032206PD_BSC 0 BALANCED SCORECARD CONSISTS OF PERFORMANCE INDICATORS COVERING DIFFERENT PERSPECTIVES … Financials Processes Markets/customers Employees Financial indicators, e.g., • Economic value added • EBITDA Indicators of process efficiency, e.g., • Status of efficiency improvement programs Indicators of employee structure, skills, and motivation, e.g., • Number of employees Indicators of revenue improvement and portfolio management, e.g., • Share of revenues, fulfillment of portfolio criteria (e.g., economic value added, core business) • A BSC covers performance indicators in four key areas and is used for steering as well as measuring individual performance • Performance indicators and their respective target values are derived stringently from strategy and planning • Steering of managers uses individualized BSCs in target agreement, strategy and forecast process 032206PD_BSC 1 … WHILE TYPES OF PERFORMANCE INDICATORS CAN BE DIFFERENT Types of performance indicators Definition/quantification Indicator • Figure used for measuring performance that is from within or outside an organization unit Project "traffic light" • BSC entry with three possible values – Red: Project plan cannot be adhered to – Yellow: Project plan can only be adhered to if special measures are taken – Green: Project is on track for the foreseeable future • Tracked by a project controller Survey • Results of a survey of internal or external customers within an organizational unit (OU), typically in the following categories – Quality of the service provided – Speed with which the service is provided – Degree of customer orientation • Data gathered by external service providers, internal department or the assistants to the supervisor/board concerned Evaluation by board/super - visor • Evaluation of an OU service along predefined categories • Filled out directly by the supervisor Objectivity (preference) 032206PD_BSC 2 • Result customer survey • Cancellation ratio EXAMPLES OF BALANCED SCORECARDS (1/2) Financial Customer/ market Process Employee Strategic goal • High profitability • Increased growth • Value generation Indicator • ROCE • Turnover growth/ market growth • DCF • High customer satisfaction • Reliability • Active customer management • Fast processing • Innovation leadership • Highly motivated employees • Percentage of large customers (turnover) • Processing time • Turnover new products/overall turnover • Employee satisfaction index Goal • > 15% • >102% • 300 Mio EUR p.a. • Top > 80% • < 0.5% • > 60% • < 1.5 • > 80% • < 3 days Perspective Lagging indicator Leading indicator 032206PD_BSC 3 SUMMARY: WHAT IS A BALANCED SCORECARD? • A set of metrics that is "balanced" across financial, operational and other, less quantitative dimensions • "A comprehensive set of performance measures that provides the framework for a strategic measurement and management system" • A method to translate an organization’s mission and strategy into a concrete set of metrics and targets • A tool to focus management attention on the achievement of a few critical strategic objectives • A method to capture critical information that may not otherwise be covered through normal reporting mechanisms • A flexible document that will vary from year - to - year and from level - to - level within a company • A set of purely financial and/or operational metrics • An exhaustive list of all KPIs that form a company's value drivers • A random list of metrics of targets that do not link with a company's overall goals • A comprehensive action plan on how to reach those goals • A mere restatement of KPIs used as part of regular reporting • A document that should be the same for all levels and functions What it is What it is not Quotation Source: The Balanced Scorecard, Robert S. Kaplan and David P. Norton 032206PD_BSC 4 EXPERIENCE WITH THE BALANCED SCORECARD IS GROWING BSC implemented Based on a survey of 194 leading German companies Source: A. Töpfer, G. Lindstädt, K. Förster, "Balanced Score Card", in Controlling 2/2002 Imple - men - tation ongoing To be imple - mented soon Familiar with BSC Unfamiliar with BSC More than half of all companies surveyed have already implemented or will soon implement a BSC system ... ... and most say they are seeing high benefits from BSC introduction BSC benefits perceived as high or very high (%) No BSC BSC +21% Strategic targets documented No BSC BSC +28% Target agreements 100 032206PD_BSC 5 Germany BALANCED SCORECARDS ARE USED BY MAJOR INDUSTRY PLAYERS IN GERMANY AND WORLDWIDE • Beiersdorf • Bertelsmann • DaimlerChrysler • Deutsche Lufthansa • Deutsche Bank Investment Banking • Gerling • Siemens (Business Services) • .... * J. Weber, U. Schäffer, Balanced Scorecard & Controlling, Gabler 2000 USA Major players have introduced BSCs ... ... and what they say* • Mobil US • Novacor Chemicals • CIGNA • Chemical Bank • Citibank • .... "Implementing BSC is not so much about reinventing the wheel, but about adding spokes and rims to create a unified entity" Dr. Guldin, Breuninger GmbH "... to provide the missing link between stra - tegic planning and the yearly mid - term planning" C. Paulsen, Dr. Voigt, Siemens AG "The extension of the strategic discussion drives the transformation towards a stronger internal and external service focus" Dr. Klingenberg, Lufthansa AG 60% of Fortune 100 companies in the US 032206PD_BSC 6 DIFFERENT DEGREES OF SOPHISTICATION CAN BE TARGETED IMPLEMENTING A BSC SYSTEM • Focus on key strategic targets • Few performance indicators • Low degree of standardization – BU/OU can choose indicators and targets independently – BSC diverges on different levels – No unified format required • Low number of reports (e.g. annual) • Simple to implement • High acceptance by employees • Simple to adapt to different situations • Potentially lack of consistency between different BSCs • Lacking link between overall goals and sub - goals • No possibility to analyze cause and effects, additional reporting necessary • Management system provides focus on strategic targets and possibility for diagnosis and performance management • Many performance indicators • High degree of standardization – Formal approach and central coordination of BSC - processes – BSC similar across various levels – Unified formats defined • Regular reports for each level (for example weekly or monthly) • Possibility of "drill - down" for analyzing root causes for diverging development • Closely linked to company goals and strategy • Difficult process of adaptation to individual circumstances • Higher degree of effort "Simple" "Comprehensive" Goal Advantage Dis - advantage Key character - istics McKinsey approach 032206PD_BSC 7 DEVELOPEMENT STAIRCASE FOR BSC - SYSTEMS DETERMINES METHODOLOGY APPLIED • Operationalized strategic goals • Cause - effect chains • Degree of influence • Strategic importance Qualitative, (strategic) BSC - System Additionally: • Assessment of indicators and value - impact based on understanding of business logic • Degree of influence • Strategic importance • Hypothesis: Value driver Qualitative, value - oriented BSC - system Additionally: • Assessment of indicators and value - impact based on sensitivity analysis • Degree of influence • Strategic importance • Key value driver Quantitative, value - oriented BSC - system Additionally: • Integration into intranet and data systems Integrated BSC - system Additionally: • Embedding BSC into steering processes • Linkage to incentive system • Adaptation of planning and controlling systems • Establishing BSC - Champion • Degree of influence • Strategic importance • Key value driver • Day - to - day application • Degree of influence • Strategic importance • Key value driver • Day - to - day application • Automated application IT - based BSC - system Criteria: McKinsey approach 032206PD_BSC 8 • Keep BSCs simple to encourage implementation process. Otherwise too much energy is lost thorough implementation process • Limit number of indicators to 20 to ensure applicability and understanding • Without support of top management high risk of ending as paper exercise • Motivation of employees to achieve goals important to ensure success of BSC - system • Indicators have to represent key performance indicators to unfold impact • "Stretch targets" encourage employees to develop performance culture • BSC is no static system; update has to be according to business development Factors of success Comments • Simplicity • Focus • Acceptance • Linkage to performance - related compensation • Linkage to business targets • "Stretch targets" • Regular update KEY SUCCESS FACTORS FOR BALANCED SCORECARDS 032206PD_BSC 9 FEEDBACK FROM CLIENTS "We thought our strategy was well defined and actionable. While trying to derive relevant performance indicators we realized that it this was not the case" Trying to summaries the strategic goals on one page caused surprisingly much discussion around a strategy we thought had been agreed on" "Developing value driver trees to derive the most important value levers for translating strategy is an extremely valuable and exciting exercise, which we will retain during the future"