IMPLEMENTING A BALANCED SCORECARD AT A SOFTWARE DEVELOPMENT COMPANY

Transcription

1 IMPLEMENTING A BALANCED SCORECARD AT A SOFTWARE DEVELOPMENT COMPANY G. Ioannou, A. Papalexandris, G. P. Prastacos and E. Soderquist {ioannou, alexp, gpp, soderq@aueb.gr} Management Sciences Laboratory, Athens University of Economics & Business 47A Evelpidon & 33 Lefkados Street, Athens , Greece Abstract-In this paper we develop a specific Balanced Scorecard (BSC) model, and present the experiences from its real-life implementation at a large software development company. The proposed approach is based on the Kaplan-Norton model, and takes into account the particularities of the software industry. Via the discussion of the actual implementation in a technology driven and oriented company, we illustrate the effect that the dynamic environment and the increased concerns about intellectual capital have on business strategy and the performance metrics inherent in the BSC model. In this context we also identify and evaluate some critical success factors and shortcomings of the particular project in order to derive guidelines for similar implementations. specific BSC model, and present the experiences from its real-life implementation at a large software development company. The proposed approach is based on the Kaplan-Norton model, takes into account the particular characteristics of the software industry, and provides special attention to the human resource involvement in the deployment of the model. I. INTRODUCTION In the early 90s Kaplan and Norton, realizing the lack of a proper management system that would incorporate all quantitative and qualitative measures of true importance to an enterprise, developed the concept of the Balanced Scorecard (BSC) which aims at providing a framework that translates strategy into action [1]. The BSC is developed along four perspectives, which provide a holistic view of any company, i.e., Financial, Customer, Internal Business Process and Learning and Growth. These perspectives allow a balance between short- and long-term objectives, between outcomes desired and the performance drivers of these outcomes, and between hard objective measures and softer, more subjective measures. Fig. 1 illustrates the BSC perspectives and their building blocks. By monitoring the metrics within each perspective and by maintaining a balance between all four perspectives, management is able to control the strategy implementation process, not just for the realization of short-term financial outcomes but also for developing long-term competitive capabilities. The literature describes in great detail the concepts of the BSC and offers insight into the benefits a company can reap as a result of the implementation and subsequent use of this management system. However, few articles offer detailed, impartial and practical information concerning the actual implementation of a BSC. In this paper we develop a Fig 1. The BSC Perspectives and Building Blocks II. THE SOFTWARE DEVELOPMENT COMPANY The Software Development Company (SDC) is a Strategic Business Unit (SBU) of a multinational enterprise with a turnover greater than 500 million and more than 400,000 employees worldwide. SDC was established in the late 1980 s with the objective of developing integrated solutions for communication, information technology and security systems. Its customer base is concentrated in Greece and the Balkans, while some customers come from other European and non-european countries. SDC employs 150 people that are almost equally split between three divisions, each one with the task of developing different technology software, and aims at reaching 200 people within the next two years. In the last few years, SDC had experienced significant changes and rapid growth and the future is expected to be even more dynamic. At the same time, increasing turnover was affecting the cost required to recruit, hire and train the employees and was making

2 on the job training more and more difficult, while placing the quality of the deliverables at risk. Under the volatile business and internal conditions, management wanted to: a) Specify the most important drivers of business performance and focus the company s effort and resources to common goals. b) Capitalize on the main strengths of SDC and depict the areas for improvement. c) Implement a measuring system which would not rely solely on financial measures, and by which the performance of the whole business unit would be rated upon. Given these circumstances, an effective and efficient management system like the BSC, being a fairly easily understood concept which enhances bottom-up flow of information [2], appealed to top management and was considered to be the most appropriate tool for the particular situation. III. APPLICATION OF THE BSC AT SDC In designing the BSC the implementation methodology framework provided by Kaplan and Norton [3] and Vital et al. [4] was mainly followed, with appropriate enhancements and changes where necessary. Even though Kaplan and Norton s four perspectives should not be used as a straightjacket [5] and many articles and books alter or add perspectives to the BSC model [6], in this BSC application the four-perspective model was kept unchanged. Thus, the selected human resources objectives and measures were incorporated in the internal process and the learning and growth perspectives. The project of preparing, designing and implementing the BSC for SDC comprised seven distinct phases as follows: The first phase involved the project preparation, which mainly comprised visioning, scoping and planning for the project, as well as developing techniques to avoid resistance to change and to achieve commitment from the company. In order to gain the necessary commitment from the whole organization, which had been recently involved in a time consuming and of disputed benefit project, it was important to present the major factors constituting the need for change in the particular business unit and to demonstrate the added value of a BSC implementation. This step was followed by the assembly of the project team, which consisted of nine SDC key employees who had the skills and the commitment to participate and actively contribute as project team members. The second phase involved the clarification of the vision and the identification of the SDC strategy and included workshops and interviews with the project team and with other internal and external stakeholders using structured questionnaires. After the distribution of questionnaires and the interviews, the following activities were performed: filled questionnaires were collected and data were analyzed, summaries were compiled and wrap-up workshops were run, to devise vision and strategy and to classify the strategy into themes. All outcomes were reported to the management committee for approval. The result of the first round of interviews and workshops of the current phase was the identification of the three most representative strategic themes of SDC, i.e.: a. Increase value added to the group. The ultimate goal of SDC was to increase the added value to the group through the pursuit and investment in technologies with large profit margins and pull out of technologically saturated markets. b. Offer high quality services to valued customers. A segmentation of SDC s clients showed that even though they were rather large and few, they still abided to the 80 / 20 Pareto Principal. Given this segmentation, SDC aimed at placing more attention to its highest value customers. c. Add, retain and develop the intellectual capital. This strategic theme was twofold. First, due to the importance of the intellectual capital, especially to these types of companies, SDC was committed at ensuring that the employees were properly motivated and satisfied. Second, it was important for SDC to increase the competency of its employees by adequately training them so that they would be able to compete effectively in such a Global and rapidly changing market. The third phase involved the identification and prioritization of strategic objectives (goals). Within this phase, the linkages of SDC to other SBUs had to be established so as to form an understanding of the corporate and business unit objectives. The selection of the strategic objectives commenced with the financial and proceeded to the goals in the other perspectives by posing the question: If I succeed with my vision and strategy, how will my performance differ for stakeholders, for customers for internal business processes and for my ability to grow and improve? [7]. In order to depict the most appropriate objectives for the company, the project team ranked each strategic objective according to the enterprise-wide significance, the improvement potential and the feasibility of implementation. The result of this phase was the design of the strategy map, which entailed all the chosen strategic objectives and their cause and effect linkages categorized according to the strategic theme and the perspective they most closely represent. This phase ended with the presentation and explanation of the strategy map and other findings to the selected stakeholders.

3 The fourth phase involved the selection of the measures for monitoring the strategic objectives (Table 1). The selection of the measures was based on the closeness and ease of monitoring of each potential measure to each strategic objective. When deciding on the measures that were going to be used the following true statement was kept in mind: Complexity is the enemy [8]. Taking into account that one of the main advantages of the BSC is that it can be used as a communication tool, we were looking to identify the measures that not only represented but could also communicate more effectively each strategic objective to the whole company. In order to identify these measures, the first step was to review existing performance measures and to check whether they had a close linkage to strategy. Incorporating these measures in the BSC capitalized on the effort already allotted in measuring performance and contributed in depicting some measures that were familiar and commonly understood by employees. TABLE. 1 EXAMPLE OF A BSC STRATEGIC GOAL BREAKDOWN Strategic Goal Add new customers Measure New customers / Total customers Measurement Three months Frequency Measure owner Mr. Smith Target Increase by 4% Initiatives Intensify and improve marketing campaign Organize and sponsor events Contact customers with dormant accounts Budget After having examined existing performance measures and since the financial and customer measures are mostly common to all companies, efforts focused and considerable time was spent reaching consensus on the leading key performance indicators. In defining these measures, the different types of culture (national culture, occupational culture and organizational culture) that existed within the organization [9] had to be taken into account, especially considering that the project was performed at a large multinational company with employees from all over the world, coming from different cultures and with different educational backgrounds. Defining the appropriate measures was not an easy task. Some of the main strategic objectives of the SDC, like the quality of the software produced or the employee development, productivity and satisfaction, were difficult to be translated into appropriate measures. In addition, most of the performance indicators were not currently available and data collection was necessary. However, this was not a limiting factor since it is a known fact that measurement often focuses on easily quantifiable criteria such as cost, profitability and productivity, while neglecting other criteria which are of the same if not of more importance to competitive success [10],[11]. After having selected 35 performance measures that would effectively represent each strategic objective and having verified the cause and effect relationships, each measure was ranked and the most appropriate ones for the BSC were selected. This was made possible by examining the interrelations of performance measures (e.g. redundancy) and factors like applicability, communication potential and measurement and improvement feasibility. Finally, to further reduce the measures, the project team was asked to vote on the measures it considered most suitable and applicable and a final selection of 20 measures (4 to 5 for each perspective) was performed. The fifth phase involved the target setting and scheduling for the measures. The main aim of this phase was to decide on a goal (target) for each objective and to determine the measurement frequency (Table 1). In this phase it was important to assure that managers would establish ownership of the measurements so that the measurement schedules would be kept and the BSC would continue to be used as the main measurement and management system after the completion of the implementation. Thus a measure owner, who would be capable of monitoring and performing fine-tuning activities to improve performance in the particular measure, had to be selected. For leading indicators, the owner was also held accountable for the overall performance of SDC. Assuming Theory Y [12] applied, whereby employees are motivated by rewards and incentives associated with goals they helped determine, the establishment of an owner for each measure and the involvement of all employees in the contribution of possible initiatives for these goals, would lead to increased motivation and effort towards achieving the goals and improving the measures that were selected. Setting the appropriate targets for the measures required a deep knowledge of the particular industry and of the competitive environment the company was operating in. It also required examination of best practices and benchmarking against leading companies in Greece and abroad. The final decision about the appropriate targets however, was always taken after direct input from the owner of the measure, to make certain that he/she would be committed to the improvement of the measure he/she assigned to. Along with the targets, the frequency of the measurements was also defined. Milestones were set for each target according to the most appropriate measurement period. Financial measures, due to their measuring periodicity nature, were taken every 6 months to one year, depending on the measurement

4 feasibility; all other measurements, which were not affected by seasonality and other factors that would make the results misleading, were examined at shorter intervals. The mangers were also prompted to set sub-milestones for the targets in order to monitor the performance of the measures and to avoid diverging from the target. Due to the lack of experience of managers with the target setting procedure for the selected measures, the targets were frequently altered towards more feasible ones, during the course of the implementation of the BSC. However, practice and experience in this field resulted in more precise and appropriate target-setting procedures as time progressed. The sixth phase involved the development of strategic initiatives for achieving the targets (Table 1). This entailed outlining the way in which targets, set in the previous phase, would be attained. The project team and the process owners derived the strategic initiatives that were believed to contribute in achieving the targets that had been set, with the help of benchmarking. The initiatives focused on the leading indicators since the performance outcomes (lagging indicators) are to a great extent dependent on the leading indicators [13],[14]. Significant attention was placed on the learning and growth perspective measures, since these were the most important ones for SDC and would mostly affect all other measures. A SWOT analysis for SDC was also used in this phase in order to depict the areas for improvement where the initiatives would be focused. As prompted by Kaplan and Norton [15], the process of coming up with the initiatives was one where most of the employees of the business unit actively participated and contributed. The number of initiatives that the employees provided was overwhelming, as is the case in several BSC implementations [16]. All the suggestions that were offered were then examined with regard to their feasibility and the expected contribution in achieving the goal. They were also ranked and prioritized according to their improvement potential in a project team workshop, which resulted in the documentation of all the proposed initiatives. The process of developing the initiatives for attaining the targets resulted also in the final adjustment of the targets themselves, based on the feasibility and the perceived effectiveness of the initiatives. Finally, a strategy budget was appointed for the strategic initiatives that were proposed in order to protect longterm objectives from the pressures to deliver shortterm financial performance [17]. After the design of the BSC for the business unit, the final phase included the formulation of the implementation plan for SDC, which involved both the communication and breakdown of measures to all the levels of the organization and the selection of the IT support necessary to monitor the company s performance. Given that 44% of the 57 organizations responding to a Survey by Towers Perrin [18] experienced serious to major problems in developing the information systems needed to support the BSC, it was imperative to select the software solution that was the most appropriate for monitoring the performance measures and to depict a way in which the information would be extracted from the database and presented both effectively and efficiently. Many BSC software solutions have recently been developed. These range from expensive, complete solutions of large software manufacturing and ERP systems development firms, like the Oracle and the SAP Balanced Scorecard solution, to very cheap solutions which serve only as a representation medium for the measures and the targets that have been set. For SDC, a middle range solution was chosen where data could be fed directly from the database of the company but some manual input was also required. The main reason for choosing not to proceed with a full-blown integrated IT solution was the attempt to promptly initiate use of the BSC by SDC s employees. The final phase resulted in the presentation of the BSC implementation to all the employees of SDC. The responsibilities of the employees, both in achieving the targets and in constantly running and proving their input for the BSC, were explained. A plan was also created to reconfirm the validity of the strategic objectives, the selected measures and the chains of cause and effect, once a year. In the case where a lack of correlation would be observed between presumed driving factors and expected results the cause and effect relations would be reconsidered and fine-tuned. In all phases, externally driven guidance and support was mostly serving the role of a facilitator rather than the implementer, placing the burden of the implementation on the SDC personnel. This way, SDC employees developed a sense of ownership of the project and at the same time, they acquired the knowledge needed to alter any strategic objective and the corresponding measures at any time where the strategic priorities of the company would change. IV. CRITICAL OVERVIEW OF THE BSC IMPLEMENTATION A BSC may bring a company many short and long-term improvements. Some of the obvious improvements are documented in case studies and include incremental changes in financial and customer measures, such as increase in revenue and profitability, decrease in cost, increased customer satisfaction etc. However, Meyer [19] rightfully argues that pre-set goals are almost always met, but whether goals are achieved by improving performance or by improving the measures without improving performance can be difficult to determine. This is

5 why, apart from the improvements in measures that result from a BSC implementation, some of the main advantages brought to a company by this tool are the not so apparent intangible improvements. In the particular implementation, apart from the anticipated feedback and communication enhancements, which are two of the main advantages of the BSC and which have been thoroughly documented in many BSC case studies, the use of the direct input from all employees and the attempt to incorporate their opinions and strategic initiatives in the BSC, also had a positive effect on the employee motivation and morale. This was evident from the increasing score in the employee satisfaction questionnaires, but could also be deduced indirectly by the decreasing yearly turnover. In our opinion, this was also the determining factor that contributed to the overall improvement in all three strategic themes and in most of the performance measures in the following years of observation. In general, however, apart from the various improvements of the BSC, there are certain weaknesses and shortcomings, which were evident from the BSC implementation at SDC. The main weakness lied in the complexity and time involved in its development and periodic review. Especially, if there is a need in representing different business units and levels of the company, where the development of a Scorecard for each level of the company is usually advisable. In such cases, as Newing [20] argues, the costs may well outweigh improvements in organizational performance. This complexity might also encourage organizations to attempt partial application of the system, in which case the benefits of the implementation will be limited. Furthermore, since the selected measures are chosen in such a way so as to be aligned with the strategic goals of a company at any given time, there is a need for frequent revalidation of the chain of relations and of the measures that are going to be used each time the strategic goals of the company change. Hence, a great amount of time and resources is not only required to develop the BSC but also to fine-tune it so that it will be kept updated and effective. V. CONCLUSIONS A lot of academic research has been performed concerning the usefulness and the value added to a company by the implementation and use of the BSC. Many articles have been written concerning the apparent improvements and benefits to a company from the implementation of this management tool. Recent research [21] also shows that more than half of the companies using the BSC were satisfied and only 12% were not satisfied. This stands in contrast to users of all performance measurement systems where the survey discovered that only one third of all respondents were satisfied with their current measurement system. Other research and documented implementations, while agreeing about the usefulness of this management tool, also point out and anecdotally support some of the shortcomings to the BSC [22],[23]. However, there are also articles that question the overall concept of the BSC and oppose its use as a performance management system [24]. After having implemented the BSC at a company facing fierce competition and vast internal instability, and after having viewed both incremental improvements in performance but also an important range of intangible benefits resulting from the implementation and use of the BSC by the company, our view coincides with the views of Mooraj et al. [25], who through a line of logical argumentation and assumptions, establish that the BSC is a necessary good for companies. However, like with most other management tools, the BSC needs to be used in order to realize its full value and usefulness as a strategic communication and management tool. Its usefulness and effectiveness, however, is critically dependent on the sequence and content of the design process used to deploy it [26], as well as on many other predictable and unpredictable internal and external company factors that have not yet been fully rationalized and documented. in closing, we must note that the BSC is seen to provide more value to a company when it is used as a framework and a guideline for successful strategy communication and implementation and as a system for understanding what really creates value in the company, than when it is used as originally proposed by Kaplan & Norton[27], namely as a performance measurement system. The last statement should be also complemented by the view of Schneiderman [28], namely, that the BSC will fail if the company does not use the information provided to drive changes in the way it works. REFERENCES [1] Kaplan, R.S and Norton, D.P. (1992) The Balanced Scorecard Measures that drive performance. Harvard business review 70(1), [2] Broady-Preston, J. and Hayward, T. E. (1998) An assessment of the relationship between marketing, information and strategy formulation in the retail banking sector. International Journal of Information Management 18(4), [3] Kaplan, R.S. and Norton, D.P. (1996) Translating Strategy into Action - The Balanced Scorecard. Harvard Business School Press. [4] Vitale, M., Mavrinac, S.C. and Hauser, M. (1994) New process/financial scorecard: A strategic performance measurement system. Planning Review 22, [5] Epstein, M. and Majoni, J.F. (1998) Implementing corporate strategy: From Tableaux

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