Balance Scorecard “The Balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age, companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.“
BALANCED SCORE CARD • Balance scorecard is a system that measures and evaluates the progress of an organization towards strategic objectives incorporating financial indicators as well as three other perspectives namely customer, internal business and learning / innovation. • The scorecard delineates the linkages between the four perspectives and the impact / interdependence among them. It helps an organization to provide continuity as well as monitor past present and potential performance. • However, the most important aspect of a balanced scorecard is that it enables the company to decide what is vital for the business to set appropriate targets and provide the necessary motivation to the employees for achieving the same.
BALANCED SCORE CARD • The balanced scorecard system came of age during the 90’s and Kaplan and Norton popularized it in 1992. Professional manager, the official magazine of Chartered Management Institute, UK reports reveal that the companies are very receptive to this tool and nearly 40% of UK companies have used it and 50% of them to a “great extent”. Comprehension about this system is wide spread both in US and Europe. • This system has been instituted not so much in terms of Key Performance Indicators (KPI) and target setting, but more for aligning actions to the company’s strategy. Actually, a comprehensive scorecard identifies exactly where the company is heading and what the company is trying to achieve. It also explains the objectives and communicates them across the organization.
BALANCED SCORE CARD • The first step towards using this tool is to design it properly on the basis of a consensus on the targets for achievement. As the scorecard is very powerful it is important to measure the deviations correctly and early. A delay in tracking may lead to the company derail from its track. • Approach to a balanced scorecard has following steps: • How do we look to shareholders? Or to succeed financially how should we appear to our shareholders? – Financial perspective • Identify goals / strategic objectives • Develop measures • Set targets • Develop key performance indicators • Take initiatives
BALANCED SCORE CARD • What must we excel at? Or to satisfy our shareholders and customers what business processes must we excel at? – Internal business • Identify goals / strategic objectives • Develop measures • Set targets • Develop Key performance Indicators • Take initiatives
BALANCED SCORE CARD • Can we continue to improve and create value? Or to achieve our vision how will we sustain our ability to change and improve? – Innovation and learning perspective • Identify goals / strategic objectives • Develop measures • Set targets • Develop Key performance Indicators • Take Initiatives
BALANCED SCORE CARD • How do customers see us? Or to achieve our vision how should we appear to our customers? – Customer perspective • Identify goals / strategic objectives • Develop measures • Set targets • Develop Key performance Indicators • Take Initiatives
BALANCED SCORE CARD • Note 1: All the above four steps are not sequential; they are interdependent and as such will have to be developed through cross-functional effort. • Note 2: The Key Performance Indicators will have to be developed for different layers of organization and different functions as they have a cascading effort across the organization. These indicators help to detect whether there is a short fall or the targets have been exceeded. • Note 3: The Key Performance Indicators also become the lead indicators to portray misalignment and strategy at a point of time.
BALANCED SCORE CARD Companies have used balanced scoreboard on an on going basis as part of their strategic management activities. The mission statement is connected to its purpose and spelt out clearly as key values. The balanced scorecard is likened to a steering wheel with four gears (Four perspectives) – customer, financial, operations and people. Latterly, a fifth (perspective) has been included in the form of community to reflect the impact of changing environment. As a steering wheel balanced scorecard communicates the direction of strategy as it is being implemented through out the organization. In some companies the business plan itself is prepared using balanced scorecard and also provide incentives on achievement of results. The results are monitored on quarterly basis and more frequent review meetings.
BALANCED SCORE CARD • The scorecard has been improved to account intangibles like managing people, learning perspective, community behavior and so on. However, it is important to interpret these outputs and fully investigate the results, as there is a certain amount of complexity in the framework. Another salient feature of balanced scorecard is that it has a flexible framework that can be applied and adapted for a big or small business and for different circumstances and situations. • Canada’s Management Accounting guideline applying the balanced scorecard states “managers can use the balanced scorecard as a means to articulate strategy, communicate its details, motivate people to executive plans and enable executives to monitor results. Perhaps the prime advantage is that a broad array of indicators can improve the decision making that contributes to strategic success…Non financial measures enable managers to consider more factors critical to long term performance.”
BALANCED SCORE CARD • Corporate social responsibility has gained great currency and has become part of annual reporting by organizations across the globe. In India, the governments during the last decade have been advocating public private partnership in many projects that are oriented towards community development. • The focus of a company in respect of corporate social responsibility is to integrate this responsibility into the balanced scorecard’s four perspectives so that they can be monitored. • It will also establish proper alignment with the company’s strategy. The following table shows the integration of corporate social responsibility to balanced scorecard:
Balanced scorecard approach How do we look to shareholders? Financial Perspective Goals Measures How do customers see us? What must we excel at? Internal Business Perspective Customer Perspective Goals Measures Goals Measures Innovation and Learning Perspective Goals Measures Can we continue to improve and create value? Kaplan, Robert S., and David P. Norton, “The Balanced Scorecard - Measures That Drive Performance,” Harvard Business Review, January-February 1992, pp. 71-79.
Balanced Score Card & Corporate Social Responsibility Source: Figure 3, page 859, “The balanced scorecard and corporate social responsibility: Aligning values for profit”, David Crawford and Total Scaletta – The Management Accountant, Volume 42, No.11, November 2007.
SCM & BSC Integration • The four Main key elements in SCM, are SC operational efficiency, Optimization of SC cost, Customer satisfaction and Continuous improvement of SC. • The four key perspectives in Balanced Scorecard, are Internal Business Perspective, Financial Perspective, Customer Perspective and Learning and Growth perspective. • The four key elements of Supply Chain cay be measured through the four perspectives of Balanced Scorecard • Ex: The ability of SC Operational efficiency can be assessed via the measures that equate with Internal Business Perspective
BSS MATRIX CUSTOMER SATISFACTION SUPPLY CHAIN OPERATIONAL EFFICIENCY FINANCIAL EFFICIENCY FINANCIAL PERSPECTIVE CUSTOMER PERSPECTIVE INTERNAL BUSINESS PROCESS PERSPECTIVE LEARNING AND GROWTH PERSPECTIVE To increase the productivity Optimise Supply Chain Cost To be competitive in product price Increase Satisfaction Increase the Supply Chain Delivery Reliability Performance Increase revenue from current customers To increase SUPPY CHAIN Responsiveness To increase the Supply Chain Flexibility To increase Supply Chain Asset Management Efficiency To develop an efficient Customer Relationship Management Integrated Supply Chain (Organization/Information / Technology integration) To develop an efficient and effective financial process
BSS MATRIX CUSTOMER SATISFACTION SUPPLY CHAIN OPERATIONAL EFFICIENCY FINANCIAL EFFICIENCY FINANCIAL PERSPECTIVE CUSTOMER PERSPECTIVE INTERNAL BUSINESS PROCESS PERSPECTIVE LEARNING AND GROWTH PERSPECTIVE Price competitiveness over Competitor in percent % of Profit Margine Total Supply Chain Cost in Rs Delivery Performancein Percent Fill Rates in percent Perfect Order Fulfillment in percent % of revenue compare to last year Order Fulfillment Lead Timesin days Supply Chain Response Timein days Cash-to-Cash Cycle Timein Days Customer complaints in Percent Integrated Supply Chain Organization in percent Information in percent (ex: ERP implementation and Supplier integration) Transaction Process Time in days
The Advantages of this Approach • It emphasizes the inter-functional and inter-firm nature of supply chains and recognizes the need to ascertain the extent to which firms effectively work together and the extent to which functions are coordinated and integrated • The framework will increase the chance that a “balanced” management approach in indeed practiced within firms and among the supply chain partners • The example measures are suggestions that may stimulate management to create other measures appropriate to their unique circumstances. • The use of this novel approach should help employees and managers focus attention on achieving goals that are beyond the typical measures of performances used within firms.