Balance Business Score Card
Information Age
The current era is driven by the information. It is a revolutionary transformation and industries are competing in this revolutionary era with the help of information, so the competition is now an information age competition. This era is more revolutionary for service industries and particularly for industries like electrical utilities because of regulatory regime and pressure from all the stakeholders. So in this era, service industries including electrical utilities require new capabilities, continuous improvement and innovation, efficient management of assets etc.
The major requirement can be broadly classified as follows:
• Customer relationship development;
• Efficient and effective service;
• Meeting the customer expectations – introduce innovation through new and better products/services;
• Provide services at a low cost with shortest possible turn around time; and
• Systems and processes development, IT deployment.
It becomes imperative for organizations to compete and to meet the expectations of Customers, Shareholders and Employees. The organizations are adopting different management tools e.g. Benchmarking, Balanced Score Card, TQM, etc. and at the same point of time turning themselves to a variety of improvement initiatives viz. reengineering, activity based cost management,customer focused environment, employee empowerment etc. Moreover now-a-days things are changing so fast that one can say – “ONLY CONSTANT IS CHANGE” and organizations not only need to focus and manage the customer, financials, internal business processes and learning & growth aspects effectively and efficiently but also they require to realign their vision and strategy as indicated by the environment and business needs. We will discuss in subsequent section the importance of traditional model and need to have balanced score card to understand the transformation and the advantages of balanced scorecard over the traditional model to meet the growing demand created by the information age.
Traditional Model
The traditional model talks only about the finance and the financial accounting model. The results are published periodically may be in the form of quarterly and annual financial reports. This model is still used extensively to meet the requirement of the law of land and to build internal assets and capabilities and even for external parties’ strategic alliance. This financial accounting model does not reflect say the quality of services, employee engagement – their motivation level, productivity, etc. customer satisfaction and their loyalty.These intangible assets are not included and reflected in the financials reports but these are the assets and capabilities which determine the competitive edge and the success of business in coming years and today.
Introduction to Balanced Score Card (BSC)
We see that the traditional model does not reflect the importance of intangible assets, their capturing and measuring mechanism and does not reflect the future prospects of the business. It is a collision between the long term capabilities & competitive edge at one end and the historical-cost which isimmovable i.e. movable and immovable. The balanced score card includes measures of the drivers of future performance with the financial measures of past performance. It addresses the core issue of creation of future value through investment in technology, processes, innovation (for information age competition), employees, share holders and customers.Kaplan and Norton who are considered the father of Balanced Score Card,developed this card which addresses all the requirement. They describe the innovation of this card as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives. The pictorial representation of this model is shown below:
Information Age
The current era is driven by the information. It is a revolutionary transformation and industries are competing in this revolutionary era with the help of information, so the competition is now an information age competition. This era is more revolutionary for service industries and particularly for industries like electrical utilities because of regulatory regime and pressure from all the stakeholders. So in this era, service industries including electrical utilities require new capabilities, continuous improvement and innovation, efficient management of assets etc.
The major requirement can be broadly classified as follows:
• Customer relationship development;
• Efficient and effective service;
• Meeting the customer expectations – introduce innovation through new and better products/services;
• Provide services at a low cost with shortest possible turn around time; and
• Systems and processes development, IT deployment.
It becomes imperative for organizations to compete and to meet the expectations of Customers, Shareholders and Employees. The organizations are adopting different management tools e.g. Benchmarking, Balanced Score Card, TQM, etc. and at the same point of time turning themselves to a variety of improvement initiatives viz. reengineering, activity based cost management,customer focused environment, employee empowerment etc. Moreover now-a-days things are changing so fast that one can say – “ONLY CONSTANT IS CHANGE” and organizations not only need to focus and manage the customer, financials, internal business processes and learning & growth aspects effectively and efficiently but also they require to realign their vision and strategy as indicated by the environment and business needs. We will discuss in subsequent section the importance of traditional model and need to have balanced score card to understand the transformation and the advantages of balanced scorecard over the traditional model to meet the growing demand created by the information age.
Traditional Model
The traditional model talks only about the finance and the financial accounting model. The results are published periodically may be in the form of quarterly and annual financial reports. This model is still used extensively to meet the requirement of the law of land and to build internal assets and capabilities and even for external parties’ strategic alliance. This financial accounting model does not reflect say the quality of services, employee engagement – their motivation level, productivity, etc. customer satisfaction and their loyalty.These intangible assets are not included and reflected in the financials reports but these are the assets and capabilities which determine the competitive edge and the success of business in coming years and today.
Introduction to Balanced Score Card (BSC)
We see that the traditional model does not reflect the importance of intangible assets, their capturing and measuring mechanism and does not reflect the future prospects of the business. It is a collision between the long term capabilities & competitive edge at one end and the historical-cost which isimmovable i.e. movable and immovable. The balanced score card includes measures of the drivers of future performance with the financial measures of past performance. It addresses the core issue of creation of future value through investment in technology, processes, innovation (for information age competition), employees, share holders and customers.Kaplan and Norton who are considered the father of Balanced Score Card,developed this card which addresses all the requirement. They describe the innovation of this card as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives. The pictorial representation of this model is shown below:
 |
| Four Perspectives of an Organisation |
Strategic Perspective
Strategic perspectives cover functions such as revenue, customer satisfaction,people, process and technology. Every organisation needs a strategy to survive and grow on its own within business environment in which it finds itself. Understanding of business environment starts with identification of the internal and external forces that shape its business.Some dimensions of the forces that act on a business are:
(a) Internal dimension that includes employees, assets, technology and capital.
(b) External forces that impact or shape the course of an organisation in the business of power can be broadly classified into: Government Policies,Regulatory Policies, Socio-economic Environment, Competition-Industry Structure.
Organizational strategy for its survival, growth and performance improvement is decided only after careful detailed analysis of the business environment.Generally management thought has been centred on the mechanistic view of the strategy, structure and systems. Bringing in the customer focus, people issues and process view helps the company in ensuring a balanced approach towards its environment.
The core of Balanced Score Card (BSC) approach is bringing customer focus as the key driver into the whole process of strategy making. The balanced scorecard is nothing but management by fact and it comes from measurement. Balanced scorecard allows the managers to see their company more clearly. The Baldrige Criteria (1997) booklet reiterates this concept of fact-based management:
"Modern businesses depend upon measurement and analysis of performance.
Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect – that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors' or with 'best practices' benchmarks."
"A major consideration in performance improvement involves the creation and use of performance measures or indicators. Performance measures or indicators are measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company's goals. Through the analysis of data from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals."
Managing Strategy through BSC
The Balanced Score Card (BSC) proposes four new management processes that separately and in combination, contribute to linking long-term strategic objectives with short-term actions. The processes are:
(i) Translating the Vision
• Clarifying the vision
• Gaining consensus
(ii) Communicating and Linking
• Communicating and Educating
• Setting goals
• Linking rewards to performance measures
(iii) Business Planning
• Setting targets
• Aligning strategic initiatives
• Allocating resources
• Establishing milestones
(iv) Feedback and Learning
• Articulating the shared vision
• Supplying strategic feedback
• Facilitating strategy review and learning
The balanced scorecard can be used as the foundation of an integrated and interactive strategic management system. Kaplan and Norton (1992) have mentioned that many organizations are using the BSC to: Clarify and update strategy Communicate strategy throughout the company
Align unit and individual goals with the strategy Link strategic objectives to long-term targets and annual budgets Identify and align strategic initiatives Conduct periodic performance reviews to learn about and improve strategy.
Strategy-Focused Organization
Organization need to focus on five principles for the successful implementation of strategy. Organizations will rarely adhere to all five principles but exemplary organization typically incorporate much of the thinking.
These five principles are:
Principle 1 : Translate the strategy to Operational Terms Sub-Components : Strategy Map and Balanced Score Card (BSC)
Principle 2 : Align the organization to the strategy Sub-Components : Corporate roles, business unit synergies and shared service synergies
Principle 3 : Make Strategy Everyone’s Everyday Job Sub-Components : Strategic awareness, personal scoreboard and balanced pay checks
Principle 4 : Make strategy a continual process Sub-Components : Link budgets and strategies, analytics and information systems, and strategic learning
Principle 5 : Mobilize change through executive leadership Sub-Components : Mobilization, governance process and strategic
management system BSC and KPI
Every successful organization measures its performance across the following parameters, for dissemination to all stakeholders:
• Financial parameters – Profitability, sustainable growth;
• Customer focus – customer satisfaction, surveys, complaints handled;
• Business process improvements – reduction of losses, costs, cycle time, etc.; and
• Learning and growth – training, staff satisfaction, attrition, etc.
This is represented as a balanced scorecard for an organization that not only looks at the operating and financial parameters but also at the learning, growth within the organization and its customer focus.Thus, each strategic perspective can be sliced across various facets of the organization and studied. It is also important that all strategic perspectives are tied to the critical success factors of the organization i.e. goals/activities that must be carried out to ensure the success of the organization. This can be measured in financial, technical or customer parameters.If one were to develop the strategic perspectives across the four distinct zones(as presented in BSC) for a distribution company, it can be along the lines as given in the diagram below.
Once the strategic perspectives are defined (closely aligned with the critical success factors), the next step is in developing the goals. Goals should be specific and be measurable.If the company proposes “Profitability” in its financial perspective, this should lead to development of goals such as ‘Return on Capital Employed’, ‘Asset Utilisation’, ‘Subsidy Reduction’, ‘Internal Resources Generation’, etc. it can be seen that each of the measures is specific and measurable and ties with the definition of profitability goal.
These goals are then converted into measurable parameters and described as Key Performance Indicators (KPIs). The KPI is not a raw data point but a meaningful analysis of critical data that measures the goal.This entire system emphasis of measurement as the building block. The KPI is a very important tool for implementation of Balanced Score Card. One cannot improve; one cannot introduce any new concept/technology unless you measure. KPI not only defines what to measure, how to measure but provides a that with the help of Balanced Score Card, overall strategy can be developed/realigned.
The KPIs help to prepare the matrix for balanced scorecard. The weightage can be assigned to each KPI to know the score. The overall result would show the current status and on the basis of which management can take the decisions for future course of action.Balance scorecard (BSC) system can be used to understand how to implement strategic initiatives that help an organization to achieve its mission/vision. BSC is a tool that helps in communication of strategic initiatives,measuring strategy, aligning the organization and a system of performance reviews.
There are three critical success factors in implementing the Balanced Scorecard.
(1) The active and visible support of senior management;
(2) A strong review process; and
(3) A knowledge team to drive and support scorecard deployment.
The balanced scorecard provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company’s competitive, market and technological environments.
References
1. Development, Management and Monitoring of Key Performance
Indicators: P. Karthikeya in DRUM Training Program Manual.
2. David P. Norton, Robert S. Kaplan: The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, 1996.
3. David P. Norton, Robert S. Kaplan: The Strategy-focused Organization,Harvard Business School Press, 2001.
4. J. Creelman, N. Makhijani: Succeeding with the Balanced Scorecard, John Wiley & Sons, 2005.
Performance Benchmarking through Indicators
There are several indicators method for benchmarking. It is also not possible to benchmark all the indicators, collect and analyze the data and take the corrective action upon gap analysis. Thus it becomes imperative to classify the indicators in certain category and choose the appropriate indicators method for that category. The indicators can be classified into three broad categories:
• Partial Indicators;
• Specific Core Indices; and
• Overall Performance Indicators.
Partial Indicators Method
The partial indicators method consists of calculating different measures of the financial, operating, commercial, and quality of a business’s performance.Past performance can provide information on improvements over time. These indicators account for the relationship of two simple measures, yielding indices of productivity, human capital development, or financial conditions, among others. Such performance indicators include, for example, the number of workers per one thousand connections, the percentage of loss, training hours,etc.
The ultimate purpose of the benchmarking exercise is to bring the step forward improvement and align the various business processes with the help of best practices to achieve the goal. Thus it becomes more important to select and tailor the set of indicators to the purpose and to the intended users.
Specific Core Indicators Method
This method emphasises to assign the responsibility and create the accountability. It is possible that for any of the main indicators, the stakeholder(s) do not have any kind of control on the processes governing the result of that indicator. It becomes imperative and helpful to supplement these indicators with specific core indicators. It will reinforce the effect of possible improvement actions.
Specific Core Indicators are widely used because they serve as a starting point for evaluating performance. The simple examples can be collections,network details related indicators.
Overall Performance Indicator Method
Overall Performance Indicator can be derived from a combination of few of the specific core indicators. The way this combination is usually performed is through a weighted average of core indices, where the weights reflect the importance assigns to each aspect of the firm performance, for an utility the weights may be assigned as per regulatory requirement/directive. These Indicator(s) provide a summary index and establish the relationship between functions of different departments. Thus it helps to communicate relative performance of wide stakeholders and abridge the gap between different functions.From a wider perspective, it helps the outside world to gauge the relative performance of different companies. For an utility, say regulator, may use these indicators to assess the relative efficiency of service companies.
Selection and Adoption of Best Practices
The balanced scorecard provides the current status with the help of KPIs. The exact area can be identified for focus. Once the focus area is selected, then the moot question remains – How to improve, what is the different methods-technologies-innovative products/service available and what should be the implementation strategy.The conceptual framework to define a model electric distribution company(DISCOM) can be selected through the People-Process-Technology taxonomy as shown in Figure.
Strategic perspectives cover functions such as revenue, customer satisfaction,people, process and technology. Every organisation needs a strategy to survive and grow on its own within business environment in which it finds itself. Understanding of business environment starts with identification of the internal and external forces that shape its business.Some dimensions of the forces that act on a business are:
(a) Internal dimension that includes employees, assets, technology and capital.
(b) External forces that impact or shape the course of an organisation in the business of power can be broadly classified into: Government Policies,Regulatory Policies, Socio-economic Environment, Competition-Industry Structure.
Organizational strategy for its survival, growth and performance improvement is decided only after careful detailed analysis of the business environment.Generally management thought has been centred on the mechanistic view of the strategy, structure and systems. Bringing in the customer focus, people issues and process view helps the company in ensuring a balanced approach towards its environment.
The core of Balanced Score Card (BSC) approach is bringing customer focus as the key driver into the whole process of strategy making. The balanced scorecard is nothing but management by fact and it comes from measurement. Balanced scorecard allows the managers to see their company more clearly. The Baldrige Criteria (1997) booklet reiterates this concept of fact-based management:
"Modern businesses depend upon measurement and analysis of performance.
Measurements must derive from the company's strategy and provide critical data and information about key processes, outputs and results. Data and information needed for performance measurement and improvement are of many types, including: customer, product and service performance, operations, market, competitive comparisons, supplier, employee-related, and cost and financial. Analysis entails using data to determine trends, projections, and cause and effect – that might not be evident without analysis. Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors' or with 'best practices' benchmarks."
"A major consideration in performance improvement involves the creation and use of performance measures or indicators. Performance measures or indicators are measurable characteristics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company's goals. Through the analysis of data from the tracking processes, the measures or indicators themselves may be evaluated and changed to better support such goals."
Managing Strategy through BSC
The Balanced Score Card (BSC) proposes four new management processes that separately and in combination, contribute to linking long-term strategic objectives with short-term actions. The processes are:
(i) Translating the Vision
• Clarifying the vision
• Gaining consensus
(ii) Communicating and Linking
• Communicating and Educating
• Setting goals
• Linking rewards to performance measures
(iii) Business Planning
• Setting targets
• Aligning strategic initiatives
• Allocating resources
• Establishing milestones
(iv) Feedback and Learning
• Articulating the shared vision
• Supplying strategic feedback
• Facilitating strategy review and learning
The balanced scorecard can be used as the foundation of an integrated and interactive strategic management system. Kaplan and Norton (1992) have mentioned that many organizations are using the BSC to: Clarify and update strategy Communicate strategy throughout the company
Align unit and individual goals with the strategy Link strategic objectives to long-term targets and annual budgets Identify and align strategic initiatives Conduct periodic performance reviews to learn about and improve strategy.
Strategy-Focused Organization
Organization need to focus on five principles for the successful implementation of strategy. Organizations will rarely adhere to all five principles but exemplary organization typically incorporate much of the thinking.
These five principles are:
Principle 1 : Translate the strategy to Operational Terms Sub-Components : Strategy Map and Balanced Score Card (BSC)
Principle 2 : Align the organization to the strategy Sub-Components : Corporate roles, business unit synergies and shared service synergies
Principle 3 : Make Strategy Everyone’s Everyday Job Sub-Components : Strategic awareness, personal scoreboard and balanced pay checks
Principle 4 : Make strategy a continual process Sub-Components : Link budgets and strategies, analytics and information systems, and strategic learning
Principle 5 : Mobilize change through executive leadership Sub-Components : Mobilization, governance process and strategic
management system BSC and KPI
Every successful organization measures its performance across the following parameters, for dissemination to all stakeholders:
• Financial parameters – Profitability, sustainable growth;
• Customer focus – customer satisfaction, surveys, complaints handled;
• Business process improvements – reduction of losses, costs, cycle time, etc.; and
• Learning and growth – training, staff satisfaction, attrition, etc.
This is represented as a balanced scorecard for an organization that not only looks at the operating and financial parameters but also at the learning, growth within the organization and its customer focus.Thus, each strategic perspective can be sliced across various facets of the organization and studied. It is also important that all strategic perspectives are tied to the critical success factors of the organization i.e. goals/activities that must be carried out to ensure the success of the organization. This can be measured in financial, technical or customer parameters.If one were to develop the strategic perspectives across the four distinct zones(as presented in BSC) for a distribution company, it can be along the lines as given in the diagram below.
Once the strategic perspectives are defined (closely aligned with the critical success factors), the next step is in developing the goals. Goals should be specific and be measurable.If the company proposes “Profitability” in its financial perspective, this should lead to development of goals such as ‘Return on Capital Employed’, ‘Asset Utilisation’, ‘Subsidy Reduction’, ‘Internal Resources Generation’, etc. it can be seen that each of the measures is specific and measurable and ties with the definition of profitability goal.
These goals are then converted into measurable parameters and described as Key Performance Indicators (KPIs). The KPI is not a raw data point but a meaningful analysis of critical data that measures the goal.This entire system emphasis of measurement as the building block. The KPI is a very important tool for implementation of Balanced Score Card. One cannot improve; one cannot introduce any new concept/technology unless you measure. KPI not only defines what to measure, how to measure but provides a that with the help of Balanced Score Card, overall strategy can be developed/realigned.
The KPIs help to prepare the matrix for balanced scorecard. The weightage can be assigned to each KPI to know the score. The overall result would show the current status and on the basis of which management can take the decisions for future course of action.Balance scorecard (BSC) system can be used to understand how to implement strategic initiatives that help an organization to achieve its mission/vision. BSC is a tool that helps in communication of strategic initiatives,measuring strategy, aligning the organization and a system of performance reviews.
There are three critical success factors in implementing the Balanced Scorecard.
(1) The active and visible support of senior management;
(2) A strong review process; and
(3) A knowledge team to drive and support scorecard deployment.
The balanced scorecard provides a framework for managing the implementation of strategy while also allowing the strategy itself to evolve in response to changes in the company’s competitive, market and technological environments.
References
1. Development, Management and Monitoring of Key Performance
Indicators: P. Karthikeya in DRUM Training Program Manual.
2. David P. Norton, Robert S. Kaplan: The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press, 1996.
3. David P. Norton, Robert S. Kaplan: The Strategy-focused Organization,Harvard Business School Press, 2001.
4. J. Creelman, N. Makhijani: Succeeding with the Balanced Scorecard, John Wiley & Sons, 2005.
Performance Benchmarking through Indicators
There are several indicators method for benchmarking. It is also not possible to benchmark all the indicators, collect and analyze the data and take the corrective action upon gap analysis. Thus it becomes imperative to classify the indicators in certain category and choose the appropriate indicators method for that category. The indicators can be classified into three broad categories:
• Partial Indicators;
• Specific Core Indices; and
• Overall Performance Indicators.
Partial Indicators Method
The partial indicators method consists of calculating different measures of the financial, operating, commercial, and quality of a business’s performance.Past performance can provide information on improvements over time. These indicators account for the relationship of two simple measures, yielding indices of productivity, human capital development, or financial conditions, among others. Such performance indicators include, for example, the number of workers per one thousand connections, the percentage of loss, training hours,etc.
The ultimate purpose of the benchmarking exercise is to bring the step forward improvement and align the various business processes with the help of best practices to achieve the goal. Thus it becomes more important to select and tailor the set of indicators to the purpose and to the intended users.
Specific Core Indicators Method
This method emphasises to assign the responsibility and create the accountability. It is possible that for any of the main indicators, the stakeholder(s) do not have any kind of control on the processes governing the result of that indicator. It becomes imperative and helpful to supplement these indicators with specific core indicators. It will reinforce the effect of possible improvement actions.
Specific Core Indicators are widely used because they serve as a starting point for evaluating performance. The simple examples can be collections,network details related indicators.
Overall Performance Indicator Method
Overall Performance Indicator can be derived from a combination of few of the specific core indicators. The way this combination is usually performed is through a weighted average of core indices, where the weights reflect the importance assigns to each aspect of the firm performance, for an utility the weights may be assigned as per regulatory requirement/directive. These Indicator(s) provide a summary index and establish the relationship between functions of different departments. Thus it helps to communicate relative performance of wide stakeholders and abridge the gap between different functions.From a wider perspective, it helps the outside world to gauge the relative performance of different companies. For an utility, say regulator, may use these indicators to assess the relative efficiency of service companies.
Selection and Adoption of Best Practices
The balanced scorecard provides the current status with the help of KPIs. The exact area can be identified for focus. Once the focus area is selected, then the moot question remains – How to improve, what is the different methods-technologies-innovative products/service available and what should be the implementation strategy.The conceptual framework to define a model electric distribution company(DISCOM) can be selected through the People-Process-Technology taxonomy as shown in Figure.
 |
| People-Process-Technology Taxonomy |
The next step involved the identification of the “best practices” which should be tailored to the conditions of individual DISCOM. A representative list of Best Practices is shown below in Figure.The few best practices which can further be assigned to individual KPIs are illustrated in Figure .
 |
| Representative List of Best Practices |
This list is just for illustrative purpose and not comprehensive but one has to remain vigilant throughout the life of product/service about the changes in processes, technology and realign the best practices accordingly. It is not one time panacea but a continuous journey.
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