Building a Balanced Scorecard Performance System

Building a Balanced Scorecard (BSC) Performance Systems Based on Howard Rohm’s article, “A Balancing Act”, in Perform Magazine, Vol.2, Issue 2, 2005, p.1-8 Introduction “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 Covey A Balancing Act z Doing the right things and doing things right z Requires development of good strategies and efficient operations to deliver the products and services to implement the strategies z The Balanced Scorecard provides a framework that helps achieve the required balance between strategy and operations The BSC z A Performance Management System z Can be used in any organization to: z align vision and mission with client and stakeholder requirements, z manage and evaluate strategy, z monitor operation efficiency improvements, z build organization capacity, and z communicate progress to all staff z Measure financial and client results, operations and organization capacity BSC Systems z Originally developed in the 1990s as a framework to measure private industry non-financial performance z Equally applicable to public sector organizations – changes need to be made for the mission and mandates which are not related to profitability z Emphasis shifted from measurement of financial and non-financial performance to the management (and execution) of strategy z Provides an ability to view three different dimensions of organizations: z Results (financial and client), Operations and Capacity z (See following slide) Figure 1: Balanced Scorecard Performance Management System Values Mission Vision FOUNDATIONS PLANS NEW INITIATIVES BUDGET LEADERSHIP & PERSONAL DEVELOPMENT Ca pa cit y Operations R e s u l t s BSC STRATEGIES & STRATEGIC MAP SUPPORT UNIT SCORECARDS PERFORMANCE MANAGEMENT Figure 1 Components of a fully developed BSC systems z Organizational Foundations, including vision, mission and values; z Plans, including communications, implementation, automation, and evaluation plans to build staff buy-in and communicate results; z Strategies and Strategic Map to chart the course and define the decomposition of strategies into activities; z Performance Measures to track actual performance against expectations; z New Initiatives to test strategic assumptions; z Budgets, including resources needed for new initiatives and current operations; z Support Unit Scorecards to translate organizational vision into actionable activities; z Leadership and Individual Development to enhance staff knowledge skills and abilities Four Perspectives z Vision, mission and strategy viewed from different perspectives: 1. Financial – representing the “Owners” of the organization; 2. Stakeholders – representing the clients (a subset of the larger universe of stakeholders) and stakeholders 3. Internal processes – representing managers and process staff 4. Learning and Growth – representing staff and infrastructure capacity 5. (See following slide) Public-Sector Balanced Scorecard: Four Perspectives Strategy Mission Clients & Stakeholders Clients & Stakeholders Internal Business Processes Internal Business Processes Staff & Organization Capacity Staff & Organization Capacity Staff & Organization Capacity Staff & Organization Capacity Building a BSC z A journey not a destination z Real value comes from continuous self- inquiry and in-depth analysis z Changing behaviour is as important as measuring performance A six-step framework to build an organizational BSC 1. Assessment 2. Strategy 3. Objectives 4. Strategic Map 5. Performance Measures 6. Initiatives Building a BSC: a 6-step framework 1. Assessment 2. Strategy 3. O bjectives 4. Strategic Map 5. M ea su re s 6. In iti at ive s MISSION STRATEGY Financial Learning & Growth Internal ProcessesC l i e n t s & S t a k e h o l d e r s Step 1: Assessment z Of the organization’s foundations, core beliefs, values, opportunities, financial position, short and long-term goals and an understanding of what matters to the stakeholders z Self-assessment often undertaken at an off-site workshops z Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis carried out, discussed and documented z A “champion” and a core BSC team selected, a schedule for the development steps set, resources secured, and a communication plan developed Step 2: Strategy z A hypotheses of what we think will work and be successful z Several overarching strategic themes developed z Also identify what approaches have not been selected z Remaining steps in building the BSC system provides a basis for testing whether our strategies are working, how efficiently they are being executed, and how effective they are in moving the organization forward toward its goals Step 3: Objectives z Decomposition of strategy into smaller components z The basic building blocks of strategy – components or activities that make up complete strategies Step 4: Strategic Map z Of the organization’s overall strategy z Using cause-effect linkages (if-then logic connections), the components (objectives) of strategies connected and placed in appropriate scorecard perspective categories z Relationship among strategy components (objectives) used to identify the key performance drivers of each strategy – taken together chart the path to successful outcomes z Figure 2 shows how an objective (effect) is dependent on another objective (cause), and how, taken together, they form a strategic thread from activities to desired end outcomes Figure 2: Strategic Mapping Financial Clients & Stakeholders Internal Processes Learning & Growth Improve Returns Broaden Revenue Mix Improve operating efficiency Increase confidence Increase satisfaction Understanding Market segments Develop New Products Cross-Sell Shift to Appropriate Channel Reduce Cycle time Provide Rapid response Increase productivity Cross training Hire Key Technical Talent Access to information Align Personal goals Step 5. Performance Measures z To develop them, understanding of the relationship between the desired outcomes and the processes used to produce outcomes needed z Track both strategies and operational progress z Desired outcomes measured from the perspective of internal and external stakeholders, and processes are measured from the perspective of the process owners and activities needed to meet requirements z Use the strategic Map developed in Step 4, specifically the objectives, to develop them z Look for the few measures (key performance drivers) critical to overall success z A means to an end, not the end themselves z “If it is important to executing good strategy well, and to operating good processes efficiently, measure it – if it isn’t, don’t” Continuous learning framework z For measuring and managing both strategic and operational performance z Use Performance Measurement stethoscope to get meaningful performance information, to measure if we are doing the right things or if we are doing things right z (See Figure 3) Figure 3:Results & Process Measures Are We Doing Things Right? Are We Doing The Right Things? People Systems Information Activity Activity Output Outcome Input Measures Process Measures Result Measures INPUTS PROCESS ACTIVITIES RESULTS Performance Measure Challenges in developing performance measures (metrics) z Tendency to hurry and identify many measures, hoping that a few good ones are in the group and will “stick” z Tendency to rush to judgement – not thinking deeply about what measures are important and why – due to pressures Three Models to get the measures that matter most z To identify the critical performance drivers, measure them, and use the information to improve decision-making 1. The Logic Model 2. Process Flow 3. Causal Analysis 1. The Logic model z Explore relationships among four types of performance measures: z Inputs – what we use to produce values z Processes – how we transform inputs into outputs z Outputs – what we produce z Outcome – what we accomplish z Reinforces the logic of the strategic map by showing the relationship among the activities that produce good outcomes z Can add another measure category – intermediate outcomes – to capture important intermediate transformations that take place between what we produce and what we accomplish z Intermediate outcomes useful when end outcome is far removed from the outputs, or when little control is exercised over the achievement of the end outcome z Figure 4 shows a series of “Why” questions to identify the end outcome z By substituting “How” for “Why”, the process works from outcomes to processes – start with the outcome and work backwards to the process Figure 4: Moving from Activities, Outputs to Outcomes End Outcome To Reduce Disease in Fish & HumansWhy? Intermediate Outcome To Improve Water QualityWhy? Intermediate Outcome To Reduce Oil SpillsWhy? Intermediate Outcome So Industry Takes ActionWhy? Output To Enact A RuleWhy? Process Write A Rule 2. Process Flow z Flow charting processes identify the activities (and measures) that matter most to produce good outcomes z Identifies places where efficiency in workflow are needed and possible z Help identify new initiatives (Step Six) that can be used to test strategic hypotheses 3. Causal Analysis z Identifies the causes and effects of good performance z Start with the result (the effect) we want to achieve and then identify all the causes that contribute to desired result z Most useful for identifying input and process measures that are leading indicators of future results Step 6: New Initiatives z That need to be funded and implemented identified z Developed at the end of the scorecard building process more strategic than if they are developed in the abstract z Are means, not ends The logic of scorecard development z Client and stakeholder requirements drive the way an organization responds to opportunities; z Vision, mission and values shape the culture of the organization and lead to a set of strategic goals that outlined performance; z Strategies provide the approach chosen to meet client and stakeholder needs and attain the desired goals – made up of building blocks that can be mapped and measured with performance measures; z Targets provide the expected levels of performance that are desired; z New initiatives provide new information successfully meet challenges and test strategy assumptions; z Resource identification and budget setting complete the process of adding the new initiatives to the current operations total budget z (See Figure 5) Figure 5: BSC Logic OutcomesMeasuresOutputsProcessInput BudgetInitiatives Targets Strategic Map Objectives ThemesStrategyPerspectives Goals Core Values Vision MissionClients & Stakeholders A completed scorecard z Takes a number of unique forms to support each organization’s unique communication and management needs z Most organizations want to see different scorecard views z (Figures 6 to 8 shows examples of several presentations Figure 6: Putting It All Together – Federal Logistics Centre Mission Provide Logistics Support & Products to Assure Safety for the Flying Public Vision Strategy Objectives Measures Targets Initiatives World-class, customer-driven; Providing Quality Service world-wide S1: More client-driven S2: Increase business opportunities S1-O1:Assure timely delivery S1-O2: Raise quality level S1-O3: Reduce cycle time S1-O1-M1:% on-time delivery S1-O2-M1:% defective product S1-O3-M2:% defective shipments S1 S2 O1 O2 O3 M1 M1 M2 S1-O1-M1-T1:100% in 2006 S1-O2-M1-T1:Zero in 2006 S1-O3-M2-T1:Zero in 2006T1 T1 T1 I1 I1 S1-I1:Reengineer delivery process S1-I1:Six Sigma training Figure 7: Linking scorecard components Client training Knowledge management 90%Cross-trainDevelop strategic skills Learning & Growth R&D Programme Client Mailing 2006-15% 2007-50% 2008-60% % revenue from new products Develop new products Internal Frequent clients’ club 95%Client retentionIncrease client satisfaction Client & Stakeholder Sales Promotion New Channel Marketing 10% Product A 40% Product B 50% Product C Revenue mixBroaden revenue mix Financial InitiativesTargetMeasureObjective What strategy must be achieved & what is critical to success? How success will be measured & tracked? Performance expectation Key action programme required to achieve objectives Figure 8: Putting It All Together - Local Government Mission Serve county residents by helping improve their lives & community Vision Strategy Objectives Measures Targets Initiatives Be the best local government service provider S1: Increase value by providing more cost-effective services S2:Reduce violence, harm & injury through community partnerships S1-O1:Optimise organization S1-O2:Identify services & resource gaps S1-O3: Survey citizens S1-O1-M1:Skills match index S1-O2-M1:Cost per unit service S1-O3-M2:Citizen satisfaction rating S1 S2 O1 O2 O3 M1 M1 M2 S1-O1-M1-T1:Skills index: 80% in 2006 S1-O2-M1-T1:Z7% improvement above baseline S1-O3-M2-T1:95% in 2006T1 T1 T1 I1 I1 S1-I1:New outreach programme S1-I1:Communications plan How long does it take to build a BSC system? z Depending on the size of the organization, 2 to 4 months is typical, 6 weeks is possible z It depends on senior management support and continuous commitment, existing assessment information, size of the organization, availability of scorecard members, willingness to change and embrace new ideas, level of organization pain and facilitation support Conclusion BSC System z Provides a basis for executing good strategy well and managing change successfully z Will cause people to think more strategic about their organization and their work z A refreshing change to “strategic planning as usual” z Bring change in the way things are done z Involves changing hearts and minds as much as it involves measuring performance