KPIs and the Balanced Scorecard Aligning enterprise performance metrics with the organization’s strategic plans Much of the material in this presentation

KPIs and the Balanced Scorecard

Aligning enterprise performance metrics with the organization’s strategic plans

Much of the material in this presentation was drawn from the following source:

• Allio, M. (2006), “Metrics that matter: seven guidelines for better performance measurement”, Handbook of Business Strategy, Vol. 7 Issue 1, pp. 255-263.

Aligning Strategy with Process Metrics

This is a process for ensuring alignment among the organization’s performance measures, strategic plans, improvement projects, and budgets. The items in blue were covered previously, and the items in grey will be covered in later class sessions.

BA 553: Business Process Management 2

1. Establish the organization’s key goals

2a. Develop and deploy the enterprise strategy to the process level

2b. Establish KPIs associated with the organization’s key goals, and measure performance in these

3. Establish process measures (if not already existing)

4. Enterprise KPIs are then recalibrated and aligned with process-level metrics

5. Once the metrics are aligned at all levels, identify process improvement projects

6. Allocate budget aligned with the process improvements needed to achieve the strategic goals. This requires that the budgeting process be scheduled after the strategic planning process


What Are Performance Measures?

Performance measures are measures that evaluate the efficiency (productivity) and effectiveness (quality) of the organization as a whole

They indicate the organization’s performance in areas that affect the continued existence of the company


Why Collect Performance Measures

Performance measures are critical to the improvement process, as any improvement effort should result in an improved bottom-line for the organization

These measures can be collected to show existing performance or improvements in performance


Examples of Performance Measures

Performance measures indicate the organization’s performance in areas that affect the continued existence of the company. Examples include:

Net income Net income growth Return on investment Actual vs. estimated budget Stock price increase Market share Sales volume Percentage of satisfied customers Annual inventory turnover Total rework or scrap dollars Labor cost per sales dollar Direct vs. indirect labor dollars Overtime cost per sales dollar


Examples of Performance Measures

Performance measures can be categorized to help understand the areas where scores are lower than desired:

Learning and Growth % of employees trained in process improvement % of employees with survey scores 80% or higher for Morale

Process % of processes achieving target Rework or scrap dollars as % of total production

Customer % of market share % of very satisfied customer

Finance Net income growth Stock as % of revenue


Focusing on the Critical Issues

It is important to focus on the few key items that will ensure the enterprise goals are achieved:


Guidelines for Establishing Good KPIs

1. Measure what is important

Successful firms strive to distill their performance indicators into a small set that closely aligns with the firm’s strategies. Here are a few key questions to ask:

Do our metrics focus on our key strategies

Do they reinforce the kind of behavior we’d like to see, and will that behavior continue to satisfy stakeholders?

Do they reflect what the customer experience is?

Do they reflect what our competitors are doing?

When was the last time we actually took action based on this metric?

Are our metrics simple and clear? Can they be easily understood, explained, and communicated?

2. Align your metrics with your key stakeholders’ metrics

Every company is in the business of satisfying its stakeholders, so it would seem academic to assert that your metrics should be aligned with theirs


Aligning Metrics with Stakeholders

A company decides to improve efficiency by increasing the minimum order size

However, the firm’s key customer was already having trouble meeting the existing minimum order requirements, as they received multiple small orders from their clients

Seeing the problem, the firm decided to reduce its minimum order requirements, increasing inventory turns and enhancing the production process for its key client


Guidelines for Establishing Good KPIs (Cont’d.)

3. Translate qualitative targets into quantitative metrics

Quantitative (number) metrics help limit subjective interpretation and speculation, and give managers numbers to shoot for. Even soft concepts like innovation can be translated into numbers with a little lateral thinking: one biotech firm used new patent applications per scientist to measure this area.

4. Deploy early warning systems

Good implementation of strategic plans hinges on responsiveness to a changing environment. Enlightened managers focus not only on annual or longer-term goals, but on intermediate and short-term milestones as well.

5. Establish a common language

Performance metrics should be simple and clearly defined, yet even sophisticated firms suffer from inconsistently defining terms. For example, middle managers may view a “growth” goal in terms of revenue (sales) growth, while the executive team may be focused on profit growth. They are not the same, and the actions needed to achieve them are different.


Establishing a Common Language

The impact of misaligned language related to goals – how different functions view profit:


Guidelines for Establishing Good KPIs (Cont’d.)

6. Deploy a balanced portfolio of metrics

The performance measures the enterprise decides to focus on should have a balance, in areas such as:

Short-term versus long-term (many firms focus to heavily on short-term results, which can jeopardize the enterprise in the long run through a lack of long-range planning)

Internal versus external (the portfolio is often overpopulated with internal performance metrics that fail to account for what happens outside the firm, and managers lose their connection to the marketplace or the behavior of competitors)

7. Align metrics with strategy

Good metrics facilitate implementation of strategy; poor or misaligned ones impede implementation. Once strategy has been developed, high-performing firms recalibrate their performance management systems to track and reward strategic behavior.


Understanding the Balanced Scorecard (BSC)

It is a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results

Originated by Doctors Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more “balanced” view of organizational performance

The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system

The “new” balanced scorecard transforms an organization’s strategic plan from an attractive but passive document into the “marching orders” for the organization on a daily basis

www.balancedscorecard.org website, accessed 12 April 2010.


BSC Aligns Strategy and ProcessesThe balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, and are therefore inadequate, alone, for guiding and evaluating the journey that today’s companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.

Kaplan, R.S. and Norton, D.P., “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review, January-February 1996.

Customer

“To achieve ourvision, howshould weappear to ourcustomers?

Objectives

Measures

Targets

Initiatives

Financial

“To succeedfinancially, how should weappear to ourshareholders?

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Internal BusinessProcesses“To satisfy ourshareholdersand customers,what businessprocesses mustwe excel at?

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Learning andGrowth“To achieve ourvision, how willwe sustain our,ability tochange andimprove?

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Strategy

First Generation BSC The items for each area of the scorecard can be written into their own

tables, to allow for more details to be added

The following is an example for the “Financial” area:


Slides 15-18: 2GC. (2009). Performance Management & the 3rd Generation Balanced Scorecard. Maidenhead, UK. Retrieved from http://www.2gc.co.uk/resources-presentations.

Second Generation BSC


The previous showed the original, first generation version of the balanced scorecard

The second generation defines strategic objectives, and ties the scorecard areas to each other via a “strategy map” that shows the cause and effect relationships

Third Generation BSC


The third generation of the BSC uses the creation of a “Destination Statement” (vision of the strategic end state) as the starting point for developing strategic objectives, selecting measures, and setting targets

Marketing Sales

Applying the 3rd Generation BSC

Approach for developing the 3rd generation BSC:

Develop the Destination Statement (vision of the “to be” situation if the strategy is achieved)

Develop the Strategy Map (strategic objectives and their inter-relationships)

Establish the measures and targets

It’s important to recognize that the balanced scorecard has no role in the formation of strategy

However, the BSC effort can be integrated with and developed based upon any strategic planning process, including Hoshin Planning


Integrating BSC and Hoshin Planning

Starting with a vision and strategy, as described in session 2 of the class, the activities for Hoshin and BSC can then be aligned.


Hoshin Planning Balanced Scorecard

1. Develop 5-year vision 2. Create destination statement (vision of the future state)

4. Establish integrated 1-year plan

3. Develop strategy map (strategic objectives and their relationships

5. Deploy to departments, identify measures and targets

6. Develop balanced scorecard

7. Execution of the plan 9. Report on progress regularly

8. Audits (monthly and yearly) Change direction if needed *

10.Update 5-year and 1-year plans as needed

11.Update destination statement, strategy map, or scorecard

* This activity is part of both approaches, but is not listed in either as a separate step.

Best Practices for BSC Implementation

What Why

1

Involve the intended users of the Balanced Scorecard in its design

It is the only way to be sure they understand and agree to the design

2

The Balanced Scorecard should be understandable and transferable

The design must be communicated and driven downward

3 Ensure the BSC is compatible with existing processes

Other management processes and tools must be retained

4 Ensure the BSC is easily aligned and cascaded through the organization

To help the entire organization work to a common purpose

5 Make efficient use of managers’ time Management time is a scare resource


Documents

KPIs and the Balanced Scorecard Aligning enterprise performance metrics with the organization’s strategic plans Much of the material in this presentation