The Balanced Scorecard and its Relationship to Operations Management

Paul Arveson
Balanced Scorecard Institute

The balanced scorecard (BSC) is now about 20 years old, and it has continued to grow in popularity among all kinds of organizations as a better way to do strategic planning and performance management. This talk will explore its roots in the Quality movement, its current structure, and possible future directions. We will show how the BSC complements, but does not compete with quality systems.
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Times are Changing in Management

From: Command-and-control

To: Employee empowerment

Stovepipes / Silos
Focus on process Standard, repetitive processes Management by rules

Cross-functional teams
Focus on results Non-repetitive activities Management by facts

Slow change
Hidden accountability Tangible assets

Rapid and continuous change

Demand for transparency Intangible assets (knowledge)
2

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Intangible Assets

Tangible assets: Facilities, inventory, Property: 10-15%

Intangible assets: Knowledge & skills of workers Information systems & data Customer relationships: 85-90%

Source: Brookings Institution, 1995

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Emerging Challenges in Performance Measurement

Concepts of performance measurement are being extended beyond industrial processes to knowledge worker environments:
Intangible assets Non-repetitive processes Network-centric environments

TQM did not give enough guidance on what to measure.

Tendency was to measure everything; but what measures are strategic? For that we need some framework to determine what are the most important things to measure.

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Whats Wrong with This Picture?

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

The Key Strategic Issue

People and their managers are working so hard to be sure things are done right, that they hardly have time to decide if they are

doing the right things.

Stephen R. Covey
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

What Is Strategy?
Strategy is a hypothesis of the best way for the organization to achieve its long-term vision and mission.

Strategy implies options and choices for an organization. There is always more than one way to achieve a vision or support a mission.
Strategy requires selection among alternative options, focusing on a few things, and deferring or rejecting the rest. Strategy is broad and comprehensive, with organizationwide, cross-cutting impacts. Organizational strategies aim at improvements:
Remedial improvements in existing performance Breakthrough improvements to move to the next level of performance

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Make Strategy Everyones Job

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

What Is The Balanced Scorecard (BSC)?

An improved strategic planning process for focusing on the most important things; A change initiative for visualizing and communicating an organizations long-term strategic intent; An effective strategic management system for aligning dayto-day work to an organizations vision and strategy using strategic performance measures and strategic initiatives; An integrated framework for informing strategic budgeting, and allowing the organization to learn what works and to become more strategy focused.

In other words, a planning and management system, not just a measurement system!
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Balanced Scorecard Perspectives

Perspective Financial or Stewardship Key Metrics Sales, Margin, Earnings Value, Cost Effective Allocation of Resources Satisfaction Retention Key Questions
For businesses: how do we create value for our owners? For government and nonprofits: how do we maximize value and effectiveness of our mission?

Customer & Stakeholder

Through the eyes of our customers and stakeholders: how well do our products and services meet their needs?
How can we improve internal processes to deliver our products and services better, faster, and cheaper? How can we support our internal processes through improved knowledge, skills and abilities, tools & technology, and leadership?

Internal Processes

Process Efficiency Speed Quality Human Capital Learning Tools, Technology Innovation Infrastructure Leadership Culture

Organization Capacity or Learning & Growth

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

10

The Balanced Scorecard Translates Strategy Into Operational Terms

(Private Sector)
Mission
Vision
Financial Perspective

Which will grow the business.

Profitability Sustainability Growth

Customer Perspective

Which will increase customer satisfaction

Value Satisfaction Retention

Internal Process Perspective

Our services will be better and more efficient

Productivity Cycle Time Quality

Organization Capacity Perspective START HERE

Adapted from original work of Kaplan & Norton
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

If we improve our capacities

Skills & Knowledge Technology Culture Leadership

11

The Balanced Scorecard Translates Strategy Into Operational Terms

(Public and Nonprofit Sectors)
Mission Vision
Customer/Stakeholder Perspective

and improved satisfaction for our customers.

Satisfaction Effectiveness Coverage

Financial/Stewardship Perspective

leading to reduced costs

Efficiency Cost Value

Internal Process Perspective

our services will be better and more efficient

Productivity Cycle Time Quality

Organization Capacity Perspective

If we improve our capacities

Adapted from original work of Kaplan & Norton

Skills & Knowledge Technology Culture Leadership

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

12

A Shipping Company Strategy Map

EXAMPLE

Increase profits

Financial

Lower costs
Increase customer satisfaction

Increase revenues
Increase customers

PERSPECTIVE

Customer

Internal processes

Fewer trucks

Employee Reduce Shorter turntraining travel time around time

Organization Capacities

Increase employee training

Improve route planning

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

13

Regional Airline Balanced Scorecard

EXAMPLE
Mission: Dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. Vision: Continue building on our unique position -- the only short haul, low-fare, high-frequency, point-to-point carrier in America.

Strategic Theme: Operating Efficiency

Financial
Profitability Lower costs Increase Revenue More Customers Lowest Prices Reduce Turnaround Time

Objectives Measures
Profitability Lower costs Increased
revenue

Targets

Initiatives

Market Value Seat Revenue Plane Lease

Cost

25% per year 20% per year 5% per year

Optimize Standardize
planes routes

PERSPECTIVE

Customer

On-time flights

On-time flights Lowest prices More Customers

FAA On Time Arrival Rating Customer Ranking No. Customers

First in
industry 98% Satisfaction % change/yr

Quality
Customer
loyalty program management

Reduce
turnaround time

On Ground
Time On-Time Departure

Internal Process

<25 Minutes 93% by end yr yr. 1

Cycle time
optimization program

Org. Capacity
Align Ground Crews

Align ground crews

% Ground crew stockholders

% Ground crew trained

70% yr. 4 90% yr. 6 100%

Stock
ownership plan

Ground crew
training

Adapted from original work of Kaplan & Norton

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

14

Strategy Is Made Up Of Strategic Objectives

Across the Four Perspectives
EXAMPLE
Strategic Theme:

Build The Business

Increase Revenue

Financial

Reduce Overhead Costs

Customer Internal Processes Organization Capacity

V A L U E

Increase Customer Confidence

Increase Customer Retention

Strategic Objectives
are the ovals on a strategy map

Improve Service Quality Improve Employee Morale

Reduce Cycle Time

Upgrade Information Technology

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

15

School District Strategy Map

EXAMPLE
Ensure Safe, Secure Facilities and an Innovative Learning Environment IMPROVE STUDENT ACHIEVEMENT Improve Quality, Standards-based Instruction Increase Community Engagement

Students

Maximize Utilization Of Technology

Resource Stewardship Internal Processes

Increase Resource Alignment With Strategic Priorities Optimize Effectiveness & Efficiency Of Processes & Services Increase Employee Accountability For Results

Ensure Fiscal Responsibility and Stability

Increase Access To and Effective Use Of Technology

Learning and Organizational Development

Increase Employee Capacity & Leadership Improve Recruitment & Retention

Increase Employee Engagement Increase Interactive Communications With Employees

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

16

Performance Measures Are Still Important

Provide a way to see if our strategy is working Focus employees attention on what matters most to success Allow measurement of accomplishments, not just of the work that is performed Provide a common language for communication What gets measured gets done. If you dont measure results, you cant tell success from failure, you cant claim success or reward it, and you may be rewarding failure. If you cant recognize success, you cant learn from it; if you cant recognize failure, you cant correct it. If you cant measure it, you cant manage it and improve it!
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

17

Strategic Performance Measures Are Derived From Strategic Objectives

EXAMPLE
Strategic Theme:

Build The Business

Increase Revenue

Sample Performance Measures

Revenue

Financial

Reduce Overhead Costs

Cash Flow; Overhead rate

Customer satisfaction index

Increase Customer Retention

Customer Internal Processes Capacity Building

Increase Customer Confidence

Repeat customers Service error rate

Improve Service Quality Improve Employee Morale

Reduce Cycle Time

Delivery time Employee morale index

Upgrade Information Technology

Average system age

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

18

Develop Meaningful Performance Measures

Meaningful means Strategic
Focused on the strategic results we want Derived from the Objectives on the Strategy Map

Meaningful means Refined

Balanced Easy to understand Hard to cheat Unobtrusive to collect Appropriate frequency Valid (measures the right things) Verified (measures things right)

Meaningful means Relevant to the user

It tells the user what he or she wants to know It provides information that will help make better decisions
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

19

Strategic Initiatives Support the Vision

STRATEGY
STRATEGIC OBJECTIVES OPERATIONS RESULTS & THEMES

VISION
Picture of the future

CUSTOMER SERVICE

MISSION

MARKETING PRODUCTION INITIATIVE

INITIATIVE

FINANCE
H. R. INITIATIVE

TECHNOLOGY INITIATIVE

TIME
THE STRATEGY RECOMMENDS SOME STRATEGIC INITIATIVES TO IMPROVE PERFORMANCE OF SOME OPERATIONS OR CREATE NEW OPERATIONS.
2009 Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

20

Strategic Initiatives Turn Strategies into Actions

Improvement project using a tool or best practice

Strategic Objective

Measures & Targets

Strategic Initiative

The strategic planning process should use initiatives to help the organization achieve its strategic objectives, not as ends in themselves.

Public sector and nonprofit organizations are especially guilty of often confusing initiative completion as the target rather than improvements in mission objectives and agency effectiveness. -- Kaplan & Norton, 2001
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

21

How Strategy And Operations Relate

Mission Vision Strategic Results

Strategic Objectives
PLANNING

Performance Metrics Strategic Initiatives

Strategic Feedback

Performance Measurements

Operational Feedback

Budgets

Inputs

Activities & Processes

Strategic Initiatives
Lean Six Sigma ISO

Outputs
OPERATIONS
BPR

Outcomes
Intermediate End

Management Tools 22

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

Major Management Tools, 2008

Source: Bain & Company, 2009

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

23

Management Tool Usage 2008

Source: Bain & Company, 2009

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

24

Tool Usage Error 1

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

25

Tool Usage Error 2

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

26

One Function of the Balanced Scorecard: Selecting the Right Tool for the Right Job

VISION

BSC

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

27

Summary: Building & Implementing The Strategic Planning & Management System

Nine-Steps To Success Balanced Scorecard Program

Strategic Planning & Management System

Mission Vision Strategic Results Strategic Objectives PLANNING Performance Metrics Strategic Initiatives
Strategic Feedback

Performance Measures
Operational Feedback

Budgets

Inputs

Activities & Outputs Processes OPERATIONS

ISO BPR

Outcomes

Lean Six Sigma

Initiatives

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

28

Past and Future of Management

STRATEGIC PLANNING

PERFORMANCE MEASUREMENT

BALANCED SCORECARD
STRATEGIC PERFORMANCEBASED MANAGEMENT

BUDGETING

INTEGRATE CHANGE MANAGEMENT TO SUPPORT TRANSFORMATION.

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

29

The BSC Strategic Management System Is A Journey

Strategy + Operations + Change

A cost-effective game plan, communicated and executed well Efficient processes run by empowered, satisfied employees Effectively managing the complexities of people, tools, innovation and action

In other words, learning to do the right

things right.

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

30

About the Balanced Scorecard Institute

The Balanced Scorecard Institute provides training and consulting services to commercial, government, and non-profit organizations in applying best practices in balanced scorecard (BSC), strategic performance management and measurement, and transformation and change management.

Cary, North Carolina (919) 460-8180

Washington, DC (202) 465-4253

www. balancedscorecard.org
31

Appendix

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

32

Performance Measures - Examples

(Private Sector) EXAMPLE Inputs
OPERATIONAL MEASURES OUTCOME MEASURES

Activities & Processes

Overhead rate, total cost of ownership

Outputs

Intermediate Outcomes
Budgets aligned to strategy

End Outcomes or Results

ROI, ROA, ROCE, EBITDA, net profit, cash flow Customer and stakeholder satisfaction; retention Fast company, strategyfocused Highperformance, learning organization

IMPROVEMENT PERSPECTIVES

Financial

Project cost, employee cost, subcontract costs Customer knowledge, sales data; customer needs Planning, process documentation FTEs, hardware, equipment, leadership

Audits passed, costs incurred, revenues Calls received, Web site traffic On-time deliverables, efficiency Skill sets, capabilities, capacities

Customer / Stakeholder

Marketing research, customer relationships Cycle time, compliance, process maturity Training, technical capabilities, security

New customers added; complaints received High quality/low cost; process alignment Aligned skills, systems, culture, leadership

Business Processes Learning & Growth

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

33

Performance Measures - Examples

(Public Sector or Nonprofit Organization) EXAMPLE Inputs
OPERATIONAL MEASURES OUTCOME MEASURES

Activities & Processes

Customer surveys conducted

Outputs

Intermediate Outcomes
Customer and stakeholder satisfaction; retention Budgets aligned to strategy

End Outcomes or Results

Mission effectiveness; Best choice organization Mission efficiency, Mission value, Productivity

IMPROVEMENT PERSPECTIVES

Customer / Stakeholder

Recipient or client knowledge; position on issues; needs Budgets, actual costs

Recipients served, coverage, visitor contacts Audits passed, funding targets reached

Financial

Overhead rate, total cost of ownership, cash flow

Business Processes
Learning & Growth

Planning, process documentation

FTEs, Hardware, Equipment, Leadership

Cycle time, compliance, process maturity

Training, technical capabilities, security

On-time Deliverables, efficiency

Doing the right things right; process alignment

Aligned skills, systems, culture, leadership

High Baldrige score; certifications; recognition

Highperformance, learning organization

Skill sets, capabilities, capacities

Note: measures shown are suggested examples; they are not intended to be prescriptive.
2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

34

Business & Industrial Clients

Consulting Software
Financial Institute

First Bank of Nigeria

International Bank Of Moscow

Spectrum Partners LLC

Citizens National Bank

Mortgage Services

Industrial/Commercial

Transportation
Golden Sunlight Mine Golden Sunlight Mine

EuroControl
Follett Corporation

AMIRI Flight, UAE

LukOil
Entertainment Croatian Telecom

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

35

Public Sector & Nonprofit Clients

Austin (TX)

City of Newark (NJ) Mecklenburg County (NC) Greenville Utilities Commission (NC)

Oneida Tribe of Wisconsin

Pinellas County Sheriff's Office (FL)

Workers Compensation Insurance Rating Bureau

Georgia Dept. of Early Care & Learning

Dalton Public Schools

U.S. Dept. of Health & Human Services U.S. Foreign & Commercial Service U.S. House of Representatives Chief Admin. Officer

American Speech-LanguageHearing Association

EuroControl Government of Malaysia

Passport Canada

Society Of Canadian Artists & Musicians

2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

36 36

 2009 by the Balanced Scorecard Institute, a Strategy Management Group company. All rights reserved.

37