Description
The balanced scorecard is a set of measures that gives a quick overall view of the per-formance of an organization or business unit. Measures are grouped into four perspec-tives: customer, internal business, innovation and learning, and financial. Within each perspective, measures chosen by the organization reflect its business strategy. At every level of the organization, measures, targets, and actions are chosen that support the overall organization scorecard. Thus, the balanced scorecard allows everyone to plan for and monitor improvement on the issues most important to the organization’s success.
When to Use For senior managers:
• When developing the organization’s mission and strategy, or . . .
• When communicating the mission and strategy throughout the organization, or . . .
• When planning programs and initiatives to achieve the organization’s goals, or . . .
• Later, when routinely reviewing the organization’s performance For everyone in the organization:
• Only after a balanced scorecard has been created for the entire organization or business unit
• When planning what areas to address for improvement, or . . .
• When assessing how well current processes are meeting the needs of the customer or the organization, or . . .
• When setting improvement goals and planning how to achieve them, or . . .
• When planning what measures to use to monitor your improvement efforts, either during initial trial of a new solution or during standardization
Procedure
The entire process of developing a balanced scorecard is beyond the scope of this book.
Here is a simplified outline to show the general concepts.
1 23 9 8 7
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For senior management:
1. Reach a consensus on the vision and strategy of the organization.
2. Consider what each of these four perspectives means for the organization:
• Customer
• Internal business
• Innovation and learning
• Financial
Decide whether the names should be changed to make the perspectives more meaningful for the organization, or even if a perspective should be added.
3. For each perspective, choose no more than five measures that would indicate progress toward achieving the organization’s strategy.
4. Choose ambitious targets for each measure that, when achieved, will bring the organization closer to its vision of excellence.
At every level of the organization—group or individual—the process is very similar:
1. Review the balanced scorecards for the organization and for the unit to which you belong. Make sure you understand what will be measured and what those
measures say about what is important to the organization.
2. Within each of the perspectives, choose no more than five measures at your level that indicate your contribution to the organizational measures.
3. Choose ambitious targets for your measures. This becomes your level’s balanced scorecard.
Everyone in the organization puts the balanced scorecard into action with these steps:
4. Identify actions that will achieve the targets. For each action, identify which measures will indicate success of the actions.
5. Set intermediate milestones for improvement in the measures. Include when the milestone will be reached as well as the numeric target.
6. Review the scorecard measures regularly. Adjust actions, milestones, targets, or even measures or strategy when necessary.
Example
Medrad, Inc., recipient of the 2003 Malcolm Baldrige National Quality Award, uses a balanced scorecard approach to ensure that the whole organization focuses on its strat-egy and vision and to guide making decisions and prioritizing resources. They have
renamed the perspectives using terms more meaningful to their organization and added an extra one to the standard four. Their perspectives are: exceed the financials (finan-cial), grow the company (innovation and learning), improve quality and productivity (internal business), improve customer satisfaction (customer), and improve employee growth and satisfaction.
Figure 5.9 shows the organization’s scorecard. Each of the five goals has a defined measurement method and a target. These long-term goals rarely change from year to year. Each year during the strategic planning process, senior managers confirm the scorecard goals and targets as well as 12 corporate objectives called the Top 12. Two of the objectives—achieve financials and achieve scorecard objectives—never change; the rest are one- to three-year programs critical to achieving the scorecard goals. Each month, the CEO communicates to all employees on the company’s performance on the scorecard goals, and the finance department publishes monthly scorecard goal results on the intranet.
Departments, teams, and employees create their own objectives supporting the scorecard goals and the Top 12 objectives. This process is called waterfalling. Many departments have their own scorecards to monitor their waterfalled goals. When cross-functional projects are selected, one of the criteria is the impact on scorecard goals.
Figure 5.10 shows how the objectives of the freight processing improvement team sup-ported Medrad’s corporate scorecard goals. Team members’ individual annual objec-tives included this project, thus linking their performance assessment and evaluation to corporate priorities.
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Corporate Goal Target
Exceed financials CMB (profit) growth > revenue growth 1
Priority Corporate Objective
2 C
Grow the company Revenue growth > 15% per year O 3
4
Grow CMB (profit) per employee > 10%
per year
Continuous improvement in Top Box ratings I 9
11 A
Improve employee growth and satisfaction
Continuous improvement in employee satis-faction above best-in-class Hay benchmark
See # 5 L
Figure 5.9 Balanced scorecard example.
See the Medrad story in Chapter 4 (page 55) for more information about their improvement process. Also, see the St. Luke’s Hospital story on page 69 for another example of a balanced scorecard.
Considerations
• The four perspectives were chosen to reflect the four most important aspects of organizational success:
– Customer perspective: What do our customers think is important? How do they think we are doing?
– Internal business perspective: In what business processes must we excel to satisfy our customers and shareholders?
– Innovation and learning perspective: Do we know how to change and improve, to keep up with a changing world?
– Financial perspective: Are the changes we make affecting the bottom line?
• Sometimes organizations using the scorecard change the names or add a perspective to reflect their unique circumstances. For example, 2003 Baldrige winner St. Luke’s Hospital of Kansas City uses for its perspectives customer satisfaction, clinical and administrative quality, growth and development, financial, and people.
• Traditionally, organizations tracked only financial measures. The other three operational measures provide a more complete picture of the sustainability of any financial results.
• The balanced scorecard is most successful when the measures reflect factors that are truly critical to the success of the organization. Then the actions chosen
Improve employee satisfaction Improve
quality and productivity Reduce
internal labor Make processes more robust
Process improvement
tools
Grow the company Exceed
financials
Figure 5.10 Project objectives support balanced scorecard goals.
to affect these measures will be ones that really matter. Because time and people-power are limited in any organization, the scorecard should show only a small set of the most critical measures and actions.
• The scorecard is balanced because it prevents an organization from creating improvements in one area that hurt the organization in another. For example, focusing only on financial measures could lead an organization to undermine product quality or timely delivery, which would upset customers and ultimately lose sales.
• The balanced scorecard also helps a group think about which of several ways of accomplishing a goal would be best for the organization overall. What effects will each solution have on all four perspectives of the scorecard?
• Because “what you measure is what you get,” the balanced scorecard is used more broadly as a management system. The thinking required to develop the measures makes it a powerful tool for focusing strategy. Senior managers clarify their vision and strategy, set a limited number of critical goals for the organiza-tion, and set priorities for actions to accomplish the goals. Organizations that use it as a management system get much greater results than those who adopt it only for performance measurement.
• Measures must be cascaded throughout the organization. At every level, a group must select measures, targets, and actions that will contribute to the changes desired by the organization.
• The balanced scorecard approach is a top-down way of setting goals that gets everyone pulling in the same direction. Goal-setting that works in the opposite direction—starting with frontline workers and moving toward upper management—creates an organization with mismatched, even contradictory, goals.
• Everyone must agree what the words of the scorecard mean. See operational definitions.
• Communication throughout the organization about the purpose, meaning, and data of the scorecard is critical.
• The assumptions and decisions that went into creating the scorecard should be reviewed frequently. Is the data available and accurate? Do the measures really capture all aspects of the vision the organization wants to achieve? Is the strategy leading us to our vision? Do changed circumstances call for changes in our measures, actions, or targets? The balanced scorecard is not cast in stone. It should be modified as the organization learns what measures are linked best to its strategy and what strategies lead to success.
• This is just an overview of a complex subject. See Resources for more information.
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benchmarking
Description
Benchmarking is a structured process for comparing your organization’s work practices to the best similar practices you can identify in other organizations and then incorpo-rating the best ideas into your own processes.
When to Use
• When you want breakthrough improvements, and . . .
• When you need fresh ideas from outside your organization, and . . .
• After your own processes are well understood and under control
Procedure Plan
1. Define a tightly focused subject of the benchmarking study. Choose an issue critical to the organization’s success.
2. Form a cross-functional team. During the first step and this one, management’s goals and support for the study must be firmly established.
3. Study your own process. Know how the work is done and measurements of the output.
4. Identify partner organizations that may have best practices.
Collect
5. Collect information directly from partner organizations. Collect both process descriptions and numeric data, using questionnaires, telephone interviews, and/or site visits.
Analyze
6. Compare the collected data, both numeric and descriptive.
7. Determine gaps between your performance measurements and those of your partners.
8. Determine the differences in practices that cause the gaps.
1
6 4
Adapt
9. Develop goals for your organization’s process.
10. Develop action plans to achieve those goals.
11. Implement and monitor plans.
Example
The example for the Gantt chart, Figure 5.67 on page 272, describes a typical plan for a benchmarking study. The arrow diagram example, Figure 5.8 on page 105, discusses the same study.
Considerations
• Various benchmarking processes have been published that range from four to ten steps. The procedure here is intended to simplify a complex process. Before beginning to benchmark, study the references listed in the Resources.
• This process is a quality improvement model. The major difference between it and other models is that benchmarking gets ideas from outside the organization, whereas other improvement methods get ideas from within. Also, the benchmark-ing process is usually focused on a subject where dramatic changes, not incremen-tal improvements, are needed.
• If you are using benchmarking as a tool within another improvement process, steps 1 through 3 and 9 through 11 are probably included in the other process.
• Before an organization can achieve the full benefits of benchmarking, its own processes must be clearly understood and under control. Before jumping into benchmarking, an organization should establish a quality improvement process that teaches it how to improve and how to work together across functions.
• Benchmarking studies require significant investments of manpower and time—up to a third of the team’s time for five or more months—so management must champion the process all the way through. They also must be ready and willing to make changes based on what is learned.
• Too broad a scope dooms the project to failure. A subject that is not critical to the organization’s success won’t return enough benefits to make the study worth-while.
• Inadequate resources can also doom a benchmarking study. This problem can be caused by taking on too large a subject or underestimating the effort involved. But it also can be caused by inadequate planning. The better you prepare, the more efficient site visits will be.
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• Sometimes site visits are not necessary if information can be transferred in other ways. Using technology well also reduces costs.
• It’s tempting to say, “Let’s just go see what Platinum Star Corporation does. We don’t need all that up-front work.” Don’t. The planning phase sets the stage for maximum learning from your partners.
• A phrase has been coined for benchmarking that skips the planning and adapting phases: industrial tourism. If you don’t transform what you’ve learned into changes to your organization, you’ve wasted a lot of time, money, and effort.
• Sometimes changes are rejected because “that won’t work here,” “we already tried that,” or “we’re different”—the notorious “not invented here” syndrome. This problem can be avoided by establishing strong management support up front, including on the benchmarking team people who actually do the process, and communicating well to the organization the benchmarking process, the specific findings, and proposed changes.
• During the first project, the organization is learning the benchmarking process while doing it. The first time doing something usually is difficult. Hang in there, then go benchmark something else.
• See benchmarking in Chapter 2 for more information about this mega-tool.