KPIs and the Balanced Scorecard

Aligning enterprise performance metrics with the organizations strategic plans

Much of the material in this presentation was drawn from the following source: Allio, M. (2006), Metrics that matter: seven guidelines for better performance measurement, Handbook of Business Strategy, Vol. 7 Issue 1, pp. 255-263.

Aligning Strategy with Process Metrics

This is a process for ensuring alignment among the organizations performance measures, strategic plans, improvement projects, and budgets. The items in grey will be covered in session 7. 1. 2. 3. 4. 5. Establish the organizations key goals Establish KPIs associated with the organizations key goals, and measure performance in these Develop and deploy the enterprise strategy to the process level Establish process measures (if not already existing) Enterprise KPIs are then recalibrated and aligned with process-level metrics

6.
7.

Once the metrics are aligned at all levels, process improvement projects can be identified
Budget must be allocated aligned with the process improvements needed to achieve the strategic goals. This is why it is critical to align the budgeting process with the strategic planning process
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What Are Performance Measures?

Performance measures are measures that evaluate the efficiency (productivity) and effectiveness (quality) of the organization as a whole
They indicate the organizations performance in areas that affect the continued existence of the company

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Why Collect Performance Measures

Performance measures are critical to the improvement process, as any improvement effort should result in an improved bottom-line for the organization
These measures can be collected to show existing performance or improvements in performance

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Examples of Performance Measures

Performance measures indicate the organizations performance in areas that affect the continued existence of the company. Examples include:

Net income Net income growth Return on investment Actual vs. estimated budget Stock price increase Market share Sales volume Percentage of satisfied customers Annual inventory turnover Total rework or scrap dollars Labor cost per sales dollar Direct vs. indirect labor dollars Overtime cost per sales dollar
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Examples of Performance Measures

Performance measures can be categorized to help understand the areas where scores are lower than desired:

Learning and Growth % of employees trained in process improvement % of employees with survey scores 80% or higher for Morale Process % of processes achieving target Rework or scrap dollars as % of total production Customer % of market share % of very satisfied customer Finance Net income growth Stock as % of revenue
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Focusing on the Critical Issues

It is important to focus on the few key items that will ensure the enterprise goals are achieved

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Guidelines for Establishing Good KPIs

1. Measure what is important

Successful firms strive to distill their performance indicators into a small set that closely aligns with the firms strategies. Here are a few key questions to ask:

Do our metrics focus on our key strategies

Do they reinforce the kind of behavior wed like to see, and will that behavior continue to satisfy stakeholders?
Do they reflect what the customer experience is? Do they reflect what our competitors are doing? When was the last time we actually took action based on this metric? Are our metrics simple and clear? Can they be easily understood, explained, and communicated?

2.

Align your metrics with your key stakeholders metrics Every company is in the business of satisfying its stakeholders, so it would seem academic to assert that your metrics should be aligned with theirs

BA 553: Business Process Management

Aligning Metrics with Stakeholders

In this example, a firm chose to improve efficiency by increasing the minimum order size However, the firms key customer was already having trouble meeting the existing minimum order requirements, as they received multiple small orders from their clients Seeing the problem, the firm decided to reduce its minimum order requirements, increasing inventory turns and enhancing the production process for its key client

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Guidelines for Establishing Good KPIs (Contd.)

3. Translate qualitative targets into quantitative metrics Quantitative (number) metrics help limit subjective interpretation and speculation, and give managers numbers to shoot for. Even soft concepts like innovation can be translated into numbers with a little lateral thinking: one biotech firm used new patent applications per scientist to measure this area. 4. Deploy early warning systems Good implementation of strategic plans hinges on responsiveness to a changing environment. Enlightened managers focus not only on annual or longer-term goals, but on intermediate and short-term milestones as well.

5.

Establish a common language

Performance metrics should be simple and clearly defined, yet even sophisticated firms suffer from inconsistently defining terms. For example, middle managers may view a growth goal in terms of revenue (sales) growth, while the executive team may be focused on profit growth. They are not the same, and the actions needed to achieve them are different.

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Establishing a Common Language

The impact of misaligned language related to goals:

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Guidelines for Establishing Good KPIs (Contd.)

6. Deploy a balanced portfolio of metrics The performance measures the enterprise decides to focus on should have a balance, in areas such as:

Short-term versus long-term (many firms focus to heavily on short-term results, which can jeopardize the enterprise in the long run through a lack of long-range planning) Internal versus external (the portfolio is often overpopulated with internal performance metrics that fail to account for what happens outside the firm, and managers lose their connection to the marketplace or the behavior of competitors)

7.

Align metrics with strategy

Good metrics facilitate implementation of strategy; poor or misaligned ones impede implementation. Once strategy has been develoepd, highperforming firms recalibrate their performance management systems to track and reward strategic behavior.

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Understanding the Balanced Scorecard (BSC)

It is a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results Originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system The new balanced scorecard transforms an organizations strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis
www.balancedscorecard.org website, accessed 12 April 2010.

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BSC Aligns Strategy and Processes

The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, and are therefore inadequate, alone, for guiding and evaluating the journey that todays companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.
Objectives Measures Targets Initiatives

Financial
To succeed financially, how should we appear to our shareholders?

Objectives Measures Targets Initiatives

To achieve our vision, how should we appear to our customers?

Vision and Strategy

Learning and Growth
To achieve our vision, how will we sustain our, ability to change and improve?

To satisfy our shareholders and customers, what business processes must we excel at?

Kaplan, R.S. and Norton, D.P., Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review, January-February 1996.
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Objectives Measures Targets Initiatives

Objectives Measures Targets Initiatives

Customer

Internal Business Processes

First Generation BSC

The items for each area of the scorecard can be written into their own tables, to allow for more details to be added The following is an example for the Financial area:

More shareholders worry about our future earnings potential due to drop in TSR and general negative press. All is down to next big announcement indicating new thrust and direction

Slides 15-18: 2GC. (2009). Performance Management & the 3rd Generation Balanced Scorecard . Maidenhead, UK. Retrieved from http://www.2gc.co.uk/resources-presentations.
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Second Generation BSC

The previous slide showed the original, first generation version of the balanced scorecard The second generation defined strategic objectives, and tied the scorecard areas to each other via a strategy map that showed the cause and effect relationships

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Third Generation BSC

The third generation of the BSC uses the creation of a Destination Statement (vision of the strategic end state) as the starting point for developing strategic objectives, selecting measures, and setting targets

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Applying the 3rd Generation BSC

Approach for developing the 3rd generation BSC:

Develop the Destination Statement (vision of the to be situation if the strategy is achieved) Develop the Strategy Map (strategic objectives and their interrelationships) Establish the measures and targets

Its important to recognize that the balanced scorecard has no role in the formation of strategy However, the BSC effort can be integrated with and developed based upon any strategic planning process, such as Hoshin Planning

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Integrating BSC and Hoshin Planning

Hoshin Planning
1. Develop 5-year vision (developed by top management, input provided by all managers) 4. Establish integrated 1-year plan 5. Deployment to departments, identify measures & targets

Balanced Scorecard
2. Create destination statement (vision of the future state)

3. Develop strategy map (strategic objectives and their relationships) 6. Develop balanced scorecard

7. Execution of the plan

9. Report on progress regularly

8. Audits (monthly and yearly)

10. Update destination statement, strategy map, or scorecard

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Best Practices for BSC Implementation

What 1 Involve the intended users of the Balanced Scorecard in its design The Balanced Scorecard should be understandable and transferable Ensure the BSC is compatible with existing processes Ensure the BSC is easily aligned and cascaded across the organization Make efficient use of managers time Why It is the only way to be sure they understand and agree to the design The design must be communicated and driven downward Other management processes and tools must be retained To help the entire organization work to a common purpose Management time is a scare resource
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