Balanced Scorecard

Balanced Scorecard YOU GET WHAT YOU MEASURE! What to measure? Not always what you want to get. Measurement (with rewards) affects behavior. What to measure? Target earnings Short term cost cutting to the detriment of quality and brand. Customer satisfaction Give away profits Quality

What to Measure? Traditional measures: Backward looking. Net income, EPS ROA, ROE Sales Backward looking. Each of these measures what you did in the past. May cause wrong behavior. Sacrifice long term for short term

Financial Measures Make them more relevant Earnings versus ROA versus EVA Abandon them for new metrics. Time to meal service Employee turnover Financial measures will follow.

Why Not Both? No single metric can provide all the necessary information to run a business. Go with a balanced portfolio of metrics. The Balanced Scorecard.

Analogy to an Airplane More than one instrument in the cockpit Today I will focus on airspeed! What about other things? Fuel, altitude, bearing, destination.

Not Just a Bunch of Random Metrics! Just Looking at an assortment of measures, some financial and some non-financial, is not necessarily a balanced scorecard approach. You need to have an integrated set of measures.

The Scorecard is a Strategic Map All roads should lead to your overall goal. You need to ask what do we need to do to get there. The question should be asked from various perspectives. Each question, from each perspective, ultimately leads to what you wish to achieve.

What Comprises a Balanced Scorecard? Four Components: Mission Perspectives Objectives Measures

Mission Highest level within a scorecard concept. Answers the following questions: What is our overall reason for being? Why do we exist as an organization?

Perspectives Perspectives represent the various areas that impact performance and determine whether the mission is obtained. Perspectives answer the question: In what are the key areas must we focus to obtain our mission?

Perspectives The following perspectives are key for most enterprises: Financial Customer Internal processes Learning and growth

Objectives Objectives identify what is important within each perspective

Objectives - Financial How does the investment community view us?

Objectives - Customer What segment do we serve? What does the customer demand from us? What value do we provide to this segment?

Objectives - Internal Processes What must we excel at? What must we do to meet the customers’ needs and provide value?

Objectives – Learning and Growth What must the organization do in order to support and improve the processes identified in the internal process perspective? Can we continue to improve and create value? What skills are needed?

Measures Measures provide a way to keep score. In other words, how can we determine if we are doing what needs to be done?. The measures are the “actionable” component of the scorecard.

How many metrics? Just enough to get the job done. Too many leads to sensory overload. Try to keep it manageable. Typical is about four per perspective.

Four perspectives Financial Customer Internal Processes : Vision and Strategy Customer Internal Processes Innovation and Learning

Rice Bowls-R-US Rice Bowls-R-Us’ (RBRS) mission is to sell more rice bowls than any other restaurant chain, including the leader. Panda Express. I. M. Rice, the president of RBRS has traditionally tracked total sales.

Rice Bowls-R-US Such an approach is one-dimensional No insight is gained on why things have improved (or faltered). No insight is gained as to what needs to improve? No insight as to where problems lie. Mr. Rice is only able to assess the business from one perspective!

Rice Bowls-R-US Mr. Rice asks himself: What is it that sells more rice bowls?

Rice Bowls-R-US Great service sells more rice bowls. It is what the customer demands. Customer perspective Measure Excellent results on customer surveys

Rice Bowls-R-US How do we deliver great service?

Rice Bowls-R-US Servers must deliver food efficiently and with a smile. Internal process perspective Measure Amount of time from order to delivery.

Rice Bowls-R-US So how do we learn the process for quickly getting the bowls into the customers’ hands and interacting in a pleasant way?

Rice Bowls-R-US The servers need to be trained in the latest techniques. Internal learning and growth perspective. Measure Number of employees attending and passing training classes

Rice Bowls-R-US All the components work together to support the ultimate goal of serving more rice bowls. President Rice can see where the business is running well or where help is needed. Employees understand what they need to do to achieve the goal.

Benefits of the BSC Brings together in one report many seemingly separate elements of the firm. Guards against sub-optimization. Reduce time to market Reduce setup costs

Problem with Balanced Scorecard What is the score? Football analogy Many metrics to measure, so what are the trade-offs? Competing for scare resources such as money, time

Solution Treat Balanced Scorecard as an instrument panel, not as a scorecard. Choose one measure as the score (firm value) and consider trade-offs among other measures to realize ultimate goal.