PMS & Balanced Scorecard

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    Performance Management&

    Balance Scorecard

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    Performance Management & Balanced Scorecard

    Purpose of Balanced Scorecard :A method of implementing a business strategyby translating it into a set of performance

    measures derived from strategic goals thatallocate rewards to executives and managersbased on their success at meeting or exceedingthe performance measures.

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    Reasons for the Need of a Balanced Scorecard1. Focus on traditional financial accounting

    measures such as ROA, ROE, EPS givesmisleading signals to executives with regards toquality and innovation. It is important to look atthe means used to achieve outcomes such asROA, not just focus on the outcomesthemselves.

    Performance Management & Balanced Scorecard

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    Reasons for the Need of a Balanced Scorecard2. Executive performance needs to be judged on

    success at meeting a mix of both financial andnon-financial measures to effectively operate abusiness.

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    Reasons for the Need of a Balanced Scorecard 3. Some non-financial measures are drivers of

    financial outcome measures which givemanagers more control to take correctiveactions quickly.(Example: controls in jet cockpit for pilot)

    Performance Management & Balanced Scorecard

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    Reasons for the Need of a Balanced Scorecard 4. Too many measures, such as hundreds of

    possible cost accounting index measures, canconfuse and distract an executive from focusingon important strategic priorities. The balancedscorecard disciplines an executive to focus onseveral important measures that drive thestrategy.

    Performance Management & Balanced Scorecard

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    1. Financial: How do we look to our Shareholders?2. Customer: How do our Customers See Us?3. Internal Business Process: What should we do

    that is Excellent?4. Employee and Organization Innovation and

    Learning: Can we continue to Improve and AddValue?

    Balanced Scorecard Perspectives

    Performance Management & Balanced Scorecard

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    Cycle Times CustomerSatisfaction

    Customer orderfulfillmentProduct assemblycycle time

    ROA

    EVA

    EPS

    Drivers Moderators Outcomes(lead indicators) (lag indicators)

    Balanced ScorecardChain of Causality of Performance Measures

    QualityDefect rateScrap rate

    ManufacturingUnit Costs

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    Drivers Moderators Outcomes(lead indicators) (lag indicators)

    Employee Employee Growth inSatisfaction Retention Rate Revenues

    Employee Product andSuggestions Process Innovations

    Balanced ScorecardChain of Causality of Performance Measures

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    Financial Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)

    Financial measures are outcomes that representthe executives success at achieving strategicperformance goals

    Financial measures are influenced by the Stageof the Life Cycle which reflects different strategic

    priorities

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    Financial Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)

    Sustain/Maturity ROCEEVA

    Earn excellentreturn on capitalinvested

    Growth Sales GrowthRevenueProductivity

    Generate newaccounts &increase marketshare

    Harvest/Decline Cash FlowReduce UnitCosts

    Obtainimmediatepayback oninvestments from

    cash cow

    Life Cycle Stage

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    Business Business Inventory cycle time

    Quality defect rate

    Distributor satisfactionCustomer satisfactionDistributor price margin

    Business Distributor/Dealer Customer

    Different Customer Models Relevant Customer Metrics

    Customer Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)

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    Business Customer Customer order fulfillment

    cycle time

    Customer satisfactionCustomer price margin

    Different Customer Models Relevant Customer Metrics

    Customer Measures & the Balanced Scorecard(Source: Kaplan & Norton, 1996)

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    Internal Business Process Measuresand the Balanced Scorecard

    Internal Business Process Measures

    Quality

    YieldThroughputCycle timeCost efficiency

    Order Fulfillment

    ProcurementRepair servicequality/downtimeWarranty quality

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    Serviceto theCustomer

    Internal Business Process Measuresand the Balanced Scorecard

    Model of Internal Business Process Logistics

    CustomerNeed

    Identified

    InnovationProcess

    OperationsProcess

    Post-SaleService

    Process

    CustomerNeed Satisfied

    IdentifyMarket

    CreateProduct

    BuildProduct

    DeliverProduct

    RelevantMetrics:

    DevelopmentCycle Time

    QualityDefects

    MCE

    DeliveryCycleTime

    ServiceSatisfaction

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    Manufacturing Cycle Effectiveness (MCE)

    Processing Time

    Throughput Time

    Throughput Time = Processing time + inspection time +movement time + waiting/storage time

    MCE 0, implies inefficient processMCE 1, implies less wasted time, greater efficiency

    Internal Business Process Measuresand the Balanced Scorecard

    MCE =

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    Employee and Organization Capabilitiesfor Innovation and Learning Measures

    What are employee and organizationcapabilities for innovation and learningmeasures?

    Represent ways to improve the other 3scorecard outcomes or measures.They nurture the other 3 areas

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    Employee and Organization Capabilitiesfor Innovation and Learning Measures

    Learning Measures Employee skill levels(certification rate)# suggestions peremployeeEmployee learning

    curve (time to reachacceptable level ofoutput or quality)

    Employee Measures Employee satisfactionEmployee retentionEmployee productivity

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    Strategy

    Internal Customer FinancialProcess T 1 T2

    T0

    LearningT3

    Balanced Scorecard: Causal Relationships

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    Balanced Scorecard: Cascading Goals

    # EmployeeSuggestionsCorporate

    SBU

    Department

    Team

    ROCECorporate

    SBU

    CustomerSatisfactionCorporate

    SBU

    Retail Store

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    Incentive Compensation for Executives withthe Balanced Scorecard

    Executive Bonus Pool is designed as a percentage ofBase SalaryThe bonus pool represents potential earnings from thebonus for an executive if all performance measures areachievedPartial success with meeting performance measuresresults in the allocation of a bonus representing a lesseramount of the total potential bonus.Example: The bonus pool for a CEO equals 100 percentof salary. Range of bonus equals 0 to 100 percent ofsalary depending on success of CEO performance.

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    Example: Automobile Company BalancedScorecard Reward Matrix for Bonus

    Category Measure WeightingFinancial (50%) EVA 25%

    Unit Profit 15%Market Growth 10%

    Customer (20%) Customer satisfaction survey10%Dealer satisfaction survey 10%

    Internal (20%) Above average rank onProcess industry quality survey 10%

    Decrease in dealerdelivery cycle time.. 10%

    Innovation (10%) Suggestions/employee 5%and Learning Emp. satisfaction survey 5%

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    The Balanced Scorecard

    Critical Thinking Questions 1. What happens to the balanced scorecard when the

    strategy changes? (example: moving from a growth toan extract profits strategy )

    2. How should resistance by executives or managers tonew measures be handled?

    3. What if executives or managers sub-optimize and onlyfocus on categories in the reward matrix with the largestpayoff such as EVA and Customer Satisfaction?