Overview of the Balanced Scorecard Howard Rohm Founder & Director, U.S. Foundation for Performance Measurement President, Howard Rohm Consultants, LLC www.fpm.com

© U.S. Foundation for Performance Measurement “It’s about management and strategy first, and measurement and technology second.” It is important for us to remember that the balanced scorecard is a management system that is supported by measures of performance. The measures help us manage, test our strategies, and evaluate results and accomplishments. © U.S. Foundation for Performance Measurement

The Evolution Of Measurement Balanced Scorecard Six Sigma Shareholder Value Competencies/ Capabilities 15th Century 19th Century Late 20th Century Business Process Reengineering Customer Satisfaction Operational Improvement Competitive Advantage Comparative Benchmarking Management Accounting Double-entry Bookkeeping Financial Strategic Operational © U.S. Foundation for Performance Measurement

Benefits of Implementing a BSC Accelerates behavioral and cultural changes Shortens implementation cycle for strategy Facilitates communication among managers, employees, and stakeholders © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement BSC History 1990 - Nolan Norton Institute study David Norton, study leader Robert Kaplan, academic consultant from Harvard Harvard Business Review articles Jan-Feb 1992: balanced performance measures Sep-Oct 1993: tie to strategic goals and objectives Jan-Feb 1996: strategic management system BSC soon expected to be used by 40% of Fortune 1000 companies; increasingly being adopted by Federal agencies, by state and local organizations, and internationally. The balanced scorecard evolved from pioneering work in the early 1990s. The Nolan Norton Institute sponsored a study involving a dozen companies, on measuring performance in the organization of the future. The study was motivated by the belief that existing approaches to measuring performance, relying mostly on financial accounting measures, were becoming obsolete. The study included companies in manufacturing, service, heavy industry, and technology. © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Meeting the Challenge with the Balanced Scorecard The balanced scorecard is a performance management system that enables an organization to establish, accomplish, and measure the success of its strategies is used to evaluate an organization’s impact from several perspectives, such as customers, employees, internal business processes, and financial results allows effective communication of strategy and performance information throughout the organization. © U.S. Foundation for Performance Measurement

Mission Perspectives Measures STRATEGY Balanced Scorecard Terms Themes Vision Customers Mission Goals Perspectives Themes STRATEGY Objectives Performance Drivers Critical Success Factors KPI Measures Thresholds Targets Initiatives © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Advantages of the BSC Emphasizes achieving results and implementing strategy Focuses on high-impact performance measures Is easy to use and economical to maintain Focuses on customers Empowers process owners to make improvements Allows comparisons to best-in-class performance (benchmarking) Bridges the gap among strategy, development, formulation, and implementation Can drive cultural change in an organization © U.S. Foundation for Performance Measurement

Why Use a BSC? Addressing “Burning Platforms” Losing competitive position New technological advances Changing labor markets Employee shifts/Downsizing Government management reforms Examples of situations that drive the need for organizational change and refocus include: competition, technology, labor markets, and management reform. Kaplan & Norton call these “burning platforms.” © U.S. Foundation for Performance Measurement

Why Use a BSC? Achieving Government Reform Objectives Program priorities that match Congressional priorities Demonstrated value of programs to the public Meaningful performance measures (especially outcome measures) to gauge program success Goals, strategies, and performance measures linked to annual budget requests Resources and contract costs for each strategy Interagency coordination, to eliminate waste Logical connections among strategy, performance plans, and performance reports © U.S. Foundation for Performance Measurement

How Is a BSC Different from Other Performance Frameworks? People use it. It changes organizational behavior. It covers whole organizations. It puts a discipline and structure in place. It ties strategies to budget. It captures the value of the business. It allows effective communications throughout the organization. © U.S. Foundation for Performance Measurement

Vision Mission Strategy sssssssWhat Does a Completed Scorecard System Look Like? Objective Measure Target Initiative Financial Measure Target Initiative Internal Business Process Objective Customer Measure Target Initiative Objective Vision Mission Strategy Measure Target Initiative Objective Learning & Growth Adapted from Kaplan and Norton © U.S. Foundation for Performance Measurement

Vision Mission Strategy What Questions Does a Scorecard System Answer? Objective Measure Target Initiative Financial To succeed financially, how should we appear to our owners? Measure Target Initiative Internal Business Process Objective Customer Measure Target Initiative Objective Vision Mission Strategy To satisfy our customers, at what business processes must we excel? To achieve our vision, how should we appear to our customers? Measure Target Initiative Objective Learning & Growth To achieve our vision, how will we sustain our ability to learn and improve? Adapted from Kaplan and Norton © U.S. Foundation for Performance Measurement

Meeting the Challenge with the Balanced Scorecard Strategic Themes Assessment Evaluate & Improve Perspectives & Objectives Cascade Strategic Map Computerize & Communicate Initiatives Performance Measures

BSC Methodology—Nine Steps to Building & Implementing a BSC Phase One: Building a Balanced Scorecard Performance System Conducting an Organizational Assessment Defining Strategic Themes Choosing Perspectives and Developing Objectives Developing a Strategic Map of the Organization Defining Performance Measures Developing Initiatives Phase Two: Implementing the Balanced Scorecard Computerizing and Communicating Performance Information Cascading the Scorecard throughout the Organization Using Scorecard Information to Evaluate and Improve Performance © U.S. Foundation for Performance Measurement

Performance Scorecard Toolkit™ Customer Satisfaction Model Who are our customers and how do we satisfy them? Tree Diagram What do we need to do to produce successful outcomes? “Why” Model What intermediate and end outcomes does our work produce? Cause- Effect What factors are associated with successful results? Flow Charting What are the critical steps in the processes needed to produce outputs and outcomes? Performance Information Communication How should I collect and communicate performance information throughout the organization? © U.S. Foundation for Performance Measurement

Example: Strategic Mapping Improve Operating Efficiency Improve Returns Broaden Revenue Mix Financial Customer Internal Processes Employees Increase Customer Satisfaction Through Superior Execution Increase Customer Confidence in Our Advice Cross-Sell the Product Line Provide Rapid Response Develop New Products Understand Customer Segments Minimize Problems Shift to Appropriate Channel Provide Access to Strategic Information Develop Strategic Skills Increase Employee Productivity Align Personal Goals © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Typical Performance Measures Shareholder value Investment Asset utilization Resource allocation Profitability Objective Measure Target Initiative Financial Strategy Measure Target Initiative Internal Business Process Objective Customer Measure Target Initiative Objective Value proposition Retention Service quality Satisfaction Production efficiency Cost Bottlenecks Measure Target Initiative Objective Learning & Growth Skills coverage Innovation Employee development Capacity building Knowledge transfer Adapted from Kaplan and Norton © U.S. Foundation for Performance Measurement

Example: Linking Objectives, Measures, Targets, and Initiatives What strategy must be achieved and what is critical to its success How success will be measured and tracked Performance expectation Key action programs required to achieve objectives Objective Measure Target Initiatives Revenue mix Customer retention % Revenue from new products Skill coverage Sales Promotions New Channel Marketing Frequent Buyers’ Club R & D Program Customer Mailing Custom Training Knowledge Library Broaden revenue mix Increase customer satisfaction Develop new products Develop strategic skills 10% Product A 40% Product B 50% Product C 95% 1999 -- 15% 2000 -- 50% 2001 -- 60% 90% Financial Customer Internal Learning & Growth © U.S. Foundation for Performance Measurement

Framework for Implementing a BSC Formulating and updating vision, mission, and strategic themes Collecting data, communicating information, and linking/aligning Providing feedback, recognition, and learning Balanced Scorecard Implementing the scorecard integrates long-range strategic planning, operational budgeting, and employee and infrastructure activities. Four steps are required to accomplish this: Set stretch targets, identify and rationalize strategic initiatives, identify critical cross-business initiatives, and link to annual resource allocation and budgets. Planning, target setting, allocating resources, and budgeting Source: Kaplan and Norton © U.S. Foundation for Performance Measurement

Cascading Scorecards Support Strategy Corporate Business Units Support Units Team/ Individual Vision Mission Strategy © U.S. Foundation for Performance Measurement

Align Strategy and Work Processes Corporate Strategic Themes 1. 2. 3. . Strategic Business Units SBU1 SBU2 SBU XX X Support Units SU1 SU X Teams/ Individuals TI1 TI X © U.S. Foundation for Performance Measurement

Linking the BSC with Budget and Operations Strategic Direction Balanced Scorecard Perspective Measure Target Initiative Objective Planning Budget Formulation & Costing Output Input Process Programs & Operations Management Adapted from: Balanced Scorecard Collaborative © U.S. Foundation for Performance Measurement

Challenges of Building and Implementing a BSC Visions and strategies that are poorly defined and understood and not actionable Strategies and goals that are not linked to performance drivers, measures, initiatives, and individual goals and incentives Strategies that are not linked to resource allocation and budget Measures that are set independently of a complete BSC system Performance targets that are too high or too low Feedback that is tactical rather than strategic Lack of meaningful employee involvement © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Attributes of Good Scorecard Performance Systems Management commitment—senior executive buy-in to change management philosophy and to adopt performance-based management principles. Actionable strategies—realistic, "stretch" goals that are easily understood and workable. Linked objectives—clear, cause-effect relationships among strategies, objectives, measures, initiatives, and resources. Balanced measures—leading and lagging measures that help validate strategies and chart new directions. Employee involvement—good communications that enable everyone to contribute to dynamic changes to meet customer requirements. © U.S. Foundation for Performance Measurement

Typical BSC Cycle: One Iteration © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Putting It All Together— A Nine-Piece Puzzle Computerize & Communicate Assessment Strategic Mapping Cascade Strategic Themes Measures Perspectives & Objectives Evaluate & Adjust Initiatives © U.S. Foundation for Performance Measurement

© U.S. Foundation for Performance Measurement Acknowledgements Performance Drivers, Niles-Goram Olve, Jan Roy and Magnus Wetter, Wiley The Strategy-Focused Organization, Robert Kaplan & David Norton, Harvard Business School Press The Balanced Scorecard, Robert Kaplan & David Norton, Harvard Business School Press Balanced Scorecard Functional Standards, The Balanced Scorecard Collaborative City of Charlotte and Wells-Fargo Online Financial Services, Case Studies, Harvard Business School Keeping Score, Mark Graham Brown, Quality Resources How To Measure Performance: A Handbook of Techniques and Tools, Performance-Based Management Special Interest Group, U.S. Department of Energy Various articles, Harvard Business Review © U.S. Foundation for Performance Measurement