Building the Balanced Scorecard

Dan Feliciano

Illegal aliens have always been a problem in the United States. Ask any Indian. - Robert Orben

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2 01/18/2008

What is Strategic Planning?

Process to establish priorities on what you will accomplish in the future Forces you to make choices on what you will do and what you will not do Pulls the entire organization together around a single game plan for execution Broad outline on where resources will get allocated

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What do you think?

Only 5% of the workforce understands their company strategy. Only 25% of managers have incentives linked to strategy. 60% of organizations dont link budgets to strategy. 86% of executive teams spend less than one hour per month discussing strategy.
Balanced Scorecard Collaborative

Up to 50% of resources of an organization are not being effectively applied to the mission and vision of the organization

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Also
90% of well-formulated strategies fail due to poor execution 75% of business improvement initiatives to solve this problem fail due to lack of sustainability.

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Why do Strategic Planning?

If you fail to plan, then you plan to fail be proactive about the future Strategic planning improves performance Counter excessive inward and short-term thinking Solve major issues at a macro level Communicate to everyone what is most important

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Fundamental Questions to Ask

Where are we now? (Assessment) Where do we need to be? (Gap / Future End State) How will we close the gap (Strategic Plan) How will we monitor our progress (Balanced Scorecard)

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DanFeliciano.com

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A Good Strategic Plan should . . .

Address critical performance issues Create the balance between what the organization is capable of doing vs. what the organization would like to do Cover a sufficient time period to close the performance gap Visionary convey a desired future end state Flexible allow and accommodate change Guide decision making at lower levels operational, tactical, individual
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Why Adopt a Balanced Scorecard?

Change Formulate and communicate a new strategy for a more competitive environment Alignment Each staff members actions are guide by the strategies and goals of the organization Focus Provides management with a tool for monitoring progress towards achieving the organizations vision
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Introduction
Balanced Scorecards provide a framework for communicating strategy in operating terms (measurements and targets). You must communicate strategy in operating terms if you expect people to execute on your strategy. When people are asked about strategy, they reach for their balanced scorecard.
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Making Strategy Everyones Job

Creating a Climate to Support Strategic Change 1
Create Strategic Awareness

Insure that each individual has sufficient understanding of the strategy (You cant execute what you dont understand) Insure that each individual knows where they fit into the overall game plan

2
Align Personal Objectives

3
Align Incentive Compensation

Reinforce desired behavior and increase intensity of awareness

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Agenda
This slide presentation will outline the major steps for building a balanced scorecard. How you execute these steps will depend upon many factors: Company culture, tolerance for change, leadership, etc.

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Overview
Balanced Scorecards are constructed from strategic maps Throughout the process, we will refer back to these maps, making sure everything is linked. This is very important since we want to capture a cause and effect relationship in building the scorecard.

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Start with Strategy

Begin with your strategic plan what things are critical to future success? Focus on customers what values will we add to our customers Define the processes how will we deliver these services to our customers Build the organization what capabilities must we put in place
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Strategic Goals
The first components of your strategy are goals. Strategic goals establish direction in concrete terms. Strategic goals anchor the rest of the process. Strategic goals should fit with the vision and mission of the organization.

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Goal Attributes
Very short statement Directly relates to the mission Broad in scope Covers long time period (such as 3 years) Examples: Improve Customer Service Leverage Core Competencies Develop more innovative products
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Strategic Objectives
Once we establish our first anchor (goals), we can develop a set of strategic objectives. Strategic objectives define what actions must be taken to reach the strategic goals. Objectives are critical to future success. For example, in order to grow revenues, we must introduce new products and expand our market share.
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Objective Attributes
Longer statement than goal statement More specific than goal statement Indirect relationship to mission Covers shorter time period than goal (such as 6 months or 1 year) Example: We will expand call center services to include technical support
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Whats the Difference Between Goals and Objectives?

Goal: Very short statement Directly relates to the mission Broad in scope Covers long time period (such as 3 years) Examples: Improve Customer Service, Leverage Core Competencies, Develop more innovative products Objective: Longer than goal statement More specific than goal statement Indirect relationship to mission Covers shorter time period than goal (such as 6 months or 1 year) Example: We will expand call center services to include technical support

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Break-out Session
Develop another example for Goal, Objective and Strategy Goal: Objective: Strategy
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Example of Goal and Objectives

Goal

Objective

Achieve Agency Reduce Operational operational Service Costs by 50% efficiencies with over the next 5 years best practices in the private sector Reduce identified reactivities within primary processes by 80% over the next 3 years

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Strategic Themes
Based on strategic goals, three to five strategic themes should emerge. From these themes, we will develop a strategic map. Four common strategic themes are: Operating Efficiencies, Customer Relations, Product Innovation, and Growing the Business.

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Strategic Model
Strategic Models can emerge from four principles: 1. Translate strategies into operating terms. 2. Link strategies throughout the entire organization. 3. Commit everyone to implementing strategy. 4. Make strategizing a continuous process of learning and adjusting to change.
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Four Perspectives
Before we build strategic maps, we need to define four perspectives: Financial: Financial Top layer in the map, represents financial outcomes (profits, revenues, etc.) Customer: Customer Next layer down, enables financial results (service, image, price, quality, etc.) Processes: Internal Processes The values added to customers, such as delivery, production, distribution, etc. Growth: Learning & Growth The people, systems, and organization that enable processes.
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Strategic Perspectives
Financial Perspective "If we succeed, how will we look to our shareholders?

Customer Perspective "To achieve our vision, how must we look to our customers?

Internal Perspective "To satisfy our customers, at which processes must we excel?

Learning & Growth "To achieve our vision, how must our organization learn and improve DanFeliciano.com

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Strategic Mapping
Strategic Maps are the foundation of the Balanced Scorecard. You will need one strategic map for each strategic theme. Maps are constructed over four perspectives. Strategic objectives are mapped over the four perspectives, linked together.
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Airline Example
Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes Customer Flight Is on Time Lowest Prices More Customers

Internal Fast Ground Turnaround

Learning Ground Crew Alignment

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Strategic Mapping: a framework

Financial perspective
Increase Shareholder value

Revenue growth strategy

Productivity strategy

Build the franchise

New markets New products New customers

Increase value to customers

Deepen the relation through expanded sales

Improve cost structure

Operating cost per unit produced

Improve use of assets

Asset utilization

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Linking
Strategic objectives need to be placed in the Strategic Map according to which perspective fits with the objective. Objectives may cross over more than one perspective. We usually start at the top with outcomes and work our way down, looking at what enables (drives) the outcome.
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Linking Strategic Themes & Objectives

Strategic Theme: Strategic Theme: Operations Operating Excellence Efficiency
Financial Grow Revenues Customer On-time Service Internal Fast ground turnaround Learning Ground crew alignment DanFeliciano.com Attract & Retain More Customers Lowest prices Profits and RONA Fewer planes

Objectives

Profitability Grow Revenues Fewer planes More Customers Flight is on -time Lowest prices

Fast ground turnaround

Ground crew alignment

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Approval
Once you have completed the strategic maps, you will need to get approval from executive management. Does this map accurately tell the story of our strategy? If management disagrees with the map, go back and redo the maps. We need to get this step right since it represents the foundation for the entire scorecard.
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Measurements
For each strategic objective, you need one measurement. Measurement provides us with feedback on meeting the strategic objective. Most organizations will use many of their existing measurements. Organizations requiring major change should include driver type measurements.
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Airline Example
Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes Customer Flight Is on Time Lowest Prices More Customers

Objectives

Measurement

Profitability More Customers Fewer planes Flight is on -time Lowest prices

Market Value Seat Revenue Plane Lease Cost FAA On Time Arrival
Rating Customer Ranking (Market Survey)

Internal Fast Ground Turnaround

Fast ground
turnaround

On Ground Time On-Time Departure

Learning Ground Crew Alignment

Ground crew
alignment

% Ground crew
trained

% Ground crew
stockholders DanFeliciano.com
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Measurement Criteria
Measurements should drive change, providing teeth to our strategy. Measurements define objectives in specific terms. A good measurement should tell you what your objective is this is an indicator of good linkage. Measurements should be repeatable, quantifiable, and verifiable.
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Good Measurements
Customer satisfaction: Retention rate Organic growth Satisfaction metric Process Efficiency: Cycle time, lead time, on-time, Employee Utilization Number of defectives / Percentage Defective
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Lead and Lag Measurements

Leading measurements are drivers behind performance and provide some predictability (forward looking) Lagging measurements are usually final outcomes that look back, such as customer satisfaction or return on investment Balanced scorecards should include both leading and lagging type measurements
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Example of Goal, Objectives & Measurements

Goal
Achieve Agency operational efficiencies

Objective
Reduce Operational Service Costs by 50% over the next 5 years Reduce identified re-activities within primary processes by 80% over the next 3 years

Measurement
Cost per Outlet Office, Cost per Region, Cost per FTE Waste Volume Charts, Rework Tracking, Cycle Time End to End in S-LX (5 of 7 Regions)

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Targets
Once you establish measurements, you need to set a target for each measurement. Targets push the organization to a required level of performance. Targets put focus on the strategy, expressing the specifics of the strategy. When an organization hits its targets, then it has successfully implemented its strategy.
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Examples of Targets
Total Time to Recruit New Employees: Less than 40 days by year-end Utilization of rental facilities: Increase to 85% during peak summer months Growth in top line revenues: 10% increase over last year Improve overall customer satisfaction: Total scores exceed 90%
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Initiatives
In order for things to happen in an organization, you must initiate major projects or programs. For example, improving customer service may require a new customer management system. Once you launch appropriate initiatives, you should be able to meet your strategic objectives. This closes the loop, everything is now linked and away we go!
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Initiative Attributes
Sponsored by senior management Designated owners manage project(s) Includes deliverables or milestones Usually has some time deadlines Could be difficult to launch lack of support, no funding, poorly defined, etc.

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Airline Example
Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes Customer Flight Is on Time Lowest Prices More Customers

Objectives

Measurement

Target

Initiative

Profitability Market Value More Customers Seat Revenue Fewer planes Plane Lease
Cost

30% CAGR 20% CAGR 5% CAGR #1 #1

Optimize
routes Standardize planes

Flight is on time Lowest prices

FAA On Time
Arrival Rating Customer Ranking (Market Survey)

Quality
management Customer loyalty program

Internal Fast Ground Turnaround

Fast ground
turnaround

On Ground Time 30 Minutes On-Time 90%

Departure

Cycle time
optimization program

Learning Ground Crew Alignment

Ground crew
alignment

% Ground crew yr. 1

trained

% Ground crew
stockholders DanFeliciano.com

70% yr. 3 90% yr. 5 100%

ESOP Ground crew

training
43 01/18/2008

Airline Example
Strategic Theme: Operating Efficiency
Financial Profitability Fewer Planes Customer Flight Is on Time Lowest Prices More Customers

Internal Fast Ground Turnaround

Learning Ground Crew Alignment

DanFeliciano.com

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Example of Goal, Objectives, Measurements, Targets & Initiatives

Goal
Achieve Agency operational efficiencies

Objective
Reduce Operational Service Costs by 50% over the next 5 years Reduce identified reactivities within primary processes by 80% over the next 3 years

Measurement

Target

Initiative
Activity Based Costing / Management

Cost per Outlet 5% - Year 1 Office, Cost per Region, Cost per 10% - Year 2 FTE 15% - Year 3 Waste Volume Charts, Rework Tracking, Cycle Time End to End in S-LX (5 of 7 Regions)

Waste stream Lean / Six reductions of Sigma 5% each year, Reworks cut in half for next 3 years, cycle time cut by 75%

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Other Important Steps

Scorecards are built around three teams: Leadership Team (upper level management), Core Team (middle level management) and Measurement Team (lower level functional personnel). Scorecards are built around at least four group meetings: Kick Off Meeting followed by at least one meeting for each of the three teams.
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Implementation
The minimum time for developing a balanced scorecard is three months. Full deployment of scorecards throughout the entire organization can take more than one year. The best place to start building a scorecard is where all components of the value chain are in place: Customer, Innovation, Production, Delivery, Services, etc.
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Managers Use the Scorecard to Select and Manage Initiatives

1 Identify All Potential Candidates for Strategic Initiative Consideration
Site Selection Projects, Activities, etc. MIS Projects, Activities, etc. Development Projects, Activities, etc. Other Projects, Activities, etc.

Criteria
Initiative:
Strategic Thrust(s): Primary Strategic Objective:

2 Screen Candidates to Identify Those That Qualify as Strategic

E-Bill Presentment
Area Strategic Importance Cost Benefit Required for Other Initiatives/Dependencies Time to Implement Overall Score

AC/IR/RC

Continue Leadership in Superior Products

Score

Points 8 -2 4 1 -2 9

Comments
The killer application X $ $ X # months X

Ranking

Initiiativ e

Strategic Thrust(s) and Obj ectiv es(s) AC/IR/RC Cont. Leaders hip in Superior Produc ts

Strategic Importance

Cost

Benefit

Required for Other Time to Implement Initiativ es/ Dependencies

Ov erall Score

Ov erall Points

3 Select and fund Strategic Initiatives

E-Bill Presentment

Prioritized List of Strategic funded Initiatives

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Its About Execution

(Work Tracking and Monitoring)
WHY?
Goals #1 #2
Processes

WHAT?

HOW?

Monitoring Budget Process & Allocation

(Project Charters, Initiatives, Department Work Plans)

#3 #4 #5 #6 .

Performance Management Process Project Management Process Board Reporting

Action Plans

(Operational Plan)

Outcomes

Balanced Scorecard

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Why Do Organizations Fail to Get Results from Their Balanced Scorecard Programs?
1.
Using It RIGHT NOT Using BSC Using It WRONG

No Executive Ownership (done

by middle management team only; long development process)

2.

Scorecard Not Linked to Strategy (no strategy map - just KPIs in

4 perspectives; mostly financial measures; done as a systems project; done only for compensation)

3.

Scorecard Not Linked to Management Processes

(Mobilize, Translate, Align, Motivate, Govern)

4.

Too many metrics!!!!

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Summary
Balanced Scorecards are the best way of communicating strategy. Scorecards rely on a fully integrated approach: Goals, Objectives, Mapping, Measurements, Targets, and Initiatives. The building of a balanced scorecard can be experimental, whereby you test your strategies, refine, and make changes as you get feedback and learn what works.
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DanFeliciano.com

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Credits
Matt H. Evans at www.exinfm.com Lawrence Serven The Buttonwood Group www.ButtonwoodLLP.com
Rick Rozzelle CELT Corporation rrozzelle@celtcorp.com

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