Reporting methods Balanced scorecard BSC Harri Haapasalo D

Reporting methods – Balanced scorecard (BSC) Harri Haapasalo; D. Sc. Tech. , M. Sc. Econ. Professor in Industrial Engineering and Management Department of Industrial Engineering and Management e-mail: harri. haapasalo@oulu. fi, office TF 320 AGENDA Why to measure and where the metrics are coming? What BSC is? Measurement and evaluating metrics DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

”What you Measure is what You Get” (Kaplan ja Norton 1992) Why to measure and where the metrics are coming? DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Measuring processes • • • Why should we measure? Measurement serves quality assurance, operation management and continuous improvement We can evaluate effeciency trough measurement Measurement creates solid bases on communication and strategy implementation Measurement transforms makes goals concrete Allows utilisation of incentives Do we have correct metrics? Are we masuring inputs or outputs Are using mirror or radar? DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Measuring processes What should we know of our system? What are the critical features that customers value? How do we measure and control those? How our metrics are related to competitors ones? DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto How do we measure the efficiency of our processes?

Performance measurement and results • • Organisational quality and management practices are implicated in metrics. Quality has rarely absolute metrics like delivery accuracy and market share, however if the quality is high enough separate quality metrics are not needed. Do I have the courage to drive 500 km in the middle of the night, in winter time – with out indications of fuel, oil or speed metrics? ? ? DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Four level performance measurement Job shop metrics Single department metrics Process level metrics Organisation level metrics Markets customers Process Operations All metrics should aim on same direction! DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Understanding Performance Measurement • Performance measurement is needed in all organisations: » systems and processes to plan performance and to measure performance » Performance measures/indicators to plan and report on performance » incentives/rewards for achieving target performance? • Performance Measures are: Instruments for managers to navigate their organisation to future success DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Connection between strategy and performance measuring • Companies need performance measures that produce meaningful feedback about activities and tasks performed. • These measures should always base on company’s vision and strategy. • The measuring can be seen as a continuous process where the aim of metrics is to pay attention to company’s most critical areas and concerns. • Kaplan and Norton describe this process as a circle where company’s vision will be clarified and concretised. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Metrics development process (Olve et al. , 1998). Vi sion trate gies S DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto St rateg ic Go als Su ccess Fac tors Metr ics

Performance pyramid (Hannus, 1994). Internal effectiviness External effectiviness Operations Quality Delivery Cycle -time Costs Time Customer satisfaction Goals Flexibility Value at Entrepreneurship Cost efficiency customer Know -how Market success Financial success Mission DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto Productivity Operative performance factors Core processes performance factors Critical business success factors Business goals Measures

The dynamic performance measurement system (Laitinen, 1996) DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Hierarchical structure of GQM (Basili et al. , 1994) – linking stategy (goal) to operational management (metrics). DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

BSC projects implemented in Finland contained the following purposes of use (Toivanen, 2001) • • • equalization of management systems, achieve change, concretize strategies at operative level, improve corporate management, improve efficiency, create unified goals for the organization and effective allocation of resources and • communicate strategies to the organization. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Models for building and implementing BSC (Kaplan and Norton, 1996 b; Olve et al. , 1998; Toivanen, 2001). Kaplan and Norton Olve, Roy and Wetter Toivanen Select the Define the business sector Clear decision to start appropriate and company’s position BSC implementation organization unit. there project Identify Define or specify Emphasize SBU/corporate company’s vision management role linkages Choose perspectives during the Conduct first Vision’s proportion to the implementation round of different perspectives and process interviews formulate general strategic Clarify company’s Synthesis objectives vision and strategy session Define critical success Definition of critical Executive factors success factors workshop: First Design measures, define Target setting and round. cause and effect – definition of measures Subgroup relationships and seek Engagement of meetings balance organization Executive Define company level Cutting down and workshop: measurement system fulfilling the measures Second round Measures and measurement Measurement system Develop the system adjustment to different implementation different parts of organization DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT plan organization Development of Tuotantotalouden osasto Executive Set targets implementation plans

Balanced Scorecard BSC Quality scorecard Balanced Metrics What BSC is? DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

What BSC is? • Balanced scorecard framework has been developed during 1990 by Robert Kaplan and David Norton • Its is a management model, • Originally it was developed as a measurement system, but it eventually turned out to be model for strategic management – – Used in operations management, controlling and follow-up Strategy implementation Communicating strategy Questioning strategy and learning • Kind of a ERP system where corpoarate strategy has been turned into a handful of metrics • The purpose is to give a indiction of ongaisations history, current state and indications of future, DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

The Balanced Scorecard – Translating Strategy into Action (Kaplan & Norton) Customer Economy Clarifyig vision and strategy Visio Communication And connections Strategy Learning and growth DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto Internal processes Planning and Target setting Feedback and learning

Balanced scorecard framework (Kaplan and Norton, 1996) Financial Past To succeed financially, how should we appear to our shareholders Objectives Measures Targets Initiatives Customer To achieve our vision, how should we appear to our customers? Vision and Strategy Internal Business Process To satisfy our shareholders and customers, what business processes must we excel at? Objectives Measures Targets Initiatives Present Objectives Measures Targets Initiatives Learning and Growth To achieve our vision, how will we sustain our ability to change and improve? Objectives Measures Targets Initiatives DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto Future

The chain of cause-and-effect relationships through the BSC perspectives (Kaplan and Norton, 1996). Financial performance ROI Customer loyalty Customer perspective On time deliveries Internal-business-process Learning and growth DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto Process quality Process lead time Operational skills

Tietolähteet Tiedon jalostaminen Käyttöliittymä Talouden, prosessien ja resurssien sekä strategisten projektien tunnusluvut Suoritteiden määrät Perusjärjestelmät Operatiivinen toiminta, taloushallinto, henkilöstöhallinto DW Mittaristo Ulkoiset tietoläht eet www ODS Datamart Erityislä hteet Metadata Measurement and evaluating metrics DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Features of good metric Relevance Metric has to be relevant i. e. it has to be vital for decision making – if it is not there is no meaning for the real value of it Economy The information gained trough metric cannot be too costly (cost-benefit analysis). There is no use in getting expensive information if it does not have relevance in decision making. Validity Metric has to be valid i. e. it has to measure the object of measurement correctly. Reliability The value of metric has to be accurate enough. It has to be reliable. Credibility The value of metric has to have credibility in name of decision-making. Metric is valuable only when decision-maker is relying on it. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

More requirements for good metrics Toivanen (2001) METRICS • Has to be connected to critical success factors • Have to be prioritaced so that they tell if the goals are fulfilled • Has to be balanced between approahces • Have to support other levels, but no need to be same in every level in organisation • Cannot be changed constantly • Has to self created - What is important for competitors might not be important for us • Has to give challenges as targets, but no too high DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

Features of successful implementation of BSC in the energy sector • Clear project model in implementation – – • A project model clarifies, facilitates and accelerates implementation. Implementation is easier to manage and control even if the project is delayed from the original timetable. The Project Manager should be an expert, and a kind of “process owner” atmosphere should be created for the project manager. There should be close connection between the metrics and strategy and relation to critical success factors in the derivation of metrics – A fundamental requirement, as the meaning of the whole system is to transfer strategy into operative information for practice. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

• Profound discussion over different perspectives – No automatic selection of Kaplan and Norton’s basic perspectives is allowed. They should be thoroughly discussed based on the company’s own strategic visions and goals. Even if the basic perspectives are selected they should be concluded only after detailed discussion. • Defining causal connections – The purpose of defining causal connections is to; • • find a more profound understanding of strategy and its assumptions, ensure that the metrics are giving incentives in the correct direction, allocate the critical resources to the vital issues and assist in finding and eliminating overlapping metrics. – Subtracting the number of metrics; • In order to control the system and avoid the measurement as an end in itself. • Because a great number of metrics prevents the controllability of the measurement system. • According to experience, it is easier to increase than decrease the number of metrics. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto

• One of the most significant aspects of implementing a BSC system is the learning process inside the organization – The vision is the goal to be achieved. Strategy is the means for the organization to reach that goal. The purpose of the measurement system implementation is to provide a framework for the organization to analyze and discuss specific issues, which they have to observe in striving to define goals on a daily basis. The meaning of different perspectives is to secure a versatile approach. One purpose in defining metrics is to check whether the strategy is realistic overall and what kind of goals should be used on a daily basis to reach long-term goals. – Detailed analysis of assumptions behind the strategy is one goal in the implementation. The metrics are just a concrete sign of detailed analysis and commitment, while metrics are also one of the ultimate goals. – Do not apply a list of predefined metrics outside the organization. A list may or may not help in creating the metrics needed, but the ultimate goal will be fully disregarded. • Courageous introduction of metrics – Metrics and a measurement system must not be considered too soon as final. Analysis and discussion should be in detail, but the measurement system will evolve as final only in practical use. The environment of an organization changes and the measurement system must react to these changes and evolve too. DEPARTMENT of INDUSTRIAL ENGINEERING and MANAGEMENT Tuotantotalouden osasto