Balance Scorecard

Balance Scorecard-Integrating Financial

and Non Financial Measure

Balance scorecard combines financial

measures with three operating measures
on customer satisfaction, internal process,
and the organizations innovation and
improvement activities.
 Translating Vision and Strategy: Four
Perspectives (Kaplan and Norton, 2007)
Comparison between Traditional Measures and
Balance Scorecard
Traditional Measures
Our traditional financial measurement
systems have no way to calculate the
true value or cost of the relationships
between functional areas
Traditional financial measures fail to
recognize companys long term
strategy with its short term actions.
Traditionally departments are
evaluated based on their financial
performance and giving bonus is tied
up with this short term financial
achievement.
Balance Scorecard
Balance Scorecard coordinates and
explains companys operation and
activities through financial and non
financial measures
However, Balance Scorecard binds
short term objectives with long term.
However, balance scorecard provides
the opportunity to understand the
entire management process on
implementing long term strategy.
Comparison between Traditional Measures and
Balance Scorecard

Traditional Measures Balance Scorecard

Traditional financial measures can only Balance Scorecard works as a
report past activities without explaining cornerstone of a companys current
or indicating future improvement or and future success.
success.

Traditional performance measurement The Balance Scorecard, on the other

system specify the particular actions
they want employees to take and then
measure to see whether the
employees in fact taken those actions.
In this way, the systems try to control
behavior.
hand is well suited to the kind of
organization many companies are
trying to become. The scorecard puts
strategy and vision, not control, at the
center.
Literature Review (Kaplans and Nortons Work)

Title and Year Explanation

The Balance Scorecard He describes here four perspectives. Senior executives understand
that drive performance, that traditional financial measures like ROI and EPS can give
1992 misleading signals for continuous improvement and innovation.
Managers also should not choose between financial and operating
measures. They want a balanced presentation of both financial and
Operating measures, which have been devised as a Balanced
Scorecard after long research with 12 companies.

Putting the Balance Linking measurement to strategy is described here through balance
Scorecard to Work, scorecard practice of three companies such as Rock Water, Apple
1993 Computer, and Advanced Microdrives. Balance Scorecards impact
on external reporting is also an important discussion of this article.
The first Book Balance He describes here the measurement of business strategy, four
Scorecard, 1996 perspectives of Balance Scorecard, linking balance scorecard to
strategy and managing business strategy through implementing
balance scorecard.
Literature Review (Kaplans and Nortons Work)

Title and Year Explanation

The Second book The He describes here five principles that transform the balance
strategy Focused scorecard from a tool for performance measurement to a
Organization, 2001 tool for creating a strategy driven performance
measurement company. Principles are translating strategy
into operational term, aligning the organization to the
strategy, making strategy everyones everyday job, making
strategy a continual process, and mobilizing change through
executive leadership.

Using the Balance This article focuses on four processes for example,
Scorecard as a strategic translating the vision, communicating and linking, business
Management system, planning, and feedback and learning.
2007
 According to Ittner, Larcker, and Meyer, 2003

The subjectivity in the balanced scorecard plan allowed

area directors to incorporate factors other than the
scorecard measures in performance evaluations, to
change evaluation criteria from quarter to quarter, to
ignore measures that were predictive of future financial
performance, and to weight measures that were not
predictive of desired results. These outcomes led many
branch managers to complain about favoritism in bonus
awards
 According to Olson and slater (2002) pointed
that

Comprehensive performance evaluation

system has greater predictive validity than
one that is purely financially oriented. And
Balance Scorecard is a comprehensive
measure, which has the ability to be to the
business strategy, communicate strategic
objectives, and enhance feedback and
learning.
 Rockwater: Responding to a Changing Industry
Rockwater, a wholly owned subsidiary of Brown & Root/Halliburton, a global
engineering and construction company, is a worldwide leader in underwater
engineering and construction. Norman Chambers, hired as CEO in late
1989, knew that the industrys competitive world had changed dramatically.
In the 1970s, we were a bunch of guys in wet suits diving off barges into
the North Sea with burning torches, Chambers said. But competition in the
subsea contracting business had become keener in the 1980s, and many
smaller companies left the industry. In addition, the focus of competition had
shifted. Several leading oil companies wanted to develop long-term
partnerships with their suppliers rather than choose suppliers based on low-
price competition.
With his senior management team, Chambers developed a vision: As our
customers preferred provider, we shall be the industry leader in providing the
highest standards of safety and quality to our clients. He also developed a
strategy to implement the vision. The five elements of that strategy were:
services that surpass customers expectations and needs; high levels of
customer satisfaction; continuous improvement of safety, equipment reliability,
responsiveness, and cost effectiveness; high-quality employees; and realization
of shareholder expectations. Those elements were in turn developed into
strategic objectives (see the chart Rockwaters Strategic Objectives). If,
however, the strategic objectives were to create value for the company, they
had to be translated into tangible goals and actions.
 Financial Measures:
The financial perspective included three measures of importance to
the shareholder. Return-on-capital-employed and cash flow
reflected preferences for short-term results, while forecast reliability
signaled the corporate parents desire to reduce the historical
uncertainty caused by unexpected variations in performance.
Rockwater management added two financial measures. Project
profitability provided focus on the project as the basic unit for
planning and control, and sales backlog helped reduce uncertainty
of performance.
 Customer Satisfaction:
Rockwater wanted to recognize the distinction between its two types
of customers: Tier I customers, oil companies that wanted a high
value-added relationship, and Tier II customers, those that chose
suppliers solely on the basis of price. A price index, incorporating
the best available intelligence on competitive position, was included
to ensure that Rockwater could still retain Tier II customers
business when required by competitive conditions.
 Internal Processes:
To develop measures of internal processes, Rockwater executives
defined the life cycle of a project from launch (when a customer
need was recognized) to completion (when the customer need had
been satisfied). Measures were formulated for each of the five
business-process phases in this project cycle (see the chart How
Rockwater Fulfills Customer Needs):
How Rockwater Fulfills Customer Needs
number of hours spent with prospects discussing new work
tender success rate
project performance effectiveness index, safety/loss control, rework
length of project closeout cycle
 Innovation and Improvement:
The innovation and learning objectives are intended to drive
improvement in financial, customer, and internal process
performance. At Rockwater, such improvements came from product
and service innovation that would create new sources of revenue
and market expansion, as well as from continuous improvement in
internal work processes. The first objective was measured by
percent revenue from new services and the second objective by a
continuous improvement index that represented the rate of
improvement of several key operational measures, such as safety
and rework. But in order to drive both product/service innovation
and operational improvements, a supportive climate of empowered,
motivated employees was believed necessary.
 Measures Targets Initiatives
Process perspective
(1) Investments, trust Percentage of Increase profit Add more private
brokerage and Wells Fargos of these bankers, license more
insurance (satisfy profit. segments as a bankers to sell mutual
customers financial group to 25% of funds.
needs) Wells Fargos
profit.
(2) Going for gr-eight! Number of Increase Offer packages of
(cross-sell) products per average to 8. products that save
customer customers time and
money. For example, the
Homebuyers Package
offers new mortgage
customers a package of
banking products that can
save customers up to
$340 per year.

(3) Doing it right for the Proportion of Cut proportion Foster customer-focused
customer (be advocates customers lost in half (to 1 in culture and attitudes.
for customers) per year 10).
(4) 100 percent bank Percent of 100% cross- Initiative to migrate
and mortgage/home mortgage and selling between mortgage and home-
equity cross-sell home-equity banking equity customers to
customers in customers and become Wells Fargo
Wells Fargos mortgage/ banking customers.
banking states home-equity
who bank with customers
Wells Fargo, and
(5) Wells Percent 100% for Cross-selling
Fargo cards in of bank each initiative to
every wallet customer type of existing
s who card banking
have a customers
credit without Wells
card or Fargo credit
debit card card.
with Wells
Fargo
(6) When, where, Ranking of #1 ranking Integrate delivery
and how (match online channels to match
when, where, and services; when, where, and
how customers want number of how customers want
to be served) active online to be served. Some
customers in machines and web
various services have
categories Spanish or Chinese
language options.
(7) Information- Percentage of Offer right Deploy customer
based marketing customers product at relationship
(analyze and meet receiving the right time management and
customers needs) personalized to save data mining
marketing customer application
messages time and packages.
money.
(8) Be our Internet
customers payments
payments processor business
revenue and
transaction
volume
(9) Outstanding Retention rate 100%
customers (attract for high-value
and retain high- customers
value customers)
Learning and growth
perspective
(10) People as a Percentage of Develop, reward, and
competitive key jobs recognize team
advantage staffed with members; build an
people with inclusive workplace.
requisite skills,
knowledge,
and training