BPI Technique - Balanced Business Scorecard (BBS)

Description

• The Balanced Business Scorecard is a framework, which links a company’s strategy with the appropriate measures that will help the company monitor and finally achieve that strategy. It represents a set of performance indicators that gives senior management a “snapshot” of the health of the business. The appropriate Balanced Business Scorecard includes financial measures that tell the results of actions already taken, as well as operational measures on customer satisfaction, internal processes and the organization’s innovation and improvement activities - all operational measures that are the drivers of future financial performance.
• With this balanced approach, the scorecard seeks to develop a full set of indicators (to motivate current actions and drive future performance), to balance measures (short term versus long term) and to link measures with objectives (to communicate importance and evaluate performance).

With the Balanced Business Scorecard performance is viewed from four different perspectives and subjected to a balanced assessment.

When to Use

• Traditional performance measurement is often approached in a rather passive way; it is regarded as a complex system which is difficult to fathom, let alone modify. The Scorecard on the other hand, is more closely linked with the cultural thinking of the organization. The power of the Scorecard lies in its focus, simplicity and vision. The experiences of companies that use the framework show that the Scorecard is most successful when it is used to drive substantial changes. In a turbulent environment, the Scorecard provides focus for actions. Where on-going projects in a company tend to peter out over time, or are pushed aside by other matters, the Scorecard can be used to maintain their momentum and sense of urgency.

• The Balanced Scorecard can be used to support the deliverables Critical Success Factors, Key Performance Indicators, To- Be Measurement Dashboard, Measurement System and Performance Feedback.

Approach

• An important condition for a successful implementation of the Scorecard is to begin with a clear vision, directly linked to Critical Success Factors and measurable ambition levels. It will then become the basis on which to develop measures at the high (business) level (3-5 measures) that will support the business strategy or vision (see Key Performance Indicators)
• Review/Establish (Confirmed) Business Vision and Critical Success Factors
• Summarize/Reflect (Confirmed) Business Vision and Critical Success Factors within the four Scorecard categories and develop preliminary set of measures
• The different perspectives in the Balanced Business Scorecard are:

• Financial Perspective
• The factors that create value for the stakeholders/owners of the company.In the end, long-term financial results are what matter to them. Cash flows - discounted for risk and time - determine the value of the organization for shareholders. Cash flows are more capable of reflecting the strategic objectives than profit or turnover. Other indicators in this perspective are growth in market share, profitability and profit per employee.
• Customer Perspective
• The performance of the company as it is judged by the customer. The true value of a product or service only becomes manifest in the eyes of the customer. It is therefore logical to measure the company's performance from the customer's point of view and to adopt a wider perspective. From the customer perspective, the important categories of indicators are price, quality, time and service. These can be measured in terms of "life cycle cost" (total operating costs including costs after purchase, such as installation, maintenance, training, facilities), error levels, timeliness of delivery, required time for the development and marketing of new products and a total score for customer satisfaction.

• Business Processes
• The performance level of the primary business processes. This perspective measures the performance of processes which have the largest impact on customer satisfaction. How can one structure the internal processes, procedures and management activities in such a way that the expectations of customers are met, or better yet, are surpassed? Turnaround time (the total time needed for the execution of the process from beginning to end, from customer to customer), quality and productivity are the most important categories in this perspective. The performance of suppliers and buyers forms part of the primary process as well.

• Organizational Learning
• The extent to which the company is able to continuously improve and innovate. The learning capacity of an organization is expressed by innovation, continuous improvement and intellectual assets. Exemplary indicators are the share of new products in the total sales, the level of improvement in development and speed of production or the level of reduction of waiting time, waste or defect level.  
• Balance identified measures
• Probably the most essential - and also most difficult - aspect of the Balanced Business Scorecard is the balance itself. A well-known phenomenon of performance reports is the abundance of figures. Managers themselves have to filter out the trends and essential issues in order to be able to plan certain actions. What they require is a  balanced overview of a limited number of key financial and operational measures which makes it possible to trace the cause and effect of performed actions. A well thought-out Scorecard is a reflection of the company's vision and the related measurable objectives.
• Review measures with the organization to create buy-in.
• Have senior managers take the output of the facilitated sessions back to their organizations for review.
• Set goals for each of the measures based upon the client’s (Confirmed) Business Vision and Critical Success Factors.
• Decompose the Business Balanced Scorecard into lower-level performance measures established at the process levels.
• Establish performance measurement system. (see Measurement System deliverable)

Guidelines

• Be aware that this approach to measures must be sold in the Envision phase to executive management to create a thorough and consistent approach around the Business Balanced Scorecard. This approach can be used up until the Design High-Level phase, when process measures need to be developed. However, rework may be required and assumptions/qualifiers may need to be incorporated.
• Do no attempt this technique without a clear business strategy. If there is no business strategy, or it has not been articulated clearly, then the scorecard must be preceded by a session to finalize or create the strategy.
• The process measurements have to be based on (primary) processes that cut through the entire organization. They should not be based on the narrow functional areas or departments, because this leads to fragmentation and sub-optimization in the lower levels of the organization.
• The risk in this technique is that the team goes overboard and creates more measures than the organization can manage. It is important to limit the number of measures that any one process, group or individual has responsibility for.
• With measures there is a tendency to immediately look for a familiar unit of measurement, such as values, numbers, times or percentages. However, the unit of measurement is not important. The applied standard and the relative importance of the measurement, are more meaningful. As long as the measure correctly reflects that which is considered important by top management, and as long as the measure indicates the company's performance in relation to its competitors, the objective or any other standard or random unit of measurement is relevant. The techniques that are used to arrive at units of measurement do not have to be special; an adequate dose of creativity and sometimes daring can make a considerable difference.

• Workshop agendas may include the following items.
• Balanced scorecard description and case
• Balanced scorecard brainstorming
• Balanced scorecard feedback
• Performance improvement objective-setting

Examples

• Below is an example of a Scorecard in which the strategic objectives are reflected. The company concerned operates in a strongly competitive market in terms of both price and technological progress. The lifetime of products is becoming increasingly shorter and the number of players entering the market is rising. In order to survive and flourish in that market, it is essential to innovate continuously and to market superior products rapidly. In that respect, the company must be capable of adequately anticipating movements in the market and taking advantage of these changes.
• This strategy is reflected by the set of performance indicators.
• The customer perspective focuses on the extent to which the company is able to offer customers new products and functionalities sooner. The reliability of announcements and deliveries plays an important role from the customer’s point of view.
• Translated into the internal processes, the applied measures are concentrated on the activities which are related to product development.
• Organizational learning is directed at innovation through the introduction of new products. Here, the importance of the multi-functional approach is stressed as well.
• In the financial perspective, attention is primarily paid to the expansion of market share.
• The interrelatedness of the measures clearly shows the strategic emphasis on innovation and marketing. From the Scorecards of the lower echelons in the organisation more detailed information can be obtained, if required (e.g. per product, region or period).

• The following example of the Balanced Business Scorecard comes from a high-tech company which excels in fast, continuous development of new products.

• This diagram below provides an example from the customer perspective of a company where timeliness is a key factor. The consequences of late delivery are represented by the discounts the company has to offer its customers. What is also shown is the level of performance in relation to the previous year and in relation to the defined objectives. Together with relevant measurements from the business process and organizational learning perspectives, a picture emerges indicating why improvements occurred and to what extent actions will be sufficiently effective to realize the increasingly demanding objectives.

Example of a possible reporting format, in this case of late deliveries

References

• The Balanced Scorecard - Measures that drive PerformanceÓ, by Robert S. Kaplan and David P. Norton, Harvard Business Review, January-February 1992
• The Balanced Business Scorecard - The link between vision and implementation, by Marc C. J. Smits, December 1993, Nolan, Norton & Co., Utrecht, The Netherlands