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Introduction to the Balanced Scorecard and Performance Measurement Systems

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Chapter 1

Introduction to the Balanced Scorecard and Performance Measurement Systems
by Christian C. Johnson

From the beginning, it is important to understand why measuring an organization's performance is both necessary and vital. An organization operating without a performance measurement system is like an airplane flying without a compass, a Formula One race car driver guiding his car blindfolded, or a CEO operating without a strategic plan. The purpose of measuring performance is not only to know how a business is performing but also to enable it to perform better. The ultimate aim of implementing a performance measurement system is to improve the performance of an organization so that it may better serve its customers, employees, owners, and stakeholders.
If one "gets" performance measurement right, the data generated will tell the user where the business is, how it is doing, and where it is going. In short, it is a report card for a business that provides users with information on what is working well and what is not. With this in mind, Chapter 1 provides an overview of the various performance measurement systems used today by enterprises to drive improvements in overall organizational performance.
A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-

A performance measurement system enables an enterprise to plan, measure, and control its performance according to a pre-defined strategy

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Balanced Scorecard for State-Owned Enterprises

defined strategy. In short, it enables a business to achieve desired results and to create shareholder value.
The major performance measurement systems in use today are profiled below (in order of global adoption) and include
? The Balanced Scorecard ? Activity-based Costing and Management ? Economic Value Added (EVA) ? Quality Management ? Customer Value Analysis/Customer Relationship
Management ? Performance Prism
THE BALANCED SCORECARD
The balanced scorecard (BSC) is the most widely applied performance management system today.1 The BSC was originally developed as a performance measurement system in 1992 by Dr. Robert Kaplan and Dr. David Norton at the Harvard Business School. Unlike earlier performance measurement systems, the BSC measures performance across a number of different perspectives--a financial perspective, a customer perspective, an internal business process perspective, and an innovation and learning perspective.
Through the use of the various perspectives, the BSC captures both leading and lagging performance measures, thereby providing a more "balanced" view of company performance. Leading indicators include measures, such as customer satisfaction, new product development, on-time delivery, employee competency development, etc. Traditional lagging indicators include financial measures, such as revenue growth and profitability. The BSC performance management systems have been widely adopted globally, in part, because this approach enables organizations to align all levels of staff around a single strategy so that it can be executed more successfully.

1 We will use the acronym BSC as a substitute for spelling out Balanced Scorecard. This saves space and is easier on the reader.

Introduction to the Balanced Scorecard and Performance Measurement Systems

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An example of a BSC is shown below:

Figure 1: Example of a Balanced Scorecard

Financial Perspective
Return on Capital Employed Cash Flow Project Profitability Profit Forecast Reliability Sales Backlog

Customer Perspective
Pricing Index Tier II Customers Customer Ranking Survey Customer Satisfaction Index Market Share Business Segment Tier I Customers Key Accounts

Internal Business Perspective
Hours with Customers on New Work Tender Success Rate Rework Safety Incident Index Project Performance Index Project Closeout Cycle

Innovation and Learning Perspective
% Revenue from New Services Rate of Improvement Index Staff Attitude Survey # of Employee Suggestions Revenue per Employee

Source: Kaplan and Norton. Putting the Balanced Scorecard to Work. Harvard Business Review. September-October 1993.

Organizations have adapted the BSC to their particular external and internal circumstances. Both commercial and notfor-profit organizations have successfully used the BSC framework. Since 1992, Drs. Kaplan and Norton have studied the success of various applications of the BSC in different types of organizations. Companies have used as few as four measures and as many as several hundred measures when designing a BSC performance measurement system. Based on this research, it has been found that a BSC framework using about 20?25 measures is the usual recommended best practice. Smaller organizations might use fewer measures, but it is generally not advisable to go beyond a total of 25 measures for any single organization, holding company, or conglomerate group of holding companies.

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Balanced Scorecard for State-Owned Enterprises

Learning and Growth

Financial

Figure 2: Example an "Ideal" Balanced Scorecard

22%

Perspective

#of Metrics Weight

22% 22% 34%

Customer

Financial

5

Customer

5

Learning and Innovation

5

Internal Processes

9

24 measures

22% 22% 22% 34%
100%

Source: Norton, David. 2000. Beware: The Unbalanced Scorecard.

Internal Processes

Figure 2 is drawn from an article written by Dr. David Norton. The brief article explained the need for balancing the number of measures in all four perspectives, with greater emphasis on process measures, because the process perspective is the primary domain through which organizational strategy is implemented.
Eight years after introducing the BSC, Kaplan and Norton published an article entitled, Having Trouble with Strategy, Then Map It! The article introduced the concept of a "Strategy Map" to the BSC framework. A "Strategy Map" enables organizations to clarify their strategy and assist organizations with creating their BSC framework and measures. A generic corporate strategy map is provided below to illustrate the "Strategy Map" concept.

Figure 3: Example of a "Generic" Strategy Map

Broaden Revenue Mix

Improve Returns Financial

Improve Operating Efficiency

Increase Customer confidence in our advice

Customer

Increase Customer Satisfaction Through Superior Execution

Develop New Products

Understand Customer Segments

Cross-Sell Products

Improve Governance

Internal Process

Minimize Problems

Increase Employee Productivity

Develop Strategic Skills

Provide Access To Strategic Info

Align Personal Goals

Learning and Growth (Employees)

Provide Rapid Response

Introduction to the Balanced Scorecard and Performance Measurement Systems

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As a result of continued research and innovations over the last 15 years, the BSC has gone through an evolutionary process of improvement, from performance measurement (1990?1996) to performance management (1996?2000), to becoming a globally recognized best practice for strategic management (2001?to present). In fact, the benefits a firm can obtain from properly implementing the BSC include
? Translating strategy into more easily understood operational metrics and goals;
? Aligning organizations around a single, coherent strategy; ? Making strategy everyone's everyday job, from CEO to the
entry-level employee; ? Making strategic improvement a continual process; and ? Mobilizing change through strong, effective leadership.
Although thousands of companies have adopted and benefited from the BSC, it is the Balanced Scorecard Collaborative, Inc. (BSCol) that has taken a leadership role in the evolution of the BSC Methodology as it is adapted by more and more organizations globally. BSCol is a consulting, education, training, research, and development firm facilitating the worldwide awareness, use, enhancement, and integrity of the BSC as a value-added management process. BSCol is founded and led by the creators of the BSC concept, Dr. Robert Kaplan and Dr. David Norton. The company serves as a global center of BSC excellence and expertise. BSCol merged with two other firms in 2005 to form Palladium Group, Inc.--the largest global firm focused exclusively on strategy execution services.
The BSC Methodology has been in use for 15 years. Early adopters of the methodology were confined to developed markets of the United States/Europe and later Asia/Australia. Adoption of the BSC in transitional economies has been slow but growing as evidenced by the case studies contained in later chapters. More importantly, firms, including eGate Consulting and BearingPoint, are increasingly spreading best practices to both the governments and private sectors of emerging markets.

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Balanced Scorecard for State-Owned Enterprises

ACTIVITY-BASED MANAGEMENT (ABM)

Using the ABC approach, companies
get insights into profitable and profitless activities based on a customer
or a product viewpoint

Traditional cost accounting permeates most organizations and is characterized by arbitrary allocations of overhead costs to items being produced. Typically, the company's total overhead is allocated to goods produced based on volume-based measures (labor hours, machine hours, etc.). The underlying assumption is that there is a relationship between overhead and the volume-based measure.
Activity-based costing (ABC) was developed to provide better insight into how overhead costs should be allocated to individual products or customers. Businesses that do not use ABC typically only make simple adjustments to allocate overhead costs that do not accurately fit elsewhere. Businesses that use ABC link expenses related to resources supplied to the company to the activities performed within the company. Through the use of ABC, expenses are allocated from resources to activities and then to products, services, and customers.
Activity-Based Management (ABM) is a discipline that focuses on the management of activities to maximize the profit from each activity and to improve the value received by the customer. This discipline includes cost-driver analysis, activity analysis, and performance measurement. ABM draws on ABC as its major source of information.
Using the ABC approach, companies get insights into profitable and profitless activities based on a customer or a product viewpoint. ABC then is a way of measuring which of the firm's activities generate revenues in excess of costs and, as a result, provide keen insight into what is really providing value for customers.2 ABC is used by many organizations that implement the BSC because ABC enables businesses to more accurately define and measure their metrics (or, measures as referred to in later chapters).

2 Meyer, Marshall W. 2002. Finding performance: The new discipline of management. In Business Performance Measurement: Theory and Practice, edited by Andrew Neely. Cambridge University Press.

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