The Scorecard for Measuring and Managing Stakeholder Relationships - Case Study Example

Performance measurement systems of organizations Introduction Performance measurement is the monitoring and reporting of accomplishments of an organization. An organization operating without a performance measurement system is like an airplane flying without a compass or a CEO operating without a strategic plan. The objective of this study is to throw light on the various frameworks used to measure performance. Performance measurement system A performance measurement system enables an enterprise to plan, measure and control its performance according to a pre-defined strategy. The ultimate aim of implementing a performance measurement system is to improve the performance of an organization so that it may better serve its customers, employees, owners and stakeholders. The different types of performance measures are input measures, process measures, output measures, outcome measures and impact measures. The organizations can develop their own customised systems to meet their specific requirements and circumstances or utilize a number of performance management models and tools to develop their framework. The major performance measurement systems in use today are Balanced scorecard, Activity-based Costing and Management, Investors in People Standard, Quality Management, Charter Mark and Performance Prism. The frameworks are explained in the following sections. Balance scorecards A Balanced scorecard defines what management means by "performance" and measures whether management is achieving desired results. Kaplan and Norton (1992) noted that it was designed to improve current performance measurement systems by providing alternatives to managing organizational performance exclusively through financial measures. According to them (1996), "the name reflected the balance between short- and long-term objectives, between financial and non-financial measures, between lagging and leading indicators, and between external and internal performance perspectives." According to CIMA (2005) official definition, the Balanced scorecard is "an approach to the provision of information to the management to assist strategic policy formulation and achievement". A Balanced scorecard is used to clarify or update a business's strategy, link strategic objectives to long-term targets and annual budgets, track the key elements of the business strategy, incorporate strategic objectives into resource allocation processes, facilitate organizational change, compare performance of geographically diverse business units and increase companywide understanding of the corporate vision and strategy. Evolution of the concept The concept was originated by Robert Kaplan and David Norton (1992) as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.The developments in the concept are as follows: a. 1st generation- The Balanced scorecard designs feature a small number of performance measures typically spread across four perspectives, namely; financial, customer, internal processes and learning and growth, as proposed by Kaplan & Norton (1996). b. 2nd generation- New Balanced scorecard designs illustrate how the various objectives are related using a diagram called the 'strategic linkage model' or 'strategy map' (Kaplan & Norton, 2004). Using objectives and linkages helps to provide a stronger basis for choosing measures and for justifying these choices to others. c. 3rd generation- The third generation of Balanced scorecard designs were developed in 2000. These are easier to develop, implement and use than any earlier version. Balanced scorecard has become the focus of a wider strategic management process - a framework for strategic management and control rather than just a performance measurement device. Perspectives The Balanced scorecard sets out a framework of four key perspectives (Kaplan and Norton, 1996), as shown in the following figure. Figure 1 - Perspectives of Balanced scorecard In each of these areas a handful of measures are identified which are most critical to the company's success. So the Balanced scorecard tracks key elements of an organization's strategy by allowing the organization to view its performance through multiple lenses. The Process of Building a Balanced scorecard While there are many ways to develop a Balanced scorecard, Kaplan and Norton (1996) defined a four-step process that has been used across a wide range of organizations which includes defining the measurement, specifying strategic objectives, choosing strategic measures and development of the implementation plan. Adaptation of Balanced scorecards The Balanced scorecard was designed for private sector businesses, but can be adapted for governmental and non-profit organizations. The Balanced scorecard is relevant in the following manner: a) Companies The benefits of implementing Balanced scorecard are similar but there are differences in its implementation in small and large organizations. The ENERCO is a global energy company (2GC Case Study, 2008). ENERCO's headquarter and its production facility is based in Ramat Hasharon, Israel. ENERCO provides a variety of products and services to a wide range of international customers including North-America, Canada, Europe and Africa. The company developed Balanced scorecards for its Business unit and functional senior management teams worldwide. The specific aims of the programme were to improve the alignment of business units behind the division's strategic goals, and to provide a mechanism to better track the execution of this strategy. The organizational design used by ENERCO is complex. This coupled with the organization's inclination towards deep customization of standard management tools and the need for this work to integrate neatly with other ongoing projects (particularly in the area of strategic planning) required the development of a novel Balanced scorecard design process. The ENERCO completed Balanced scorecard designs within 19 Business Units, each resulting in Balanced scorecards showing 12-18 month priorities, metrics and targets. Because of these Balanced scorecards, performance conversations within these units are now based on a broader range of strategic and operational information than previously, with more clearly defined accountabilities in place to ensure priorities are delivered. In this respect, the work has clearly addressed the issues with respect of performance management and strategic delivery identified by ENERCO at the outset. b) Government agencies Taxpayers, the ultimate customers of government, are demanding more accountability for the use of their funds. They want to see tangible results from all government agencies, at all levels. The Balanced scorecard is the only framework readily available that can align strategy, performance and budgeting to meet these requirements. Therefore, government agencies are increasingly looking to the Balanced scorecard approach. The Defence Storage and Distribution Agency (DSDA) is a semi- autonomous central government agency working in the UK Defence sector (Cobbold, I., Lawrie, G. & Marshall, J. 2003). Its main activity is providing key elements of logistics support to the armed forces in UK and North West Europe. In January 2002, the DSDA decided to implement the Balanced scorecard system at the management board level as the system was already used by the Defence Ministry and the DLO and was used in equivalent organizations in the USA. Initially, the 2nd generation Balanced scorecards were implemented. It was a failure due to the problems in the type of system implemented and the inexperience of the team involved. The lack of tangible benefits from the implementation of the system and the need for better performance management information and tools forced the agency to take the assistance of an external agency. 3rd generation Balanced scorecard system was implemented in June, 2003. The results were better. The former systems starts with deciding on which is the most important strategic objective of the agency while the 3rd generation Balanced scorecard system begins with development of the "Destination Statement", which throws light on the desired future state of the agency. Most public sector organizations, however, are not in the "revenue producing" business and the model for the resulting Balanced Scorecard must be customized. In these agencies, the financial (budget) perspective is not at the top of the model, but is typically aligned more closely to other perspectives. In addition, we have found that a stakeholder perspective is found in many public sector organizations. It is the position and influence of this outside stakeholder perspective that provides the financial motives for most government agencies. c) Non-profit organizations Non-profit organizations are committed to a mission, and they need to focus their limited resources efficiently in order to achieve mission effectiveness and value for their members and sponsors. The Balanced scorecard approach aims to translate strategy into action using a coherent set of performance measures. The benefits of the approach are that it is based on a 'balanced' set of performance indicators covering the entirety of an organization's mission and goals, rather than just financial indicators. This is particularly important in the not-for-profit sector, where financial indicators of performance are less relevant. The keys to successful application of Balanced scorecard in non-profit sector are the understanding how to describe success in non-profit organization and coping with more variability in success criteria. The University of Edinburgh implemented the first Balanced scorecard in the academic year 2002-2003 (Smith, R. 2007). Although the Balanced scorecard was first introduced in the University in 2002, work was undertaken to, wherever possible, apply the Balanced scorecard retrospectively in order to allow the early establishment of a time series of performance measurement, with the aim of testing the validity/utility of the chosen measures. The University's Balanced scorecard is updated on a continual basis: as soon as any of the individual performance indicators are available for the given year or have been updated, the current version of the Balanced scorecard is updated, in line with our published timetable for updating. The application of a Balanced scorecard to the University of Edinburgh has the aim of providing both a management tool to help senior management ensure the University's strategic goals and mission are being achieved and confirming to government and the public that the University is meeting, if not exceeding, their expectations. Balanced scorecard- Benefits and pitfalls The organizations implementing the Balanced scorecard system have the benefits such as translation of strategy into measurable parameters, communication of the strategy to everybody in the firm, alignment of individual goals with the firm's strategic objectives and feedback of implementation results to the strategic planning process. The potential pitfalls that should be avoided when implementing the Balanced scorecard are lack of a well-defined strategy, using only lagging measures and use of generic metrics. The Balanced scorecard system does not take into account the intermediaries, suppliers, regulators and the community. So the organizations have to adopt alternative frameworks, which are explained in the following section. Alternatives to Balanced scorecard framework The organizations use the following frameworks to measure their performance, taking into account the nature of their activities and requirements. 1. Activity-based Costing and Management- Activity-based costing (ABC) provides better insight into how overhead costs should be allocated to individual products or customers. Through the use of ABC, expenses are allocated from resources to activities and then to products, services, and customers. Activity-Based Management (ABM) is a discipline that focuses on the management of activities to maximize the profit from each activity and to improve the value received by the customer. This discipline includes cost-driver analysis, activity analysis, and performance measurement. ABM draws on ABC as its major source of information. The public sector has attempted to adopt this system in the adoption phase, where the influence of government requirements. The Blood Transfusion Service, part of UK's National Health Service implemented the ABC system in 1993 till 2001(Lapsley, 2005). The UK's transfusion services rely on voluntary donors, who donate their blood up to three times a year. Though this main input material is free, the costs of transfusion centres are significant as they manage many varied phases within a long supply chain: collection, processing, testing, delivery (on a daily basis) and clinical assistance. Since 1980, there was an increase in costs within these services because of two major events: the discovery of HIV and of Creutzfeldt-Jakob Disease- the human variant of Bovine Spongiform Encephalopathy (BSE). The main private sector goal, profit, does not apply in public sector organizations. Also, in hospitals physicians and administrators have different perspectives on service delivery and the final goal of the organization, which are not easily merged in a single strategy. So the ABC system was implemented in specific subunits within the organizations. ABC framework had influence across all stages of implementation, but with less power at the ultimate 'use of information' stage. The progression from implementation of ABC to actual use was influenced by the existence of a competitive environment and by effective interaction with existing information systems. These findings underline the complexity of healthcare organizations as settings for accounting innovations. The system lacks the strategic and non-financial elements that are captured in the Balanced scorecard. Thus, most successful firms use ABC to manage costs and gain insight into their internal competitive advantages. Successful firms use ABC in combination with the BSC to drive the achievement of a firm's strategy and competitive advantage. 2. Investors in People Standard The Investors in People Standard framework ensures that people in an organization have the right knowledge, skills and motivation to work effectively. Thomson Directories began operating in 1980 and quickly established itself as the leading local directory publisher in the UK (Hurley, J. & Radbourne, P. 2007). Thomson faced the staff retention challenges. In an effort to combat this trend, Thomson has developed a caring environment and a sense of fun within its sales teams. Opportunities for progression within the company are also stressed, and the company places an emphasis on flexibility and benefits, training and development initiatives and social activities. Unusual perks are offered, including the chance for staff members to win five-star holidays. By revisiting its values and culture, Thomson Directories has improved staff retention, especially among sales employees, where a 50 percent staff turnover rate has been reduced to 30 percent. Thomson Directories Ltd's efforts in improving the business in this respect were recognized when the company achieved the Investors in People standard in 1994. The company has used Investors in People standard as a means of evaluating their entire culture as well as building the people development strategy 3. Quality Management- Quality Programs aim to assist organizations to improve the quality of the manufacturing and service offerings. The various quality programs are Total Quality Management (TQM), Six Sigma, European Foundation Quality Management (EFQM), and The Baldridge National Quality Program. A central tenet for all of these programs is business performance measurement. The 'Business Excellence Model' is widely used in major UK and European organizations as a means of reviewing performance against internationally recognized best practice.. The Business Excellence Model (BEM) is a nine-box model, originally developed by the European Foundation for Quality Management (EFQM), as given below. Figure 2- Business Excellence Model The idea is to conduct a Self-Assessment by comparing the organization to the Model. The Model presents a plausible logic. The "results" - financial, customer satisfaction, people satisfaction and impact on society are achieved through acting on "enablers" - leadership, policy and strategy, people management, resources and process management. By improving the 'how', it is argued, improved results - the 'what' - will follow. Owing to pressures from a range of stakeholders for a wider and improved range of services from the Higher Education (HE) sector in the UK, linked with a simultaneously increasing pressure on resource utilization, universities are facing the challenges of reorienting their approaches to be more customer-focused and conducting their activities in a more business-like manner (Hides, MT and Davies, J and Jackson, S 2004). A consortium of UK universities implemented the European Foundation for Quality Management (EFQM) excellence model as a means for addressing these issues. EFQM excellence model self-assessment helps to produce a more customer-oriented culture in HE institutions, providing that the lessons learned from the wider public sector are put into practice. ISO 9001 (2000) is another global standard and approach for quality management systems. It focuses on the management of processes and documentation in order to meet customers' needs and expectations. Once a system is in place and established, the organization can seek independent assessment by the UK Accreditation Service (UKAS) which is recognized by the Department of Trade and Industry. Only organizations accredited by UKAS can use the national accreditation mark. Although Quality Programs focus on continuous improvement, they are not well suited to measuring relative performance among differing enterprises in different industries. 4. Charter Mark The Charter Mark is the UK Government's national standard for the improvement of customer service within the public sector. It fits with the Government's agenda for public service reform by focusing on key criteria such as setting standards, consulting users, using resources effectively and delivering customer satisfaction. Using the Charter Mark principles helps organizations determine what the customer wants and how that can be delivered effectively. Organizations can use the Charter Mark as recognition of the excellence in customer service they have achieved, demonstrating to themselves and the wider public the high level of service that can be expected. Organizations that achieve the standard have the right to display the prestigious Charter Mark logo. In June 2005 a Cluster Group of schools in Airdrie, North Lanarkshire, demonstrated its collective commitment to its partners by achieving Charter Mark - the Government's UK-wide standard for excellence in public service (SGS UNITED KINGDOM LIMITED, 2005). Led by St. Margaret's High School the group comprises eight primary schools (six of which have a nursery component) and one secondary school. The Cluster began exploratory discussions with an assessment team from SGS in June 2004. SGS is the global leader and innovator in inspection, verification, and testing and certification services. The benefit was that a range of resources across the cluster was available to the schools in the cluster. The achievement has generated great interest amongst staff, pupils, and parents across the Cluster Group of Schools. 5. Performance Prism- The "Performance Prism" is relatively new, having been developed by a major consulting firm and the Cranfield School of Management in 2000. The five facets of performance prism are shown in the following figure. Figure 3 - Performance prism One of the first applications of the Performance Prism took place at DHL International in the UK in 1999 (Neely, A., Adams, C. & Kennerley, M., 2002). DHL is one of the world's most successful international express courier companies. Previously DHL's UK board used to meet on a monthly basis and review company performance data at a detailed level. They would look at the UK's operation in terms of its ability to achieve "notional result", DHL's internal measure of profitability. They would also review operations performance. The same issues arose at each monthly performance review. So the DHL decided to implement the Performance Prism and construct a success map for the company. The success map had three broad strands, namely; growing revenue volumes, revenue quality and cost efficiency and ensuring that the business utilized its assets as efficiently as possible. The system has provided a logical and coherent structure for the board to shape its performance measurement and management system. All organizations wishing either to implement a new set of measures or to upgrade their existing scorecard should consider applying the Performance Prism to the measures selection process. The framework is developed based on the Balanced scorecard system. It is a customized Balanced scorecard framework. In the "Performance Prism," companies view their organizations from five perspectives, rather than the four traditional perspectives of the BSC. These five perspectives are stakeholder satisfaction, strategies, processes, capabilities and stakeholder contribution. Need to identify the long term strategy before choosing a suitable framework. Performance measurement systems succeed when the organization's strategy and performance measures are in alignment and when senior managers convey the organization's mission, vision, values and strategic direction to employees and external stakeholders. The performance measures give life to the mission, vision, and strategy by providing a focus that lets each employee know how they contribute to the success of the company and its stakeholders' measurable expectations. A well established long term strategy provides a good starting point for any performance measurement framework. In the discussion above, on the frameworks used to measure performance, it is seen that all the frameworks require the existence of a well defined strategy. Conclusion A framework is necessary to organize the thoughts, identify common goal and ensure appropriate coverage for the performance measurement. This is particularly important when a measurement system is developed for the first time. When updating the performance measures, it is useful to review other frameworks to identify new ideas and approaches that might improve the existing system. No two organizations are alike and their need for balanced measures and their identified business perspectives vary. Bibliography 1. CIMA Official Terminology, CIMA Publishing, 2005. 2. Cobbold, I., Lawrie, G. & Marshall, J. (2003) Design of a corporate performance management system in a devolved governmental organization. 2GC Research Paper. [Internet], October. Available from: < http://www.2gc.co.uk> [Accessed 14 November 2008]. 3. ENERCO- 3rd Generation Balanced Scorecard in a Major Energy Company (2008) 2GC Case Study [Internet], September. 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S., & Norton, D. P. (2004). Strategy maps: Converting intangible assets into tangible outcomes. Boston: Harvard Business School Press. 10. Lapsley, I. (2005) ACTIVITY BASED COSTING IN HEALTHCARE: A UK CASE STUDY, Research in Healthcare Financial Management [Internet], January. Available from :< http://www.allbusiness.com> [Accessed 15 November 2008]. 11. Neely, A., Adams, C. & Kennerley, M. (2002) Performance Prism: The Scorecard for Measuring and Managing Stakeholder Relationships. Financial Times Series- Prentice Hall, pp.344- 350. 12. Schools Celebrate Their Charter Mark Success (2006) SGS Case studies [Internet], September. Available from: < http://www.uk.sgs.com> [Accessed 15 November 2008]. 13. Smith, R. (2007) BALANCED SCORECARD BACKGROUND INFORMATION. University of Edinburgh [Internet], November. Available from: < http://www.ed.ac.uk> [Accessed on 16 November 2008] Read More