1 Management Planning & Control System Balanced Scorecard Planning for Long-Run Organizational Success

2 Balanced Scorecard what is it ??? Balances financial and non-financial measures Balances financial and non-financial measures Balances short and long-term measures Balances short and long-term measures Balances performance drivers (leading indicators) with outcome measures (lagging indicators) Balances performance drivers (leading indicators) with outcome measures (lagging indicators) Should contain just enough data to give a complete picture of organizational performance… and no more! Should contain just enough data to give a complete picture of organizational performance… and no more! Leads to strategic focus and organizational alignment. Leads to strategic focus and organizational alignment.

3 “It is of great value to have a tool like the BSC, which helps translate a company’s vision and strategy into an integrated set of strategic objectives that will describe the long-term drivers of its success” - Ratan N. Tata - “The Balanced Scorecard is one of the most interesting management tools. Perhaps a tool that will become as central to business as double-entry accounting concept.” - Peter Drucker The Balanced Scorecard

4 Mission and Goals Dept plans and objectives Performance and development plan Action-work, development and support Monitoring and feedback Performance standards Performance measures Competence Requirements Performance Pay

5 Why is it Important? It describes the vision of the future to the entire organization. It creates shared understanding. It describes the vision of the future to the entire organization. It creates shared understanding. The scorecard creates a complete model that enables employees to see their contributions to success. The scorecard creates a complete model that enables employees to see their contributions to success. The scorecard focuses change efforts. If the right objectives and measures are identified, successful implementation will likely occur. The scorecard focuses change efforts. If the right objectives and measures are identified, successful implementation will likely occur.

6 Balanced Scorecard Balance between Balance between –Measures of current performance –Long-range competitive abilities

7 Balanced Scorecard Four aspects of firm performance Four aspects of firm performance –Financial –Internal business –Customer –Innovation and learning

8 Financial Perspective How do we look to shareholders? How do we look to shareholders? –Does the company exhibit the ability to survive, succeed, and prosper?

9 Customer Perspective How do our customers (and other external stakeholders) see us? How do our customers (and other external stakeholders) see us?

10 Internal Business Perspective At what must we excel currently?

11 Innovation and Learning Perspective Can we continue to improve and create value ?

12 Perspectives are Interrelated Emphasizes the synergies, relationships existing within the company and with its external constituencies Emphasizes the synergies, relationships existing within the company and with its external constituencies –Innovation pleases customers which are necessary for good financial results –Good financial results make financing improvements possible Not a random collection of measures Not a random collection of measures

13 ORGANIZING PERFORMANCE INDICATORS IN AN CAUSAL CHAIN LAGGING EVA FINANCIAL DEBTORS OPER’G EXPENSES CUSTOMER ON - TIME CUSTOMERS SATISFACTION DELIVERY INTERNAL SHORTER LOWER BUSINESS CYCLE REWORK PROCESSES PROCESS QUALITY LEARNING EMPLOYEE EMPLOYEE AND SKILLS SUGGESTIONS GROWTH EMPLOYEE MORALE LEADING

14 Setting Performance Standards For each perspective find out the measurable parameters. Draw a table with the parameters: Objectives; Objectives; Measures; Measures; Targets; Targets; Initiatives. Initiatives.

15 Overall Concepts Strategy guides scorecard development Strategy guides scorecard development –Measures must relate to strategy Reflect critical success factors Reflect critical success factors –Measures are interrelated Must understand how the perspectives influence each other Must understand how the perspectives influence each other Organization-wide view replaces local focus Organization-wide view replaces local focus

16 Overall Concepts Not a quick process Not a quick process –Implementation requires Thought Thought Analysis Analysis Data-gathering Data-gathering Time Time

17 Performance Pay Quantum of Compensa tion Fixed Variable How hard I work Where I work

18 Linking incentives to EVA Why are incentives so important? Strategy:Use performance-based pay to attract top talent and and encourage value creation Executive Talent * Decisive edge in value creation * Highly sought Executive Talent * Decisive edge in value creation * Highly sought Pressure on Performance * Tremendous opportunities * Fewer competitive barriers * Accelerating change * Rapid competitive response * Investor pressure Pressure on Performance * Tremendous opportunities * Fewer competitive barriers * Accelerating change * Rapid competitive response * Investor pressure

19 Step 1. A Corporate Scorecard defines overall strategic priorities and context Step 2. Each SBU develops a long-range plan and BSC consistent with the corporate strategic agenda Step 4. Departments, teams and individuals develop scorecards consistent with their organization’s strategy Corporate / Group SBU C SBU B SBU A Teams and Individuals Support Functions Step 3. Each Support Unit develops a scorecard to support the internal customers Align All Levels Of The Organization

20 The Last Sentence Summary “The best Balanced Scorecards will tell the story of the strategy so well that the strategy can be inferred by the collection of objectives and measures and the linkages among them.”

21 The traditional annual incentive plan Target $ Bonus Operating Profit Budget 80%120%

22 The EVA-based incentive plan Target $ Bonus EVA Performance Target Deferred “at risk” portion of award Key Features: * No caps (or floors) * A bonus “bank” * Self-adjusting targets * Greater leverage

23 The EVA-based incentive plan: Target-Setting Target $ Bonus EVA Performance Target Key Features: * No caps (or floors) * A bonus “bank” * Self-adjusting targets * Greater leverage Targets can reflect: * Uniform improvement level * Peer performance * Market expectations Targets can reflect: * Uniform improvement level * Peer performance * Market expectations

24 Incentive systems EVA is an ideal bonus base ¥ ¥EVA based bonuses to management can turn out to be quite big if management does well. This gives incentive to management to improve profitability.   This kind of bonuses are also good for shareholders   This kind of bonus is a way to pay according to true performance   Bonus is objective (there are no subjective assessment) ¥ ¥Bonus has no limits because no one wants to limit company’s EVA ¥ ¥Investors and equity analysts tend to take a positive stand to this kind of bonuses (like well designed share options)

25 Measuring Performance  Measurement is the language that gives clarity to vague concepts.  Measurement is used to communicate, not to control.  Strategy can be described as a series of cause and effect relationships.

26 A Summary Of Benefits It makes strategy operational by translating strategy into performance measures and targets It makes strategy operational by translating strategy into performance measures and targets It emphasizes on getting ready for the future rather than evaluating the past It emphasizes on getting ready for the future rather than evaluating the past It measures those aspects that are most important for the success of the organization It measures those aspects that are most important for the success of the organization It helps focus the entire organization on what must be done to create breakthrough performance It helps focus the entire organization on what must be done to create breakthrough performance It acts as an umbrella/filter for a variety of diverse corporate programs It acts as an umbrella/filter for a variety of diverse corporate programs It helps the cascade of corporate level measures to lower levels so that employees can improve organizational effectiveness It helps the cascade of corporate level measures to lower levels so that employees can improve organizational effectiveness

27 EVA Measure Mindset Management System Motivation “Understand Value Creation” – Familiarise managers with key concepts and how they can contribute to the overall value creation “See the Value” - Use EVA as a means to track the wealth creation performance “Manage for Value” - Establish decision making rules that are aligned to wealth creation “Get paid for Value” - Link variable compensation to multi-period wealth creation targets

28 Total Value of the firm CapitalMVA Improving Current EVA Improving EVA for 2-3 years Improving EVA for > 5 years Growing Future EVA Improving this year’s EVA Actions

29 Balanced Scorecard EVA MVA