LSM531: Choosing the Right Performance Measures for Your Organization

Transcription

1 LSM531: Choosing the Right Performance Measures for Your Organization Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 1

2 This course includes Three self-check quizzes Two discussions Three tools to download and use on the job One scored project in multiple parts One video transcript file Completing all of the coursework should take about five to seven hours. What you'll learn Categorize business objectives and measures into the four groups defined by the balanced scorecard (financial, customer, operations, learning and growth) Distinguish between objectives, measures, and targets Evaluate initiatives for their applicability in reaching targets Distinguish outputs from outcomes, using the balanced scorecard and a causal map Create a balanced scorecard and strategy map for your team, department, unit, or organization Course Description Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 2

3 This course introduces the basics of measuring and reporting the performance of your organization. Performance reporting systems lay out an organization's strategy and report on how well it is executing that strategy. This course places particular emphasis on one such system: the balanced scorecard, one of the most popular tools for clarifying your firm's strategy and integrating it into a comprehensive system of performance reporting. Robert J. Bloomfield Professor of Accounting, Samuel Curtis Johnson Graduate School of Management, Cornell University Since coming to Johnson in 1991, Bloomfield has used laboratory experiments to examine the effects of financial market regulations on investor welfare, and to explore how psychological forces can alter the behavior of financial markets. Bloomfield is the founding director of the Financial Accounting Standards Research Initiative (FASRI). FASRI, an activity of the Financial Accounting Standards Board, uses a blog and weekly online round table discussions, to foster communication between academic researchers and accounting standard setters, and conducts and supports studies that can assist the FASB in its deliberations. Professor Bloomfield is an editor of Accounting, Organizations and Society, and serves on the editorial boards of a number of peer-reviewed journals, including The Accounting Review, Journal of Accounting and Economics, and Journal of Accounting Research. Start Your Course Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 3

4 Module Introduction: Specifying Strategy Organizations of all types use management reporting systems, often called managerial reporting systems, to track financial and nonfinancial performance. One of the most popular performance reporting systems is the balanced scorecard. This first section of the course introduces management reporting systems generally, and the balanced scorecard particularly, and explains how organizations use them to track progress toward their strategic objectives. In this brief presentation, Professor Bloomfield explains how this module will unfold. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 4

5 Watch: What Do We Mean by Management Reporting? In this presentation, Professor Bloomfield introduces management reporting systems. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 5

6 Read: Functions of Management Reporting Systems Management reporting systems play a variety of roles in tracking financial and non-financial performance in organizations. In some cases, a single report or reporting system may perform multiple roles. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 6

7 Watch: Strengths and Limitations of Management Reporting Systems In this presentation, Professor Bloomfield lays out three central themes relating to management reporting systems. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 7

8 Watch: Yes, There Is Such a Thing as a Free Lunch Nobel-winning economist Milton Friedman famously argued that "there ain't no such thing as a free lunch." In this video, Professor Bloomfield argues that the "no free lunch" philosophy is useful for an economist, but not so useful for people who work in organizations or design their reporting systems. The only reason economists can do their job better by assuming there is no free lunch is that people in organizations are doing their jobs: sniffing out cost savings, efficiencies, and opportunities to add value or increase revenues-the free lunches-that are indeed all around them! Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 8

9 Watch: Introduction to the Balanced Scorecard In this segment, Professor Bloomfield explains how this important performance reporting framework provides not only balance, but relief from information overload. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 9

10 Watch: Balanced Scorecard 1.0 In this presentation, Professor Bloomfield gives a more in-depth tour of the balanced scorecard, its components, and how it works. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 10

11 Read: Four Perspectives One purpose of the first version of the balanced scorecard was to give more prominence to nonfinancial strategic objectives and performance measures. Kaplan and Norton settled on four categories that represent important dimensions of any organization: the financial perspective, the customer perspective, the internal processes perspective, and the learning and growth perspective. Although many organizations (particularly nonprofits and governmental agencies) modify these categories slightly, these four are widely used. Click the four balanced scorecard categories below to learn more about the types of objectives corresponding to each. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 11

12 Watch: Choosing Objectives The first step in creating a balanced scorecard is to transform your organization's strategy into a set of objectives. In this presentation, Professor Bloomfield shares some advice about crafting the set of objectives to use in a balanced scorecard. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 12

13 Read: Linking Objectives to Measures, Targets, and Initiatives Once you have identified a specific objective, you must link it to a measure, set an appropriate target for each performance category, and plan one or more initiatives to help you reach that target. Here are some examples representing each category of the balanced scorecard. Financial Perspective Organization: A nonprofit organization providing hunger relief to families in its community Objective: Maximize service provided per dollar expended Measure: Dollar value of food delivered per dollar of other operating expenses Performance Target: Increase the measure to $8 of food delivered per $1 of other operating expenses. Initiative 1: Consolidate supply routes in high-demand areas. Initiative 2: Increase the number of volunteers through a service campaign. Customer Perspective Organization: A government agency providing employment services for war veterans Objective: Increase awareness of services among the target constituency Measure: Percentage of prospective beneficiaries aware of agency services, as measured by phone surveys of Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 13

14 veterans returning from service in the prior 3 years Performance Target: Seventy-five percent of survey respondents report being aware of agency services. Initiative: Partner with local newspapers and radio stations to encourage news reports on success stories. Internal Processes Perspective Organization: A service department for a local auto dealer Objective: Improve customer satisfaction Measure: Responses to customer satisfaction survey administered via the day after the service is provided Performance Target: Eighty-five percent of responding customers rate service experience at "very satisfied." Initiative: Design and implement a "customer care culture" staff training and awareness program. Organization: A household paper products manufacturer Objective: Decrease downtime due to machine breakdown Measure: Minutes that machines are idle due to machine failure, maintenance, or repair Performance Target: Downtime will be less than 2 hours per month. Initiative: Apply lean maintenance techniques to equipment maintenance processes and train maintenance personnel. Learning and Growth Perspective Organization: An international energy company Objective: Increase employee awareness of current best practices in identifying new opportunities for cost reduction Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 14

15 Measure: Hours of innovation training provided to employees each year Performance Target: Sixty percent of employees will have attended at least 8 hours of innovation training in the last 12 months. Initiative: Identify external innovation training and develop and deliver an in-house innovation awareness course. It is important to keep in mind that more than one initiative may be needed to reach the desired performance target and objective. Also, sometimes a single initiative will serve more than one objective and target. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 15

16 Tool: Sample Scorecards Download the Tool Sample Balanced Scorecards Balanced scorecards from different organizations can vary widely in their visual appearance and layout. There are many software applications, spreadsheet templates, and other examples out there in the world that show how balanced scorecards can look and what additional information they can include. Every organization needs to customize the visual format of its balanced scorecard to meets its own unique needs, but the fundamental principles and purpose of the scorecard apply, regardless of the visual format. For this course, we chose a simple layout shared by all four of the sample balanced scorecards included below. This highlights how the core principles and components of the scorecard apply, regardless of the type or size of the organization or unit. The samples here include large and small companies, for-profit and nonprofit organizations, and department-level and enterprise-level examples. Read about each organization below, then download the balanced scorecards for all four organizations from the link above. Ground Operations Department at Puddle Jumpers Airline Puddle Jumpers Airline is a regional air carrier operating in 23 small to midsized airports in northwest Europe. At an enterprise level, the airline has identified a need to improve turnaround time on the ground, both to reduce costs and to improve its reputation with customers. The Ground Operations Department has developed a unit-level balanced scorecard. Big Bucks Bank Big Bucks Bank wants to increase revenue and profit margins. Big Bucks plans to decrease operating costs and to increase revenue by increasing its customer base and expanding the portfolio of products and services it offers. Sales Department at WRST Radio The Sales Department at WRST Radio has set a goal of reaching $250,000 in annual sales. The station's only revenue source is advertisers who purchase on-air advertisements, or "spots," on their station. The department realizes that adding new customers, leveraging existing customers, and increasing customer satisfaction are keys to reaching this goal. Bleeding Heart Food Bank The Bleeding Heart Food Bank is a nonprofit organization providing hunger relief to families within its community. Bleeding Heart's priorities include investing in its employees, operational excellence, and improving the livelihood of each family it serves. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 16

17 Watch: Tips for Building Your Balanced Scorecard As part of your course project, you will create a balanced scorecard for your own organization. In this presentation, Professor Bloomfield offers some guidance. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 17

18 Watch: The Role of Causation After seeing how the balanced scorecard was implemented and used in organizations, creators Robert Kaplan and David Norton were not satisfied with the four-food-groups approach. They recast their framework into a representation of an organization's strategic plan. In this presentation, Professor Bloomfield explains the shift from the four-food-groups approach to what he calls "balanced scorecard 2.0." In this major upgrade, the scorecard moves beyond balance to incorporate causal relationships, and in so doing, it gives a new way for organizations to define and display their strategy, and to identify why they are or are not achieving their objectives. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 18

19 Tool: Sample Strategy Maps Download the Tool Sample Strategy Maps As you have seen, businesses typically organize their strategy maps with the financial objectives at the top, followed by the customer, internal process, and learning and growth objectives. In a not-for-profit or government organization, the mission typically focuses on providing a service rather than making a profit or generating shareholder value. As you'll see in the last example below, these organizations arrange their strategy maps with the customer (mission) objectives at the top, since for these organizations, the financial objectives tend to be leading measures of the customer (mission) objectives. The strategy maps on this page correspond to the sample balanced scorecards presented in the previous section. As with the sample scorecards, these sample strategy maps are simple and share the same basic visual organization. In the real world, strategy maps can vary widely in their visual layout and the additional information they include. Review the four organizations below, then download the set of strategy maps from the link above. Ground Operations Department at Puddle Jumpers Airline Puddle Jumpers Airline is a regional air carrier operating in 23 small to midsized airports in northwest Europe. At an enterprise level, the airline has identified a need to improve turnaround time on the ground, both to reduce costs and to improve its reputation with customers. The Ground Operations Department has developed a unit-level balanced scorecard. Big Bucks Bank Big Bucks Bank wants to increase revenue and profit margins. Big Bucks plans to decrease operating costs and to increase revenue by increasing its customer base and expanding the portfolio of products and services it offers. Sales Department at WRST Radio The Sales Department at WRST Radio has set a goal of reaching $250,000 in annual sales. The station's only revenue source is advertisers who purchase on-air advertisements, or "spots," on their station. The department realizes that adding new customers, leveraging existing customers, and increasing customer satisfaction are keys to reaching this goal. Bleeding Heart Food Bank The Bleeding Heart Food Bank is a nonprofit organization providing hunger relief to families within its community. Bleeding Heart's priorities include investing in its employees, operational excellence, and improving the livelihood of each family it serves. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 19

20 Module Introduction: Implementing the Balanced Scorecard Once you have created a balanced scorecard, it's time to determine how to implement it, to align it with strategy at all levels of the organization, and to make sure that the information it provides is useful and understandable to the people who need it. This module examines the issues and challenges around implementing a balanced scorecard, and discusses how to produce a balanced scorecard report that helps decision makers see not only where you are, but how you got there and what you will do next. In this brief presentation, Professor Bloomfield describes what you can expect from the rest of the course. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 20

21 Watch: What's the Difference? When considering the objectives and measures to include in a balanced scorecard, it is important to understand the distinction between objectives and measures that are outputs, and those that are outcomes. In this presentation, Professor Bloomfield discusses the importance of each, and the difference between them. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 21

22 Read: Outputs and Outcomes Out There Outputs represent the quantity and quality of the products or services an organization (or one of its employees or units) produces. Thus, outputs are aspects of performance that are largely within the control of the organization-it may be painful or expensive, but an employee or organization unit can typically guarantee that they meet outcome targets simply by redoubling their efforts. Outcomes, on the other hand, are the intended results of providing outputs. Most balanced scorecards include a mix of outputs and outcomes. It is essential to be able to distinguish between them, because they differ in important ways. One the one hand, outcomes are more important than outputs. After all, outcomes are the reason the organization generates output. However, outcomes are also much harder to control, because they are influenced by outside factors, such as economic conditions, environmental variables, or the actions of your customers, competitors, or constituents. Focusing on outcomes helps the organization make sure it is achieving its ultimate goals, whereas focusing on outputs helps ensure that the organization is improving its own contribution to outputs. Consider some of the outputs and outcomes in the examples below. Try to think of some other outputs or outcomes you would add to the ones listed here. Training Department Organization: A midsized manufacturer Objective: To provide a safe working environment for all employees Output measures: Number of training sessions offered, number of training hours, number of attendees, and number of safety awareness posters displayed Outcome measures: Scores from a posttraining assessment, number of safety violations, and days without a safety violation Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 22

23 Government Agency Organization: A city fire department Objective: To protect life and property from fire Output measures: Number of fires responded to quickly, number of calls taken, and number of automatic alarm systems inspected Outcome measures: Number of fire-related injuries, and dollar value of property lost to fire Small Business Organization: A home-improvement contractor Objective: To help homeowners with improvements to their homes Output measures: Number of projects, number of customers, and amount of revenue Outcome measures: Customer-satisfaction survey results, number of references from existing customers, and increase in customer property values Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 23

24 Nonprofit Organization Organization: A national adult literacy organization Objective: To provide free literacy instruction to any adult Output measures: Number of clients served, number of materials printed, and number of locations served Outcome measures: Number of clients who can read as a result of our instruction, number of clients obtaining a high school equivalency diploma, and average increase in reading level Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 24

25 Watch: The Importance of Alignment Now that you have a balanced scorecard and a strategy map, it's time to make sure the scorecards for each part of the organization are properly aligned with the objectives of the overall organization, and with those of other units in the organization. When the balanced scorecard is properly integrated into an organization, it performs a coordination-facilitating role, making sure that all the parts of your organization are playing the right notes at the right time. Every unit in your organization should be pursuing objectives that support, build on, and complement one another, and should work in concert rather than at cross-purposes. In this presentation, Professor Bloomfield shares some practical rules for integrating a balanced scorecard into the organization as a whole. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 25

26 Read: Cascading the Scorecard A small company with a single department may choose to implement only a single balanced scorecard. However, most organizations consist of multiple organizational units (divisions, departments, functional groups, or teams) and need to cascade the scorecard throughout the organization by following these three practices: Everyone in the organization understands the top-level balanced scorecard. The scorecard used to guide top executives at the organization captures the organization's overall strategy. Everyone in the company, regardless of level, should know what that strategy is. Every unit has its own balanced scorecard. Every unit should have its own goals to accomplish, and should have its own strategy for accomplishing them. As a result, the scorecard will be tailored to the unit's role in the larger organization. Many units will have objectives in only some of the four perspectives. For example, most of the objectives of marketing units fall under the "customer" perspective. A production unit might have mostly "internal process" objectives, or they might define their "customers" as the other units within the organization that use their products. Regardless of the area of focus, it is important that each unit have a scorecard with objectives, measures, and targets that fall within its span of control. Organizations integrate scorecards across units. Almost every unit in a large organization can view other units as its customers. Almost every unit has some impact on the organization's financial performance. Every unit's scorecard should recognize these relationships. For example, a technology services unit might view controlling total investment in hardware as a key financial objective, and reducing response time to computer problems in other units as a customer objective, even though both would be "internal process" objectives for the firm as a whole. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 26

27 Watch: Measuring and Reporting Performance In this presentation, Professor Bloomfield discusses some of the implementation realities associated with using a new balanced scorecard to report performance. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 27

28 Read: Dashboards and the Balanced Scorecard Many organizations use balanced scorecard dashboards to provide managers with up-to-the-minute performance measures against targets and objectives, displayed in a simple and graphically concise format. Many types of enterprise dashboards are available, and the term "dashboard" is used generally to describe any set of charts, gauges, graphs, or other indicators that display data that may or may not be linked to the objectives of interest to the viewer. A balanced scorecard dashboard is a specific type of dashboard with a defined structure. It typically gives users a way to see each of the perspectives (financial, customer, etc.) as well as the pertinent objectives, measures, and targets, along with some sort of indication of whether the measured performance is on, above, or below target. A balanced scorecard dashboard can be extremely useful, especially as an attention-directing tool. But a balanced scorecard dashboard tells only part of the story and generally offers little context to help decision makers understand what is really going on and what should be done about it. Interpretive information of this kind is best presented in a balanced scorecard report. Here are some sample dashboards: Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 28

29 Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 29

30 Tool: What Makes a Good Balanced Scorecard Report? Download the Tool Blank balanced scorecard report template Balanced scorecard reports come in a variety of formats and may be organized in any number of ways, depending on the needs of your organization. Here are a few key components that are important to include: 1. Executive Summary Whether you call it an "executive summary" or "introduction," your report should begin with a clear, concise explanation of performance over the reporting period. Remember that your report is a narrative; the executive summary is the abridged version of that narrative. It should present a persuasive and cogent explanation of what happened, why it happened, and how to respond. Write your executive summary as if it's the only part of your report that some of your leaders will read. Many people find that it makes most sense to write this section last. Characteristics of a Good Report Accessible The information should be available to all those contributing to the outcomes. Performance results need to reach those who are in the best position to respond to them. Comprehensible The report may be read by people from a variety of backgrounds and cultures, so the language should be clear and free of jargon. The information should be well organized and use easily understood headings to allow for quick navigation through the report. Charts and diagrams should be clearly labeled and easy to read. Verifiable The report should list the sources of its underlying data, along with any limitations of the data, its measurement or measure-ability, and margin of error. 2. (optional) List of Objectives and Measures, or Key Performance Indicators The measures and objectives you include in your balanced scorecard and strategy map may warrant some explanation of their own. A balanced scorecard report often includes a section dedicated to listing, describing, and sourcing the measures used. This is an excellent place to explain changes in measurement since the previous report, and to discuss any limitations of the measures or data. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 30

31 3. The Strategy Map Include your strategy map with all of its causal links. Be sure also to include your balanced scorecard so that you clearly show the measures, targets, initiatives, and owners associated with the objectives in your strategy map. 4. Progress This section of your report shows and explains the measured performance against the objectives. It will probably contain charts, graphs, and tables. In this section, you compare the performance of the current period to the baseline. How did performance compare with the last reporting period? How did it compare with that of competitors? How did it compare with the performance of peers? When explaining the organization's or unit's progress, it is important to explain the events that led to the current results. What were some of the internal and external factors influencing performance? This section should also contain an explanation of unintended effects-measured or unmeasured-that may have influenced the outputs and outcomes of other objectives outside the realm of this scorecard. 5. Recommendations Every good report looks ahead to next steps and possible actions the unit can take. If the unit doesn't meet the targets, should it consider a different course of action? If the target has been reached, is it beneficial to continue improvements in that area or to divert efforts to another area? Consider questions such as these as you think about the recommendations to include in your report. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 31

32 Watch: Best Practices in Reporting: Lessons from the U.S. Government The United States government has devoted considerable effort to improving performance reporting by federal agencies such as the Federal Trade Commission, the Securities and Exchange Commission, the Department of Homeland Security, and others. In this presentation, Professor Bloomfield relates some best practices established by the U.S. government for performance reporting generally, and for the balanced scorecard in particular. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 32

33 Watch: Thank You and Farewell In this final presentation of the course, Professor Bloomfield shares his parting thoughts. Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 33

34 Stay Connected Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 34

35 Copyright 2012 ecornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners. 35