The Balanced Scorecard: Translating Strategy Into Action (32 page)

Unfortunately, these initiatives are frequently not linked to achieving targeted improvement for strategic objectives. Thus, the efforts are managed independently, sponsored by different champions, and compete with each other for scarce resources, including the scarcest resource of all, senior management time and attention. When the Balanced Scorecard is used as the cornerstone of a company’s management system, the various initiatives
can be focused on achieving the organizational objectives, measures, and targets.

The first set of opportunities for performance improvement occurs immediately after the design of a Balanced Scorecard. We invariably discover that data are not available for at least 20% of the measures on the scorecard. Recall the discussion in
Chapter 6
on the paucity of measures for employee development and reskilling. Here too, missing measurements are generally not a data problem. They reveal a management problem: “If you can’t measure it, you can’t manage it.” If data do not exist to support a measure, the management process for a key strategic objective is likely to be inadequate or nonexistent.

As specific examples, the missing measures at National Insurance included such items as regulatory compliance, claims effectiveness, policyholder satisfaction, and competency levels. The missing measures at Metro Bank included deposit service cost, share of target market segment, service error rate, and competency levels. The missing measures at Pioneer Petroleum included customer retention, dealer quality, service quality, and technical competency. For each of these organizations, the missing measures indicated that managers were not currently able to manage several critical processes, now considered essential for strategic success.

For example, Metro’s inability to measure deposit service cost meant that marketing managers could not determine if a customer relationship was profitable. The development of this measure led to extending its activity-based costing model from just measuring only product costs to measuring customer profitability. This initiative ultimately enabled Metro to restructure its prices and service offerings to more targeted market segments. National
Insurance’s inability to measure claims effectiveness meant that it could not tailor its claims management process for the specialist niches in which it intended to operate. The lack of a customized claims management process was a barrier to National’s entire strategy. To correct this gap, the company developed a new claims management approach that could be tailored to individual niches. Pioneer’s inability to measure customer retention meant that its marketing managers could not effectively manage the market segmentation program. In developing the program to obtain this measure, Pioneer’s managers also obtained mechanisms for collecting information about and monitoring targeted consumers’ preferences.

If a continuous improvement approach is adopted, a rate-of-improvement metric should be used to track whether near-term efforts are on the right trajectory to achieve the ambitious long-term target. One example is the half-life metric developed at Analog Devices (see
Chapter 6
). The half-life measures how many months are required to reduce process defects by 50%. The metric assumes that when TQM teams are successfully applying formal quality improvement processes, they should be able to reduce defects at a constant rate (each 50% reduction in defects takes about the same
number of months). By establishing the rate at which they expect defects to be eliminated from the system, managers can validate whether they are on a continuous improvement trajectory that will yield the desired performance over the specified time period.

Frequently, managers conclude that local problem solving to continuously improve critical processes will not enable the three-to five-year stretch targets to be achieved. This gap signals the need to develop and deploy entirely new ways of accomplishing these processes. Thus, the scorecard approach provides the front-end justification and focus for organizational reengineering and transformation. Rather than just apply fundamental process redesign to any local process, where gains might be easily obtained, managers develop or reengineer processes that will be critical for the organization’s strategic success. And unlike conventional reengineering programs, where the objective is massive cost cutting (the slash and bum rationale), the objective for a reengineering or transformation program need not be measured by dollars saved. The targets for the strategic initiative can be dramatic time reductions in order fulfillment cycles, shorter time-to-market
in product development processes, and enhanced employee capabilities. These nonfinancial targets can be used to justify and monitor strategic initiatives since the Balanced Scorecard has established the linkage of these measures to dramatic improvements in future financial performance.

Most important, when the power of the scorecard is used to drive reengineering and transformation programs, the organization can focus on the issues that create growth, not just those that reduce costs and increase efficiency. Again, the key ingredient for setting priorities for reengineering programs is the cause-and-effect relationships embedded in the Balanced Scorecard. Recall the example of National Insurance (described in
Chapter 7
), which developed a scorecard to clarify its new vision of becoming a specialist insurer. The Balanced Scorecard became the point of departure for reengineering the underwriting, claims management, and agency-management business processes.

Figure 10-3 illustrates how high-level scorecard measures led to developing a more detailed performance model for the underwriting process. The Underwriting Performance Model identified the factors in the underwriting process that contributed most heavily to the results desired on the Balanced Scorecard. For example, the scorecard outcome measure, loss ratio, was driven by three factors: account selection, accurate pricing, and reduced claims. These factors, in turn, were driven by whether the organization had the capabilities to learn about specific hazards and exposures. As illustrated in Figure 10-4, the Underwriting Performance Model generated the foundation of a Desktop System designed to support the underwriter in the field. Each outcome identified in the performance model generated specifications for the design of an information and work support system. The design specifications identified the more detailed knowledge and experience sharing that was fundamental to the new process design. The performance model, linked to the Balanced Scorecard, allowed the development of an information technology platform that was focused on the strategic objective—improve the underwriting process. The scorecard objective enabled National’s executive team to invest in the long-term drivers, including significant investments in data acquisition and information technology, that would ultimately create financial success for the organization.

Conversely, companies should also review all their current initiatives to determine whether they are contributing to achievement of one or more scorecard objectives. For instance, shortly after the merger that created it, Metro Bank had launched more than 70 different action programs. Each was intended to produce a more competitive and successful institution, but none was integrated into an overall strategy. When building its Balanced Scorecard, Metro executives dropped or consolidated many of these action programs. For example, a marketing effort directed at very high net worth individuals was dropped as was a sales force operational improvement program aimed at enhancing existing low-level selling skills. Managers replaced the latter with a major reskilling program more aligned with the strategic objective to transform salespersons into trusted financial advisers, capable of cross-selling a broad range of newly introduced products.