Balanced Scorecard Budgeting
Fusing the Link Between Strategy & Budgeting
Lawrence Serven
The Buttonwood Group
www.ButtonwoodLLP.com
203/328-3056
Outline
–
A Tale of Two Companies
–
3 Immutable Laws (and their implications)
–
Balanced Scorecard Budgeting
–
Keys to Success
–
Q&A
2
A Tale of Two Companies
Company snapshot: which company has been
more successful?
Company A
Company B
Sales Growth
8%
0%
Gross Margin %
55%
35%
SG&A as a % of Sales
5%
15%
EBITA as a % of Revenue
15%
3%
RONA %
20%
2%
3
A Tale of Two Companies
Why has “Company
A” been more
successful?
4
A Tale of Two Companies
Company snapshot (part 2): why has Company A
been more successful?
Company A
Company B
Customer Satisfaction Index
90
75
# Defects per Thousand
5
20
% On Time Delivery
95%
70%
New Product Dev. Cycle Time
6 mos.
18 mos.
Employee Satisfaction Index
90%
70%
% of Sales Coming From Products
Introduced in the Last 2 Years
20%
1%
% Product Returns
1%
8%
5
A Tale of Two Companies
Which way should the arrow go? Which set of
measures drives the other?
Customer Satisfaction Index
Sales Growth
# Defects per Thousand
Gross Margin %
% On Time Delivery
New Product Dev Cycle Time
SG&A as a % of Sales
Employee Satisfaction Index
EBITA as a % of Revenue
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
RONA %
6
A Tale of Two Companies
Customer Satisfaction Index
# Defects per Thousand
% On Time Delivery
New Product Dev Cycle Time
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
=
Measures for
What Really
Drives Success
in the Business
% Product Returns
7
A Tale of Two Companies
Set annual plan targets (numerical)
Set annual plan targets (numerical)
Bake into the budget
Bake into the budget
Report on every month to sr. exec team
Report on every month to sr. exec team
Analyze variances
Analyze variances
Customer Satisfaction Index
Sales Growth
# Defects per Thousand
Gross Margin %
% On Time Delivery
New Product Dev Cycle Time
SG&A as a % of Sales
Employee Satisfaction Index
EBITA as a % of Revenue
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
RONA %
8
A Tale of Two Companies
Most companies manage to the P&L while the actual drivers of
business performance “fade into the background”.
Sales Growth
Gross Margin %
Customer Satisfaction Index
SG&A as a % of Sales
# Defects per Thousand
% On Time Delivery
New Product Dev Cycle Time
EBITA as a % of Revenue
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
RONA %
% Product Returns
9
A Tale of Two Companies
Highly successful companies manage to the real drivers of success…
…and also understand how and why they impact the P&L
Customer Satisfaction Index
Sales Growth
# Defects per Thousand
Gross Margin %
% On Time Delivery
New Product Dev Cycle Time
SG&A as a % of Sales
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
EBITA as a % of Revenue
RONA %
10
A Tale of Two Companies
Set annual plan targets (numerical)
Bake into the budget
Report on every month to sr. exec team
Analyze variances
Customer Satisfaction Index
Sales Growth
# Defects per Thousand
% On Time Delivery
Employee Turnover
Gross Margin %
SG&A as a % of Sales
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
EBITA as a % of Revenue
RONA %
11
Outline
–
A Tale of Two Companies
–
3 Immutable Laws (and their implications)
–
Balanced Scorecard Budgeting
–
Keys to Success
–
Q&A
12
3 Immutable Laws
Immutable Law #1: Strategy has no value on it’s own other
than to achieve specific goals. Strategy for strategy’s sake is
corporate make work.
Set corporate targets first, then build a strategy to meet
them. That’s purpose built strategy.
13
3 Immutable Laws
Immutable Law #2: It’s all about execution. A plan exists only
in PowerPoint until it’s executed.
Build the ongoing monitoring and reporting mechanisms to
ensure plans are being followed through on.
14
3 Immutable Laws
Immutable Law #3: Any project, strategic or operational, will
die unless resources are allocated to it.
The resources necessary to see a project though must be
identified and included in the operating budget.
15
Outline
–
A Tale of Two Companies
–
3 Immutable Laws (and their implications)
–
Balanced Scorecard Budgeting
–
Keys to Success
–
Q&A
16
KPIs
Plan
Monitor
Budget
17
KPIs
Step 1: Identify Company KPIs
18
Step 1: Identify Company KPIs
Best KPIs
Worst KPIs
Used to make better decisions
Shelfware
Embraced by line managers
Seen as not really relevant to
line managers
Reflects what actually
drives success in the
business
Nothing but Financial Stats
Cocktail Napkin
Telephone Directory
19
Step 1: Identify Company KPIs
The Value Driver Workshop
Who: The Senior Management Team (or designates)
What: A one day Workshop to identify what really drives success in the
business (e.g, Innovation, being the Low Cost Producer, etc.)
How: A series of facilitated workshop exercises
Next
20
Step 1: Identify Company KPIs
Identification of KPIs
Who: The project work team
What: A Workshop to translate what Senior Management has
identified as driving the success of the business into Key
Performance Indicators (KPIs)
How: A series of facilitated brainstorming exercises
21
Step 1: Identify Company KPIs
Step 1 Deliverables: A Company Scorecard of KPIs
Customer Satisfaction Index
# Defects per Thousand
% On Time Delivery
New Product Dev Cycle Time
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
22
KPIs
Step 2: Establish
targets for the KPIs
Plan
23
Step 2: Establish Targets for KPIs
KPI Target Setting
Who: KPI Teams
What: Benchmarking and historical analysis to determine both long
term (strategic) and short term targets for each KPI
How: After a kick off meeting led by the KPI team leader, the group conducts
benchmarking and historical trend analysis to establish long term (i.e., 3 to 5
years) targets as well as targets for the upcoming year. Depending upon the
circumstances, this may take a few days to a few weeks.
24
Step 2: Establish Targets for KPIs
Step 2 Deliverables: Targets for KPIs
Customer Satisfaction Index
2005
2006
2007
80
85
90
# Defects per Thousand
% On Time Delivery
New Product Dev Cycle Time
Employee Satisfaction Index
% of Sales Coming From Products
Introduced in the Last 2 Years
% Product Returns
25
KPIs
Step 2: Establish
targets for the KPIs
Plan
Step 3: Develop
Strategy to Achieve
Targets
26
Step 3: Develop Strategy to Achieve Targets
Develop Strategy to Achieve Targets
Who: KPI Teams & SMEs (subject matter experts)
What: Each KPI team develops a strategy that is designed to achieve
the targets for their KPIs. This is a long term view that incorporates
strategic initiatives.
How: Each KPI team, working with internal experts and other subject matter
experts develops a strategy, including long term initiatives, that if executed will
achieve the targets established for the KPIs.
27
Step 3: Develop Strategy to Achieve Targets
Step 3 Deliverables: Strategic Initiative Summary
KPI: Employee Satisfaction
‘05-’07 Targets
2005: 80
2006: 85
2007: 90
Strategy
Description
Through investments job rotation and other programs, we will make our employees the most sought after in the industry. Clearly this will
be “a win” for our employees, but it will also be a “win” for the company. If, in fact, our employees are the most sought after in the
industry, that will be a major selling point in recruiting new talent. It also serves as an acid test for us, for in fact our employees are the
most sought after in the industry, they most sought after skills and know how. We will be known as the company that enables employees
to build their marketable skills and understanding of the business.
Leader
Hans Bergen [V.P., Career Development]
Strategic Initiatives
•
•
•
•
•
Integrate the goal of developing employees into each manager’s bonus calculation
Develop a career rotation program
Set standards for hours of training per year for each job level and monitor
Create a job shadowing program
Launch an alumni network
28
KPIs
Step 2: Establish
targets for the KPIs
Plan
Step 3: Develop
Strategy to Achieve
Targets
Step 4: Develop Action
Plans to Achieve Near
Term Targets
29
Step 4: Create Action Plans to Achieve Near Term Targets
Develop Action Plans
Who: KPI Teams
What: Each KPI team develops Action Plans that are designed to
achieve the targets for their KPIs. Particular attention is paid to what
can be done in the first year.
How: Each KPI team, working with internal experts and other subject matter
experts develop Action Plans; complete with Activities, Tasks, and Milestones.
30
Step 4: Create Action Plans to Achieve Near Term Targets
Develop Action Plans
Who: KPI Teams
What: Each KPI team develops Action Plans that are designed to
achieve the targets for their KPIs. Particular attention is paid to what
can be done in the first year.
How: Each KPI team, working with internal experts and other subject matter
experts develop Action Plans; complete with Activities, Tasks, and Milestones.
31
Step 4: Create Action Plans to Achieve Near Term Targets
Step 4 Deliverables: Action Plans (Summary View)
Career Rotation Program
PROJECT LEADER
ACTION PLAN: Formalizing a Rotation Program
LEADER: Margaret Cho
LAST UPDATED: 11/15/02
Margaret Cho
Week Beginning Monday:
7
APRIL
14
21
28
5
MAY
12
19
26
2
JUNE
9
16
23
7
14
JULY
21
28
35
4
AUG
11
18
25
1
SEPT
8
15
22
6
OCT
13
20
27
3
NOV
10
17
24
1
8
DEC
15
DEADLINE
December
22
ORGANIZE A CROSS FUNCTIONAL TEAM
Solicit input from sr. management
Draft intro letter
Formalize team roster
Schedule kick off meeting
Prep for kick off meeting
Conduct kick off meeting
BRIEF DESRIPTION
DRAFT PROJECT CHARTER
Organize sub team to draft charter
Define objectives
Define scope
Define approach
Document
Review charter with team
Present to senior management
Modify charter as directed
Enable employees to rotate through
various business units/ functional
areas to build their skills and
understanding of the business.
COMPLETE RFP PROCESS
Draft RFP for consulting assistance
Review project charter & use as cornerstone
Solicit 3 - 6 bids
Review bids
Interview vendors
Make team selection
Present to senior management for approval
DEVELOP PROGRAM BLUEPRINT
Review best practices
Benchmark industry practices
Brainstorm alternatives
Select best alternative
Complete details
Draft program description document
VALIDATE WITH SR. MANAGEMENT
Present to sr. management for approval
VALIDATE WITH BUSINESS UNITS
Present to Business Unit for Approval
INCORPORATE FEEDBACK
COMMUNICATE PROGRAM TO ORGANIZATION
>>>>
IMPLEMENT PROGRAM (2004)
(HIGH LEVEL) RESOURCE REQUIREMENTS
INTERNAL
• 8 Person cross functional team (on
average 2 hours a week for 9 months)
• 1 Procurement specialist to help us
through the RFP process
EXTERNAL
• HR Specialist (TBD)
KEY MILESTONES
1) Organize a cross functional team – April ’05
2) Draft a complete project charter (Objectives, Scope, Approach,
Structure) – May ’05
3) Complete RFP process for outside expert – July ’05
4) Develop program blueprint – Oct ’05
5) Validate program with Sr. Management – Nov ’05
6) Implement program -- 2006
32
Step 4: Create Action Plans to Achieve Near Term Targets
Step 4 Deliverables: Action Plans (Gant Chart)
ACTION PLAN: Formalizing a Rotation Program
LEADER: Margaret Cho
LAST UPDATED: 11/15/02
Week Beginning Monday:
7
APRIL
14
21
28
5
MAY
12
19
26
2
JUNE
9
16
23
7
14
JULY
21
28
35
4
AUG
11
18
25
1
SEPT
8
15
22
6
OCT
13
20
27
3
NOV
10
17
24
1
8
DEC
15
22
ORGANIZE A CROSS FUNCTIONAL TEAM
Solicit input from sr. management
Draft intro letter
Formalize team roster
Schedule kick off meeting
Prep for kick off meeting
Conduct kick off meeting
DRAFT PROJECT CHARTER
Organize sub team to draft charter
Define objectives
Define scope
Define approach
Document
Review charter with team
Present to senior management
Modify charter as directed
COMPLETE RFP PROCESS
Draft RFP for consulting assistance
Review project charter & use as cornerstone
Solicit 3 - 6 bids
Review bids
Interview vendors
Make team selection
Present to senior management for approval
DEVELOP PROGRAM BLUEPRINT
Review best practices
Benchmark industry practices
Brainstorm alternatives
Select best alternative
Complete details
Draft program description document
VALIDATE WITH SR. MANAGEMENT
Present to sr. management for approval
VALIDATE WITH BUSINESS UNITS
Present to Business Unit for Approval
INCORPORATE FEEDBACK
COMMUNICATE PROGRAM TO ORGANIZATION
>>>>
IMPLEMENT PROGRAM (2004)
33
KPIs
Step 5: Develop Action
Plan Budgets
Plan
Budget
34
Step 5: Develop Action Plan Budgets
Develop Action Plan Budgets
Who: KPI Teams, working closely with Finance
What: Each KPI team works with the Finance build budgets for their
Action Plans
How: Each KPI team, working with Finance, identifies the resources they
need to execute their Action Plans. Finance then translates these resource
requirements into SG&A line item detail and CAPEX requests for budget
purposes.
35
Step 5: Develop Action Plan Budgets
Step 4 Deliverables: Action Plans Budgets
ACTION PLAN
Formalize a Career Rotation Program
TEAM LEADER Margaret Cho
SOFTWARE
EQUIPMENT
CONSULTING
OTHER
PROJECT TOTAL
2005
TOTAL
$0.1
$0.2
$0.1
$0.1
$0.5
36
KPIs
Step 5: Develop Action
Plan Budgets
Plan
Step 6: Combine
with the Baseline
Budget
Budget
37
Step 6: Combine with the Baseline Budget
Create a Baseline Budget
Who: Finance and budget managers
What: The Finance area facilitates the development of a baseline
budget (“keep the lights turned on”) that can then be combined with
the Action Plan budgets to produce a total company plan
How: Working with managers, the Finance area develops a baseline budget,
that incorporates all elements of the annual plan P&L, that is then combined
with the Action Plan budgets.
38
Step 6: Combine with the Baseline Budget
Step 6 Deliverables: A Combined Budget (Incorporating both Action Plan
Budgets and the Baseline Budget
TOTAL COMPANY
2005 SHORT FORM P&L
Dollars in Millions
BASELINE
$1,200.0
IMPACT OF
ACTION PLANS
Better/(Worse)
$1.0
TOTAL
$1,201.0
COGS
$780.0
$0.5
$780.5
Contribution Margin
$420.0
$0.5
$420.5
G&A Expenses
$320.0
$2.0
$322.0
Net Income
$100.0
($1.5)
$98.5
Revenue
39
KPIs
Plan
Monitor
Step 7: Establish
ongoing reporting
and review
Budget
40
Step 7: Establish Ongoing Reporting
Establish Ongoing Reporting & Review
Who: Finance and IT work team.
What: Finance and IT work together to build an ongoing reporting
mechanism for: Financial Results, KPIs and the progress of the
Action Plans.
How: A combined Finance and IT work team identify requirements and select
the tools that will enable monthly monitoring of results (both financial and
KPIs). In addition, the work team will develop a process for the monthly
review of progress of Action Plans alongside of the financial results.
41
Step 7: Establish Ongoing Reporting
Step 7 Deliverables: Reporting and monitoring tools for KPI results
Progress on Value Drivers
June Year To Date
(Partial View for Illustration Only)
Significantly exceeds target
Within target range
Significantly below target
Value Driver
Measure
Operating Efficiency
Operating Expense Ratio
Quality Obsession
# of Defects per Thousand
Potent Workforce
Employee Turnover
Employee Survey Index
Stoplight
Rating
Target
Reference Data
YTD Actual
45%
46%
5
8
20%
25%
95
80
42
Step 7: Establish Ongoing Reporting
Step 7 Deliverables: Reporting and monitoring tools for progress of
Action Plans
Career Rotation Program
PROJECT LEADER
ACTION PLAN: Formalizing a Rotation Program
LEADER: Margaret Cho
LAST UPDATED: 11/15/02
Margaret Cho
Week Beginning Monday:
7
APRIL
14
21
28
5
MAY
12
19
26
2
JUNE
9
16
23
7
14
JULY
21
28
35
4
AUG
11
18
25
1
SEPT
8
15
22
6
OCT
13
20
27
3
NOV
10
17
24
1
8
DEC
15
DEADLINE
December
22
ORGANIZE A CROSS FUNCTIONAL TEAM
Solicit input from sr. management
Draft intro letter
Formalize team roster
Schedule kick off meeting
Prep for kick off meeting
Conduct kick off meeting
BRIEF UPDATE
DRAFT PROJECT CHARTER
Organize sub team to draft charter
Define objectives
Define scope
Define approach
Document
Review charter with team
Present to senior management
Modify charter as directed
We’ve slipped 60 days due to a delay in reaching a
decision on our RFP vendor, but we should be able
to make up half that time.
COMPLETE RFP PROCESS
Draft RFP for consulting assistance
Review project charter & use as cornerstone
Solicit 3 - 6 bids
Review bids
Interview vendors
Make team selection
Present to senior management for approval
DEVELOP PROGRAM BLUEPRINT
Review best practices
Benchmark industry practices
Brainstorm alternatives
Select best alternative
Complete details
Draft program description document
VALIDATE WITH SR. MANAGEMENT
Present to sr. management for approval
VALIDATE WITH BUSINESS UNITS
Present to Business Unit for Approval
INCORPORATE FEEDBACK
COMMUNICATE PROGRAM TO ORGANIZATION
>>>>
IMPLEMENT PROGRAM (2004)
KEY QUESTIONS
Project on Schedule? NO
# Days Delayed: 60
Reasons?
Senior management approval of
vendor by 60 days.
Actions to get back on track?
Streamlining brainstorming and
documentation should result in a
savings of 30 days
KEY MILESTONES
1) Organize a cross functional team – April ’03
2) Draft a complete project charter (Objectives, Scope, Approach,
Structure) – May ’03
3) Complete RFP process for outside expert – July ’03
4) Develop program blueprint – Oct ’03
5) Validate program with Sr. Management – Nov ’03
6) Implement program -- 2004
43
Outline
–
A Tale of Two Companies
–
3 Immutable Laws (and their implications)
–
Balanced Scorecard Budgeting
–
Keys to Success
–
Q&A
44
Keys to Success
Keys to Success #1: Benchmark your company against national
averages to quantify if your organization could benefit (or not):
•Do people know what the strategy is?
•Do they know how it links to the plan/budget?
•Do they know what the company’s key performance measures are?
•Do they think they have anything to do with them?
•Do goals really cascade down through the organization?
•Are we any different from national averages?
45
Keys to Success
Keys to Success #2: Don’t create a separate budget exercise;
bring balanced scorecard budgeting into your current process
•Many companies make the mistake of creating a separate process for
budgeting balanced scorecard initiatives.
•But the “real” budgeting process still dictates how resources are
allocated.
46
Keys to Success
Keys to Success #3: Know thyself. Customize Balanced
Scorecard Budgeting to suit your culture & planning processes
•If you currently employ a rolling six quarter forecast, for example, then
tailor the Balance Scorecard Budgeting approach to synch up with it.
•If your strategic planning process looks out five years, for example, then
your KPI targets should go out five years.
47
Keys to Success
Keys to Success #4: Pick the right technology tools to enable
Balanced Scorecard Budgeting.
•After designing your Balanced Scorecard Budgeting process, develop a set
of requirements for a planning/reporting system.
•Determine if your current set of tools can meet the requirements
•If the current set of tools will not adequately meet the needs, conduct a
vendor selection process (with a minimum of three vendors).
48
Outline
–
A Tale of Two Companies
–
3 Immutable Laws (and their implications)
–
Balanced Scorecard Budgeting
–
Keys to Success
–
Q&A
49
Q&A
50