Linking Operations to
Strategy and Budgeting
By David P. Norton, President, Palladium Group, and cofounder, Balanced Scorecard
Collaborative; and Philip W. Peck, Director, Palladium Group
In the May–June issue,David Norton made the case for a new expense
category, STRATEX, dedicated to funding strategic initiatives—the
means by which the enterprise carries out strategy. But successful
strategy execution requires more than just a separate budget for
strategy; the organization must link both strategy and operations
to the budget, and do so in a way that is transparent (thus easy to
analyze and revise) and future-focused. Causal models, driver-based
planning, and adaptive tools such as rolling forecasts together constitute
just such an integrating mechanism that can also give organizations
more information (the whys, not just the whats), flexibility,
and agility—vital capabilities in a competitive, fast-changing world.
The budget: we love to hate it. Former GE chief Jack Welch once characterized
it as “the bane of corporate America,” words that capture the frustration of
growing numbers of managers. For most organizations, the annual budget
process is a painful, distracting, months-long exercise that consumes a tremendous
amount of resources and so quickly becomes outdated that it is often
irrelevant for decision making. Moreover, since most organizations do not link
the operational plans (the basis for budgets) to strategy, they suffer chronic
fiscal disconnect. Once the budget is approved, they spend the next twelve
months reconciling results to the original—and flawed—numbers. Despite the
cost and complexity, the end result is so inflexible that it can’t be adapted to—
or help the organization adapt to—changing conditions.
In fairness, much of the frustration comes from what budgeting doesn’t do—
and was never intended to do. The financial budget was meant to provide a
rational way to allocate financial resources and ensure control of their use,
functions that it performs with reasonable effectiveness. It was not designed
to adequately make forecasts, explain variances, or promote a long-term view.
It was not meant for communicating strategy or for target setting. And more
important, it was never intended for managing either strategy or operations,
although many organizations attempt to do so. We don’t advocate, as some do,
eliminating financial budgeting. Let’s just accept it for what it is: a necessary
tool for managing the allocation of financial resources. To manage strategy and
operations, we must look to other systems.
Friday, August 31, 2007
Selected Bibliography - The Balanced Scorecard
Selected Bibliography
The Balanced Scorecard - Measures That Drive Performance, Kaplan, Robert S., and Norton, David P.; Article, Harvard Business Review, January 1992.
Putting The Balanced Scorecard To Work, Kaplan, Robert S., and Norton, David P.;
Article, Harvard Business Review, September 1993.
Using the Balanced Scorecard as a Strategic Management System, Kaplan, Robert S., and Norton, David P.; Article, Harvard Business Review, January-February 1996.
The Balanced Scorecard: Translating Strategy into Action, Kaplan, Robert S., and Norton, David P.; Harvard Business School Press, 1996.
The Strategy Focused Organization, Kaplan, Robert S., and Norton, David P.; Harvard Business School Press, 2001.
Having Trouble With Your Strategy? Then Map It, Kaplan, Robert S., and Norton, David
P.; Article, Harvard Business Review, September-October 2000.
The Balanced Scorecard - Measures That Drive Performance, Kaplan, Robert S., and Norton, David P.; Article, Harvard Business Review, January 1992.
Putting The Balanced Scorecard To Work, Kaplan, Robert S., and Norton, David P.;
Article, Harvard Business Review, September 1993.
Using the Balanced Scorecard as a Strategic Management System, Kaplan, Robert S., and Norton, David P.; Article, Harvard Business Review, January-February 1996.
The Balanced Scorecard: Translating Strategy into Action, Kaplan, Robert S., and Norton, David P.; Harvard Business School Press, 1996.
The Strategy Focused Organization, Kaplan, Robert S., and Norton, David P.; Harvard Business School Press, 2001.
Having Trouble With Your Strategy? Then Map It, Kaplan, Robert S., and Norton, David
P.; Article, Harvard Business Review, September-October 2000.
Microsoft® approach to developing and implementing a Balanced Scorecard for enterprise performance management
Abstract
This paper describes the Microsoft® approach to developing and implementing a Balanced Scorecard for enterprise performance management. It presents basic information on the Balanced Scorecard performance management methodology, and identifies key business issues that must be addressed in developing and deploying a balanced scorecard. The paper then presents the Microsoft Balanced Scorecard Framework (BSCF)—a comprehensive set of techniques, tools, and best practices to speed scorecard implementation using toolsets with which organizations are familiar.
An extensive body of research and literature describing the Balanced Scorecard exists. That body of knowledge is constantly being expanded by The Balanced Scorecard Collaborative, Balanced Scorecard Institute, various consulting organizations, software companies, and client organizations. This paper cannot comprehensively cover such a complex topic or reflect accurately many of the nuances of scorecard development and implementation. Instead, it presents a basic conceptual overview of the Balanced Scorecard. Interested readers are encouraged to use the bibliography presented at the end of this paper as a guide to more detailed information.
This paper describes the Microsoft® approach to developing and implementing a Balanced Scorecard for enterprise performance management. It presents basic information on the Balanced Scorecard performance management methodology, and identifies key business issues that must be addressed in developing and deploying a balanced scorecard. The paper then presents the Microsoft Balanced Scorecard Framework (BSCF)—a comprehensive set of techniques, tools, and best practices to speed scorecard implementation using toolsets with which organizations are familiar.
An extensive body of research and literature describing the Balanced Scorecard exists. That body of knowledge is constantly being expanded by The Balanced Scorecard Collaborative, Balanced Scorecard Institute, various consulting organizations, software companies, and client organizations. This paper cannot comprehensively cover such a complex topic or reflect accurately many of the nuances of scorecard development and implementation. Instead, it presents a basic conceptual overview of the Balanced Scorecard. Interested readers are encouraged to use the bibliography presented at the end of this paper as a guide to more detailed information.
mobile phones to boost TV ratings
Using mobile phones to boost TV ratings
To realize the benefits of interactive technology, broadcasters and mobile carriers must work on their own interaction.
Jacques R. Bughin
The McKinsey Quarterly, Web exclusive, June 2004
The advertising revenues of Europe's large free-to-air television broadcasters are beginning to recover after the declines of 2001 and 2002.1 But owing to the proliferation of niche cable and satellite television channels, those revenues are still spread too thinly. The broadcasters' road to revenue growth thus remains far from smooth.
One way to boost ratings and advertising sales would be to marry TV broadcasting with the Short Message Service. SMS, which enables mobile users to exchange text messages, is quickly becoming more and more popular despite high prices. A survey2 suggests that 42 percent or more of the mobile-phone users, and up to 70 percent of the teenagers, in a number of Europe's largest TV broadcast markets are interested in some form of interactivity between TV and their mobile phones.
At present, SMS-TV messaging accounts for less than 2 percent of the €22 billion in gross annual advertising revenues generated in the European TV broadcast market. But broadcasters could be underestimating the greatest strength of linking SMS to TV: SMS is an effective direct-marketing tool and can also increase ratings. McKinsey studies found that adding SMS interactivity to certain shows improved their viewers' loyalty. In some cases, the addition of SMS boosted the viewership of popular free-to-air television shows by up to 20 percent. Since advertising rates are directly linked to ratings, well-executed SMS-TV shows could at least preserve, and perhaps enhance, a broadcaster's bottom line.
An accidental success
SMS wasn't originally intended for consumers: in the early 1990s engineers used it to communicate with each other. But it soon became clear that text messages were an efficient way to tell customers, for example, about network outages or to remind them when payment was due. From there, customers quickly figured out how to send text messages themselves—before mobile operators had even decided how to charge for the service. "Text" duly became a verb.
The real SMS boom, however, started in 1999, when it became possible for the first time for content providers and users to send text messages across most provider networks. Stock quote services, bank account balances, train schedules—all could be sent to subscribers, while customers could transmit text messages to each other whether or not they used the same mobile carrier. Since then, mobile users, particularly those aged 16 to 30, have adopted SMS as their preferred chatting medium. From the technology's inception through March 2002, almost 30 billion3 SMS messages were sent in the world as a whole. By the end of 2003, mobile users were sending an average of 1 billion messages a day, and by 2006, Western Europe alone is expected to rack up that number of daily messages.4
Texting and TV
It didn't take long for mobile operators and broadcasters to cash in. The first and most obvious SMS-TV application involves inviting viewers of music contests and reality shows—many of whom just can't let go of their mobile handsets—to vote for their favorite song or contestant by sending a text message rather than dialing in from a landline telephone. Currently, 65 percent of the interactions between mobile phones and TVs entail voting during these types of programs. SMS-TV shopping has also captured the viewers' attention; in Germany, for instance, CDs and concert tickets can be bought with SMS text codes on Viva, a domestic music-TV channel. Viva's management claims that the service is more profitable than some established TV-shopping channels.
SMS-TV chat lines—a development reminiscent of Internet chatting—also show great promise. In Germany, RTL-teletext, which offers a TV broadcast message board, claims to host up to 220,000 text messages a day. Almost 70 percent of the broadcasters in Europe have now launched their own SMS chat lines and enjoy similar success.
SMS provides excellent indications of a show's popularity or potential, even though conversion rates (from viewer to active SMS participant) vary widely by application and by the content of individual shows. McKinsey studies demonstrate that if more than 5 percent of a show's viewers interact with it, its audience is extremely engaged—and more likely to tune in again, to tell friends about it, and even to spend money on show-related content or merchandise. Broadcasters can use their knowledge of SMS activity to accelerate their marketing efforts and to command higher prices for advertising slots.
The future is marketing
In 2003, the 900 million messages sent in the European SMS-TV market generated an estimated €400 million for broadcasters, mobile operators, and technology providers, or about 5 percent of the total SMS market included in our research.5 If the system's operational effectiveness were improved and if new shows, chat rooms, and shopping applications were developed, this market could easily be worth €750 million by the end of 2005. Broadcasters could capture one-third to one-half of that sum—€250 million to €375 million.
European broadcasters stand to benefit even more from direct-marketing opportunities created by well-executed SMS-TV shows. Viewers who use SMS-TV to vote for contestants on the hit Big Brother, for example, buy more show-related merchandise than do other viewers, and 70 percent of the teenagers who purchase Big Brother merchandise vote by text message, according to McKinsey estimates. The technology enables broadcasters to collect viewers' names, to compile a database of engaged customers in order to market more show-related and other merchandise, to offer them special privileges on pop artists' Web sites, and to advertise early previews of new episodes. FlyTxt, a UK-based mobile marketer, has been engaged by many broadcasters in Europe to store contact information for their SMS voters in a customer relationship database. Certain broadcasters claim conversion rates of up to 15 percent for their marketing programs.
Europe is clearly the world leader in SMS-TV, and the market is growing. Studies of more than 60 SMS-TV shows in Western Europe suggest that, depending on the show's format, 5 to 15 percent of the total audience is converted from viewer to active SMS participant. The results of traditional marketing campaigns pale by comparison: the best-targeted ones might yield participation rates of 3 to 8 percent, while click-through rates for Internet advertising average from 1 to 4 percent.
More viewers will mean more advertising revenue. In a recent survey, about 58 percent of advertisers said they would allocate a larger proportion of their ad budgets to channels with attractive ratings growth resulting from the use of SMS (Exhibit 1). In addition, 46 percent of those advertisers would bring new money to TV, either by reallocating the money from other media or simply by making new investments. Our studies show that SMS interactivity can encourage ratings growth of 50 to 100 percent for niche cable and satellite channels. Advertising provides 20 percent of the revenues of the average thematic pay broadcaster, which can reasonably expect one out of every five shows to be interactive. SMS interactivity can therefore boost the total revenues of a niche pay-TV broadcaster by 1.5 to 2.5 percent.
To realize the benefits of interactive technology, broadcasters and mobile carriers must work on their own interaction.
Jacques R. Bughin
The McKinsey Quarterly, Web exclusive, June 2004
The advertising revenues of Europe's large free-to-air television broadcasters are beginning to recover after the declines of 2001 and 2002.1 But owing to the proliferation of niche cable and satellite television channels, those revenues are still spread too thinly. The broadcasters' road to revenue growth thus remains far from smooth.
One way to boost ratings and advertising sales would be to marry TV broadcasting with the Short Message Service. SMS, which enables mobile users to exchange text messages, is quickly becoming more and more popular despite high prices. A survey2 suggests that 42 percent or more of the mobile-phone users, and up to 70 percent of the teenagers, in a number of Europe's largest TV broadcast markets are interested in some form of interactivity between TV and their mobile phones.
At present, SMS-TV messaging accounts for less than 2 percent of the €22 billion in gross annual advertising revenues generated in the European TV broadcast market. But broadcasters could be underestimating the greatest strength of linking SMS to TV: SMS is an effective direct-marketing tool and can also increase ratings. McKinsey studies found that adding SMS interactivity to certain shows improved their viewers' loyalty. In some cases, the addition of SMS boosted the viewership of popular free-to-air television shows by up to 20 percent. Since advertising rates are directly linked to ratings, well-executed SMS-TV shows could at least preserve, and perhaps enhance, a broadcaster's bottom line.
An accidental success
SMS wasn't originally intended for consumers: in the early 1990s engineers used it to communicate with each other. But it soon became clear that text messages were an efficient way to tell customers, for example, about network outages or to remind them when payment was due. From there, customers quickly figured out how to send text messages themselves—before mobile operators had even decided how to charge for the service. "Text" duly became a verb.
The real SMS boom, however, started in 1999, when it became possible for the first time for content providers and users to send text messages across most provider networks. Stock quote services, bank account balances, train schedules—all could be sent to subscribers, while customers could transmit text messages to each other whether or not they used the same mobile carrier. Since then, mobile users, particularly those aged 16 to 30, have adopted SMS as their preferred chatting medium. From the technology's inception through March 2002, almost 30 billion3 SMS messages were sent in the world as a whole. By the end of 2003, mobile users were sending an average of 1 billion messages a day, and by 2006, Western Europe alone is expected to rack up that number of daily messages.4
Texting and TV
It didn't take long for mobile operators and broadcasters to cash in. The first and most obvious SMS-TV application involves inviting viewers of music contests and reality shows—many of whom just can't let go of their mobile handsets—to vote for their favorite song or contestant by sending a text message rather than dialing in from a landline telephone. Currently, 65 percent of the interactions between mobile phones and TVs entail voting during these types of programs. SMS-TV shopping has also captured the viewers' attention; in Germany, for instance, CDs and concert tickets can be bought with SMS text codes on Viva, a domestic music-TV channel. Viva's management claims that the service is more profitable than some established TV-shopping channels.
SMS-TV chat lines—a development reminiscent of Internet chatting—also show great promise. In Germany, RTL-teletext, which offers a TV broadcast message board, claims to host up to 220,000 text messages a day. Almost 70 percent of the broadcasters in Europe have now launched their own SMS chat lines and enjoy similar success.
SMS provides excellent indications of a show's popularity or potential, even though conversion rates (from viewer to active SMS participant) vary widely by application and by the content of individual shows. McKinsey studies demonstrate that if more than 5 percent of a show's viewers interact with it, its audience is extremely engaged—and more likely to tune in again, to tell friends about it, and even to spend money on show-related content or merchandise. Broadcasters can use their knowledge of SMS activity to accelerate their marketing efforts and to command higher prices for advertising slots.
The future is marketing
In 2003, the 900 million messages sent in the European SMS-TV market generated an estimated €400 million for broadcasters, mobile operators, and technology providers, or about 5 percent of the total SMS market included in our research.5 If the system's operational effectiveness were improved and if new shows, chat rooms, and shopping applications were developed, this market could easily be worth €750 million by the end of 2005. Broadcasters could capture one-third to one-half of that sum—€250 million to €375 million.
European broadcasters stand to benefit even more from direct-marketing opportunities created by well-executed SMS-TV shows. Viewers who use SMS-TV to vote for contestants on the hit Big Brother, for example, buy more show-related merchandise than do other viewers, and 70 percent of the teenagers who purchase Big Brother merchandise vote by text message, according to McKinsey estimates. The technology enables broadcasters to collect viewers' names, to compile a database of engaged customers in order to market more show-related and other merchandise, to offer them special privileges on pop artists' Web sites, and to advertise early previews of new episodes. FlyTxt, a UK-based mobile marketer, has been engaged by many broadcasters in Europe to store contact information for their SMS voters in a customer relationship database. Certain broadcasters claim conversion rates of up to 15 percent for their marketing programs.
Europe is clearly the world leader in SMS-TV, and the market is growing. Studies of more than 60 SMS-TV shows in Western Europe suggest that, depending on the show's format, 5 to 15 percent of the total audience is converted from viewer to active SMS participant. The results of traditional marketing campaigns pale by comparison: the best-targeted ones might yield participation rates of 3 to 8 percent, while click-through rates for Internet advertising average from 1 to 4 percent.
More viewers will mean more advertising revenue. In a recent survey, about 58 percent of advertisers said they would allocate a larger proportion of their ad budgets to channels with attractive ratings growth resulting from the use of SMS (Exhibit 1). In addition, 46 percent of those advertisers would bring new money to TV, either by reallocating the money from other media or simply by making new investments. Our studies show that SMS interactivity can encourage ratings growth of 50 to 100 percent for niche cable and satellite channels. Advertising provides 20 percent of the revenues of the average thematic pay broadcaster, which can reasonably expect one out of every five shows to be interactive. SMS interactivity can therefore boost the total revenues of a niche pay-TV broadcaster by 1.5 to 2.5 percent.
The Balanced Scorecard
Basic Concepts
Accountants communicate with financial statements. Engineers communicate with as-built drawings. Architects communicate with physical models. It seems that almost every profession has some means of communicating clearly to the end user. However, for people engaged in strategic planning there has been an on-going dilemma. The finished product, the strategic plan, has not communicated and reached the end user. Sure strategic plans are nice to look at, full of bar charts, nice covers, well written, and professionally prepared; but they simply have not impacted the people who must execute the strategic plan. The end result has been poor execution of the strategic plan throughout the entire organization. And the sad fact of the matter is that execution of the strategic plan is everybody’s business, not just upper level management. Upper level management creates the strategy, but execution takes place from the bottom up.
Chapter
1
So why do strategic plans fail? According to the Balanced Scorecard Collaborative, there are four barriers to strategic implementation:
1. Vision Barrier – No one in the organization understands the strategies of the organization.
2. People Barrier – Most people have objectives that are not linked to the strategy of the organization.
3. Resource Barrier – Time, energy, and money are not allocated to those things that are critical to the organization. For example, budgets are not linked to strategy, resulting in wasted resources.
4. Management Barrier – Management spends too little time on strategy and too much time on short-term tactical decision-making.
Therefore, we need a new way of communicating strategy to the end-user. Enter the Balanced Scorecard. At long last, strategic planners now have a crisp and clear way of communicating strategy. With balanced scorecards, strategy reaches everyone in a language that makes sense. When strategy is expressed in terms of measurements and targets, the employee can relate to what must happen. This leads to much better execution of strategy.
Not only does the Balanced Scorecard transform how the strategic plan is expressed, but it also pulls everything together. This is the so-called “cause and effect” relationship or linking of all elements together. For example, if you want strong financial results, you must have great customer service. If you want great customer service, you must have excellent processes in place (such as Customer Relations Management). If you want great processes, you must have the right people, knowledge, and systems (intellectual capital).
In the past, many components for implementing a strategic plan have been managed separately, not collectively within one overall management system. As a result, everything has moved in different directions, leading to poor execution of the strategic plan. Like a marching band, everyone needs to move in lockstep behind one overall strategy.
Therefore, you should think of the Balanced Scorecard as a management system, not just another performance measurement program. And since strategy is at the center of value-creation for the organization, the Balanced Scorecard has become a critical management system for any organization. In 1997, Harvard Business Review called the Balanced Scorecard one of the most significant business developments of the previous 75 years.
Balanced Scorecards provide the framework around which an organization changes through the execution of its strategy. This is accomplished by linking everything together.
This is what makes the Balanced Scorecard so different; it captures the cause and effect relationship throughout every part of the organization. In the case of Mobil Oil, the truck driver pulls a balanced scorecard off the visor in his cab, outlining the five things he must do as a truck driver. Like a laser beam, strategy now has a clear path to everyone in the organization.
Throughout the entire process of building and implementing a balanced scorecard, we all need to speak the same language. Therefore, the first thing to get out of the way is to understand a few terms:
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 relation’s 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 & 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 to 5 years).
Now that you understand the purpose and terminology behind the Balanced Scorecard, let’s describe the overall process on how we will build the Balanced Scorecard. The process consists of seven steps over three phases:
Phase I: The Strategic Foundation
Step 1: Communicate and align the organization around a clear and concise strategy. This is the fundamental starting point behind everything else. Your strategy is what “feeds” the Balanced Scorecard.
Step 2: Determine the major strategic areas or scope for getting the organization focused on those things the organization can actually do.
Step 3: Build a strategic grid for each major strategic area (step 2) of the business. Out of all the steps in the entire process, this can be the most difficult since we must take our entire strategy (step 1) and transform it into specific terms that everyone can understand. And everything must be linked to form one complete strategic model.
Phase II: Three Critical Components
Step 4: Establish Measurements: For each strategic objective on each strategic grid, there needs to be at least one measurement. Measurement provides the feedback on whether or not we are meeting our strategic objectives.
Step 5: Set Targets for each measurement: For each measurement in your scorecard, establish a corresponding target.
Step 6: Launch Programs: Things will not happen unless the organization undertakes formal programs, initiatives or projects. This effectively closes the loop and links us back to where we started – driving the strategy that was formulated in phase I.
Phase III: Deployment
Step 7: Once the Balanced Scorecard has been built, you need to push the entire process into other parts of the organization until you construct a single coherent management system. This pulls everything together, allowing successful execution of your strategy.
Don’t worry if all of this doesn’t make sense yet! The remainder of this short document will describe in detail each of the steps outlined above. Once you have completed this short document, you should have a solid understanding of what is required for building a great balanced scorecard.
Phase I: The Strategic Foundation
Chapter
2
When balanced scorecards were first introduced, it seems that everyone rushed to put a whole new set of measurements in place. However, this is not how to build a balanced scorecard. Strategizing is critically important to building a good balanced scorecard. In fact, it is so important that the authors of the book, The Balanced Scorecard, Robert S. Kaplan and David P. Norton, released a follow-up book titled: The Strategy Focused Organization. Therefore, we need to focus on building a strategic foundation, culminating with a set of strategic grids or maps. This is the watershed event within the entire process! The combination of strategic grids, measurements, targets and programs represent the four key components that makeup the Balanced Scorecard. All of these components will be described in detail as we work our way through the seven step / three phase process.
So let’s get started with step one; namely by establishing our strategy for driving the rest of the process. You already have an understanding of how to construct a strategic plan. However, we want to make sure that we have a crystal clear and sharp strategic plan for feeding our balanced scorecard. A clear strategy requires two things: Specific objectives that tell people what to do and a set of targets for communicating what is expected.
Objectives need to communicate the action people must undertake. As strategy guru Michael Porter of Harvard University points out – “The essence of strategy is in the activities, choosing to perform activities differently or to perform different activities than rivals.” We must define what these activities are if we expect to have a clear and sharp strategy.
Exhibit 1: Strategic objectives expressed in relation to action and activities
Three examples of strategic objectives
Over the next six months, delivery times will decrease by 15% through more localized distribution centers.
By the year 2003, customer turnover will decline by 30% through newly created customer service representatives and pro-active customer maintenance procedures.
Operating downtimes will get cut in half by cross training front line personnel and combining all four operating departments into one single service center.
The second key ingredients for a clear strategy are targets. Targets put teeth into a strategy by imposing criteria that the organization must achieve. For example, the strategy needs to be clarified by defining market share, revenue growth, new products introduced, and other specifics that set forth the end results of our strategy. In order to have targets, we need measurements. Since both targets and measurements are critical components of the Balanced Scorecard, we will defer discussion of targets and measurements until we get into the design phase (phase II). However, suffice it to say that if you have measurements and targets as components of your strategy, then building the Balanced Scorecard will be much easier.
Once you have defined a clear strategy (objectives and targets), then you must rally the organization around it. This requires a major communication initiative. A good starting point is to develop a communication plan. A communication plan outlines how you will communicate the strategy to each stakeholder group:
Exhibit 2: Basic Communication Plan
Stakeholder Group Form of Communication
Shareholders Press Conference
Division Managers Management Retreat / Presentation
District Managers Site to Site Visits / Handouts
Operating Staff Site to Site Visits / Handouts
Administrative Staff Site to Site Visits / Handouts
Suppliers Personal Contact / Mailing
Distributors Personal Contact
Effective communication is the Achilles Heel in this entire process. Therefore, extensive and continuous communication is vital to getting the organization aligned around its strategy.
Finally, you need to align and re-configure the various parts of the organization around the strategy. This may require changes to the organizational structure, selling off assets, making sure you have a “productive” culture, and other significant changes. Strategy is about closing the gaps between the present position of the organization and where the organization wants to be. Therefore, you must make changes to the organization if you expect success with your strategy.
Once the organization is set around its strategy, then and only then can you begin building the balanced scorecard system. In the case of Mobil Oil, it took over one year to create the right number of operating divisions around its new strategy.
Before we start designing the Balanced Scorecard, we need a “fence line” of strategic areas. This restricts the organization to a selected area for achieving strategic success; otherwise the organization may find itself trying to do too many things. Strategy is about choices and making decisions on those things the organization can do vs. those things the organization cannot do. Or to put it another way: A few successes are better than a lot of failures.
Therefore, the strategic thrust of the organization needs to be confined to a few major areas. This will provide the “scope” we need for building a set of balanced scorecards. For most organizations, the strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees. For example, most publicly traded corporations will have “shareholder value” as a major strategic area. This becomes one of the strategic areas for building the Balanced Scorecard. Additionally, each strategic area will flow across all four perspectives of the Balanced Scorecard: Financial, Customer, Internal Processes, and Learning and Growth. The following exhibit illustrates how shareholder value flows up across the four perspectives of the Balanced Scorecard:
Exhibit 3: Basic flow of Strategic Area within the Balanced Scorecard
Shareholder Value
Financial Revenue Growth
Customer More Customers
Processes Customer Marketing & Service Programs
Learning Support Systems & Personnel
Notice how each lower perspective layer supports and enables the upper perspective layer; such as More Customers will enable Revenue Growth. Keep in mind that we are trying to link everything together. This is critical to building a great balanced scorecard; i.e. capturing the cause effect relationship.
Collectively, we want to limit our strategic areas to no more than five areas. This helps ensure successful implementation of our strategy. Some common strategic areas are: Customer Service, Shareholder Value, Operational Efficiency, Product Innovation, and Social Responsibility. We can refer to our strategic goals (created from our strategy in phase I) to help us isolate our strategic areas. The following exhibit illustrates how a strategic goal leads us into a strategic area:
Exhibit 4: Example of linking a strategic goal to a strategic area
Strategic Goal => By the year 2005, our company will have the most innovative product line of hand held computers
Strategic Area => Product Innovation
Finally, there is the possibility that one strategic area may conflict with another. For example, Operational Efficiency may require cost reductions while Market Share may require more expenses. If such conflicts do exist, make sure all stakeholders involved are fully aware of these conflicting areas and how they fit within your strategic plan.
Now that we have a strategy in place (step 1) and now that we have defined our strategic areas or scope (step 2), we will translate the specifics of our strategy into a set of grids. As you may recall, we noted that balanced scorecards are structured over four perspectives or layers: Financial, Customer, Internal Processes, and Learning and Growth. Strategic grids include these four layers. Within each layer, we will place our strategic objectives, making sure everything links back. Trying to develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard. Consultants sometimes refer to this step as straw modeling; trying to string connecting lines over a map that presents an overall strategic model.
Building a strategic grid starts at the very top – strategic goals and areas. As we indicated earlier, most publicly traded companies have shareholder value as a strategic area. In order to improve shareholder value, the organization can do things like grow revenues or increase operating performance. Once you decide on your strategy for improving shareholder value, then you have to decide on how you will grow revenues or improve operating performance. The following exhibit illustrates this bottom up flow within the Financial Perspective:
Exhibit 5: Flowing strategic objectives within the Financial Perspective
Shareholder Value
Grow Revenues Operating Improvements
New Sources of Revenues
Increase Customer Profitability
Lower Costs
High Utilization of Assets
We will flow our strategic objectives down each perspective within a grid of boxes, making sure everything is linked. This grid will serve as the foundation for constructing the Balanced Scorecard.
Next, we move down to the Customer Perspective. In order to construct the customer perspective, we need to understand the value(s) we provide to our customers. For example, Federal Express is extremely efficient in getting packages delivered on time. Therefore, on time delivery is the specific value that Federal Express delivers to its customers. Companies that emphasize operational efficiency usually provide certain value attributes, such as competitive pricing, on-time delivery, or superb quality. Other companies may create value for customers through their great relationship with the customer. Finally, some companies may add value by emphasizing innovative and unique products and / or services. It is extremely important to define your customer and the values you provide; otherwise you run the risk of building a scorecard that doesn’t fit with the capabilities of the organization.
Once you have clearly defined your customer values, you can define strategic objectives within the Customer Perspective, linking these objectives to the financial perspective objectives. For example, suppose we have a strategic goal that stipulates that our company will be the price leader in long distance phone service. We can flow this goal within the scorecard grid as follows:
Exhibit 6: Linking customer objectives to financial objectives
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Leader in Pricing
Notice how “Leader in Pricing” is the driver behind acquiring more customers. In turn, more customers will flow up to the next layer of growing revenues. And growing revenues is our strategy for meeting our strategic thrust or area of creating shareholder value.
Next, we need to ask the question: How will we become a leader in competitive pricing for attracting new customers? This brings us down to the next perspective: Internal Processes. Internal Processes represent the collection of activities that give a company a competitive advantage in the marketplace.
Referring back to the Customer Perspective, we could choose between three strategies:
1. Operational Efficiency – Value for customers through competitive pricing, superior quality, on-time delivery or diverse product lines.
2. Customer Relationships – Value for customers through personal service, building trust, brand loyalty, providing customized solutions, and other one-to-one relationships.
3. Innovative Products & Services – Inventing new products and features, fast delivery of products and services, forming partnerships to expand product lines, and other product leadership initiatives.
If we go back to our example on price leadership in long distance phone service, we need to emphasize operational efficiency within our strategy since this will enable competitive pricing. Next, the company must define its strategic objectives for operational efficiency (which leads to competitive pricing). This can include numerous objectives: Supply chain management, cycle time improvements, cost reduction programs, and any objective aimed at operational excellence. Once we decide on objectives, we can extend our strategic grid down into the next perspective as follows:
Exhibit 7: Linking objectives down to Internal Processes
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Become the Price Leader
Internal Processes Improve Operational Efficiency
Cost Reduction Program Knowledge Based System Reduce Non Core Activities
This brings us to the final perspective, Learning and Growth. Learning and Growth is the foundation that enables us to deliver on strategic objectives defined in the Internal Processes Perspective. Like the other perspectives, we need to look at different strategies that fit with our current strategic grid:
1. Competencies – Skills and knowledge of the work force.
2. Technologies – Applications and systems for execution of internal processes.
3. Change Culture – Organizational alignment, employee motivation, executive leadership, communication, and other qualities of empowering the organization.
If we go back to our strategic grid (Exhibit 7), we must decide on what strategic objectives are required for meeting the three objectives defined in the Internal Processes Perspective. Therefore, we can extend our grid as follows:
Exhibit 8: Strategic objectives defined for all four perspectives
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Become the Price Leader
Internal Processes Improve Operational Efficiency
Cost Reduction Program Knowledge Based System Reduce Non Core Activities
Learning and Growth Training - Best practices in cost management Database network on operational performance Re-align organization with core competencies
Once you have completed the strategic grid, go back and make sure everything fits with your overall strategy. A set of strategic grids should provide the strategic model for running the business, outlining the specifics of the strategy. All stakeholders should be able to look at your grids and follow the flow of your strategy. Don’t forget that you are trying to limit your objectives (and grids) to a critical few strategic areas. If possible, keep the total number of objectives on the grid to no more than 20 to 25 objectives.
We have completed the foundation of the Balanced Scorecard, a set of strategic grids for each strategic area that captures and links objectives across four or more perspectives. We can now move forward and populate each grid with: Measurements, Targets, and Programs.
Exhibit 9: Summarize Phase I
Five Major Milestones – Phase I
1st Establish a clear strategy (objectives & targets)
2nd Communicate the strategy
3rd Align the organization around the strategy
4th Limit the strategic areas to no more than five
5th Link strategic objectives into grids across four perspectives
Phase II: Three Critical Components
Once we have completed the strategic foundation (phase I), we are set to measure our objectives, establish a target for each measurement, and initiate programs that will make all of this happen. This will effectively complete the building of the Balanced Scorecard.
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For each strategic objective on your strategic grid, you need at least one measurement. If you have several measurements for a strategic objective, then chances are you have more than one strategic objective. Can you have an objective without a measurement? Yes, it is possible, but not having a measurement makes it difficult to manage the objective. It’s best to revisit this objective and ask the question: Why is this an objective?
Measurement allows us to quantify our strategic objectives, asking the question: How well are we doing? So how do you build your measurements? Here are some basic guidelines:
Linked: Measurements communicate what is strategically important by linking back to your strategic objectives.
Repeatable: Measurements are continuous over time, allowing comparisons.
Leading: Measurements can be used for establishing targets, leading to future performance.
Accountable: Measurements are reliable, verifiable, and accurate.
Available: Measurements can be derived when they are needed.
The following template can be used to help build an appropriate measurement:
Exhibit 10: Measurement Template
Strategic Objective =>
Describe the Measurement =>
Define Type / Formula =>
Unit of Measurement =>
Frequency of Measurement =>
Assumptions =>
Sources =>
Availability => ___ Available ___ Not Available ___ Requires Change
Support Required => ___ IT Support ___ Finance Support ___ Other
In addition to the above criteria, you need to understand some concepts related to measurement. For example, some measurements will lead to change in your organization. These types of measurements are called leading indicators since they drive or push final outcomes within the organization. Examples include customer contracts executed, competitive pricing index, employee feedback indicator, service response time, and time spent with customers. If your organization needs to change rapidly, then you need to include some leading type measurements into your balanced scorecard. A common place to use leading measurements is within the Learning and Growth perspective since this is the principal “driver” perspective behind the Balanced Scorecard.
The other side of measurement is looking back, historical type measurements that show us a final outcome or result. These measurements are referred to as lagging indicators and they dominate most performance measurement systems. About 70% of all measurements tend to fall into this category. Examples include most financial type measurements (return on equity, sales growth, economic value added, etc.) and many non-financial type measurements (production breakeven, customer retention, employee productivity index, etc.). Lagging type measurements are common within the Customer and Financial perspectives since these are outcome related.
Almost half of your measurements can be extrapolated from existing systems and procedures. Some common type measurements include ratios, percentages, rankings, and indexes. Ratios are good for expressing critical relationships while percentages are good for expressing an overall trend over time. Rankings work well for highly ranked companies trying to move up in the ranking. However, lower ranked companies usually cannot move easily within a ranking system and therefore, this form of measurement may be too ambitious.
Another way to look at measurement is to understand the relationship between leading and lagging indicators for the three lower perspectives. For example, the Customer Perspective can be broken down into two groups of measurement: Lagging Indicators such as customer satisfaction, retention, and market share; and Leading Indicators such as competitive pricing, excellent quality, outstanding reputation, image, and customer relationships. For example, in order to retain customers, we must provide one or more value attributes to the customer.
Exhibit 11: Cause Effect Relationship between Leading and Lagging Indicators
Customer Perspective Lagging Indicators are desired results:
Customer Satisfaction Customer Retention Market Share
Leading Indicators – Value Attributes to Customers:
Quality Time Price Image Reputation
The Internal Process Perspective can be broken down into three result categories:
• Pre Delivery Results => Innovative Processes that meet customer needs, provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced.
• Delivery Results => Operations that produce and deliver products and services to customers. Example of Leading Indicator => Delivery Response Time to Customer.
• Post Delivery Results => Value added services provided to customers once products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint.
The Learning and Growth Perspective will emphasize three result categories: Employees, Systems, and Organization.
• Results for Employees => Employee satisfaction, productivity, and retention. Example of Leading Indicator => Percentage of Key Personnel Turnover.
• System Results => Engaging to the end user, accessibility, and quality of information. Example of Leading Indicator => Percentage of employees who have on-line access.
• Results for the Organization => Climate for change, strong leadership, empowering the workforce, and other motivating factors. Example of Leading Indicator => Number of Employee Suggestions.
One of the major challenges in building your balanced scorecard is to keep the number of measurements to a manageable few. Throughout building the balanced scorecard, we try to follow the “4 to 5 Rule.” This rule says that we build balanced scorecards with four to five layers, four to five measurements per layer, resulting in no more than 20 to 25 measurements per scorecard (strategic grids). If you have too many measurements, you can index your measurements into one single measurement. For example, you can apply weighted percentages to calculate a single measurement.
Example of indexing a measurement:
Weighted
Measurement Description Value Importance Index
Customer Satisfaction Rating .78 50% .39
Customer Compliment Index .89 25% .22
Quality Satisfaction Indicator .72 25% .18
Single Measurement used in Balanced Scorecard .79
However, indexing is a sword sharp at both ends. It helps reduce the number of measurements, but it also buries the results making it difficult to clearly see what is going on. The best approach is to use stand-alone measurements wherever possible.
One of the best benchmarks to apply to your measurements is to ask the following question: Can I understand your strategic objective by simply looking at your measurement? Keep in mind that you are trying to capture the best “cause and effect” relationship that you can. This is what makes a great balanced scorecard. For example, what does this measurement say: % sales growth. This measurement implies that we have a strategic objective that must be related to growing sales revenues. Suppose your strategic objective was not to increase sales revenues, but to increase return on shareholder equity. This changes your measurement to return on equity. Remember everything must be linked as you build your balanced scorecard.
Measurement alone is not good enough. We must drive behavioral changes within the organization if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organization in meeting its strategic objectives. For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established.
Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. Your strategic goals can also give you clues as to what your targets should be. Another good source for targets is benchmarking for best practices.
Exhibit 12: Setting targets based on strategic goals
Current Year Sales Revenues Goal: We will grow sales by 40% over the next 3 years
Year 2002 Target Year 2003 Target Year 2004 Target
$ 160,000 $ 172,000 $ 195,000 $ 224,000
Make sure your targets match your measurements one to one, communicating what needs to change in relation to the measurement. Also be aware that targets may require considerable research. Finally, if past targets have not resulted in much change, then you should consider setting more aggressive targets.
Exhibit 13: Adding Measurements and Targets to the Balanced Scorecard
Perspectives Objectives Measurements Targets
2002 2003
Financial Maximum Returns
Utilization of Assets
Revenue Growth Return on Equity
Utilization Rates
% Change in Revenues 12%
7%
+11% 13%
8%
+11%
Customer Customer Retention
Customer Service
Customer Relations Retention %
Survey Rating
% Self Initiated Calls 75%
85%
35% 75%
88%
40%
Internal Processes Fast Delivery
Effective Service
Optimal Cost
Resource Utilization Turnaround Time
1st Time Resolvement
% cost of sales
Productivity Indicator 15m
68%
66%
77% 14m
69%
64%
80%
Learning & Growth High Skill Levels
Employee Satisfaction
Outstanding Leaders Skill set ratio
Survey Index
5 point ranking 65%
75%
4.5 68%
77%
4.8
The final design step is to close the loop and put specific programs in place to make everything happen. This is perhaps the fun part in the entire process. How do we actually hit these targets and meet our strategic objectives? What major initiatives must the organization undertake to make all of this happen? Programs are the major projects that facilitate execution of everything downstream within the scorecard. Some typical examples of programs include quality improvement programs, marketing initiatives, enterprise resource planning, customer relation’s management, and supply chain management.
Programs usually have certain characteristics:
• Sponsored by upper level management
• Utilizes designated leaders and cross-functional teams
• Consists of deliverables, milestones, and a timeline
• Requires resources (people, facilities, allocated budget, etc.)
Once programs have been established and sold to various stakeholders, they tend to add some degree of strategic value or impact. However, getting a major program initially launched can be difficult due to funding, apprehension, politics, and other obstacles. If existing programs lose funding, then you need to work back through your scorecard, adjusting your targets and making sure everything still fits.
One of the critical steps in selecting programs is to plot programs against all strategic objectives and assess the strategic impact. This can be extremely important since executive management will routinely demand cost reductions. You don’t want to cut programs with the biggest strategic impact. This would undercut your ability in meeting strategic objectives. Programs with little or no strategic impact should get lowest priority within the organization.
Exhibit 14: Compare Programs with Strategic Objectives for Strategic Impact
Instructions: List all strategic objectives for each perspective in the Balanced Scorecard. Plot any program that helps achieve a strategic objective. Programs Global Market Program Leadership Building Quality Control Review IT Complaint Tracking Prod Yield System Asian Production Plant Customer Management Knowledge System Community Awareness Employee Rotation Enterprise Planning
Strategic Objectives
F1: Maximum Return on Equity
F2: Positive Economic Value Added
F3: 15% Revenue Growth
F4: 5% Reduction in Production Cost
C1: Secure 1% market share in Asia
C2: Obtain competitive pricing
C3: Develop new market partnerships
C4: Integrate service process w/customer
P1: Improve production workflows
P2: Flawless manufacturing
P3: Expand knowledge distribution
P4: Integrate financial / production
P5: Link processes to customer inputs
L1: Engage workforce into the business
L2: Expand leadership capacities
L3: Become a customer driven culture
In the above example, notice that the Production Yield System and the Customer Management program impact three different strategic objectives while the IT Complaint Tracking program and the Community Awareness program fail to impact any strategic objective. Additionally, since the Financial Perspective is the final outcome, there are usually no programs associated with driving financial related strategic objectives.
Our balanced scorecard now has the final key component (programs). Referring back to Exhibit 13 we can supplement the scorecard with those programs that have been screened and selected for launch:
Exhibit 15: Supplement the Balanced Scorecard with Programs
Objectives Measurements Targets Programs
2000 2001
Maximum Returns Return on Equity 12% 13%
Utilization of Assets Utilization Rates 7% 8%
Revenue Growth % Change in Revenues +11% +11%
Customer Retention Retention % 75% 75% Customer Relations Management (CRM)
Customer Service Survey Rating 85% 88% Customer Relations Management (CRM)
Customer Relations % Self Initiated Calls 35% 40% Customer Relations Management (CRM)
Fast Delivery Turnaround Time 15m 14m Cycle Process System
Effective Service 1st Time Resolvement 68% 69% Customer Relations Management (CRM)
Optimal Cost % cost of sales 66% 64% Cycle Process System
Resource Utilization Productivity Indicator 77% 80% Cycle Process System
High Skill Levels Skill set ratio 65% 68% Open Corp University
Employee Satisfaction Survey Index 75% 77% Quality Time Initiative
Outstanding Leadership 5 point ranking 4.5 4.8 Special Training Program
Accountants communicate with financial statements. Engineers communicate with as-built drawings. Architects communicate with physical models. It seems that almost every profession has some means of communicating clearly to the end user. However, for people engaged in strategic planning there has been an on-going dilemma. The finished product, the strategic plan, has not communicated and reached the end user. Sure strategic plans are nice to look at, full of bar charts, nice covers, well written, and professionally prepared; but they simply have not impacted the people who must execute the strategic plan. The end result has been poor execution of the strategic plan throughout the entire organization. And the sad fact of the matter is that execution of the strategic plan is everybody’s business, not just upper level management. Upper level management creates the strategy, but execution takes place from the bottom up.
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So why do strategic plans fail? According to the Balanced Scorecard Collaborative, there are four barriers to strategic implementation:
1. Vision Barrier – No one in the organization understands the strategies of the organization.
2. People Barrier – Most people have objectives that are not linked to the strategy of the organization.
3. Resource Barrier – Time, energy, and money are not allocated to those things that are critical to the organization. For example, budgets are not linked to strategy, resulting in wasted resources.
4. Management Barrier – Management spends too little time on strategy and too much time on short-term tactical decision-making.
Therefore, we need a new way of communicating strategy to the end-user. Enter the Balanced Scorecard. At long last, strategic planners now have a crisp and clear way of communicating strategy. With balanced scorecards, strategy reaches everyone in a language that makes sense. When strategy is expressed in terms of measurements and targets, the employee can relate to what must happen. This leads to much better execution of strategy.
Not only does the Balanced Scorecard transform how the strategic plan is expressed, but it also pulls everything together. This is the so-called “cause and effect” relationship or linking of all elements together. For example, if you want strong financial results, you must have great customer service. If you want great customer service, you must have excellent processes in place (such as Customer Relations Management). If you want great processes, you must have the right people, knowledge, and systems (intellectual capital).
In the past, many components for implementing a strategic plan have been managed separately, not collectively within one overall management system. As a result, everything has moved in different directions, leading to poor execution of the strategic plan. Like a marching band, everyone needs to move in lockstep behind one overall strategy.
Therefore, you should think of the Balanced Scorecard as a management system, not just another performance measurement program. And since strategy is at the center of value-creation for the organization, the Balanced Scorecard has become a critical management system for any organization. In 1997, Harvard Business Review called the Balanced Scorecard one of the most significant business developments of the previous 75 years.
Balanced Scorecards provide the framework around which an organization changes through the execution of its strategy. This is accomplished by linking everything together.
This is what makes the Balanced Scorecard so different; it captures the cause and effect relationship throughout every part of the organization. In the case of Mobil Oil, the truck driver pulls a balanced scorecard off the visor in his cab, outlining the five things he must do as a truck driver. Like a laser beam, strategy now has a clear path to everyone in the organization.
Throughout the entire process of building and implementing a balanced scorecard, we all need to speak the same language. Therefore, the first thing to get out of the way is to understand a few terms:
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 relation’s 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 & 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 to 5 years).
Now that you understand the purpose and terminology behind the Balanced Scorecard, let’s describe the overall process on how we will build the Balanced Scorecard. The process consists of seven steps over three phases:
Phase I: The Strategic Foundation
Step 1: Communicate and align the organization around a clear and concise strategy. This is the fundamental starting point behind everything else. Your strategy is what “feeds” the Balanced Scorecard.
Step 2: Determine the major strategic areas or scope for getting the organization focused on those things the organization can actually do.
Step 3: Build a strategic grid for each major strategic area (step 2) of the business. Out of all the steps in the entire process, this can be the most difficult since we must take our entire strategy (step 1) and transform it into specific terms that everyone can understand. And everything must be linked to form one complete strategic model.
Phase II: Three Critical Components
Step 4: Establish Measurements: For each strategic objective on each strategic grid, there needs to be at least one measurement. Measurement provides the feedback on whether or not we are meeting our strategic objectives.
Step 5: Set Targets for each measurement: For each measurement in your scorecard, establish a corresponding target.
Step 6: Launch Programs: Things will not happen unless the organization undertakes formal programs, initiatives or projects. This effectively closes the loop and links us back to where we started – driving the strategy that was formulated in phase I.
Phase III: Deployment
Step 7: Once the Balanced Scorecard has been built, you need to push the entire process into other parts of the organization until you construct a single coherent management system. This pulls everything together, allowing successful execution of your strategy.
Don’t worry if all of this doesn’t make sense yet! The remainder of this short document will describe in detail each of the steps outlined above. Once you have completed this short document, you should have a solid understanding of what is required for building a great balanced scorecard.
Phase I: The Strategic Foundation
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When balanced scorecards were first introduced, it seems that everyone rushed to put a whole new set of measurements in place. However, this is not how to build a balanced scorecard. Strategizing is critically important to building a good balanced scorecard. In fact, it is so important that the authors of the book, The Balanced Scorecard, Robert S. Kaplan and David P. Norton, released a follow-up book titled: The Strategy Focused Organization. Therefore, we need to focus on building a strategic foundation, culminating with a set of strategic grids or maps. This is the watershed event within the entire process! The combination of strategic grids, measurements, targets and programs represent the four key components that makeup the Balanced Scorecard. All of these components will be described in detail as we work our way through the seven step / three phase process.
So let’s get started with step one; namely by establishing our strategy for driving the rest of the process. You already have an understanding of how to construct a strategic plan. However, we want to make sure that we have a crystal clear and sharp strategic plan for feeding our balanced scorecard. A clear strategy requires two things: Specific objectives that tell people what to do and a set of targets for communicating what is expected.
Objectives need to communicate the action people must undertake. As strategy guru Michael Porter of Harvard University points out – “The essence of strategy is in the activities, choosing to perform activities differently or to perform different activities than rivals.” We must define what these activities are if we expect to have a clear and sharp strategy.
Exhibit 1: Strategic objectives expressed in relation to action and activities
Three examples of strategic objectives
Over the next six months, delivery times will decrease by 15% through more localized distribution centers.
By the year 2003, customer turnover will decline by 30% through newly created customer service representatives and pro-active customer maintenance procedures.
Operating downtimes will get cut in half by cross training front line personnel and combining all four operating departments into one single service center.
The second key ingredients for a clear strategy are targets. Targets put teeth into a strategy by imposing criteria that the organization must achieve. For example, the strategy needs to be clarified by defining market share, revenue growth, new products introduced, and other specifics that set forth the end results of our strategy. In order to have targets, we need measurements. Since both targets and measurements are critical components of the Balanced Scorecard, we will defer discussion of targets and measurements until we get into the design phase (phase II). However, suffice it to say that if you have measurements and targets as components of your strategy, then building the Balanced Scorecard will be much easier.
Once you have defined a clear strategy (objectives and targets), then you must rally the organization around it. This requires a major communication initiative. A good starting point is to develop a communication plan. A communication plan outlines how you will communicate the strategy to each stakeholder group:
Exhibit 2: Basic Communication Plan
Stakeholder Group Form of Communication
Shareholders Press Conference
Division Managers Management Retreat / Presentation
District Managers Site to Site Visits / Handouts
Operating Staff Site to Site Visits / Handouts
Administrative Staff Site to Site Visits / Handouts
Suppliers Personal Contact / Mailing
Distributors Personal Contact
Effective communication is the Achilles Heel in this entire process. Therefore, extensive and continuous communication is vital to getting the organization aligned around its strategy.
Finally, you need to align and re-configure the various parts of the organization around the strategy. This may require changes to the organizational structure, selling off assets, making sure you have a “productive” culture, and other significant changes. Strategy is about closing the gaps between the present position of the organization and where the organization wants to be. Therefore, you must make changes to the organization if you expect success with your strategy.
Once the organization is set around its strategy, then and only then can you begin building the balanced scorecard system. In the case of Mobil Oil, it took over one year to create the right number of operating divisions around its new strategy.
Before we start designing the Balanced Scorecard, we need a “fence line” of strategic areas. This restricts the organization to a selected area for achieving strategic success; otherwise the organization may find itself trying to do too many things. Strategy is about choices and making decisions on those things the organization can do vs. those things the organization cannot do. Or to put it another way: A few successes are better than a lot of failures.
Therefore, the strategic thrust of the organization needs to be confined to a few major areas. This will provide the “scope” we need for building a set of balanced scorecards. For most organizations, the strategic thrust of the organization will revolve around stakeholder groups; such as customers, shareholders, and employees. For example, most publicly traded corporations will have “shareholder value” as a major strategic area. This becomes one of the strategic areas for building the Balanced Scorecard. Additionally, each strategic area will flow across all four perspectives of the Balanced Scorecard: Financial, Customer, Internal Processes, and Learning and Growth. The following exhibit illustrates how shareholder value flows up across the four perspectives of the Balanced Scorecard:
Exhibit 3: Basic flow of Strategic Area within the Balanced Scorecard
Shareholder Value
Financial Revenue Growth
Customer More Customers
Processes Customer Marketing & Service Programs
Learning Support Systems & Personnel
Notice how each lower perspective layer supports and enables the upper perspective layer; such as More Customers will enable Revenue Growth. Keep in mind that we are trying to link everything together. This is critical to building a great balanced scorecard; i.e. capturing the cause effect relationship.
Collectively, we want to limit our strategic areas to no more than five areas. This helps ensure successful implementation of our strategy. Some common strategic areas are: Customer Service, Shareholder Value, Operational Efficiency, Product Innovation, and Social Responsibility. We can refer to our strategic goals (created from our strategy in phase I) to help us isolate our strategic areas. The following exhibit illustrates how a strategic goal leads us into a strategic area:
Exhibit 4: Example of linking a strategic goal to a strategic area
Strategic Goal => By the year 2005, our company will have the most innovative product line of hand held computers
Strategic Area => Product Innovation
Finally, there is the possibility that one strategic area may conflict with another. For example, Operational Efficiency may require cost reductions while Market Share may require more expenses. If such conflicts do exist, make sure all stakeholders involved are fully aware of these conflicting areas and how they fit within your strategic plan.
Now that we have a strategy in place (step 1) and now that we have defined our strategic areas or scope (step 2), we will translate the specifics of our strategy into a set of grids. As you may recall, we noted that balanced scorecards are structured over four perspectives or layers: Financial, Customer, Internal Processes, and Learning and Growth. Strategic grids include these four layers. Within each layer, we will place our strategic objectives, making sure everything links back. Trying to develop strategic objectives and placing them into the correct layers for all strategic grids is probably the most difficult step in building the Balanced Scorecard. Consultants sometimes refer to this step as straw modeling; trying to string connecting lines over a map that presents an overall strategic model.
Building a strategic grid starts at the very top – strategic goals and areas. As we indicated earlier, most publicly traded companies have shareholder value as a strategic area. In order to improve shareholder value, the organization can do things like grow revenues or increase operating performance. Once you decide on your strategy for improving shareholder value, then you have to decide on how you will grow revenues or improve operating performance. The following exhibit illustrates this bottom up flow within the Financial Perspective:
Exhibit 5: Flowing strategic objectives within the Financial Perspective
Shareholder Value
Grow Revenues Operating Improvements
New Sources of Revenues
Increase Customer Profitability
Lower Costs
High Utilization of Assets
We will flow our strategic objectives down each perspective within a grid of boxes, making sure everything is linked. This grid will serve as the foundation for constructing the Balanced Scorecard.
Next, we move down to the Customer Perspective. In order to construct the customer perspective, we need to understand the value(s) we provide to our customers. For example, Federal Express is extremely efficient in getting packages delivered on time. Therefore, on time delivery is the specific value that Federal Express delivers to its customers. Companies that emphasize operational efficiency usually provide certain value attributes, such as competitive pricing, on-time delivery, or superb quality. Other companies may create value for customers through their great relationship with the customer. Finally, some companies may add value by emphasizing innovative and unique products and / or services. It is extremely important to define your customer and the values you provide; otherwise you run the risk of building a scorecard that doesn’t fit with the capabilities of the organization.
Once you have clearly defined your customer values, you can define strategic objectives within the Customer Perspective, linking these objectives to the financial perspective objectives. For example, suppose we have a strategic goal that stipulates that our company will be the price leader in long distance phone service. We can flow this goal within the scorecard grid as follows:
Exhibit 6: Linking customer objectives to financial objectives
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Leader in Pricing
Notice how “Leader in Pricing” is the driver behind acquiring more customers. In turn, more customers will flow up to the next layer of growing revenues. And growing revenues is our strategy for meeting our strategic thrust or area of creating shareholder value.
Next, we need to ask the question: How will we become a leader in competitive pricing for attracting new customers? This brings us down to the next perspective: Internal Processes. Internal Processes represent the collection of activities that give a company a competitive advantage in the marketplace.
Referring back to the Customer Perspective, we could choose between three strategies:
1. Operational Efficiency – Value for customers through competitive pricing, superior quality, on-time delivery or diverse product lines.
2. Customer Relationships – Value for customers through personal service, building trust, brand loyalty, providing customized solutions, and other one-to-one relationships.
3. Innovative Products & Services – Inventing new products and features, fast delivery of products and services, forming partnerships to expand product lines, and other product leadership initiatives.
If we go back to our example on price leadership in long distance phone service, we need to emphasize operational efficiency within our strategy since this will enable competitive pricing. Next, the company must define its strategic objectives for operational efficiency (which leads to competitive pricing). This can include numerous objectives: Supply chain management, cycle time improvements, cost reduction programs, and any objective aimed at operational excellence. Once we decide on objectives, we can extend our strategic grid down into the next perspective as follows:
Exhibit 7: Linking objectives down to Internal Processes
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Become the Price Leader
Internal Processes Improve Operational Efficiency
Cost Reduction Program Knowledge Based System Reduce Non Core Activities
This brings us to the final perspective, Learning and Growth. Learning and Growth is the foundation that enables us to deliver on strategic objectives defined in the Internal Processes Perspective. Like the other perspectives, we need to look at different strategies that fit with our current strategic grid:
1. Competencies – Skills and knowledge of the work force.
2. Technologies – Applications and systems for execution of internal processes.
3. Change Culture – Organizational alignment, employee motivation, executive leadership, communication, and other qualities of empowering the organization.
If we go back to our strategic grid (Exhibit 7), we must decide on what strategic objectives are required for meeting the three objectives defined in the Internal Processes Perspective. Therefore, we can extend our grid as follows:
Exhibit 8: Strategic objectives defined for all four perspectives
Financial Shareholder Value
Grow Revenues
Customer Acquire More Customers
Become the Price Leader
Internal Processes Improve Operational Efficiency
Cost Reduction Program Knowledge Based System Reduce Non Core Activities
Learning and Growth Training - Best practices in cost management Database network on operational performance Re-align organization with core competencies
Once you have completed the strategic grid, go back and make sure everything fits with your overall strategy. A set of strategic grids should provide the strategic model for running the business, outlining the specifics of the strategy. All stakeholders should be able to look at your grids and follow the flow of your strategy. Don’t forget that you are trying to limit your objectives (and grids) to a critical few strategic areas. If possible, keep the total number of objectives on the grid to no more than 20 to 25 objectives.
We have completed the foundation of the Balanced Scorecard, a set of strategic grids for each strategic area that captures and links objectives across four or more perspectives. We can now move forward and populate each grid with: Measurements, Targets, and Programs.
Exhibit 9: Summarize Phase I
Five Major Milestones – Phase I
1st Establish a clear strategy (objectives & targets)
2nd Communicate the strategy
3rd Align the organization around the strategy
4th Limit the strategic areas to no more than five
5th Link strategic objectives into grids across four perspectives
Phase II: Three Critical Components
Once we have completed the strategic foundation (phase I), we are set to measure our objectives, establish a target for each measurement, and initiate programs that will make all of this happen. This will effectively complete the building of the Balanced Scorecard.
Chapter
3
For each strategic objective on your strategic grid, you need at least one measurement. If you have several measurements for a strategic objective, then chances are you have more than one strategic objective. Can you have an objective without a measurement? Yes, it is possible, but not having a measurement makes it difficult to manage the objective. It’s best to revisit this objective and ask the question: Why is this an objective?
Measurement allows us to quantify our strategic objectives, asking the question: How well are we doing? So how do you build your measurements? Here are some basic guidelines:
Linked: Measurements communicate what is strategically important by linking back to your strategic objectives.
Repeatable: Measurements are continuous over time, allowing comparisons.
Leading: Measurements can be used for establishing targets, leading to future performance.
Accountable: Measurements are reliable, verifiable, and accurate.
Available: Measurements can be derived when they are needed.
The following template can be used to help build an appropriate measurement:
Exhibit 10: Measurement Template
Strategic Objective =>
Describe the Measurement =>
Define Type / Formula =>
Unit of Measurement =>
Frequency of Measurement =>
Assumptions =>
Sources =>
Availability => ___ Available ___ Not Available ___ Requires Change
Support Required => ___ IT Support ___ Finance Support ___ Other
In addition to the above criteria, you need to understand some concepts related to measurement. For example, some measurements will lead to change in your organization. These types of measurements are called leading indicators since they drive or push final outcomes within the organization. Examples include customer contracts executed, competitive pricing index, employee feedback indicator, service response time, and time spent with customers. If your organization needs to change rapidly, then you need to include some leading type measurements into your balanced scorecard. A common place to use leading measurements is within the Learning and Growth perspective since this is the principal “driver” perspective behind the Balanced Scorecard.
The other side of measurement is looking back, historical type measurements that show us a final outcome or result. These measurements are referred to as lagging indicators and they dominate most performance measurement systems. About 70% of all measurements tend to fall into this category. Examples include most financial type measurements (return on equity, sales growth, economic value added, etc.) and many non-financial type measurements (production breakeven, customer retention, employee productivity index, etc.). Lagging type measurements are common within the Customer and Financial perspectives since these are outcome related.
Almost half of your measurements can be extrapolated from existing systems and procedures. Some common type measurements include ratios, percentages, rankings, and indexes. Ratios are good for expressing critical relationships while percentages are good for expressing an overall trend over time. Rankings work well for highly ranked companies trying to move up in the ranking. However, lower ranked companies usually cannot move easily within a ranking system and therefore, this form of measurement may be too ambitious.
Another way to look at measurement is to understand the relationship between leading and lagging indicators for the three lower perspectives. For example, the Customer Perspective can be broken down into two groups of measurement: Lagging Indicators such as customer satisfaction, retention, and market share; and Leading Indicators such as competitive pricing, excellent quality, outstanding reputation, image, and customer relationships. For example, in order to retain customers, we must provide one or more value attributes to the customer.
Exhibit 11: Cause Effect Relationship between Leading and Lagging Indicators
Customer Perspective Lagging Indicators are desired results:
Customer Satisfaction Customer Retention Market Share
Leading Indicators – Value Attributes to Customers:
Quality Time Price Image Reputation
The Internal Process Perspective can be broken down into three result categories:
• Pre Delivery Results => Innovative Processes that meet customer needs, provide solutions, and address emerging trends. Example of Leading Indicator => Number of new products introduced.
• Delivery Results => Operations that produce and deliver products and services to customers. Example of Leading Indicator => Delivery Response Time to Customer.
• Post Delivery Results => Value added services provided to customers once products and / or services have been delivered. Example of Leading Indicator => Cycle Time for Resolving Customer Complaint.
The Learning and Growth Perspective will emphasize three result categories: Employees, Systems, and Organization.
• Results for Employees => Employee satisfaction, productivity, and retention. Example of Leading Indicator => Percentage of Key Personnel Turnover.
• System Results => Engaging to the end user, accessibility, and quality of information. Example of Leading Indicator => Percentage of employees who have on-line access.
• Results for the Organization => Climate for change, strong leadership, empowering the workforce, and other motivating factors. Example of Leading Indicator => Number of Employee Suggestions.
One of the major challenges in building your balanced scorecard is to keep the number of measurements to a manageable few. Throughout building the balanced scorecard, we try to follow the “4 to 5 Rule.” This rule says that we build balanced scorecards with four to five layers, four to five measurements per layer, resulting in no more than 20 to 25 measurements per scorecard (strategic grids). If you have too many measurements, you can index your measurements into one single measurement. For example, you can apply weighted percentages to calculate a single measurement.
Example of indexing a measurement:
Weighted
Measurement Description Value Importance Index
Customer Satisfaction Rating .78 50% .39
Customer Compliment Index .89 25% .22
Quality Satisfaction Indicator .72 25% .18
Single Measurement used in Balanced Scorecard .79
However, indexing is a sword sharp at both ends. It helps reduce the number of measurements, but it also buries the results making it difficult to clearly see what is going on. The best approach is to use stand-alone measurements wherever possible.
One of the best benchmarks to apply to your measurements is to ask the following question: Can I understand your strategic objective by simply looking at your measurement? Keep in mind that you are trying to capture the best “cause and effect” relationship that you can. This is what makes a great balanced scorecard. For example, what does this measurement say: % sales growth. This measurement implies that we have a strategic objective that must be related to growing sales revenues. Suppose your strategic objective was not to increase sales revenues, but to increase return on shareholder equity. This changes your measurement to return on equity. Remember everything must be linked as you build your balanced scorecard.
Measurement alone is not good enough. We must drive behavioral changes within the organization if we expect to execute strategy. This requires establishing a target for each measurement within the Balanced Scorecard. Targets are designed to stretch and push the organization in meeting its strategic objectives. For example, suppose the strategic objective is to improve customer satisfaction and the measurement is based on number of customer complaints. The average number of monthly complaints is 45 for the last 12 months. A target of no more than 40 complaints could be established.
Targets need to be realistic so that people feel comfortable about trying to execute on the target. Therefore, targets should be mutually agreed upon between management and the person held responsible for hitting the target. One good place to start in setting a target is to look at past performance. Past trends can be extended for modest improvement. Your strategic goals can also give you clues as to what your targets should be. Another good source for targets is benchmarking for best practices.
Exhibit 12: Setting targets based on strategic goals
Current Year Sales Revenues Goal: We will grow sales by 40% over the next 3 years
Year 2002 Target Year 2003 Target Year 2004 Target
$ 160,000 $ 172,000 $ 195,000 $ 224,000
Make sure your targets match your measurements one to one, communicating what needs to change in relation to the measurement. Also be aware that targets may require considerable research. Finally, if past targets have not resulted in much change, then you should consider setting more aggressive targets.
Exhibit 13: Adding Measurements and Targets to the Balanced Scorecard
Perspectives Objectives Measurements Targets
2002 2003
Financial Maximum Returns
Utilization of Assets
Revenue Growth Return on Equity
Utilization Rates
% Change in Revenues 12%
7%
+11% 13%
8%
+11%
Customer Customer Retention
Customer Service
Customer Relations Retention %
Survey Rating
% Self Initiated Calls 75%
85%
35% 75%
88%
40%
Internal Processes Fast Delivery
Effective Service
Optimal Cost
Resource Utilization Turnaround Time
1st Time Resolvement
% cost of sales
Productivity Indicator 15m
68%
66%
77% 14m
69%
64%
80%
Learning & Growth High Skill Levels
Employee Satisfaction
Outstanding Leaders Skill set ratio
Survey Index
5 point ranking 65%
75%
4.5 68%
77%
4.8
The final design step is to close the loop and put specific programs in place to make everything happen. This is perhaps the fun part in the entire process. How do we actually hit these targets and meet our strategic objectives? What major initiatives must the organization undertake to make all of this happen? Programs are the major projects that facilitate execution of everything downstream within the scorecard. Some typical examples of programs include quality improvement programs, marketing initiatives, enterprise resource planning, customer relation’s management, and supply chain management.
Programs usually have certain characteristics:
• Sponsored by upper level management
• Utilizes designated leaders and cross-functional teams
• Consists of deliverables, milestones, and a timeline
• Requires resources (people, facilities, allocated budget, etc.)
Once programs have been established and sold to various stakeholders, they tend to add some degree of strategic value or impact. However, getting a major program initially launched can be difficult due to funding, apprehension, politics, and other obstacles. If existing programs lose funding, then you need to work back through your scorecard, adjusting your targets and making sure everything still fits.
One of the critical steps in selecting programs is to plot programs against all strategic objectives and assess the strategic impact. This can be extremely important since executive management will routinely demand cost reductions. You don’t want to cut programs with the biggest strategic impact. This would undercut your ability in meeting strategic objectives. Programs with little or no strategic impact should get lowest priority within the organization.
Exhibit 14: Compare Programs with Strategic Objectives for Strategic Impact
Instructions: List all strategic objectives for each perspective in the Balanced Scorecard. Plot any program that helps achieve a strategic objective. Programs Global Market Program Leadership Building Quality Control Review IT Complaint Tracking Prod Yield System Asian Production Plant Customer Management Knowledge System Community Awareness Employee Rotation Enterprise Planning
Strategic Objectives
F1: Maximum Return on Equity
F2: Positive Economic Value Added
F3: 15% Revenue Growth
F4: 5% Reduction in Production Cost
C1: Secure 1% market share in Asia
C2: Obtain competitive pricing
C3: Develop new market partnerships
C4: Integrate service process w/customer
P1: Improve production workflows
P2: Flawless manufacturing
P3: Expand knowledge distribution
P4: Integrate financial / production
P5: Link processes to customer inputs
L1: Engage workforce into the business
L2: Expand leadership capacities
L3: Become a customer driven culture
In the above example, notice that the Production Yield System and the Customer Management program impact three different strategic objectives while the IT Complaint Tracking program and the Community Awareness program fail to impact any strategic objective. Additionally, since the Financial Perspective is the final outcome, there are usually no programs associated with driving financial related strategic objectives.
Our balanced scorecard now has the final key component (programs). Referring back to Exhibit 13 we can supplement the scorecard with those programs that have been screened and selected for launch:
Exhibit 15: Supplement the Balanced Scorecard with Programs
Objectives Measurements Targets Programs
2000 2001
Maximum Returns Return on Equity 12% 13%
Utilization of Assets Utilization Rates 7% 8%
Revenue Growth % Change in Revenues +11% +11%
Customer Retention Retention % 75% 75% Customer Relations Management (CRM)
Customer Service Survey Rating 85% 88% Customer Relations Management (CRM)
Customer Relations % Self Initiated Calls 35% 40% Customer Relations Management (CRM)
Fast Delivery Turnaround Time 15m 14m Cycle Process System
Effective Service 1st Time Resolvement 68% 69% Customer Relations Management (CRM)
Optimal Cost % cost of sales 66% 64% Cycle Process System
Resource Utilization Productivity Indicator 77% 80% Cycle Process System
High Skill Levels Skill set ratio 65% 68% Open Corp University
Employee Satisfaction Survey Index 75% 77% Quality Time Initiative
Outstanding Leadership 5 point ranking 4.5 4.8 Special Training Program
outsourcing IT offshore
Despite the supercharged politics surrounding
the issue, outsourcing IT offshore
has become a fact of life, and it’s
growing quickly.Why? Because despite
the difficulties, offshoring can provide huge benefits
in terms of productivity, prices, profits and
wages—an irresistible combination in a highly
competitive world. A natural evolution of how the
global marketplace operates today, offshoring is on
the way to becoming a mainstream business. And
the future for outsourcing looks even brighter.
Still, offshore outsourcing brings with it a wide
variation in costs from country to country, as well as
significant risks—geopolitical, economic, legal, cultural,
and IT infrastructure and competency—and
companies making decisions about where to outsource
must take these into account. The goal of this
whiteboard is to provide a thorough country-bycountry
analysis of the current outsourcing market,
and to point out where to find the best opportunities
for a variety of services. The result is the Global
Outsourcing Index,which rates each country on the
basis of a combination of relative cost, risk, and market
opportunity. And because the world is changing
so fast, the whiteboard also looks at where offshoring
opportunities can be found in the future.
The trend toward offshore outsourcing is a lot
more complex than simply seeking skills and
resources in the lowest-cost locations. The driving
forces in the IT outsourcing market are quality
and speed to market, not just cost of services.
A new wave of outsourcing is allowing companies
to acquire reliable IT quickly, in order to deploy
specialized services, and ramp down easily when
these services are no longer needed.
At the same time, offshoring is pushing the
world beyond the information economy and
toward a global knowledge-based economy. Technology
enables knowledge to be shared quickly
throughout the developed and developing world,
allowing a variety
of regional specializations
to arise.
These trends are
conspiring to bring
further changes to
the global outsourcing
market in the next decade or so. First of all,
consumer demand and spending power in the
emerging economies is growing more quickly
than expected. And as they grow in strength and
stability, the risks of outsourcing can be spread
further as companies have a wider variety of geographic
locations to choose from.
In the future,many companies will not outsource
to a particular country at all. Instead, they
will turn to large multinational corporations with
access to a variety of resources and expertise across
the globe and the ability to spread risk. As these
one-stop shops grow in size and skills, they will
gain a significant competitive advantage over even
the strongest individual outsourcing markets.
the issue, outsourcing IT offshore
has become a fact of life, and it’s
growing quickly.Why? Because despite
the difficulties, offshoring can provide huge benefits
in terms of productivity, prices, profits and
wages—an irresistible combination in a highly
competitive world. A natural evolution of how the
global marketplace operates today, offshoring is on
the way to becoming a mainstream business. And
the future for outsourcing looks even brighter.
Still, offshore outsourcing brings with it a wide
variation in costs from country to country, as well as
significant risks—geopolitical, economic, legal, cultural,
and IT infrastructure and competency—and
companies making decisions about where to outsource
must take these into account. The goal of this
whiteboard is to provide a thorough country-bycountry
analysis of the current outsourcing market,
and to point out where to find the best opportunities
for a variety of services. The result is the Global
Outsourcing Index,which rates each country on the
basis of a combination of relative cost, risk, and market
opportunity. And because the world is changing
so fast, the whiteboard also looks at where offshoring
opportunities can be found in the future.
The trend toward offshore outsourcing is a lot
more complex than simply seeking skills and
resources in the lowest-cost locations. The driving
forces in the IT outsourcing market are quality
and speed to market, not just cost of services.
A new wave of outsourcing is allowing companies
to acquire reliable IT quickly, in order to deploy
specialized services, and ramp down easily when
these services are no longer needed.
At the same time, offshoring is pushing the
world beyond the information economy and
toward a global knowledge-based economy. Technology
enables knowledge to be shared quickly
throughout the developed and developing world,
allowing a variety
of regional specializations
to arise.
These trends are
conspiring to bring
further changes to
the global outsourcing
market in the next decade or so. First of all,
consumer demand and spending power in the
emerging economies is growing more quickly
than expected. And as they grow in strength and
stability, the risks of outsourcing can be spread
further as companies have a wider variety of geographic
locations to choose from.
In the future,many companies will not outsource
to a particular country at all. Instead, they
will turn to large multinational corporations with
access to a variety of resources and expertise across
the globe and the ability to spread risk. As these
one-stop shops grow in size and skills, they will
gain a significant competitive advantage over even
the strongest individual outsourcing markets.
From Technology Steward
Information technology (IT) has the power to disrupt industries and transform how
business is done. Leading companies are already tapping that power. Rethinking business
strategies, processes, and management practices. Reshaping companies and cultures.
Recasting infrastructures and product portfolios. And most important, achieving
exceptional business results.
Standing at the center of this transformation is today’s Chief Information Officer (CIO).
There might have been a time when keeping the company’s data centers up and running
was good enough. But today, expectations for a CIO are much, much higher.
Today’s CIO is a business leader—not just an IT manager—steering a mission-critical
function as large and complex as any operation in the company, working side by side
with business units to help improve performance and efficiency.
CIOs today help other business leaders in the company see what’s possible—and help
them anticipate what’s lurking in the business environment and competitive moves of
others. In many cases, they also face the unenviable task of anchoring a transformational
vision throughout the company, overcoming barriers to change, and building organizational
support in the face of significant resistance.
This book is written for business leaders in every function—not just IT. It focuses on the
10 greatest opportunities and challenges in information and technology today, and
outlines the essential capabilities required to master them. These are the issues that
define today’s CIO.
business is done. Leading companies are already tapping that power. Rethinking business
strategies, processes, and management practices. Reshaping companies and cultures.
Recasting infrastructures and product portfolios. And most important, achieving
exceptional business results.
Standing at the center of this transformation is today’s Chief Information Officer (CIO).
There might have been a time when keeping the company’s data centers up and running
was good enough. But today, expectations for a CIO are much, much higher.
Today’s CIO is a business leader—not just an IT manager—steering a mission-critical
function as large and complex as any operation in the company, working side by side
with business units to help improve performance and efficiency.
CIOs today help other business leaders in the company see what’s possible—and help
them anticipate what’s lurking in the business environment and competitive moves of
others. In many cases, they also face the unenviable task of anchoring a transformational
vision throughout the company, overcoming barriers to change, and building organizational
support in the face of significant resistance.
This book is written for business leaders in every function—not just IT. It focuses on the
10 greatest opportunities and challenges in information and technology today, and
outlines the essential capabilities required to master them. These are the issues that
define today’s CIO.
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