Review : Putting the Balanced Scorecard to Work

Kaplan, R. and Norton, D. 1993. Putting the balanced scorecard to work. The performance measurement, management and appraisal sourcebook, pp. 66–79.

The article states that today’s managers realize the impact measures have on performance. But what they don’t realize is that measurement is essential part of the strategy. They may introduce new strategies and innovative operating procedures, but continue to use the same short-term financial indicators. They not only fail to realize the new indictors, but also fail to question whether the old measures are relevant.

The balance scorecard provides with a comprehensive framework that translates company strategic objectives into a set of performance measures. It presents with four different perspectives from which to choose measures: financial, performance for customers, internal processes, and innovative and improvement activities.

Traditionally, companies have their own operational and physical measures for local activities. But these local measures are bottom up and are based on ad hoc processes. On the other hand, the scorecard’s measures are based on organization’s strategic vision and competitive demands. Scorecard, by requiring the organization to concentrate on limited number of indicators, helps them to concentrate on their strategic vision.

Unlike traditional measures, which focus on past successes, the balanced scorecard tries to strike a balance between current and future successes. Also, it tries to strike a balance between external measures, such as operating income and internal measure, such as new product development.

Finally, organizations are typically involved in various initiatives such as: process reengineering, total quality, and employee empowerment, but lack a sense of integration. The process of balanced scorecard development tries to create a focal point of activity where all such activities are integrated.

The balanced scorecard is not a template that can be applied everywhere. Its development is a process that can be applied to different situations, strategies and environment. In addition to organization, their individual units can customize it according to their objectives. Balanced scorecard is very transparent, as by looking at it, one can arrive at a conclusion about business unit’s competitive strategy.

Let’s take example of Rockwater, which is an underwater engineering and construction company. They realized that the competition in their industry has changed dramatically. They observed that the focus in the industry had shifted from low-price competition to long-term partnership based on value creation for the clients. The senior management team of the company created a vision for their company. It was to provide highest standard of safety and quality for their clients. Based on that vision, they also created a strategy, which had five elements, which were further developed into strategic objectives. To make them tangible, they distributed those strategic objectives among the four sets of balanced scorecard performance measures.

If one observes their financial measures, in addition to the measures for short-term results, they added two more measures to overcome the uncertainty of future performance. Regarding the Customer Satisfaction measures, and in response to changing environment, they decided to divide them into those who provide high value and those who are price conscious. This will allow them to create a different set of measures for both kinds of clients. As value-based clients were beginning to bring in more business, and were focus of their strategies, they decided to conduct an annual survey to understand their perceptions of the company. This was in addition to monthly satisfaction and performance ratings they requested from their clients. They felt that such measures gave them direct access to customer and market feedback.

Regarding internal processes at Rockwater, they made a major shift in their thinking. They moved from measuring performance of each functional unit to that of integrated key business processes. This helped individual business units to come out of their silos, and think about product and end-to-end process to deliver them. This helped make the effectiveness of their project performance as their key core competence. Further, the also realized that time spent with prospective client went a long way in building relationship. And it had direct bearing on influencing results. At the same time they wanted that a metric that could be communicated this across the organization. Even though it is an input or process measure, they chose to go ahead with “hours spent with key prospects discussing new work” as a key measure.

With regards to Innovation and Improvement, Rockwater believe that it was something that driving the other three categories. They believed that they would achieve these objectives through innovation of new products and services. This will result in creation of new sources of revenue, and market expansion and diversification. They also stressed on the need for continuous improvement of internal processes. They measured the first objective by the revenue generated from new sources. And the second objective was measured by a continuous improvement index. They felt the need to create an appropriate atmosphere in order to drive these two objectives. A supportive climate of empowered and motivated employees was considered essential.

The picture changes slightly when evaluating the role of balanced scorecard in context of Apple computers. When they went about creating theirs, they wanted to think beyond the short-term measures, such as ROE and market share. For financial perspective they chose shareholder value; for customer perspective, they chose market share and customer satisfaction; for internal process perspective, they chose core competencies; and lastly for improvement and innovation, they stressed on employee attitude.

As their customer base was not homogeneous, they chose to do their own customized survey than to depend on standard market surveys. It is highly noteworthy the core competencies they chose under internal process perspective. What they chose to make their core competencies is the kind of things that are close to their client base. That made a wonderful strategy, and it clearly reflects on their products. To promote the employee commitment and their alignment, they chose to do survey. And in an effort in that direction, they formulated the survey question to convey and assess their knowledge about company strategy. Also, the used the market share as tool to remain attractive to software developers. The inclusion of shareholder value is well thought off, even though it is a result and not a driver of performance. This was done with the idea of replacing the old indicators that didn’t take into account the investment made today, which will generate revenue in future. This helps the unit head of each major organizational unit to assess the impact of their initiatives on company’s new ventures.

These initiatives have helped Apple in many ways: as the balanced scorecard is used primarily as a planning device, instead of monitoring device; and these metrics can be driven both vertically and horizontally.

The move to balanced scorecard at AMD (Advanced Micro Devices) depicts a very contrasting picture. They did execute a quick and smooth transition to balanced scorecard. They already had a clearly defined mission and strategy, and senior management team understood it well. They already had performance measures, which fitted well into a quarterly briefing book’s seven sections. So, the things pretty much remained the same. As a result what they had a repository of information that allowed long-term analysis for performance and planning evaluation. All this looks fine, but it had retrospective outlook, and didn’t seem to lead the change.

It cannot be overemphasised that the development of balanced scorecard helps drive change. Particularly, if two different organizations are merging, it helps bring together the culture and help employee speak same language. The process of developing the balance scorecard comes in handy, when despite apparent consensus on strategy; there is disagreement about how to make it operational. Therefore, it helps them reach a consensus regarding the high priority areas.

Taking example of Analog Devices, it states that the main impact has been to help sustain initiatives where they have been working for years. In contrast, the scorecard isn’t always an instrument for dramatic change. Taking the example of AMD, the development of scorecard didn’t have any dramatic impact because the executives didn’t use it to drive the change. Prior to developing the scorecard, they had already formulated and reached consensus over mission, strategy and key performance indicators. As AMD competes in a narrow segment of the industry, the managers were already familiar with the technology, engineering and the markets. So, what they compiled at the scorecard wasn’t new, but it did allow them to see things from organizational perspective. Therefore, AMDs limited success with the scorecard underscores the point that it delivers dramatic results only when used to drive a change process. That makes it not just a measurement system, but a management system.

Not just the scorecard, but also the kind of measures we are employing is also important. Taking the example of FMC Corporation, as diversified company, the return-on-capital-employed (ROCE) was especially important for them. The move away from return-on-investment to ROCE helped them focus their attention on further growth. From that perspective, it helped them determine business that were doing well, and those that weren’t. It also set them for splitting the company into independent companies, such that each had its own strategy. The take away is that if you want a corporate to change its strategy, then you must change the system of measuring the new strategy.

Balanced scorecard also helped organization step away from measuring only the short-term financial results. The organizations realized that they need a new system of measurement to help manager achieve breakthrough in marketplace. They would need to focus on thing that will bring in long-term values, such as customer service, market position and new product development. They use the balanced scorecard a focus of their discussion about they want to see in future, how to become the most valued supplier etc.

It also entailed giving freedom to division managers to develop their own balanced scorecard. But senior management did give them certain specific guidelines: first, the measures should be objective and quantifiable, and second, they should be output measures, and not process measure. It is believed that focusing on output measures helps managers to understand their industry and strategy, and helps to measure success through specific output.

While building upon the balanced scorecard, one needs to understand that difference between process improvements and the output achieved. Furthermore, one needs to differentiate between benchmarking and scorecard. It is much easier to benchmark a process than an output. That is because each of the output measures are associated with long-term targets. That is what makes a scorecard more strategic.

The managers at FMC didn’t find going for unit wise scorecard as smooth as predicted.

Synergy in community sector

There is active decision these days at personal level whether the new/re-elected government in Ontario will push for mergers in community health sector.  There has been a lot of speculation lately, and people within the organization have begun chatting.  Couple of observations here: not all mergers & acquisitions are successful; also some organization rather be stand-alone; what’s the guarantee that m&a will increase care and save money; and push to integrate might take focus away from core competences.

Under these circumstances, what should the leaders in system do?  Should they push for integration? Or should they offer to cash benefits it integrate? or like current scenario leave it to organizations to decide.

I don’t think they should push for integration as that might prompt organization to leave everything and run to find a partner.  That may lead to unhealthy associations with negative fall out in future.

Leaving it to organization won’t work either as executives won’t take pain unless there is some push or incentive.   I’ll leave it to the government whether to push or create incentive, but they should first create an atmosphere where organizations are prompted to talk to each other.

One of the things that come to mind is that organizations should be prompted to be in direct working relations with each other.  Say, a home care organization can develop direct working relationship with a long term care (LTC)  facility.  Such that if one of former’s client needs LTC service, the can be directed right away.  This way chances are that both organization might find reasons to integrate.  Even otherwise, they will develop efficient working mechanism between them.

Some may say that it will bypass the CCACs, but at the same time it will give choice to patients whether they’d want to go to LTC their home care provider recommends or go via CCAC route.  This will create incentives for efficiently run organizations to come together.  Also, take load off CCACs.  Now how that relates to first come first serve basis enshrined in Canadian health system, will be topic of further debate.

Medecins Sans Provincial Frontiers

Was reading in CBC that doctors, especially foreign trained are having difficulty having their credentials acknowledged across provincial boundaries.  It talks about an agreement being reached in this regard between provinces, but regulatory bodies not doing enough to implement it.  I’d say it is generally true of these licensing bodies, as they are more of interest groups making sure there is no flooding of physicians in the market.  There has to be cross border acceptability of licence, otherwise new Canadian doctors will shirk from going to Prairies unless assured that they can settle in major metropolitan centres in future.

The article states that the problem is particularly high in case of special licences where a doctor is supposed to work under supervision of an experienced doctor.  And can work independently only if there is shortage in that province.  If you have a look at it, it smacks of licensing bodies having upper hand over provincial health priorities.  These special licences speak of the fact that their denial of full license has less to do with doctors abilities, and more to do with their restrictive agenda.

In my opinion the special or selective licence itself is a problem.  Like the current situation doctors with these special license should be allowed to work under the experienced doctor.  But, the latter  taking the mentorship role and guiding the protégé through getting full license.

Weird Idea

Was just thinking to myself why Canadians are so scared of private healthcare that it gives them sleepless nights.  After all, greater part of the world pays direct out of pocket for healthcare, so why is it that we behave differently.  I think it is out of fear that if we were to go the private way, we will have to continue to pay for public healthcare system via taxes.  So, what do we do?  If we were to go the private way, will the government agree to cut down our taxes?  I don’t think so, as they still need to maintain and expand the public healthcare system.  So, where do we go from here?  We can certainly demand that if we had to take help of private healthcare facilities, then that would imply that our tax dollars didn’t come in handy.  In short, money spent by individual on private healthcare should be tax deductible.

Board and Quality Initiatives – I

Lately have been working on the role the boards should be playing in leading quality initiatives in an organization.  It becomes some sort of challenge as it is an operational matter and therefore beyond direct preview of the boards.

Although, dashboards of various kinds are widely accepted as a means of governing quality and other parameters, but the idea is to go beyond the reporting mechanism and actually lead the initiatives.  So, here are a few thoughts on this matter.

  • The quality parameters can be either devised in-house or can be borrowed from the accrediting agency or some other similar organization.  As those would be become widely acceptable standards, if the organization wants to stand out it needs create some of its own based on its mission, vision and values.
  • It is generally not talked about, but if you want to maintain quality then there has to be some time associated with monitoring of quality.  An audit done once every six months may miss out on many adverse incidences.  Therefore, I’d recommend that quality parameters should be evaluated as frequently as operationally possible.  This is something that board can stress upon.
  • Regarding boards response to negative trends in dashboards, I’d suggest their recommending executive team to formulate some short term plan to overcome those negative outcomes.
  • Also, it would be very important to link quality initiatives to the strategic plan, and this is something board can stress upon.  The strategic plan should include when and how we will reach a certain level of quality, and the dashboard would be use to collaborate the results.

Quality Symposium

Attended a health quality symposium today, and here are a few thoughts I’d like to share.

  • They showed an example of hospital bourn infection that patient got due to negligence of nursing staff.  It occurred to hospitals should make it a point to show such slide presentation to their nursing staff, and particularly show examples from their own hospital.  That way the staff would be able to relate better and feel personally obliged to avoid such incidences in future. 
  • Also it was suggested that hospitals should be appoint physician and nurse champion/lead on quality.  They would review and publish shining examples of how staff members took preventive steps to avoid potential adverse outcome.  I should mention that those examples should be chosen where timely action was taken.
  • Hospitals should also develop inexpensive tools to measure quality.  That is particularly relevant to small organizations with little or no IT infrastructure.
  • With regards to surveys and feedback reporting, it should be right after the incident.  Some organizations do annual or bi-annual surveys, and by the time they’re done half of the things have faded from people’s memory.  It quality is to be maintained, then incidents should be reported at the earliest and action taken promptly.

Hospital Boards & Stakeholder Engagement

was reading an article in recent edition of CCHSE publication Forum about decisions by boards that didn’t go down well with certain stakeholders.  It didn’t take the name of the institution, but talked about how the consolidation of Maternal & Child Health services by a particular multi site institution.

The article gives certain do’s and don’ts that boards to should follow in order to overcome ethical dilemma and decision-making.  What I am wondering is whether boards have all inputs from various stakeholders in the first place.  All institutions have various stakeholder committees, but does the outcome of those meeting ever reach the board members.  Similarly, do the board members ever get first hand information about government’s or regional health authority’s perspective.

Among other things, institutions should some sort of knowledge bank or bulletin to inform the boards and other senior leaders of the deliberations of various stakeholders (including government) meetings.  It should be confidential, but not restricted.  Besides giving access to meeting minutes and executive summary, there should be opportunities to interact on one on one basis with stakeholders.  Board members in spite of their best intentions, will make better decisions only if they are even better informed.