Balanced Scorecard: the four perspectives. Internal processes
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:
- What benefits will be valued by customers in new products?
- 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
