Balanced Scorecard Designer

Cascading: conclusion

Indicative and Imperative KPIs

It is not a secret that in practice the system of budgetary management receives unflattering recalls and censures for the completely avoidance a company strategy, i.e. there is no direct connection of the budget of development (constituted on three – five years for fulfillment of KPIs of the Innovation and Learning and Internal Process Perspectives) and the master budget (the system of the interconnected budgets approved for no more than a year). At the same time, if the process of construction of budgetary management model is performed in coordination with the strategy, formulated in terms of KPIs, such system is really capable to solve the problems facing to top management of the company, referring to the corporate administration. To implement the model of KPIs to the multi level companies’ management systems (with the need of organizing cascading: the process of distribution of authorities and responsibilities for indicators among the lower hierarchy level subsystems’ managers and specialists) it is rational to divide KPIs into the following groups:

• “Indicative” indicators;
• Imperative (control) indicators.

The quantity indicative KPIs correlates with the purposes and processes of the services and divisions, associated with them. Examples of such KPIs could be: “Quantity of document circulation per week”, “Quantity of specialized exhibitions per season” and others. So “indicative” indicators can be both leading, and lagging.

Imperative (control) indicators are creating by the top hierarchy levels of management and their quantity is the same as the quantity of Perspectives, the top level categories, including the overall sum of the subcategories and KPIs. All the imperative indicators are actually lagging ones. These indicators are needed for top management (it also can be a management company) to control the performance of lower level management (it also can be an enterprise or a factory). Thus it is supposed that target values of control indicators are formed by the higher level management (or company) in an exclusive order and “lowers” them downwards for fulfillment. The purpose of lower level management is to form the target values of indicative KPIs the way, so: on the one hand, their achievement will be directly connected and aimed to achieve the imperative KPIs target values; from the other hand, they could direct the resources (Human, Financial and others) to full-scale realization of strategic goals. At the same time, to maintain of integrity of the management system, the overall set of indicative and control KPIs needs to be determined for all chain of management beforehand. such managerial technique promotes realization of a principles of Management by objectives (МВО). MBO concept’s important statement is all levels of management hierarchy to be involved in process of achieving strategic goals, using the language of KPI as all – fits – one to organize well functioning cascading and both ways feedback (for example, orders <-> reports).

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

Cascading

One of the most important purposes of management is performing well organized cascading. Cascading could be determined as the process of distribution of authorities and responsibilities for indicators among the lower hierarchy level subsystems’ managers and specialists.

It needs to be mentioned that the cause and effect relations between indicators, presented in the map of KPIs, are mostly not function (can not be presented in a way of mathematical formulas). For example, the achievement of desired performance value for such budgeting indicator as “the percentage of innovation investment” (a part of Innovation and Learning perspective) does not cause directly improvement of the value of such indicator as “Cleanliness of metal fusion” (Internal Process

Perspective), but it creates «strategic base» to achieve this improvement. It means, it usually needs a lot of managerial work to focus human resources as well as other type of resources (and for example, financial) to achieve the target value of some indicator.

Classification of indicators for management according to their importance

While creating a model of KPI based management for the certain company, it needs KPIs for management to be divided into the following groups according to their importance*:

• KPI of strategic type;
• KPI of standard type.

KPI of strategic type are linked directly with the company’s strategy. The achievement of target values of such indicators cause significant changes in the whole company. It needs for managers to initiate and monitor the set of complex activities, usually in different hierarchy levels, to achieve the target values. It needs active management’s initiatives: the actions leading to essential “break” of one of process aspects (for example, product’s quality, automation, department and operation group management system construction, and others). Strategic KPIs usually show the nature of Strategic Plan referring to the language of measurement, being whole company’s first – priority. The last but not the least is that Strategic KPIs’ target values present the competitive advantage, the company is aimed to.

As for standard type of KPIs, its values could be supported by managers to be frozen within some particular interval in short term period. Oppositely to strategic KPIs, standard ones are linked directly neither to the strategy, nor to operational management. A good example of such KPI could be “current liquidity coefficient” indicator; its value could easily be supported by managers to be limited within the interval from 2 to 2.25.

In needs to be noticed that considering indicator to belong to standard or strategic depends on the strategic plan, top managers created and approved. The more important the KPI is, referring to strategic plan, the closer it comes to be considered strategic. The process of division the indicators into those two groups is an important company’s activity, because it needs a well optimized resources distribution for the strategy to be realized. Considering every indicator to be strategic, the company might face shortage of resources when it comes up to realize the strategic goals via directed operational activities. A good example of the importance of resources distribution according to the company’s strategic goals could be a work of subsystem of budgeting. Read more about cooperation of BSC (a type of KPIs based management concept) and the subsystem of budgeting in the article: “BSC and the systems of management: BSC and the Budgeting system”.

Plans (budgets) in the given context are meant as plans in the quantitative expression, displaying achievement of KPIs. Since the model of the interconnected plans and budgets needs to guarantee the consistency of the information in budgets, this instrument should be implemented to the process of balancing target values in model KPI. Thereupon the expanded demands are needed to be made to a planning and budgeting subsystem, integrated in the company: this subsystem should become the basic instrument of quantitative planning and modeling within the whole company. For example, the standard indicator of the “turn-around time of a debt receivable” can be calculated on the basis of the given operating budgets. In turn, it is necessary to form a special development budget, in addition to basic types of budgetary management subsystems, for the monitoring of KPI’s values of strategic type (for example, “The market share”, “Cleanliness of metal fusion”) could be performed as well. This special development budget (for example, the budget of investments, the budget of capital investments) needs to be aimed to realization of long-term projects with the established budgets (in contrast with achievement of certain target significances of data KPI).

(*) The importance of KPIs could also be presented and measured using a weight value parameter. Most of dashboards, aimed to support KPI and BSC management concept, provide weight values management as a necessary attribute of KPIs. Knowing weights of indicators, presenting on the dashboard or some type of report, helps resource distribution (for example, budgeting plan) to proceed according to the strategic plan, providing most important activities with more assets. Also weight values presence on a dashboard directs the attention of managers to the indicators, important for the priority strategic goals to be achieved and makes them to provide more initiatives to the activities, associated with those indicators.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

Cause and effect relations between KPIs

While building a map of KPIs for the departments and the responsibility centers, the process of defining cause and effect relations between KPIs is also performing. Those relationships could be divided into two groups: clear (the ones that might be calculated) and unclear (hidden) ones. Clear (computational) cause – effect relationships can provide the way to calculate a higher level KPIs on the basing on lower level KPIs’ values. Unclear (hidden) indicators present cause – effect relationships between KPIs, which belong to different categories or subcategories. While building the conceptual map, it needs the quantity of KPIs, which refer to management level, to be limited by 15 – 20 ones for one level of management. It is urgent for big companies with sophisticated hierarchy; it is aimed to prevent the KPIs to be mixed up and present conflicting information. This suggestion of limitation of the KPIs is based on concept called “necessary minimum provides the best way to present the achievement of goals”, which appeared as a result of practical repots of companies in different business sectors and locations. It is certainly is not an absolute rule, but the logic of preventing the map of KPIs to be overloaded by the quantity of measures needs to be understood by top management.

The process of establishing cause and effect relations between KPIs, which form the structure of the system, is actually the process of balancing the scorecards. While performing the relations’ determinations and formalization, strategic hypothesis, related to the way on how one indicator’s performance value dynamics depends on another KPI’s performance value dynamics, appear as well as relatively redundant indicators are determining. Usually each hypothesis has a formalized nature, i.e. it actually represents the certain stable assumption, which usually is one of the strategic points (for example: «Achievement of the set market share promotes share price persistent growth»).

The presence of hypotheses, related to cause and effect relations of strategic goals between each other, can be revealed on the following basic points:

• Evidence of logical interrelation between indicators;
• The function relations between indicators exist and can be presented in a way of mathematical formulas;
• The correlation linking between the indicators existence is proved by the correlation coefficient, which had been determined as a result of the analysis and research (this point highly increases probability of existence of a cause and effect relation).

The process of balancing scorecards is the last stage to complete the creation and forming KPIs’ map. When the dynamics of KPI’s values, referring to the strategic management is defined, it needs the stability of cause and effect relations between indicators to be verified in an operative mode with the purposes of formation of more exact cause and effect hypotheses.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

What KPI to include in the map?

While defining and selecting KPIs to be included into management level KPIs map, the special corporate concept is forming, aimed to create and form set of criteria for indicators to be satisfied with the needs of the company. The list of them could be mostly like the following (starting with the highest weight value and finishing with the lowest one):

• The KPI present the key aspect of the company’s business activity (key business process);
• The KPI’s value is an important condition, influencing managerial decisions;
• The KPI could be managed directly, i.e. responsible managers might influence on the performance of activity, measured by the indicator;
• The KPI has a potentially stable cause – effect relationships with other indicators;
• It is easy to collect and calculate data referring to the KPI. It also easy to report KPI’s value to the higher level;
• The KPI is based on economical (statistical) meaning at consolidation (aggregation) on higher levels of responsibility.

Deciding whether to include the particular KPI to the responsible manager’s dashboard or not, it needs to use the clearest and most common (referring to the business sector, or to the company, or to the department) term, conditions and criteria.

Perspectives distribution of both leading and lagging indicators could be performed the following way: leading KPIs are going to the perspectives, related to human resources, company’s development, internal technological and business processes, PR and marketing (Customer, Internal Process and Innovation and Learning Perspectives, according to the original BSC concept); while lagging indicators are going to the perspectives, related to the financial and accounting activities (Financial Perspective, according to the original BSC concept).

It needs to be noticed that KPI based Management offers to use not only financial indicators, but also other, non material ones to measure the whole company’s performance. It is not enough to use the only financial KPIs not only for top managers to gain an objective dashboard, but also for translating the strategy of the company and its priorities to employees and group managers. Nevertheless for-profit organizations need financial indicators as an important measure, good performance of which could result for company to succeed. But the map of KPIs needs to balance the weights of perspectives the way to pay a bit more attention to leading indicators, because the activity they present might be managed directly and fast. Leading KPIs provide top managers with an opportunity to react rather fast to the problems appearing, preventing their growth into local crisis. Also leading indicators help managers to better understand the key processes and ensure managerial decisions to cause a long term effect. As for lagging indicators (most of which are related to the financial activities), they oppositely provide a short term view and managerial decisions based on their information are not able to cause a long positive effect. But not absolutely all the KPIs in Financial Perspective are lagging ones. “The index of budgeting management quality” as a KPI, related to Financial perspective could be a good example, presenting leading indicator of financial activity.

As it is known, the system of budgeting management is mostly focused on financial indicators, the meaning of which are linked directly to measures of operational plans and budgets. That is why it needs the system of KPI management to be focused on non material indicators, which measure the customers’ satisfaction, internal process effectiveness, the potential of staff, innovation ideas and other activities, oppositely to budgeting system. KPI management concept in this case is based on the idea to improve non financial activities in order to increase financial ones; in other words, it is aimed to gain profit (certainly, not always right away, but absolutely always in long term perspective). But however the range of KPIs to be focused on is not limited by the only indicators, which are linked directly to the budgeting measures: there are also KPIs, the linking between which is sometimes hard to determine and formalize, could be used in a map. However those links are hard to determine and formalize, it could be used to put forward a strategic hypothesis (for example, such cause and effect point as “The market capitalization increase depends on satisfaction of consumers”). It increases the number of KPIs and motivates managers to look for initiative solutions to realize and support those links between indicators and the activities, they are associated with.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

Leading and Lagging indicators concept as an inherent part of KPI based management

It certainly is not enough just to create and use the set of indicators measuring such activities as financial results (effectiveness) and cash flow to manage the company in balanced way. Such indicators show only one part of operational activity, which appeared as a result of fulfillment of current plans and budgets.

It is usual for practice of companies that most of financial indicators of efficiency actually are derivative of the approved financial budgets, i.e. forming the structure of distribution of the resources, but not of processes. But for purposes of management it needs to fund KPIs, which could be influenced directly by managers. It is knows, that the only way for manager to influence on indicator is to know exactly all the chain of delegation (all the part of cascading) referring to this indicator, translating to the set of more and more detailed and specified tasks. For example, the return on assets as the major indicator (which is derivative of the budget of incomes and costs indicators and the balance of forecast) is usually controlled by the financial executive officer. Certainly, it needs to control all the chain of parent indicators to receive a precise value of this KPI. In this case the chain consists of: Profitability of earnings and asset turnover, which, in turn, depends on productivity of resources, success of realization of investments into development of the company and a stable market share.

Lagging indicators are mostly historical metrics; they are aimed to measure the performance of company’s past activities. For example, most of financial KPIs are actually lagging indicators. Managers are not able to receive up to date information from lagging indicators (reports might be received once quarter or even a year). That is why they are not able to monitor these processes directly. Lagging indicators present the performance of the overall system’s work and there are lots of factors that influence on them. These metrics show the results and effects of management actions that already have been applied.

Leading KPIs are the metrics that refer to the current and future effects. Oppositely to lagging indicators, leading ones are linked with manager’s decisions directly. After a decision is taken, it could be resulted in changing the performance of activity, that leading indicator show. Lagging indicators are needed to be used as a tool to manage the company’s future (which is actually one of the most important goals of the Balanced Scorecard concept).

It needs to be known that leading and lagging KPIs terms might be used by both strategic and operational management. As for strategic management, it uses those KPIs as elements of the strategic map. As for operational management, the current planning might use leading indicators of efficiency as a part of an operational cycle frameworks. Since the duration of operational cycles is usually from a week to a month, it is necessary to make special demands to periodicity of reports on leading KPI’s, because those indicators allow to measure the performance of process and actually refer to up to date problems of subsystems.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

BSC management system methodology

Balanced Scorecard concept is one of the most influential conceptual solutions of strategic management on indicators and also most widely spread among the companies worldwide. It offers to divide all the key performance indicators by the strategic purposes, the activity, they measure, is directed to. Those directions are called “the Perspectives” in Balanced Scorecard methodology (read more in the article: “What is Balanced Scorecard concept”). There are four of them according to the original concept: Financial perspective, Customer perspective, Innovation and learning perspective and Internal process perspective (read more about every perspective’s standings in the article: “What is Balanced Scorecard concept: the four perspectives”). All the KPIs become a part of one of the Perspectives. Financial perspective usually includes KPIs, which present cost indexes of the company, its yield, liquidity and solvency; such as: Return on investment, Cash flow and others. Customer Perspectives include KPIs, presenting customer’s satisfaction and marketing actions’ efficiency; such as: “New customers acquired”, “Complaints number”, “Customer attrition” and others. Innovation and Learning Perspective include KPIs, which present innovational techniques creation, finding and implementation as well as development and education projects progress; such as: Number of ideas developed within measurement period, Number of collected ideas that were implemented, % of ideas that are funded for development and others. Internal Process Perspective include KPIs, which measure the effectiveness of existing technological and administrative activities within the company also called business process; such as: Administrative expense (total revenues, %), Administrative expense (customer, $), Lead time, product development, days, Lead time, from order to delivery, Days and others.

There is no all – fit – one set of indicators, it needs every company to create its own. The main factors that influence on the KPIs are the following:

• Business sector;
• Business development directions;
• Company’s structure;
• Features of the company relations with macro economical and an operational environment;
• Top management’s needs and expectations of BSC implementation and functioning.

Oppositely to KPIs, the Perspectives are considered universal (according to the original Kaplan’s and Norton’s concept). Practically, the four Perspectives really could fit most of the companies but it is not necessary to be limited by them. One of the ideas of concept’s founders is to open manager’s eyes to such non-material activities as innovation or process optimization. That is why it is certainly up to managers to add Perspectives that are important for the company. It could be Ecological Perspective or Public Relations Perspective. Practically, first of all, the Perspectives are defining (usually from 4 to 8 ones) and after that, the process of creating, forming, selecting and substantiation of KPIs for every perspective starts. All the Perspectives and KPIs from operational plan are needed to be linked with the strategic goals they are aimed to achieve.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, multilevel companies, strategy, studies, theory

KPI definition

While creating a model of KPI based management it needs to define the directions of company’s activities aimed to achieve one or another strategic goal; also the strategy itself needs to be overviewed, rebuilt and formalized. Practically, every company has some type of goals. But nevertheless, when it needs these goals to be formalized and detailed, it often causes disagreement between persons concerned. One of the most important actions to be performed in order to direct the business to the strategy is to understand and adjust the main goals, the company needs to achieve. It is not less important, to learn how the system of internal operational activities is functioning and how its performance affects on strategic goals achievement. Defining the factors of influence is needed to establish the linking between operational and strategic activity, which makes it possible to create the strategic map, presenting all the strategic goals along with operational tasks, which work on its achievement. To monitor this map, it needs Key Performance Indicators to be defined. These indicators have to show the performance of the key activities of the company, including internal processes, activities of departments, managers’ decisions, and others.

In this case, KPI could be defined as effectiveness measurement indicators, which present one of the activities of the company, important for one of the strategic goal’s achievement.

KPIs are a kind of language to formalize the strategy and put forward hypotheses. It also needs not to mix up KPI with other measures existing in company’s process. The features, that make indicators to be KPI are the following:

• Answering the purpose of strategy;
• Presenting the performance values, taking into account both operational and functional processes*

(*) Operational process is the one, which involved directly in the creation of product’s or service’s cost and functional process is additional, serving one.

The map of the article

• Part 1: This part introduces the basic statements of KPI based management. Also it defines the term KPI;
• Part 2: BSC management system’s methodology;
• Part 3: Leading and Lagging indicators concept as an inherent part of KPI based management;
• Part 4: This part presents the basic criteria of what KPI to include in the map;
• Part 5: Cause and effect relations between KPIs;
• Part 6: The beginning of Cascading description: classification of indicators for management according to their importance
• Part 7: Conclusion of Cascading description: Indicative and Imperative KPIs

Expert_KPI Articles, Balanced Scorecard Theory balanced scorecard, BSC, key performance indicator, kpi, strategy, studies, theory

Balanced Scorecard and the system of Organization Design

The system of BSC could be a good basis for a system of delegation of authorities. When the Balanced Scorecard concept is implemented it helps every employee to understand their responsibilities. Also the exact logic of cooperation between all the main activities is forming with help of the new system. In other words BSC already contains a set of rules referring to the Organization Design. Specifically, Organization Design is defined as a formal, guided process aimed to integrate the people, technology and information of an organization.

Certainly some type of an organization design exists in every company but BSC makes it based on values. This comes to be the most important feature of cooperation between organization design and the system of Balanced Scorecard. The following paragraphs will describe the features of value – based model referring to the organization design.

A value based model for the organization design gives an important advantage: manager is going to have a possibility to control the results of their own actions. Self – control makes a strong impact on motivation of the employee. It often happens that employees begin working much better, trying to perform the task by the most efficient way but not simply to ensure a necessary minimum to be paid.

Special indicators, which allow easy and exact way to measure the performance of activities, are needed to be created for every manager. The measure units could be not only number-based but also could contain some scales of quality. Also such indicators sometimes may not be the same as operational indicators. The most important thing here is those indicators to be aimed to solve the existing problems and they should be focused on the directions of grows according to the strategic goals in order to show the employee the directions of self – improvement.

As for the organization design referring to the departments, such factors as strategic goals, operational tasks and indicators could be presented in the form of sections of duty regulations and orders from above.

A practical example

During one of the implementation projects in the big company, the implementers used a Balanced Scorecard as a basis for creation and development of the system of organization design. The distribution of the strategic goals among the departments was held by the system of BSC. While the project of implementation was continuing, some hidden problems were noticed and solved (for example, it was decided not to combine the two different businesses into the one as the only body corporate).

Also BSC was used to create the sections of duty: at first, functional responsibilities were determined, and then the strategic goals and the operational indicators for each employee were created which later became one of the most important parts of the contracts.

Summary

The logic of creation and setting a model of organization design was described in this part of the article. It still could be some specific features referring to the system of delegation of authorities as well as to the cooperation between the main activities of the company. It needs a managerial decision to choose the way of implementation BSC into the existing subsystem of organization design between adding several elements of value – based management (the part of BSC) or to reconstruct the whole subsystem. Sometimes the second alternative is the only choice. For example when the company aims to grow into the modern management system using the best scientific concepts, or if the situation in company is that bad, so nothing but reconstructing of the whole managerial system could help to fix the problems.

Conclusion

This article showed the most common ways of cooperating BSC and the basic managerial subsystems of the company according to the practical and theoretical issues. The features of coordination BSC and the strategic management system, the system budgeting, the motivation management and the system of organization design were described in five parts of the article. Certainly it was not possible to fully describe all the subsystems of company’s management could ever exist. We could later continue the description of the integration BSC into company. But the purpose of this issue was to show the logic of BCS to be able to coordinate with any subsystem with specific features inside the company. Whatever subsystems exist in the model of business all of them needs to be linked with each other and with the only center of coordination to be functioning directly to achieve the strategic goals of the whole company. This is the only way not only for BSC to be functioning well, but also for the company to be directed into its strategy being balanced, well thought-out and successful.

The map of the article

• Part 1: This part is the intro, the first part of the whole article. It also contains the pyramid of management systems;
• Part 2: BSC and the Strategic Management system;
• Part 3: BSC and the Budgeting system;
• Part 4: BSC and the motivation system;
• Part 5: Balanced Scorecard and the subsystem of Organization Design. This part also contains the conclusion and summary for the whole article.

Expert_KPI Articles balanced scorecard, BSC, management, Organization Design, studies, subsystems, theory

BSC and the Motivation system

In the 21st century, the age of information, people with their specific knowledge have become one of the most important types of business resources. There are a lot of theories aimed to increase the motivation of staff in order to increase the performance of the whole business. That is why BSC as a concept aimed to reform the overall logic of business needs to be integrated into the subsystem of motivation.

Every employee’s support is an important condition for a successful functioning of Balanced Scorecard. According to the theory by Kaplan and Norton the staff needs to know exactly not only the strategic goals of the company but also the way on how their operational activity could help to achieve those goals. That is why it is very important to set linking between the staff motivation managerial subsystem and the Balanced Scorecard.

One of the common ways for BSC to be respected by the staff is reconstructing the logic of salary. One of the parts (it could also be an additional part) of every employee’s salary could depend on the degree of achievement of strategic goals. When Balanced Scorecard system is functioning, this part of the salary could be easily calculated according to the information of the indicators performance values. The three main different levels of those calculations are the corporate level, the level of departments and the personal level. The part of salary based on the strategic goals’ achievement could be combined with other part based on the previous logic of salary (price-work, the hourly pay or the fixed salaries).

There are several ways to link the part of the salary with the indicators of BSC:

• Bonus gained for the achievement of strategic goal is linked with one of the indicators. But if more than one is needed, the indicators could be ranged using the concept of weights. For example, the performance value of the indicator called “A” could be linked with 15 percent of the amount of bonus, the performance value of the indicator “B” could be linked with 45 percent and so on;
• There is a basic amount of money for the salary of every of the employees. If the employee manages to reach some value of the performance indicator or indicators (according to their personal plan for a period of time) he or she is responsible for, their salary is set as 100 percent of the basic amount. If the plan is not performed, their salary is set as 80 percent and if he or she overfulfils the plan of performance values of indicators, their salary for a given period is set for 120 percent of the basic amount;
• Referring to the chiefs of branch or grocery departments of the company it is possible to use the composite indicators which could be based on several conditions. For example, the positioning within the branch could be measured using such indicators as “recognition of the company in branches”, “quantity of branch decisions” and others. All of those indicators could be a good measurement system along with the main indicators the department is responsible for. This way also shows the logic of personalized concept of motivation linked with BSC – it has to found the way how to measure the role of every employee and no of their contributions to the whole company’s strategy achievement has to be forgotten.

But it needs to be noticed that the system of motivation should not be fully oriented only on strategic goals and the contribution of the whole company’s performance. It might be risky because employees could start thinking only about their strategic roles and indicators their bonus stands for but not about their routine operational tasks. So it needs to leave one of the parts of their salary to be based on their operational activities’ results in order employees to pay attention to it as well. In theory Balanced Scorecard perfectly translates all the strategic goals into operational tasks but practice of the system’s usage almost never rich such ideal situation, especially in the big companies where might be lost of lags in feedback and linking. That is why operational indicators sometimes do not show the same as indicators given by strategy and referring to salary it could be separated.

A practical example

The mistakes in creation of indicators could be risky for the motivation of the staff. It often happens when wrong indicators could be disincentive for employees. For example, a manager of logistics department of one of the big companies had “decreasing the cost of supplies” as one of his main indicators. But if some lag of supplies happened during the first dates of the new month, the plan for the indicator failed for all the period and the manager stopped to pay attention to it until next month. Certainly, the performance of one of the strategic goals became worse and worse. Another example shows the chief who set too high value of planned performance for his people’s indicators which caused a sharp decrease of the staff’s salary while the level of performance was not changed. It means sometimes it is better to avoid such binary indicators as those that was mentioned above. “Yes or No” conditions could be changed into something more objective and the decisions of changing salary somehow could also be overviewed if the logic does not work for one or another person.

Summary

Referring to human resources, the main purpose of Balanced Scorecard system is showing the strategy of the company to every its employee. The theory considers that for employee the understanding of their role and their contributions to the whole company’s strategy is already a good reason to be motivated. But practically it does not always happen this way. Since this article is only a part of series called “BSC and the systems of management” the question of how to link the subsystem of motivation staff and Balanced Scorecard is given here just referring to the easiest and most understandable way – the salary changing.

Certainly there are great number of theories and concepts aimed to motivate the staff and every company could use any combinations of those studies. That is why there is no ideal instruction that could give an answer on how to coordinate those systems; it needs specific knowledge of the situation in company to create a suitable plan of integration of the BSC. Just like anything concerned to a man the way of linking BSC and the motivation system needs a personalized concept – every man is unique and needs their own specific methods of motivation.

The map of the article

• Part 1: This part is the intro, the first part of the whole article. It also contains the pyramid of management systems;
• Part 2: BSC and the Strategic Management system;
• Part 3: BSC and the Budgeting system;
• Part 4: BSC and the Motivation system;
• Part 5: Balanced Scorecard and the subsystem of Organization Design. This part also contains the conclusion and summary for the whole article.

Expert_KPI Articles balanced scorecard, BSC, management, motivation, studies, subsystems, theory

BSC and the Budgeting system

Balanced Scorecard system might be cooperated with the subsystem of budgeting on tree different levels. First of all BCS could set up the basic parameters for the budgeting model of the company. In this case the Scorecard’s indicators are going to become a starting point, the basis for the determination of the budgeting model for the whole company.

Also the system of budgeting could cooperate with the Balanced Scorecard by importing the exact values of its indicators’ performance to the BSC as target values for it. The practical examples show the high risk of usage of financial indicator’s as a key targets for the whole company’s Scorecard if those indicators were not tested on financial and economic model. Sometimes it is possible for the financial organizations to artificially increase values of profitableness by “inflating” the volume of assets. But the risk grows this way even more. The process of monitoring of the financial indicators on the financial and economic model (which is one of the common functions of the budgeting subsystem of the company) allows management to perform a “sensitivity analysis” (the test aimed to define what exact factors will affect achievement of one or another indicator).

The third level of systems’ cooperation is referring to the distribution of financial resources of the company between the different strategic goals. In order to link the budgeting subsystem with Balanced

Scorecard it needs every budgetary demand or the item in the budget should be linked with one of the strategic targets. According to practical examples is usually performed the following way: in any budgetary demand (except for the “Costs” item) the strategic target, which is linked with it, needs to be noticed along with the indicator that is going to grow when it will be performed and the result that is going to be gained. In this case, the estimation of expediency of the budgetary demand will be guided not by some abstract importance or personal sensations of the committee of supply participants, but it will be based on quite real indicators. And the main benefit of such cooperation of systems is the possibility of management to estimate the amount of financial resources necessary to spend for achievement of the given strategic target. Certainly, the amount of money will still be approximate but accuracy of the forecast will be increased manyfold. It is also important to separate the investment outlay (long time investments which will not gain profitable returns immediately) from the operative expenses (those which are referring to a regular operations of the company) for the system to work successfully.

A practical example

The absence of any stable linking between the subsystem of budgeting and the strategic management (or BSC if it is implemented) causes the errors in setting up priorities while financing different activities of the company. Mostly such activities as “development of employee’s skills” or “customer satisfaction” do not receive enough money to be performed well. The example of one of the manufacturing companies where BSC was implemented showed that before the new system began to work the activity of learning was almost forgotten by the budgeting system. Certainly the all the operational processes were done through inertia which caused a huge decrease of the performance. The situation with the company could be described as the “Cash Cow” position in the Boston Consulting Group matrix (a well known strategic management concept): the company with high market share in a slow-growing industry. That is why implementers needed to find the way to continue the growth. While setting up the BSC system, implementers reached their goal: after the review of the whole company’s strategy the top management started to pay attention to the learning as well as to the other non material activities which fixed the situation significantly.

Summary

The system of budgeting as an important part of the company needs to understand what strategic purpose it works for. The only proper way of distribution of financial resources is that every dollar from the company’s budget needs to be spent only to reach one or another strategic goal. Also all the four perspectives of Balanced Scorecard system help not to forget any activity which could be considered useless by short sighted concept. BSC needs to show to every department and employee their role and importance for the company’s strategy. In this case budgeting subsystem could be considered as an important tool that is performing the linking between operational and strategic subsystems by the only of the clearest way to every employee – giving money.

The map of the article

• Part 1: This part is the intro, the first part of the whole article. It also contains the pyramid of management systems;
• Part 2: BSC and the Strategic Management system;
• Part 3: BSC and the Budgeting system;
• Part 4: BSC and the motivation system;
• Part 5: Balanced Scorecard and the subsystem of Organization Design. This part also contains the conclusion and summary for the whole article.

Expert_KPI Articles balanced scorecard, BSC, budgeting, management, studies, subsystems, theory