BSC implementation stages. Case studies
Strategy of a company, establishment of goals and tasks is a privilege and responsibility of top management, while implementation of strategy is performed by ordinary employees in departments and business units of a company. Lack of feedback and sharing of information between top management and employees is typical for many businesses. This is explained by information overload of top management which makes it impossible to adequately assess information, and as a result to implement strategic goals by the personnel.
On the other hand, lack of employees‘ strategic goals and proper motivation system leads to the situation when those who implement goals do not coordinate their actions with those who set strategic goals. Such disorientation often results in utilization of company resources to perform secondary tasks. This is a typical problem for industrial enterprises with complex structure both in Europe and in U.S.
Company strategy is not self sufficient. Top management aims at implementation of strategic goals through assigning of tasks to employees and control over their fulfillment. Relationship chain during strategy implementation consists of two elements:
- Vertical “top management – personnel.” At this stage top management identifies tasks, makes personnel familiar with them, and controls fulfillment through reports. If necessary, tasks may be slightly amended.
- Vertical “personnel – top management.” The personnel receives tasks, undertakes actions to fulfill them and informs top management on fulfillment results. The next stage implies feedback from top management.
Weak points in this chain are information channels between top management and personnel. If they do not function properly then decisions may be based on incomplete or distorted information. Many managers think that having received as much information as possible they protect themselves from making wrong decisions. But much information does not mean better information.
New management tools
Company management needs the tool that would make it possible to base decision-making process on reliable, complete and adequate information. Balanced Scorecard system is such a tool that includes financial and nonfinancial indicators, showing progress (or maybe regress) towards implementation of strategic goals.
Efficiency evaluation is exactly the kind of instrument that finds out whether or not operational management complies with company strategic goals (like gaining new market shares, increasing company value etc). It needs mentioning that Balanced Scorecard is just a tool that facilitates the process of strategic decision making, but it is not a universal treatment for all business problems. Balanced Scorecard helps identify facts and problem areas but it doesn’t provide managers with ready to use decisions.
Why are we talking about efficiency based management? Increasing production and improving quality of products is not enough to gain competitive advantage in the modern markets. That’s why an increasing number of companies use progressive methods of corporate governance. These methods allow to timely react to changes in the market.
The goal of Balanced Scorecard system is to put strategy into action through development and measurement of a complex set of key performance indicators which lays down foundation to form company strategy.
Excessive focus on indicators belonging to one category/group may negatively influence the end result. That is why Balanced Scorecard System includes four perspectives:
- Financial
- Customer
- Internal processes
- Learning and growth
Implementation of Balanced Scorecard at the enterprise is performed in 5 stages. The succession of stages is very important since any changes may have a negative impact on BSC effectiveness.
Stage one. Strategy development
A clear and comprehensive strategy outlines basic steps to be taken to implement desired goals and results. Company strategy should be divided into certain strategic initiatives which will identify tasks for certain departments, subdivisions, business units or even individual employees. Coordination between departments and identification of strategic priorities are key elements of the first stage.
Stage two. Identification of key success factors
The second stage outlines key success factors, i.e. those characteristics of company managerial and economic activity that are vital to implementation of the strategy.
Stage three. Identification of key performance indicators
It is imperative to focus on most important indicators. Their number should be limited otherwise Balanced Scorecard will be too complex. Besides, KPIs should motivate employees. These are major requirements for key performance indicators:
- Limited number
- Unity for the entire organization
- Measurability
- Direct ties to key success factors
- KPIs should be controlled
- Motivation for employees
Of course, the choice and the nature of key performance indicators depends on business area of the company and its organization structure. Let’s view to case studies to illustrate the above said.
Case study number one. Oil producing company
Structural division: well repair shop
Increase of oil extraction volumes is a strategic goal for oil producing company. This increase is represented by growth of oil extraction volumes and decrease of losses during oil extraction which lowers oil price. That’s why, key performance indicators for well repair shop are set taking into account both company strategic goals and specific nature of this production unit. During repair process the well is suspended, and consequently downtime results losses (amount of oil which could be extracted during the downtime period). Production efficiency of underground reparing is represented by debit increase per well (in tons).
KPIs for well repair shop would have the following structure:
- Total downtime of wells (identifies losses related to lost opportunities)
- Average time for repairing (actual-planed)
- Unit cost for each extra ton of oil (actual-planned)
- Number of repair campaigns (actual-planned)
- Average repair costs for one well (actual-planned)
This structure of key performance indicators includes bonus system for employees which motivates them to decrease downtime and repair time through more effective planning and execution of works and improvement in quality of works. The company evaluates not only the number of repaired wells but also the result – debit increase. These key performance indicators are coordinated with strategic goals of the company – increase of oil production. Moreover, these indicators are controlled by well repair shop, which means it can affect them.
Case study number two. Engineering plant
Organization department: supply and logistics service
The strategic goals for this department are cost decrease of products and shortening of production cycle. Supply in logistics department has key performance indicators that represent specific nature of the company in general, as well as certain department in particular. The department is responsible for provision of continuous production process with the component parts and their sufficient stock at the storage facilities. Failure to supply production process with component parts results in production downtime. At the same time, stock increase at storage facilities leads to use of additional funds.
The following key performance indicators can be applied to evaluate efficiency of this department:
- Average time from placing the order to receipt of component parts (planned-actual, in days)
- Average production downtime caused by logistics failure (in hours)
- Number of days in the materials turnover cycle (planned-actual)
- The ratio of stock cost to production volume (planned-actual)
This structure of key performance indicators makes it possible to track efficiency planning of production needs in materials and component parts, as well as avoid overstocking.
Stage four. Development and evaluation of Balanced Scorecard
At this stage that general system of financial and nonfinancial indicators is being developed. The combination of key performance indicators, their information value and sufficiency will influence decision-making.
Stage five. Choice of technical solutions to implement Balanced Scorecard
At this stage the source of information is chosen. At that, such information choice should be relevant for accurate evaluation of KPIs. The information should be obtained in a timely manner.
As in any change of management system, implementation of Balanced Scorecard faces obstacles and even certain opposition. There are several reasons for that. Firstly, a company or an enterprise may be unready to implement BSC. This especially concerns enterprises affected by severe crisis, since top management of such companies focuses on fulfilling short-term tasks, but not strategy development. Secondly, implementation of BSC implies transparent management system and “old school” managers may view this as pressure and total control. Thirdly, this is lack of effective IT and information systems. Fourthly, this is irregular use of Balanced Scorecard. If BSC is used on occasion its effect will equal zero. Finally, it is important to remember that Balanced Scorecard does not substitute strategy and system of managerial reports.
Summary
Taking into account the above said, factors for successful BC implementation go as follows:
- Prior strategy development which is a key success factor. BSE is just a managerial tool
- Identification of company goals taking into account relation of goal implementation with company value
- Effective and reliable information system which serves as a source of information and a basis for efficiency evaluation of key performance indicators
- Support from top management, change of corporate management style, motivation of ordinary personnel. Without a proper bonus and compensation system it will be difficult to persuade ordinary managers to effectively use Balanced Scorecard. Key performance indicators evaluation is also about performance evaluation of individual employee.
- Continuous use of the system, inclusion of BSC to the toolbox of top management
When properly used, BSC improves performance of a company, since every employee understands how his performance affects implementation of company strategic goals. With Balanced Scorecard top managers can measure performance efficiency of every department, and thus can influence implementation of strategic goals.
In the end, it needs mentioning that successful use of BSC depends on understanding of this tool, its nature, limitations and goals. Balanced Scorecard is indeed a very effective strategic management tool. But it is not easy to implement and maintain BSC not because of its complex structure but because of the wrong attitude of top management towards Balanced Scorecard.
The above case studies prove that there is no universal solution. Balanced Scorecard is individually implemented but every enterprise, and top management should take into account specific nature of a company, current problems, competition in the markets, education level of personnel and a number of other factors to effectively identify most important indicators. Of course, there are set of key performance indicators characteristic for certain business areas. But as said above, a thorough research and analysis needs to be performed before making the final decision to implement Balanced Scorecard.
