TABLE OF CONTENTS
Chapter Contents
1 Introduction
1.1Background and Objectives
1.2Scope of the Project
2 What is Performance Management?
2.1 Performance Management
2.2 Performance Management Framework
3 Balanced Scorecard Performance Management
3.1 What is Balanced Scorecard?
3.2 Benefits of Balanced Scorecard as a Strategic Measurement and Management System
3.3 The Four Perspectives of the Balanced Scorecard
3.3.1 The Financial Perspective
3.3.2 The Customer Perspective
3.3.3 The Internal Business Process Perspective
3.3.4 The Learning and Growth Perspective
4 The Process of Building Departmental/ Sectional Balanced Scorecard
4.1 Step 1: Revisit Corporate Objectives
4.2 Step 2: Revisit Corporate Balanced Scorecard
4.3 Step 3: Formulate Departmental/ Sectional Objectives
4.4 Step 4: Develop Departmental/ Sectional Key Performance Indicators (KPIs)
4.5 Step 5: Formulate Targets for Each KPI
4.6 Step 6: Develop Definition for Each KPI
4.7 Step 7: Determine the Data Availability Status
4.8 Step 8: Develop Scoring System
4.9 Step 9: Develop Action Program
APPENDIXES:
1.Issues that May Appear During the Development of Balanced Scorecard
2.Self-Assessment of Your Scorecard
3.Frequently Asked Questions
FLOW OF WORK
STATUS
Done
Done
To be developed
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1. INTRODUCTION
1.1 Background and Objectives
Adhering to the management philosophy of “building value and trust”, The Company is introducing a balanced scorecard system to strengthen its performance management in achieving the company’s vision and goals. The new performance management system, which is intended for senior and middle management staff, links their accomplishment of the balanced scorecard targets with the reward system.
1.2 Scope of the Project
The Company has commissioned Hong Kong Productivity Council (HKPC) to assist in establishing and deploying the balanced scorecard system at the corporate level and the departmental/ sectional level. Implementing the balanced scorecard allows the Company to manage more successfully and achieve greater results by focusing on the "vital few" Key Performance Indicators (KPIs) that are important to customers, employees and stakeholders. It is found that organisations that effectively manage KPIs achieve superior business results more than their business counterparts.
The corporate balanced scorecard will translate the company's strategic direction and goals into a comprehensive set of key performance indicators for the coming 3 to 5 years. At the departmental/ sectional level, the functional departments/ sections will deploy the departmental/ sectional balanced scorecards to be derived from the corporate balanced scorecard. The departmental/ sectional balanced scorecard is composed of outcome measures and performance targets for departmental/ sectional functions.
To help all staff gain a thorough understanding of the balanced scorecard system, this guidebook will serve as a practical tool to lead you step by step in:
·understanding what is a performance measurement and management system ·understanding the need and purpose of the balanced scorecard
·setting key performance indicators in the four perspectives of the balanced scorecard ·identifying data availability status
·establishing the scoring system
·mapping out action plans and milestones for collecting, analysing and presenting data
2. WHAT IS PERFORMANCE MANAGEMENT
2.1 Performance Management
Performance management is a means of getting excellent results from the organisation, teams and individuals by understanding and managing performance within an agreed framework of planned goals, objectives and standards. Performance management therefore consists of a systematic approach to the management of people, using performance goals, measurement, feedback and recognition as a means of motivating them to realize their maximum potential.
The balanced scorecard provides managers with the instrumentation they need to navigate to future competitive success. It provides the framework for a strategic measurement and performance management system to measure and manage corporate, departmental/ sectional and individual performance.
2.2 Performance Management Framework
3. BALANCED SCORECARD PERFORMANCE MANAGEMENT
3.1 What is Balanced Scorecard?
Successful organisations rely on a structured methodology for deploying strategic direction, communicating expectations and measuring progress towards agreed objectives. The innovative ideas and principles of the Balanced Scorecard were first described in the book "The Balanced Scorecard - Translating Strategy into Action" by Prof. Robert S.Kaplan from Harvard Business School and Dr. David P. Norton from Renaissance Solutions Inc. back in 1996.
The balanced scorecard is a conceptual framework for translating an organisation's strategic objectives into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Process, and Learning and Growth. Some indicators are maintained to measure an organisation's progress toward achieving its vision; other indicators are maintained to measure the long-term drivers of success. Through the balanced scorecard, an organisation monitors both its current performance (finances, customer satisfaction, and business process results) and its efforts to improve processes, motivate and educate employees, and enhance information systems - its ability to learn and improve.
3.2 Benefits of Balanced Scorecard as a Strategic Measurement and Management System
·Ensuring that corporate strategies are clearly communicated throughout the organisation ·Providing a common framework for strategic planning
·Providing key information by measuring the results of strategic plans
·Focusing management on cause-and-effect relationships between processes and Key Performance Indicators
·Increasing the importance of non-financial measures
·Instilling a high-performance culture which creates value for customers, employees and stakeholders
·Providing measures and feedback on business performance
·Linking with the rewards system for motivation purpose
·Deploying the objectives to lower levels for actions and improvement
3.3 The Four Perspectives of the Balanced Scorecard
The balanced scorecard measures organisational performance across four balanced perspectives: Financial, Customer, Internal Business Process and Learning and Growth. The balanced scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.
3.3.1 The Financial Perspective
·This perspective should show the results of the strategic choices made in the other perspectives, while at the same time establishing several of the long-term goals. The focus of the financial perspective is how the company positions itself as an attractive and exciting investment to its owners.
3.3.2 The Customer Perspective
·This perspective describes the ways in which value is to be created for customers, how customer demand for this value is to be satisfied, and why the customer will be willing to pay for it. Therefore, the internal processes and the development efforts of the company should be guided by this perspective.
3.3.3 The Internal Business Process Perspective
·This perspective focuses on the internal business results that lead to financial success and satisfied customers. To meet organisational objectives and customers' expectations, organisations must identify the key business processes at which they must excel. Key processes are monitored to ensure that outcomes will be satisfactory.
3.3.4 The Learning and Growth Perspective
·The learning and growth perspective enables the organisation to ensure its capacity for long-term renewal, a prerequisite for survival in the long run. In this perspective the company should consider not only what it must do to maintain and develop the know-how required for understanding and satisfying customer needs, but also how it can sustain the necessary efficiency and productivity of the processes which presently create value for the customer.
4.THE PROCESS OF BUILDING A DEPARTMENTAL/ SECTIONAL BALANCED SCORECARD
This chapter provides a step-by-step guide for building a departmental/ sectional balanced scorecard in the four perspectives, and for ensuring that performance measures fit within an overall management approach. Examples are provided to illustrate how to set effective objectives and quantifiable KPIs.
4.1 STEP 1: REVISIT CORPORATE OBJECTIVES
The departmental/ sectional balanced scorecard should be aligned with the corporate objectives of the company. As a result, in developing the departmental/ sectional balanced scorecard, the departmental/ sectional manager needs to revisit the vision, 5-year goals, strategies and annual objectives which guides the company towards the desired future situation. Please fill out the company vision and 5-year goals in the table below:
4.2STEP 2: REVIEW CORPORATE BALANCED SCORECARD
4.3STEP 3: FORMULATE DEPARMENTAL/ SECTIONAL OBJECTIVES
The departmental/ sectional objectives should be aligned with the corporate objectives and it must:
-describe an activities that leads to the desired outcome
-has to be defined in concrete, not abstract terms
-express action. This is done by using a verb with an active connotation (e.g.
“Improve …”)
-relate to the area of responsibility of the manager for whom the objective is developed -be limited in numbers (no more than 5 to 7)
4.4 STEP 4: DEVELOP DEPARTMENTAL/ SECTIONAL KEY PERFORMANCE INDICATORS (KPIs)
A Key Performance Indicator(KPI) is preferably composed of a numerator and a denominator and percentages provide more valuable information than absolute numbers. A KPI should be concise, easy to understand, complete and measurable in practice, and should contain a reporting frequency such as monthly, quarterly or yearly basis. When creating KPIs, it is important to ensure that they link directly to the strategic directions, strategies and annual strategic objectives.
Below are some examples of KPI for each perspective. They are proposed for reference only as KPIs should always reflect the particular strategy and critical success factors of the company.
Examples of KPI in the four perspectives of the balanced scorecard:
CAUSE AND EFFECT RELATIONSHIPS BETWEEN KPIs
The balance of different areas of focus and KPI is an important element in the design of scorecards. There is often a more or less clear intention to agree on interrelationships and priorities of different factors:
?How urgent is it to increase computer literacy among employees?
?How important is customer service for repurchase frequency?
?Is it more profitable in the long run to concentrate on improving business processes than
on lowering prices?
Thus, it is a natural idea to try to create a model showing how the different KPIs in your scorecard are interrelated.
For example, Return on Capital Employed (ROCE) may be a scorecard KPI in the financial perspective. The driver of this KPI could be repeat and expanded sales from existing customers, the result of a high degree of loyalty among them. Thus, Customer Loyalty may be included in the scorecard in the customer perspective. Subsequently, analysis of customer preferences may reveal that On-time Delivery (OTD) of orders is highly valued by customers and it is expected to lead to higher customer loyalty, so it may become another KPI in the customer perspective. To achieve improved OTD, the business may need to achieve short Cycle Time in operating processes and high Quality Internal Processes, both factors could be scorecard KPIs in the internal business process perspective. And to achieve the KPIs in the internal business process perspective, the company may need to train and improve the skills of the operating employees, so Employee Skills may become one of the KPIs in the learning and growth perspective.
Senior Manager Guidebook for the Balanced Scorecard 4.5 STEP 5: FORMULATE TARGETS FOR EACH KPI
General Guidelines on Setting Effective Targets
?Targets must be set for every KPI used.
?The target should be realistic and achievable.
?The target should contain an acceptable range. Corrective action should be taken when
the result is not within this range.
?The target should be determined together with the manager who is responsible for the
result of the indicator in question. This will enhance support for the target within the organisation.
Turning Strategy into Action
Measurement and Target Form
Turning Strategy into Action 17
Turning Strategy into Action 18
4.6 STEP 6: DEVELOP DEFINITION FOR EACH KPI
Once the KPIs are set, you need to define every of them so that staff members can fully understand what they mean. It is a very important step the management should do in order to avoid any confusions when interpreting the KPIs.
Examples:
Please use the Glossary Form below to define the KPIs in the Department/ Section.
GLOSSARY FORM FOR KPIs IN THE COMPANY