FINANCIALS EXTERNAL The Balanced Scorecard

STRATEGY
Integrating Measurement, Plan-Do-Review
and Communication

INTERNAL LEARNING Business Process Knowledge Document

 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

What is included in this document. . . INTERNAL LEARNING

CONTENTS
CONTENTS

• Traditional Measurement- Benefits and Concerns

• Balanced Scorecard:
– Unique Features
– How it works

• Getting Started - The First Steps

• Integrating Balanced Scorecard and Plan-Do-Review

• Application Across the Business

Balanced Scorecard - T&T

2
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

Traditional measures, measures, measures, measures. . . INTERNAL LEARNING

TRADITIONALLY
TRADITIONALLY

Benefits
Benefits Concerns
Concerns

• Traditionally dominated by • Crucial elements to deliver

Financial add-ups, after the Strategies are overshadowed
event
• Proliferation of measures to
• Great for business turnarounds ‘check-up’ on lower levels

• A good place to start if the • Weak alignment of all measures

business has nothing - look to the Strategy for the group/
after the cash business

• Characterised as ‘driving
forward looking in the rear view
mirror’

......and
andwe
weseldom
seldomstop
stopto
tothink
think“what
“whatare
arethe
thekey
keypriorities”?
priorities”?

Balanced Scorecard - T&T

3
 BALANCED SCORECARD

The Balanced Scorecard has unique features as opposed

FINANCIALS EXTERNAL

STRATEGY

to traditional measurement approaches. . . INTERNAL LEARNING

FEATURES
FEATURES

Strategyis
Strategy isat
atthe
thecentre
centreof
ofthe
the
managementsystem
management system

Thefocus
The focusis
ison
onfactors
factorsthat
thatcreate
create
long-termvalue
long-term value Measurementis
Measurement is
usedto
used to
communicate,
communicate,
Measuresand
Measures andindicators
indicatorsare
arecascaded
cascaded
andtested
testedfor
foralignment
alignmentthrough
throughthe
the
notto
not tocontrol
control
and
organisation
organisation

TheScorecards
The Scorecardsare
arean
anintegral
integralpart
partof
ofthe
the
Plan-Do-Reviewmanagement
Plan-Do-Review managementprocess
process

.....with
.withthe
the emphasis
emphasison
ondrivers
drivers of
offorward
forwardperformance!
performance!

Balanced Scorecard - T&T

4
 BALANCED SCORECARD

To drive forward Performance you need some Lead

FINANCIALS EXTERNAL

STRATEGY

Indicators and Lag Measures. . . INTERNAL LEARNING

HOW
HOWITITWORKS
WORKS

LAG MEASURES
Heading LEAD INDICATORS
Heading
• Text
•• Petrol consumption ••• Text
Speed
• Oil consumption • Engine revs
• Tyre wear • Engine temperature
• Washer levels • Fuel level indicator
• Scratches and bumps • Oil level indicator
• Engine wear • Warning light status
• Speeding fines • Defensive driving
• Tiredness breaks

These
These are
EFFECT CAUSE may
measures
impact
of effect
on

......where
whereINDICATORS
INDICATORScontrol
controland
andcommunicate
communicateBEHAVIOUR
BEHAVIOUR
which will lead to a measurable result!
which will lead to a measurable result!
Balanced Scorecard - T&T
5
 BALANCED SCORECARD

Our Strategy is at the centre of the Measurement System,

FINANCIALS EXTERNAL

STRATEGY

reflected in 4 balanced critical success factors. . . INTERNAL LEARNING

HOW
HOWITITWORKS
WORKS

BalancedScorecard
Balanced Scorecard
Financial
Financial Quadrant
Quadrant
“How
“How do
do we
we look
look to
to
our shareholders?”
our shareholders?”

Customer
Customer Quadrant
Quadrant Internal
Internal Quadrant
Quadrant
“What
“What business
business
“How
“How do
do we
we look
look to
to
our
our customers?”
customers?” STRATEGY processes
processes are
value
are the
value drivers?”
drivers?”
the

Organisational
Organisational Learning
Learning Quadrant
Quadrant
“Are
“Are we
we (our
(our people)
people) able
able to
to
sustain innovation, change
sustain innovation, change
and
and improvement?”
improvement?”

Reference: “The Balanced Scorecard — Measures That Drive Performance, “Robert S. Kaplan, David P. Norton, Harvard
Business Review, Jan-Feb ‘92.
Balanced Scorecard - T&T
6
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

Our BSC ‘operationalises’ our Strategy. . . INTERNAL LEARNING

HOW
HOWITITWORKS
WORKS
Balancing Four Critical Success Factors
TheVision
The Vision

. . . by distilling If we Financial
Strategic Objectives succeed, how
will we
Profitability

down into Key look to our

shareholders
Growth

Result Areas then ?

Shareholder
Value

into Indicators and Customer

Measurements To achieve Cycle Time
our vision,
how must we Quality
look to our Service
customers?
Price /Cost

To satisfy our Internal

customers, Cycle Time
what business
processes Quality
must we
excel at? Productivity

To achieve Learning
our vision,
how will we Innovation
sustain Continuous
innovation, Learning
change and Intellectual
improvement? Assessment

Balanced Scorecard - T&T

7
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

A Good BSC will “tell the story” of your Strategy INTERNAL LEARNING

HOW
HOWITITWORKS
WORKS

CriteriaFor
Criteria ForAAGood
GoodBalanced
BalancedScorecard
Scorecard

Causeand
 Cause andEffect
EffectRelationships
Relationships
Everymeasure
Every measureselected
selectedshould
shouldbe
bepart
partofofaachain
chainof
of
causeand
cause andeffect
effectthat
thatrepresents
representsthe
thestrategy
strategy

A STRATEGY is a Linkedto
 Linked toFinancials
Financials
Set of Hypotheses Everymeasure
measureselected
selectedcan
canultimately
ultimatelybe
berelated
relatedto
to
Every
about Cause & financialindicators
indicators
financial
Effect
PerformanceDrivers
 Performance Drivers
AAbalance
balanceof
oflead
leadmeasures
measuresand
andlag
lagindicators
indicators

Measuresthat
 Measures thatCreate
CreateChange
Change
Somemeasures
Some measureswhich
whichcause
causethetheorganisation
organisation
tochange
to changeits
itsbehaviour
behaviourininsome
someway
way

Balanced Scorecard - T&T

8
 BALANCED SCORECARD

The real value of a Balanced Scorecard comes from a

FINANCIALS EXTERNAL

STRATEGY

focus on “Performance Drivers” not past results INTERNAL LEARNING

HOW
HOWITITWORKS
WORKS

StrategicObjectives
Strategic Objectives OutcomeMeasures
Outcome Measures(Lag
(LagIndicators)
Indicators) PerformanceDrivers
Performance Drivers(Lead
(LeadIndicators)
Indicators)

Financial •  Return on Equity

F1 - Meet Shareholder Expectation •  Combined Ratio

F2 - Improve Operating Performance Authority levels

for spending
F3 - Achieve Profitable Growth Business
Portfolio Mix Catastrophic Mgt of Budget
F4 - Reduce Shareholder Risk Losses assumptions

Acquisition/
Customer Retention
C1 - Improve Agents Performance (vs. plan)

C2 - Satisfy Target Policyholders Acquisition/

Retention
(by segment)

Business Mix
Internal (by segment)

I 1 - Develop Business in Target Markets Loss Ratio

Underwriting
Quality Audit
I 2 - Underwrite Profitably Claims
Frequency
I 3 - Align Claims with the Underwriting Claims Severity

I 4 - Improve Productivity Expense Ratio Velocity

coefficients

Learning Development &

Staff Training Plan
L1 - Upgrade Staff Competencies Productivity
L2 - Improve Access to Strategic Info
Balanced Scorecard - T&T
9
 BALANCED SCORECARD

There are some initial steps required to implement the

FINANCIALS EXTERNAL

STRATEGY

Balanced Scorecard process . . . INTERNAL LEARNING

FIRST
FIRSTSTEPS
STEPS

• Establish the Key Objectives for the Business/Supply

Chain/Site/Function to deliver the Strategy, in each of the BSC
critical success factors

• Distil the ‘precious few’ Key Result Areas (KRAs) to achieve the
deliverables within each Objective

• For each KRA, agree the Lead Indicators & Lag Measures which will
indicate progress to the deliverables

• Share and cascade these steps down through the Organisation, and
check for alignment and consistency

• Use the BSC as an integral part of the ‘Teams’ regular Plan-Do-

Review throughout the Organisation

......ititis
iscrucial
crucialto
toavoid
avoid ‘Analysis
‘AnalysisParalysis!’
Paralysis!’

Balanced Scorecard - T&T

10
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

Some tips for successful implementation INTERNAL LEARNING

FIRST
FIRSTSTEPS
STEPS

•• Form
Formaateam
teamand
andjust
justget
getstarted!
started!
•• Get
Getan
an“Executive
“ExecutiveChampion”
Champion”who
whoreally
reallybelieves
believes--and
andis
iswilling
willingto
torole
role
model
modelthe
theplan-do-review
plan-do-reviewprocess
process
•• Work
Worktop-down
top-downand
andbottom-up
bottom-upand
andinvolve
involvemiddle
middlemanagers
managers
•• Brown
Brownpaper
paperthe
theas-is
as-isand
andto-be
to-beusing
usingthe
the“Scorecard”
“Scorecard”framework
framework
•• Keep
Keepititsimple
simple
•• Don’t
Don’tget
getbogged
boggeddown
downwith
withjargon
jargonor
ortheory
theory
•• Make
MakeKPI
KPIcharts
chartsand
andgraphics
graphicsvisible
visible
•• Pilot
Pilot and
andcreate
createaarole
rolemodel
model--you’ll
you’llbe
beamazed
amazedat
athow
how
fast
fastpeople
peoplecopy
copyitit
•• Establish
Establishaareview
reviewprocess
processquickly
quickly

The
Thepower
powerof
ofthe
theprocess
processwill
willspeak
speakfor
foritself!
itself!

Balanced Scorecard - T&T

11
 BALANCED SCORECARD

The change/project team will need a

FINANCIALS EXTERNAL

STRATEGY

charter for their BSC. . . EExxaam

mpple
INTERNAL LEARNING

FIRST
le
FIRSTSTEPS
STEPS

OBJECTIVES
OBJECTIVES ACTIVITIES
ACTIVITIES DELIVERABLES
DELIVERABLES CSFs
CSFs
•• Development
Development of ofaa single
single aligned
aligned •• Share
Share best
best practice
practice inin balanced
balanced •• Creation
Creation andand delivery
delivery of ofBSC
BSC •• Creation
Creationof ofkey
key
set
set of
ofbusiness
businessperformance
performance scorecards
scorecards and and implementation
implementation and
and KPIs
KPIs aligned
aligned to to the
the ‘to be’ supply
‘to be’ supply
measures chains
measuresfor forM&S
M&S and and the
the ‘watch-outs’
‘watch-outs’ business
businessstrategy
strategy chains
supply chain
supply chain •• Agree •• Communication •• Articulation
Articulationof of
Agree with
withRBBRBB process
processforfor Communicationof of activities
activitiestoto the
•• Gain thesupply
supply
Gain commitment
commitment for for BSC
BSC development
development of BSCalongside
of BSC alongside core team and executives
core team and executives chains
among chainsintointoclear
clear
among M&SM&S management
management supply
supply chain
chainvision
vision and
and •• Documented
Documented linkages
linkages business
business
team/client
team/client group
group principles
principles and their orderof
and their order of objectives
•• vision
vision objectives
•• Clarify implementation
implementation
Clarify the framework for
the framework for •• SBOs
•• Commitment
Commitmentby by
implementation
implementationand and •• Create
Create work
work plan
planand
andGantt
Gantt SBOs M&S
M&S
management
management processes
processes to to chart
chart •• CSFs
CSFs management
management
follow construction of initial
follow construction of initial •• Review team
teamto to
Reviewcurrent
current KPIs
KPIsandandtargets
targets •• KPIs
KPIs andand targets
targets implement
scorecard
scorecard implementPDR, PDR,
•• Assist in delivery of KPIs
Assist in delivery of KPIs at at •• Plan
Plan for roll-out/cascade of
for roll-out/cascade of based
basedon on
•• Implement
Implement balanced
balancedscorecard
scorecard M&S
principles M&S management
management team/client
team/client KPIs/PDR
KPIs/PDR to to other
otherproduct
product agreed
agreedvision
vision
principles and
and associated
associated level
level supply
supplychains
chains at atall
alllevels
levels in
in and
andSBOs
SBOs
measures
measuresthroughout
throughout M&SM&S M&S organisation
•• Define M&S organisation •• Commitment
Commitmentby
•• Ensure Define and
and initiate
initiateaaPDR
PDR by
Ensure smooth transition from
smooth transition from process
process for M&S management
for M&S management •• Mechanism
Mechanism for foralignment
alignmentof of
GPM
GPMto toBSC
BSC
existing
existingmeasures
measuresto toKPIs
KPIs team/client implementation
implementation
team/client group
group top
topdown
down KPIsKPIs to to bottom
bottomup up (as
•• Ensure
Ensure we webuild
buildonon what
what isis KPIs (asclients
clientsof ofthe
the
•• Pilot
Pilot BSC
BSC using
using key
key individual
individual KPIs supply chain)
supply chain)
already
already in place andfocus
in place and focus on on product supply chains •• Pilot
the product supply chains Pilotrun
run for
forkey
key individual
individual •• Clearly
Clearlydefined
the new measures needed for
new measures needed for •• Obtain product
productsupply
supply chains
chains
defined
supply
supplychain
chain differentiation
differentiation Obtain timely
timely actual
actualdata
data for
for management
management
agreed
agreedKPIsKPIs •• Plan
Planfor
fortransition
transition from
from accountabilities
accountabilities
existing for
forthe
•• Discuss
Discuss targets
targets with
with M&S
M&S existing measures to
measures toKPIs
KPIs the
measures
management measures
management team/client group
team/client group
•• Develop
Developroll-out
roll-out plan
plan for
for
cascading
cascading

Balanced Scorecard - T&T

12
 BALANCED SCORECARD

The KPIs need to be prioritised in order to establish the

FINANCIALS EXTERNAL

STRATEGY

Top 3 measures per quadrant for focus INTERNAL LEARNING

FIRST
FIRSTSTEPS
STEPS

Question: Which measures have the highest impact?

High

Performance
Performance

Ease of
Implementation
Plan
Planand
and
Process
Processtoto
Reach 50%
Reach 50%
increase
increasein
in
sales
sales

Low
Low High
Impact
Balanced Scorecard - T&T
13
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

The “Balanced Scorecard” principles brought to life. . . INTERNAL LEARNING

BSC
BSC&&PDR
PDR
Senior
Management

CO FE AN
Team

EF RG
‘Group’

ST CT ISA
O
Strategy
Operations

IV T
Management

E I
Asset Team

VI EAD
Management

EF P E

L
SI E

ON
O
FI RA

ON R
Team

CI TI

EF ESO
EF RO

EN ON

AR SH

R
P

FE U
FI CE

T S
CI D

Y IP

CT RC
EN UR

O EAD
BJ E
L
T ES

IV ES
EC RS
TE EAD

EF RO

E
L

TI H
AM E

P
FE CE

CU ATI
VE IP
EF AN

S
CT S S
M
FE AG

ST SF
RS

IV ES
CT EM
HI

OM AC
CU QU
IV EN
P
CU LIV

RE
ST IR
DE

ST ER

ER TIO
O EM
O

T
M BL

M
ER E

ER EN
A

N
S

TS

......and
andcascaded
cascadedthrough
throughteams
teamsand
andindividuals,
individuals,to
tobe
bealigned
alignedto
to
the
theStrategy!
Strategy!

Balanced Scorecard - T&T

14
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

A BSC cascade can be directed through the line INTERNAL LEARNING

BSC
BSC&&PDR
PDR
EExxaam
mpple
le
Objectives Measures
• To invest wisely and thereby ensure • Successful implementation of capital
outstanding returns on capital projects, on time, within budget
investment at minimal risk

Progress of capital project

Procurement PTD Progress of engineering

aspects of project Project manager

Progress of all mechanical engineering work Project engineer

Progress of an engineering activity Engineering team

Individual contribution to progress Individual engineer

Balanced Scorecard - T&T

15
 BALANCED SCORECARD

Our Supply Chain BSC cascaded to include both line and

FINANCIALS EXTERNAL

STRATEGY

support functions within the project INTERNAL LEARNING

BSC
BSC&&PDR
PDR

The supply chain

balanced scorecard Steering Group Balanced
scorecards for
mpple
defines overall
EExxaam le strategic priorities Management Team
support activities
promote “Best
Practice” sharing

Supply Chain Balanced

Line Activities Support Activities
Scorecard(Overall Strategic Objectives)
Objectives Measures Sites Prc’ment Distr. Tolling Finance IT PTD
F1 Maximise profit x x x x x x x x
F2 Manage working capital effectively x x x x x x x x
F3 Invest wisely x x x x x x x x
C1 Retain customer loyalty x x
C2 Increase customer spend x x x x
C3 Attract new customers x x x x x x
O1 Build better & simpler for less x x x x x x x x
O2 Operate betters & simpler for less x x x x x x x x
O3 Supply better & simpler for less x x x x x x x x
O4 New technology better & simpler for less x x x x x x x x
P1 Retain the best x x x x x x x x
P2 Develop people to be the best x x x x x x x x
P3 Recruit the best x x x x x x x x
P4 Live the values Each function/site x
develops a scorecard
consistent with the
overall scorecard and Departments, teams
objectives and individuals can develop
plans consistent with the
functional objectives and
scorecard as well as supply
chain objectives

Balanced Scorecard - T&T

16
 BALANCED SCORECARD

The BSC is a solid foundation for our Plan-Do-Review

FINANCIALS EXTERNAL

STRATEGY

processes. . . INTERNAL LEARNING

BSC
BSC&&PDR
PDR
Examples of …with
…with
Balancing 4 Critical Success Factors
key meetings differing
differing
Frequencies
Frequencies
Establish
Establish E.G.
meetings charters Charter
meetings charters
Monthly/Quarterly
Board
Agree
Agree
accountabilities
accountabilities RACI Review
and
and KPIs
KPIs
Plan
Business Unit Monthly
Establish
Establish targets
targets
and
and definitions
definitions Do

Focus
Focuson
Focus on
on
variances
variancestoto
variances to Operations Weekly
target
plan
target

Assign/agree actions to
resolve variances:
What By When
Daily
whom Production
Balanced Scorecard - T&T
17
 BALANCED SCORECARD

We then linked the BSC with the PDR “traffic light”

FINANCIALS EXTERNAL

STRATEGY

system INTERNAL LEARNING

BSC
BSC&&PDR
PDR

Perf. Measure "A" "R"s Target for 2000 Explanation of Current Status Jan Feb

mpple
Engage sites

EExxaam
SNO le
Stretch SL Huddersfield

PPDDRR Deliver or better Seneffe resource issues are a concern Team launch NWT resources OK.
SNO Implementation BTT the 2000 SNO re. Bips implementation.Argentina amber. Guatemala meeting. PDR/RACI in place
programme Benefits down die to Syngenta effect. Draft cost reporting Mak deal signed.
Establish Asset Confirm PMP RACI Update site capacity
Asset Review Process JDH Review process Publish plan data and key drivers.

On hold till post merger Agree strategic

Manufacturing Strategy JDH principles.Agree bench-
marking for 2000.
Basis of Safety review Compliance and best
Global Processes MAK practice.

Establish GMST
Product Siting JDH as key decision
forum.
Budget $497m
Fixed Costs CB Target $486m

Some slippage, should be Problems with process,

G In control - On target A able to recover. No R immediate action required
immediate action
Report
Reportnot
notdue
due Report
Reportnot
notyet
yetdeveloped
developed

Balanced Scorecard - T&T

18
 BALANCED SCORECARD

We are making extensive use of the Balanced Scorecard

FINANCIALS EXTERNAL

STRATEGY

unique process right across the business. . . INTERNAL LEARNING

APPLICATION
APPLICATION

ingg
PPlalannnnin ring
MMaannuufafacctuturing

The ISOP, Supply Senior Management,

Chain ROPS, Yalding Asset Management
YROP and Shift Hand-over
levels

HHRR SSHHEE
International Supply Management of the
Chain Career Working SHE 2000
Party improvement plan
deliverables, by the
SHE Committees

.... ..to
todrive
driveforward
forwardand
andachieve
achieveextraordinary
extraordinaryresults!
results!

Balanced Scorecard - T&T

19
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

For further information or help. . . INTERNAL LEARNING

Please
Please contact
contact Andrew
Andrew Thurston
Thurston

1.
1. ‘The
‘The Balanced
Balanced Scorecard’
Scorecard’ Robert
Robert S.
S. Kaplan,
Kaplan, David
David P.
P. Norton
Norton
Harvard
Harvard Business
Business Review,
Review, Jan-Feb
Jan-Feb ‘92
‘92

Balanced Scorecard - T&T

20
 BALANCED SCORECARD
FINANCIALS EXTERNAL

STRATEGY

Glossary of Terms INTERNAL LEARNING

Set of measures, split into 4 sections or quadrants - Financial, Internal, External and
Balanced Scorecard People - which are all taken into account to ensure balance in achieving objectives

A formal, low technology way of mobilising people to follow an ongoing planning,

Plan-Do-Review implementation and review change process which is activity oriented

Lead indicators Indicators which show projected performance - present tense

Lag Measures Measures which show how well something has performed - past tense

Hypothesis A statement describing a state which needs to be proved or disproved

A summary, agreed by the team, of the Rational, Emotional, Political influences of their task OR
Charter The mission statement of a Natural Work Team which defines the primary areas of opportunity to
be addressed and worked.

Technique used in charting roles and responsibilities within a group/team.

RACI (R-Responsible. A- Accountable, C-Consulted, I-Informed)

Balanced Scorecard - T&T

21