Performance measurement using Balanced Scorecard

Balanced scorecard to evaluate performance of a firm

1. The Balanced Scorecard Approach MBA-I , DMS, NALSAR

2. What is a Balanced Scorecard? The Balanced Scorecard is a strategic planning and management system used to align business activities to the vision and strategy of the organization by monitoring performance against strategic goals.

3. Balanced Scorecard Concept Was first published in 1992 by Kaplan and Norton, a book followed in 1996. Traditional performance measurement that only focus on external accounting data are obsolete. The approach is to provide 'balance' to the financial perspective.

4. The Balanced Scorecard: A Good Idea in 1992 “The Balanced Scorecard – Measures that Drive Performance” Harvard Business Review, 1992 Balanced Scorecard in 1992

5. The Balanced Scorecard: A Great Idea by 2002 50% usage in Fortune 500 Harvard Business Review “Hall of Fame” 50,000+ BSC on-line members Balanced Scorecard by 2002 21 translations 17 translations

6. Balanced Scorecard Hall of Fame Implemented Strategies and Achieved Breakthrough Results… Fast Saatchi & Saatchi + $2b ATT Canada + $7b Chemical Bank 99% Merged Target Asset Retention UPS Southern Garden Wells Fargo Cigna + $3b Brown & Root #1 in growth & profitability City of Charlotte Duke Children’s Mobil Last to first Cash flow +$1.2b ROI 6% --> 16% Hilton Hotels Least Cost Producer 3 years Customer Satisfaction Market Revenue Index Revenues 9% Net Income 33% # Customers 450% Best Online Bank Customer Satisfaction = 70% Public Official Award Customer Satisfaction #1 Cost/Case 33% 3 years 2-5 years 3 years 3-5 years 3 years 3 years 2 years 3 years 3 years 2-5 years 2 years

7. © 1998 Renaissance Worldwide, Inc. and Robert S. Kaplan, All rights reserved. STRATEGY HUMAN RESOURCES BUSINESS UNITS EXECUTIVE TEAM INFORMATION TECHNOLOGY BUDGETS AND CAPITAL INVESTMENTS The Balanced Scorecard process allows an organization to align and focus all its resources on its strategy Question: How can complex organizations achieve results like this in such short periods of time? Answer: Alignment!

8. A Gap Exists Between Mission-Vision-Strategy and Employees’ Everyday Actions MISSION Why we exist VALUES What’s important to us VISION What we want to be STRATEGY Our game plan EMPOWERMENT / PERSONAL OBJECTIVES What I need to do TOTAL QUALITY MANAGEMENT What we must improve

9. The Balanced Scorecard Links Vision and Strategy to Employees’ Everyday Actions BALANCED SCORECARD Translate, Focus and Align STRATEGIC INITIATIVES What are the priorities MISSION Why we exist VALUES What’s important to us VISION What we want to be STRATEGY Our game plan STRATEGIC OUTCOMES Satisfied SHAREHOLDERS Delighted CUSTOMERS Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE EMPOWERMENT / PERSONAL OBJECTIVES What I need to do TOTAL QUALITY MANAGEMENT What we must improve

10. Why Use a Balanced Scorecard? Improve organizational performance by measuring what matters Increase focus on strategy and results Align organization strategy with workers on a day-to-day basis Focus on the drivers key to future performance Improve communication of the organization’s Vision and Strategy Prioritize Projects / Initiatives

11. Balanced Scorecard Balance betwen Financial measures of performance Long-range competitive abilities

12. Balanced Scorecard Four aspects of firm performance Financial Customer Internal business Innovation and learning

13. Financial Perspective How do we look to stockholders? Survive Succeed Prosper

14. Customer Perspective How do our customers see us? New products Responsiveness Quality

15. Internal Business Perspective At what must we excel currently? Manufacturing/service excellence New product/service introduction

16. Innovation and Learning Perspective Can we continue to improve and create value? Technological leadership Time to market Employee training and satisfaction

17. Perspectives are Interrelated Innovation pleases customers which are necessary for good financial results Good financial results make financing improvements possible

18. Overall Concepts Not just a set of measures Measures must relate to strategy Critical success factors Measures are interrelated Must understand how the perspectives influence each other

19. Overall Concepts Not a quick process Implementation requires Thought Analysis Data-gathering Time

20. Overall Concepts Thought What is our strategy? What is critical to implementing the strategy? How can we measure our progress?

21. Overall Concepts Analysis What are the linkages between functions? What drives the achievement of goals? What measures correlate with the drivers?

22. Overall Concepts Data-gathering What data is available? What isn’t? How should it be gathered? Reported?

23. Overall Concepts Time Cannot be done in an afternoon Successful implementation may take several months Never-ending process

24. 4 Original Business Perspectives Adapted from The Balanced Scorecard by Kaplan & Norton The Balanced Scorecard model suggests that we view the organization from 4 perspectives. Then Develop metrics, collect data and analyze it relative to each of these perspectives

25. 4 Business Perspectives Questions Financial What must we do to create sustainable economic value? Internal Business Process To satisfy our stakeholders, what must be our levels of productivity, efficiency, and quality? Learning and Growth How does our employee performance management system, including feedback to employees, support high performance? Customer What do our customers require from us and how are we doing according to those requirements?

26. Balanced Scorecard Measurements

27. Key Implementation Success Factors Obtaining executive sponsorship and commitment Involving a broad base of leaders, managers and employees in scorecard development Choose the right Scorecard Champion Beginning interactive (two-way) communication first Viewing the scorecard as a long-term journey rather than a short-term project Getting outside help if needed

28. Balanced Scorecard Example STRATEGY MAP BALANCED SCORECARD MEASUREMENT PROCESS: MANUFACTURING EXCELLENCE THEME: ROCE > xx%, VOLUME = xx,xxx units OBJECTIVES TARGET ACTION PLAN INITIATIVE BUDGET FINANCIAL PERSPECTIVE Improve Productivity OFFER PRODUCTS & SERVCIES THAT ARE CONSISTENT, TIMELY and LOW-COST Long-Term Shareholder Value ROCE > xx% Grow Revenue CUSTOMER PERSPECTIVE Operating Cost & Efficiency Capacity Utilization Capability Utilization Brand / Image Cost/Unit, Efficiency % Utilization Monthly Monitoring Weekly/Monthly Monitoring Monthly Monitoring Weekly/Monthly Monitoring Low Cost Manufacturing World-Class Quality Standards World-Class Delivery Timing Knowledgeable & Skilled Partner High Customer Satisfaction Reinforce Brand Image Man-hour per Unit Defect per Unit Sales Delivery Direct Pass Rate Market Feedback Sales Volume Weekly Monitoring Daily Monitoring Daily Monitoring Daily Monitoring Weekly Monitoring Monthly Monitoring Prod. & Sales Mtg. Low Cost World Class ENSURE OPERATIONAL EXCELLENCE WITH INNOVATION AS WELL BEING SOCIALLY RESPONSIBLE INTERNAL PERSPECTIVE Customer Satisfaction Enhance Brand Operational Excellence Process Innovation Alliances with SBUs Socially Responsible Productivity Delivery Continuous Improvement NPI Safety & Health Environment Cycle Time Meet Daily Plan WIP KAIZEN ICC Timely Introduction Industrial Accident Commuting Accident Toxic Waste Disposal ISO 9002 Hourly Monitoring Daily Monitoring Daily Monitoring Monthly follow-up Specific Programmed Weekly Follow-up Cross Audits Defensive Driving Facility Readiness Certification STRATEGIC JOB & SYSTEMS LEARNING & GROWTH PERSPECTIVE Skills Info. System Develop the Necessary Skills Information Systems Availability Strategic Awareness R&D & Development ALC, Procurement, Financial Alignment Training and Skill Build-up Set-up, Test and Validation Communication Programmed Trial Prod. Spare Parts Prod Warranty Cost t OPEX Rs. XX M CAPEX Rs. xx M

29. Balanced Scorecard Strategy Map

30. The Road to Disaster Senior management not committed No one else will be either Lack of consensus Lack of commitment

31. The Road to Disaster Consultants Good Provide needed expertise Bad Take over the project Consensus, commitment of employees is lost

32. The Road to Disaster Failure to communicate Employees don’t understand: Strategy Their roles Importance of the scorecard measures

33. The Road to Disaster Carve it in stone It won’t be perfect, ever Must evolve Delay implementation until perfect See above

34. The Scorecard as a Change Agent Four steps Translating the vision into action Communicating and linking Business planning Feedback and learning

35. Translating the Vision Strategy must be reduced to a set of objectives and measures which can be operationalized “We want to be the best” won’t do

36. Communicating and Linking Corporate strategy must be communicated to all levels Lower levels must have objectives linked to corporate objectives

37. Business Planning Integrate the financial plan with the business plan Use the scorecard to allocate resources to critical activities Avoids the short-term spending mentality

38. Feedback and Learning Monitor short-term results to determine if progress is being made toward long-term objectives May need to refine measures, activities, objectives, even strategy

39. The Principles of a Strategy-Focused Organization TRANSLATE STRATEGY CONTINUAL PROCESS ORGANIZATION ALIGNMENT EVERYONE’S JOB EXECUTIVE LEADERSHIP CEO Sponsorship Executive Team Engaged “New Way of Managing” Accountable for Strategy A Performance Culture Mission / Vision Strategy Maps Balanced Scorecard Targets Initiatives Linked to Budgeting Linked to Ops. Mgmt. Management Meetings Feedback System Learning Process Corporate Role Corporate - SBU SBU - Shared Services External Partners Strategic Awareness Goal Alignment Linked Incentives BALANCED SCORECARD Strategy Focused Organization

40. Beyond Balanced Score Card

41. Global Reporting Initiative

42. World’s most widely used standards for sustainability reporting Independent body Works closely with UNEP

43. Economic Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, retained earnings, and payments to capital providers and governments . Financial implications and other risks and opportunities for the organization’s activities due to climate change . Coverage of the organization’s defined benefit plan obligations Significant financial assistance received from government Policy, practices, and proportion of spending on locally-based suppliers at significant locations of operation Procedures for local hiring and proportion of senior management hired from the local community at locations of significant operation Development and impact of infrastructure investments and services provided primarily for public benefit through commercial, in kind , or pro bono engagement

44. Environmental Materials used by weight or volume . Percentage of materials used that are recycled input materials . Direct energy consumption by primary energy source . Indirect energy consumption by primary source Total water withdrawal by source . Total direct and indirect greenhouse gas emissions by weight . NO, SO, and other significant air emissions by type and weight Total water discharge by quality and destination Total weight of waste by type and disposal method Total number and volume of significant spills Initiatives to mitigate environmental impacts of products and services, and extent of impact mitigation . Percentage of products sold and their packaging materials that are reclaimed by category Monetary value of significant fines and total number of non-monetary sanctions for noncompliance with environmental laws and regulations

45. Labor Practices & Decent Work Employment Total workforce by employment type, employment contract, and region, broken down by gender …… Labor Management relation Occupational Health & Safety Training & Education Diversity & Equal Opportunity Equal Remuneration for Women & Men

46. Human Rights Investment & procurement practices Non-discrimination Freedom of association & collective bargaining Child labor Forced and compulsory labor Security practices Indigenous rights Assessment & Remediation

47. Society Local community Percentage of operations with implemented local community engagement, impact assessments, and development programs Operations with significant potential or actual negative impacts on local communities Corruption Public policy Anti-competitive behavior Compliance

48. Product Responsibility Customer Health & Safety Product & service labeling Marketing communication Customer privacy Compliance

49. Dow Jones Sustainability Index

50. Economic Dimensions Corporate Governance Risk and Crisis Management Codes of Conduct/Compliance/Anti-Corruption & Bribery Industry Specific Criteria Environmental Dimensions Environmental Reporting Industry Specific Criteria Social Dimension Human Capital Development Talent attraction and retention Labour practice indicators Corporate citizenship / Philanthrophy Social Reporting Industry specific criteria

51. BP Sustainability Index Environmental Impact Emission Nuisance (Noise, odour , visual) Carbon footprint Waste Economic Impact Taxes Dividends Reinvestment Social investment Money to contractors Resource Impact Oil & Gas Water Energy Raw Materials Intellectual capital Infrastructure (physical) Social Impact Jobs Health & Safety Tackling Poverty and Social Exclusion Equip people with skills to fulfill their potential Reduce proportion of unfit housing stock Reduce both crime and fear of crime Social impact of products

52. Scholarly developments Ranganathan , 1998 Socio-economic, socio-environmental and environmental-economic Parris & Kates 2003 Sustainability of Nature (Earth, Biodiversity, Ecosystems) through development of People (Child survival, Life Expectancy, Education, Equity) Sustainability of Life Support (Ecosystem services, Resources, Environment) through development of Economy (Wealth, Productive Sectors, Consumption) Sustainability of Community (Cultures, Groups, Places) through development of Society (institutions, Social Capital, States, Regions) Hubbard, 2006 : Beyond Triple Bottom Line Szekely and Knirsch , 2005

53. Economic Sustainability Matrix Environmental Sustainability Matrix Social Sustainability Matrix Total Income Earning before tax Net Income Earnings per share Total expenditure on purchase of goods, services and materials Equivalent monetary value of all benefit to staff Interest on liabilities and dividends Change in retained income Taxes paid to authorities State subsidies and assistance Donations to communities, civil societies and others in cash and in kind Investment in R&D Capital Expenditure Cash Flow Expenditure on Employee Health and Safety Total spending for culture and society Total cost of personnel Return on capital after tax Appropriation of funds to shareholders (dividends), to employees (wages, benefits), to the state (taxes, levies, duties etc), to creditors (interest) and to the company (reserves) % of employees in Environment Management Energy consumption Water consumption Emission of greenhouse gases Waste per employee per year Paper consumption Business travel Total material consumption Waste recycling Acceptance of return of used products Fines, sanctions and penalties for non-compliance Emission to water Volume of waste water Total spending on environmental protection CO2 emission Number of services identified with potential to contribute to sustainability Dust Emission Total number of employees Staff in Training Average participation of employees in education measures % proportion of female employees in management and executive positions Average fluctuation and net change in employment Practice of documentation of industrial accidents and illness Lost days/absence due to injuries in industrial accidents and work-related deaths Average hour of training / further training per employee Number of trainees Cost of personnel Disabled employees Idea management and employee participation programs Percentage of largest 25 suppliers that fulfill social criteria % of part time employees Number of employee projects Expenditure on training Average year of service of employees in company

54. Is mere reporting enough?

55. Economic Sustainability Matrix Environmental Sustainability Matrix Social Sustainability Matrix Return on Investment Earnings per share % of expenditure on purchase of goods, services and materials on Total income Equivalent monetary value of all benefit to staff on total income Interest on liabilities on total income Change in retained income Taxes paid to authorities on total income State subsidies and assistance received on total income % of income for Donations to communities, civil societies and others in cash and in kind % of income as Investment in R&D % of income as investment on Capital Expenditure % of income as total spending for culture and society Appropriation of funds to shareholders (dividends), to employees (wages, benefits), to the state (taxes, levies, duties etc), to creditors (interest) and to the company (reserves) in percentage of income % of employees in Environment Management Energy consumption per unit currency of income Water consumption per unit currency of income Emission of greenhouse gases in ppm Waste per employee per year Paper consumption per employee Business travel expenses per unit currency of income Weight of material consumption per unit currency of income % Waste recycling % Acceptance of return of used products Fines, sanctions and penalties for non-compliance as % of total income Emission to water in ppm per unit currency of earning Volume of waste water as % to total water consumed % of income as total spending on environmental protection CO 2 emission in ppm Dust Emission in ppm Number of services identified with potential to contribute to sustainability % of income as investment in energy efficient and non-polluting technology % of natural raw materials procured with proper documentation % of total income invested for tree plantation, soil conservation, rainwater harvesting etc Total number of employees upon investment % of staff in training % of employees encouraged /assisted for higher education and skill development % proportion of female employees in management and executive positions % of employees who have same sex orientation % of staff of lower caste % of staff of minority religion % of staff who are ex-military persons % of staff who are ex-militants or ex-convicts who joined mainstream of life % of employees from other provinces and from underdeveloped provinces Average fluctuation and net change in employment % Documented industrial accidents including near miss and illness upon total employee Lost man days/absence due to injuries in industrial accidents and work-related deaths Average hour of training per employee Total cost of personnel as % of income % of employees physically challenged % of employee participation ideas implemented % of largest 25 suppliers that fulfill social criteria % of part time employees Number of welfare projects % Expenditure on Employee Health and Safety % of income spent on training Average year of service of employees in company Number of child labor engaged as % of staff Reported cases of child labor, forced or involuntary labor as % of total staff Number of cases of harassment to opposite gender as % of total staff % of time wage delayed Total number of grievance reported upon total staff

56. Economic Sustainability Matrix Stakeholder Affected Positive Direction Return on Investment Owner ↑ % of expenditure on purchase of goods, services and materials on Total income Owner ↓ Equivalent monetary value of all benefit to staff on total income Society ↑ Interest on liabilities on total income Owner ↓ Change in retained income Owner ↑ Taxes paid to authorities on total income Society ↑ State subsidies and assistance received on total income Society ↓ % of income for Donations to communities, civil societies and others in cash and in kind Society ↑ % of income as Investment in R&D Environment / Society ↑ % of income as investment on Capital Expenditure Owner / Society ↑ % of income as total spending for culture and society Society ↑ Appropriation of funds to shareholders (dividends), to employees (wages, benefits), to the state (taxes, levies, duties etc), to creditors (interest) and to the company (reserves) in percentage of income Owner / Society ↑

57. Environmental Sustainability Matrix Stakeholder Affected Positive Direction Energy consumption per unit currency of income Environment / Society ↓ Water consumption per unit currency of income Environment / Society ↓ Waste in unit per employee per year Environment ↓ Paper consumption per employee Environment ↓ Business travel expenses per unit currency of income Society ↓ Weight of material consumption per unit currency of income Environment ↓ % Waste recycling Environment ↑ % Acceptance of return of used products ↑ Fines, sanctions and penalties for non-compliance as % of total income Society ↑ Emission to water in ppm per unit currency of earning Environment ↓ Volume of waste water as % to total water consumed Environment ↓ CO2 emission in ppm Environment ↓ Dust Emission in ppm Environment ↓ % of income as total spending on environmental protection Environment ↑ Number of services identified with potential to contribute to sustainability Environment ↑ % of income as investment in energy efficient and non-polluting technology Environment ↑ % of natural raw materials procured with proper documentation Society / Environment ↑ % of total income invested for tree plantation, soil conservation, rainwater harvesting etc Environment ↑

58. Social Sustainability Matrix Stakeholder Affected Positive Direction Total number of employees upon investment Society ↑ % of employees encouraged /assisted for higher education and skill development Society / Shareholder ↑ % proportion of female employees in management and executive positions, Society ↑ % of employees who have same sex orientation, physically challenged, of lower caste, of minority religion, staff who are ex-military persons, who are ex-militants or ex-convicts who joined mainstream of life, from other provinces and underdeveloped provinces Society ↑ % Documented industrial accidents including near miss and illness upon total employee Society / Shareholder ↓ Lost man days/absence due to injuries in industrial accidents and work-related deaths Society / Shareholder ↓ Average hour of training per employee Society ↑ Total cost of personnel as % of income Society ↑ % of employee participation ideas implemented Society / Shareholder ↑ % of part time employees Society ↓ Number of welfare projects Society ↑ % Expenditure on Employee Health and Safety Society ↑ % of income spent on training Society / Shareholder ↑ Average year of service of employees in company Society ↑ Number of child labor engaged as % of staff Society ↓ Reported cases of child labor, forced or involuntary labor as % of total staff Society ↓ Number of cases of harassment to opposite gender as % of total staff Society ↓ % of time wage delayed Society ↓ Total number of grievance reported upon total staff Society ↓