Balanced Scorecard • YOU GET WHAT YOU MEASURE! • Not always what you want to get. • Measurement (with rewards) affects behavior. • What to measure?
What to Measure? • Traditional measures: • Net income, EPS • ROA, ROE • Sales • Backward looking. • Each of these measures what you did in the past. • May cause wrong behavior. • Sacrifice long term for short term
Financial Measures • Make them more relevant • Earnings versus ROA versus EVA • Abandon them for new metrics. • Time to meal service • Employee turnover • Financial measures will follow.
Why Not Both? • No single metric can provide all the necessary information to run a business. • Go with a balanced portfolio of metrics. • The Balanced Scorecard.
Analogy to an Airplane • More than one instrument in the cockpit • Today I will focus on airspeed! • What about other things? • Fuel, altitude, bearing, destination.
Not Just a Bunch of Random Metrics! • Just Looking at an assortment of measures, some financial and some non-financial, is not necessarily a balanced scorecard approach. • You need to have an integrated set of measures.
The Scorecard is a Strategic Map • All roads should lead to your overall goal. • You need to ask what do we need to do to get there. • The question should be asked from various perspectives. • Each question, from each perspective, ultimately leads to what you wish to achieve.
What Comprises a Balanced Scorecard? • Four Components: • Mission • Perspectives • Objectives • Measures
Mission • Highest level within a scorecard concept. • Answers the following questions: • What is our overall reason for being? • Why do we exist as an organization?
Perspectives • Perspectives represent the various areas that impact performance and determine whether the mission is obtained. • Perspectives answer the question: • In what are the key areas must we focus to obtain our mission?
Perspectives • The following perspectives are key for most enterprises: • Financial • Customer • Internal processes • Learning and growth
Objectives • Objectives identify what is important within each perspective
Objectives - Financial • How does the investment community view us?
Objectives - Customer • What segment do we serve? • What does the customer demand from us? • What value do we provide to this segment?
Objectives - Internal Processes • What must we excel at? • What must we do to meet the customers’ needs and provide value?
Objectives – Learning and Growth • What must the organization do in order to support and improve the processes identified in the internal process perspective? • Can we continue to improve and create value? • What skills are needed?
Measures • Measures provide a way to keep score. • In other words, how can we determine if we are doing what needs to be done?. • The measures are the “actionable” component of the scorecard.
How many metrics? • Just enough to get the job done. • Too many leads to sensory overload. • Try to keep it manageable. • Typical is about four per perspective.
Four perspectives Financial : Vision and Strategy Customer Internal Processes Innovation and Learning
Rice Bowls-R-US • Rice Bowls-R-Us’ (RBRS) mission is to sell more rice bowls than any other restaurant chain, including the leader. Panda Express. • I. M. Rice, the president of RBRS has traditionally tracked total sales.
Rice Bowls-R-US • Such an approach is one-dimensional • No insight is gained on why things have improved (or faltered). • No insight is gained as to what needs to improve? • No insight as to where problems lie. • Mr. Rice is only able to assess the business from one perspective!
Rice Bowls-R-US • Mr. Rice asks himself: • What is it that sells more rice bowls?
Rice Bowls-R-US • Great service sells more rice bowls. It is what the customer demands. • Customer perspective • Measure • Excellent results on customer surveys
Rice Bowls-R-US • How do we deliver great service?
Rice Bowls-R-US • Servers must deliver food efficiently and with a smile. • Internal process perspective • Measure • Amount of time from order to delivery.
Rice Bowls-R-US • So how do we learn the process for quickly getting the bowls into the customers’ hands and interacting in a pleasant way?
Rice Bowls-R-US • The servers need to be trained in the latest techniques. • Internal learning and growth perspective. • Measure • Number of employees attending and passing training classes
Rice Bowls-R-US • All the components work together to support the ultimate goal of serving more rice bowls. • President Rice can see where the business is running well or where help is needed. • Employees understand what they need to do to achieve the goal.
Benefits of the BSC • Brings together in one report many seemingly separate elements of the firm. • Guards against sub-optimization. • Reduce time to market • Reduce setup costs
Problem with Balanced Scorecard • What is the score? • Football analogy • Many metrics to measure, so what are the trade-offs? • Competing for scare resources such as money, time
Solution • Treat Balanced Scorecard as an instrument panel, not as a scorecard. • Choose one measure as the score (firm value) and consider trade-offs among other measures to realize ultimate goal.