Balance scorecard project

ADissertation Report

On

Putting HR on Balanced Scorecard

(A Case Study of Verizon)(SUBMITTED TOWARDS PARTIAL FULFILLMENT OF POST

GRADUATE DIPLOMA IN MANAGEMENT)

(Approved by AICTE, Govt. of India)

ACADEMIC SESSION

(2008-10)

Under the guidance of: Submitted by:

Supervisor Name Your Name Lecturer (college name) Roll: - PGDM-08/012

College Address

College Logo

PREFACE

There is a famous saying The theory without practical is lame and practical

without theory is blind.

Alignment of the Human Resource with the overall strategy of the company is a

very big and toughest challenge for the company.

Human resource is an important part of any business and managing them is an

important task.

Our institution has come forward with the opportunity to bridge the gap by

imparting modern scientific management principle underlying the concept of the

future prospective managers.

To the emphasis on practical aspect of management education the faculty of

College Name has with a modern system of practical training of repute and

following management technique to the student as integral part of PGDM.

ACKNOWLEDGEMENT

It is not possible to prepare a project report without the assistance &

encouragement of other people. This one is certainly no exception.

On the very outset of this report, I would like to extend my sincere & heartfelt

obligation towards all the personages who have helped me in this endeavor.

Without their active guidance, help, cooperation & encouragement, I would not

have made headway in the project.

I am ineffably indebted to Supervisor Name for conscientious guidance and

encouragement to accomplish this assignment.

I am extremely thankful and pay my gratitude to my faculty guide Guidance

Name, College Name for her valuable guidance and support on completion of

this project in its presently.

I extend my gratitude to College Name for giving me this opportunity.

I also acknowledge with a deep sense of reverence, my gratitude towards my

parents and member of my family, who has always supported me morally as

well as economically.

At last but not least gratitude goes to all of my friends who directly or indirectly

helped me to complete this project report.

Any omission in this brief acknowledgement does not mean lack of gratitude.

Thanking You

Your Name

CERTIFICATE FROM THE FACULTY GUIDE

This is to certify that the project work entitled Putting HR on Balanced

Scorecard: A Case Study of Verizon. is a bonafide work carried out by Your

Name, a candidate of the PGDM (2008-2010) College Name under my

guidance and direction.

Signature of the Guide

Guidance Name

TABLE OF CONTENTS1. INTRODUCTION 1

2. RESEARCH METHODOLOGY

3. LITERATURE REVIEW

4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE FUTURE

5. THE HR ARCHITECTURE AS A STRATEGIC ASSET

5.1. THE HR FUNCTION5.2. THE HR SYSTEM5.3. EMPLOYEE BEHAVIOURS

6. THEORY BEHIND THE BALANCED SCORECARD

6.1. BACKGROUND OF THE CONCEPT OF BALANCED SCORECARD6.2. DEFINING CRITICAL SUCCESS FACTORS AND MEASURES6.3. THE FOUR PERSPECTIVES: CAUSE AND EFFECT RELATIONSHIP6.4. THE BALANCED SCORECARD MODEL6.5. BALANCED SCORECARD AS A MEASUREMENT TOOL

7. IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE

7.1. INTEGRATING HR INTO THE PERFORMANCE MEASUREMENT SYSTEM7.2. THE SEVEN-STEP MODEL FOR IMPLEMENTING HRS STRATEGIC ROLE

8. BENEFITS OF THE DEVELOPING HR SCORECARD

9. CASE STUDY: VERIZON

9.1. INTRODUCTION: VERIZON9.2. HR CHALLENGE & STRATEGY9.3. THE TEAM9.4. THE PROCESS9.5. EARLY RESULTS9.6. COMMUNICATING THE HR SCORECARD9.7. WEB-BASED IMPLEMENTATION AND GRAPHICS (FRONTEND AND BACKEND)

FINDINGS OF THE STUDY

LIMITATIONS OF THE STUDY

CONCLUSION

RECOMMENDATIONS

REFERENCES

TABLE OF FIGURES

Figure 1: HR Architecture Strategic components

Figure 3:- The Main framework of Balanced Scorecard

Figure 4:- Model for implementing HRs Strategic Role

Figure 5: A High Performance Work System

Figure 6: Simple Strategy Map

Figure 7:- Initial model used to align HR strategy to business strategy

Figure 8:- The People Requirement and Business Driver Determination Process

Figure 9:- The HR Scorecard Strategy Map

Figure 10: HR Scorecard Implementation Architecture

1. INTRODUCTION

The new economic paradigm is characterised by speed, innovation, quality and customer

satisfaction. The essence of the competitive advantage has shifted from tangible assets to

intangible ones. The focus is now on human capital and its effective alignment with the

overall strategy of organisations. This is a new age for Human Resources. The entire system

of measuring HRs contribution to the organisations success as well as the architecture of the

HR system needs to change to reflect the demands of succeeding in the new economy. The

HR scorecard is a measurement as well as an evaluation system for redefining the role of HR

as a strategic partner. It is based on the Balanced Scorecard framework developed by Kaplan

and Norton and is set to revolutionise the way business perceives HR.

Based on various studies, it can be concluded that firms with more effective HR management

systems consistently outperform the competition. However, evidence that HR can contribute

to a firms success doesnt mean it is now effectively contributing to success in business.

It is a challenge for managers to make HR a strategic asset. The HR scorecard is a lever

that enables them to do so. Implementing effective measurement systems for intangible

assets is a very difficult task and demands the existence of a unified framework to guide

the HR managers. It is this difficulty that has been the prime reason why managers tend to

avoid dealing with intangible assets as far as possible. In the process firms under-invest in

their people and at times invest in the wrong ways. Another difficulty is, managers cannot

foresee the consequences of their investments in intangible human assets in a well-defined

measurable manner and they are not willing to take the risk. Thus, the most effective way to

change this mindset is obvious to build a framework just like the balanced scorecard, which

has sound measurement strategies and is able to link HR functions, activity and investment

with the overall business strategy. The HR scorecard framework was specifically designed

for these purposes.

AJAY KUMAR GARG INSTITUTE OF MANAGEMENT Page 1

2. RESEARCH METHODOLOGY

2.1.Research Objectives

1. To highlight the importance of Balanced Scorecard as a measurement tool.

2. To find out the need of Balanced Scorecard in todays competitive environment.

3. To find out how Balanced Scorecard is useful for developing the Human Resource as

a strategic partner.

4. To find out how Balanced Scorecard can be implemented to Human Resource.

2.2.Type of Research- Exploratory Research

2.3.Data sources: The research is based on secondary data and the data is collected from various websites, Journals, Magazines, Articles and Research Paper.

2.4.Data Analysis: The research is divided into the six sections. The First section deals with the overall introduction of the research and the Second section highlights

the Human Resource as a strategic partner and the traditional human resource

and the human resource in present and the future of the human resource. Third

section explains in detail the HR Architecture as a strategic asset which contains

the hr function, hr system and the employee behavior. Fourth section explains

the background and the concept of balanced scorecard, need of the balanced

scorecard in todays competitive environment, and defines the balanced scorecard

as a measurement tool. Fifth section explains how balanced scorecard can be

implemented into the human resource to develop the HR as a strategic partner.

Sixth section contains the case study of Verizon and explains how Verizon has

implemented the balanced scorecard to human resource to generate the value through

the intangible asset.


3. LITERATURE REVIEW

1. Is the balanced scorecard HR's ticket to the board? Nelson, Paul. Personnel Today, 3/5/2002.

Most thoughts comprised of some combination of BC is a wonderful tool to allow HR to

show its value to a firm, BSCs will only work with senior management buy-in and BSCs

alone will not bring a firm closer to its goal, contributing to the overall business will.

2. HR Performance Scoring Demonstrates Results. McKewen, Darren. 2004. Career

Journal.com Accessed from website.

The first part of this article gives numbers on the popularity of BCs throughout industry.

From the article: According to a recent survey by the Balanced Scorecard Collaborative and

the Society for Human Resource Management, about one-fourth of HR organizations have

adopted the Balanced Scorecard approach. However, virtually all of the 1,300 respondents

have explored the possibility. The rest of the article has no relation to balanced scorecards.

3. The Balanced Scorecard: Creating a Strategy-Focused Workforce. Frangos,

Cassandra.

A synopsis of three scholars (Jac Fitz-enz, David Norton, and Helen Drinanwork) in the field

of HR metrics and analysis, by way of selling the authors upcoming Net Conference.

1. Fitz-enz evaluates a firms HR process by cost, duration, accomplishment, error rate,

employee satisfaction, matricing these five over three distinct tasks: acquiring talent,

developing talent, and retaining it.

2. Norton developed the "Human Capital Readiness Report," which provides a snapshot

of an organization's human capital relative to its strategic requirements. It documents

the strategic requirements, then shows, through its measures and programs, how

human capital is being developed.

3. Drinan had been working on a profile of HR leaders


So what is the profile of outstanding HR leaders? Among other things, they derive

their agendas from enterprise business objectives; they stay in touch with the workforce;

think "customer focus," not "customer service"; and concentrate on a few strategic priorities.

4. A Balanced Scorecard Changes HR Mgmt From Art to Science. Human

Resource Department Management Report. January, 2003. Issue 1-03, p. 1.

Objective:- Reasons for and application of using the BSC as a way to measure HR

productivity and effectiveness.

Biggest reason: a move to measuring tangible assets, and a need to turn the intangibility of

HR into something more measurable. Case: Alterra Health Care in Milwaukee, which used

HR as the centerpiece of a larger strategic transformation that targeted the firms 145%

turnover rate.

5. Understanding the Balanced Scorecard: An HR Perspective. ICG Research.

2003.

Objective:- How to implement the Balanced Scorecard to Human Resource.

1. Building the Balanced Scorecard should be a team effort at the executive level and

functional heads must not create their bits of Scorecard in isolation. Therefore, HR

can be custodians but not owners of the learning and growth perspective.

2. Implementation is a bigger issue than scorecard design. The difficulty of cultural

change that accompanies Scorecard implementation is typically underestimated. One

of the biggest problems is the (legitimate) fear that the Scorecard will be used to beat

up people.

3. The HR Scorecard must make visible the link from what staff does to strategic

outcomes. Cascading goals, which may be done through the ten-step process, is one

element of successfully creating the link.


6. Secrets to Success with Balanced Scorecards. HR Focus. October, 2001 Vol.

78, no. 10, p. S3.

Summarizes the 10 Commandments of Performance Management from a book by William Abernathy: Managing Without Supervising: Creating an Organization- Wide Performance System. Some of these commandments:

1. No one should design his or her own incentive plan

2. The frequency of measurement feedback is as important as the amount

3. Measure only controllable job outputs

7. Avoiding performance measurement traps: ensuring effective incentive design

and implementation. McKenzie F.C. & Shilling M.D. July/August, 1998.

Compensation and Benefits Review. Vol. 30 (4), p. 57-65.

Details methods of performance measurement and the traps associated with each.

Measurements evaluated include: Traditional accounting methods (ROI, EPS, RONA),

Value-Based, such as Economic Value Added, and the Balanced Scorecard. Traps associated

with the BSC are as follows:

1. Assuming the Balanced Scorecard is a perfect tool for compensation.

2. Reduced focus on performance management

3. Using measures that are difficult to quantify

4. Contradicting goals or benchmarking

5. Getting tied-up in implementation

Nine guidelines for effective performance management are outlined:

1. Emphasize a few measures.

2. Focus on measures that participants can control.

3. Avoid all-or-nothing programs.

4. Balance accuracy and simplicity.

5. Include an appropriate subjective element.

6. Mind the corporate culture.

7. Communicate up-front, then keep communicating.

8. Revisit the program design often.

9. Integrate with long-term incentives.


4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE FUTURE

The general scenario in most companies is as follows. HR management teams have well-

developed visions of their departments, their roles and responsibilities. But, the senior

management is generally skeptical of HRs role in the firms success. They generally

consider HR to just be another necessary appendage but not something that can contribute to

the success of the company. Even if the senior management does believe that human capital

is their most prized possession and asset, they cannot understand how the HR team can make

this belief come alive.

There is one reason for all of this. Human capital is an intangible asset and HRs influence

on firm performance is difficult to measure. The standard elements of a firms resource

architecture that are measured include total compensation, employee turnover, cost per hire,

percentage of employees that undergo performance appraisals and percentage employee

satisfaction. The question to be asked is: Are these the measures crucial to implementing the

firms strategy? This is clearly not the case. Interesting attributes would include a committed

workforce, competency development programs, etc. But, it is very difficult to imagine

measures for these quantities. Hence, in the current state of HR there is a clear rift between

what is measured and what needs to be measured.

As mentioned in the introduction, the role of HR is no more just administrative. It has a much

broader, connected and strategic role to play. But, these statements must be substantiated.

The reasons why HR must be considered as a strategic asset must be highlighted. A strategic

asset is something difficult to trade or imitate. They are normally a set of scarce, special

or even exotic resources and capabilities that bestow a firm its competitive advantage. An

unlikely paradox is that the very intangibility of human capital that makes it so difficult

to measure and evaluate, also proves to be the one quality that makes it a strategic asset.

Consider the difference between being able to align employee efforts with the companys

strategic goals and instead having innovative policies of performance appraisals. The latter

is a policy. It is visible to competitors and can be easily copied. The former on the other

hand is a strategic move. It is not easy to imitate since it is a very circumstantial effort,

which depends on the specific firm, its goals and its people. This proves to be a strategic

asset i.e. something that competitors cannot see but that can be utilised to gain a competitive


advantage. It is thus important to align the HR strategy to the overall business strategy

signifying a top-down approach as opposed to a bottom-up approach where each division

such as marketing, HR etc. performs its standard individual roles without a clear outlook

towards the firms strategy.

Many firms have realised this and have made efforts to measure HRs influence on the firms

performance. However, most of these approaches seem to focus on the individual, as it is

believed that if one can achieve an improvement in individual employee performance, it

would automatically enhance the performance of the organisation. The point that is missed is

the fact that organizational units, be it individuals or teams, do not function in isolation. The

stress is on streamlining and cooperatively working towards a common goal.


5. THE HR ARCHITECTURE AS A STRATEGIC ASSET

The focus of corporate strategy is to create sustained competitive advantage whereas that of

HR strategy is to maximize the contribution of HR towards the same goal. Thinking about

HRs influence on the overall strategy of the company requires one to look at all aspects of

the HR architecture. The HR architecture describes the relationship of the HR function, the

HR system and the employee behaviour.

Figure 1: HR Architecture Strategic components

5.1.The HR function

The foundation of a value-creating HR strategy is a management infrastructure that

understands and can implement the firms strategy. The professionals in the HR function

would be expected to lead this effort. This clearly implies that HR managers and

professionals need to get a deeper understanding of the HR function. There are two basic

functional categories in HR management. The first is technical. It includes delivery of HR

basics such as recruiting, compensation and benefits. The second is strategic. It involves

delivering the above mentioned services in a way that directly supports the implementation

of the firms strategy. Most HR managers are proficient enough in the technical aspect

but rarely do they even know about the strategic aspect. Thus, the competencies that the

HR managers need to develop and the ones that have the largest impact on organisational

performance are the business and strategic competencies.


5.2.The HR system In an effective high performance HR system, each element is designed to maximise the

overall quality of human capital throughout the organisation. To build and maintain a set of

talented human capital, the HR system should:-

1. Link its selection and promotion decisions to validated competency models

2. Develop strategies that provide timely and effective support for the skills demanded

by the firms overall strategy implementation.

3. Enact compensation and performance management policies that attract, retain and

motivate high-performance employees.

Basically, the firm needs to structure all the elements of its HR system in a way that

supports a high-performance workforce. However, systemic thinking implies stress on the

interrelationships of the HR system components and the link between HR and the larger

strategy of the firm. The laws of system thinking imply the following:

1. Problems of today are most likely due to past decisions. It is thus important to look at

the causal nature of past solutions and current problems.

2. One should think twice before taking the easy way out or deciding to go with standard

solutions to any problem as this will most likely lead to a crop of new problems in the

future.

3. Cause and effect are not closely related in time. There is a lag between cause and

effect and HRs influence on firm performance is normally much less direct than

that of other performance drivers. This can make it hard to measure as well as be

misleading. It is thus important to look at the leading indicators and not just the

lagging indicators. Typical financial performance measures are lagging indicators and

in an attempt to solve financial problems, the first step is normally to cut costs. It is

more important to actually pinpoint the cause of the problem and look to long-term

benefits than short term ones.


4. The best strategies are often unobvious. Small changes in how HR drivers are

managed can slowly gather momentum and work their way through the strategy

implementation process.

5. It is important never to dissect the system and view each of its parts independently.

One must look at the system as a whole and the connections between the individual

parts is normally the vital place to look at for a solution to any of the problems.

Firms with high performance work systems tend to devote considerably more resources to

recruiting and selection. There is a strong emphasis on training and performance management

and compensation is tied to performance. Teamwork is encouraged, there is generally less

unionization and they have a large and effective HR team. It is important to note, that all

these factors in tandem, not in isolation, lead to better performance, once again showing the

systemic nature of HRs role in performance enhancement. The effects of these measures are

lower employee turnover, more retention, greater sales per employee and a greater market

value for the firm.

It is also important for the HR system to constantly check for alignment of all its parts i.e.

how much they reinforce or conflict with each other. An example of misalignment is a policy

that encourages teamwork but rewards individual contributions.

In the service sector, the employee-customer relationship is very obvious and visible and

so the impact of value creation is unmistakable. But, in many firms, the value is derived

from the operational processes and quality of work that the employees generate. This is less

obvious to competitors and it cannot be imitated. It is especially in these kinds of firms that

the alignment of HR strategy and policy with the overall strategy of the firm matters the

most.

The alignment process begins with a clear understanding of what kind of value the

organisation is supposed to generate and how it should be generated. In the Balanced

Scorecard, this is referred to as the strategy map that stresses the relationship between

the ultimate goals and the key success factors at the four important levels of customers,

internal operations, people and systems. Once the firm has a clear understanding of the value-


creation process, it can then design an implementation model that specifies needed skills and

competencies and employee behaviours throughout the firm. The HR management section

can then be directed towards generating these necessary competencies and behaviours.

The stress is not just on the creation of sound HR policies and strategies. How these are

implemented is also very important. There has to be a strong alignment with the firms

competitive strategy.

A high performance HR system will also tend be unique. This is because it depends on the

particular organisation, its goals, people and strategy. Hence, it proves to be a strategic asset.

5.3.Employee Behaviours

As mentioned above the final results of the strategies are mapped to required employee

behaviours. It is important that each employee be trained not just to do his or her job but also

to have a substantially clear understanding of where he or she stands in the big picture of

the overall strategy of the firm. Strategic behaviours are productive behaviours that directly

serve to implement the firms strategy. There are two basic categories. Core behaviours are

behaviours that are considered fundamental to the success of the firm, across all business

units and levels. Situation-specific behaviours on the other hand, are more circumstantial

behaviours. These are not required all the time but are absolutely necessary in certain

scenarios.


6. THEORY BEHIND THE BALANCED SCORECARD

6.1.Background of the Concept of Balanced Scorecard

Throughout the history of contemporary management theories starting from the ones that

were introduced by the intrusion of the mass production in the beginning of the 20th century

and until today, all the gurus of management have been trying to find uniform solutions on

more efficient allocation and use of very limited resources available to businesses. Those

paths in seeking the Holy Grail of operational efficiency have brought up several new

management theories.

In the dawn of the century, Frederick W. Taylor established the very concepts of resource

allocation in his Principles of ScientJlc Management. In 1920-ics it went around assembly

line and motion studies as the first experience from systematic mass production had given

theorists quite a lot of materials to be analysed from the point of view of using traditional

blue-collar employees more efficiently. In the I 930-ies, the main topic was motivation

of employees, as it turned out that human nature does not enable to work long hours on a

repetitive tasks without frustration level getting so high enough to diminish productivity.

In the l940-ics and 1950-ies, the first statistical and linear methods were introduced in

trying to measure logistics of the operations management and its implications to overall

company success in financial-analysis side. In the beginning of 1980-ics, partly because of

introduction of electronic data processing equipment and quick development of computers,

the whole array of management techniques were initiated. The particular reasons for the

vast development of the new theories were catalyzed mainly by ever growing competition

generated through more systematic use of computers, and of course also by rapid growth of

the importance of human capital.

Todays companies are in the midst of a revolutionary transformation. Industrial age

competition is shifting to information age competition. During the industrial age, roughly

from 1850 to about 1975, companies succeeded by how well they could capture the benefits

from economies of scale and scope. Technology mattered, but, ultimately, success accrued

to companies that could embed the new technology into physical assets that offered efficient,

mass production of standard products. During the industrial age, the financial control systems


were developed in major companies to facilitate and monitor efficient allocations of financial

and physical capital. A summary financial measure such as return-on-capital-employed

(ROCE) could both direct a companys internal capital to its most productive use and monitor

the efficiency by which operating divisions used financial and physical capital to create value

for shareholders.

The emergence of the information era, however, in the last decades of the 2O century, has

made obsolete many of the fundamental assumptions of industrial age competition. The

information age environment for both manufacturing and service organisations requires

new capabilities for competitive success. The ability of a company to mobilise and exploit

its intangible assets has become far more decisive than investing and managing tangible,

physical assets.

Industrial age companies created a sharp distinction between two groups of employees. The

intellectual elite managers and engineers used their analytical skills to design products

and processes, select and manage customers, and supervise day-to-day operations. The

second group was composed of the people who actually produced the products and delivered

the services. This direct labour work force was a principal factor of production, which

performed its tasks under supervision of the first group. Today automation and productivity

have increased the number of people performing analytic functions: engineering, marketing,

management and administration. Therefore, the people are more viewed as problem solvers,

not as variable costs. In other words, information age has brought about the concept of

knowledge management.

The shift to successful knowledge management has introduced a variety of improvement

initiatives:

1. Just-in-time

2. Total quality management,

3. Lean enterprise,

4. Business process re-engineering,

5. Time-based competition,


6. Customer-focused organization,

7. Activity-based cost management,

8. Employee empowerment,

9. Living company and many others.

Some of those programmes have meant in practice real breakthrough and improvement,

others have proven to be in the best case just a short-time disturbance, but in the worst cases

total failures resulting in disarray or even bankruptcy of a particular company. The main

reason for that lies in five main implementation problems:

1. current performance measurement systems are based on the traditional financial

accounting model, which does not enable to objectively analyse information-age

companies;

2. if some non-financial performance measurement even is made, it is solely based on

employees tactical performance, not on strategic performance;

3. majority of management and employee salary-based motivation schemes arc only

short-run profit oriented, that does not enable to align towards long-run goals;

4. overall company strategy is not closely linked to organisational and personal

improvement programmes; and

5. strategy is not generally linked to resource allocation, which results in under-

financing some of the crucial parts of organisations development.

As for today, superior financial performance and efficiency in production are just not enough

to gain sufficient competitive advantage, but more and more attention needs to be paid to

intangible sides of business.

For at least 15 years, the leading management journals have published articles about how to

build up a mechanism that would enable to control all the aspects of a companys

performance. One of the most versatile tools for that purpose is Balanced Scorecard.


The long-term success of any organization is determined by the capabilities and the

competencies it has developed. Todays businesses require a better understanding of their

customers (both existing and potential ) and their needs, better streamlined processes and

highly skilled people for ensuring future survival and sustainable growth.

This innovative tool Balanced Scorecard developed by Robert S Kaplan and David P

Norton in 1992 is unique in two ways compared to the traditional performance measurement

tools. They are:-

1. It considers the financial indices as well the non-financial ones in determining the

corporate performance level and

2. It is not just a performance measurement tool but is also a performance management

system

The aim of the Balanced Scorecard is to direct, help manage and change in support of the

longer-term strategy in order to manage performance. The scorecard reflects what the

company and the strategies are all about. It acts as a catalyst for bringing in the change

element within the organization

Balanced Scorecard uses a balanced measurement system that comprises of the old

financial side and four new perspectives of:

1. Financial Perspective - How do we look at shareholders?

2. Customer Perspective - How should we appear to our customers?

3. Internal Business Processes Perspective - What must we excel at?

4. Learning and Growth Perspective - Can we continue to improve and create value?

Hence, from the above lines we can say that this tool has considered not only the financial

results to be important but also those factors which actually drive an organization towards

future successes as mentioned earlier. The tool has given stress on the other areas which

are required to balance the financial perspective in order to get a total view about the

organizational performance and improve the same.


The framework tries to bring a balance and linkage between the

1. Financial and Non-Financial Measures,

2. Tangible and the Intangible measures,

3. Internal and the External aspects and

4. Leading and the Lagging indicators.

The Balanced Scorecard emphasises the importance of measuring business performance

from the perspective of strategic implementation, rather than relying solely on financial

results. Senior managers tend to pay far too much attention to the financial dimensions of

performance and not enough attention to the driving forces behind those results. Financial

measures are lagging indicators i.e. backward looking. They are designed to rectify or change

past results. Performance drivers on the other hand are within the control of the management

in the present and the Balanced Scorecard methodology encourages management to look at

these leading indicators as well. By specifying the important process measures, assessing

them, and communicating the firms performance based on these criteria to the employees,

the managers can ensure that the entire organisation participates actively in the strategy

implementation process. It is a unifying tool in strategy implementation.

To achieve strategy alignment, firms must engage in a two-step process. As mentioned

before, first the managers must understand the details of how value is created in their firm.

Once this is done, they can design a measurement system based on their understanding. The

first step focuses the organisation on two dimensions of the strategy implementation process

namely breadth and causal flow. Breadth refers to the fact that companies must study more

than just financial results as outcomes of strategy implementation. It must also focus on

other key performance drivers. Causal flow refers to the series of linkages between financial

and non-financial determinants of firm performance. This gives the managers a deeper

perspective of why certain financial results are the way they are. It allows them to link the

financial measures to the non-financial measures of success. The second point is the design


of a measurement system. This involves attaching metrics to the financial and non-financial

determinants. The Balanced Scorecard identifies four key perspectives that directly and

completely define strategy measurement and analysis. They include the financial perspective,

the customer perspective (e.g. customer loyalty and satisfaction), the internal processes

perspective (e.g. process quality and process cycle time) and finally learning and growth

perspective (e.g. employee skills) that is the leading indicator.

The next important step is communication. The top management that has done the above

analysis must communicate their findings and decisions to the middle and front-line

managers, who in turn must communicate it to the other employees. In this way, everyone in

the organisation is made aware and can participate in the strategy implementation process.

This also helps allocate resources intelligently and guides employees decisions. The

Balanced Scorecard model recognises the importance of both tangible and intangible assets

and of financial and non-financial measures. It focuses on the complex connections among

the firms customers, operations, employees and technology and places an important role for

HR. The BSC framework highlights the differences between leading and lagging indicators.

Lagging indicators include financial metrics, which typically reflect only what has happened

in the past. Such metrics accurately measure impacts of past decisions but dont help in

making current decisions or guaranteeing future outcomes. The leading indicators are the

unique indicators for each firm. They include process cycle time, customer satisfaction or

employee strategic focus. These indicators assess the status of key success factors that drive

the implementation of the firms strategy and hence emphasise the future rather than the past.


6.2. Defining Critical Success Factors and MeasuresFour Perspectives

1. Financial Perspective - How do we look at shareholders?

From all the measurement perspectives of a Balanced Scorecard, the financial perspective

needs to be introduced the least as the main financial measurement systems have been

analysed during the past years very thoroughly

The particular financial performance measures for any Balanced Scorecard should define

long-run financial objectives for the organisation. While most of the organisations would

emphasise profitability objectives, other possibilities may also be considered. Businesses

with many products in the early stage of their life cycle can stress rapid growth objectives,

and mature businesses may emphasise maximising cash flow.

Norton and Kaplan recommend to simplify the financial perspective measurement selection

pool to identify first the organisations stage, which would mainly be one of the three:

I. rapid growth organisations - are at the early stages of their life cycle. They may

have to make considerable investments to develop and enhance new products and

serviccs, to construct and expand production facilities, to build operating capabilities,

to invest in systems, infra-structure, and distribution networks that will support

relationships, and to nurture and develop customer relationships.

II.sustain organisations organisations that still attract investment and

reinvestment, but are required to cam excellent returns on their invested capital.

These businesses are expected to maintain their existing market share and perhaps

grow it somewhat. Investment projects will be more directed to relieving bottlenecks,

expanding capacity, and enhancing continuous improvement.


III. harvest organisations - have reached a mature phase of their life cycle, where the

company wants to harvest the investments made in the earlier to stages. These

businesses no longer warrant significant investment only enough to maintain

equipment and capabilities, not to expand or build new capabilities. Any investment

project will have to have very short and definite payback periods. The main goal is to

maximise cash flow back to the organisation.

The financial objectives for businesses in each of these three stages are quite different.

Financial objectives in the growth stage will emphasise sales growth; sales in new markets

and to new customers; sales from new products and services; maintaining adequate

spending levels for product and process development, systems, employee capabilities; and

establishment of new marketing, sales, and distribution channels. Financial objectives in the

sustain stage will emphasise traditional financial measurements, such as return on capital

employed, operating income, and gross margin.

Investment projects for businesses in the sustain category will be evaluated by

standard, discounted cash flow, capital budgeting analyses. Some companies will employ

newer financial metrics, such as economic value added and shareholder value. These metrics

all represent the classic financial objective---earn excellent returns on the capital provided to

the business.

The financial objectives for the harvest businesses will stress cash flow. Any investments

must have immediate and certain cash paybacks. The goal is not to maximise return on

investment, which may encourage managers to seek additional investment funds based on

future return projections. Virtually no spending will be done for research or development or

on expanding capabilities, because of the short time remaining in the economic life of

business units in their harvest phase.

Some of the objectives together with a measurement measures

Objectives Measures

Survive Cash Flow

Prosper Increase in Market Share


Profitability Return on Equity

Cost Leadership Unit Cost

2. Customer Perspective - How should we appear to our customers?

The customer perspective addresses the question of how the firm is viewed by its customers

and how well the firm is serving its targeted customers in order to meet the financial

objectives. Generally, customers view the firm in terms of time, quality, performance, and

cost. Most customer objectives fall into one of those four categories.

In the customer perspective of the Balanced Scorecard, managers identify the customer and

market segments in which the business unit will compete and the measures of the business

units performance in these targeted segments.

The customer perspective typically includes several generic measures of the successful

outcomes from a well-formulated and implemented strategy. The genetic outcome measures

include customer satisfaction, customer retention, new customer acquisition, customer

profitability, and market and account share in targeted segments. While these measures may

appear to be generic across all types of organisations, they should be customised to the

targeted customer groups from whom the business unit expects its greatest growth and

profitability to be derived.

I. Market and Account Share

Market share, especially for targeted customer segments, reveals how well a company

is penetrating a desired market. For example, a company may temporarily be meeting

sales growth objectives by retaining customers in non-targeted segments, but not

increasing its share in targeted segments. The measure of market share with targeted

customers would balance a pure financial signal (sales) to indicate whether an


intended strategy is yielding expected results.

When companies have targeted particular customers or market segments, they can

also use a second market-share type measure: the account share of those customers

business (some refer to this as the share of the customers wallet). The overall

market share measure based on business with these companies could be affected by

the total amount of business these companies are offering in a given period. That is,

the share of business with these targeted customers could be decreasing because these

customers are offering less business to all their suppliers. Companies can measure-

customer by customer or segment by segment-how much of the customers and

market segments business they are receiving. Such a measure provides a strong focus

to the company when trying to dominate its targeted customers purchases of products

or services in categories that it offers.

II. Customer Retention

Clearly, a desirable way for maintaining or increasing market share in targeted

customer segments is to retain existing customers in those segments. Research on

the service profit chain has demonstrated the importance of customer retention.

Companies that can readily identify all of their customers-for example, industrial

companies, distributors and wholesalers, newspaper and magazine publishers,

computer on-line service companies, banks, credit card companies, and long-distance

telephone suppliers- can readily measure customer retention from period to period.

Beyond just retaining customers, many companies will wish to measure customer

loyalty by the percentage growth of business with existing customers

III.Customer Acquisition

Companies seeking to grow their business will generally have an objective to increase

their customer base in targeted segments. The customer acquisition measure tracks,

in absolute or relative terms, the rate at which a business unit attracts or wins new

customers or business. Customer acquisition could be measured by either the number

of new customers or the total sales to new customers in these segments. Companies

such as those in the credit and charge card business, magazine subscriptions, cellular

telephone service, cable television, and banking and other financial services solicit


new customers through broad, often expensive, marketing efforts. These companies

could examine the number of customer responses to solicitations and the conversion

rate- number of actual new customers divided by number of prospective inquiries.

They could measure solicitation cost per new customer acquired, and the ratio of new

customer revenues per sales call or per dollar of solicitation expense.

IV. Customer Satisfaction

Both customer retention and customer acquisition are driven from meeting customers

needs. Customer satisfaction measures provide feedback on how well the company is

doing. The importance of customer satisfaction probably cannot be over-emphasised.

Recent research has indicated that just scoring adequately on customer satisfaction is

not sufficient for achieving high degrees of loyalty, retention, and profitability. Only

when customers rate their buying experience as completely or extremely satisfying

can the company count on their repeat purchasing behaviour.

V. Customer Profitability

Succeeding in the core customer measures of share, retention, acquisition, and

satisfaction, however, does not guarantee that the company has profitable customers.

Obviously, one way to have extremely satisfied customers (and angry competitors)

is to sell products and services at very low prices. Since customer satisfaction

and high market share are themselves only a means to achieving higher financial

returns, companies will probably wish to measure not just the extent of business

they do with customers, but the profitability of this business, particularly in targeted

customer segments. Activity-based cost (ABC) systems permit companies to

measure individual and aggregate customer profitability. Companies should want

more than satisfied and happy customers; they should want profitable customers. A

financial measure, such as customer profitability, can help keep customer-focused

organisations from becoming customer-obsessed.

The customer profitability measure may reveal that certain targeted customers are

unprofitable. This is particularly likely to occur for newly acquired customers, where

the considerable sales effort to acquire a new customer has yet to be offset from


the margins earned by selling products and services to the customer. In these cases,

lifetime profitability becomes the basis for deciding whether to retain or discourage

currently unprofitable customers.

Newly acquired customers can still be valued, even if currently unprofitable, because

of their growth potential. But unprofitable customers who have been with the

company for many years will likely require explicit action to cope with their incurred

losses.

VI. Beyond the Core: Measuring Customer Value Propositions

Customers value propositions represent the attributes that supplying companies

provide, through their products and services, to create loyalty and satisfaction

in targeted customer segments. The value proposition is the key concept for

understanding the drivers of the core measurements of satisfaction, acquisition,

retention, and market and account share. For example, customers could value short

lead times and on-time delivery. They could value a constant stream of innovative

products and services. Or they could value a supplier able to anticipate their needs and

capable of developing new products and approaches to satisfy those emerging needs.

While value propositions vary across industries, and across different market segments

within industries, Kaplan and Norton have observed a common set of attributes that

organises the value propositions in all of the industries where we have constructed

scorecards. These attributes are organised into three categories.

Product/Service Attributes

Customer Relationship

Image and Reputation

Product and service attributes encompass the functionality of the product/service,

its price, and its quality. The image and reputation dimension enables a company

to pro- actively define itself for its customers. The customer relationship dimension

includes the delivery of the product/service to the customer, including the response

and delivery time dimension, and how the customer feels about the experience of


purchasing from the company.

In summary, the customer perspective enables business unit managers to articulate their

unique customer and market-based strategy that will deliver superior future financial returns.


Objectives Measures

New Product % of sales from new product

Customer Relationship % of retained customer

Responsive Supply On time Delivery


3. Internal Business Processes Perspective - What must we excel at?

Internal business process objectives address the question of which processes are most critical

for satisfying customers and shareholders. These are the processes in which the firm must

concentrate its efforts to excel.

In the internal business process perspective, executives identify the critical internal processes

in which the organisation must excel. The critical internal business processes enable the

business unit to deliver on the value propositions of customers in targeted market segments,

and satisfy shareholder expectations of excellent financial returns. The measures should be

focused on the internal processes that will have the greatest impact on customer satisfaction

and achieving the organisations financial objectives.

The internal business process perspective reveals two fundamental differences between

traditional and the Balanced Scorecard approaches to performance measurement. Traditional

approaches attempt to monitor and improve existing business processes.

They may go beyond just financial measures of performance by incorporating quality and

time-based metrics. But they still focus on improving existing processes. The Balanced

Scorecard approach, however, will usually identify entirely new processes at which the

organisation must excel to meet customer and financial objectives. The internal business

process objectives highlight the processes most critical for the organisations strategy to

succeed.

The second departure of the Balanced Scorecard approach is to incorporate innovation

processes into the internal business process perspective. Traditional performance

measurement systems focus on the processes of delivering todays products and services to

todays customers. They attempt to control and improve existing operations - the short wave

of value creation. But the drivers of long-term financial success may require the organisation

to create entirely new products and services that will meet the emerging needs of current and


future customers. The innovation process-the long-wave of value creations, for many

companies, is a more powerful driver of future financial performance than the short-term

operating cycle. But managers do not have to choose between these two vital internal

processes. The internal business process perspective of the Balanced Scorecard incorporates

objectives and measures for both the long-wave innovation cycle as well as the short-wave

operations cycle.


Objectives Measures

Manufacturing Excellence Cycle Time per Unit

Safety incidence Index Number of Accidents

Increased design Productivity Engineering Efficiency

Increased Product Launch Days Actual Launch Days Vs Plan

4. Learning and Growth Perspective - Can we continue to improve and create

value?

Learning and growth metrics address the question of how the firm must learn, improve, and

innovate in order to meet its objectives. Much of this perspective is employee- centered.

The fourth Balanced Scorecard perspective, Learning and growth, identifies the infrastructure

that the organisation must build to create long-term growth and improvement. The customer

and internal business process perspectives identify the factors most critical for current and

future success. Businesses are unlikely to be able to meet their long-term targets for

customers and internal processes using todays technologies and capabilities. Also, intense

global competition requires that companies continually improve their capabilities for

delivering value to customers and shareholders.


Organisational learning and growth come from three principal sources: people, systems, and

organisational procedures. The financial, customer, and internal business process objectives

on the Balanced Scorecard will typically reveal large gaps between existing capabilities of

people, systems, and procedures and what will be required to achieve targets for

breakthrough performance. To close these gaps, businesses will have to invest in re-skilling

employees, enhancing information technology and systems, and aligning organisational

procedures and routines. These objectives arc articulated in the learning and growth

perspective of the Balanced Scorecard. As in the customer perspective, employee-based

measures include a mixture of generic outcome measures- employee satisfaction, employee

retention, employee training, and employee skills- along with specific drivers of these generic

measures, such as detailed indexes of specific skills required for the new competitive

environment. Information systems capabilities can be measured by real-time availability of

accurate customer and internal process information to front-line employees. Organisational

procedures can examine alignment of employee incentives with overall organisational

success factors, and measured rates of improvement in critical customer-based and internal

processes.


Objectives Measures

Technology Leadership Time to develop new product

Manufacturing Learning Time to new process maturity

Product Focus % of product representing 80% of sales


6.3.The Four Perspectives: Cause and Effect Relationship

The four perspectives as mentioned above are highly interlinked. There is a logical

connection between them. The explanation is as follows If an organization focuses on the

learning and the growth aspect, it is definitely going to lead to better business processes. This

in turn would be followed by increased customer value by producing better products which

ultimately gives rise to improved financial performance.

Figure 2: The Cause and Effect relationships among the four perspectives


6.4.The Balanced Scorecard Model

Explanation:

Following steps are to be taken so as to utilize the Balanced Scorecard as a strategic

management tool:

1. The major objectives are to be set for each of the perspectives.

2. Measures of performance arc required to be identified under each of the Objectives

which would help the organization to realize the goals set under each of the

perspectives. These would act as parameters to measure the progress towards the

objectives.

3. The next important step is the setting of specific targets around each of the identified

key areas which would act as a benchmark for performance appraisal. Hence, a

performance measurement system is build around these critical factors. Any deviation

in attaining the results should raise a red signal to the management which would

investigate the reasons for the deviation and rectify the same.

4. The appropriate strategies and the action plans that arc to be taken in the various

activities should be decided so that it is clear as to how the organization has decided

to pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is

often referred to as a blueprint of the company strategies.



To achieve our vision, how will we sustain our ability to change and improve?Learning and GrowthObjectives Measures Targets Initiatives

To achieve our vision, how should we appear to our customers?Customer Objectives Measures Targets Initiatives

To Satisfy our shareholders and customers, processes must we excel at?Internal Process Objectives Measures Targets Initiatives

To succeed financially, how should we appear to our shareholders? Financial Objectives Measures Targets Initiatives

Vision and Strategy

Figure 3:- The Main framework of Balanced Scorecard

6.5.Balanced Scorecard as a Measurement Tool

To illustrate the use of todays main measurement tools, Kaplan and Norton bring the

following example:

Imagine entering the cockpit of a modern jet airplane and seeing only a single instrument

there. How would you feel about boarding the plane after the following conversation with the

pilot?

Q: I am surprised to see you operating the plane with only a single instrument. What does

it measure?

A: Airspeed. I am really working on airspeed this flight.

Q: That good. Airspeed certainly seems important. But what about altitude? Would an

altimeter be helpful?

A: I worked on altitude for the last few flights and Ive gotten pretty good on it. Now I have

to concentrate on proper airspeed.

Q: But I notice you do not even have a fuel gauge. Wouldnt that be useful?

A: You are right; fuel is significant, but I cannot concentrate on doing too many things well

at the same time. So on this flight Im focusing on airspeed. Once I get to be excellent at

airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of

flights.

We suspect that you would not board the plane after this discussion. Even if the pilot did an

exceptional job on airspeed, you would be worried about colliding with tall mountains or

running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of

guiding a complex vehicle like a jet airplane through crowded air spaces with only a single

instrument. Skilled pilots are able to process information from a large number of indicators to


navigate their aircraft. Yet navigating todays organisations through complex competitive

environments is at least as complicated as flying a jet. Why should we believe that executives

need anything less than a full battery of instrumentation for guiding their companies?

Managers, like pilots, need instrumentation about many aspects of their environment and

performance to monitor the journey toward excellent future outcomes.

7.IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE

7.1.Integrating HR into the performance measurement system

To integrate HR into a business performance measurement system, managers must identify

the points of intersection between the HR and the organisations strategy implementation

plan. These points are commonly called the HR deliverables. They are the outcomes of the

HR architecture that serve to execute the firms strategy. This is in contrast to the aspects

of HR that focus on HR efficiency and activity. The deliverables can be classified into two

groups, namely the performance drivers and the enablers. Performance drivers are core

people-related capabilities or assets such as employee productivity and satisfaction. There

is no single correct set of performance drivers. Each firm needs to identify its own set

based on its unique characteristics. Enablers reinforce performance drivers. E.g. Preventive

maintenance can be considered an enabler of on-time delivery, which is a performance driver.

A performance driver can have several enablers. Most of the time, each enabler separately

may seem rather mundane but its the cumulative effect that has strategic importance.

Performance Drivers:

HR managers tend to focus on performance drivers in an attempt to demonstrate their

strategic impact. However, in most cases although they do stress on these drivers they

are unable to make a solid case for it since they do not have the right measures. Without

measures one cannot display HRs actual contribution to the overall mission. Most of the

measures used are very simplistic and it undermines HRs credibility in the organisation. This

credibility is very important since it is what matters when a manager is faced with a conflict

between financial and non-financial reports. For example, if people measures are good but


financial measures are bad, the manager will go for the solution that supports the credibility

of finance or HR. In most cases it is finance and the immediate decision is reducing bonuses

etc. as the CFO might feel it is not warranted when there is no proof of performance. The

point that is being missed is that the CFO is looking at the lagging indicators. Balanced

performance needs one to look at the leading indicators such as HR measures as well since

these are the ones that create value in the organisation. High HR scores in the face of low

finances actually signal improved finances in the future (provided other leading indicators are

also on the positive side). Similarly, strong financial measures and weak leading measures

such as HR measures are indicative of a financial problem in time to come. Thus, managers

must interpret these measures in a balanced manner looking at the past and into the future.

Identifying HR performance drivers can be very challenging since it is unique to the firm. It

is important to identify the performance drivers and integrate them directly into performance

criteria giving them equal weight with the more traditional performance measures. For

example, one half of the bonus pays can be based on the financial results while the other half

is based on the employees adherence to the value behaviours.

HR enablers:

HR enablers reinforce the core performance drivers. If employee productivity is identified as

a performance driver, re-skilling and training can be considered an enabler. Some enablers

might be specifically HR focused i.e. they enhance the effectiveness of HR performance

drivers. There might also be some HR enablers that do have profound positive effects with

respect to the other perspectives as well, such as customers, operations and the financial

segment. It is important to identify these and keep them up to date with the current goals of

the organisation. Without the properly aligned enablers, it is not possible to implement new

strategies. The systemic aspect of HR once again comes to the forefront, whereby the entire

HR system can influence employee behaviour from different points. Thus, HR managers

should evaluate the degree to which their firms system of enablers support the HR as well as

non-HR performance drivers as listed in their Balanced Scorecards. By identifying the links

between enablers and universal performance drivers, the HR team can play a much larger role

and suggest ideas that can affect other sectors in the firm as well.


7.2.The Seven-Step Model for Implementing HRs Strategic Role

Ulrich et al. discuss a seven step model for formalising the strategic role of HR. They are

summarised below:


Periodicallytest HR

measuresagainst the

firms strategymap andadjust asrequired

Figure 4:- Model for implementing HRs Strategic Role

1. Defining Business Strategy:

HR managers should focus on implementation of strategy. By doing so, they can facilitate

discussion about how to communicate the firms goals throughout the organisation. When

strategic goals are not developed with an eye towards the implementation detail, they tend

to be too generic and abstract. These vague goals will tend to confuse employees and they

would not know how exactly to implement the strategies. The important thing for HR

managers is to state the goals in such a way that the employees understand what exactly

their role in the organisation is and thus the organisation knows how to measure success in

achieving these goals.

2. Building a case for HR as a strategic asset:

Once a firm clarifies its strategy, HR professionals need to build a clear case for the strategic

role of HR. In concrete terms, they must be able to explain how and why HR can support the

strategy. It is important to look at as much of case histories and internal as well as external

research while going through this phase. Although it is not wise to imitate others, one can

learn a lot by looking through past experiences of others. Basically, the direct impact on

the HR systems high performance characteristics is non-linearly related to the increase in

market value. This is because in the lower ranges of performance, increase in market value

is basically because HR stops making mistakes it used to make in the past. It is almost like it

is getting out of the way and avoids blunders and wrong practices that worsen the situation.

In the middle range of performance, HR starts consolidating its efforts. It is learning from its

mistakes and in the process does not actually add much to the market value of the employees

and the company, but once a certain threshold is crossed indicating that the firm has adopted

the appropriate HR practices and implemented them effectively, the market value soars

exponentially. This is mainly because the HR system starts getting integrated into the


overall strategic system of the firm. Basically, the firms must consolidate the appropriate

HR policies and practices into an internally coherent system that is directly aligned with

business priorities and strategies that are most likely to create economic value. This can lead

to significant financial returns to the company. It is this plan that must be made concrete and

shown as a strong case to make senior management believe in HRs potential.

It is important to note however, that simple changes in an HR practice do not make a

difference. The HR measures describe the whole HR system and changing the system to cross

the threshold mentioned above needs time, effort, insight and perseverance since results are

not directly proportional. This clearly indicates the requirement of an HR transformation

rather than a change. It is this very character of transformation, which is difficult and time-

consuming to achieve, that makes HR a strategic asset.

Figure 5: A High Performance Work System

Along with value creation, there must also be a strong case for HRs role in strategy

implementation. Strategy implementation rather than strategy content separates the successful

from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement


Knowledge Management

System

Strategic Alignment System

Performance Measurement

System

Employees who are strategically focused

The Firms capacity to implement the Strategy

The Overall performance of the firm

A High Performance Work System

one. This once again shows the strategic nature of HRs role in performance improvements.

Successful strategy implementation is driven by employee strategic focus, HRs strategic

alignment and a balanced performance measurement system. The most important HR

performance driver is a strategically focused workforce. Effective knowledge management

combined with the above-mentioned factors creates a strategically focused organization.

3. Creating a Strategy Map:

The first two steps clarify the firms strategy. This paves the way for the implementation

process. But, before this is done, the firm must get a clear understanding of its value chain.

The value chain is the complex cumulative set of interactions and combinatorial effects that

create the customer value in the products and services of the firm. It is important that the

firms performance management system must account for each of the links and dependencies

in the value chain. The Balanced scorecard framework refers to this process and creating a

strategy map. These are basically diagrams that show the links in the value chain. It shows

how different components in different layers interact. It is what provides managers and

employees the big picture of how their tasks affect the other elements in the firm and how it

affects overall strategy. This process should involve managers from all over the organisation,

not just HR. The broad participation is required to improve the quality of the strategy map. It

also allows each member of the team who is an expert in his or her domain to provide his or

her own insights into what is accomplishable.


Learning and Growth

Internal/Business

Processes

Customer

Financial

Figure 6: Simple Strategy Map

The following questions have been identified as the key ones to be asked during the strategy

map creation process:-

1. Identify the critical strategic goals from the generic ones.

2. Identify the performance drivers for each goal.


On-time Delivery

Customer Loyalty

Return on the capital employed in the business

Process Quality

Process cycle time

Employee skills

3. Think about how one can measure progress towards these goals.

4. Identify barriers to the achievement of each goal.

5. Recognise the employee behaviours needed to ensure that the company achieves

its goals.

6. Identify missing employee competencies and check if HR is providing the

necessary competencies.

7. Finally, decide what needs to change.

These basic questions generate a wealth of information about how well a firms HR has been

contributing to the success of the organisation. Along with these discussions, it is useful for

the company to conduct surveys within the organisation to identify the extent to which each

employee understands the organisational goals. Once the whole picture of the firms value

chain is highlighted, the firm can then translate the information into a conceptual model using

language and graphics that make sense to the members of the organisation. The model should

then be tested for understanding and acceptance amongst the leaders and the employees.

The strategy map essentially contains predictions about which organisational processes drive

firm performance. The company can validate these hypotheses only after achieving the goals

set for each of the performance drivers and then measuring their impact on overall firm

performance. The graphical nature of the strategy map helps the senior management as well

as the employees have more confidence in the strategy implementation plan.

4. Identifying HR deliverables within the strategy map:

HR creates much of its value at the points of intersection between the HR system and the

overall strategy implementation system of the organisation. Thus, to leverage this to the

maximum possible extent it is important that there is a clear understanding of both sides of

this intersection.


In the past, HR managers lacked the required amounts of knowledge about the business side

and general managers did not fully understand the HR side. It is HRs responsibility to depict

HR deliverables including performance drivers as well as HR enablers in the strategy map of

the firm. Performance drivers such as employee competence, motivation and availability are

very fundamental and so it might be difficult to locate these precisely on the strategy map. It

is important to identify those HR deliverables that support the firm-level performance drivers

on the strategy map. The focus should be on the kind of strategic behaviours that depend on

competencies, rewards and work organisation. E.g. Employee stability improves R&D cycle

time, the latter being a firm-level performance driver. Thus, employee stability becomes an

important HR enabler. Once this enabler has been identified, the firm can design policies

such as bonus schemes etc. that would encourage R&D staff to continue working for the firm.

5. Aligning the HR architecture with the HR deliverables:

The above-mentioned steps encourage the top-down thinking approach, whereby strategy

decides what HR deliverables the firm needs to focus on. It is also important to consider

how the HR system made up of the rewards, competencies; work organisation etc. needs

to be structured to provide the deliverables that are identified in the strategy map. This step

enhances the value creation aspect of the firm by aligning the HR system with the firms

larger strategy implementation system. For this, internal alignment and external alignment

are important. Internal alignment refers to the aligning components within the HR system.

External alignment refers to the alignment of the HR system with the other elements in the

firms value creation process. These two are not isolated processes. They are closely related.

Internal alignment is necessary but not sufficient in itself for external alignment to occur.

Basically, highly cohesive HR strategies will work as long as they are aligned well with the

overall strategy of the company. It will fail if it is not periodically reshaped so as to align it

with the overall strategy.

However, for a particular fixed overall strategy, all firms need an internally aligned HR

strategy in order to achieve the overall goals. Misalignment between the HR system and the

strategy implementation system can destroy value. In fact, the wrong measurement system

can have the exact opposite effect than intended.


6. Designing the Strategic HR measurement system:

The above steps guide the development of the HR architecture and lay the groundwork

necessary to measure the performance relationship between HR and the firms strategy. The

next step is to design the measurement system itself. This requires a new, modern perspective

on measuring HR performance. It also requires HR to resolve several new technical

issues that it might not be familiar with. To accurately measure the HR-firm performance

relationship, it is imperative that the firm develops valid measures of HR deliverables.

This task has two dimensions.

Firstly, HR has to be confident that they have chosen the correct HR deliverables.

This requires that HR have a clear understanding of the causality in the value chain

for effective strategy implementation.

Secondly, HR must choose the correct measures for those deliverables. During this

process of developing the HR scorecard, the firm might go through several stages of

increasing sophistication.

The first stage is normally the traditional category of measures. These mainly include

operational measures such as cost per hire, activity counts etc. These are not exactly strategic

measures. In the second stage, HR measures have a strategic importance but they dont

help much in making a case for HR as a strategic asset. Firms may declare several people

measures such as employee satisfaction as strategic measures and these might be included

directly into the reward systems.

In this stage, there tends to be a balance between financial and non-financial measures

but there is less of an agreement on how exactly they combine together to implement the

strategy. These are normally hasty decisions and the firms might have not gone through all

the previous steps mentioned above.


The next stage represents a transition point whereby the firm includes non-financial measures

such as HR measures into its strategic performance measurement system. The links between

the various measures are also identified i.e. they are placed appropriately in the strategy map.

The HR measures now actually track HRs contribution to strategy implementation.

In the final stages, the HR measurement system will enable the firm to estimate impacts of

HR policies on firm performance. If the value chain is short and the strategy map is relatively

simple, the complete impact of HR on the overall performance can be measured. For more

complex value chains, the impact can be more accurately measured on local segments or

sectors of the strategy map. These local impacts can then be assimilated to give a good

measure of the total impact on the firms performance. Thus, each level of sophistication of

the measurement system adds value to the non-financial measures and forces in the firm and

enables a better performance appraisal.

7. Implementing the strategy by using the measures:

The previous step completes the HR scorecard development process. The next step is to

use this powerful new management tool in the right way. This tool not only helps the firm

measure HRs impact on firm performance, but also helps HR professionals have new

insights into what steps must be taken to maintain HR as a strategic asset. It helps the HR

professionals dig deeper into the causes of success and failure and helps them promote the

former and avoid the latter. Implementing the strategy using the HR scorecard requires

change and flexibility as well as constant monitoring and re-thinking. The process is not

a one-time event. HR professionals must regularly review the measures and their impacts.

They must review the HR deliverables identified as important and see to it that the drivers

and enablers and internally as well as externally aligned. Special reviews of the HR enablers

must be conducted as these have the maximum direct impact on specific business objectives.

Enablers that do not tend to play a positive role should be replaced.


8. BENEFITS OF THE DEVELOPING HR SCORECARD

The HR Scorecard offers the following benefits:

1. It reinforces the distinction between HR do-ables and deliverables:

The HR measurement system must clearly distinguish between the deliverables that

influence strategy implementation and do-ables that do not. Policy implementation is

not a deliverable until it has a positive effect on the HR architecture and creates the

right employee behaviours that drive strategy implementation. An appropriate HR

measurement system will encourage HR professionals to think both strategically as

well as operationally.

2. It enables cost control and value creation:

HR is always expected to control costs for the firm. At the same time, HR has

to fulfill its strategic goal, which is to create value. The HR scorecard helps

HR professionals balance the two and find the optimal solution. It allows HR

professionals to drive out costs where appropriate, but at the same time defend

investments in intangibles and HR by outlining the benefits in concrete terms.

3. It measures leading indicators:

Just as there are leading and lagging indicators in the overall balanced performance

measurement system, there are drivers and outcomes in the HR value chain as well. It

is thus important to monitor the alignment of the HR decisions and systems that drive

the HR deliverables. Assessing this alignment provides feedback on HRs progress

towards these deliverables and lays the foundation for HRs strategic influence.

4. It assesses HRs contribution to strategy implementation:

The cumulative effect of the HR Scorecards deliverable measures provides the

answer to the question regarding .HRs contribution to firm performance. All

measures have a credible and strategic rationale. Line managers can use these


measures as solutions to business problems.

5. It lets HR professionals effectively manage their strategic responsibilities:

The scorecard encourages HR managers to focus on exactly how their decisions

affect the successful implementation of the firms strategy. This is due to the systemic

nature of the scorecard. It provides a clear framework to think in a systemic manner.

6. It encourages flexibility and change:

The basic nature of the scorecard with its causal emphasis and feedback loops helps

fight against measurement systems getting too standardised. Standardisation is good

for things that dont tend to have a dynamic nature but firm performance is a dynamic

phenomenon. Every decision needs to be taken based on the past and future scenarios.

One of the common problems of measurement systems is that managers tend to get

skilled to obtain the right numbers once they get used to a particular measurement

system. The HR scorecard engenders flexibility and change because it focuses on

the firms strategy implementation, which constantly demands change. With this

framework, measures simply become indicators of the underlying logic that managers

accept as legitimate. It helps them look at the bigger picture and since there are no

perfect numbers it makes it easier for managers to change direction when needed.

We see talent as the emerging single sustainable competitive advantage in the future. To

capitalize on this opportunity, HR must evolve from a Business Partner to a critical asset

manager for human capital within the business. The HR scorecard is designed to translate

business strategy directly to HR objectives and actions. We communicate strategic intent

while motivating and tracking performance against HR and business goals. This allows each

HR employee to be aligned with business strategy and link everyday actions with business

outcomes.

Garrett Walker, Director HR Strategic

Performance Measurement, GTE


9. CASE STUDY: VERIZON

To clarify the HR Scorecard framework it is important to summarise a case study.

This section explains the details of the HR scorecard developed by Verizon, a leading

telecommunications provider in the United States.

9.1.Introduction: VerizonVerizon HR has effectively designed and implemented a strategic management system, which

is based upon the balanced scorecard model of Dr. David Norton and Dr. Robert Kaplan of

Harvard Business School. The HR Balanced Scorecard was conceived with new economy

organisational dynamics in mind. The scorecard uses a broad range of leading and lagging

indicators which include overall strategy

Documents

Balance scorecard project