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October, 2003

Making Scorecards Actionable Newsletter # 5/2003

Content of Making Scorecards Actionable Newsletter # 5/2003

» Our Opinion
» Balanced Scorecard In The Media
» Lessons Learned From Completed Scorecard Projects
» Elaboration On Key Design Issue #5: How to Balance the Incentive Systems



OUR OPINION

Ten years ago when BSC was new, it was sometimes viewed as a substitute for budgets. Proponents pointed out the limitations of using financial metrics as the primary tool for formulating responsibilities and monitoring performance, and so it was quite natural to set up BSC as a replacement for budgeting.

Some companies took a more sophisticated position, and noted that budgets fulfil multiple roles. While scorecards are superior to conventional budgets as contracts for an organization’s tasks during the next year, budgets will often have had other uses as well. These may require scorecards to be complemented by other tools. In fact, budgets have often been ‘jack-of-all-trades’, and not particularly good at any of them. For instance, using the budget to predict cash flows or currency positions could be substituted by improving an organization’s forecasting, eg introducing rolling forecasts. Indeed Nordea, one of the case companies described in Making Scorecards Actionable, is one among a growing number of companies whose new planning system combines scorecards, rolling financial forecasts, and service level agreements. Budgets used to fulfil all of these tasks.

So should you abolish budgeting when introducing BSC? We believe there are several parts to this question.

One is what kind of budgets you have used. At least since the early 1970s, budget literature has advocated that budgets should relate closely to action plans where various non-financial metrics would be used. Although these will rarely have been presented in such an organized way as the scorecard, or have been based on explicit cause-and-effect linkages like a scorecard, good and strategy-based budgets may sometimes come quite close. If so, this experience should of course be utilized, and scorecards will be experienced mainly as a more complete budget.

Another is what amount of detail budgets have contained. Already thirty years ago, proponents of management by objectives encouraged broad performance objectives and local freedom to select the means to fulfil the objectives. When scorecards are introduced, managers no longer should be responsible for large numbers of separate line items like in the old budget. They will, however, be responsible for the financial performance agreed together with their scorecards!

This also has to do with the level of organization we are considering. In large corporations, top executives will be relatively more interested in financial performance – preferably not just quarterly earnings, but still financial metrics will play a stronger role.

Budgets will not go away. The financial perspective in a scorecard can be seen as a rudimentary budget. For some purposes more detailed budgets may still be needed as a supplement to the scorecard. This requires a conscious design, suited to the new situation. Maybe the biggest problem with budgets is that they have not been sufficiently adapted to the company on hand and its situation?



BALANCED SCORECARD IN THE MEDIA
By Carl-Johan Petri

In this issue of the Making Scorecards Actionable Newsletter we will look into an American company’s experiences from working with scorecards. What is interesting to note in this article, which was published in Strategic Finance in July 2003 (Gumbus, 2003), is how the company – Futura Industries – has switched interest from the outcome oriented metrics in the financial perspective to the driving indicators in the “Learning and Growth perspective”. According to Susan Johnson, president of Futura, her and the company’s deliberate attention to the learning and growth perspective has yielded impressive results; a 50% increase in revenue without adding personnel from 1996 to 1999.

When the managing director joined Futura she set out to transform the company into a people-oriented business. This was not an obvious decision since the company operated in a very traditional industry; aluminium extruding. Typically, companies in this industry focused on optimising the production plants or forcing the suppliers to lower their prices. Instead Johnson decided to start the development of the business from the Learning and Growth perspective. Her idea was simple; it is the people that are driving this enterprise.

Demonstrating a true interest in the employees require more than just pointing out the personal side of the equation in the scorecard. To actually show that the employees are essential to the business, the company decided to perform a set of different surveys. By doing this they also acquired knowledge about the situation in the company and what was important to the employees. The company decided to work with a set of different surveys; Based on a Gallup survey, the company could find out how happy the employees were with their job, what made it difficult to do their job, if they had the support to be successful, who made up their support network, where they got information about the company, and how to improve communications. Employees were asked if they saw themselves employed at Futura in a couple of years, if they were comfortable with their teammates, and if they had confidence in the company's leadership. By doing this the HR function could collect a wealth of knowledge about the employee's work-life issues – positive as well as negative.

The annual Leadership Survey on the other hand, asked the employees how their manager could improve his leadership and management skills in order to increase their efficiency and contribute to better communication between manager and employee.

For example, the survey asks whether the manager:

· Provide opportunities to understand the big picture,
· Show courtesy and respect for people,
· Keep the team productive in periods of constant change,
· Take initiative to get things done, and
· Avoid backbiting and gossip.

According to Johnson there is an obvious link between the investments that are made within the Learning and Growth Perspective and financial returns. These investments, and the immediate results of them, can be monitored through the different surveys used by Futura. And, the satisfying results in these surveys also correlate with better performance in the customer- and process perspectives – which together contribute to deliver a 50% increase in revenue without adding personnel from 1996 to 1999.



LESSONS LEARNED FROM SCORECARD PROJECTS
By Nils-Göran Olve

Some years ago, one of us advised a company who wanted to introduce scorecards for its administrative functions. Obviously, as consultants we would have been happier if the entire organization had been our client, but we still felt that the Service manager who contacted us should go ahead and try. His department consisted of Personnel, Finance, IT, janitor and legal services, a total of just 50 people in two different towns. Resources would not allow a large consultancy job, nor did we think one was necessary.

Instead, we used a series of seminars and quarterly follow-up meetings to design, monitor and discuss the tasks of these units. Early in the project, we encouraged the service employees themselves to go out and interview their internal clients. This turned out to be quite interesting, as neither ‘suppliers’ nor ‘customers’ had taken time off previously to sit down and discuss mutual expectations. This was when this company was in the process of introducing an improved range of self-services over its intranet, and the interviews triggered quite interesting discussions whether the service employees should give priority to personal service to their clients, or devote time to improving the contents of the intranet services.

The project focussed on quite informal scorecards, and a number of the metrics were more like promises that certain changes should have been made before a certain date, or at least specified progress made towards that goal. As for the design issues identified in Making Scorecards Actionable, some were difficult to handle in this project:

· There was no proper strategy map provided by higher management – the Service department had to find out itself what its role might be. We believe this may often be the case, and its scorecard then becomes its own proposal to top management – a ‘bid’ to play a more specific part in the development of the organization.
· The dialogues where scorecards would be used were informal and local ones, which made it difficult to get sufficient priority for the project. Although it was commissioned by the department head, the impression was that BSC was viewed mostly as a way of improving discussions that should have taken place anyway – maybe not a bad achievement, but not a full-blown BSC project.
· For this reason, roles and IT support were not really addressed, nor were incentives.

Still, in considering various BSC projects in our experience, we find this application quite interesting. It proves that a local group of employees, with some support from outside, can find it beneficial to use the scorecard as a format for working on their own understanding of their task, in the process also developing their understanding of their clients needs.



ELABORATION ON KEY DESIGN ISSUE #5: HOW TO BALANCE THE INCENTIVE SYSTEMS
By Carl-Johan Petri

The feasibility of a reward system is contingent on many factors in the organization. Hence, it is impossible to say whether incentives will support a balanced scorecard project or not. When planning to implement an incentive system, the first question to answer must be whether the system’s main purpose is “behavioural control” or “profit sharing”. If it is profit sharing, the incentive schemes will primarily serve as a method to distribute a profit between the members in the organization. A scorecard structure could thus be used to summarize an individual’s or a group’s performance. The performance evaluation hence defines how the profit will be distributed between the employees (an alternative distribution mechanism would, for example, be to split the profit equally between all employees).

Another decision that must be made at this state is of course which profit to share. Most organizations calculate profits at various levels in the organization: an internal profit center may show one profit, the company may show another profit and (if applicable) the corporation may show yet another profit. It is important that the profit sharing system strike a balance between cooperation on the one hand and suboptimisation on the other. Sharing one’s own unit’s profit may result in suboptimisation (but also create a sense that the employee can influence the result), while sharing the next level’s profit may promote cooperation (or be perceived as irrelevant because such results are too remote).

If the incentive scheme, on the other hand, mainly will be used to influence behaviour, it is important to think about the reward package in another way. The money used to fuel the incentive model should be seen as an operating cost, and should not be conditioned to whether the company is making a profit or not. This cost is incurred based on operational performance – not on financial performance. Hence, it might be the case that the “rewards” (if the company is true to its balanced scorecard beliefs) are paid even though the company is making a loss.

Regardless the discussion above, there is one general reason why incentives should be linked to the scorecard. This reason does not, primarily, focus on the stimuli-response logic inherent in most reward structures, but rather on management’s responsibility to demonstrate their belief in the scorecard. If the company is prepared to reward its employees for their efforts in the customer, process, and learning and development perspectives – it conveys that it believes in the hypotheses in the scorecard. For no other reason, this might be enough of a trigger to institute some kind of reward system, linked to the balanced scorecard.








MAKING SCORECARDS ACTIONABLE NEWSLETTER is a bi-monthly update on our experiences and opinions on how scorecards and strategy maps can be made actionable – to help organizations realize their intended business strategies. The newsletter is compiled and distributed for free by the authors of the book “Making Scorecards Actionable – Balancing Strategy and Control”. Also make sure to check out www.makingscorecardsactionable.com to get up to date information about our seminars, to evaluate your organization’s BSC skills according to our computerized BSC Analyser and to download presentations from the document archive.
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