Balanced Scorecard management system arouses keen interest of top managers of various companies.  However, often those who start implementing BSC fail because they forget about the first and the most important step which is working out of a company strategy.  One should understand that BSC does not substitute strategy but only serves as implementation tool.  That’s why it is imperative to identify company strategy in detail and only then proceed to its formalization with the help of BSC and creation of implementation/control mechanisms.

This article focuses on the work which needs to be done before creation and implementation of Balanced Scorecard.  This serves as a future key success factor for any project.

What is strategy development?

Strategy is a many-sided notion.  Often strategy implies action plan, business concept, conduct principles.  Creators of Balanced Scorecard David Norton and Robert Kaplan defined a strategy as a set of theories on causes and consequences.  This definition makes it possible to present a strategy in the form of a map on which strategic objectives at different levels are linked with cause and effect ties.  What can be more understood and comprehensive than the visual are representation?  Such an approach encourages the strategy to come down from the academic level and makes it a real working tool for ordinary managers.  However, it is not easy to make such a transformation and turn the strategy into a comprehensive strategy map.  Before designing such a map you need to formulate the concept of the strategy.

There are four basic elements of a strategy:

• Strategic benchmarks (mission, values, vision) which answer questions like “Why do we run this business?” or “What are our goals?”
• Strategic positioning (market and customer concept) answers questions like “What needs to be done in the market?”
• Organizational concept which implies necessary changes in the company
• Basic strategic development direction identifies ways and methods to implement goals

So, if company management has answers to all the questions implied by these strategy elements it is possible to say that such a company has defined its strategy.  In case there are no answers, then all those complex plans and analytical materials will never help since such a company has no strategy.

What is your strategic problem?

This is the key question to be answered before development of a strategy.  Problem is an existing or potential obstacle for company development.  Very often top managers say: “We have got no problems!” This means that they have not yet faced problems.  Smart managers solve problems before they break out in the form of sales decrease, revenue sinking and other catastrophes for any business.  These are strategic problems.  They have not come yet, but there are certain warnings for managers.  It is possible to analyze these signals and understand what changes must be introduced to get company prepared for problems.

Hypothetical case study

Let’s analyze development of a strategy in case study of a general contract building company “X” which offers services of general contractor for projects priced between $0,5-50 million.  On average, the company simultaneously implements 10-12 projects.  The annual amount of work completed by the company is about $90 million.  The company personnel counts 200 employees.  Company “X” is well known in the construction market of its region; it is successfully developing and constantly participating in tenders.

Company owners are worried about lack of stability and pauses between projects.  To avoid idleness the company is often forced to take unprofitable projects and lower tender bids.

Usually, general contractor gets 15% from total project cost (in case of profitable projects).  In fact this figure goes down to 10% which is not suitable for company owners.  They want higher profitability and stability of results.

Managers (who are at the same owners) of the company directly participate in the operational management.  They are not happy with this fact.  As soon as their business reaches certain stability level they want to shift away from management process.

Interests and key problems are identified.  However, it is difficult to find solutions.  This is quite a typical and even normal situation.  In order to formulate a strategy it is imperative to transfer from visible problems to real ones.

Problem analysis, as well as analysis of internal and external environment made it possible to conclude the following:

1. The market is overwhelmed by price competition.  Consequently there are opportunities for differentiation.
2. There are “marketing complex” problems (see figure below)
3. Suitable interest margin is offered in the projects with foreign contractors or in huge construction projects.  However, such projects are often taken by foreign or huge national construction companies.
4. Quantitative growth is not attractive to founders of the company.  They want an effective midsize company.
5. There are many spontaneous expenses in the projects caused, among others, by quality problems.
6. Key causes of quality problems are lack of experienced managers, lack of attention to customers, low quality work of sub-contractors.
7. Sales related problems:

• The company is participating a large number of tenders (usually 24 in a quarter) while contracts are concluded only with 2;
• The company receives most tender invitations not from the customers but through monitoring of construction market;
• At the initial stages of work with customers a qualitative selection of contacts (identifying non-promising contacts) is not performed which results in overloading of sales department employees and project directors.  This also leads to lack of attention to really promising customers;
• Lack of interest of project directors in sales (when they have an opportunity to do construction management work they do so), and their low qualification as salespeople.
• Poor teamwork, misunderstanding between sales department employees and project directors which is evident and understood customers.
• Weak management when participating in tenders makes it impossible to evaluate risks related to customers and their projects and timely reject the project.
• There is no analysis of success and failures in tenders which makes it impossible to improve sales process.  That is why tender wins are quite accidental.

8. The company has no clear positioning in the market, and that’s why it does not differ from dozens of similar construction firms in the eyes of customers.

"Marketing complex" problems

All these problems make it impossible to create a well balanced portfolio of profitable projects, and that’s why a company is forced to work with unqualified customers.

Find an effective solution

Since we have formulated the problem, there certainly should be solution.  For company “X” this solution is correct positioning.

Top managers posed the most important question: “What is the value of general contracting services for the customer?” before answering this question it was necessary to analyze the entire customer base and experience on previously constructed projects.  As a result, the following conclusion was made: the most successful and profitable projects were implemented when the customer was represented by the organization with no experience in construction business but which has clearly defined its business goals and objectives.  Such an organization needs an experienced general contractor that will help implement creative ideas and at the same time minimize risks related to construction.  The answer to the question on service value looked like this: “General contractor provides customers with a controlled risk level for investment project (for a customer without experience in construction but with a comprehensive business idea)”.  That’s why in such a case the key position in idea is risk management in construction project.

Having identified problems and solution principles it is necessary to make the next step and answer the question: “Why do we run this business and what are our goals?” Sure, there can be just one answer for a commercial organization: “Make money!” However, this answer is not enough to develop a strategy.  Every company consists of people and it has strong ties with external environment.  Developing strategic benchmarks is about understanding who we are and where we go.  This is where mission, vision and values can help.

Key positioning idea

Set strategic benchmarks

Mission is a company destination, its role in the society, an ideal to which it strives for.

Company “X” has formulated its mission in the following way: “Our job is provision of general contractor services.  Our priorities are about decreasing investment risks for customers.  We achieve the best combination of quality terms and costs through professional project management and exceptional attention to customer needs.”

Vision is a future picture with the certain timing.  A company should fully identify position in the market, its internal processes an organizational structure, characterize key resources.  Company “X” strategic vision looks like this: “In 5 years the company will enter the top five group of leading construction companies in the region “Y” that are engaged in construction and reconstruction of the largest and most prestigious housing and industrial objects.  The bulk of portfolio would consist of projects priced $50-500 million.  Company success in the market is based on its reputation of the highly professional management capable of controlling risks for complex projects, avoid losses among investors.  The company possesses highly qualified personnel which values traditions of excellence and effective team work. Company “X” will become an active player in the local and national construction market. The company will direct investments in human resources, creative methods and technologies for effective work, establishment of long lasting relationships with customers and subcontractors.”

Identification of key success values sets goals and benchmarks for employees: continuous learning, commitment to excellence, leadership, innovation etc.

Formulate concept of conduct in the market

So, now we have strategic benchmarks.  It is imperative to understand how we will implement goals.  In the first place, one should ask a question: “What needs to be done in the market?” Most specialists suggest using methods and activities different from those used by competitors.

Strategic positioning

In our case this will look in the following way.

Market concept:

• Distinctive feature of company service is professional risk management
• Service cost is above average for the market
• Company works only with target customers
• Establishment of long lasting and mutually profitable relationships with customers is a key priority

Target customers

Develop key organizational principles

Having clarified market policy, it is necessary to look inside the organization and think of the possible changes in the internal environment.  The following questions can help here:

• What strategic business areas does the company cover?
• What business units does the company consist of?
• What is the synergy of different business units and business areas?
• On what principles are relations between corporate center and business units based?
• What are key management principles?

Here are key organizational principles for Company “X”:

• Project director is the “process owner” of relationships with customers throughout the entire implementation of a project and even after it.
• Marketing director is responsible for acquisition of new customers.  His goal is to make customers queue up at the company office door.
• When potential customer is found responsibility is transferred to project director who makes a decision on possible cooperation.  In case of a positive decision sales project starts.
• Project director manages sales process, personally holds all meetings with customers and makes key decisions.  Project director is aided by specialists from sales and marketing departments.
• A after signing of the contract project director personally tracks construction process and informs customer on possible unforseen situations, manages customer expectations and demands.  It is very important to keep balance in relationships with a customer.  Project director should not be under customer’s thumb, but at the same time he should avoid conflicts and timely solve current and possible problems.  Project director should form customer’s correct attitude to what is going on at the construction site.  Often, conflicts are caused not by problems but lack of information and understanding between contractor and customer.
• After completion of construction project director does not lose relationships with the customer, fighting for his loyalty and looking for new contracts.

Identifying directions for strategic changes

Company “X” has formulated directions of the development in such a way:

• From attempts to be helpful for everybody to work with target customers
• From construction management to risk management
• From heroic fight against difficulties to unsurpassed skill

Summary

Having summarized the above said will have a presentation consisting of several slides which, however, will tell us much more about company strategy than endless theoretical works.

So, we have clarified our strategy.  Now it is clear what needs to be changed and what needs to be achieved.  It is possible to formalize strategy by creating Balanced Scorecard.  But let’s summarize key principles that lay down the foundation of strategy development process:

• Teamwork should imply participation of both top management and front line managers who directly contacts customers.
• Collective mind approach.  It is necessary to attract as many special ease in different areas as possible to work out a comprehensive and well balanced strategy.  Such approach is better than expensive market research.
• Using employee creative potential.  Company management should encourage free exchange of ideas, initiatives and analyze any proposals offers from personnel.
• Strategy development process should be well controlled, divided into stages, every participant should have certain tasks.  Creativity and discipline are two complementary elements of such work.
• Focus on a common strategic vision.  The final document with the company strategy should not be the key goal.  Company management should focus on a common strategic vision and methods of its implementation through discussions, brainstorms, exchange of ideas and initiatives.  This is the key value of strategy development process.

Article in the source language

bsc_ideas Articles, BSC implementation, Case Studies

What can be done so that the Balanced Scorecard becomes the main organizational feedback system and it measures the things that allow the company to safely take off, land, fly and navigate through its difficulties and opportunities, regardless of the outside weather conditions?

I am reminded of a story from the beginning of the 20th century where the reality of the plane use has changed with faster engines, higher altitudes and a conversion to the closed rather than open pilot’s seat, but the pilots continued to do the same thing they have been used to doing – relying on the topography to orient themselves. In fact, if they were not sure where they were, they would swoop down to look at the names of the train stations and thus orient themselves. In order to break them off this habit and to get them to rely on their controls, in exasperation the commanding officers literally commanded the soldiers to travel to the various train stations and change up the signage if they heard an airplane approaching. The exercise worked.  The pilots finally got the message, they cannot rely on the signs on the ground to navigate, they have to rely on the controls in the airplane. This mental shift has done more for the development of the aviation than much of the technological change that came before and after that shift.

This has become so fundamental to flying that before a pilot can get a license to fly bigger planes, they have to pass a controls exam and have a number of controls only flight miles. Sometimes the pilots still make mistakes, either because they do not trust their controls or the controls malfunction. Quite a few deadly crashes are attributed to either of these problems. However, we continue to fly relying on controls and work on improving the controls and making them more redundant and this propels aviation forward.

Business world has not made and is not really ready to make a similar leap. No matter how much the speed of business has increased, no matter how much higher our businesses can fly, no matter how closed off the cockpits of our business are from the outside we still orient ourselves by getting down to the land, slowing down, looking out of the window and trying to read the signs. Needless to say, this is no way to move forward.

Historically, the main organizational feedback mechanism has been the income statement (or it’s predictive cousin, the budget). However, this does not work in the long term for a rapidly changing business, since the easiest way to meet the budget is to sacrifice the future in order to do so. It used to work. It worked OK in the environment that is largely static, where not much changes, even such a limited feedback tool was enough. But as competition gets aggressive, as speeds and flexibility increase, we are forced to look at a much broader picture and we fail to do so with the traditional financial only indicators.

In 1992 Norton and Kaplan, in presenting the Balanced Scorecard, formalized the thought that we need to look at multiple voices that came from Total Quality Management model which in turn was influenced from Toyoda, who no doubt was indirectly influenced by Andrew Carnegie’s Wealth of Nations. Yet, 18 years later the adoption of this tool has been sporadic and rarely company-wide.

And the only solution to this, in my mind, is a more streamlined, system that can be implemented much more readily that the traditional Balanced Scorecard. A system in which management is trained and certified. A system that is testable and verifiable, repeatable and replicate-able. A universal system of Business measurement that can be implemented in any kind of a business and used by anyone to provide consistently better feedback than is available by use of the financial statements alone, or relying primarily on intuition.

Just as the airplane can only be flown by a simultaneous attention to gauges that use different systems of measurement (fuel gauge, altimeter, attitude indicator, air speed indicator, magnetic compass, heading indicator, turn indicator, vertical speed indicator, course deviation indicator, radio magnetic indicator) that are fairly standard no matter the airplane, the need for business indicators that provides information in a similar fashion is even more crucial since unlike flying we cannot do without it.

This tool is the Excellence  Matrix (E-M8) which is being developed right now by Futureworks in collaboration  with Bucket Brigade and AKS-Labs. The challenges are many, since in business we do not even have the terminology or universally agreed upon units of measurement that define the variable that we must monitor, but a 100 years ago the airplanes faced the same challenge and they overcame it. Thus, we need to commit to doing the same in the realm of business.

Would you like to be a part of this research or one of the companies that becomes a test bed for these new tools? If so, get in touch with the good folks at Aks-labs or with myself directly and we will figure out what are the opportunities for collaboration.

—

Oleg Tumarkin, Juris Doctor, Master of Business Administration, Certified Six Sigma Black Belt is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with Bucket Brigade and AKS-Labs provides business coaching and Balanced Scorecard implementations.  His life’s passion is the development of a universal business measurement and management system that would cause management in to the realm of a repeatable, replicable, yet humane and flexible science.

oleg_tumarkin Articles, Balanced Scorecard Theory

Nowadays implementation of newest management systems in business processes is very acute and popular.  But the question “what needs to be done?” raised by top managers and answered in specialized literature, special management courses and universities, is followed by the question “how to implement it?” What steps are to be taken to achieve planned objectives?

Theoretical literature fails to give answer on “know how”, i.e on the way to set a company on the new track without harming it.  Well-known professors and lecturers prefer to avoid answering this question, getting away with general and sometimes very general phrases.

Today, Balanced Scorecard System has become especially popular among different organizations and businesses.  This system is based on four key categories of indicators called perspectives:

• Financial
• Customer
• Internal processes
• Learning and growth

The book by Robert Kaplan and David Norton, who are known as creators of BSC, helps systemize isolated attempts to implement different indicators representing cause-effect relationship between operational management and company strategic goals.

This article dwells on implementation of customer related indicators and evaluation of customer relationships.  Perhaps, you have often heard from your boss: “Increase the number of regular and key customers!”, “intensify work with a particular customer group”, “be polite with customers” and so one and so forth.  At a first glance these are standard phrases stressing necessity to reach prosperous future of an organization as soon as possible.  These are just slogans.  But let’s deeper investigate the problem.

Question number one.  In fact, who is a regular customer for an organization?  And who is non-regular?  80% of managers would find it difficult to answer such question.  We can often hear such an answer: “these are those customers who purchase a lot”.  Some managers would say so: “those who regularly purchase a lot.” But in the modern age of information it is not enough.  Every employee in organization can understand these criteria in his or her own way.  It may turn out that that top manager thought about one customer group, the department chairman has his own understanding, and a front line manager has interpreted the situation in an absolutely another way…

Let’s analyze the concept of different customer types.  First of all we can divide customers by the amount and frequency of purchases they make.  There a three basic customer types:

• Potential
• Real
• Regular

Potential customers of those in need of products/services offered by the company, but they have not made a single purchase for the accounting period. “Why accounting period?” –  you might ask.  In fact this is a very important issue since total sales volume is calculated for a certain period.  The right choice of period is imperative.  We recommend one year, although every company adjusts this period according to their strategic goals and operational tasks.  It is possible to use such a formula to identify potential customer:

Potential customer = sales volume per period = 0 or

Potential customer = number of purchases per period = 0

It is very important for the organization to have information about potential clients, save this information to databases because these customers may turn into real customers under certain conditions.

Real customers are those who have made at least one purchase for the accounting period.  Very often managers talking about customers in general mean exactly this category of customers.  The formula will look in such a way:

Real customer = sales volume per period > 0 or

Real customer = number of purchases per period > 0

Real customers are valued since under certain conditions every customer from this category may become a regular customer, and consequently a regular source of income for the company.

Regular customers are those who make regular purchases from organization, and the purchase amount exceeds a certain limit for the accounting period.  Here 2 conditions are linked with a logical operator .AND. It means that regular customers should meet both conditions.

Regular customer = sales volume per period >A . AND. number of purchases per period >B, where

A is equivalent sales volume

B is equivalent number of purchases

This formula contains both sales volumes and their frequency.  Of course, it would be easier to take into account only sales volumes, but it may happen that the first time customer makes a huge single purchase, and it wouldn’t be reasonable to consider him a regular customer.

Now, when managers are aware with the principles of identifying customer types, it is possible to assign them with the task of implementing company strategic goals.  What tasks can be set?  Let’s review the most typical ones.

Task #1

• Filling database with information on potential customers

Sub-tasks

a)      Search for customers who are in a need of products/services offered by the company

b)      Saving information on potential customers in database (creating customer profiles)

c)      Identifying need for products/services expressed in numerical indicators

Implementation criteria for this goal

• Number of potential customers added to the database per manager, department or Financial Accounting Center (FAC)
• Accuracy of entering information in the customer profile

Most organization should also identify customer need for products/services which will make possible to further divide potential customers according to their needs, as well as identify priority potential customers who should enjoy a greater attention from managers.

Task #2

• Increase the number of real customers in the accounting period

It is interesting that the number of real customers may vary if report on customers is regularly completed at a certain time (for example once a month).  If we take one year as the accounting period the diagram will look like this

Identifying number of customers for the accounting period

When the first report was made there were 100 real customers, while the second report counts 105 real customers.  At a first glance the increase counts only 5 customers, but in fact this number equals 15, while 10 customers were lost.  Thus, 100+15-10=105

Implementation criteria for this goal:

• Identifying number of me you real customers per manager, department or FAC for the accounting period
• Identify in the number of lost real customers per manager, department or FAC for the accounting period

It is very important to compare estimated customer need for products/services with actual sales volume for such a customer.  If the figures look very different it is necessary to introduce amendments in the evaluation of customer needs.

Task #3

• Increase the number of regular customers in the accounting period

As already said in description for Task#2, it is necessary to make calculations for the whole accounting period of one or two years.

Implementation criteria for this task

• Identifying number of customers per manager, department or FAC for the accounting period
• Identify in the number of new regular customers per manager, department or FAC for the accounting period

As every regular customer is a regular source of income it is imperative to find out reasons for losing regular customers.  It is even possible to create such a group of customers “lost regular customers” and track any changes in their relations with the company.

It is necessary to understand that all customers in all reports are interrelated.  The logic chain suggests that a customer first becomes a potential one, then real and then regular.  Unfortunately, this chain can work backwards, and a regular customer may turn into real and then potential one (for example, such a customer fails to make purchases for a certain period).

In addition to reports on the number of customers in each category it is highly recommended to introduce indicator representing the number of visits/contacts/calls to a certain target customer group.

Summary

Different customer groups required different attention.  Thus, it is recommended to make regular visits to regular customers at least once a week, for real customers at least two times a month, for potential customers once a month.

In such a way objectives and tasks at all managerial levels become clear and comprehensive.  It is important to identify quantitative indicators to implement strategic goals of the company.

Such a system covers all possible relations between different customer groups and accompany.  Sure, it is possible to make a more complex system.  That one should remember that this will increase expenses related to implementation of indicators system in a company.

bsc_ideas Articles, BSC implementation

Major advantages of BSC and EVA

A great advantage of Balanced Scorecard is the possibility to use it in combination with other performance management systems and individual indicators.  We have already written about Six sigma, Total Quality Management, Lean production and the way these systems can work with Balanced Scorecard.  This article focuses on EVA (economic value added) and Balanced Scorecard.  We will attempt to contrast the two systems to find similarities and differences between them and answer the question whether or not they can be successfully combined.

Economic value added

EVA is an estimate of organization economic profits which is calculated in the following way: net operation profit after taxation minus capital value.  EVA is used to measure efficiency with which organization uses resources.  In other words, economic value added indicator shows difference between return obtained from investments and the cost of resources.  Of course, the higher the EVA, the more efficient resource utilization.  EVA is a registered trade mark by its developer Stern Stewart & Co.

At a first glance, it is not clear how can one compare Balanced Scorecard (which is a system that communicates operational management with strategic goals of the company) with the EVA which is just an individual indicator.  The authors of the EVA went farther in the development of this concept and created the system called EVA based management.

EVA based management is a financial management system which offers a solid basis for decision making to key and secondary personnel, as well as makes it possible to make, monitor and measure adopted decisions in a similar “vain” – adding value to shareholders investments.

Goals of BSC and EVA

The goal of BSC is to direct organization to the right track to reach strategic goals and pursue strategic mission. The goal of EVA based management is adding value to the company.  The differences between the systems are evident.  In case of BSC a strategic goal may be just any goal, while EVA based management pursues a particular goal of adding value to the company.  However, it would be fair to say that very often companies using BSC include the goal of adding value to the company to the set of strategic goals.

Theoretical background

BSC emerged as a result of studies of different methods and tools to evaluate business performance efficiency.  The authors of this concept have found out that it is not enough to use only financial indicators to adequately measure organization.  That’s why BSC concept includes four perspectives: financial, customer, internal processes, learning and growth.

The financial perspective answers the question “How will shareholders measure us in case of success?” Financial results of the most important for any business.

Customer perspective develops that image of the company and the way the company should satisfy customer needs in order to implement strategic goals.  Customer perspective is about marketing and customer relations management which usually sets long-term goals.

Learning and growth perspective answers the question “How should organization develop and learn to reach strategic goals?” It establishes infrastructure which an organization needs to sick your growth and development in the long term perspective.

Balanced Scorecard is based on the following principles:

• Cause and effect relationship
• Into relation of indicators which the company can measure in the end of a certain period and indicators which can be evaluated immediately
• Subordination of all indicators financial results

EVA based management emerged as a result of value based management development.  EVA indicator became a successor of such indicators as ROI (return on investment) and ROCE (return on capital employed).  The following principles lay down the foundation of EVA based management:

• Business owners invest capital to get profits
• The company is founded to get additional profits
• Company personnel aims at increasing shareholders value through motivation system

EVA based management is based on the indicator mathematical formula.  By splitting this formula it is possible to identify objectives and share responsibilities for their implementation.

Implementation results

BSC creators view organization as a strategy-oriented.  Most important things to know about Balanced Scorecard:

• Putting strategy into action.  BSC makes it possible to transfer strategy to the operational level which makes it possible to aim all actions at implementation of strategic goals.
• Links between organization and strategy.  Balanced Scorecard makes it possible to achieve a synergy effect when all departments and business units of a company pursue strategic goals.
• Strategy implementation by all employees.  Balanced Scorecard encourages employees to contribute to implementation of strategic goals through an extensive communication and motivation system.
• Real-time strategic management.  Balanced Scorecard makes it possible to link budget and strategy with the help of information and analytical systems in order to exercise continuous control and conduct strategic education campaigns.
• Mobilization.  Balanced Scorecard creates at perfect motivation for employees at all levels.

Creators of EVA based management have established so-called 4 Ms:

• Measurement.  EVA based management system makes it possible to create evaluation system for the company which can correctly indicate actual profitability.
• Management system.  The system covers a set of managerial decisions, including strategic planning, allocating funds, purchase and sale of actives, goal setting etc.
• Motivation.  A fair compensation and bonus system based on EVA indicator makes it possible to balance interests of managers and shareholders.
• Mindset.  Implementation of management and compensation system based on EVA indicator leads to changes in the corporate culture and organization climate.

Drawbacks

Major drawbacks of Balanced Scorecard:

• BSC can be designed only often are all employees except and understand company strategy
• There is no responsibility for the total result
• This system focuses on managing funds and resources but not financing them

Key drawbacks of EVA based management system:

• Strong ties between bonuses and EVA indicator may lead to making decisions aimed at short term benefits through cost reduction and use of actives with the expired depreciation term
• Scorecard system consists of financial indicators which ignore such long-term success factors as personnel knowledge, information technologies, corporate culture etc.
• EVA based management system works more in the short term perspective.

Conclusion

Analysis showed that these management tools are not mutually exclusive.  They can be used both separately and in combination.  The best effect is achieved through combined usage of EVA and BSC.  EVA indicator may be used as a general strategic goal and a basis of motivation system, as well as a part of financial perspective, while BSC is a major management tool which focuses on implementation of strategic goals and communication between operational in strategic management.

bsc_ideas Articles, Balanced Scorecard Theory

Innovation management is a method to measure and manage all processes related to innovation in the company.  At that, it can be development of innovation in products and services, as well as organizational innovation.  Often, some companies are making mistakes by introducing new ideas as to products and services without introduction of new approaches and business processes.  In other words, employees must have the necessary set of tools and organizational guidelines to complete innovation goals.  There should be also a reliable feedback system between managers, front line employees who communicate directly with customers and engineers/specialists who develop new products/services.

The goal of innovation management is to force company to respond to internal and external opportunities and use innovative ideas, products and services to improve company position in the market, attract new customers, increase sales among existing customers, increase competitive advantage, meet customers’ and shareholders’ objectives etc.

There are two types of innovation processes: pushed and pulled.  Pushed innovation is normally based on existing technology or technologies that have been recently created, while a pulled innovation looks for areas where customers’ needs are unknown, so the solution must be found to satisfy customers’ needs.

Statistics show that ability to change and amend products and conduct in the market is the key success factor in today’s business.  That’s why innovation management is becoming increasingly popular.  Sure, implementation of new ideas is not an easy process.  Top management needs to answer several questions like “where do we find new ideas?”, “how do we select the most promising ideas?”, “how do we implement your ideas?” In order to measure innovation efficiency a detailed balanced scorecard needs to be designed.

According to recent survey by PricewaterhouseCoopers, almost half of top managers among 355 North American private companies attempt to measure innovation with a system of quantitative indicators.  The following criteria are used to measure success of innovative decisions: impact on company revenue increase, customer satisfaction, revenue increase from new products, performance improvement, profitability dynamics.  At the same time, organizations use different approaches to measure their innovative activity, and only few of them use a reliable Balanced Scorecard system which is well integrated in the strategic vision/goals of the company.

As it turned out, innovative groups whose goals can be measured receive a continuous support of the top management as compared to innovative ideas which are impossible to evaluate.  No wonder!  In order to persuade management one needs to demonstrate efficiency of innovative methods and their impact on business success.

Why should innovation be measured?

Indicators, also called innovation metrics, help analyze organization capabilities to adopt innovative decisions, as well as serve as measures of company success in this area.  Although very few companies are now using innovation metrics and their work, there are several obvious reasons supporting use of such metrics:

• Balanced scorecard establishes formalized base (objective numerical figures) managerial decisions.  It is very important especially taking into account that most of innovative projects are quite risky and run in the long term.
• Innovative indicators represent strategic interests of the company, which makes it possible to integrate innovation into a business processes and establish an effective feedback system between those who generate new ideas and managerial team.
• Indicators help allocate and share resources between corporate management system and system of innovative initiatives.  Innovation metrics establishes expectation in regards to innovative potential of the company, and comparison of expected and current indicators helps reveal those innovative projects which funding does not meet established goals.
• Innovation metrics motivates personnel and encourages initiative.  Comprehensive and ambitious goals make employees more creative.

Currently, innovation management as a corporate discipline is widely used in most companies.  One of the reasons is that companies often lack relevant experience to implement BSC and establish innovation indicators.  Today’s corporate practice usually includes such indicators as research and development budget, research and development budget vs. annual sales volume ratio, number of patents received for the accounting, number of initiatives received from organization employees.  Without any doubts, these indicators may be quite helpful but they do not fully evaluate innovating potential of a company, and thus will not be very important in strategic decision making.  For example, huge R&D budget does not necessarily mean emergence of numerous new products and services which will immediately conquer the market and become additional source of income for the company.

What is the price for innovation?

• Outside consultants.  Support and advice from outside consultants will help shape and outline corporate innovative management system, formulate methodology, as well as find and educate a leader in the company who will be in charge of innovation.
• Company personnel.  Perhaps, expenses for company own personnel represent the greatest part of innovation budget.  These are expenses for employees directly managing innovative ideas, payments to employees working extra time (for example, a production manager spends 10% of extra working time as innovative group member).
• Technologies.  These are expenses related to purchase and development of software solutions used to optimize work of innovation management system.
• Other outside resources.  There may be expenses related to purchase of specialized databases, subscription to online and printed bulletins or periodicals.
• Bonuses.  Of course, employees should be financially motivated to generate innovative ideas.  As a rule such expenses are insufficient, but in some cases they may be quite huge, for example if an employee receives percentage from company earnings or savings which became a direct result of using innovative ideas.

Key indicators

• ROII (return on innovation investment) is coefficient of innovation profitability. ROII can be calculated both for successfully implement projects as well as projects which are being prepared to be implemented, given that forecast of revenue growth and cost savings is made.

Financial results from innovation may be:

a)      Revenue received from sales of new product

b)      Increase of revenue you resulted in introduction all the new product to the market compared to planning variable

c)      Decrease of operational cost savings in relation to any service of the company

d)     Revenue obtained from introduction of products to new market segments

• Revenue received from sales of new products as compared to total revenue for the last several years.  This is one of the most popular metrics used by various organizations.
• Changes in the relative market value of the company as compared to relative growth of a target market for the last several years.  This indicator is based on the belief that innovation is a key resource of a company that makes it possible to increase competitive advantage and even be ahead of the market.
• Number of new products, services and businesses which the company has introduced to the market for the last several years.
• Number of innovative ideas which came from employees of the company during a certain period.
• Ratio between total number of innovative ideas and number of implemented innovative ideas.
• Time span between submission of an innovative idea and start of innovative project.  This indicator evaluates feedback and communication system within the company.
• Number of customers considering your company innovative vs.  total number of customers
• Innovation index.  Sometimes, companies designed own innovation index to which they include many of the above mentioned indicators.

Deadliest mistakes in evaluation of innovation

Many organizations consider innovation measurement to be quite a difficult process and develop own complex system of innovation metrics.  However, if company management gets carried away with this process the indicators may become abstract and lose ties with the way the company functions.
Here are five most common mistakes in development of innovation measurement system:

• Too many indicators.  This mistake may be caused by either desire to accomplish much during the short period of time, or reluctance to get read of some of the old indicators which proved to be ineffective.  Inclusion of too many indicators results in enormous time consumption required to collect and analyze information.  Innovation metrics should not conflict with the system of indicators in other perspectives, like financial or customer.
• “Project management” approach to innovation.  Often companies view innovation as project which is managed according to common project management methods.  At that, efficiency evaluation is performed based on traditional financial indicators to project management like NVP or IRR.  However, innovation is not a bunch of separate projects but a continuous process of generating, selecting and developing innovative ideas.
• Innovation indicators are not integrated in the BSC.  It often happens that separate departments develop own innovation indicators and set own innovation goals which, however, may conflict with strategic goals and strategic vision of the company.  In such a case, innovative ideas do not cover the entire company, serving as local projects.
• Focus on cost saving.  Often, innovative ideas are used only to decrease losses but not too study customer needs and satisfy them using innovative methods.  At the same time, statistics show that satisfaction of customers needs using innovative ideas inevitably results in cost savings as well.
• Focus on past events.  Failure to implement goals results in fear to make radical steps.  No management system can eliminate this fear.  That’s why the company needs to make sure that both success and failures of innovation teams should be encouraged.  Of course, such approach works only if personnel is truly committed to innovative ideas.  Mistakes are often used as a valuable experience which makes it possible to avoid such mistakes in future.

Major innovation mistakes

Summary and recommendations

• When selecting innovation indicators use both financial and non-financial/qualitative metrics.  Changes in nonfinancial indicators will make it possible to timely locate problems in innovation management system and take response actions.
• Regularly check actuality of indicators been in use.  The company and the market are developing, and thus some indicators may turn out of date.
• Do not use complex indicators.  Remember that, ideally, Balanced Scorecard System should involve participation of the entire personnel
• Do not use too many indicators.  A dozen of indicators will be enough.
• Use at least one indicator which measures customer relationship

bsc_ideas Articles, BSC implementation

It is not a secret that implementation of Balanced Scorecard is quite a difficult and lengthy process which requires considerable investment of time, money and human recourses. Every minor detail in the BSC dashboard may play an important role. That is why it sometimes happens that Balanced Scorecard only harms companies which have a negative experience of BSC implementation. The reason is the mistakes made at different stages of Balanced Scorecard implementation. Possessing ground knowledge is a must for managers in charge of BSC implementation and maintenance.

In fact, the company management as well as employees need to understand the way BSC works in its 4 perspectives: financial, customer, internal processes, learning and growth. In other words, it should be clear what goals the company has, how it is going to achieve them and how success will be measured. Every of the 4 perspectives covers certain issues and things concerning the company in the external and internal environment. The last perspective in BSC is learning a growth. The last but not the least.

Such sequence has sense. First, the company sets goals in financial perspectives in order to meet requests and objectives of shareholders. On the other hand the company has customers whose needs must be also satisfied. Internal processes define actions and innovations that will make implementation of shareholders’ and customers’ objectives possible. Finally, objectives in learning and growth perspective offer infrastructure that makes it possible to achieve ambitious goals in the three other perspective. It is difficult to say which perspective is the most important. The name of BSC suggests the answer – they are all equal, as the Scorecard is BALANCED.

Learning and growth perspective explained

Objectives in learning and growth perspective are drives that that encourage implementation of goals set in the financial, customer and internal processes objectives. It has been observed that when organizations were measured based on short term financial objectives it was really difficult to perform effective investments that would improve performance of people, organization processes and systems. As a rule, cutbacks on such investment types are the direct way to improve short-term financial goals. As a result, consequences of saving in such investment types are not visible in the short term. But when they eventually come on the surface it is sometimes too late to act.

Sometimes, investment in the research and development are confused with learning and growth objectives. It is OK if the company invests in new equipment and technologies, but it still needs relevant infrastructure and educated personnel to make the new technologies work for the company. Of course, this concept works only in the long term, in order to reach long term financial objectives.

The three key categories in learning and growth perspective:

• Employee capabilities
• Information system capabilities
• Motivation, empowerment and alignment

Employee capabilities. With the emergence of huge businesses and enterprises employees usually had a strict plan which outlined the scope and the nature of work to be done. In other words, employees had to do much of routine work. However, the IT revolution brought in dramatic changes. Now, employees are hired to think for the company, while most of routine work is automated. The front line employees are those people who are close to production and customers at the same time. That is why creative ideas often come from the lowest levels. In the modern business world, maintaining current performance is not enough. Refusal to develop will soon cause company’s death. Thus, these days, creative ideas and minds of employees are used in favor of the company.

Learning and growth evaluation framework

Core employee measurement group (Employee capabilities)

• Employee satisfaction
• Employee retention
• Employee productivity

Most companies have agreed that employee satisfaction is a precondition for overall business success. Statistics shows that most satisfied employees usually have the most satisfied customers. The answers lie in the psychological perspective. If an employee feels that he/she is valued, if there is a positive organization climate, it is reasonable to expect higher performance form such an employee.

Employee satisfaction is especially important in companies that provide customers with services since those employees who directly interact with customers usually receive the lowest compensation. The most common way to measure customer satisfaction is to conduct an annual/monthly survey. They key points in this survey go as follows:

• Involvement in decision making
• Recognition for a job well done
• Access to information which is required to perform tasks well
• Encouragement to be creative and active in the workplace
• General satisfaction with the company

Employees are asked to grade these points of a 1-5 or 1-3 scale. The average figure can be then added to Scorecard and given necessary weight (priority/importance).

Employee retention is another important indicator. As a rule, smart HR managers try to make the best employees stay in the company for as long as possible. Long term investments in personnel are known to be rather effective, and if an employee leaving the company, it (the company) loses part of its intellectual potential. Percentage of most important personnel turnover is a major indicator for employee retention.

Employee productivity is a measure representing impact of innovation, improved skills and knowledge of employee, improved customer satisfaction and internal processes on the company profitability. One of the simplest ways to evaluate employee profitability is to measure such an indicator as revenue per employee which, of course, should be well integrated in the system of other economic measures of BSC.

Information system capabilities

If the company expects employee (especially a front line employee who directly contacts customers) to perform better, it needs to make sure that such an employee is provided with the most accurate, complete and up-to-date information regarding customers, their goals, internal processes and possible consequences of his/her (employee) decisions. Employees should have a quick feedback on the product and services they offer customers. Ideally, this should be an online access to information in order to completely satisfy customers’ needs.

Motivation, empowerment and alignment

Imagine that an employee is well educated and has access to information on products/services. However, if he/she is not motivated enough the organization is unlikely to benefit. Thus, organization climate, employee initiative and motivation are extremely important. Some companies use such indicator as number of suggestions per employee. Of course, this indication should be tracked further to implementation and implementation results. It goes without saying that initiatives are to be encouraged financially, or in any other suitable for personnel ways. It is important that senior management controls how such suggestions are used and provide employees with feedback on this issue. Often, suggestions from front line employees can save thousands of dollars for big companies.

It is imperative that all goals and objectives in different department and business units align with company strategic goals formulated in Balanced Scorecard. One of the best ways to make sure objectives of departments are integrated to BSC it to expose Balanced Scorecard to as many employees as possible so that every employee understand his contribution to implementation of strategic goals and role of BSC in the company.

Summary

Capabilities of a company to learning and growth pre-determine success in the three other objectives. There are three sources of enablers for learning and growth: employee, information systems and organizational alignment. A special attention is to be paid to employee satisfaction and motivation (this especially concerns front line employees who contact with customers).  All goals and measure in learning and growth objective must be subordinated to strategic goals of the company formulated in BSC.

bsc_ideas Articles, Balanced Scorecard Theory

Much has been said about most common mistakes managers make when implementing Balanced Scorecard. One of the most typical errors is that a company may be simply unready to use BSC or it lacks human resources who will be in charge BSC implementation. At the same time, even competent personnel may make mistakes related to the wrong choice of key performance indicators (KPIs) also called measures. As know, BSC key performance indicators are split within 4 categories: financial, customer, internal processes, and learning and growth. It is recommended that KPIs for BSC are selected in this sequence. So, firs the company set financial objectives (for shareholders) and customer objectives (for existing and new customers). Based on these objectives a set of KPIs in internal processes perspective is established. Internal processes are those processes and innovations that makes it possible to achieve shareholders’ and customer goals.

Internal processes objectives

Unlike other performance management systems, Balanced Scorecard covers the most complete internal process value chain: innovation process, operations process, post-scale service. Innovation process includes identification of current and new customers’ needs and development of new solutions to satisfy those needs. Operations process is delivery of products/services to end customers, while post-sale service implies all activities related to satisfaction of customer needs after purchase of product/service.

The process of selecting measures and establishing objectives in the internal processes perspective vividly demonstrates difference between Balanced Scorecard and other performance management systems that concentrate on control and improvement of existing business processes. They mostly rely on financial measures and monthly variance reports. Luckily most businesses have made step forward in this sense and use more measures and objectives in optimization of internal processes. In addition to financial measures they are using measures of yield, quality, cycle time and throughput. Sure, such approach is better than use of financial indicators only, but these are rather attempts to improve performance of individual department/business units than the performance of the whole company. In Balanced Scorecard internal processes measures are derived from strategic goals of the company in regard to shareholder and customers to meet their expectations. Such a top-down approach usually leads to emergence of new business processes which a company needs to perform. In other words, being familiar with the objectives for shareholders and customers, company managers identify business processes that will make it possible to reach such objectives which will lead to a breakthrough performance (ideally).

Typical stages in delivery of products/services to end customer

Internal business process value chain

Every business is individual and thus has own unique business processes. However, it is possible to systematize them into three categories to help companies implementing BSC choose the right measures in their internal processes perspective. As said above this chain consists of innovation, operations and post scale service.

Innovation is about research possible or hidden needs of customers in order to design a product/service that will meet these needs. The operation process implies delivery of product/service to the end customer. Traditionally, this process has been given much attention by most companies. Cost reduction and operational excellence are the key goals here. However, for instance, operational excellence should not be the most important component in this chain.

Service to the customer after he/she has purchased a product/service is the last element in the chain. Such post-sale service may include training and support, for example for sophisticated products/services. This is also a well established feedback system and a well reputed customer support center.

Innovation process

In the pioneer years of BSC development innovation process was separated from internal processes. But experience of BSC implementation in different companies proves that innovation is one of the most important/critical internal processes. Some companies are paying more attention to timely and effective innovation than traditional operational excellence. Importance of innovation is especially noticeable in companies with long development and design cycles (pharmaceuticals, software and hi tech industry etc).

Innovation process consists of two elements: first, managers identify the market, it size and peculiar features, customers’ existing and possible needs and preferences as well as price limits for new products/services. It is very important to have accurate and valid information on market size and imagine those new opportunities the new market can offer. Here one should answer two questions:

1. What benefits will be valued by customers in new products?
2. How innovation will help beat competitors in the new market?

These seemingly simple questions require extensive research and creativity. Innovation is the answer. If several decades ago companies gained competitive advantage by producing high-volume products of excellence quality, now competitive advantage is gained through release of innovative products/services. It often happens that as soon as the company releases a new product it already has technology and plans to develop a new product. Thus, research and development processes have become extremely important in the business value chain. These days, some companies spend more on innovation and research then they do to maintain operation and production processes.

Operation process

Operation process begins when a company receives a customer order for a product/service and ends when a product/service is delivered to customer. This process implies timely delivery of existing products to existing customers. As these operations are repetitive companies tend to optimize and improve them. However, excessive attention to operations processes may sometimes have negative consequences. The primary focus is cost, cycle time and quality.

Post sale service

These are warranty and repair activities, processing of payments, training and support. It is possible to apply the same metrics here: time, cost and quality. Time refers to time required to solve problem. Cost means cost of recourse used to solve the problem and quality is how well customers’ problems were solved (for example the number of first resolution calls (one and done calls).

Summary

To sum it up, the following should be said:

• Measures for internal processes are to be established after financial and customer objectives are set
• Internal processes measures are to be integrated into general strategy of a company
• Innovation, operation and post service are key processes
• Innovation is a key to success in the modern competitive markets

bsc_ideas Articles, Balanced Scorecard Theory

It has been proved that Balanced Scorecard works at best when measures in the all 4 perspectives are correctly set: financial, customer, internal processes, learning and growth. Each of the perspectives covers certain aspects of business functioning, both in the internal and external environment. According to own strategic goals, companies tends to make emphasis on certain perspectives, giving them different weights. At that, all of the perspectives are interrelated – success in one perspective may directly depend on improvements in the other one. It is very difficult to systematize these ties, since much depends on company organization structure, position in the market, and as said above, strategic vision.

We have already analyzed financial perspective which comes as the focus for the other three perspectives, containing the most important (ultimate) business goals – maximizing profits. In order to reach financial objective much needs to be done by the company in internal and external perspectives. Customer is a supreme value for business. Thus, customer perspective in BSC implementation must be given due attention. Marketing rises in popularity, and businesses wage “wars” to win favor of customers, make customers change brands and buy new products. Most companies try to stay in touch with customers even if they are not currently buying from them. Loyalty to a brand brings considerable profits in the long term.

Customer perspective in the BSC

In the BSC customer perspective a company selects market and customer segments where it will compete. Sure, the goals remain the same – implementation of financial objective. In simple words, this is making more money (maximizing profits). The financial perspective identifies key customer measures: loyalty, retention, acquisition and profitability. These measures are aligned to target markets and customer groups.

Marketing gained popularity in the last several decades. Before that, companies were too focused on internal processes and innovation. As a result, some of them released quality products/services at competitive prices but such products/services were not something that customers needed at the time. Non-understanding of customers’ needs give advantage to competitor who can offer customers products/services that meet their requirements. Thus, the focus has been shifted from internal (processes inside the company) to external (customers and markets) environment. Delivering value to customer has become a number one goal for many companies. It became understood that in order to reach long term financial objectives the company must offer products and services really valued by customers. In customer perspective, Balanced Scorecard translates strategy and mission statements into clear market and customer-based goals.

Market segmentation. Different preferences of different customer target groups

Of course, existing and potential customers do not look the same. They are all different, with different requirements, needs, values, lifestyles, and thus they value products/services differently. It is imperative to analyze several customer/market segments to offer products and services which will be most valued by a certain market segment. Such approach makes it possible to provide customers with products/services according to their preferences, which protects the company from competitors. As a result a customer stays loyal to a definite company/brand.

Marketing specialists sometimes give fancy names to customer segments offering descriptions of a typical customer. For instance, marketing specialists as supermarket chain stores have creates an extensive classification of female buyers: from housewives and stay-at-home moms who empty store shelves to business ladies buying delicacies. A company needs to have special offers for each customer segment.

In BSC, once the market segmentation is performed, objectives and measures for target groups should be defined.  There are two sets of measures used in customer perspective: customer core management group used by most companies (customer satisfaction, customer retention, market share etc) and performance drivers of customer outcomes which answer the questions such as “What should a company offer to customers to improve customer satisfaction and retention in order to increase market share?”

Core measures of customer perspective

Customer core management group

Core management group of customer outcomes is very much the same across different companies and organization. These are measures of:

• Market share. This is a proportion of business in a particular market (this may be number of customers, amount of money spent etc). Measurement of market share is performed just after market segments are identified. What information is used? This is information from industry groups, government stats, trade associations and other public sources of information. Sometimes, the market is measured by the amount of money existing and potential customers are ready to pay (for instance, the amount of beverages customers can consume).
• Customer retention. Obviously retention of customers is an effective way to keep current revenue level. Thus, it is really important to measure customer retention from time to time in order to identify change trends. The fact that customers stay with the company proves that such customers are loyal towards it. Measuring customer retention is in some ways measurement of customer loyalty.
• Customer acquisition. This is attraction of new customers which is a core element in the growth strategy. Increasing of customer base is very important. Measurement of customer acquisition is evaluation of rates at which a company attracts new customers. This indicator is represented either by the number of new customers or the number of sales from the new customers. Customer acquisition campaigns are especially popular with companies offering subscription services (cell phone, ISP, mass media, cable TV etc.)
• Customer satisfaction. Success in the above two categories depends on how well a company meets customers’ needs. Customer satisfaction is all important. Satisfied customer stays loyal to the company. Customer satisfaction surveys have become extremely popular in all business spheres. These are mail surveys, telephone interviews, personal meetings. Sometimes, customers are asked to rate conversation with call center operators, quality of service at sales centers etc.
• Customer profitability. Having extremely satisfied customers does not necessarily guarantee high revenue. Being customer-obsessed is not good. Thus, customer profitability is a good indicator showing efficiency of actions taken within marketing campaigns of the above 4 categories. Sometimes it is impossible to satisfy all customer demands in a way that will be profitable for a company. A compromise between profitability and customer satisfaction must be reached.

Customer value propositions

Customer value propositions

Value propositions make it possible to better understand drivers of the core measures, or as said above give answer to the question “What needs to be done to improve customer satisfaction”. They can be split into 3 categories:

• Attributes of products/services. These are functionality, price and quality. Different target groups value different attributes.
• Customer relationships. This is about establishing feedback system in order to learn customer attitude towards products, services, product attributes, customers’ requests and propositions.
• Image and reputation. Excellent reputation increases chances of acquiring new customers and retaining existing ones. As to the image creation this process works in the both ways. A company creates own image, and at the same time it may create an image of a typical customer. It often happens that customers tend to refer themselves to a target group or customer image created by a company, although, in fact, they do not always entirely fit this image.

Summary

It is difficult to say whether or not customer perspective is the most important in BSC. However, the popularity of marketing measures and size of marketing budgets in numerous companies proves that advertising and marketing campaigns promote sales, retention and acquisition of new customers which maximizes revenues.

It should be noted that any marketing/customer perspective measures should be well integrated into the company strategy and financial goals otherwise inappropriate marketing campaign may result in huge losses or bring only short-term results. Balanced Scorecard will certainly help align customer measures and objectives with strategic goals of the company.

bsc_ideas Articles, Balanced Scorecard Theory

Employee morale is second only to the quality of the management team in influencing the long term success of a business or for that matter of any organization. It (the employee morale) is a very good indicator of the quality of the management team since it is the most direct outcome of good management. After all  a good management team will do everything to engage their employees.

The best way to measure employee morale is not however the traditional survey. After all, this is not just costly and very periodic information, but it is typically very biased and unrepresentative. People are generally not very aware of how they feel and are unlikely to express their feelings in a place where management whom they might not trust will see it. They are even less likely to produce meaningful responses if they are faced with  a multiple choice or likert scale to describe their morale. Even if the data was perfect, the management would have limited ability to analyze it and  act upon it, since they would have no way of separating the aspects of how people feel that are due to things happening within the organization from the feelings that are just their frustrations or joys bleeding over from other aspects of their life.

Neither is absenteeism, or tardiness necessarily a good indicator of employee morale,  because appropriate external threats and rewards can cause people to show up on time and be there every day even if they dread their jobs.  They would be miserable there and have very low productivity.

This leaves us with engagement. After all if employees love their job they will care and be engaged. And even if it were possible for them to love their job but be disengaged and not care, this would be of little value to the business.

Thus engagement is what we really want to measure.  But how do we measure it? The best approach that I have found is based on the assumption that people who care will tend to want to improve the facilities around them and that if they are allowed to do so, they will like where they work and care about it even more. By picking this variable we can insure that the very process of measurement will propel the organization in the right direction. (Unlike a survey, since someone might not even realize that they are unhappy until they have to say that they are on a monthly survey)

So, the KPI of employee engagement is the number of employee recommended changes that have actually been implemented per full time employee equivalent.

This indicator should closely correlate with the quality of the management team, since the changes can only get implemented and employees can only be happy when there are open channels of communication between them and the management. Study after study  have shown that good employee morale has a positive impact on the bottom line and I suspect that this is a large part of the reason why.

While employee engagement is a lagging indicator for management ability, it is a leading indicator for process improvement, customer loyalty and financial performance.

—

Oleg Tumarkin, JD, MBA, CSSBB is an Adjunct Professor of Business at Lakeland College and Concordia University of Wisconsin. His firm, FutureWorks, in partnership with Bucket Brigade and AKS-Labs provides business coaching and Balanced Scorecard implementations.  His life’s passion is the development of a universal business measurement and management system that would cause management in to the realm of a repeatable, replicable, yet humane and flexible science.

oleg_tumarkin Balanced Scorecard Theory

Introduction of Balanced Scorecard system in early 1990 was a response to business challenges of that time. The system was the first to add non financial indicators to a set of KPIs to be evaluated under performance management concept. Inclusion of non financial indicators did not mean that creators of BSC rejected financial indicators. It would be wrong to say that since financial KPIs have no impact on customer and employee satisfaction, they should not be used by companies in their metrics systems. Kaplan and Norton claimed that those companies which refuse to use all 4 perspectives (financial, customer, internal processes, learning and growth) are doomed to fail in BSC implementation. Use of Balanced Scorecard helped managers break obsession with accounting and financial figures. However, as they say, everything in moderation. There are cases when top management gets carried away with customer satisfaction and growth of intangible assets.

Different financial objectives at different business life cycles

Financial perspective. Goals and Measures

First, it needs saying that all measures and objectives in all other three perspectives focus on financial goals/objectives. The ultimate goal of any company is making profits. Every measure and KPI should be selected in such a way so that it is well integrated in the strategy of improving financial performance. So, it is possible to say that financial goals are result of improvements in the 3 other perspectives. As a rule financial objectives can be easily linked to all 3 BSC perspectives (sure, there can be exceptions but they are not numerous). In this sense financial objectives play two roles: they define expectations as to company financial performance (as set in the strategy) and at the same time act as targets for objectives and measures in the 3 other perspectives.

Identical financial measures for all business units and departments?

There is much debate over the use of identical financial objectives for all business units of a company. Supporters of this method claim that in such a way everyone will be evaluated according to the same metrics, thus supporting “fair play” principle. However, this approach fails to recognize different strategies of different business units, departments and divisions. Thus, it is highly recommended that heads of departments and business units adjust financial indicators to strategies of their business units/departments. Sure thing, these strategies must be subordinated to a general company strategic vision.

Different financial objectives for businesses in different life cycles

Obviously, businesses undergoing different stages of development require different financial objectives. These stages can be quite numerous, but in order to simplify them let’s identify the key three of them:

1. Growth. It should be noted that growth businesses undergo early stages of development. This means that such business posses services and products with a certain potential for growth. Growth businesses may have negative cash flow and low returned on the invested capital. Thus, in order to realize this potential a company needs to develop infrastructure, distribution networks, production systems etc. So, what are financial objectives for growth businesses? Well, this is revenue growth, growth of sales in targeted markets and customer groups.
2. Sustain. In general most business units and departments in a company are in a sustain stage. This means that such departments still attract investments and apply reinvestment techniques. The ultimate goals here may be keeping current market share and in some cases gradually increasing it. Thus, most of financial objectives in sustain stage will involve goals related to profitability such as operating income and gross margin.
3. Harvest. Some business units may have already reached the state of maturity and thus the company management wants to harvest investments made throughout the first two stages. At this stage the company rarely attracts new investments (maybe to maintain equipment or perform similar tasks but not to expend). Thus, a key goal here would be maximizing cash flow streaming back to the company and reduction of working capital requirements.

Thus, it is evident that each of the stages requires own financial objectives which are dictated by requirements of a business life cycle. So, financial goals for growth businesses include growth of sales in existing and new markets, from existing and new product. Sustain stage implies traditional financial objectives such as operating income, ROCE, gross margin while financial objectives at harvest stage focus on increasing cash flow.

In general, financial objectives fall under the following categories:

1. Revenue growth and mix. This is mainly about reaching new customers and markets, expanding products and services and changing them, introducing new pricing policies etc.
2. Productivity improvement/cost reduction. This may include reduction of indirect costs, sharing common resources with other departments, lowering direct costs.
3. Investment strategy/assets utilization means a greater utilization of fixes assets base and improving return on investment.

One should also not forget about risk management as a part of financial perspective objectives. Most successful companies integrate risk management and tolerance systems into their financial goals. For instance, if a company decides to broaden sources of revenue this is both a strategic goal and the way such a company protects itself from changes in the external environment which serves as a risk management objective.

Key categories of financial objectives

Summary

Financial objectives are long term goals for a company. One of the greatest advantages of Balanced Scorecard is that this system makes the financial goals clear, comprehensive and explicit. Moreover, BSC can adjust such goals to different cycles of business life. Financial indicators in Balanced Scorecard represent profitability, revenue increase and asset returns. This proves strong ties of Balanced Scorecard with a long-term strategy of organizations.

At that, even using financial indicators and objectives alone, it is possible to establish effective metrics and specify long tern financial goals.

Finally, it should be noted that all objectives in other 3 perspectives are directly or indirectly related to financial perspective and relevant financial objectives. Every measure eventually ends up in a particular financial goal, the most common of which is increasing competitive advantage, gaining larger market share and making a company more attractive to shareholders.

bsc_ideas Articles, Balanced Scorecard Theory