3-06 kpis and the balanced scorecard

8/13/2019 3-06 KPIs and the Balanced Scorecard

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KPIs and the Balanced Scorecard

Aligning enterprise performance metricswith the organizations 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 performancemeasurement,Handbook of Business Strategy, Vol. 7 Issue 1, pp. 255-263.


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BA 553: Business Process Management 2

Aligning Strategy with Process Metrics

This is a process for ensuring alignment among the organizations

performance measures, strategic plans, improvement projects, and budgets.The items in greywill be covered in session 7.

1. Establish the organizations key goals

2. Establish KPIs associated with the organizations key goals, andmeasure performance in these

3. Develop and deploy the enterprise strategy to the process level

4. Establish process measures (if not already existing)

5. Enterprise KPIs are then recalibrated and aligned with process-levelmetrics

6. Once the metrics are aligned at all levels, process improvement projectscan be identified

7. Budget must be allocated aligned with the process improvements neededto achieve the strategic goals. This is why it is critical to align thebudgeting process with the strategic planning process


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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 organizations performance in areas that

affect the continued existence of the company


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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


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Examples of Performance Measures

Performance measures indicate the organizations 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


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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


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Focusing on the Critical Issues

It is important to focus on the few key items that will ensure

the enterprise goals are achieved


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Guidelines for Establishing Good KPIs

1. Measure what is important

Successful firms strive to distill their performance indicators into a small setthat closely aligns with the firms strategies. Here are a few key questionsto ask:

Do our metrics focus on our key strategies

Do they reinforce the kind of behavior wed 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 wouldseem academic to assert that your metrics should be aligned with theirs


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Aligning Metrics with Stakeholders

In this example, a firm chose

to improve efficiency byincreasing the minimumorder size

However, the firms keycustomer was already havingtrouble meeting the existing

minimum orderrequirements, as theyreceived multiple smallorders from their clients

Seeing the problem, the firmdecided to reduce itsminimum orderrequirements, increasinginventory turns andenhancing the productionprocess for its key client


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Guidelines for Establishing Good KPIs (Contd.)

3. Translate qualitative targets into quantitative metrics

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

4. Deploy early warning systems

Good implementation of strategic plans hinges on responsiveness to achanging environment. Enlightened managers focus not only on annual orlonger-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 evensophisticated 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. Theyare not the same, and the actions needed to achieve them are different.


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Establishing a Common Language

The impact of misaligned language related to goals:


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Guidelines for Establishing Good KPIs (Contd.)

6. Deploy a balanced portfolio of metrics

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

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

Internal versus external (the portfolio is often overpopulated withinternal performance metrics that fail to account for what happensoutside the firm, and managers lose their connection to the marketplaceor the behavior of competitors)

7. Align metrics with strategy

Good metrics facilitate implementation of strategy; poor or misaligned onesimpede implementation. Once strategy has been develoepd, high-performing firms recalibrate their performance management systems totrack and reward strategic behavior.


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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 aroundboth the internal business processes and external outcomes in order tocontinuously improve strategic performance and results

Originated by Drs. Robert Kaplan (Harvard Business School) and DavidNorton as a performance measurement framework that added strategic

non-financial performance measures to traditional financial metrics to givemanagers and executives a more 'balanced' view of organizationalperformance

The balanced scorecard has evolved from its early use as a simpleperformance measurement framework to a full strategic planning andmanagement system

The new balanced scorecard transforms an organizations strategic planfrom an attractive but passive document into the "marching orders" for theorganization on a daily basis

www.balancedscorecard.org website, accessed 12 April 2010.
http://www.balancedscorecard.org/http://www.balancedscorecard.org/


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BSC Aligns Strategy and Processes

The 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 todays 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, howshould weappear to our

shareholders?

Objectives

Measures

Targets

Initiatives

Internal BusinessProcesses

To satisfy ourshareholdersand customers,what businessprocesses mustwe excel at?

Objectives

Measures

Targets

Initiatives

Learning andGrowth

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

Objectives

Measures

Targets

Initiatives

Visionand

Strategy


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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:


More shareholders worry about our future earnings potential due

to drop in TSR and general negative press. All is down to next big

announcement indicating new thrust and direction

Slides 15-18: 2GC. (2009). Performance Management & the 3rd Generation Balanced Scorecard.

Maidenhead, UK. Retrieved from http://www.2gc.co.uk/resources-presentations.
http://www.2gc.co.uk/resources-presentationshttp://www.2gc.co.uk/resources-presentationshttp://www.2gc.co.uk/resources-presentationshttp://www.2gc.co.uk/resources-presentations


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Second Generation BSC


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

scorecard The second generation defined strategic objectives, and tied the scorecard areas

to each other via a strategy map that showed the cause and effect relationships


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Third Generation BSC


The third generation of the BSC uses the creation of a Destination State-

ment (vision of the strategic end state) as the starting point for developingstrategic objectives, selecting measures, and setting targets


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Applying the 3rdGeneration BSC

Approach for developing the 3rdgeneration 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

Its important to recognize that the balanced scorecard has no

role in the formation of strategy

However, the BSC effort can be integrated with anddeveloped based upon any strategic planning process, such

as Hoshin Planning



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Integrating BSC and Hoshin Planning


1. Develop 5-year vision

(developed by top manag-

ement, input provided by all

managers)

4. Establish integrated 1-year

plan

5. Deployment to departments,

identify measures & targets

7. Execution of the plan

8. Audits (monthly and yearly)

2. Create destination statement

(vision of the future state)

3. Develop strategy map (strategic

objectives and their relationships)

6. Develop balanced scorecard

9. Report on progress regularly

10. Update destination statement,

strategy map, or scorecard

Hoshin Planning Balanced Scorecard


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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 across 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


3-06 kpis and the balanced scorecard

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