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Theme 13
KM Performance Appraisal -BSC-
Sang W. KIM, Ph.D
Professor, Chungbuk National University
Spring, 2014
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contents
1. Background
2. BSC: Balanced ScoreCard
3. Performance Measures & BSC
4. Beyond the BSC
목 차
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‘Intellectual capital’ is the principal asset of knowledge-based organizations and
their performance management systems seek to maintain and enhance the value
of this human asset base.
1. Background
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Paradigm Shift in Performance Evaluation
Traditional Focus Scorecard Focus
Objective
Context
Characteristic
Information
Control
Budget
Functional, analytical
Isolated measurement
Learning
Strategy
Team based, communicative
Objective/measure cause & effect
1. Background
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The key idea is that communicating directly forces you to translate your
strategy into a set of action-oriented performance measurements instead of
using control.
It enables you to translate the strategy into a language that’s more precise.
For example, instead of saying “let’s improve customer satisfaction,” it says,
what do you mean by customer satisfaction…..and
how do you quantitatively define it?”
From there, it forces you to ask
what skills are required to improve customer satisfaction…..and
what skills do your employees currently exists and
what is needed….
By monitoring the index, you can see how well you are closing the gap.
▣ Not Control, But Communicate & Motivate
Kaplan & Norton : BSC Inventors
1. Background
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Balanced Scorecard (BSC):
A method of implementing a business strategy by translating it into a set of
performance measures derived from strategic goals that allocate rewards to
executives and managers based on their success at meeting or exceeding the
performance measures.
2. BSC: Balanced ScoreCard
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Reasons for the Need of BSC
1. Focus on traditional financial accounting measures such as ROA, ROE, EPS
gives misleading signals to executives with regards to quality and innovation.
It is important to look at the means used to achieve outcomes such as ROA, not
just focus on the outcomes themselves.
2. Executive performance needs to be judged on success at meeting a mix of both
financial and non-financial measures to effectively operate a business.
3. Some non-financial measures are drivers of financial outcome measures which
give managers more control to take corrective actions quickly.
(Example: controls in jet cockpit for pilot)
4. Too many measures, such as hundreds of possible cost accounting index
measures, can confuse and distract an executive from focusing on important
strategic priorities. The balanced scorecard disciplines an executive to focus
on several important measures that drive the strategy.
2. BSC: Balanced ScoreCard
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1. Financial: How do we look to our Shareholders?
2. Customer: How do our Customers See Us?
3. Internal Business Process: What should we do that is Excellent?
4. Innovation and Learning: Can we continue to Improve and Add Value?
Balanced Scorecard Perspectives
Today, the center of value creation has shifted from tangible assets to intangibles
such as
Customer relations
Innovative products and services
High quality and responsive business processes
Information technologies and customer databases
Employee capabilities, skills and motivation
2. BSC: Balanced ScoreCard
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LEARNING PERSPECTIVE
"TO ACHIEVE OUR GOALS,
HOW MUST OUR ORGANIZATION
LEARN AND INNOVATE?”
"TO SATISFY OUR CUSTOMERS,
AND SHAREHOLDERS, IN WHICH
INTERNAL BUSINESS PROCESSES
MUST WE EXCEL?”
"TO ACHIEVE OUR
FINANCIAL OBJECTIVES,
WHAT CUSTOMER NEEDS
MUST WE SERVE?”
FINANCIAL PERSPECTIVE
"TO SATISFY OUR
SHAREHOLDERS, WHAT
FINANCIAL OBJECTIVES
MUST WE ACCOMPLISH?”
INTERNAL PERSPECTIVE
CUSTOMER PERSPECTIVE
2. BSC: Balanced ScoreCard
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One-dimensional to Multi-dimensional Performance Measuring
One-dimensional financial-based models measure past performance and sacrifice
long term to short term results and fail to successfully measure the performance of
today’s firm.
One of the most widespread multi-dimensional performance measurement models
is the Balanced Scorecard(BSC), which was invented in1992 by Drs. David
Norton and Robert Kaplan.
2. BSC: Balanced ScoreCard
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Basic Functions of BSC
2. BSC: Balanced ScoreCard
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Cycle Times Customer
Satisfaction
Customer order
fulfillment
Product assembly
cycle time
ROA
EVA
EPS
Drivers Moderators Outcomes (lead indicators) (lag indicators)
Quality
Defect rate
Scrap rate
Manufacturing
Unit Costs
BSC Chain of Causality of Performance Measures (Source: Kaplan & Norton, 1996)
3. Performance Measures & BSC
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Employee Employee Growth in
Satisfaction Retention Rate Revenues
Employee Product and
Suggestions Process Innovations
Drivers Moderators Outcomes (lead indicators) (lag indicators)
3. Performance Measures & BSC
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Financial Measures & BSC
Financial measures are outcomes that represent the executive’s
success at achieving strategic performance goals
Financial measures are influenced by the Stage of the Life
Cycle which reflects different strategic priorities
Sustain/Maturity
ROCE
EVA
Earn excellent
return on capital
invested
Growth Sales Growth
Revenue
Productivity
Generate new
accounts & increase
market share
Harvest/Decline
Cash Flow
Reduce Unit Costs
Obtain immediate
payback on investments
from cash cow
Life Cycle Stage
3. Performance Measures & BSC
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Business Business
Inventory cycle time
Quality defect rate
Distributor satisfaction
Customer satisfaction
Distributor price margin
Business Distributor/Dealer
Customer
Different Customer Models Relevant Customer Metrics
Customer Measures & BSC
Business Customer
Customer order fulfillment cycle time
Customer satisfaction
Customer price margin
3. Performance Measures & BSC
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Internal Business Process Measures & BSC
• Quality
• Yield
• Throughput
• Cycle time
• Cost efficiency
• Order Fulfillment
• Procurement
• Repair service quality/downtime
• Warranty quality
Internal Business Process Measures
Service to the
Customer
Model of Internal Business Process Logistics
Customer Need
Identified
Innovation
Process
Operations
Process
Post-Sale
Service Process
Customer Need
Satisfied
Identify
Market
Create
Product
Build
Product
Deliver
Product
Relevant
Metrics:
• Development
Cycle Time
• Quality
Defects
• MCE
• Delivery
Cycle Time
• Service
Satisfaction
3. Performance Measures & BSC
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Manufacturing Cycle Effectiveness (MCE)
Processing Time Throughput Time
Throughput Time = Processing time + inspection time + movement time + waiting/storage time
MCE 0, implies inefficient process
MCE 1, implies less wasted time, greater efficiency
MCE =
3. Performance Measures & BSC
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Innovation and Learning Measures & BSC
What are employee and organization capabilities for innovation and
learning measures?
Represent ways to improve the other 3 scorecard outcomes or measures.
They nurture the other 3 areas
Learning Measures
• Employee skill levels (certification rate)
• # suggestions per employee
• Employee learning curve (time to reach acceptable level of output or quality)
Employee Measures
•Employee satisfaction
•Employee retention
•Employee productivity
3. Performance Measures & BSC
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Strategy
Internal Customer Financial
Process T1 T2
T0
Learning
T3
BSC: Causal Relationships
3. Performance Measures & BSC
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BSC: Cascading Goals
# Employee
Suggestions
Corporate
SBU
Department
Team
ROCE
Corporate
SBU
Customer
Satisfaction
Corporate
SBU
Retail Store
3. Performance Measures & BSC
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Incentive Compensation for Executives with BSC
Executive Bonus Pool is designed as a percentage of Base Salary
The bonus pool represents potential earnings from the bonus for an
executive if all performance measures are achieved
Partial success with meeting performance measures results in the allocation
of a bonus representing a lesser amount of the total potential bonus.
Example: The bonus pool for a CEO equals 100 percent of salary. Range
of bonus equals 0 to 100 percent of salary depending on success of CEO
performance.
3. Performance Measures & BSC
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Example: Automobile Company Balanced Scorecard Reward
Matrix for Bonus
Category Measure Weighting
Financial (50%) EVA 25%
Unit Profit 15%
Market Growth 10%
Customer (20%) Customer satisfaction survey 10%
Dealer satisfaction survey 10%
Internal (20%) Above average rank on
Process industry quality survey…… 10%
Decrease in dealer
delivery cycle time……….. 10%
Innovation (10%) Suggestions/employee 5%
and Learning Emp. satisfaction survey 5%
3. Performance Measures & BSC
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Critical Thinking Questions
1. What happens to the balanced scorecard when the strategy changes?
(example: moving from a “growth” to an “extract profits” strategy)
2. How should resistance by executives or managers to new measures be
handled?
3. What if executives or managers sub-optimize and only focus on categories
in the reward matrix with the largest payoff – such as EVA and Customer
Satisfaction?
4. Beyond the BSC
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3rd Generation Balanced Scorecard is an umbrella concept that links together
organizational philosophies and management tools.
4. Beyond the BSC
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`
` Bob Kaplan and I have long believed that
dynamic systems simulation would be the
ultimate expression of an organization’s strategy
and the perfect foundation for a balanced
scorecard.
Why Dynamic BSC?
- David Norton (2000)
4. Beyond the BSC
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According to Richmond (2001) the strategy mapping system for BSC has serious
limitations which may result in strategy failure. He points out three main flaws of
this system:
• It expresses only one-way relations, cause-and-effect logic, whereas very often
factors within strategic initiatives influence each other in a feedback loop pattern.
• It may lead to incorrect conclusions about impact of strategic initiatives because
it does not capture delays, fundamental factors of dynamics in any environment. .
• Due to its static nature, the mapping system is unable to answers such questions
as ‘what will happen, if …?’. Despite much information gained through the
performance measurement activities, managers may be still unable to react
correctly to changes and discrepancies between the goal and the result of initiatives
undertaken to meet that goal.
4. Beyond the BSC
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Akkermans and Oorschot (2002, 4) point out further limitations inherent in these
flaws:
• Performance measurement based only on few indicators may lead to troubles
unless the most relevant indicators are chosen. Balanced Scorecard methodology
does not possess any mechanism, which can assess the relevance of defined
indicators.
• There are insufficient links between top level, strategic scorecard and
operational-level measures, and the Balanced Scorecard does not consider an
enterprise in the context of an extended value chain.
4. Beyond the BSC
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4. Beyond the BSC
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Our discussion ends here for the semester. Thanks for the endurance and persistence you have shown for the semester to learn something about ‘knowledge and its management’ and to practice your English.