1 Overview of the Balanced Scorecard Development Process

2 What Is a Balanced Scorecard? At the highest level, the Balanced Scorecard is A framework that helps organizations translate strategy into operational objectives that drive both behavior and performance.

Balanced Scorecard History Measurement and Reporting Alignment and Communication Enterprise-wide Strategic Management Articles in Harvard Business Review:  “The Balanced Scorecard — Measures that Drive Performance” January - February 1992  “Putting the Balanced Scorecard to Work” September - October 1993  “Using the Balanced Scorecard as a Strategic Management System” January - February Acceptance and Acclaim:  “The Balanced Scorecard” is translated into 18 languages  Selected by Harvard Business Review as one of the “most important management practices of the past 75 years. “

4 The Conclusion Measurement Must Be Linked To Strategy Strategy Balanced Scorecard Measurement To Communicate, Not To Control Measurement Communicates Values, Priorities And Direction The Premise The Premise Behind the Balanced Scorecard Is that Measurement Motivates Behavior

5 Internal Process Perspective Financial Perspective Learning & Growth Perspective Customer Perspective Return on Investment Price Quality Time FunctionImage Relatio- ship Value Proposition Sources of GrowthSources of Productivity Technology Infrastructure Climate for Action ++ “Build the Brand” “Make the Sale” “Deliver the Product” “Service Exceptionally” Revenue Strategy Productivity Strategy 1.The economic model of key levers driving financial performance 2.The value proposition of target customers 3.The value chain of core business processes 4. The critical enablers of performance improvement, change and learning The Balanced Scorecard Is Based on an Understanding of the Basic Building Blocks of the Strategy Staff Competencies

6 Knowledge, Skills, Systems, and Tools Financial Results To Build the Strategic Capabilities.. Needed to Deliver Unique Sets of Benefits to Customers... To Drive Financial Success... And Realize the Vision Equip our People... InternalCapabilities Customer Benefits We Use the Scorecard to Articulate Strategic Hypotheses in Cause-effect Terms

7 Objectives Fast ground turnaround Statement of what strategy must achieve and what’s critical to its success Target 30 Minutes 90% The level of performance or rate of improvement needed Cycle time optimization Key action programs required to achieve objectives Initiative Measurement On Ground Time On-Time Departure How success in achieving the strategy will be measured and tracked Strategic Theme: Operating Efficiency Profitability Financial Learning More customers Ground crew alignment Lowest prices Fewer planes Customer Internal Fast ground turnaround Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives Flight Is on time BSC Terminology

8 % Ground crew trained % Ground crew stockholders ObjectivesMeasurement Market Value Seat Revenue Plane Lease Cost FAA On Time Arrival Rating Customer Ranking (Market Survey) On Ground Time On-Time Departure Strategic Theme: Operating Efficiency Initiative Cycle time optimization program ESOP Ground crew training Quality management Customer loyalty program Target 30% CAGR 20% CAGR 5% CAGR #1 30 Minutes 90% yr. 1 70% yr. 3 90% yr % Profitability Financial Learning More Customers Ground Crew Alignment Lowest Prices Fewer Planes Customer Internal Fast Ground Turnaround Flight Is on Time Profitability More Customers Fewer planes Flight is on - time Lowest prices Fast ground turnaround Ground crew alignment Balanced Scorecard Example

9 Some of the Indicators of Good Balanced Scorecard 4.Financial Linkage Every objective can ultimately be related to financial results 1.Executive Involvement Strategic decision makers must validate and own the strategy and related measures 2.Cause-and-Effect Relationships Every objective selected should be part of a chain of cause and effect linkages that represent the strategy 3. Balance between outcome and leading measures There should be a balance of outcome measures and leading measures to facilitate anticipatory management 5.Linkage of Initiatives and Measures: Each initiative should be based on a gap between baseline and target. A good Balanced Scorecard will “tell the story” of your strategy in actionable terms.

10 Some Goals of the Balanced Scorecard Provide a generic framework to translate strategy into operational terms Create a systems approach to form an integrated Strategic Management Process Provide a clear line of sight to the vision and strategy of the company Provide a tool for communicating the : strategy, and processes and systems required for implementing the strategy Draw a cause and effect roadmap to stakeholder value – shareholder, customer, and employee.

11 How Does the Scorecard Benefit Your Organization? Improves management effectiveness by having a shared and actionable view of the strategy Optimizes and ensures strategic outcomes for a given set of resources Enables employees to work in a coordinated, collaborative fashion towards organizational goals Speeds time to value through faster more informed decision-making on time and resource allocation Accelerates the approach, and its accuracy to the strategic destination

–$275 loss 1998 –Top Quartile 1999 –$3b spin-off Brown & Root Engineering (Rockwater) Zeneca AgriculturalSouthern Citrus CIGNA Property & Casualty ATT Canada 1993 –Losing money 1996 –# 1 in Niche (growth & profits) 1994 –BSC introduced 1998 –Sales growth 2X industry Profits > competitors –$300M loss 1998 –Customer base doubles 1999 –$7b spin-off Shipments on Spec On Time Delivery Rework Absenteeism Employee Turnover Cost per Pound (¢) 70% 89% 6% 10% % 98% 2% 1% Some Results of Balanced Scorecard Users Chemical Bank Profits 1993 – X 1998 –20X Mobil USM&R 1993 –#6 in Profitability 1995 –#1 in Profitability 1998–#1 in Profitability Acquired by Exxon

13 Typically 8-12 Weeks Step 1 Develop a Project Plan Step 2 Build a StrategicArchitecture Step 3 Draft a Strategy Map With Linkages And Themes Step 4 Determine Measures and Targets Step 5 Select Strategic Initiatives Step 6 Plan for implementation of the SFO Balanced Scorecard Six Step Development Process

14 Step1:Develop a project plan Step 2: Build a strategic architecture Step 3:Uncover strategic linkages and key themes Step 4:Determine Measures and Targets Step 5:Select Strategic Initiatives Step 6:Plan for Implementation Week Typical Balanced Scorecard Project Schedule

15 Steps 1 Develop a Project Plan Step 2 Build a StrategicArchitecture Step 3 Uncover Strategic Linkages and Key Themes Step 4 Determine Measures and Targets Step 5 Select Priority Initiatives Step 6 Plan for SFO Implementation Work/Inputs Strategy Documents Draft themes and linkages based on Strategic Destination Outputs: Agreed upon stretch targets Finalized theme(s) Strategy map Agree upon stretch targets Review and refine themes Refine and rework draft linkages Discuss next steps Steps 1 to 3 Are the Basis for the BSC

16 Refine and validate linkages Review draft measures Design new measures Begin targets discussion Plan for measures development Work/Inputs Refined strategy Existing measures assigned to objectives Draft measures developed Outputs: 90% complete linkages Complete measures Measures development plan in place Steps 1 Define Strategic Destination Step 3 Build the Strategic Linkages Step 4 Determine Measures and Targets Step 5 Select Priority Initiatives Step 6 Plan for SFO Implementation Step 2 Identify Key Themes Driving the Strategy Step 4: Measures Development

17 Review and validate linkages and measures Review existing initiatives Brainstorm new initiatives Align/ rationalize initiatives to themes Work/Inputs: Refined linkages and measures Inventory of existing initiatives Proposed new initiatives Outputs: “Locked in” on objectives and linkages Measures defined Initiatives defined Plan for initiatives review established Plan for implementation Steps 1 Define Strategic Destination Step 2 Identify Key Themes Driving the Strategy Step 3 Build the Strategic Linkages Step 4 Determine Measures and Targets Step 5 Select Priority Initiatives Step 6 Plan for SFO Implementation Steps 5 & 6: Initiative Prioritization and Implementation Planning

18 Review/Summary The Balanced Scorecard is a framework that helps organizations translate strategy into operational objectives that drive both behavior and performance The Balanced Scorecard is based on the premise that measurement motivates The scorecard is broken down into four perspectives that are linked The balanced scorecard has benefits across organizations A typical balanced scorecard project is 12 weeks, during which time we help organizations translate strategy into operational objectives, determine measures, and provide guidance on setting targets and defining strategic initiatives