Change Implementation Techniques for Creating a Sense of Urgency

Technique 2.44 Balanced Scorecard

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Introduction

. This technique illustrates the balance between financial and operational measures. The financial measures tell details of the past, while operational measures are the drivers of future financial performance. There are linkages between the measures and 3 important principles:

i) cause and effect occurrences - measures are related to each other

ii) it is important to differentiate between measures which are lead indicators and those which are lag indicators

iii) all measures should be linked back to profitability

. A balanced scoreboard allows the organisation to be looked at from 4 important perspectives:

i) Customer perspective (how do customers see us and what do they want from us?), ie this perspective contains core outcome measures on such things as customer satisfaction, customer retention, and new customer acquisition

ii) Financial perspective (how do we look to our shareholders?), ie measures covering the financial perspective indicate whether the company's strategy, implementation, and execution are contributing to bottom line improvement.

iii) Internal business perspective (what must we excel at to satisfy shareholders and customers?), ie measures indicate how successful the company is at developing and deploying key business processes for identifying markets, creating product/service offerings, building and delivering products/services and providing effective post-sales service to customers.

iv) Innovation and learning perspective, ie capability development (do we continue to improve and create value?), ie measures reflect the success the company is having in retaining employees, embracing technology and systems, and aligning organisational procedures and routines to develop capabilities in people, systems and procedures that the organisation will need in the future. An alternative element is employee perspective which is linked with what employees are concerned about, such as knowing what to do, how to do it and getting some recognition.

The responses to the balanced scorecard are used to develop performance measures for an organisation.

Example of a Balanced Business Scorecard

Some other customer measures:

. Market share with target customers

. Percent growth of business with existing customers

. Customer profitability

. Lead time for product development

. On-time delivery

. Response time

. Defect rates

. Returns by customers

. Warranty claims

. Success in handling a field service request

. Customer identification - know who your customers are

. Customer satisfaction measurement - measure their perceptions

. Requirement discovery - meet with them to review their requirements

. Transparent pricing - help customers understand the cost of their requirements

. Continuous partnering - ensure a focus on "win-win" outcomes

. Service delivery reviews ‐ customer/staff meetings

Some other financial measures:

. Operating income

. Return on capital employed

. Return on investment

. Economic value added (after-tax operating income minus cost of capital)

. Sales growth

. Revenue growth

. Percent of revenue from new products/services

. Profitability by product/service/customer

. Net revenue per ton/price per call/price per unit

. Revenue per employee

. Unit cost of performing work or producing output (cost per litre, cost per kilogram, cost per transaction, etc)

. Expenses, such as selling, general and administrative, as a percentage of total cost or revenues

. Benchmarking - measurement of costs against best practices

. Competitive assessment - compared with other providers

. Portfolio analysis - the mix of services provided to a particular customer

. Customer profitability - are we helping the businesses to make money?

. Business planning - taking account of changes in our customers' organisations

. Continuous process improvement - never happy with the status quo

Some other internal business measures (including service delivery measurements):

Percentage of sales from new products

The rate of new product introduction vs. plan

Elapsed time to develop new generation of products

Break-even time for new products

Labour efficiency

Machine efficiency

Quality (waste, scrap and rework, etc)

Cycle time

Work definitions - to detail exactly what we will deliver

Defect measurement - to ensure we know when things go wrong

Service-based costing - to understand the cost of what we do

Process re-engineering - to address the defects and cost of poor quality

Performance measurement - to determine productivity and to add value

Service bundling - to help the customer understand it

Organisation modeling - to ensure what we are organized to deliver

Some other innovation and learning measures (including some employee's satisfaction or employee commitment measurements):

Employee satisfaction

Staff turnover and employee retention

Revenue to employee

Value added per employee

Strategic job coverage ratio (number of employees qualified for specific jobs vs. anticipated needs)

Retraining cycle time (length of time required to take existing employees to new skill level)

Suggestions per employee

Suggestions implemented

Percentage of employees with personal performance goals linked to business strategy

Strategic information coverage (current availability of information relative to anticipated needs)

Percentage of processes with real-time quality, cycle time and cost feedback

Percentage of customer-facing employees with online access to information about customers

Employee motivation measurement - team climate and value surveys

Competency definition - measure and track competency attainment

Mentor programs and high potential staff development

Learning and planning

Knowledge management

Leadership development

Rewards and recognition

Some basic steps to construct a balanced scorecard

Established objectives

There is a need to ensure that all those involved in the process of developing a scorecard agree on the reasons for doing it. Reasons can range from measuring organisation performance to communicating strategy throughout the organisation

Decide who will be involved in the developmental process

As the scorecard is a strategic instrument, it is important that the key stakeholders (including senior management) are involved in its development. Generally, if it is delegated to a junior group and/or outside consultants, its effectiveness is reduced. The "journey" is a significant element of the overall exercise

Decide on the organisational unit to which the scorecard will apply

Depending on the complexity of the organisation, the scorecard may be relevant at either the top or somewhere further down the organisation. For example, diversified businesses sometimes develop a scorecard for the whole organisation but business units are often the most appropriate level

Decide on the structure

The preferred option involves the 4 perspectives: customer satisfaction, internal processes, financial performance, and learning and growth. Variations are possible

Handling KPIs

- renew existing measures that may become part of the scorecard by turning them into KPIs

- develop additional KPIs that may form part of the scorecard

- relate all KPIs back to the original objective of developing the scorecard

- you need at least 3 to 7 KPIs for each part of the scorecard

Finalize the scorecard

Set performance targets for each KPI and decide how the scorecard will be maintained, updated and communicated

(sources: Robert Kaplan et al, 1992 & 1996; Joseph Boyett et al, 1998; International Quality & Productivity Centre, 2003 ; Harry Osman, 2004d)