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Performance Measurement Strategy

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Published: Mon, 5 Dec 2016

A performance measurement system is a process developed to implement an organizations strategy effectively. This involves identification of the critical factors that impact overall success. When the strategic factors are correctly identified, measured, and rewarded regularly, employees are made aware of them and are thus motivated to achieve those goals that ultimately result in the overall success of the company. While profitability is an obvious component, there are many other factors that determine both the short and long term goals necessary for company growth and overall performance. The Balanced Scorecard ( BSC ) is one example of a performance measurement system designed to analyze goals from multiple perspectives. The resulting balance that the system fosters culminates in goal congruence and encourages employees to continually act in the best interest of the company (Anthony & Govindarajan, ch. 11, pg. 496). This paper will review the fundamentals of BSC, its historical evolution, and the results achieved from its application in several company case studies.

What is the Balanced Scorecard?

The seminal article, ‘The Balanced Scorecard – Measures that Drive Performance’ by R. Kaplan & D. Norton, 1992, clearly demonstrates the theory and implementation of BSC. The system is comprised of both financial and operational measures that are derived from a company’s strategic objectives. Effective measurement is thus the key component for motivating breakthrough improvements in critical areas (Kaplan, Norton 1993). The “Scorecard” in BSC refers to a means of recording and communicating performance and results. “Balanced” refers to balance among measures, performance indicators, outcome and output measures, horizontal measures and vertical accountability. The framework is designed to improve results via development of high priority actions and resources that compliment the overall company strategy. It is therefore a mechanism to drive change by measurement of future orientated strategies with aggressive goals for improvement. Performance measures are utilized to track organizational performance on a daily bases. This design thereby bridges the distance between leadership strategy and employee operations ( Hall, 2000). Employees are clearly aware of their goals and managers are able to view company performance in several areas simultaneously (Kaplan, Norton, 1992). The four perspectives addressed in this measurement system are:

1)Financial (e.g., profit margins, return on assets, cash flow).

2)Customer (e.g., market share, customer satisfaction index).

3)Internal Business (e.g., employee retention, cycle time reduction).

4)Innovation and Learning (e.g., percentage of sales from new products).

Figure 1, source: Kaplan & Norton, HBR, 1992

The above diagram, Figure1, illustrates the primary components of the BSC system that contribute to its success. By defining the four perspectives and requiring managers to select a limited number of critical indicators, the BSC clarifies the company’s strategy and fosters continuous measures for achievement of the established goals (Kaplan, Norton, 1993).

Financial Perspective

The financial performance measures indicate the company’s profitability and growth. Historically this measure has been of great importance in determining an organization’s worth. While it is a very important aspect of a company’s success, relying on financial control systems alone can be detrimental to the company’s long term success. If the only goal of the organization is measured by cash flow, quarterly sales growth, and increased market share, the company may resort to the sacrifice of quality and service in an attempt to cut costs and increase immediate sales. While this strategy may be effective short-term, the long-term implications are irrevocably detrimental as customer satisfaction and future sales plummet (Anthony, Govindarajan, ch. 11, p 494).

Some critics feel strongly that financial performance should not be considered a performance measure at all. Rather, concentration of effort in areas of customer satisfaction, quality, cycle time reduction, and employee motivation will ultimately culminate in long-term financial success (Kaplan & Norton, 1992). According to Kaplan and Norton, financial measures are actually beneficial and , when designed correctly, can actually improve the company’s total quality management program. For example, Kaplan and Norton site a chemical company case study that implemented a total quality management program consisting of extensive measurements of “employee participation, statistical process control, and key quality indicators” (Kaplan & Norton, 1992). This plethora of data conveyed on the managers reports was so overwhelming as to be useless in terms of evaluating and improving operations. One department manager, however, created a daily income statement in relation to key components of operations so employees could monitor the effects of their production processes from the previous day. In doing so, employees were empowered to make changes to constantly improve the production process and quality which, in turn, had a direct bearing on the bottom line. In this instance, the daily financial report served as the primary communication between management and the production employees to positively or negatively reinforce their operations and decisions from the previous day. (Kaplan, case 9-190-039, Texas Eastman Company, HBR 1992). This example demonstrates a key component of any measurement system: limitations and regular monitoring of critical processes. With this strategy in place, employees are made aware of the organization’s strategy and goals and realize the impact that their actions have on those goals. Furthermore, financial performance measures complete the BSC strategy by forcing managers to explore the relationship between operations and finance. Improvements in the areas of quality, response time, productivity and new innovations are only beneficial if they ultimately result in an increase in the bottom line.

Customer Perspective

Financial performance measures, however, are not the only measure of importance to a company’s success and, in fact, can be detrimental to the organization’s long-term success if overemphasized. For this reason, it is only one of the four perspectives to be considered in the BSC system. Another measure of the BSC system is the Customer Perspective. Many companies focus on “customer satisfaction” but the BSC forces managers to identify the critical factors related to customer satisfaction and the means to measure or monitor them on a regular basis. Concerns generally fall into the four categories of timeliness, quality, service and cost. The important and often overlooked key to this perspective is determining the wants, needs, and expectations of the customer rather than setting the goals arbitrarily. It is often beneficial to use external measures in order to establish company goals with respect to the customer perspective. External measures include customer surveys, report cards, and benchmarking current practices with leading competitors’ best systems (Kaplan & Norton, 1992). This category of the BSC system is particularly important to repeat business sales and long term success from customer loyalty and retention. The cause and effect relation between the internal business perspective, customer perspective and the resulting financial perspective is shown in the class text page 499.

Internal Business Perspective

The internal business perspective is the mechanism that provides data linking internal business results to financial success and satisfied customers. Organizational objectives and customer expectations are met through the identification of critical business processes. These processes are then monitored or measured frequently to ensure satisfactory outcomes (Balance Scorecard home page). The data obtained from customer measures and financial performance is then utilized to refine internal processes to achieve goals relating to processes including cycle time, quality, employee skills and productivity. Measures must reflect localized department and workstation levels that are influenced directly by employee actions. In doing so, the employee takes direct ownership of their actions and is fully integrated into the measurement of goals thereby increasing motivation. For example, a responsive information system would allow for the tracking of a late delivery to its source. However, poorly designed measures and the resulting lack of feedback would result in an inability to track problem sources with a concomitant lack of individual responsibility for employees at lower levels. Without properly identified critical goals and measures and a clear understanding and measurement of those goals, employees are unable to contribute and optimize activities that promote the companies overall mission and contribute to financial success. (Kaplan & Norton, 1992)

Innovation and Learning Perspective

The final link that completes the BSC chain involves the company’s ability to evolve to accommodate changes in demand, technological advances, and remain competitive in the marketplace. As company goals evolve and change in response to internal and external measures, the importance of this final segment is realized. Inability to measure and respond with innovative improvements in operations and new products would quickly cause a company to lose its competitive edge. While this segment might consume a percentage of the bottom line, the long-term benefits are realized in continual growth and development of the internal processes and customer satisfaction and thus leads to increased overall company value. (Kaplan & Norton, 1992).

The primary benefit of this system is its ability to bridge the distance between upper management strategy and its application to lower level operations. When properly researched and applied the system allows for ease of communication between upper management and all departmental levels. Key objectives are identified and their interrelationship is illuminated. Lower level workers are empowered to make decisions to improve processes. New and better processes are continually discovered, implemented, and reviewed and innovation and action are rewarded at all levels. (Hall, 2000)

Putting the Balanced Scorecard to Work ( Implementing BSC )

Theoretical implementation of the balanced scorecard involves four basic steps:

1)Define strategy

2)Define measures of strategy

3)Integrate measures into the management system

4)Review measures and results frequently

(Anthony & Govindarajan, ch 11, p 500)

While all aspects are important to the success of the system, the essential part is the implementation of measures. Managers must introduce new measures to monitor new goals and processes and continually reevaluate old measures to determine their relevance as the system evolves. (Kaplan & Norton, 1993)

The first step involves defining one’s strategy. The BSC is not a one size fits all template, but rather varies widely from one company to the next. It is designed to fit each company’s mission, strategy, technology, and culture. (Kaplan & Norton, 1993). The scorecard is defined by its ability to link various perspectives of a company. This interrelationship is the direct result of formulating a concrete company strategy with explicit goals. By defining overall strategy at the corporate level, the scorecard is then applied to the lower levels. (Anthony & Govindarajan, p. 501) In this way, all goals and measurement systems remain interrelated and directed toward the ultimate strategy and well defined goals initially established at the corporate level.

With a well defined strategy and set of critical goals, the system must follow through in applying measures to not only to operations and financial processes, but also to the management system itself. For example, compensation and rewards must also be based on measurement system successes rather then solely on financial performance. (Anthony & Govindarajan, p. 500)

Unlike many other systems, BSC balances critical factors in both financial and operational measures allowing companies to tell the results of actions already taken while simultaneously measuring current practices in customer satisfaction, internal processes, and the organization’s innovation and improvement activities which are the indicators for future financial performance. (Kaplan & Norton, 1992) Therefore the review of these measures and results on a regular and frequent basis is the final step in implementation of BSC. It is the responsibility of senior management to constantly analyze the measures and implement changes in the strategy and adjust measures accordingly to be congruent with revised strategies and goals. In doing so, management is constantly aware of whether the strategy is being implemented correctly and its overall success; the importance of these measures is conveyed to all levels of the company; and strategy are constantly evolving and measurements are improving to better reflect those outcomes. (Anthony & Govindarajan, p. 501)

Practical implementation of BSC requires a company to build a unique scorecard. These steps are outlined in the article “Bridging the Distance” by Mary Jo Hall. The design will very depending on where the organization is in terms of strategic planning and implementation, but the process of developing a BSC can be divided into a series of stages that apply to all. When completed, the BSC serves as a mechanism that forces cause and effect analysis and integrates strategy with daily work. The series of six stages include: (Hall, 2000)

1)Mobilizing the leadership

2)Developing the architecture

3)Linking and aligning the parts

4)Mapping the initiatives

5)Rolling out and cascading throughout the organization

6)Continuing to focus and improve the strategy

( source, Hall, 2000, p. 26)

In the first stage senior leadership must be knowledgeable and committed to the BSC structure. A thorough understanding of the BSC system is needed to implement the cascading chain of command that it requires. This is followed by the strategic architecture (stage 2) or developing the perspectives that are appropriate for the organization. Traditionally, the four perspectives include financial, customers, internal business, and learning and growth, but these may be modified to fit the company focus. The value of this architecture is that it forces the company to view its processes and service through the eyes of its customers. Leadership must determine a “Value Proposition” defined by the equation:

Value = Product and Service Attributes + Image + Relationships

Customer satisfaction measures include time (rapid response), quality (defect free products and services), and price (not just at purchase but over the lifetime). (Kaplan & Norton, 1996). Leadership must therefore create a “value chain” that links internal processes with customer perceived value including the development of new work, production, and delivery. Objectives can then be determined for each BSC perspective. This is accomplished via brainstorming for each perspective and then identifying the most critical objectives.

In stage 3 the perspectives are lined up horizontally with financial on top, followed by customer, internal processes, and learning and growth on the bottom. (see Figure 2, Strategic

Map)

Figure 2, Strategic Map, source: Hall, 2000, p 26

An interrelationship digraph is constructed for each objective. This often times reveals a critical path that highlights the ” high impact objectives” (those steps that produce the greatest return in the shortest amount of time). Measures are then assigned for each objective including defining the unit of measure, and how and when it is collected.

With clear objectives and measures determined, stage 4 involves mapping initiatives. These action projects are used to evaluate the company strategy once the initiatives are mapped the strategic map is basically complete and can be implemented.

Stage 5 and 6 are the implementation of the strategic plan via creating links between resources and initiatives. This involves establishment of communication, implementation techniques, and feedback mechanisms. Followed by the continual improvement via feedback loops to constantly assess and report the BSC process. (Hall, 2000).

Case Studies

The remainder of this paper will review BSC applications in several organizations to show the variations and modifications of the BSC system as it applies to different company models: traditional for profit, Department of Defense, government, and health care industry. As stated earlier, creation of the balanced scorecard for each company is customized to reflect the company’s strategy and objectives. BSC is utilized by more than 50% of North American companies nationwide attesting to its popularity and effectiveness as a management system. (Turner, 2000).

Rockwater Case

Rockwater, a wholly owned subsidiary of Halliburton, a global engineering and construction company, is a worldwide leader in underwater engineering and construction. Increased competition forced the CEO to consider ways to make the company more competitive. The strategy involved developing long-term relationships with large suppliers based on value and safety rather than low-price competition, while maintaining a second-tier service for customers that chose suppliers solely on the basis of price. The following diagram (Figure 3) shows how Rockwater’s vision was translated to a company strategy and then broken down into the critical strategic objectives from the four BSC perspectives.

Figure 3, Rockwater’s Strategic Objectives, source: Kaplan & Norton, HBR , p.135,1993

The vision was determined by the senior management team. Then the strategy was developed to implement the vision. These were, in turn developed into strategic objectives. The next step, of course, was translating those objectives into tangible goals and actions. The Balanced Scorecard’s set of four performance measures was thus utilized to facilitate that link. See Rockwater’s BSC , Figure 4 below.

Figure 4, Rockwater’s BSC, source: Kaplan & Norton, HBR , p.135,1993

The financial measures encompassed both short-term goals of: Return on Capital Employed, Cash Flow, and Project Profitability addressed historical uncertainty caused by unexpected variations in performance.

Customer satisfaction perspective was divided into Tier I and Tier II customers. Tier I customers were asked to supply monthly service and performance ratings, providing the company with competitive market feedback. Market share by key accounts provided objective measures of their success in this area. (Kaplan & Norton, 1993).

Internal processes were determined for each project life cycle. Emphasis was placed on the aspects that the company found most important to their vision including 1) time spent with new customers. This emphasis communicated the company’s belief in the importance of building long term relationships and satisfying customers 2) emphasis was also placed on safety as internal studies revealed that indirect costs from accidents could be 5 – 50 times the direct costs.

Innovation and Improvements came from product and service innovation and improved internal work processes. Measurement for these systems was tracked by percent revenue from new services and by a continuos improvement index that followed several key operational measures such as safety and rework. This perspective also included staff attitude survey and employee suggestions which the company felt empowered and motivated their employees.

In this example, the BSC assisted Rockwater in achieving a process view of operations, motivation of employees, improved safety protocols and long-term value oriented partnerships with customers which culminated in their original mission statement: to be number one in the industry. (Kaplan & Norton, 1993)

Department of Defense Case

The Department of Defense (DoD) has also adapted the BSC as a means to measure performance for electronic business and electronic commerce (EB / EC). Figure 5 shows the use of BSC that has been modified to a phase continuum model.

Figure 5, Use of the EB/EC Continuum

With this modification, organizations with DoD can evolve from Phase 1 usage of EB / EC to the more complex use of electronic technology in Phase 3. Each phase outlines the goals and performance measures established for the segment and is designed such that the department can graduate seamlessly to the next phase. (Defense Reform, Electronic Commerce Conference, April,2000)

Traditionally, federal agencies focused on internal or process performance as determined by factors including: number of programs controlled by the agency, number of full time equivalents allotted, and the size of the budget. With the BSC system, the framework allows the measurement of the organization’s short-term and long-term ability to meet goals through the identification and assessment of performance drivers and outcomes. (Defense Reform, Electronic Commerce Conference, April,2000).

The following diagram (Figure 6) illustrates the balanced scorecard perspectives used by the DoD.

Figure 6, Balance Scorecard Perspectives

Again, the BSC system has been modified from the original four perspectives to include all of the relevant perspectives required to achieve the desired goal by balancing the results of internal processes with external stakeholder measures. (Defense Reform, Electronic Commerce Conference, April,2000).

Due to the immense number of processes and organizations throughout the DoD, measurement approaches using the BSC system must be applied to small segments toward individual project goals and processes. This adaptation also veers away from the original design of BSC in that top management does not dictate one singular strategy and list of goals, but rather encourages specific projects to develop measures appropriate to each projects goals and processes prior to implementation, thus utilizing the BSC framework in manageable applications.

Government use of BSC case(s)

Government agencies have also found the BSC system useful. The city of Charlotte, N.C. modified and implemented the BSC system in an attempt to promote vision and strategy for the future. City mangers have found the system useful as it provides “substantial focus, motivation, and accountability in government…” (Syfert, Elliott, 1998)

Another government variation of BSC is seen in the article by Dale Quinlivan, Rescaling the Balanced Scorecard for Local Government. This article suggest that the original framework is not adequate for ‘not-for-profit’ organization and that the Australian Business Excellence Framework categories would serve as more appropriate perspective categories.

According to, The Balanced Scorecard Institute in its world wide web page, “in government settings, outcomes are based on mission success rather than profit”, and Kaplan and Norton go further to say: “Success for government and not-for-profit organizations should be measured by how they meet the needs of their constituencies. Tangible objectives must be defined for customers and constituencies. Financial considerations can play an enabling or constraining role, but will rarely be the primary objective.” (Kaplan and Norton, 1996)

This was also seen in the BSC application in Charlotte, N.C. where the financial perspective was replaced with the customer perspective. The Kaplan model assumes a link between customer service and financial objectives, but this link does not necessarily exist when the services are provided by public funds. For this reason, Quinlivan suggests the perspectives be altered or customized to meet the not-for-profit criteria. Health care organizations for example have adapted the four perspectives of:

1)Patient – value added – patient perspective

2)Employee – value added – internal perspective

3)Business – value added – learning perspective

4)Business – value added – financial perspective

For each perspective, the vision of what was to be achieved was translated into changes in behavior, performance and perception. This established, the BSC for the vision and a list of actions and measures to achieve them could be devised. (Quinlivan, 2000)

Similarly, the Australian Business Excellence framework categories might better serve a government model. This model shows categories that have been proven to be important dimensions of an organizations ability to deliver effective service. ( Quinlivan, 2000, p39). The Business Results category provides the framework to link cause and effect to business outcomes. Because government organizations deliver an unusually large number of services, the perspectives chosen for the BSC must focus on major strategies required to maximize service success. For example, Charlotte, N.C. identified 5 key areas in their strategic plan: community safety, city-within-a-city, transportation, economic development, and restructuring government. Each area utilized its own BSC towards a common set of 19 objectives established by the City. With these minor modifications, the BSC has proven to be an effective management system for government applications in Charlotte, N.C., and the health care industry. (Quinlivan, 2000, p. 40)

Health Care Industry (case)

As briefly mentioned, public health care service industry is yet another organization that requires some modification of the BSC system.

Performance management within a multi-agency healthcare setting would be potentially beneficial for two reasons:

1)Public services would benefit from improvement in areas including economy, efficiency, and service delivery.

2)To reinforce accountability and account for the resources used and outcomes that are achieved.

(source: International Journal of Medical Marketing, p 175, 2003)

The BSC system was implemented within the Bradford Health Action Zone at a primary care trust facility. This organization implemented the BSC system using the four steps indicated in the following diagram (Figure 7) to achieve its primary goal and vision.

Figure 7, How the BSC seeks to deliver strategic benefits, source: International Journal of Medical Marketing, p 181, vol. 3, 3)

The following diagram (Figure 8) below, demonstrates the Balanced Scorecard designed for the healthcare facility and how the components relate to the mission statement which states, ” is that via partnership working, it will provide and commission services and improvement programs that will reduce health inequalities and increase standards of health for its local population…” (International Journal of Medical Marketing, p 184, 2003)

Figure 8, Balanced Scorecard

This system utilizes four perspectives as outlines by Kaplan and Norton, however, the financial perspective is replaced by a cost perspective which is designed to maximize the allocated budget by attaining goals set forth in the remaining three areas. Application of the BSC system proved to be attainable and promising in the analysis of its application to the public health care system.

Conclusion

The BSC is a comprehensive view of an entire organizational system that allows management to look at the past, present, and future financial measures. The cause and effect of relationships and the enhanced communication that are fostered creates a goal congruent atmosphere that includes participation from lower level employees. The measures allow for constant reevaluation and improvement by upper management with a cascading chain of command that filters back to the operations on a daily basis. These measures and processes address the inadequacies of traditional financial based systems and when implemented correctly, provide and dynamic framework for long-term organizational success.

Furthermore, the BSC system is dynamic enough to be adapted to not-for-profit organizations and government systems with similar results.

Planning

Budgetary planning is the process of preparing detailed, short-term plans for all the functions, departments and activities of the organisation. It is important that the short-term plans and objectives that make up the budget are related to the long-term plan and objectives of the organisation. The budget may be drawn up by preparing an overall budget for the organisation which is then broken down into more detailed budgets for the different parts of the organisation [the top-down approach] or by devising budgets for the various parts of the organisation and then bringing them together to build up the overall budget [the bottom up approach].

Extrapolations, Forecasts and Plans

In discussing budgetary planning it is important to distinguish between extrapolations, forecasts and plans.

An extrapolation is the continued projection of an existing trend.

A forecast will be based on an extrapolation, but is adjusted to take account of any known factors which will affect the trend.

A plan involves some intervention by the organisation in order to modify events in such a way as to make it more likely that the organisation’s objectives will be achieved.

Co-ordination

It is vital that the plans of each department are related to each other and are integrated together to make a coherent whole e.g. it is no use planning for sales of 150,000 units if productive capacity is restricted to 120,000 units. Note the significance in this context of limiting factors and the principal budget factor.

The principal budget factor is the factor which acts as an over-riding limitation on the activities of the organisation. It might be sales, productive capacity, finance, shortages of materials, labour or energy. The principal budget factor can change over time. Identifying limiting factors is a key element in the co-ordination aspect of budgetary control.

The Master Budget

This is the overall plan for the business’s financial activities, to which, therefore, its

sectional plans must be related. For commercial organisations it will be normally in the form of a planned Income Statement, Balance Sheet and Cash Flow Statement.

The master budget is the key element in budget co-ordination as it summarises all the other plans and reveals any inconsistencies amongst them.

Control

As far as possible, actual Activity should be in line with the original plan and steps should be taken to restore Activity to the plan when there are deviations from it [although on occasions it will be necessary to adjust the plan to meet changing circumstances].

Control is exercised in organisations by the continual feedback of information to facilitate such corrective action.

Variations from plan are revealed by measuring actual performances and comparing it to planned performance. These variations [known as variances] are analysed in more detail and reported to managers for action. NB taking action on variances is the key part of the control mechanism. It is important therefore, that information [in the form of budgetary reports] is timely, relevant and comprehensible.

We shall discuss the control aspects of budgeting in more detail in the next session.

We can sum up the purposes of budgeting as follows:

It has been claimed that the operation of a budgetary control system within an organisation can be valuable in a number of different respects. These include:-

Planning


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