BSC Designer – Balanced Scorecard Software

Much has been said about involvement of ordinary personnel in implementation of Balanced Scorecard and development of strategy maps.  If company top management has a very vague idea about urgent problems of their business, the image of their customer, customer demands, products produced by rival companies, then a strategy map developed by top managers will have nothing to do with reality.

Think about this: who can provide top management with the most complete information on regular or one-time customers of the company?  Head of departments?  Well, in some cases yes.  But that will be a general description, and such information will be quite useless.  But ask a sales manager or a front line employee who contacts with customers every day.  He will give you the full story of relations with customers, current and ongoing problems, suggestions as to improvement of customer relations etc.

Thus, it becomes clear that personnel at all company levels must be involved in implementation and maintenance of Balanced Scorecard.  But how will you explain the benefits of this system?  How will you motivate personnel?  Financial motivation proved to be the best.  But development of fair and effective system of financial rewarding and compensation together with implementation of Balanced Scorecard proved to be quite problematic.

Top managers of companies, participants of conferences and seminars dedicated to Balanced Scorecard and business owners have different problems in regard to development of an effective reward system in balance scorecard.  Some people claim that their attempts to implement BSC failed because their reward and compensation system failed to stimulate relevant conduct.  Others say that it is impossible to change human contact without proper reward.  It needs mentioning, that an increasing number of companies are willing to communicate compass agent systems with Balanced Scorecard and strategy maps.  Some companies even offer to include strategy maps to motivation models only after Balanced Scorecard and strategy maps take roots in the company.

Even if we suppose that rewards and bonus system plays an important role in implementation of Balanced Scorecard (or any other system that changes company conduct), it wouldn’t be fair to think that reward and bonus mechanisms are key success factors. Just to the contrary, there are numerous cases and examples when motivation systems were built in accordance to the company strategy and values, but employees nevertheless showed conduct that differed from the kind of conduct to be rewarded.

When employees were asked questions why they neglect actions that would result in rewards, employees answered that bonus and reward programs were based on very simplistic approach to workforce as an instrument.  Employees were following certain conduct patterns not because they wanted to earn more or less, but because they wanted to make their own contribution to implementation of what they think to be company goals.  Some employees just wanted to do something that is characteristic of their profession.

In the last several decades the U.S. companies chose the approach of so-called “bribery” (in a good sense of this word).  So, company management pays different bonuses to employees in key positions or include them to shareholder council just to retain them.  But this does not always work.  When dealing with highly qualified employees the company should know that it needs them more than these employees need the company.  First of all, these people must know the company goals, mission and values.  Secondly, they should be interested in personal achievements and personal responsibility.  Thirdly, they want to be respected not as personalities only, but also as professional in a particular business area. That is why company management and owners have to be very cautious when introducing reward and bonuses systems.

Reward system and Balanced Scorecard

Effectiveness of reward system depends on many factors, and that’s why it is impossible to say if such system will effectively work with Balanced Scorecard project.  It’s not a secret that personnel behavior very much depends on financial rewards.  There are many reward system types, but will analyze the following two: behavioral control and profit sharing.

Before implementation of any reward system one should answer the following question: what is the key goal – behavioral control or profit sharing?  If we’re talking about profit sharing then reward systems will be the method of sharing profits among company employees.  At that, Balanced Scorecard and strategy maps may be used to evaluate performance and contribution of individual employees, departments, business units etc.  After that, such evaluation will predetermine the way profits will be shared among employees.  In simple words, the better employee works and the greater contribution he made to implementation of strategic goals, the more money he gets.  It is also very important to decide what profits are meant (department, company or corporation level).  It is recommended to introduce such reward system on the department level in order to ensure better cooperation between departments and business units.

But if reward system will be used for direct behavioral control the premium package must be analyzed from a different angle.  Money used as “fuel” for behavioral control system should be viewed as operational expenses which do not depend on company profits.  These expenses occur as company doing business and they do not depend on financial results.  It sometimes happens that the company still has to pay bonuses even if it suffers losses.

There is another reason which explains why reward systems should be communicated with Balanced Scorecard.  It does not refer to logic “stimulus-reaction” characteristic of most reward systems, but rather to ability of top management to demonstrate their true faith in Balanced Scorecard.  If company is ready to reward employees’ efforts in implementation of goals in such perspectives as customers, internal business processes and learning and growth, it means that company owners and top management really believes in the great power of Balanced Scorecard.  Such belief or faith will be enough to introduce some system to reward personnel.

Any organization that is thinking about communicating of its Balanced Scorecard with reward system should consider all positive and negative effects of such collaboration.

Balanced reward system should be based on static and dynamic indicators.  Balanced Scorecard system should not be limited to a set of goals, but it should establish balance between dynamic indicators and final/intermediary results.  If the reward system contains only individual goals or focuses on behavior or results, it cannot be considered balanced.

When developing and implementing reward and bonus system the company should not focus only on financial and pseudo-financial payments, and instead consider a serious of other reward types that can meet demands and expectation of an employee.  Rewards can vary from material things that have certain market value to nonmaterial ones to which an employee may give a high praise.  Nonmaterial rewards can be hardly evaluated in monetary terms (for example, meeting with an experienced leader manager, attendance of closed seminar or having free time for a personal project).

Implanting Balanced Scorecard to reward system

No matter what rewards the company wants to introduce, financial or nonfinancial, they can be communicated with the Balanced Scorecard and strategy maps.  Company top management may show faith into the Balanced Scorecard and their readiness to pay bonuses according to the statement “you get what you ask for”.  But rewards may draw personnel attention to certain conduct.  In order to influence employee conduct indicators in the reward system should be:

• Verisimilar.  Indicators should arouse trust.  The first opposition line is the thought “Perhaps, this is wrong.”
• Considered reasonable.  The second opposition line is critical opinion “Well yes, this has nothing to do with our business.”
• Related to any known action.  The third opposition line is exclamation “Well, it’s a pity it is not so, but we can do nothing about it.”
• Related to any action for which an employee receives reward.  The last opposition line is the statement “I can do something about that, but what for?”

Only if indicators are trusted, and they are reasonable and related to any action performed by an employee, they will truly influence organization conduct.

It is also very important to decide according to which indicators employees will be rewarded.  As known, there are leading and lagging indicators.  So, imagine that employees are rewarded for such leading indicators as “number of visits to customers” or numbers of calls to customers.  In any Balanced Scorecard these indicators play an important role, as usually the more customers know about the products and services the more they buy.  But it wouldn’t be fair to reward employees just for visiting customers or calling them.  Of course, such indicator should be evaluated.  But reward is something that is given for certain results.

Summary

To sum it up it needs mentioning that Balanced Scorecard would barely work without proper motivation of personnel.  Financial motivation proved to be the most effective.  So, reward and bonus system in the company should be well integrated to Balanced Scorecard and strategy maps.  If employees receive rewards for fall success they will have a distorted concept of company strategy.  In such a way successful implementation of Balanced Scorecard becomes impossible.

bsc_ideas Articles, Balanced Scorecard Theory, BSC implementation

Balanced Scorecard in any organization is a linking instrument that is used in discussion of virtually any activity or business aspect. For example, all companies want to keep their customers, clients and buyers satisfied. All companies have their own internal business processes and well established practices. All commercial organizations want to make profits and prepare their companies for future.

At some moment, every successful company comes to the stage when it has to think about cause and effect ties. That’s why Balanced Scorecard implementation implies development of a more effective management system. BSC is used to channel company business efforts into the strategy and strategic vision, perform evaluation and monitoring through measurement of key performance indicators. It is also important to make decisions and offer response actions based on evaluation of key performance indicators.

As compared to other tools and methods of describing organization strategies, Balanced Scorecard has two prominent features. The first one is a simple format of a strategy map which is described by unlimited number of key performance indicators for each of the four perspectives/categories: financial, customer, internal business processes, learning and growth. The second distinctive feature is particular focus on interrelation of perspectives and indicators. Perfectly formulated strategy map will reflect strategic logic of cause and effect ties between current activity and long-term success.

Strategy maps aim at changing organization conduct based on a dialog. Everything that company does (for example, education, improvements in customer service etc.) is based on the belief that such steps will contribute much to implementation of strategic goals. Cause and effect ties implanted to any efficient strategy map vividly demonstrate “business logic” which derives benefit from correct today’s decisions and actions in order to achieve success in future. As a result, strategy maps translate strategy into action (everyday decisions and duties of personnel).

It is rather difficult to evaluate efficiency of using Balanced Scorecard. This is explained by HOW Balanced Scorecard is USED. Recent surveys have shown that many companies claim to use Balanced Scorecard or are going to use this system in the near future. However, the actual number of companies whose management systems are based on Balanced Scorecard is much lower. Most respondents are sure that they really use Balanced Scorecard, but in fact it is not so. Thus, it would be interesting to have a precise look at the ways in which BSC might be used:

• Many companies are using Balanced Scorecard as the scheme for discussing strategies but not as regularly used management tool;

• Some companies are planning and organizing reports in the form of four or five perspectives included to Balanced Scorecard. In order to get a general model they share existing key performance indicators without prior discussion of a strategy. This is supported by the fact that the format of strategy maps looks quite attractive, but such use of Balanced Scorecard is unlikely to bring companies potential benefits.

• In some cases Balanced Scorecard is introduced as a substitution for budgeting system, in other cases budgets and strategy maps are coexisting. The most widely used option is combination of strategy maps and cash flow plans. This is explained by the fact that budgets always played a dual role: they structured goals by activity types and made forecasts as to money demands. The first role is acquired by strategy maps, while operational plans play the second role.

• Balanced Scorecard may be used for the entire company, for a certain part of the business, on certain hierarchical levels, departments and even individual employees. Cause and effect ties between different strategy maps differ depending on what hierarchical they are implemented. Some corporations have unified interrelated indicators, while in others strategy maps and key performance indicators are custom made for every “user.”

• The key problem is supposed ties between indicators. For example, one supplier of software and IT solutions requires integration of information collected from all departments of organization while others our run the interested in logics than in figures. Obviously, identified indicators are easier to summarize (for instance, revenue). Then would be reasonable to calculate average market share or average employee contribution? Does department always implement its goals if its structural subdivisions have justified general expectations, but certain internal deviations have been found?

• Some companies use strategy maps when making preparations for project implementation. At that, learning and growth perspective may be referred both to the project itself and to the company in general if its life cycle is long enough.

• Certain companies also attempt to implement strategy maps for such corporate management functions as IT and HR. In these cases there should be differences between strategy maps for IT and HR departments and IT/HR policy of the entire company.

• Government, public and nonprofit organizations begin to use Balanced Scorecard and the system is gaining popularity among such organizations.

These numerous options of Balanced Scorecard use demonstrate that BSC is a suitable method to discuss any activity. It would be fair to say that there is no one correct way to use Balanced Scorecard. That’s why, before implementation of Balanced Scorecard it is vital to know what part of organization or what activity aspect requires thorough discussion, and who will be involved in implementation of Balanced Scorecard. Organization process of BSC implementation is very important. What company departments and employees will participate in development of strategy and key performance indicators?

Balanced Scorecard as a tool that makes information public

Companies rarely use strategy maps as annual reports. But general and financial reports are very often using such notions as intellectual potential. This means that Balanced Scorecard system has greatly influenced the concept of compiling annual reports.

On the one hand, how can one trust nonfinancial reports of the company in regard to customers, processes and development efforts, of if traditional accounting reports are not always trust? Can such reports be subjected to audit? Is it true that nonfinancial assets depend on internal and external variables that cannot be checked and verified?

On the other hand, use of nonfinancial indicators which may be somewhat discouraging is explained by the fact that modern business cannot be described with simple notions and terms, as it was several decades ago. Modern business has new requirements and demands for information contained in strategy maps.

Strategy maps do not only reflect important financial and operational information, but it also tells about company strategy in a simple form. Moreover, strategy maps will be understood both for business gurus, experienced investment managers, shareholders, advertisers and ordinary employees.

A new trend or developing standard?

It is obvious that goals and capabilities of Balanced Scorecard projects have changed. Early projects were focused on operational management. Soon, Balanced Scorecard was declared a strategic management tool to be used all companies.

Corporations that run different business types face difficulties in formulation of a corporate strategy, and financial indicators are usually more suitable and even sufficient for this level. That’s why the bulk of the job on implementation of Balanced Scorecard is performed on the level of departments and business units, or even lower levels, of where nonfinancial indicators and cause and effect ties are more attractive than indicators of traditional control systems. Some companies even claim that strategy maps should be built from bottom to the top instead of being imposed from the top.

There are also differences in implementation of declared goals. Some Balanced Scorecard projects still remain useless pile of information, although company top management was very enthusiastic about Balanced Scorecard concept and to be an active part in development of strategy, although this strategy was never implemented. This means that Balanced Scorecard and strategy maps failed to become effective strategic management tools.

At the same time some companies focused on regular evaluation and reporting as an important element of Balanced Scorecard project. Sometimes, even top management did not participate in discussion of strategy.
As a result, often strategic maps turn into presentation slides that will have nothing to do with reality, or Balanced Scorecard becomes a tool to evaluate and control car and performance of the company which has nothing to do with the company strategy. Sometimes Balanced Scorecard is even used as a database to share and report information.

Well, it is really difficult to build an effective strategy maps without making BSC project a senseless ritual. A BSC project can become a real challenge for the company. This is partially explained by the avalanche of literature and studies dedicated to Balanced Scorecard theory. It all looks great on paper. But the company should learn to live with Balanced Scorecard and strategy maps. No one claims that it will be easy. That’s why preparations for implementation of Balanced Scorecard should be given due attention. Company owners and top management must decide why they want to use Balanced Scorecard and whether they really need it. Otherwise, Balanced Scorecard will become the most expensive management control system or database the company have ever used.

bsc_ideas Articles, Balanced Scorecard Theory, BSC implementation

These days attention of top managers is pretty much devoted to human resource management. It has become obvious that without competent and loyal personnel the company has no chances for survival no matter how ambitious plans it might have.  Very often top managers of big companies do not know much about their customers, while front line managers directly contact them, and thus possess valuable information which may and must be used to increase company competitive advantage in the market.

Experience shows that a great number of companies and private businesses are making the same to mistakes.  Such mistakes they HR campaign rather expensive and in most cases ineffective.  These two mistakes are:

• Implementation and development of human resource key performance indicators in a vacuum
• Creation of a great number of KPIs which the company cannot handle and use in an effective way

So, one of the most common mistakes is that HR managers attempt to develop and implement key performance indicators in a vacuum.  HR managers are recommended to use a collaborative approach.  This means that the chosen indicators must represent key success factors in HR policy.  In other words, key performance indicators must mean something both for company top management and ordinary employees.  They should be well understood and clear the company personnel.  At the same time such indicators should be well integrated into the system of company strategic goals, its mission and values.  Thus, development of KPI is in HR management should be performed with the involvement of HR specialists, company top management, and ordinary employees.

The second mistake is that some managers want to create perfect HR scorecard and as a result create a great number of key performance indicators which are then so difficult to measure and analyze.  Great number of key performance indicators is absolutely unnecessary.  Moreover, such system will be difficult to maintain.  There is a general suggestion that 8-12 of indicators is enough to show impact of human resource management on company performance and progress on the way to implement strategic goals.  Besides, let’s not forget that creation and evaluation of key performance indicators requires time and money, so it is really important to focus on something that really matters for the business.  Below are suggestions as to creation of key performance indicators in HR.

Overall workforce productivity

• Improvement in workforce productivity (%).  The company pays certain amount of money to employ personnel and naturally expects some revenue/profits.
• The value of improved workforce productivity as compared to last year

Employee engagement

It is important that company personnel love their job and understand human resource approaches.  Relations between ordinary employees and their managers are very important for high performance of both.

• Percentage of employees who are eager to come to work every day
• Number of employees who are satisfied with current relations with managers

Recruitment

This is another very important aspect of human resource management.  The sooner the company finds the best professionals, the better for the company.

• Time periods during which major positions in the company are vacant
• Performance score of new hires
• Manager satisfaction degree you with new hires (comparison to last year’s results)
• Turnover rate of new hires during first 12 months
• Financial impact of that hires in major positions

Retention

It is not enough to hire educated and competent personnel.  It is very important to create such conditions that people are reluctant to leave the company.  The following key performance indicators may evaluate this important aspect of human resource management:

• Employee turnover rate
• Turnover rate in major positions
• Preventable turnover in key positions
• Turnover rate in managerial, technical, sales and other positions
• Financial impact of employee turnover in major jobs
• Managers’ satisfaction rate with human resource management retention efforts

Human resource costs

• Costs spend for human resource against generated revenue

Manager satisfaction

This is a very tricky category of HR evaluation.  It wouldn’t be too often that managers give poor grade to performance of human resource department, if they are asked a direct question “do you like your HR managers?” So, it is important to be very cautious and delicate here. Ask questions about human resource impact on productivity and efficiency of a business unit, department or an individual employee.  In such a way there will be no offenses between managers and human resource specialists.  The following key performance indicators might be helpful:

• Raking of all HR functions obtain from managers surveys.  In such surveys managers would be asked to evaluate functions of HR managers.

Compensation and benefits

• Number of employees satisfied with their current compensation
• Number of employees showing above average performance and getting above average compensation
• Number of employees who have shown top performance but resigned for salary related reasons

Employee relations

As known, positive organization climate encourages employees to show high performance.  Use of such indicators is recommended to measure employee relations:

• Number of employees who claim to have a bad manager
• Manager satisfaction with influence of HR Dept own relations in the company
• Organization climate (information obtained from surveys)

Training and development

Once the company recruited and retained professional employees it is necessary to educate them and develop their skills and knowledge.

• Number of employees who are satisfied with learning and growth opportunities offered by the company
• Number of employees who say their satisfied with project assignments for development and growth as well as job rotations
• Number of employees who say they possess suspension knowledge in their business area
• Percentage of employees who regularly undergo training sessions and participate in coaching programs

Conclusion

Sure thing, the least of key performance indicators in human resource management evaluation will vary from business to business.  Much depends on company structure, excepted internal processes and communications, and of course, company strategy, mission, system of values etc.  Finally, it should be noted that implementation of HR goals in general should be regularly measured (once a year).

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Strategy maps model does not only include a system of key performance indicators in a certain format, but also characterizes conditions for its effective use.  Strategy map concept becomes in such a way a part of strategic management control system and at the same time a very clear answer to avalanche of criticism towards traditional managerial control systems.  It would be interesting to compare Norton and Kaplan model with analogous systems.  With the emergence of strategy maps concept the system of managerial control has broaden.  It would be wrong to say that financial indicators have lost their significance, but now they meet demands of the system that contain both financial and nonfinancial key performance indicators.

From financial to strategic control

The early 1990s faced severe criticism of the traditional managerial control system because of excessive focus on financial indicators.  Control over financial indicators was not effective anymore because of changes in the global economy, appearance of new business ideas, intensification of competition and globalization of markets.

In the 20^th century the traditional system of managerial control was functioning under conditions of mature markets and technologies that were changing very slowly.  There is a joke that traditional system of managerial control has stopped developing in around 1925.  By that time its key instruments which are also used nowadays had formed: budgeting, cost calculating using “standard cost” method, transfer pricing, DuPont model etc.  Managerial control was mainly about maintaining of company efficient functioning.  As a result managers were focused on expenses and ways to decrease them, while sales growth was not given due attention.

But times have changed, new technologies have appeared, and thus business acquired different demands.  Financial indicators represented consequences of previously adopted decisions and they could not adequately reflect processes of long-term strategic development of business.  Many managers came to understand that in order to maintain competitive advantage in the market it is imperative to have more complete information on different aspects of running business.  That’s why in early 1980s a serious of new concepts and instruments of managerial control appeared – total quality management, business process redesign, lean production, Six Sigma and a number of others.

New methods rarely gave initiative to accounting or financial control departments.  The goals of new managerial tools often conflicted with goals of traditional managerial systems.  The strategy based on independence of personnel in decision-making does not harmonize with short-term planning which is predetermined by high priority of financial indicators.  As a result, functions of managerial control systems have broadened with control of external factors and storage of strategic information which makes correct forecast quite possible.

Criticism of traditional managerial control systems

Modern business environment has new demands to managerial control systems used by any company.  In the early 1990s the criticism of traditional managerial control systems has intensified.  Of course, this criticism was supported by a number of reasons, namely:

• Unreliability of information for decision making.  Information on expenses, sales volumes and profitability is the key information managers use in decision making.  Traditional financial indicators reflect results for the past periods.  Such information may lead to decision-making which will not meet of requirements of strategic goals.
• Inability to take into account modern requirements for business organization and strategy development. Goals and tasks of financial control conflict with tasks of strategic planning.  For instance, based on information of financial control company management may make the decision to cut expenses on development and innovation, personnel education, cancellation of share emission, and delay investment decisions.  As a result the key problem is to match short-and long-term goals.
• Decisions are based on information obtained in the accounting system. Managerial control is performed based on accounting information which complies with legal requirements.  Shareholders always want to have information on company performance in order to consider alternative investment options.  Financial indicators only do not give full and adequate picture of business development.
• Distorted information on expenses and control over investments. Traditional control over expenses did not include analysis of reasons for emergence of such expenses.  It only registered the amount and where such expenses appeared.  Nowadays, traditional methods of sharing expenses when in direct expenses are allocated in proportion to direct expenses is out of date.  Ties between direct and indirect expenses have changed as a result of increase in expenses for development and innovation, synergy effect, simplification of production processes schemes.  Production of different product types in the same or similar production lines makes it difficult to calculate profitability of every product.  Moreover, sometimes it is impossible to calculate full cost for development of a product in the long term.  It is imperative to develop a new method to share expenses other than traditional method of expenses deduction, like well-known ABC method.
• Provision of personnel with incomplete information.  Financial indicators will not tell much to most employees in the company as it is very difficult for them to understand relation between their job and figures in annual or quarter reports.  Financial indicators are too difficult to understand and this fact slows down decision-making and performing of urgent countermeasures, if necessary.
• Lack of attention to business environment in which company operates.  Traditional system of financial indicators does not reflect possible conduct of competitors and customers and future, and consequently it cannot warn the company on possible changes in the industry or business environment.  Key financial indicators used in most of such systems are mostly focused on internal programs of the company.  They are designed to compare current indicators with the results obtained during previous periods.  That’s why using these indicators, it is very difficult to compare co performance, strengths and weaknesses to key competitors in the market.
• Orientation on current performance.  Leaders in the market prefer monthly and quarterly reports, which leads to making of short-term investment decisions.  Besides, focus on long-term perspective forces managers to manipulate financial indicators to make current conditions of the company look better than they really are.  As a result, false managerial decisions are made.

Strategic maps: is it about registration of facts or strategic analysis?

Balanced Scorecard. Both words in the name of this extremely popular strategic management and performance evaluation tool are equally important. The word “balance” stresses the importance of using both financial and non financial indicators. In other words financial indicators are balanced with nonfinancial ones. As a result, the company gets the most complete information. But what about the word scorecard? Is it like score in a game? Well, this is partially so. Balanced Scorecard stores information on company performance. But still, it would be wrong to consider Balanced Scorecard and strategy maps as a form to save performance results. Strategy maps make it possible to forecast certain conditions and future results. Strategy map is an illustration to the company business plans. Strategy maps characterize goals and tasks to be implemented by company departments. That is why strategy maps are often used as a kind of alternative to budget formation (moreover, strategy maps influence the entire process of budget formation). Strategy maps help set the right balance between short- and long-term goals, agree strategic development plans of different department, branches and business units of the company.  Very often the contents of strategy maps caused lively discussions.  As known, usually discussions result in adoption of very creative decisions and ideas.  That’s why the strategy map only looks like a scorecard the stores information this is an effective strategic management tool.

Understanding of business nature

The key task of strategy maps is to give the most complete characteristic of all key success factors for the company. Although financial indicators are extremely important for the company operating in market environment, non-financial indicators are equally important as they can warn the company at the early stages on non-favorable or dangerous factors which are unreachable for financial indicators. The company management must take these factors into account and develop prompt response actions.

Until recently most companies applied the concept of strategy maps mostly in the internal environment. However, experience in evaluation of customer relations and improvement of internal business processes would be quite helpful in relations with shareholders.

Not everybody would agree that the company strategy and its successful implementation could be pictured with the help of a few indicators. It is so much easier to set a task and organize control system over its implementation. In such a way, managers get much freedom. It is also possible to improve the system of financial indicators in such a way so that they correctly reflect company success in attraction of new customers, improvement of internal business processes, development of new products etc.

At the same time, implementation of strategy maps may have some negative effects. A strict control system will be built which will change managerial style. Top management will be constantly issuing orders and instructions to subordinate managerial levels. But when all employees in the company understand benefits of using strategy maps and their own contribution to implementation of strategic goals, such a drawback will not matter at all!

Summary

When properly implemented, Balanced Scorecard and strategy maps with have a dual effect. On the one hand this is a very reliable system of managerial control and accounting. The scorecard system will store information on company performance at a given moment as well as track changes over certain periods of time. But on the other hand, strategy maps will encourage company personnel to generate productive and creative ideas. For instance, an ordinary manager who understands his contribution to implementation of strategic goals for the company is more likely to offer some things that will change company performance for the better. It is not a secret that discussions as a rule end in adoption of interesting and compromising decisions.

It is imperative to get personnel involved in discussion of strategic maps and the process of KPI development. Sometimes, front line employees know much more about company regular customers than top-managers who have never seen these customers. Strategy maps concept makes it possible to broaden managerial control system and acquire new functions. Company personnel needs to understand strategic goals and ways of their implementation, otherwise Balanced Scorecard and strategy maps will remain just another control system which will cause personnel anxiety and irritation.

bsc_ideas Articles, Balanced Scorecard Theory, BSC implementation

Successful implementation of Balanced Scorecard and introduction of strategy maps concept of the company very much depends on the right choice of key performance indicators (KPIs).  Unfortunately, it is impossible to develop a universal set of key performance indicators which will be effective for any company.  Every business is individual and that means that it requires individual approaches to performance evaluation and strategy development.  Much depends on the strategy itself and company strategic goals.  Every business has different key success factors and key performance indicators should reflect relations to the success factors.

At the same time, it is possible to compile a general list of key performance indicators which are divided into categories.  This list should not be viewed as a must have set of indicators.  In each case the number of key performance indicators and KPIs themselves will vary.  But the list of key performance indicators which will be compiled below is based on experienced of many companies and researches related to strategic maps.

One look at the list is enough to understand that this list of key performance indicators includes both final indicators and those KPIs that characterize key success factors.  You’ll find both leading and lagging indicators.  As known lagging indicators mostly concerned financial issues, while KPIs related to customer relations, internal business processes and learning and growth will tell much about what will happen to the company.  Some indicators, like number of received patents, may be viewed as a result for learning and growth perspective.  Most indicators, however, combine final indicators and indicators characterizing certain activity aspects.  For instance, such indicator as time for placing an order characterizes one of key activity aspects, while customer loyalty is a final result.  At the same time, customer loyalty stimulates sales volumes, which is a vivid example of how cause and effect ties work within the framework of strategy maps.

Financial perspective

•          Total assets holdings

•          Asset value per one employee

•          Capital productivity ratio

•          Sales volumes for new products/services

•          Working efficiency of personnel

•          Profitability of assets

•          Revenue from new products/services

•          Revenue per employee

•          Market price per share

•          Profitability of net assets

•          Added value per one employee

•          Efficiency of assets

•          Profitability of investment

•          Efficiency of sales volumes

•          Ratio of marginal revenue

•          Marginal revenue per employee

•          Cash flow

•          Ratio of equity capital to total assess holdings

•          Profitability of investment

•          Total expenses

Of course, this is only a short list of indicators, and other key performance indicators may and must be evaluated.  You can find the full list of all possible indicators in specialized literature.  But from the above list it is evident that some business experts and authors (like Kaplan and Norton) tend to use markets and customer oriented indicators to the financial category.  Although such indicators characterize past periods of company activity and can be obtained from financial and accounting reports, they have strong relations to customer perspective of the Balanced Scorecard.

Key performance indicators of the financial category make it possible to perform comparative analysis of different departments of the company.  It is recommended to contrast obtained results with the average indicators for the industry and results obtained for the past periods.  For example, Volvo company is effectively using graphs and time series to present its policy and strategy.  Financial perspective may include both static and dynamic indicators.  This makes it possible to evaluate current condition of the company and changes in performance and profitability.

Customer perspective

•          Number of customers

•          Market share (%)

•          Average annual sales volume per customer

•          Number of lost customers

•          Average time of taking an order

•          Number of customers per employee

•          Specific weight of concluded agreements in the total number of contacts with customers

•          Customer satisfaction

•          Customer loyalty

•          Expenses per customer

•          Number of visits/contacts with customers

•          Number of advertising campaigns

•          Trademark index

•          Marketing expenses

•          Average contact duration with a customer

•          Average amount of products shipped to one customer

•          Number of customer visits to the company

•          Average time between first contact with the customer and signing of agreement

•          Average annual expenses to serve one customer

Some of the above mentioned indicators characterize customer perception of the company, including customer satisfaction and different indicators on relations between customers and the company.  They may be decomposed to customer segments, sales channels etc.  Such indicators are simultaneously reflecting current situation in relations of customers with the company (certain segment of customers or customer group) and changes in customer relations over a certain period of time.  In other words, these indicators look like a balance of customer relations and report on revenue and losses.  Experience shows that in order to forecast sales volumes organization should monitor indirect indicators like recognition rate of the brand and the like.  Besides, there are even deeper indirect key performance indicators like company marketing efforts or number of contacts/visits to potential customers.  Such indicators are sometimes included to learning and growth perspective especially if they reflect expenses related to entering certain market segments or repositioning of the company.

Depending on the situation (strategy and key success factors) the company may require indicators reflecting product share in total purchase volumes of customers, number of contacts with customers, number of employees who regular ea contact customers etc.  You will find more information in specialized marketing literature and studies.

Internal business processes

•          Specific weight of administered if expenses in total revenue

•          Ratio of timely completed orders

•          Average product labor-output ratio

•          Average development time of a new product

•          Average time from placing the order to its completion

•          Supplier frequency

•          Average decision-making time

•          Turnover of material assets

•          Labor productivity growth

•          Efficiency of information systems

•          Increasing number of IT Systems &Computer Equipment

•          Specific weight of expenses on IT Systems in the total amount of administrative expenses

•          Emission of hazardous substances to the environment

•          Influence of company products to the external environment

•          Expenses related to correction of mistakes in managerial decisions

•          Number of properly executive orders

•          Administrative expenses per employee

It is often reasonable to evaluate not only efficiency of some production processes and operations at a given moment but also assess potential of these indicators, opportunities to improve them in order to increase production output and broaden production line.  Similar to customer perspective, indicators must evaluate current condition of the company and changes in internal processes over a certain period of time.  If the company decided not to single out a separate perspective of human resource capital, it is possible to include indicators reflecting efficiency of human resources and technologies to the internal processes perspective.  It is very important to include indicators on efficiency of IT Technologies use.  In the age of information any company is interested to evaluate indicators showing customer skills and efficiency of using IT systems, computer equipment Internet and web based services, corporate customer database etc.

Learning and growth perspective

•          Expenses for research and innovation

•          Specific weight of expenses on research and innovation in the total amount of expenses

•          Specific weight of expenses on improvements in total amount of expenses related to IT technologies

•          Length of research and innovation projects

•          Resources allocated on research and innovation

•          Investment in training of personnel dedicated to customer relations

•          Investments in innovation and research

•          Expenses related to preparations and study of new products

•          Investments in exploration of new markets

•          Frequency of direct contacts with customers

•          Number of registered patents

•          Average time company patents are in force

•          Number of rational and creative ideas per employee

•          Average training cost per employee

•          Employee satisfaction index

•          Marketing expenses per customer

•          Employee trust rate to the company

•          Specific weight of employees who have not reached a certain age in the total number of employees

•          Non production expenses per customer

•          Specific weight of new products in the total amount of products

Similar to previous category, the above mentioned indicators often reflect interaction of human resources and technologies.  Company management is often forced to use indicators that characterize uncompleted processes contrary to final KPIs.  As known, high professional and education level of strategic development department employees does not guarantee that the company will complete a great number of successful innovation projects, as well as huge investments in business do not guarantee success.  Selected indicators should enable users to make own conclusions as to efficiency of using certain resources or combination of resources.

Human resources perspective

•          Leadership index

•          Personnel motivation index

•          Number of employees

•          Personnel turnover rate

•          Average employment time in the company

•          Average employee age

•          Time spent for education and training of personnel

•          Ratio between temporary and permanent employees

•          Percentage of employees with college degree

•          Average employee absence time

•          Number of female managers

•          Number of job applications to the company

•          Personnel trust rate to the company

•          Ratio of employees under 40 y.o.

•          Annual expense for re-education of personnel

•          Number of fulltime employees who spend less than half of working time in office

•          Ratio of fulltime employees

•          Number of temporary fulltime employees

•          Number of part time employees

•          Number of employees with a per hour compensation system

Please note that in the company decides to create a separate human resources perspective then indicators should fully reflect strategically important characteristics of personnel.  One of such characteristics is personnel competence.  Of besides, many human resource managers group employees by age, sex, education, experience, nationality etc.  Employee turnover rate and career chances have an exceptional importance.  As a result, selected indicators should have strong cause and effect ties with indicators in other categories.

It should be repeated that the choice of key performance indicators solely depends on company strategy, its organization structure, strategic goals, mission and values.  A certain set of indicators which proves to be effective for one company may turn out to be a failure for another.  That’s why, most top managers and scholars claim that successful choice of key performance indicators predetermine successful implementation of Balanced Scorecard and strategy maps in the company.

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The concept of strategy maps is based on the assumption that financial indicators do not always give a full picture of the company activity.  That’s why this model better suits companies and commercial organizations that have the primary goal of making profits.  It also concerns government sector.  This article focuses on approaches to implementation of strategy maps in government and nonprofit organizations, and changes which need to be introduced to the strategy maps concept as compared to their commercial counterparts.

Use of strategy maps in public organizations

Strategy maps complement financial information on the performed actions.  Consequently, companies that have the primary goal of making short-term profits have no urgent need in implementation of strategy maps.  But it would be interesting to know what information the company needs and what systems of gathering information are used in such companies.  Strategic maps are mostly helpful for description of those operations the result which will be visible in future, and advantages (such as profits increase) will not be immediate.  Such operations are performed by support and development departments, although their final goal is to increase profits for the company.

This is especially true for central and local government bodies.  As a service supplier, the government sector has almost the same requirements to administrative management as commercial organizations.  Since the early 1950s the U.S. and other countries have been arguing on success criteria which determine efficiency of government bodies and methods of analysis performed when choosing economic policy.

Currently, strategic maps are being tested in some departments and bodies of central and local governments.  Unfortunately, there are no real cases of a full implementation of strategy maps and Balanced Scorecard.

Strategy maps and local government

Regional and municipal government of Sweden has been using different performance evaluation tools with a set of key performance indicators.  Recently a “customer – supplier” model has been gaining popularity. Local government purchases or orders necessary services and pays for them with the taxpayers’ money.  In order to review the volume of supplied services and even change the supplier, local government is freed from any responsibility as a service supplier.  This responsibility goes to municipal departments that render services.  For example, healthcare department may be divided into several sub-departments, one of which renders services.  The customer goal is to get the best services for taxpayers’ money.  It is very important to introduce indicators related to customer satisfaction.  Thus, introduction of non-financial indicators is very helpful.  If customers are not satisfied, the results cannot be viewed as positive.  Strategic maps can be used both by different service administrators (local government, school councils, hospital management) and service suppliers that are directly responsible to taxpayers and local governments for rendering high quality services.

In fact, a number of municipal bodies in Sweden are using different modifications of strategy maps.  Some local governments have been using key performance indicators which can be easily represented in the form of strategy maps.  It is believed that the key advantage of using strategy maps is related to comparative analysis or benchmarking which is easy to be introduced in municipal bodies, as compared to private companies.  Indicators used by Swedish authorities are related to resources, activity types and perception of government policy and actions by taxpayers.  Moreover, some indicators characterize public attitude towards actions/decisions of the local government.  Some municipal departments even go further by introduction of strategy maps in schools and hospitals.  The local authorities want to know answers to such questions: are students satisfied with curriculum, do patients like their stay in the hospital etc?

Of course, the bulk of indicators are related to financial issues.  Thus, indicators describe the number of real estate objects, equipment units, expenses for maintenance of real estate and production facilities, total length of roads and highways, traffic lights units, of street lights etc.  Through measurement of maintenance expenses it is possible to optimize them (average maintenance costs per one light post, meter of track etc.) The choice of such indicators depends on the way they will be used in decision making.

Distinctive features of strategy maps in government sector

Methods of using and implementation of strategy maps by local governments look almost the same as the methods used by commercial organizations.  However, certain changes and amendments must be introduced to strategy maps to bring them into full conformity with the demands to government organizations.

First and foremost, the concept of strategy maps is based on balance between different activity aspects and criteria.  Moreover, such balance should promote long-term profitability for the company.  Organizations referring to local and central government bodies are pursuing different goals.  Obviously, a substitute for financial category must be found.

Secondly, the four categories of Balanced Scorecard should also undergo certain changes.  At the same time, this model is quite universal and thus can be used in government sector.  Both government and commercial business sector uses strategy map model of the type “yesterday-today-tomorrow.” In other words, it is believed that financial category includes indicators which mostly refer to the past (“yesterday”).  Other Balanced Scorecard categories include indicators and measures related to something that will happen.  But instead of financial aspect government organization should rather describe results of their work in a broader sense in accordance to the model “expenses-results.” The owner of such organization will be the entire society representatives of which form legislative bodies and the government.  For example, when implementing strategy maps in schools the following indicators may be used: number of graduates, number of job positions occupied by graduates in future etc.  These categories are used from the service provider perspective.  As to the customer perspective, graduates themselves can evaluate quality of received education.  From social perspective, the schools should provide society with a certain number of graduates possessing certain knowledge.

Customer perspective can be substituted by focus on relations.  Customers are supreme value for a commercial organization.  In case of government bodies customers are citizens, city inhabitants, taxpayers.  Through substitution of customer relations by focus on relations changes in municipal environment can be easily tracked.

Learning and growth perspective is something that needs no changes when government organization implements strategy maps.  Learning and growth perspective should give answer to the question: “What will happen in future?” What will city infrastructure look like?  What did the architect concept for the city?  What is the progress with renovation of schools and other educational establishments?

Summary

Although advantages of using strategy maps in government sector are obvious and moreover tested by local governments in different countries, it would be wrong to talk about full scale use of strategy maps and Balanced Scorecard by government bodies.  Politics is very subtle and complex thing.  Sometimes something that is said to be done is not done in fact.  Political decisions may bring effect of Balanced Scorecard and strategy map to naught.  Relations of taxpayers and government bodies are sometimes very complicated.  If the information obtained with the help of strategy maps appears in newspapers headlines it will be rather discouraging for the society.  Voters remember promises of politicians, but these promises are often forgotten.  However, it doesn’t mean that the concept of Balanced Scorecard has no chances for survival in the government sector.  Just to the contrary strategy maps appeared to be quite ineffective tool for state governance.

Use of Balanced Scorecard is rather recommended for local governments that will describe their accomplishments with the help of strategy maps.  It would be great if a taxpayer can visit Internet page and look at that the development strategy of his native city and check how his money is used.  Of course, Balanced Scorecard and strategy map concept should be adapted to specific character of the government sector.  This is something that can be really done, although no one is claiming then this will be an easy task.

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