“Bringing Strategy to Life with the Balanced Scorecard”
Joseph Lakatos, LL.M, CPA, CFE
Elingburg Distinguished Professor of Business Innovation
Western Carolina University
Prepared by Joseph P. Lakatos, Copyright 2017
Today’s Menu
1. Describe the balanced scorecard as a comprehensive performance
measurement system.
2. Discuss how the balanced scorecard should be a part of strategy.
3. Demonstrate how the balanced scorecard brings strategy to life.
4. Walk through an example and take a look at the experience of a local CEO.
5. Illustrate the positive impact the balanced scorecard system has on an
organization’s culture
6. Key lessons learned from balanced scorecard implementation
Prepared by Joseph P. Lakatos, Copyright 2017
Setting the foundation…
Prepared by Joseph P. Lakatos, Copyright 2017
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Setting the foundation (cont’d). . .
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Most organizations fail in executing strategy
(Only 10% execute strategy successfully)
Vision
Barrier
People
Barrier
Management
Barrier
Prepared by Joseph P. Lakatos, Copyright 2017
Resource
Barrier
ENGAGEMENT:
What is the Primary Goal of Strategic Management?
Prepared by Joseph P. Lakatos, Copyright 2017
Sustainable Superior Performance is a Function of:
1. A Company’s Success in Strategy
Creation and Implementation, and
2. The Company’s Strategic Position
in the Industry
Strategic position reflects choices
made about:
1.
The kind of value your
organization creates
2. How that value is created
3. And how you fund your strategy
Prepared by Joseph P. Lakatos, Copyright 2017
3. Industry Structure
To Be Robust, a Strategy Must Pass 5 Tests
1. Create Unique Value
2.
3.
4.
5.
A Tailored Value Chain
Trade-Offs or Choices
Fit
Continuity
Prepared by Joseph P. Lakatos, Copyright 2017
Today’s Competitive Environment
Organizations devote
significant human and
financial resources to
measure their performance
in achieving strategic goals.
Many are dissatisfied
with their measurement
efforts. Why? …
Prepared by Joseph P. Lakatos, Copyright 2017
The root of the problem…
1. Exclusive reliance on financial measures - ignores the rising
value of intangible assets, such as
 innovative cultures,
 employee knowledge,
 customer relationships, and
 supplier relationships
2. Poor implementation of strategy
Prepared by Joseph P. Lakatos, Copyright 2017
Criticisms levied against financial measures

Not consistent with today’s business realities
 “Driving by rearview mirror” - reporting time lags that hinder
timely decision making
 Tend to reinforce functional silos
 Sacrifice long term thinking
 e.g. downsizing – studies show does not improve profits

Financial measures are not relevant to many levels of the
organization

employees at all levels need performance data they can act on
Prepared by Joseph P. Lakatos, Copyright 2017
Increasing Value of Intangible Assets
• 1982 - 38%
• 1992 - 62%
• Today - 75%
Prepared by Joseph P. Lakatos, Copyright 2017
The picture tells the story…
• Non-financial criteria constitute 35% of
investor’s decisions
• The more non-financial measure are
considered in forecasting the more
accurate the forecasts
• Today, approximately 75% of the
sources of value inside organizations
are not being measured.
• Human capital becomes the focus.
Prepared by Joseph P. Lakatos, Copyright 2017
Before we discuss the Balanced Scorecard’s
role in Strategy Execution…
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Accounting and Strategy
Must Dance Together – the Tango or the Waltz?
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Role of Accounting in an Organization’s
Pursuit of Sustainable Superior Performance
1. Provide management with the tools to:




measure and report performance
identify strengths, weaknesses, opportunities and threats
adjust business activities and revise strategies
leverage the company’s performance to obtain funding
2. Establish a system of internal controls to minimize risks
Prepared by Joseph P. Lakatos, Copyright 2017
Let’s explore the Balanced Scorecard and see how it
aids an organization in achieving its strategy?
Prepared by Joseph P. Lakatos, Copyright 2017
The BSC Provides the Processes to Overcome the
Barriers to Strategy Execution
Vision Barrier
v.
“Shared Understanding
and Translation of
Strategy”
People Barrier
v.
“Cascading the
Scorecard”
Management Barrier
v.
“Strategic Learning”
Prepared by Joseph P. Lakatos, Copyright 2017
Resource Barrier
v.
“Strategic Resource
Allocation”
What is the Balanced Scorecard?
 A comprehensive performance measurement system.
 Includes financial and operational measures related to
organizational goals and strategies.
 Comprises several perspectives which can serve as measurement
categories.
 Developed by Robert Kaplan and David Norton.
Financial
Customer
Internal processes
Innovation and learning
Prepared by Joseph P. Lakatos, Copyright 2017
Prepared by Joseph P. Lakatos, Copyright 2017
U.S. Cellular and Jack Rooney – the beginnings of BSC
with a focus on customers and employees
Rooney took on measures to transform U.S. Cellular’s culture with implementation of what
he called the “Dynamic Organizational Model” (DOM), which begins with leadership
effectiveness, leading to greater satisfaction of associates and customers, and better business
results. The core tenants of the DOM are:
• Ethical behavior is more than the mere avoidance of breaking laws and includes
supporting and respecting fellow associates.
• Ethics is a part of every situation, and must be taken into account by everyone regardless
of job title.
• Open and effective communication with associates and customers.
• An emphasis on retaining existing customers.
• Best practices as the norm at customer service centres.
• Complete integration of servant leadership development enabling associates to provide
customers with an ideal experience while supporting one another. Attributes of servant
leadership include communicating a vision, living with integrity, empowering and
encouraging others, being a role model, building community, behaving ethically, learning
from others, and promoting diversity and trust.
Prepared by Joseph P. Lakatos, Copyright 2017
Outcomes at U.S. Cellular
Outcomes: By the end of 2009, 96% of the associates felt they were
well-trained to do their jobs; 98% had a positive overall opinion of U.S.
Cellular and what it was accomplishing; 95% were confident in senior
leadership; and 90% of U.S. Cellular’s leaders had been promoted from
within. Revenues grew from $1.4 billion to $4.4 billion.
Stirred the Development of the BSC!!
Prepared by Joseph P. Lakatos, Copyright 2017
Historical accuracy and integrity of
financial numbers
Prepared by Joseph P. Lakatos, Copyright 2017
Today’s drivers of
economic success
Setting the Right Goals for Competing
Be The Best
Be Unique
• Be Number 1
• Earn higher returns
• Focus on Market Share
• Focus on Profits
• Serve “best” customer with
“best” product
• Meet diverse needs of
target customers
• Compete by Imitation
• Compete by Innovation
Prepared by Joseph P. Lakatos, Copyright 2017
The BSC Helps Provide Answers to Some
Important Questions Asked by
Organizations?
1.
2.
3.
4.
5.
6.
How Do Customers View Us?
How Do We Create Value?
What Core Competencies Do We Need?
How Do Shareholders View Us?
How Do Suppliers View Us?
Are Employees Aligned with Strategy?
Prepared by Joseph P. Lakatos, Copyright 2017
How does an organization go about
creating and implementing a BSC?...
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How does an organization go about
creating and implementing a BSC?
1.
2.
3.
4.
Securing executive sponsorship
Creating an implementation team
Preparing an implementation plan - next
Creating a “Strategy Map” – the decisive
ingredient
5. Selection of Key Performance Measures
6. The Role of Target Setting
7. “Cascading” of the BSC
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BSC Implementation Plan
Steps in the Planning Phase
1.
2.
3.
4.
5.
6.
Week 1: Develop a guiding rationale for your BSC.
Week 2: Determine the appropriate organizational unit.
Weeks 1-3: Secure executive sponsorship.
Weeks 2-4: Form and train your BSC team.
Weeks 3-5: Formulate your implementation plan.
Weeks 4-5: Develop a communication strategy and plan.
Prepared by Joseph P. Lakatos, Copyright 2017
BSC Implementation Plan
Steps in the Development Phase
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Week 6: Gather and distribute background material.
Week 6: Provide BSC education.
Weeks 6-7: Develop or confirm mission, values, vision, and strategy.
Weeks 6-7: Conduct executive interviews.
Week 8: Develop strategy map.
Week 9: Conduct an executive workshop and gather employee feedback.
Week 10: Develop Performance Measures.
Week 11: Conduct a follow up executive workshop.
Weeks 12-13: Establish targets and prioritize initiatives.
Weeks 14-15: Gather data for your first BSC report.
Week 16: Hold your first BSC meeting.
Week 17+: Develop an ongoing implementation plan.
Sample Strategy Map Incorporating the BSC
Prepared by Joseph P. Lakatos, Copyright 2017
Prepared by Joseph P. Lakatos, Copyright 2017
Overcoming the Barriers to Strategy Execution
Vision Barrier
v.
“Shared Understanding
and Translation of
Strategy”
People Barrier
v.
“Cascading the
Scorecard”
Management Barrier
v.
“Strategic Learning”
Prepared by Joseph P. Lakatos, Copyright 2017
Resource Barrier
v.
“Strategic Resource
Allocation”
Choosing Measures for Each BSC Perspective…
Prepared by Joseph P. Lakatos, Copyright 2017
Choosing Measures for the Customer Perspective
Critical Questions
1. Who are our target customers?
* A problem arises: “All things to all
customers”
2. What is your value proposition
in serving them?
3. What do customers expect or
demand from us?
Value Proposition Choices
1. Operational Excellence
2. Product Leadership
3. Customer Intimacy
Typical Measures
Customer Satisfaction, Customer
Loyalty, Market Share and Customer
Acquisition
Prepared by Joseph P. Lakatos, Copyright 2017
Operating or Business Improvement
Process Perspective – Measurable Areas
Enhance or Develop New Processes in:






Product Development
Supplier Relationships
Production
Manufacturing
Delivery
Post sale service
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Employee and Learning Growth Perspective
“Close the Infrastructure Gap”
To ensure sustainable performance in
the future:
• Employee skills
• Information systems
• Environment
Measures
“Enablers” of all other BSC
measures
Prepared by Joseph P. Lakatos, Copyright 2017
Measures for the Financial Perspective
 Profitability
 Revenue Growth
 Asset Utilization
 Etc.
Prepared by Joseph P. Lakatos, Copyright 2017
KPI Examples for Each Perspective
Key financial indicators (the “usual”)
Expense as a % of revenue
Expense variance %
New product ROI
Net profit
Net profit margin
Year over year revenue growth
New product revenue
Key customer indicators
Average customers per hour
Average customer survey rating
Number of customer complaints per period
Number of sales returns per period
Customer repeat count
Prepared by Joseph P. Lakatos, Copyright 2017
Companies using the
balanced scorecard monitor
previous period and
standards for each indicator.
KPI Examples (con’td)
Key operating/business process improvement
Products produced/sold per day ratio
Daily units lost
Average call wait
Fulfillment/Customer Conversion Rate
New product acceptance rate
Number of defects reported
Time to market for new products
Key learning and growth
Headcount growth
Employee turnover ratio
Job offer acceptance rate
Employee satisfaction
Prepared by Joseph P. Lakatos, Copyright 2017
Let’s try a simple example…
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Prepared by Joseph P. Lakatos, Copyright 2017
International Accountants’ Association (IAA)
IAA is professional association, like the IMA, with 97,600
members. They have a goal of reaching 100,000 members by the
end of the year. IAA operates from New Zealand, but has local
memberships units throughout the world. The local units hold
monthly meetings to discuss recent developments in accounting
and to hear professional speakers on topics of interest. The
association’s journal, International Accountant, is published
monthly with feature articles and topical interest areas. The
association published books and reports and sponsors continuing
education courses.
Prepared by Joseph P. Lakatos, Copyright 2017
Financial performance indicators:
Possible KPI’s for IAA
1.
Income/loss per member per year
2.
Income/loss per employee per year
3.
Income/loss for memberships
4.
Income/loss for subscriptions
5.
Income/loss per country/language
6.
Income/loss per professional meeting or for all meetings
7.
Budget versus actual comparisons for revenues and expenses
8.
Revenue/costs versus benchmarks set by top management
Customer performance indicators:
1.
Number of member complaints
2.
Membership turnover
3.
Percent of members participating in continuing education seminars
4.
Ratio of outside subscriptions to membership
Operating performance indicators:
1.
Members per employee
2.
Revenue growth versus employee growth
3.
Increase in costs of given activities versus their outputs; for example, employee cost per run of monthly journal versus that of last year.
4.
Cost savings ideas per employee which resulted in implementation
Prepared by Joseph P. Lakatos, Copyright 2017
International Accountants’ Association (IAA)
Planned Revenues/Expenses (based on a Goal of 100,000
Members) for the Year Ending November 30, 2016
Revenues
Expenses
Salaries
Other personnel costs
Occupancy costs
Reimbursement to local units
Other membership services
Printing and paper
Postage and shipping
General and administrative
$27,900,000
$13,950,000
3,450,000
1,900,000
780,000
525,000
300,000
110,000
545,000
Prepared by Joseph P. Lakatos, Copyright 2017
($21,560,000)
$ 6,340,000
Standard
Financial information:
Total Revenues
$27,900,000
Total Costs
$21,560,000
Journal advertising
$ 220,000
ROI:
($6,340,000 / $40,000,000)
0.159
Residual Income:
Income
$ 6,340,000
Minimum return (11% of assets)
-4,400,000
Residual income
$ 1,940,000
Customer information:
Course attendance
Technical reports sold
Operating criteria:
Average cost per special publication
Average cost per magazine
Other personnel costs vs. salaries:
($3,450,000 / $13,950,000) 0.247
($3,400,000 / $14,000,000) 0.243
Actual
$26,700,000
$21,672,000
$ 200,000
($5,028,000 / $44,000,000) 0.114
$ 5,028,000
-4,840,000
$ 188,000
35,000
28,000
33,285
30,000
$11
$18
$12
$20
International
Accountants’
Association
(IAA)
Prepared by Joseph P. Lakatos, Copyright 2017
Which areas show success at IAA? Areas for improvement?
Areas of Success:
1.
2.
1.
2.
3.
4.
5.
6.
More reports were sold
Other personnel costs were slightly less in relation to salaries
Areas for Improvement:
Total revenues decreased while total costs increased
ROI decreased significantly
Residual income decreased significantly
Fewer people took courses
Advertising went down
Publication costs went up
IAA experienced declining membership and lower than expected attendance at continuing
education courses during the year, resulting in lower revenues, but without commensurate decreases
in costs. Most of the costs were kept in line with growth expectations that never materialized.
Engagement: What’s missing in IAA’s
Balanced Scorecard?
What KPI’s would you add
to measure this?
(Remember these measures
are “enablers”!)
Prepared by Joseph P. Lakatos, Copyright 2017
How do we assess whether a company needs
or is a good fit for the BSC?
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Assessing the Need for a Balance Scorecard*
1. Our organization has invested in TQM and other improvement initiatives, but has not
seen a corresponding increase in financial or customer results.
2. If we did not produce our current performance reports for a month nobody would notice.
3. We create significant value from intangible assets, such as employee knowledge and
innovation, customer relationships, and a strong culture.
4. We have a strategy but have a hard time implementing it successfully.
5. We rarely review our performance measures and make suggestions for new and
innovative indicators.
6. Our senior management team spends the majority of its time together discussing
variances from plan and other operational issues.
7. Our budgeting process is very political and based largely on historical trends.
8. Our employees do not have a solid understanding of our mission, vision and strategy.
9. Our employees do not know how their day-to-day actions contribute to the organization’s
success.
10. Nobody owns the performance measurement process in our organization.
Prepared by Joseph P. Lakatos, Copyright 2017
* Adapted from Paul R. Niven’s Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. 2nd ed. John Wiley & Sons
Assessing the Need for a Balance Scorecard*
11. We have numerous initiatives taking place at our organization, and it’s possible that all
are not truly strategic in nature.
12. There is little accountability in our organization for the things we agree as a group to do.
13. People tend to stay within their “silos”, with little collaboration among departments.
14. Our employees have difficulty accessing the information they need to serve customers.
15. Priorities at our organization are often dictated by current necessity or “firefighting”.
16. The environment in which we operate is changing, and we too must change to succeed.
17. We face increased pressure from stakeholders to demonstrate results.
18. We do not have clearly defined performance targets for both financial and non-financial
indicators.
19. We cannot clearly articulate our strategy in a one-page document or “strategy map”.
20. We sometimes make decisions that are beneficial in the short term, but may harm longterm value creation.
* Adapted from Paul R. Niven’s Balanced Scorecard Step-by-Step: Maximizing Performance and Maintaining Results. 2nd ed. John Wiley & Sons
Prepared by Joseph P. Lakatos, Copyright 2017
Interview with a CEO of an
Asheville Based Company
Prepared by Joseph P. Lakatos, Copyright 2017
Q1: How did you go about creating and implementing the balance
scorecard - who was involved, did you create a team, did you educate
everyone in the organization about it before its implementation, etc.
1. The creation of the scorecard was primarily done by the CEO,
with input from other executives and the board of directors.
2. The original motivation was to create a clearer profit sharing
plan for the staff. In the past “profit sharing” was not defined
at all, and was simply a “gift” at the end of the year. There
was no “line-of sight” for employees that connected their
performance with the company’s performance.
3. The creation went through several iterations before it was
rolled out to the staff.
Prepared by Joseph P. Lakatos, Copyright 2017
Q1: How did you go about creating and implementing the balance
scorecard - who was involved, did you create a team, did you educate
everyone in the organization about it before its implementation, etc.
4. The scorecard was first rolled out to the entire staff at a
company meeting in early March. The CEO explained every
measure on the scorecard to the staff.
5. The scorecard was reviewed with the entire company again
one month later, to reinforce the metrics and how they reflect
our performance (both positive and negative).
6. After these initial two meetings, I now meet with the entire
company quarterly in person to review the scorecard.
Additionally, the scorecard is updated each month and posted
on our company’s internal “dashboard” so that employees can
view it at any time.
Prepared by Joseph P. Lakatos, Copyright 2017
Q2: Have you revised the BSC since implementation? If so,
what factors contributed to its revision?
a. Yes! The BSC format was revised every 2-3 months on average. Now
that it has been in effect for over a year, the revisions are less
frequent. For example, this past month I added more detail on the
scorecard related to our average customer discounts. In the past, we
had only reported the average discount at shipment, but the sales and
marketing staff really wanted to know what it was at the time of the
initial order.
b. The other challenge has been not to revise the scorecard so much that
it gets entirely too long. I want to keep it always to 2 pages or less, so
that anyone can digest it quickly. This forces us to really only report
the most essential metrics – if we’re going to add another metric, we
have to figure out what to give up.
Prepared by Joseph P. Lakatos, Copyright 2017
Q3: What improvements have you seen in your company’s
performance and culture?
a. 2016 was the first year that we hit our shipment goals since before the
great recession hit. I attribute much of this to the clarity that the BSC
brought to our staff. In the past, people knew we needed to “do more”,
but they didn’t understand the specifics of how to get where we needed
to be. Obviously, this could very well be correlation, not causation.
b. Our culture has always been really special. People are extremely
committed to our greater cause and purpose, but with the BSC they now
have a specific set of measurements that they can connect with this
greater mission. I believe that this has allowed our excellent culture to
thrive even more, because people have specific outlets for their effort.
Again, this is hard to quantify…but, my gut feeling is that we have had a
marked increase in accountability, without losing the more esoteric parts
Prepared by Joseph P. Lakatos, Copyright 2017
of our culture.
Q4: What were the key lessons learned from
implementing the BSC?
a. Employees really want to know what’s going on. Many
small business owners want to hide details from their
staff, but for the most part, this is counterproductive.
b. A tool like the BSC really allows me as the CEO to
ensure that the “ownership of problems” is correctly
distributed. I no longer have to feel responsible for every
aspect of performance – each department and employee
knows what they are accountable for.
Prepared by Joseph P. Lakatos, Copyright 2017
Let’s talk a little more about the benefits of
“Cascading” the BSC
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When we work strictly in our functional silos, we are like a
bunch of blind people trying to understand what an
elephant is.
It’s a sheet
of rawhide.
It’s a steel
tube.
Please tell me
what it is?
It’s a snake.
Prepared by Joseph P. Lakatos, Copyright 2017
It’s a
tree trunk.
The BSC allows those in an organization from the front line
to the BOD, to crawl all over and under the enterprise to
better help them see and understand the whole animal.
Accounting
Marketing
Sales
It is an
enterprise!
Production
Finance
Prepared by Joseph P. Lakatos, Copyright 2017
Balanced Scorecard as Strategy Translator
 Can be the primary vehicle for translating strategy into action
and establishing accountability for performance.
 Identifies the areas of managerial action that are believed to be
the drivers of corporate achievement.
Prepared by Joseph P. Lakatos, Copyright 2017
Using the Balanced Scorecard to Achieve the
Desired Culture in Your Organization
Prepared by Joseph P. Lakatos, Copyright 2017
Let’s Review What the BSC Does for Us?




Communicates and links the strategic vision to responsible parties
Translates the vision into measurable operational goals
Assists in the design and planning of business processes
Provides a mechanism to implement feedback and organizational
learning in order to modify and adapt strategic goals when indicated
 Improves morale and achieves cultural changes - team environment!
BUT ?????????????????????????????
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Only as Good as the People Who Create It
As good as the strategy…
 Realistic objectives…
 How many KPI’s…
 Cannot fix what is broken…

Prepared by Joseph P. Lakatos, Copyright 2017
Wrap-Up: How Do Organizations Benefit
from Implementation of a BSC?
Increased financial returns
II. Greater employee alignment with
overall goals
III. Improved collaboration
IV. Unrelenting focus on strategy
I.
Benefits I-IV lead to sustainable
growth

Prepared by Joseph P. Lakatos, Copyright 2017
The Balanced Scorecard serves as a…
Communication
Tool
Measurement System
Strategic Management System
Prepared by Joseph P. Lakatos, Copyright 2017