1. Balanced Scorecard
Management must consider both financial and operational performance measures
Measures should be linked with company goals and strategy
Financial measures are only one measure among many
Uses key performance indicators
The balanced scorecard recognizes that management must consider both financial performance measures and operational performance measures when judging the performance of a company and its subunits. These measures should be linked with the company’s goals and its strategy for achieving those goals.
The balanced scorecard represents a major shift in corporate performance measurement. Rather than treating financial indicators as the sole measure of performance, companies recognize that they are only one measure among a broader set. Keeping score of operating measures and traditional financial measures gives management a “balanced” view of the organization.
Management uses key performance indicators—such as customer satisfaction ratings and revenue growth—to measure critical factors that affect the success of the company. 1

2. The Balanced Scorecard
The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI.
I’m glad we used the balanced scorecard to tell which approach
is best.
Reduce
Expenses
Increase
Sales
Reduce
Assets

3. Examples of critical factors and corresponding KPIs
COMPANY GOALS
Examples of critical factors and corresponding KPIs
CRITICAL FACTORS
Customer satisfaction
Operational efficiency
Employee excellence
Financial profitability
As shown here, key performance indicators (KPIs) are summary performance measures that help managers assess whether or not the company is achieving its goals.
KEY PERFORMANCE INDICATORS
Market share
Yield rate
Training hours
Revenue growth 3

4. Four Perspectives
Financial
Customer
Internal Business
Learning and Growth
The balanced scorecard views the company from four different perspectives, each of which evaluates a specific aspect of organizational performance:
1. Financial perspective
2. Customer perspective
3. Internal business perspective
4. Learning and growth perspective
Companies that adopt the balanced scorecard usually have specific objectives they wish to achieve within each of the four perspectives. Once management clearly identifies the objectives, they develop KPIs that will assess how well the objectives are being achieved. To focus attention on the most critical elements and prevent information overload, management should use only a few KPIs for each perspective. 4

5. Financial Perspective
How do we look to shareholders?
Ultimate goal is to generate income for owners
KPIs:
Sales revenue growth
Gross margin growth
Return on investment
Working capital used
The financial perspective helps managers answer the question, “How do we look to shareholders?” The ultimate goal of companies is to generate income for their owners. Therefore, company strategy revolves around increasing the company’s profits through increasing revenue growth and increasing productivity. Companies grow revenue through introducing new products, gaining new customers, and increasing sales to existing customers. Companies increase productivity through reducing costs and using the company’s assets more efficiently. Managers may implement seemingly sensible strategies and initiatives, but the test of their judgment is whether these decisions increase company profits. The financial perspective focuses management’s attention on KPIs that assess financial objectives, such as revenue growth and cost cutting. Some commonly used KPIs include: sales revenue growth, gross margin growth, and return on investment. 5

6. Customer Perspective How do customers see us?
Top priority for long-term success
Customer concerns:
Product price
Product quality
Sales service quality
Product delivery time
KPIs:
Customer satisfaction
Market share
Number of customers and repeat customers
Rate of on-time deliveries
The customer perspective helps managers evaluate the question, “How do customers see us?” Customer satisfaction is a top priority for long-term company success. If customers are not happy, they will not come back. Therefore, customer satisfaction is critical to achieving the company’s financial goals outlined in the financial perspective of the balanced scorecard. Customers are typically concerned with four specific product or service attributes: (1) the product’s price, (2) the product’s quality, (3) the sales service quality, and (4) the product’s delivery time (the shorter, the better). Since each of these attributes is critical to making the customer happy, most companies have specific objectives for each of these attributes.
Businesses commonly use KPIs, such as customer satisfaction ratings, to assess how they are performing on these attributes. No doubt you have filled out a customer satisfaction survey. Because customer satisfaction is crucial, customer satisfaction ratings often determine the extent to which bonuses are granted to restaurant managers. Other typical KPIs include percentage of market share, increase in the number of customers, number of repeat customers, and rate of on-time deliveries. 6

7. Internal Business Perspective
At what business processes must we excel?
Three factors:
Innovation
KPI: Number of new products developed
Operations
KPIs:
Product efficiency – number of units produced
Product quality – defect rate
Post-sales service
KPIs
Number of warranty claims
Average wait time on phone for customer service
The internal business perspective helps managers address the question, “At what business processes must we excel to satisfy customer and financial objectives?” The answer to this question incorporates three factors: innovation, operations, and post-sales service. All three factors critically affect customer satisfaction, which will affect the company’s financial success.
Satisfying customers once does not guarantee future success, which is why the first important factor of the internal business perspective is innovation. Customers’ needs and wants change as the world around them changes. Companies must continually improve existing products and develop new products to succeed in the future. Companies commonly assess innovation using KPIs, such as the number of new products developed or new-product development time.
The second important factor of the internal business perspective is operations. Efficient and effective internal operations allow the company to meet customers’ needs and expectations. For example, the time it takes to manufacture a product (manufacturing cycle time) affects the company’s ability to deliver quickly to meet a customer’s demand. Production efficiency (number of units produced per hour) and product quality (defect rate) also affect the price charged to the customer. To remain competitive, companies must be at least as good as the industry leader at those internal operations essential to their business.
The third factor of the internal business perspective is post-sales service. How well does the company service customers after the sale? Claims of excellent post-sales service help to generate more sales. Management assesses post-sales service through the following typical KPIs: number of warranty claims received, average repair time, and average wait time on the phone for a customer service representative. 7

8. Learning and Growth Perspective
How can we continue to improve and create value?
Three factors:
1) Employee capabilities
KPIs:
Hours of employee training
Employee satisfaction and turnover
Number of employee suggestions implemented
Dollars per worker on Workers Compensation Exp
Sales dollars per worker
The learning and growth perspective helps managers assess the question, “How can we continue to improve and create value?” The learning and growth perspective focuses on three factors: (1) employee capabilities, (2) information system capabilities, and (3) the company’s “climate for action.” The learning and growth perspective lays the foundation needed to improve internal business operations, sustain customer satisfaction, and generate financial success. Without skilled employees, updated technology, and a positive corporate culture, the company will not be able to meet the objectives of the other perspectives.
First, because most routine work is automated, employees are freed up to be critical and creative thinkers who therefore can help achieve the company’s goals. The learning and growth perspective measures employees’ skills, knowledge, motivation, and empowerment. KPIs typically include hours of employee training, employee satisfaction, employee turnover, and number of employee suggestions implemented.
Second, employees need timely and accurate information on customers, internal processes, and finances; therefore, other KPIs measure the maintenance and improvement of the company’s information system. For example, KPIs might include the percentage of employees having online access to information about customers, and the percentage of processes with real-time feedback on quality, cycle time, and cost.
Finally, management must create a corporate culture that supports communication, change, and growth.
Copyright (c) 2009 Prentice Hall. All rights reserved. 8

9. Learning and Growth Perspective
2) System capabilities
KPIs:
Percentage of employees with online access to customer data
Percentage of processes with real-time feedback
3) Company’s climate for action
A balance of responsibility and authority
The learning and growth perspective helps managers assess the question, “How can we continue to improve and create value?” The learning and growth perspective focuses on three factors: (1) employee capabilities, (2) information system capabilities, and (3) the company’s “climate for action.” The learning and growth perspective lays the foundation needed to improve internal business operations, sustain customer satisfaction, and generate financial success. Without skilled employees, updated technology, and a positive corporate culture, the company will not be able to meet the objectives of the other perspectives.
First, because most routine work is automated, employees are freed up to be critical and creative thinkers who therefore can help achieve the company’s goals. The learning and growth perspective measures employees’ skills, knowledge, motivation, and empowerment. KPIs typically include hours of employee training, employee satisfaction, employee turnover, and number of employee suggestions implemented.
Second, employees need timely and accurate information on customers, internal processes, and finances; therefore, other KPIs measure the maintenance and improvement of the company’s information system. For example, KPIs might include the percentage of employees having online access to information about customers, and the percentage of processes with real-time feedback on quality, cycle time, and cost.
Finally, management must create a corporate culture that supports communication, change, and growth.
Copyright (c) 2009 Prentice Hall. All rights reserved. 9

10. Key Features of Performance Management

11. Key Features of Performance Management
Is an essential part of organisation strategy:
- derived from the mission and vision statements
- links the mission and vision, strategy, goals and processes of the organisation

12. Key Features of Performance Management (Continued)
Provides quantitative and qualitative information:
- assesses non-financial as well as financial criteria
- is a decision making tool
- provides a standardised and consistent approach

13. Key Features of Performance Management (Continued)
Provides a multidimensional focus on people and processes:
- is a process not a system
- measures processes not functions
- needs top-down and bottom-up communication and understanding
- enables delegation and empowerment
- enhances employee satisfaction

14. Key Features of Performance Management (Continued)
Provides both external and internal perspectives:
- focuses on customer satisfaction
- can be used to benchmark against competitors

15. Key Features of Performance Management (Continued)
Continuous Improvement
- emphasises causes, promotes self-diagnosis and identifies areas for improvement
- promotes effective planning

16. Why Balanced Scorecard ?

17. Why Balanced Scorecard?
Financial performance measurements no longer adequate
Financial evaluations are reactive
Financial measures not able to reflect contemporary value creating actions
A Holistic measurement tool formulating an integral part of strategy (cross functional integration)

18. Why Balanced Scorecard? (Continued)
Bridges financial measurements and strategy
Lever to streamline and focus strategy
Translate company strategy into specific measurable objectives
Put strategy not control at the centre
Pulls people to the overall vision

19. Why Balanced Scorecard? (Continued)
It is a framework for creating a set of measures that gives managers a fast and comprehensive view of the business.
It is a tool providing all of the critical indicators of a businesses current and future performance.
It supplements traditional financial measures with three additional perspectives:

20. Balanced Scorecard - Principles

21. Balanced Scorecard - Principles
Performance measures are balanced to reflect key areas of corporate activity which will create long term shareholder value
Performance measurement are designed to monitor value drivers - quality, cycle time and service are key determinants of customer satisfaction which is the ultimate driver

22. Balanced Scorecard - Principles (Continued)
Financial measures are used to explicitly include shareholder value calculations
Organisation learning is specifically measured - ability to change, rate of change and continuous improvements

23. Balanced Scorecard - Principles (Continued)
A top-down process is used to directly link vision and strategy - both senior management sponsorship, involvement and commitment, and lower level participation and agreement are all necessary
Measures must link individual worker performance to overall organisation vision and strategy

24. Balanced Scorecard Value’s

25. Balanced Scorecard Value’s
Translate business plan into a set of clear measures and targets
As a reporting tool, will give managers regular feedback on their performance, allowing them to assess their situation and improve
Provide a fair, data based, systematic mechanism for setting performance targets and rewarding achievement

26. Balanced Scorecard Value’s (Continued)
Allow each business unit to focus on a few high value opportunities
Be able to pinpoint issues and identify performance improvement opportunities
Provide a checks and balances system to manage short term performance and strategic implications
Ensure a comprehensive measurement system, measuring all perspectives of the business

27. What does the Balanced Scorecard measure?

28. What does the Balanced Scorecard measure?
Product
Internal Processes
Customer
Innovation and improvements

29. Vision & Strategy FINANCIAL “Financial Health” INT. BUS. CUSTOMER
“Happy Customers”
“how should we appear to our customer - to achieve our vision?”
LEARNING & I NNOVATION
“Happy Employees”
“how will we sustain our ability to service, change and improve -
to achieve our vision?”
INT. BUS.
PROCESS
“Way of doing things”
“what business processes must we excel at - to satisfy our shareholders?”
FINANCIAL
“Financial Health”
“how should we appear to our shareholder - to succeed financially?”

30. Customer Perspective
Demands that managers translate their general mission statements on customers into specific measures that reflect what really matters to the customer eg.
- Lead time
- Quality
- performance
- Service

31. Internal Processes
Internal measures should stem from the business processes that have the greatest impact on customer satisfaction, e.g.
- Factors that effect cycle time
- Quality
- employee skills
- productivity

32. Innovation and learning perspective
A company’s ability to innovate, improve and learn, ties directly to the company’s value. Only through the ability to launch new products, create more value for customers and improve operating efficiencies continually can a company penetrate new markets and increase revenue and margins.

33. Financial Perspective
Financial performance measures indicates whether the company’s strategy, implementation and execution are contributing to bottom-line improvement e.g.
- profitability
- growth
- shareholder value

34. The Balanced Scorecard is like the dials in an airplane cockpit: It gives managers complex information at a glance
Kaplan and Norton

35. How does these measures differ from traditional measurements?

36. How does these measures differ from traditional measurements?
Grounded in Organisations Strategic Objectives
Focus strategic vision
Provide balance
Ensure a focus beyond the current year

37. Barriers to Effective Balanced Scorecard Implementation

38. Barriers to effective Balanced Scorecard Implementation
Measurements are non quantifiable
Measurements are input rather than output driven
No buy-in from employees/management
Balanced Scorecard perceived as latest fad.
No migration planning
No system to support measurements

39. Barriers to effective Balanced Scorecard Implementation (Continued)
No follow-up on operational improvements with another round of actions
Strategies not effectively executed
Lack or no clear understanding on Balanced Scorecard mechanism
Preoccuaption of measurements instead of outputs

40. Balanced Scorecard Benefits

41. Balanced Scorecard Benefits
Synergy between efforts
Focus
Cross functional integration
Create customer and supplier partnership
Continuous improvement
Team rather than individual accountability
Assist managers in understanding interrelationships

42. Balanced Scorecard Benefits (Continued)
Tool to measure individual as well as group performance
Scientific approach to quantifying strategic objectives

43. Practical Application of the Balanced Scorecard

44. “If you can’t measure it you can’t manage it’’
Kaplan and Norton

45. A Strategic Framework for Action
Clarifying and Translating the Vision and Strategy
Clarifying the vision
Gaining consensus
Strategic Feedback and Learning
Communicating and Linking
Articulating the shared vision
Supplying strategic feedback
Facilitating strategy review and learning
Communicating and educating
Setting goals
Linking rewards to performance measures
Balanced Scorecard
Planning and Target Setting
Setting targets
Aligning strategic initiatives
Allocating resources
Establishing milestones
Kaplan & Norton, 1996

46. Strategy linked to Balanced Scorecard
Financial perspective •
Satisfy Stakeholders
Customer & Stakeholder
Learning & Growth
perspective
perspective
MPT Strategy •
Develop employees •
Satisfy customers •
Motivate employees •
Retain customers
Process perspective •
Increase efficiency •
Provide high quality Port
service

47. Balanced Scorecard
Tying the Balanced Scorecard Measures to the Strategy for Success
Company develops three to five performance measures for each dimension
Measures should be tied to company strategy
Balance among the dimensions is critical
You get what you measure!

48. How Balance is Achieved in a Balanced Scorecard
Performance is assessed across a balanced set of dimensions
Balance quantitative measures with qualitative measures
There is a balance of backward-looking measures and forward-looking measures

49. Developing a Strategy Map for a Balanced Scorecard
A strategy map is a diagram of the relationships of the strategic objectives across the four dimensions
Used to test the soundness of the strategy
Identifies how strategy is linked to measures on the scorecard
Communicates strategic objectives to employees

50. Keys to a Successful Balanced Scorecard
Targets
For each measure, there should be a target so managers know what they are expected to achieve
Initiatives
For each measure, the company must identify actions that will be taken to achieve the target
Responsibility
A particular employee must be given responsibility and held accountable for successfully implementing each initiative
Funding
Initiatives must be funded appropriately
Top Management Support
It is crucial to have the full support of top management

51. Return on Investment (ROI) Formula
Income before interest
and taxes (EBIT)
ROI =
Net operating income
Average operating assets
Average Current & Non Current Assets.

52. Return on Investment (ROI) Formula
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
$30,000
$200,000
= 15%
ROI =

53. Controlling the Rate of Return
Three ways to improve ROI . . .
Reduce
Expenses
Reduce
Assets
Increase
Sales

54. ROI and the Balanced Scorecard
The balanced scorecard provides managers with a roadmap that indicates how the company intends to increase its ROI.
I’m glad we used the balanced scorecard to tell which approach
is best.
Reduce
Expenses
Increase
Sales
Reduce
Assets

55. Criticisms of ROI In the absence of the balanced
scorecard, management may
not know how to increase ROI.
Managers often inherit many
committed costs over which
they have no control.
Managers evaluated on ROI
may reject profitable
investment opportunities.

56. As division manager would you
Criticisms of ROI
As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your division’s ROI -- the higher your ROI, the bigger your bonus.
The company requires an ROI of 15% on all new investments -- your division has been producing an ROI of 30%.
You have an opportunity to invest in a new project that will produce an ROI of 25%.
As division manager would you
invest in this project?

57. Criticisms of ROI As division manager, I wouldn’t invest in
that project because
it would lower my pay!

58. Criticisms of ROI Your division before new investment:
Net operating income $ 60,000
Average operating assets ,000
ROI %
New investment:
Net operating income $ 10,000
Average operating assets ,000
ROI %
Your division after new investment:
Net operating income $ 70,000
Average operating assets ,000
ROI %

59. Criticisms of ROI Gee . . . I thought we were supposed to do what
was best for the
company!

60. Residual Income - Another Measure of Performance
Net operating income
above some minimum
return on operating
assets

61. Residual Income Let’s calculate residual income.
A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets.
In the current period the division earns $30,000.
Let’s calculate residual income.

62. Residual Income (EVA)

63. Motivation and Residual Income
Residual income encourages managers to
make profitable investments that would
be rejected by managers using ROI.

64. Your division before new investment:
Net operating income $ 60,000
Average operating assets ,000
ROI %

65. Your division after new investment:
Net operating income $ 70,000
Average operating assets ,000
ROI %
An increase of $2,500 in residual income!!