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Thursday, October 28, 2004

Balanced Scorecard presents a mix of lag and lead indicators

THE MANILA TIMES
Business Times p.B1
Thursday, October 28, 2004
http://www.manilatimes.net/national/2004/oct/28/yehey/business/20041028bus6.html

LEARNING & INNOVATION
By Moje Ramos-Aquino
Balanced Scorecard presents a mix of lag and lead indicators


ONE of the benefits of a Balanced Scorecard is that it provides us the venue for constant conversations about what we do, why we do, what we are doing and how well we are doing-in living facts and figures.

Organizations, though, still exclusively rely on financial measures of performance. Paul Niven (Balanced Scorecard Step by Step: Maximizing Performance and Maintaining Results, Wiley & Sons) describes financial measures as:

* Not consistent with today's business environment, in which most value is created by intangible assets.
* Provide a great "rearview mirror" of the past but often lack predictive power.
* Consolidation of financial information tends to promote functional silos.
* Long-term value-creating activities may be compromised by short-term financial metrics from activities such as employee reductions.
* Most high-level financial measures provide little in the way of guidance to lower-level employees in their day-to-day actions.

Many organizations still use these lagging measures of performance as basis for many important business decisions instead of developing leading indicators. Niven advocates using two columns for collecting performance measures, i.e., one for lagging indicators and another for the leading measures that will drive your outcome measures.

To build a good Balanced Scorecard you should mix lag and lead measures. Niven made these differentiations:

Lag measures focus on results at the end of a time period, easy to identify, normally characterizing historical performance. Examples are market share, sales, lost-time accidents and employee satisfaction. However, since they are historical in nature, they do not reflect current activities and lack predictive power. A high sales volume in the last quarter or year will not guarantee similar or higher sales volume in the future.

Lead measures drive or lead performance of lag measures, normally measuring intermediate processes and activities. Examples are hours spent with customers, proposals written and absenteeism.

They are predictive in nature and allow the organization to make adjustments based on results. However, they are difficult to identify and capture and are often new measures with no history at the organization.

Lag indicators represent the consequences of actions previously taken while lead indicators predict performance of lagging measures. Examples: sales may be driven by hours spent with customers, market share may be driven by brand awareness, and lost-time accidents may be driven by the safety audit scores.

Lag indicators without performance drivers fail to inform you of how you hope to achieve your results. Conversely, leading indicators may signal key improvements throughout the organization, but on their own do not reveal whether these improvements are leading to improved customer and financial results.

Lead indicators are what make your organization stand out in the marketplace or in your industry by identifying the specific activities and processes you believe are critical to driving those lag indicators of success.

A well-constructed BSC gives you a reliable and more accurate story of your organization, using both lag and lead indicators, and gives you a better handle at decision making and lots of confidence at managing and leading.

(Moje, president of Paradigms & Paradoxes Corp., assists organizations in their Strategic Thinking, Planning and Balanced Scorecard initiatives. Her e-mail address is innovationcamp@yahoo.com)

Thursday, October 21, 2004

Balanced Scorecard (BSC): a virtuous cycle

Learning & Innovation – October 21, 2004
By Moje Ramos-Aquino, FPM

Balanced Scorecard (BSC): a virtuous cycle

The fathers of BSC Robert S. Kaplan & David P. Norton describes it as “a system of linked objectives, measures, targets and initiatives which collectively describe the strategy of an organization and how the strategy can be achieved. It can take something as complicated and frequently nebulous as strategy and translate it into something that is specific and can be understood.” A Balanced Scorecard is a framework for defining, refining and communicating strategy, for translating strategy to operational terms, and for measuring the effectiveness of strategy implementation.

In its simplest form, a BSC is a virtuous cycle, a cause-and-effect chain.

Authors Olve, Petri and Roy (Making Scorecards Actionable: balancing strategy and control; Wiley & Sons) there is more to the scorecard than immediately meets the eye:

• The scorecard is balanced; the four perspectives aim for a complete description of what you need to know about the business. There is a time dimension going from bottom to top. E.g. current profitability (or loss) may largely be a consequence of what was done last quarter or last year.

• It is balanced because it shows both internal and external aspects of the business. E.g. a “well-oiled machinery” of internal processes and the customers’ views and contacts that have been established in the marketplace are both shown in a BSC.

• Finally, the BSC is linked through cause–and-effect assumptions. Among its important uses is to reflect on how strong these linkages are, what time delays they involved, and how certain you can be about them in the face of external competition and change.

(Moje, president of Paradigms & Paradoxes Corp, assists companies in their Strategic Thinking, Planning and Balanced Scorecard initiatives. Her email address is innovationcamp@yahoo.com)

Thursday, October 14, 2004

Balanced Scorecard (BSC): An overview

THE MANILA TIMES
Business Times p.B1
Thursday, October 14, 2004
http://www.manilatimes.net/national/2004/oct/14/yehey/business/20041014bus5.html

LEARNING & INNOVATION
By Moje Ramos-Aquino
Balanced Scorecard (BSC): An overview


Peter Senge observes that many leaders have personal visions that never get translated into shared visions that galvanize an organization. He asserts that what has been lacking is the discipline for translating individual vision into shared vision.

Now there is the BSC used by many successful organizations (private and government) around the world as a tool that translates an organization's VMVG and strategy into a comprehensive set of performance measures that provides the framework for a strategic measurement and management system.

The BSC can be used to deal with many of the barriers to effective cascade of shared visions and successful implementation of strategy such as:

* Vision, Mission, Values and Strategic Goals (VMVG), which are not known, actionable and understood
* Strategy is not linked to departmental, team and individual objectives
* Strategy is not linked to resource allocation
* Feedback is tactical, not strategic

The Balanced Scorecard Collaborative, a global network to support organizations implementing BSC, reports that the origins of BSC can be traced back to 1990, when the Nolan Norton Institute sponsored a one-year multicompany study: "Measuring Performance in the Organization of the Future."

The study team was led by Nolan Norton as project leader and Robert Kaplan as academic consultant. Dr. David Norton was CEO of the Nolan Norton Institute, a consulting firm he confounded, which became the research arm of the KPMG, and he now serves as the president with the Balanced Scorecard Collaborative. Robert S. Kaplan is the Marvin Bower Professor of Leadership Development at Harvard Business School.

Messrs. Norton and Kaplan believed that reliance on summary financial-performance measures was hindering organizations' abilities to create future economics values. Therefore, study participants shifted to focus on the multidimensional scorecard and expanded to "Balanced Scorecard" concepts in 1992.

So what is a Balanced Scorecard?
The author Nils Goran Olve defines BSC as a format for describing the activities of an organization through a number of measures for each of these (usually) four perspectives. The description may refer to the business's current performance, or to its goals for the next period.

A BSC measures the performance of organizations from the following perspectives:
* Financial: How do we look to shareholders?
* Customers: How do customers see us?
* Internal process: What must we excel at?
* Innovation and Learning: Can we continue to improve and create value?
Why use BSC when you already went through your annual goal setting and budget setting exercises. You also have regular feedback mechanism to discuss the bottom line and total quality initiatives, e.g. ISO, ESH, others. Three major reasons to migrate your strategy into the BSC framework:

* The traditional financial performance measures (i.e. ROI, EPS) can give misleading signals for continuous improvement and innovation.

* Financial Measures alone are not enough because they may not capture all of a company's strategic objectives, bottom-line measures are after the fact and they are not very diagnostic.

* Balanced Scorecard aligns organizations to new strategies: away from the historic, short-term focus on cost reduction and low-price competition, and toward generating growth opportunities by offering customized, value-added products and services to customers.

The name "Balanced Scorecard" reflects the Balance between:
* short-term and long-term objectives
* financial and non-financial measures
* lagging and leading indicators
* external and internal performance perspectives.

For this segment of our continuing Journey on Entrepreneurship, we shall heavily lean on these books from John Wiley & Sons, Inc. for the case studies and experience of the authors:

Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results by Paul R. Niven
Making Scorecards Actionable: Balancing Strategy and Control by Nils-Goran Olve, Carl-Johan Petri, Jan Roy and Sofie Roy.

We shall also use notes from materials I bought at the ASTD 2004 International Conference.

If you are already using BSC or about to use BSC, let's exchange notes, ideas, feelings and insights from our experience. I shall endeavor to answer your questions.

(Moje, president of Paradigms & Paradoxes Corp., facilitates and consults on Strategic Thinking, Planning and Balanced Scorecard. Her e-mail address is innovationcamp@yahoo.com)

Thursday, October 7, 2004

Balanced Scorecard: Common language for business

THE MANILA TIMES
Business Times p.B1
Thursday, October 07, 2004
http://www.manilatimes.net/national/2004/oct/07/yehey/business/20041007bus6.html

LEARNING & INNOVATION
By Moje Ramos-Aquino, FPM
Balanced Scorecard: Common language for business


Mimes communicate using their body, gestures and facial expressions. Accountants communicate with financial statements. Scientists communicate with formulas, models and prototypes. Business communicates in various forms, styles, buzzwords, jargons and acronyms that differ industry to industry, company to company that makes everything very confusing.

Harvard professors Robert S. Kaplan and David P. Norton have jointly devised an easily understandable language for business that could be readily used to communicate top down, laterally and bottom up. In this interesting leg of our Journey on Entrepreneurship, we shall learn about the Balanced Scorecard (BSC). It is a communication, management and performance measurement system in one simple framework.

First let us define a few terms to help us build and implement a BSC:

Cause effect relationship: The natural flow of business performance from a lower level to an upper level within or between perspectives. For example, training employees on customer relations leads to better customer service which in turn leads to improved financial results. One side is the leader or driver, producing an end result or effect on the other side.

Goal: An overall achievement that is considered critical to the future success of the organization. Goals express where the organization wants to be.

Measurement: A way of monitoring and tracking the progress of strategic objectives. Measurements can be leading indicators of performance (leads to an end result) or lagging indicators (the end results).

Objective: What specifically must be done to execute the strategy; i.e. what is critical to the future success of our strategy? What the organization must do to reach its goals!

Perspectives: Four or five different views of what drives the organization. Perspectives provide a framework for measurement. The four most common perspectives are: financial (final outcomes), customer, internal processes, and learning and growth.

Programs: Major initiatives or projects that must be undertaken in order to meet one or more strategic objectives.

Strategic area: A major strategic thrust for the organization, such as maximizing shareholder value or improving the efficiency of operations. Strategic areas define the scope for building the balanced scorecard system.

Strategic grid: A logical framework for organizing a collection of strategic objectives over four or more perspectives. Everything is linked to capture a cause and effect relationship. Strategic grids are the foundation for building the Balanced Scorecard.

Strategic model: The combination of all strategic objectives over a strategic grid, well connected and complete, providing one single model or structure for managing the strategic area.

Strategy: An expression of what the organization must do to get from one reference point to another reference point. Strategy is often expressed in terms of a mission statement, vision, goals and objectives. Strategy is usually developed at the top levels of the organization, but executed by lower levels within the organization.

Target: An expected level of performance or improvement required in the future.

Templates: Visual tools for assisting people with building a balanced scorecard, typically used for capturing and comparing data within the four components of the Balanced Scorecard: strategic grids, measurements, targets and programs.

Vision: An overall statement of how the organization wants to be perceived over the long term (3 years to 5 years).

Our references are mainly:

Making Scorecards Actionable: balancing strategy and control (John Wiley and Sons) Nils-Goran Olve,Carl-Johan Petri, Jan Roy and Sofie Roy

Balanced Scorecard Step-by-Step: maximizing performance and maintaining results (G.P. Putnam’s Sons) By Paul R. Niven

If you have extra budget, you may also want to get the books of Mssrs. Kaplan and Norton (Harvard Business School Press): The Strategy-Focused Organizations: How Balanced Scorecard companies thrive int he new business environment The Balanced Scorecard: Translating strategy into action and Strategy Maps: Converting intangible assets into tangible outcomes.

(Moje, president of Paradigms & Paradoxes Corp., facilitates Strategic Thinking, Planning and Balanced Scorecard initiatives. Her e-mail address is innovationcamp@yahoo.com)