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How to put your company... - UNDERTHEMICROSCOPE
00:00 14 May 1997
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If I were to ask you to tell me how fit or healthy you are as an
individual you would probably refer to your heart rate, weight,
days off work, and so on.
Likewise, if I asked you about the characteristics of the car you drive, you would probably refer to things like its acceleration, fuel consumption and top speed.
Both serve to illustrate ways of making sense and summarising key characteristics.
Just as performance indicators can be used for individual health and car performance, so too can they be used to describe company performance.
However, if you ask a selection of senior executives what they understand by performance indicators and their importance, many would typically make reference in their responses to a series of primarily financial measures. But, things are changing. There has been increasing concern in many organisations about the way that organisational performance is currently measured.
quality
The development of global markets, accompanied by intense competition, has necessitated a drive for quality and a search for continuous cost-improvement. Accompanying this drive has been the questioning of whether established methods of measurement and analysis are still wholly appropriate.
In all areas of business it has become clear that the needs of both customers and shareholders have to be satisfied, and that an emphasis upon one to the exclusion of the other will not be accepted.
The challenge to meet these needs in a turbulent business environment means that firms have to be able to respond to customer requirements with their internal delivery mechanisms, and also be able to update and change them as necessary.
The implications of this are profound. To be successful, companies will need a broad set of performance indicators and not just a set focusing upon financial indicators of performance. What is more, these indicators will have to be appropriate and relevant.
To take a personal health example, the benefits of preventions via diagnosis are well known. What we require is an understanding of those things that really matter to our future well being.
Dwelling upon the past is only relevant in so far as it helps us make future decisions.
An approach referred to as "scorecard", and often known under the banner of the Balanced Scorecard, has been developed to broaden the scope of performance indicators away from a preoccupation with finance.
This approach includes some financial measures which are complemented by operational measures like customer satisfaction, internal process measurement and the organisational innovations and improvement to activities.
All the latter require operational measures of strategy and represent the drivers of future financial performance.
balance
The Balanced Scorecard allows managers to look at the business from four important perspectives:
lHow do customers see us? (customer perspective)
l What must we excel at? (internal perspective)
l Can we continue to improve and create value? (innovation and learning perspective)
l How do we look to our shareholders? (financial)
These four perspectives are not mutually exclusive but part of a more integrated whole. However, each perspective will deal with important performance-related issues in their own right.
For example, the customer perspective recognises that products incur costs, but it is customers who provide profits. This being the case they deserve attention in their own right. This means that performance indicators which focus upon the ability to meet customer requirements in terms of time, quality, performance and service, and cost can be usefully developed.
Meeting customer requirements has clear implications for the organisation's delivery mechanisms and the internal business perspective focuses upon the processes and actions that need to be undertaken within the organisation. The measures in the form of the resulting performance indicators will stem from the analysis of those features which will have an impact upon customer satisfaction.
perspective
The innovation and learning perspective has a slightly different emphasis. While the first three perspectives identify key objectives that need to be measured in determining success, that perspective focuses on the dynamics of change.
The nature of global competitiveness recognises that targets have to keep changing and need to be redefined. Ccontinuous improvements to products and processes are of necessity.
As a result that section identifies those challenges and measures them in terms of innovation, improvements and the learning curve.
Last, but by no means least, the financial perspective, as it relates to shareholders, addresses at least two key concerns:
l How much has my investment earned and is value being created for me?
l Is my investment secure?
To that end key indicators are typically adopted which cover profitability, liquidity and increasingly, value creation.
By way of an illustration of this approach Rockwater, a wholly owned subsidiary of Brown & Root/Halliburton, a global engineering and construction company was one company that developed scorecarding in a collaborative venture, and a Balanced Scorecard framework was identified as appropriate.
customer
From a customer perspective Rockwater identified the distinction between two types of company, those that wanted a high value relationship and those that chose suppliers solely on the basis of price.
To this end a price index incorporating the best available intelligence on competitive position, was developed and included in the scorecard to ensure that the company could retain the latter when market conditions dictated.
However, the company's strategy was to focus upon value-based business. As a consequence the company introduced an annual survey to rank customers' perceptions of its services compared to its competitors. Finally, market share by key accounts was adopted as an objective measure that improvements in customer satisfaction were being translated into tangible benefits.
This change in customer focus had profound implications for the company's internal business measures. Past measures emphasised the performance of functions, whereas the new focus of attention was upon key business processes.
For example, an index of project performance which transcended functional boundaries was developed. Furthermore, emphasis was directed at important human-related issues such as the need to educate employees about the performance of working closely to identify and satisfy customer needs.
In terms of innovation and learning measures of performance were developed to drive improvement in financial, customer and internal process performance. Last, but by no means least, a series of financial measures was developed to ensure that the results of the company's endeavors met shareholders' perspectives.
n Henley Management College and the Chartered Institute of Building have a partnership to run a Developing Directorial skills in Construction programme. The indicators used to assess the performance of the company in the Balanced Scorecard approach:
Customer Perspective
l Customer ranking survey
l Customer satisfaction index
l Market share by key accounts
l Price index - best available intelligence on competitive position
INTERNAL Perspective
l Hours with customers on new work
l Tender success rate
l Rework
l Safety incident index
l Project performance index
l Project closeout cycle
Innovation and Learning
Perspective
l Per cent revenue from new services
l Rate of improvement index
l Staff attitude survey
l Per cent of employee suggestions
l Revenue per employee
Financial Perspective
l Return on capital employed
l Cash flow
l Project profitability
l Profit forecast reliability
l Sales backlog
As illustrated, focusing upon a handful of measures that are the most critical components of the desired objectives is a feature of the approach. As a result of this, its implementation by organisations has been shown to have two major benefits:
l It brings together, in a single management report, many of the disparate elements of a company's competitive agenda.
l It helps to prevent decisions being made which are not in the interests of the whole organisation, even though it may benefit one particular part of the business. By forcing senior managers to consider all important operational measures together, the Balanced Scorecard lets them see whether improvement in one area may be achieved only at the expense of another.
References:
Kaplan, R S & Norton D.P. The Balance Scorecard Measures That Drive Performance, Harvard Business Review, January/February, 1992 pp 71-79
Kaplan, R S & Norton D. P Putting the Balanced Scorecard to Work, Harvard Business Review, September/October 1993 pp 134-137.
Likewise, if I asked you about the characteristics of the car you drive, you would probably refer to things like its acceleration, fuel consumption and top speed.
Both serve to illustrate ways of making sense and summarising key characteristics.
Just as performance indicators can be used for individual health and car performance, so too can they be used to describe company performance.
However, if you ask a selection of senior executives what they understand by performance indicators and their importance, many would typically make reference in their responses to a series of primarily financial measures. But, things are changing. There has been increasing concern in many organisations about the way that organisational performance is currently measured.
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quality
The development of global markets, accompanied by intense competition, has necessitated a drive for quality and a search for continuous cost-improvement. Accompanying this drive has been the questioning of whether established methods of measurement and analysis are still wholly appropriate.
In all areas of business it has become clear that the needs of both customers and shareholders have to be satisfied, and that an emphasis upon one to the exclusion of the other will not be accepted.
The challenge to meet these needs in a turbulent business environment means that firms have to be able to respond to customer requirements with their internal delivery mechanisms, and also be able to update and change them as necessary.
The implications of this are profound. To be successful, companies will need a broad set of performance indicators and not just a set focusing upon financial indicators of performance. What is more, these indicators will have to be appropriate and relevant.
To take a personal health example, the benefits of preventions via diagnosis are well known. What we require is an understanding of those things that really matter to our future well being.
Dwelling upon the past is only relevant in so far as it helps us make future decisions.
An approach referred to as "scorecard", and often known under the banner of the Balanced Scorecard, has been developed to broaden the scope of performance indicators away from a preoccupation with finance.
This approach includes some financial measures which are complemented by operational measures like customer satisfaction, internal process measurement and the organisational innovations and improvement to activities.
All the latter require operational measures of strategy and represent the drivers of future financial performance.
balance
The Balanced Scorecard allows managers to look at the business from four important perspectives:
lHow do customers see us? (customer perspective)
l What must we excel at? (internal perspective)
l Can we continue to improve and create value? (innovation and learning perspective)
l How do we look to our shareholders? (financial)
These four perspectives are not mutually exclusive but part of a more integrated whole. However, each perspective will deal with important performance-related issues in their own right.
For example, the customer perspective recognises that products incur costs, but it is customers who provide profits. This being the case they deserve attention in their own right. This means that performance indicators which focus upon the ability to meet customer requirements in terms of time, quality, performance and service, and cost can be usefully developed.
Meeting customer requirements has clear implications for the organisation's delivery mechanisms and the internal business perspective focuses upon the processes and actions that need to be undertaken within the organisation. The measures in the form of the resulting performance indicators will stem from the analysis of those features which will have an impact upon customer satisfaction.
perspective
The innovation and learning perspective has a slightly different emphasis. While the first three perspectives identify key objectives that need to be measured in determining success, that perspective focuses on the dynamics of change.
The nature of global competitiveness recognises that targets have to keep changing and need to be redefined. Ccontinuous improvements to products and processes are of necessity.
As a result that section identifies those challenges and measures them in terms of innovation, improvements and the learning curve.
Last, but by no means least, the financial perspective, as it relates to shareholders, addresses at least two key concerns:
l How much has my investment earned and is value being created for me?
l Is my investment secure?
To that end key indicators are typically adopted which cover profitability, liquidity and increasingly, value creation.
By way of an illustration of this approach Rockwater, a wholly owned subsidiary of Brown & Root/Halliburton, a global engineering and construction company was one company that developed scorecarding in a collaborative venture, and a Balanced Scorecard framework was identified as appropriate.
customer
From a customer perspective Rockwater identified the distinction between two types of company, those that wanted a high value relationship and those that chose suppliers solely on the basis of price.
To this end a price index incorporating the best available intelligence on competitive position, was developed and included in the scorecard to ensure that the company could retain the latter when market conditions dictated.
However, the company's strategy was to focus upon value-based business. As a consequence the company introduced an annual survey to rank customers' perceptions of its services compared to its competitors. Finally, market share by key accounts was adopted as an objective measure that improvements in customer satisfaction were being translated into tangible benefits.
This change in customer focus had profound implications for the company's internal business measures. Past measures emphasised the performance of functions, whereas the new focus of attention was upon key business processes.
For example, an index of project performance which transcended functional boundaries was developed. Furthermore, emphasis was directed at important human-related issues such as the need to educate employees about the performance of working closely to identify and satisfy customer needs.
In terms of innovation and learning measures of performance were developed to drive improvement in financial, customer and internal process performance. Last, but by no means least, a series of financial measures was developed to ensure that the results of the company's endeavors met shareholders' perspectives.
n Henley Management College and the Chartered Institute of Building have a partnership to run a Developing Directorial skills in Construction programme. The indicators used to assess the performance of the company in the Balanced Scorecard approach:
Customer Perspective
l Customer ranking survey
l Customer satisfaction index
l Market share by key accounts
l Price index - best available intelligence on competitive position
INTERNAL Perspective
l Hours with customers on new work
l Tender success rate
l Rework
l Safety incident index
l Project performance index
l Project closeout cycle
Innovation and Learning
Perspective
l Per cent revenue from new services
l Rate of improvement index
l Staff attitude survey
l Per cent of employee suggestions
l Revenue per employee
Financial Perspective
l Return on capital employed
l Cash flow
l Project profitability
l Profit forecast reliability
l Sales backlog
As illustrated, focusing upon a handful of measures that are the most critical components of the desired objectives is a feature of the approach. As a result of this, its implementation by organisations has been shown to have two major benefits:
l It brings together, in a single management report, many of the disparate elements of a company's competitive agenda.
l It helps to prevent decisions being made which are not in the interests of the whole organisation, even though it may benefit one particular part of the business. By forcing senior managers to consider all important operational measures together, the Balanced Scorecard lets them see whether improvement in one area may be achieved only at the expense of another.
References:
Kaplan, R S & Norton D.P. The Balance Scorecard Measures That Drive Performance, Harvard Business Review, January/February, 1992 pp 71-79
Kaplan, R S & Norton D. P Putting the Balanced Scorecard to Work, Harvard Business Review, September/October 1993 pp 134-137.
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