BALANCED SCORECARD: AS A METHOD FOR PERFORMANCE ASSESMENT Semih AKKERMAN Murat ALTUN

BALANCED SCORECARD: AS A METHOD FOR PERFORMANCE ASSESMENT

Semih AKKERMANMurat ALTUN

2

Agenda

Strategic Planning Consciousness, Failure and Incredible

Facts

Performance Measurement

Balanced Scorecard

The Aim for Using BSC

Applying of BSC step by step

Case Studies

3

Strategic Planning Consciousness

Do you really think that the executives look like they are

conscious about strategic planning ?

4

Incredible Facts

Most of the workforce does not understand their company’s strategy.

5%

95%

Graph Showing the Employee's Awareness About their Com-

pany's Strategy

Percentage of employees un-derstanding their company's strat-egy

Percentage of employees having no idea about what their com-pany's strategy is

5

Incredible Facts

Most of the managers don’t have incentives linked to strategy.

25%

75%

Graph Showing the Executive's Strategy Understandings

Managers hav-ing incentives linked to strategy

Managers hav-ing attitude of behaving ran-domly

6

Incredible Facts

Organisations don’t have ability of linking their budgets to strategy.

40%

60%

Graph Showing the Percentage of Organisations

Linking Their Budgets to Strategy

Organisations linking their budgets to strategy

Organisations not linking their budgets to strategy

7

Incredible Facts

Executive teams don’t spend enough time for discussing strategy.

86%

14%

Graph of Percentages Wheather the Executive

Teams Spend More Than One Hour per Month Discussing

Strategy or not

Executive teams spend less than one hour per month discussing strategy

Executive teams spend more than one hour per month discussing strategy

8

Strategic Planning Failure

Paul R. Niven declaration about strategic failure;• Vision barrier• People barrier• Resource barrier• Management barrier

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Performance Measurement

“ I often say that when you can measure what you are

speaking about, and express it in numbers, you know

something about it; but when you cannot measure it,

when you cannot express it in numbers, your

knowledge is of a meager and unsatisfactory kind. ”

William Thomson Kelvin“If you can’t measure it, you can’t manage it.”“If you can’t measure it, you can’t improve it.”

Robert Kaplan and David Norton

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Initial Step Toward Balanced Scorecard

Profitability

Market share

Productivity

Product leadership

Public responsibility

Personnel development

Employee attitudes

Balance between short-

range and long-range

objectives

General Electronics(1955) conducted a project to

develop performance measures for GE’s decentralized

business units:

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Not worked: corporate pressure for short-term profits

led unit managers to compromise long-term objectives

and their public responsibilities

Initial Step Toward Balanced Scorecard

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Prominent Step Toward Balanced Scorecard:Japanese Management Movement (1975-1990)• Japanese innovations in quality and just-in time production (such

as Total Quality Maagment,Just in Time,Short Cycle Time) shoke

Western leadership in many industries.

• US corporations had become obsessed with short-term financial

measures and had failed to adapt their management accounting

and control systems to the operational improvements from

successful implementation of total quality and short-cycle-time

management.

Because, traditional western performance measurement are short

term and financial performance oriented

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Managing with information from financial accounting systems

impedes business performance today because traditional cost

accounting data do not track sources of competitiveness and

profitability in the global economy. Cost information, perse,

does not track sources of competitive advantage such as

quality, flexibility and dependability. […] Business needs

information about activities, not accounting costs, to manage

competitive operations and to identify profitable products.

(Johnson, 1980, 44-5).

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Steps Toward Balanced ScorecardThe US Government introduced Malcolm Baldrige National Quality

Award in 1987 to promote quality awareness, recognize quality

achievements, and publicize successful quality strategies.

The initial set of Baldrige criteria:

▫ financial metrics (profits per employee),

▫ customer-perceived quality metrics (market cycle time, late

deliveries),

▫ internal process metrics (defects, total manufacturing time, order

entry time, supplier defects) and

▫ employee metrics (training per employee, morale).

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Mother of Balanced Scorecard• A semiconductor company, Analog Devices described how executives at the top of the

organization benefited from seeing nonfinancial information and introduced a highly successful

quality management system, which included an innovative quality improvement metric.

• Analog’s vice president, an experienced Baldrige Award examiner,translated the Baldrige

criteria into an internal corporate scorecard for his executive team.

• The scorecard includes:

▫ high-level financial metrics

▫ customer quality metrics, such as on-time delivery, lead time, and customer measured defects

▫ manufacturing process metrics, such as yield, part-per-million defect rates, and cycle times

▫ employee metrics, such as absenteeism and lateness.

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Balanced Scorecard

Kaplan and Nortan (1992)

developed a superior

performance measurement tool

called Balanced Scorecard that

uses both financial and non-

financial measures for long-term

performance.

Four Perspective of Initial BSC

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Balanced Scorecard

After implementation of tool and feedback of BSC users (1993),

Balanced Scorecard is not only measuremet system but also a core

of management.BSC depends on management whether to be a record

keeping instrument or a tool to focus on strategy to enchance

organizational performance.

(Larry D. Brady,FMC Corporation)

Therefore,measures on balanced scorecard must be specifically

designed to fit firm’s vision, mission,strategy, technology, and culture.

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Balanced Scorecard

Short term actions with long-term strategies?

an improved measurement system to core strategic

management system

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Balanced Scorecard

with Balance Scorecard link

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Strategic Map in Balanced Scorecard

Describe the cause-effect relationships between strategic objectives

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Strategic Management System

• Mobilize change through executive leadership

• Translate the strategy into Operational Terms

• Align the organization to the strategy

• Motivate employees to make strategy their everyday job

• Govern to make strategy a continual process

22

Balanced Scorecard

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Balanced ScorecardThe balanced scorecard is centered on four performance metrics or perspectives:

▫ Customers

▫ Internal processes

▫ Financial

▫ Learning and growth

When implemented properly, each one of these perspectives contains four subparts

consisting of

• Objectives - what the strategy is to achieve in that perspective

• Measures - how progress for that particular objective will be measured

• Targets - refer to the target value that the company seeks to obtain for each

measure

• Initiatives - what will be done to facilitate the reaching of the target

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Balanced Scorecard

The term “scorecard” signifies quantified performance

measures and “balanced” signifies the system is balanced

between:

▫ Short-term and long term objectives

▫ Financial and non-financial measures

▫ Lagging and leading indicators

▫ Internal and external performance perspectives

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BSC for Non-Profit Organization

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Statistical data taken from Bain & Company Guide;

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Organizations use BSC mainly because;

• Clarifying strategy and standing as the basic guideline

• Describing strategic position and directions schematically

• Including statements about strategic objectives and annual

budget

• Standing as the link between key component for reaching

the long term target

• Making any strategic upgrades possible and easy

• Presenting the key elements in business strategy

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Organizations use BSC mainly because;

• Allocating resources in the most efficient manner

• Simplifying the understanding of strategy

• Giving advantage of comparing performance of different

business units in the same framework

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Applying of BSC

Wallace’s three phases;

• Phase 1: The Strategic Foundation

• Phase 2: The Critical Components

• Phase 3: Deployment

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Applying of BSC

Phase 1: The Strategic Foundation

Step 1: Strategic Allignment

• Determination of a clearly defined strategy, objective

and target

• Telling people what to do (objective) and what is

expected (target)

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Applying of BSC

Examples;

• Thanks to new drilling machines, we will increase the ratio

of winning soil work tenders by %50 in next 10 years.

• The time consumed for training employees will be

decreased by %50 up to New Year through the

implementation of new staff trainee software system.

• We will decrease the cost and the time consumed up to %

15 through the implementing of new mobile concrete

mixing equipment and the income will increase by % 20 in 6

months.

32

Applying of BSC


Step 2: Communicating the Plan

• Transmitting the information by using appropriate

communicating tools

33

Applying of BSC

Examples;

• Presentations, handouts or meetings for Executive

Members

• E-mail, newsletters or town hall meetings for

Employees

• Team meetings or Status memos for Project Teams

34

Applying of BSC


Step 3: Strategic Areas

• Analyzing more than one perspective in one framework

Four main ares frequently used by managers;

• Financial

• Customer

• Process

• Employee’s learning and growth

35

Applying of BSC

Other areas used depending on the business;

• Efficiency

• Safety

• Innovation

Or

• Philantrophy

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Applying of BSC

Examples;

Strategic GoalStrategic

AreaThanks to new drilling machines, we will increase the ratio of winning soil work tenders by %50 in next 10 years.

Financial

The time consumed for training employers will be decreased %50 up to New Year through the implementation of new staff trainee software.

Employee’s learning and growth

We will decrease the cost and the time consumed up to % 15 through the implementing of new mobile concrete mixing equipment and the income will increase by % 20 in 6 months.

Process

37

Applying of BSC


Step 4: Strategic Grids

• Connecting all the strategic objectives together within

the light of determined strategic goal.

• Investigation of the factors determining the strategy

one by one

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Applying of BSCExample;

CustomerExpanding the customer population

Address to more customer

FinancialGive the lowest prices

Decrease the production costs

ProcessIncrease the production efficiency

Use the workers efficiently Use material efficiently

Employee's Learning and

GrowthTrain workers

Set workers time schedule in the most

efficient way

Decrease prodigality

Use right tools with right employees

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Applying of BSC

Phase 2 : Three Critical ComponentsStep 5: Measurements• Determining whether the organization moves to the

target or not

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Applying of BSC

Wallace suggestions;

• Ability of being linked with a strategic objective

• Being repeatable

• Standing as the indicator of long term targets or

performance

• Being accountable, reliable, verifiable and accurate

• Being available when needed

41

Applying of BSC

Phase 2 : Three Critical Components

Step 6: Targets

• Association of measurements with reasonable targets

for achieving the performance improvement

42

Applying of BSCExamples;

Strategic Goal

Thanks to new drilling machines, we will increase the ratio of winning soil work tenders by %50 in next 10 months.

Year 1 2 3 4 5 6 7 8 9 10

Number of Soil Work Tenders Gained 12 12 13 13 14 14 15 16 17 18

43

Applying of BSCStrategic Goal

The time consumed for training employers will be decreased %50 up to New Year through the implementation of new staff trainee software.

YearMarch (Today) April May June July August September October November December

The Time Consumed for Training the

Employers per Month (Hours)

36 34 32 30 28 26 24 22 20 18

Strategic Goal

We will decrease the cost and the time consumed up to % 15 through the implementing of new mobile concrete mixing equipment and the income will increase by % 20 in 6 months.

Month 1 2 3 4 5 6

Time consumed for mixing concrete per one truck

(minutes)

17 (20 before installation

17 17 17 17 17

Yearly Income ($) 200000 210000 220000 230000 235000 240000

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Applying of BSC

Phase 2 : Three Critical Components

Step 7: Programs

• Tools used for achieving the strategic objective

45

Applying of BSC

Phase 3 : Deployment

Step 8: Launch

• Performing of last checks

• Feedback request and evaluation

46

Applying of BSC

The functionality of BSC lives with

the absolute adoptance by

audience!

47

Case Studies

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Case:Private SectorBalanced Scorecard for Insurance Companies in Turkey

Customer Measures Mean

Customer Satisfaction 2.1795

Market Share 4.0514

Customer Loyalty 4.4615

Rate of New Customer Acquisition 4.5128

Customer Profitability 4.7949

Customer Complaints 4.8462

Brand Recognition 5.1538

Number of Customers 5.2564

Total Cost to Customer 5.3077

Agencies Performance 5.5641

Customer Loss 5.6667

Adds Cost as a Percentage of Sales 5.6923

Cancellation Rate of Sales 5.8462

Frequency (Number of Sales

Transactions) 5.9744

Financial Measures Mean

Accounting Profit/ Equity 2.0225

Technical Profit/Premium Received 3.6410

Loss Ratio 4.0510

Banded Rates 4.8205

Accounting Profit / Premium Received 5.0769

Equity / Technical Provisions 5.1026

Premium Received / Equity 5.4359

Retention Rate 5.5385

Profit Before Tax / Premium Received 5.5641

Agency Claims /Equity 5.5897

Liquid assets /Total assets 5.5897

Liquid assets /Short term Liabilities 5.6154

Compensation /Payment Rate 5.6154

Expense Ratio 5.6667

Profitability of Insurance Funds 5.6667

Net assets/ Insurance Funds 5.8462

Premium Reinsurance Receivable/ Total Assets 5.8718

Total Loans/ Total Assets 5.9231

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Case:Private SectorBalanced Scorecard for Insurance Companies in Turkey

Internal Business Measures Mean

Customer Database Availability 3.3846

Employee Benefit Rate 3.8718

Number of Positive Media Stories 4.6154

Consistency of Claim to

Compensation 4.6410

Business Mix to Marketing

Segments 4.8718

Community Involvement 5.0256

Frequency of Claim to

Compensation 5.2051

Frequency (Cancellation of

operations) 5.4359

Quality of The Policies 5.5897

Loss Ratio 5.6154

Learning and Growth Measures Mean

Employee Satisfaction 4.025

6

Invest in Training Employee 4.282

1

Motivation 4.769

2

Reward and Incentive 4.794

9Communication Between Employee and Departments

4.9231

Employee Offers 4.974

4

Quality of The Work Environment 5.000

0

Employee Improvement 5.025

6

Employee Productivity 5.282

1

Time for The Training of Employees 5.435

9

Ethics Violations 5.564

1

Leadership Development 5.615

4

Absenteeism 5.717

9

Support Operating System 5.871

8

Turnover Rate 5.897

4Employee Participation in Professional or Trade Associations

6.9487

Too many measures decreases the efficiency of BSC !!!

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Case :Private SectorBalanced Scorecard for Insurance Companies in Turkey

Financial Measures Mean Customer Measures Mean

Profitability of Insurance Funds

5.666

7 Customer Loss

5.666

7

Net assets/ Insurance Funds

5.846

2 Adds Cost as a Percentage of Sales

5.692

3

Premium Reinsurance Receivable/ Total

Assets

5.871

8 Cancellation Rate of Sales

5.846

2

Total Loans/ Total Assets

5.923

1 Frequency (Number of Sales Transactions)

5.974

4

Internal Business Measures Mean Learning and Growth Measures Mean

Frequency of Claim to Compensation

5.205

1 Absenteeism

5.717

9

Frequency (Cancellation of operations)

5.435

9 Support Operating System

5.871

8

Quality of The Policies

5.589

7 Turnover Rate

5.897

4

Loss Ratio

5.615

4

Employee Participation in Professional or Trade

Associations

6.948

7

Efficient Balanced Scorecard

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Case : Balanced Scorecard of A and S Construction Private Limited (ASPL)

Background Information :

• a small size family construction firm established in India,1975

• 100 employees(4 top management,30 mid-level management,rest

is skilled or unskilled operatives and supervisors

• Focus on infrastructure projects of central government(85%of

revenue) and real estate projects(15% of revenue)

• steady growth rate of 12%

• High demand: 5 times than firms capacities minimizing the rivalry

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Problems:

• Delays occur due to

▫ poor internal and external communication,

▫ poor site management

▫ ineffective planning and scheduling

• 5% tender success rate

• Lock-up mone

▫ Higher raw material price

▫ Delay in salary

▫ Decrease in manpower turnover


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• Data gathered:financial statements(2004-2006), summary of offers made to the clients

by ASPL and its competitors, and summary of offers received by ASPL from its

suppliers.

• Education on balanced scorecard for top management: concept, its usefulness in

strategy communication, and implementation and success stories of application

▫ Seperate session would be conducted for lower management in local language later.

• Vision and mission constructed

▫ Vision : the most trusted construction firm of their government clients as well as the

private-sector clients

▫ Mission : We commit ourselves to contribute to the development of the country by

constructing roads, bridges, industrial and commercial real estate of customer-

defined quality and time-frame at competitive prices. We will achieve this through

continuous cost reduction and productivity improvement. We will share our wealth

with our employees.


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• Possible scorecard objectives and measures was collected

▫ Low price

▫ Project completion on time

▫ Effective communication

▫ Effective planning and scheduling

▫ Increase in tender success rate

▫ Higher quality

▫ Client expectation


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!!! Problematic Learning Perspective:participants of construction projects are ‘joined’ temporarily until the completion of the project

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Case: Performance Measurement of Korean Construction Companies with BSC Approach

• Target 34 of 500 top Korean construction companies included 19 building

construction-oriented companies, 10 civil and plant business-oriented

companies, and 5 both.

• Determine performance criteria according to

▫ Interview with 15 construction companies(5 large,5 mid-size and 5 small

size) for goals and vision

▫ Lituraturized management strategies for construction companies

▫ long-term master plans of construction companies

• Collect data by questionnaire survey and by interviews carried out in

February–May 2005

and financial data from annual report

• Estimate weight for performance criteria by 12 experts via survey

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Perspective/Objective Measurement Scoring Rubrics Assesment Method

A. Financial

Profitability Return on equity (ROE)

Common percent

scale Annual Report

Growth Net sales growth rate Relative ranking Annual Report

Stability Debt ratio Multiple scale Annual Report

B. Customer

External customer

satisfaction State of award Strict EA limits Questiannaire

Internal customer Employee turnover rate Distribution range Questiannaire

Market share New orders received Relative ranking

Questiannaire &Annual

Report

C. Internal business

process

R&D R&D expenses(% of sales) Distribution range


Report

Technological capability Intellectual property Strict EA limits


Report

Business efficiency G&A expenses(% of sales)

Common percent

scale Questiannaire

D. Learning and growth

HR development

% of employees with advanced

degrees Distribution range Questiannaire

Organization competency

Quality of knowledge

management 5-point rating scale Questiannaire

Informatization Level of informatization 5-point rating scale Questiannaire


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Perspective/Objective Measurement Weight Mean Score

A. Financial 0.333 3.14

Profitability Return on equity (ROE) 0.170 3.29

Growth Net sales growth rate 0.078 2.94

Stability Debt ratio 0.086 3.03

B. Customer 0.187 2.88

External customer satisfaction State of award 0.060 2.41

Internal customer Employee turnover rate 0.036 3.53

Market share New orders received 0.091 2.94

C. Internal business process

0.211 3.06

R&D R&D expenses(% of sales) 0.070 2.56

Technological capability Intellectual property 0.057 2.71

Business efficiency G&A expenses(% of sales) 0.083 3.74

D. Learning and growth 0.270 2.91

HR development % of employees with advanced degrees 0.070 2.75

Organization competency Quality of knowledge management 0.111 3.09

Informatization Level of informatization 0.089 2.82

Total Score : 3.02


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Case: Quality Balanced Scorecard in Construction Industry

60

Case: Visual Balanced Scorecard:Hydro Group

61

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BALANCED SCORECARD: AS A METHOD FOR PERFORMANCE ASSESMENT Semih AKKERMAN Murat ALTUN