office & administration and office & administration department to the company cannot be department to the company cannot be denominated in monetary terms, but denominated in monetary terms, but instead in terms of quality of services instead in terms of quality of services to assist the entire organization.to assist the entire organization.

The output of the sales/production The output of the sales/production departments are denominated in departments are denominated in monetary terms unlike others.monetary terms unlike others.

Profit CentreProfit Centre The responsibility centre which is The responsibility centre which is

measured in terms of both the expenses measured in terms of both the expenses incurred as well as revenue earned is incurred as well as revenue earned is known as profit centre . The resultant of known as profit centre . The resultant of a profit centre is revenue realization, a profit centre is revenue realization, which is made either through the internal which is made either through the internal sales or to the external consumers . The sales or to the external consumers . The revenue can be realized either through revenue can be realized either through the external sale to outsiders or through the external sale to outsiders or through the internal consumption , which is an the internal consumption , which is an outcome of internal transfer from one outcome of internal transfer from one department to another department ; if department to another department ; if such transfer is at profit .such transfer is at profit .

For Example – the most ideal illustration is For Example – the most ideal illustration is the industry with process, which transfers the industry with process, which transfers the output from one process to another the output from one process to another with profit margin by considering the sale with profit margin by considering the sale price.price.

Investment CentreInvestment Centre

Is the responsibility centre at which the Is the responsibility centre at which the manager is responsible for the effective utility manager is responsible for the effective utility assets in order to earn the best rate of return assets in order to earn the best rate of return out of the investments or assets employed . out of the investments or assets employed . The exact volume of assets employed cannot The exact volume of assets employed cannot be easily assessed for single department be easily assessed for single department responsibility centre. The difficulty in the responsibility centre. The difficulty in the assessment on the volume of assets is only assessment on the volume of assets is only there to the utility of the assets, which is not there to the utility of the assets, which is not only in one responsibility centre but also in only in one responsibility centre but also in more than one .more than one .

Process of Responsibility Process of Responsibility Accounting SystemAccounting System

Identifying different responsibility centre Identifying different responsibility centre and defining the various responsibility and defining the various responsibility managermanager

Setting up of TargetsSetting up of Targets

The second step in the process of The second step in the process of establishing the responsibility accounting establishing the responsibility accounting system is to setting the targets of the system is to setting the targets of the responsibility centre only through the responsibility centre only through the advisory role of responsibility manager.advisory role of responsibility manager.

Evaluating of PerformanceEvaluating of Performance

The third step involved in the The third step involved in the establishment of responsibility accounting establishment of responsibility accounting is the comparison the performance with is the comparison the performance with the predetermined standards. If any the predetermined standards. If any deviation occurs between above deviation occurs between above mentioned, the observed/identified mentioned, the observed/identified deviations will be reported to the top level deviations will be reported to the top level management .management .

Correction of Deviated Correction of Deviated Course of ActionCourse of Action

deviated course of action is corrected deviated course of action is corrected through the directions from the top level through the directions from the top level management to the responsibility management to the responsibility manager, to maintain the uninterrupted manager, to maintain the uninterrupted flow of work in future. The above flow of work in future. The above enlisted steps are not only involved in enlisted steps are not only involved in the process of assigning the the process of assigning the responsibilities, but also in enhancing responsibilities, but also in enhancing the level of performance through the the level of performance through the controlling of costs .controlling of costs .

Advantages of Responsibility Advantages of Responsibility AccountingAccounting

Responsibility accounting is used as a Responsibility accounting is used as a monitoring and controlling device to monitoring and controlling device to achieve the targets and objectives of the achieve the targets and objectives of the organization .organization .

Responsibilities are Assigned Responsibilities are Assigned It is an elevator of performance It is an elevator of performance Delegation of ControlDelegation of ControlPlanning is FacilitatedPlanning is Facilitated

Balanced ScorecardBalanced Scorecard

• The Organization will become more “strategically focused” over the next ten years given the recent policy directive issued by BSP (Budget & Strategic Planning).

• People at all levels have relied heavily on tactical performance measurements, such as number of maps submitted, number of land structures in flow, and % of supply vendor contracts in place.

Why the Balanced Scorecard?Why the Balanced Scorecard?

Need more Need more balancedbalanced approach to approach to looking at performance, both tactical looking at performance, both tactical and strategic. and strategic.

Only 5% of a workforce tends to Only 5% of a workforce tends to understand their company’s strategy.understand their company’s strategy.

86% of executive teams spend less 86% of executive teams spend less than one hour per month discussing than one hour per month discussing strategy. strategy.

• The Organization’s Information Resource Planning System (IRPS):

- Enterprise wide system for how we will evaluate success – division read outs, data turnarounds, global partnerships, etc.

- Must be integrated into all agency components (such as region and global outlet offices)

- Designed around the Balanced Scorecard framework

• The Balanced Scorecard will be the strategic view of performance for the agency, balancing out our current tactical view of performance which is already in place.

A Major Driver is . . . A Major Driver is . . .

Definition of Balanced Definition of Balanced ScorecardScorecard

The Balanced Scorecard is a The Balanced Scorecard is a tool that tool that translates an organization's mission and translates an organization's mission and strategy into a comprehensive set of strategy into a comprehensive set of performance measures that provides the performance measures that provides the framework for a strategic measurement and framework for a strategic measurement and management system. management system. The Balanced The Balanced Scorecard is an approach for driving Scorecard is an approach for driving organizational improvement toward pre-organizational improvement toward pre-selected goals which keeps track of progress selected goals which keeps track of progress through carefully selected measures. through carefully selected measures.

The Balanced Scorecard is also an The Balanced Scorecard is also an integrated management system integrated management system consisting of three components: consisting of three components:

1) strategic management system, 1) strategic management system, 2) communication tool, and 2) communication tool, and 3) measurement system. 3) measurement system.

It results in a carefully selected set of It results in a carefully selected set of measures derived from and linked to an measures derived from and linked to an organization’s core strategies. The organization’s core strategies. The measures selected for the scorecard measures selected for the scorecard represent a tool for leaders to use in represent a tool for leaders to use in communicating to employees and communicating to employees and external stakeholders the outcomes external stakeholders the outcomes and performance drivers by which the and performance drivers by which the organization will achieve its mission organization will achieve its mission and strategic objectives. and strategic objectives.

Companies are using the scorecard to:Companies are using the scorecard to: clarify and update strategy;clarify and update strategy; communicate strategy throughout the communicate strategy throughout the

company;company; align unit and individual goals with strategy;align unit and individual goals with strategy; link strategic objectives to long term targets link strategic objectives to long term targets

and annual budgets;and annual budgets; identify and align strategic initiatives; and toidentify and align strategic initiatives; and to conduct periodic performance reviews to conduct periodic performance reviews to

learn about and improve strategy.learn about and improve strategy.

Traditional PerspectivesTraditional Perspectives

There are a number of “balances” in the There are a number of “balances” in the BSC, among which are the balance or BSC, among which are the balance or equilibrium between four historical domains equilibrium between four historical domains or perspectives considered to be mutually or perspectives considered to be mutually linked in terms of strategy and performance:linked in terms of strategy and performance:

1. Learning and Growth Perspective 1. Learning and Growth Perspective 2. Internal Process Perspective2. Internal Process Perspective 3. Customer Perspective3. Customer Perspective 4. Financial Perspectives4. Financial Perspectives

Paul Niven’s analogy of the Balanced Paul Niven’s analogy of the Balanced Scorecard is that of a tree The Learning Scorecard is that of a tree The Learning and Growth perspective are the roots, the and Growth perspective are the roots, the trunk is the Internal Process perspective, trunk is the Internal Process perspective, Customers are the branches, and the Customers are the branches, and the leaves are the Financial perspective. leaves are the Financial perspective. Each perspective is interdependent on Each perspective is interdependent on those below as well as those above. It is a those below as well as those above. It is a continuous cycle of renewal and growth. continuous cycle of renewal and growth.

Leaves (finances) fall to fertilize the Leaves (finances) fall to fertilize the ground and root system, which stimulates ground and root system, which stimulates growth throughout the organization. In this growth throughout the organization. In this analogy, learning and growth is the analogy, learning and growth is the foundation on which all other perspectives foundation on which all other perspectives are built are built

For example, if a hospital assesses patient For example, if a hospital assesses patient satisfaction and discovers patients aren’t satisfaction and discovers patients aren’t satisfied (Customer Perspective), one of the satisfied (Customer Perspective), one of the strategies might be the implementation of strategies might be the implementation of employee training in the area of customer employee training in the area of customer service (Learning & Growth Perspective). service (Learning & Growth Perspective). Improved customer service through a Improved customer service through a reduction of wait time in the emergency room reduction of wait time in the emergency room (Internal Process Perspective) can ultimately (Internal Process Perspective) can ultimately improve utilization (Financial Perspective). improve utilization (Financial Perspective). There are definite cause and effects between There are definite cause and effects between and among each of the four perspectives. and among each of the four perspectives. The key is to identify the right strategies.The key is to identify the right strategies.

BalancesBalances One of the reasons the Balanced Scorecard One of the reasons the Balanced Scorecard

has been so successful is that it is a has been so successful is that it is a balanced approach. This balance includes:balanced approach. This balance includes:

1.Balance between financial and non-1.Balance between financial and non-financial indicators of successfinancial indicators of success

2.Balance between internal and external 2.Balance between internal and external constituents of the organizationconstituents of the organization

3.Balance between lag and lead indicators of 3.Balance between lag and lead indicators of performanceperformance

Internal constituents might include employees Internal constituents might include employees whereas external constituents might include whereas external constituents might include physician groups or insurers. physician groups or insurers.

Lag indicators generally represent past Lag indicators generally represent past performance and might include customer performance and might include customer satisfaction or revenue. Although these measures satisfaction or revenue. Although these measures are objective and accessible, they lack any are objective and accessible, they lack any predictive power. predictive power.

Lead indicators are the performance drivers that Lead indicators are the performance drivers that lead to the achievement of lag indicators and lead to the achievement of lag indicators and often include the measurement of processes and often include the measurement of processes and activities. For example, ER wait time might activities. For example, ER wait time might represent a leading indicator of patient represent a leading indicator of patient satisfaction. A Balanced Scorecard should satisfaction. A Balanced Scorecard should contain a variety of different measures.contain a variety of different measures.

An approach to performance measurement that also focuses on what managers are An approach to performance measurement that also focuses on what managers are doing today to create future shareholder value. A balanced scorecard is a set of doing today to create future shareholder value. A balanced scorecard is a set of performance measures constructed for four dimensions of performance. The performance measures constructed for four dimensions of performance. The dimensions are financial, customer, internal processes, and learning and growth. dimensions are financial, customer, internal processes, and learning and growth. Having financial measures is critical even if they are backward looking. After all, they Having financial measures is critical even if they are backward looking. After all, they have a great effect on the evaluation of the company by shareholders and creditors. have a great effect on the evaluation of the company by shareholders and creditors. Customer measures examine the company's success in meeting customer Customer measures examine the company's success in meeting customer expectations. Internal process measures examine the company's success in expectations. Internal process measures examine the company's success in improving critical business processes. And learning and growth measures examine improving critical business processes. And learning and growth measures examine the company's success in improving its ability to adapt, innovate, and grow. The the company's success in improving its ability to adapt, innovate, and grow. The customer, internal processes, and learning and growth measures are generally customer, internal processes, and learning and growth measures are generally thought to be predictive of thought to be predictive of futurefuture success (i.e., they are not backward looking). After success (i.e., they are not backward looking). After reviewing these measures, note how "balance" is achieved: (1) performance is reviewing these measures, note how "balance" is achieved: (1) performance is assessed across a assessed across a balanced set of dimensionsbalanced set of dimensions (financial, customer, internal (financial, customer, internal processes, and innovation); (2) processes, and innovation); (2) quantitativequantitative measures (e.g., number of defects) are measures (e.g., number of defects) are balanced with balanced with qualitativequalitative measures (e.g., ratings of customer satisfaction); and (3) measures (e.g., ratings of customer satisfaction); and (3) there is a balance of there is a balance of backward-lookingbackward-looking measures (e.g., financial measures like measures (e.g., financial measures like growth in sales) and growth in sales) and forward-lookingforward-looking measures (e.g., number of new patents as an measures (e.g., number of new patents as an innovation measure).innovation measure).

Government Performance Government Performance Results ActResults Act

Required to develop long-term Strategic Plans ("SP")

Specify general Goals and Objectives

Develop Annual Performance Plans ("APP")

Specify measurable performance goals

Annual Performance Report ("APR")

Demonstrate actual results

APP goals should show the expected progress toward meeting the long-term goals of the SP

Introduced in 1992, by Robert Kaplan and David Introduced in 1992, by Robert Kaplan and David Norton, the Balanced Scorecard is the most Norton, the Balanced Scorecard is the most commonly used framework for ensuring that commonly used framework for ensuring that agencies execute their strategies. Today, about agencies execute their strategies. Today, about 70% of the Fortune 1,000 companies utilize the 70% of the Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance.Balanced Scorecard to help manage performance.

Balanced Scorecards are used as the roadmap for Balanced Scorecards are used as the roadmap for creating the “Strategic Management System” or creating the “Strategic Management System” or our IRPS. And this will drive overall our IRPS. And this will drive overall organizational performance for our entire agency! organizational performance for our entire agency!

Where it started . . .Where it started . . .

Some Basic PrinciplesSome Basic Principles

Quantifies the Agency Strategy in measurable termsQuantifies the Agency Strategy in measurable terms Strategy is summarized on a Strategy Map over four Strategy is summarized on a Strategy Map over four

views of performance (perspectives).views of performance (perspectives). Must capture a Must capture a cause-effect relationshipcause-effect relationship between between

strategic objectives over the four perspectives on the strategic objectives over the four perspectives on the Strategy Map.Strategy Map.

Critical Components include:Critical Components include:

- Measurements- Measurements

- Targets- Targets

- Initiatives- Initiatives Everything must be Everything must be linkedlinked: Goals to Objectives, : Goals to Objectives,

Objectives to Measurements, Measurements to Targets.Objectives to Measurements, Measurements to Targets.

Four Views of PerformanceFour Views of Performance

Strategy can be described Strategy can be described as a series of cause and as a series of cause and effect relationships.effect relationships.

Provides a “line of sight” Provides a “line of sight” from strategic to operational from strategic to operational activityactivity working on the “right” things.working on the “right” things.

“If we succeed, how will we look to our stakeholders?”

Stakeholders

Strategic Objectives

“To satisfy our customers, at which processes must we excel?

Internal Processes

"To execute our processes, how must our organization learn and

improve?"

Learning & Growth

“In order to succeed, what investments in people and

infrastructure must we make?”

Agency Investments

Strategy

AgencyAgency

DepartmentDepartment

Team/IndividualTeam/Individual

Measures Objectives

Complete Framework for IRPS

The Importance of AlignmentThe Importance of Alignment

Alignment all the Way Through Alignment all the Way Through

Improved "Cause and Effect" Knowledge

Innovation

Business ProcessesImproved Environmental Assessment Reports

ManagementJustified Initiatives to Improve Water Quality

Investments Available to be Allocated to Other Critical Areas

Environmental HealthImproved Water QualityRelationship

ManagementEnhanced Public Confidence

Increased Investment Accountability

Financial ManagementDecreased Litigation Costs

Resource Investment

Goal: Improve environmental health

Initiative: Data MiningPerformance Gap: Less than Organization watershed water quality

In order to be successful, the In order to be successful, the Agency’s IRPS should . . .Agency’s IRPS should . . .

Be comprised of a Be comprised of a balancedbalanced set of a limited set of a limited vital fewvital few measures;measures;

Produce Produce timelytimely and and usefuluseful reports at a reasonable cost; reports at a reasonable cost;

Display and make readily available information that is Display and make readily available information that is sharedshared, , understoodunderstood, and , and usedused by the Agency; and by the Agency; and

Supports the Supports the organization’s valuesorganization’s values and the relationship and the relationship the organization has with customers, suppliers, and the organization has with customers, suppliers, and stakeholders.stakeholders.

Get down to a set of quantifiable strategic Get down to a set of quantifiable strategic objectives:objectives:

Too vague Too vague

More preciseMore precise

Make sure your objectives have a direct Make sure your objectives have a direct relationship to your goals and your goals have a relationship to your goals and your goals have a direct relationship to your mission and values. direct relationship to your mission and values.

Before we can map your Before we can map your strategy . . .strategy . . .

Improve Customer Service

Reduce average customer wait times by 30% by year end

Thank UThank U