balance scorecard project
DESCRIPTION
This is a project giving guidance to hr peopleTRANSCRIPT
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ADissertation Report
On
Putting HR on Balanced Scorecard
(A Case Study of Verizon)(SUBMITTED TOWARDS PARTIAL FULFILLMENT OF POST
GRADUATE DIPLOMA IN MANAGEMENT)
(Approved by AICTE, Govt. of India)
ACADEMIC SESSION
(2008-10)
Under the guidance of: Submitted by:
Supervisor Name Your Name Lecturer (college name) Roll: - PGDM-08/012
College Address
College Logo
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PREFACE
There is a famous saying The theory without practical is lame and practical
without theory is blind.
Alignment of the Human Resource with the overall strategy of the company is a
very big and toughest challenge for the company.
Human resource is an important part of any business and managing them is an
important task.
Our institution has come forward with the opportunity to bridge the gap by
imparting modern scientific management principle underlying the concept of the
future prospective managers.
To the emphasis on practical aspect of management education the faculty of
College Name has with a modern system of practical training of repute and
following management technique to the student as integral part of PGDM.
ACKNOWLEDGEMENT
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It is not possible to prepare a project report without the assistance &
encouragement of other people. This one is certainly no exception.
On the very outset of this report, I would like to extend my sincere & heartfelt
obligation towards all the personages who have helped me in this endeavor.
Without their active guidance, help, cooperation & encouragement, I would not
have made headway in the project.
I am ineffably indebted to Supervisor Name for conscientious guidance and
encouragement to accomplish this assignment.
I am extremely thankful and pay my gratitude to my faculty guide Guidance
Name, College Name for her valuable guidance and support on completion of
this project in its presently.
I extend my gratitude to College Name for giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude towards my
parents and member of my family, who has always supported me morally as
well as economically.
At last but not least gratitude goes to all of my friends who directly or indirectly
helped me to complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thanking You
Your Name
CERTIFICATE FROM THE FACULTY GUIDE
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This is to certify that the project work entitled Putting HR on Balanced
Scorecard: A Case Study of Verizon. is a bonafide work carried out by Your
Name, a candidate of the PGDM (2008-2010) College Name under my
guidance and direction.
Signature of the Guide
Guidance Name
TABLE OF CONTENTS1. INTRODUCTION 1
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2. RESEARCH METHODOLOGY
3. LITERATURE REVIEW
4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE FUTURE
5. THE HR ARCHITECTURE AS A STRATEGIC ASSET
5.1. THE HR FUNCTION5.2. THE HR SYSTEM5.3. EMPLOYEE BEHAVIOURS
6. THEORY BEHIND THE BALANCED SCORECARD
6.1. BACKGROUND OF THE CONCEPT OF BALANCED SCORECARD6.2. DEFINING CRITICAL SUCCESS FACTORS AND MEASURES6.3. THE FOUR PERSPECTIVES: CAUSE AND EFFECT RELATIONSHIP6.4. THE BALANCED SCORECARD MODEL6.5. BALANCED SCORECARD AS A MEASUREMENT TOOL
7. IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE
7.1. INTEGRATING HR INTO THE PERFORMANCE MEASUREMENT SYSTEM7.2. THE SEVEN-STEP MODEL FOR IMPLEMENTING HRS STRATEGIC ROLE
8. BENEFITS OF THE DEVELOPING HR SCORECARD
9. CASE STUDY: VERIZON
9.1. INTRODUCTION: VERIZON9.2. HR CHALLENGE & STRATEGY9.3. THE TEAM9.4. THE PROCESS9.5. EARLY RESULTS9.6. COMMUNICATING THE HR SCORECARD9.7. WEB-BASED IMPLEMENTATION AND GRAPHICS (FRONTEND AND BACKEND)
FINDINGS OF THE STUDY
LIMITATIONS OF THE STUDY
CONCLUSION
RECOMMENDATIONS
REFERENCES
TABLE OF FIGURES
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Figure 1: HR Architecture Strategic components
Figure 3:- The Main framework of Balanced Scorecard
Figure 4:- Model for implementing HRs Strategic Role
Figure 5: A High Performance Work System
Figure 6: Simple Strategy Map
Figure 7:- Initial model used to align HR strategy to business strategy
Figure 8:- The People Requirement and Business Driver Determination Process
Figure 9:- The HR Scorecard Strategy Map
Figure 10: HR Scorecard Implementation Architecture
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1. INTRODUCTION
The new economic paradigm is characterised by speed, innovation, quality and customer
satisfaction. The essence of the competitive advantage has shifted from tangible assets to
intangible ones. The focus is now on human capital and its effective alignment with the
overall strategy of organisations. This is a new age for Human Resources. The entire system
of measuring HRs contribution to the organisations success as well as the architecture of the
HR system needs to change to reflect the demands of succeeding in the new economy. The
HR scorecard is a measurement as well as an evaluation system for redefining the role of HR
as a strategic partner. It is based on the Balanced Scorecard framework developed by Kaplan
and Norton and is set to revolutionise the way business perceives HR.
Based on various studies, it can be concluded that firms with more effective HR management
systems consistently outperform the competition. However, evidence that HR can contribute
to a firms success doesnt mean it is now effectively contributing to success in business.
It is a challenge for managers to make HR a strategic asset. The HR scorecard is a lever
that enables them to do so. Implementing effective measurement systems for intangible
assets is a very difficult task and demands the existence of a unified framework to guide
the HR managers. It is this difficulty that has been the prime reason why managers tend to
avoid dealing with intangible assets as far as possible. In the process firms under-invest in
their people and at times invest in the wrong ways. Another difficulty is, managers cannot
foresee the consequences of their investments in intangible human assets in a well-defined
measurable manner and they are not willing to take the risk. Thus, the most effective way to
change this mindset is obvious to build a framework just like the balanced scorecard, which
has sound measurement strategies and is able to link HR functions, activity and investment
with the overall business strategy. The HR scorecard framework was specifically designed
for these purposes.
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2. RESEARCH METHODOLOGY
2.1.Research Objectives
1. To highlight the importance of Balanced Scorecard as a measurement tool.
2. To find out the need of Balanced Scorecard in todays competitive environment.
3. To find out how Balanced Scorecard is useful for developing the Human Resource as
a strategic partner.
4. To find out how Balanced Scorecard can be implemented to Human Resource.
2.2.Type of Research- Exploratory Research
2.3.Data sources: The research is based on secondary data and the data is collected from various websites, Journals, Magazines, Articles and Research Paper.
2.4.Data Analysis: The research is divided into the six sections. The First section deals with the overall introduction of the research and the Second section highlights
the Human Resource as a strategic partner and the traditional human resource
and the human resource in present and the future of the human resource. Third
section explains in detail the HR Architecture as a strategic asset which contains
the hr function, hr system and the employee behavior. Fourth section explains
the background and the concept of balanced scorecard, need of the balanced
scorecard in todays competitive environment, and defines the balanced scorecard
as a measurement tool. Fifth section explains how balanced scorecard can be
implemented into the human resource to develop the HR as a strategic partner.
Sixth section contains the case study of Verizon and explains how Verizon has
implemented the balanced scorecard to human resource to generate the value through
the intangible asset.
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3. LITERATURE REVIEW
1. Is the balanced scorecard HR's ticket to the board? Nelson, Paul. Personnel Today, 3/5/2002.
Most thoughts comprised of some combination of BC is a wonderful tool to allow HR to
show its value to a firm, BSCs will only work with senior management buy-in and BSCs
alone will not bring a firm closer to its goal, contributing to the overall business will.
2. HR Performance Scoring Demonstrates Results. McKewen, Darren. 2004. Career
Journal.com Accessed from website.
The first part of this article gives numbers on the popularity of BCs throughout industry.
From the article: According to a recent survey by the Balanced Scorecard Collaborative and
the Society for Human Resource Management, about one-fourth of HR organizations have
adopted the Balanced Scorecard approach. However, virtually all of the 1,300 respondents
have explored the possibility. The rest of the article has no relation to balanced scorecards.
3. The Balanced Scorecard: Creating a Strategy-Focused Workforce. Frangos,
Cassandra.
A synopsis of three scholars (Jac Fitz-enz, David Norton, and Helen Drinanwork) in the field
of HR metrics and analysis, by way of selling the authors upcoming Net Conference.
1. Fitz-enz evaluates a firms HR process by cost, duration, accomplishment, error rate,
employee satisfaction, matricing these five over three distinct tasks: acquiring talent,
developing talent, and retaining it.
2. Norton developed the "Human Capital Readiness Report," which provides a snapshot
of an organization's human capital relative to its strategic requirements. It documents
the strategic requirements, then shows, through its measures and programs, how
human capital is being developed.
3. Drinan had been working on a profile of HR leaders
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So what is the profile of outstanding HR leaders? Among other things, they derive
their agendas from enterprise business objectives; they stay in touch with the workforce;
think "customer focus," not "customer service"; and concentrate on a few strategic priorities.
4. A Balanced Scorecard Changes HR Mgmt From Art to Science. Human
Resource Department Management Report. January, 2003. Issue 1-03, p. 1.
Objective:- Reasons for and application of using the BSC as a way to measure HR
productivity and effectiveness.
Biggest reason: a move to measuring tangible assets, and a need to turn the intangibility of
HR into something more measurable. Case: Alterra Health Care in Milwaukee, which used
HR as the centerpiece of a larger strategic transformation that targeted the firms 145%
turnover rate.
5. Understanding the Balanced Scorecard: An HR Perspective. ICG Research.
2003.
Objective:- How to implement the Balanced Scorecard to Human Resource.
1. Building the Balanced Scorecard should be a team effort at the executive level and
functional heads must not create their bits of Scorecard in isolation. Therefore, HR
can be custodians but not owners of the learning and growth perspective.
2. Implementation is a bigger issue than scorecard design. The difficulty of cultural
change that accompanies Scorecard implementation is typically underestimated. One
of the biggest problems is the (legitimate) fear that the Scorecard will be used to beat
up people.
3. The HR Scorecard must make visible the link from what staff does to strategic
outcomes. Cascading goals, which may be done through the ten-step process, is one
element of successfully creating the link.
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6. Secrets to Success with Balanced Scorecards. HR Focus. October, 2001 Vol.
78, no. 10, p. S3.
Summarizes the 10 Commandments of Performance Management from a book by William Abernathy: Managing Without Supervising: Creating an Organization- Wide Performance System. Some of these commandments:
1. No one should design his or her own incentive plan
2. The frequency of measurement feedback is as important as the amount
3. Measure only controllable job outputs
7. Avoiding performance measurement traps: ensuring effective incentive design
and implementation. McKenzie F.C. & Shilling M.D. July/August, 1998.
Compensation and Benefits Review. Vol. 30 (4), p. 57-65.
Details methods of performance measurement and the traps associated with each.
Measurements evaluated include: Traditional accounting methods (ROI, EPS, RONA),
Value-Based, such as Economic Value Added, and the Balanced Scorecard. Traps associated
with the BSC are as follows:
1. Assuming the Balanced Scorecard is a perfect tool for compensation.
2. Reduced focus on performance management
3. Using measures that are difficult to quantify
4. Contradicting goals or benchmarking
5. Getting tied-up in implementation
Nine guidelines for effective performance management are outlined:
1. Emphasize a few measures.
2. Focus on measures that participants can control.
3. Avoid all-or-nothing programs.
4. Balance accuracy and simplicity.
5. Include an appropriate subjective element.
6. Mind the corporate culture.
7. Communicate up-front, then keep communicating.
8. Revisit the program design often.
9. Integrate with long-term incentives.
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4. HUMAN RESOURCES AS A STRATEGIC PARTNER THE PRESENT AND THE FUTURE
The general scenario in most companies is as follows. HR management teams have well-
developed visions of their departments, their roles and responsibilities. But, the senior
management is generally skeptical of HRs role in the firms success. They generally
consider HR to just be another necessary appendage but not something that can contribute to
the success of the company. Even if the senior management does believe that human capital
is their most prized possession and asset, they cannot understand how the HR team can make
this belief come alive.
There is one reason for all of this. Human capital is an intangible asset and HRs influence
on firm performance is difficult to measure. The standard elements of a firms resource
architecture that are measured include total compensation, employee turnover, cost per hire,
percentage of employees that undergo performance appraisals and percentage employee
satisfaction. The question to be asked is: Are these the measures crucial to implementing the
firms strategy? This is clearly not the case. Interesting attributes would include a committed
workforce, competency development programs, etc. But, it is very difficult to imagine
measures for these quantities. Hence, in the current state of HR there is a clear rift between
what is measured and what needs to be measured.
As mentioned in the introduction, the role of HR is no more just administrative. It has a much
broader, connected and strategic role to play. But, these statements must be substantiated.
The reasons why HR must be considered as a strategic asset must be highlighted. A strategic
asset is something difficult to trade or imitate. They are normally a set of scarce, special
or even exotic resources and capabilities that bestow a firm its competitive advantage. An
unlikely paradox is that the very intangibility of human capital that makes it so difficult
to measure and evaluate, also proves to be the one quality that makes it a strategic asset.
Consider the difference between being able to align employee efforts with the companys
strategic goals and instead having innovative policies of performance appraisals. The latter
is a policy. It is visible to competitors and can be easily copied. The former on the other
hand is a strategic move. It is not easy to imitate since it is a very circumstantial effort,
which depends on the specific firm, its goals and its people. This proves to be a strategic
asset i.e. something that competitors cannot see but that can be utilised to gain a competitive
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advantage. It is thus important to align the HR strategy to the overall business strategy
signifying a top-down approach as opposed to a bottom-up approach where each division
such as marketing, HR etc. performs its standard individual roles without a clear outlook
towards the firms strategy.
Many firms have realised this and have made efforts to measure HRs influence on the firms
performance. However, most of these approaches seem to focus on the individual, as it is
believed that if one can achieve an improvement in individual employee performance, it
would automatically enhance the performance of the organisation. The point that is missed is
the fact that organizational units, be it individuals or teams, do not function in isolation. The
stress is on streamlining and cooperatively working towards a common goal.
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5. THE HR ARCHITECTURE AS A STRATEGIC ASSET
The focus of corporate strategy is to create sustained competitive advantage whereas that of
HR strategy is to maximize the contribution of HR towards the same goal. Thinking about
HRs influence on the overall strategy of the company requires one to look at all aspects of
the HR architecture. The HR architecture describes the relationship of the HR function, the
HR system and the employee behaviour.
Figure 1: HR Architecture Strategic components
5.1.The HR function
The foundation of a value-creating HR strategy is a management infrastructure that
understands and can implement the firms strategy. The professionals in the HR function
would be expected to lead this effort. This clearly implies that HR managers and
professionals need to get a deeper understanding of the HR function. There are two basic
functional categories in HR management. The first is technical. It includes delivery of HR
basics such as recruiting, compensation and benefits. The second is strategic. It involves
delivering the above mentioned services in a way that directly supports the implementation
of the firms strategy. Most HR managers are proficient enough in the technical aspect
but rarely do they even know about the strategic aspect. Thus, the competencies that the
HR managers need to develop and the ones that have the largest impact on organisational
performance are the business and strategic competencies.
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5.2.The HR system In an effective high performance HR system, each element is designed to maximise the
overall quality of human capital throughout the organisation. To build and maintain a set of
talented human capital, the HR system should:-
1. Link its selection and promotion decisions to validated competency models
2. Develop strategies that provide timely and effective support for the skills demanded
by the firms overall strategy implementation.
3. Enact compensation and performance management policies that attract, retain and
motivate high-performance employees.
Basically, the firm needs to structure all the elements of its HR system in a way that
supports a high-performance workforce. However, systemic thinking implies stress on the
interrelationships of the HR system components and the link between HR and the larger
strategy of the firm. The laws of system thinking imply the following:
1. Problems of today are most likely due to past decisions. It is thus important to look at
the causal nature of past solutions and current problems.
2. One should think twice before taking the easy way out or deciding to go with standard
solutions to any problem as this will most likely lead to a crop of new problems in the
future.
3. Cause and effect are not closely related in time. There is a lag between cause and
effect and HRs influence on firm performance is normally much less direct than
that of other performance drivers. This can make it hard to measure as well as be
misleading. It is thus important to look at the leading indicators and not just the
lagging indicators. Typical financial performance measures are lagging indicators and
in an attempt to solve financial problems, the first step is normally to cut costs. It is
more important to actually pinpoint the cause of the problem and look to long-term
benefits than short term ones.
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4. The best strategies are often unobvious. Small changes in how HR drivers are
managed can slowly gather momentum and work their way through the strategy
implementation process.
5. It is important never to dissect the system and view each of its parts independently.
One must look at the system as a whole and the connections between the individual
parts is normally the vital place to look at for a solution to any of the problems.
Firms with high performance work systems tend to devote considerably more resources to
recruiting and selection. There is a strong emphasis on training and performance management
and compensation is tied to performance. Teamwork is encouraged, there is generally less
unionization and they have a large and effective HR team. It is important to note, that all
these factors in tandem, not in isolation, lead to better performance, once again showing the
systemic nature of HRs role in performance enhancement. The effects of these measures are
lower employee turnover, more retention, greater sales per employee and a greater market
value for the firm.
It is also important for the HR system to constantly check for alignment of all its parts i.e.
how much they reinforce or conflict with each other. An example of misalignment is a policy
that encourages teamwork but rewards individual contributions.
In the service sector, the employee-customer relationship is very obvious and visible and
so the impact of value creation is unmistakable. But, in many firms, the value is derived
from the operational processes and quality of work that the employees generate. This is less
obvious to competitors and it cannot be imitated. It is especially in these kinds of firms that
the alignment of HR strategy and policy with the overall strategy of the firm matters the
most.
The alignment process begins with a clear understanding of what kind of value the
organisation is supposed to generate and how it should be generated. In the Balanced
Scorecard, this is referred to as the strategy map that stresses the relationship between
the ultimate goals and the key success factors at the four important levels of customers,
internal operations, people and systems. Once the firm has a clear understanding of the value-
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creation process, it can then design an implementation model that specifies needed skills and
competencies and employee behaviours throughout the firm. The HR management section
can then be directed towards generating these necessary competencies and behaviours.
The stress is not just on the creation of sound HR policies and strategies. How these are
implemented is also very important. There has to be a strong alignment with the firms
competitive strategy.
A high performance HR system will also tend be unique. This is because it depends on the
particular organisation, its goals, people and strategy. Hence, it proves to be a strategic asset.
5.3.Employee Behaviours
As mentioned above the final results of the strategies are mapped to required employee
behaviours. It is important that each employee be trained not just to do his or her job but also
to have a substantially clear understanding of where he or she stands in the big picture of
the overall strategy of the firm. Strategic behaviours are productive behaviours that directly
serve to implement the firms strategy. There are two basic categories. Core behaviours are
behaviours that are considered fundamental to the success of the firm, across all business
units and levels. Situation-specific behaviours on the other hand, are more circumstantial
behaviours. These are not required all the time but are absolutely necessary in certain
scenarios.
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6. THEORY BEHIND THE BALANCED SCORECARD
6.1.Background of the Concept of Balanced Scorecard
Throughout the history of contemporary management theories starting from the ones that
were introduced by the intrusion of the mass production in the beginning of the 20th century
and until today, all the gurus of management have been trying to find uniform solutions on
more efficient allocation and use of very limited resources available to businesses. Those
paths in seeking the Holy Grail of operational efficiency have brought up several new
management theories.
In the dawn of the century, Frederick W. Taylor established the very concepts of resource
allocation in his Principles of ScientJlc Management. In 1920-ics it went around assembly
line and motion studies as the first experience from systematic mass production had given
theorists quite a lot of materials to be analysed from the point of view of using traditional
blue-collar employees more efficiently. In the I 930-ies, the main topic was motivation
of employees, as it turned out that human nature does not enable to work long hours on a
repetitive tasks without frustration level getting so high enough to diminish productivity.
In the l940-ics and 1950-ies, the first statistical and linear methods were introduced in
trying to measure logistics of the operations management and its implications to overall
company success in financial-analysis side. In the beginning of 1980-ics, partly because of
introduction of electronic data processing equipment and quick development of computers,
the whole array of management techniques were initiated. The particular reasons for the
vast development of the new theories were catalyzed mainly by ever growing competition
generated through more systematic use of computers, and of course also by rapid growth of
the importance of human capital.
Todays companies are in the midst of a revolutionary transformation. Industrial age
competition is shifting to information age competition. During the industrial age, roughly
from 1850 to about 1975, companies succeeded by how well they could capture the benefits
from economies of scale and scope. Technology mattered, but, ultimately, success accrued
to companies that could embed the new technology into physical assets that offered efficient,
mass production of standard products. During the industrial age, the financial control systems
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were developed in major companies to facilitate and monitor efficient allocations of financial
and physical capital. A summary financial measure such as return-on-capital-employed
(ROCE) could both direct a companys internal capital to its most productive use and monitor
the efficiency by which operating divisions used financial and physical capital to create value
for shareholders.
The emergence of the information era, however, in the last decades of the 2O century, has
made obsolete many of the fundamental assumptions of industrial age competition. The
information age environment for both manufacturing and service organisations requires
new capabilities for competitive success. The ability of a company to mobilise and exploit
its intangible assets has become far more decisive than investing and managing tangible,
physical assets.
Industrial age companies created a sharp distinction between two groups of employees. The
intellectual elite managers and engineers used their analytical skills to design products
and processes, select and manage customers, and supervise day-to-day operations. The
second group was composed of the people who actually produced the products and delivered
the services. This direct labour work force was a principal factor of production, which
performed its tasks under supervision of the first group. Today automation and productivity
have increased the number of people performing analytic functions: engineering, marketing,
management and administration. Therefore, the people are more viewed as problem solvers,
not as variable costs. In other words, information age has brought about the concept of
knowledge management.
The shift to successful knowledge management has introduced a variety of improvement
initiatives:
1. Just-in-time
2. Total quality management,
3. Lean enterprise,
4. Business process re-engineering,
5. Time-based competition,
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6. Customer-focused organization,
7. Activity-based cost management,
8. Employee empowerment,
9. Living company and many others.
Some of those programmes have meant in practice real breakthrough and improvement,
others have proven to be in the best case just a short-time disturbance, but in the worst cases
total failures resulting in disarray or even bankruptcy of a particular company. The main
reason for that lies in five main implementation problems:
1. current performance measurement systems are based on the traditional financial
accounting model, which does not enable to objectively analyse information-age
companies;
2. if some non-financial performance measurement even is made, it is solely based on
employees tactical performance, not on strategic performance;
3. majority of management and employee salary-based motivation schemes arc only
short-run profit oriented, that does not enable to align towards long-run goals;
4. overall company strategy is not closely linked to organisational and personal
improvement programmes; and
5. strategy is not generally linked to resource allocation, which results in under-
financing some of the crucial parts of organisations development.
As for today, superior financial performance and efficiency in production are just not enough
to gain sufficient competitive advantage, but more and more attention needs to be paid to
intangible sides of business.
For at least 15 years, the leading management journals have published articles about how to
build up a mechanism that would enable to control all the aspects of a companys
performance. One of the most versatile tools for that purpose is Balanced Scorecard.
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The long-term success of any organization is determined by the capabilities and the
competencies it has developed. Todays businesses require a better understanding of their
customers (both existing and potential ) and their needs, better streamlined processes and
highly skilled people for ensuring future survival and sustainable growth.
This innovative tool Balanced Scorecard developed by Robert S Kaplan and David P
Norton in 1992 is unique in two ways compared to the traditional performance measurement
tools. They are:-
1. It considers the financial indices as well the non-financial ones in determining the
corporate performance level and
2. It is not just a performance measurement tool but is also a performance management
system
The aim of the Balanced Scorecard is to direct, help manage and change in support of the
longer-term strategy in order to manage performance. The scorecard reflects what the
company and the strategies are all about. It acts as a catalyst for bringing in the change
element within the organization
Balanced Scorecard uses a balanced measurement system that comprises of the old
financial side and four new perspectives of:
1. Financial Perspective - How do we look at shareholders?
2. Customer Perspective - How should we appear to our customers?
3. Internal Business Processes Perspective - What must we excel at?
4. Learning and Growth Perspective - Can we continue to improve and create value?
Hence, from the above lines we can say that this tool has considered not only the financial
results to be important but also those factors which actually drive an organization towards
future successes as mentioned earlier. The tool has given stress on the other areas which
are required to balance the financial perspective in order to get a total view about the
organizational performance and improve the same.
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The framework tries to bring a balance and linkage between the
1. Financial and Non-Financial Measures,
2. Tangible and the Intangible measures,
3. Internal and the External aspects and
4. Leading and the Lagging indicators.
The Balanced Scorecard emphasises the importance of measuring business performance
from the perspective of strategic implementation, rather than relying solely on financial
results. Senior managers tend to pay far too much attention to the financial dimensions of
performance and not enough attention to the driving forces behind those results. Financial
measures are lagging indicators i.e. backward looking. They are designed to rectify or change
past results. Performance drivers on the other hand are within the control of the management
in the present and the Balanced Scorecard methodology encourages management to look at
these leading indicators as well. By specifying the important process measures, assessing
them, and communicating the firms performance based on these criteria to the employees,
the managers can ensure that the entire organisation participates actively in the strategy
implementation process. It is a unifying tool in strategy implementation.
To achieve strategy alignment, firms must engage in a two-step process. As mentioned
before, first the managers must understand the details of how value is created in their firm.
Once this is done, they can design a measurement system based on their understanding. The
first step focuses the organisation on two dimensions of the strategy implementation process
namely breadth and causal flow. Breadth refers to the fact that companies must study more
than just financial results as outcomes of strategy implementation. It must also focus on
other key performance drivers. Causal flow refers to the series of linkages between financial
and non-financial determinants of firm performance. This gives the managers a deeper
perspective of why certain financial results are the way they are. It allows them to link the
financial measures to the non-financial measures of success. The second point is the design
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of a measurement system. This involves attaching metrics to the financial and non-financial
determinants. The Balanced Scorecard identifies four key perspectives that directly and
completely define strategy measurement and analysis. They include the financial perspective,
the customer perspective (e.g. customer loyalty and satisfaction), the internal processes
perspective (e.g. process quality and process cycle time) and finally learning and growth
perspective (e.g. employee skills) that is the leading indicator.
The next important step is communication. The top management that has done the above
analysis must communicate their findings and decisions to the middle and front-line
managers, who in turn must communicate it to the other employees. In this way, everyone in
the organisation is made aware and can participate in the strategy implementation process.
This also helps allocate resources intelligently and guides employees decisions. The
Balanced Scorecard model recognises the importance of both tangible and intangible assets
and of financial and non-financial measures. It focuses on the complex connections among
the firms customers, operations, employees and technology and places an important role for
HR. The BSC framework highlights the differences between leading and lagging indicators.
Lagging indicators include financial metrics, which typically reflect only what has happened
in the past. Such metrics accurately measure impacts of past decisions but dont help in
making current decisions or guaranteeing future outcomes. The leading indicators are the
unique indicators for each firm. They include process cycle time, customer satisfaction or
employee strategic focus. These indicators assess the status of key success factors that drive
the implementation of the firms strategy and hence emphasise the future rather than the past.
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6.2. Defining Critical Success Factors and MeasuresFour Perspectives
1. Financial Perspective - How do we look at shareholders?
From all the measurement perspectives of a Balanced Scorecard, the financial perspective
needs to be introduced the least as the main financial measurement systems have been
analysed during the past years very thoroughly
The particular financial performance measures for any Balanced Scorecard should define
long-run financial objectives for the organisation. While most of the organisations would
emphasise profitability objectives, other possibilities may also be considered. Businesses
with many products in the early stage of their life cycle can stress rapid growth objectives,
and mature businesses may emphasise maximising cash flow.
Norton and Kaplan recommend to simplify the financial perspective measurement selection
pool to identify first the organisations stage, which would mainly be one of the three:
I. rapid growth organisations - are at the early stages of their life cycle. They may
have to make considerable investments to develop and enhance new products and
serviccs, to construct and expand production facilities, to build operating capabilities,
to invest in systems, infra-structure, and distribution networks that will support
relationships, and to nurture and develop customer relationships.
II.sustain organisations organisations that still attract investment and
reinvestment, but are required to cam excellent returns on their invested capital.
These businesses are expected to maintain their existing market share and perhaps
grow it somewhat. Investment projects will be more directed to relieving bottlenecks,
expanding capacity, and enhancing continuous improvement.
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III. harvest organisations - have reached a mature phase of their life cycle, where the
company wants to harvest the investments made in the earlier to stages. These
businesses no longer warrant significant investment only enough to maintain
equipment and capabilities, not to expand or build new capabilities. Any investment
project will have to have very short and definite payback periods. The main goal is to
maximise cash flow back to the organisation.
The financial objectives for businesses in each of these three stages are quite different.
Financial objectives in the growth stage will emphasise sales growth; sales in new markets
and to new customers; sales from new products and services; maintaining adequate
spending levels for product and process development, systems, employee capabilities; and
establishment of new marketing, sales, and distribution channels. Financial objectives in the
sustain stage will emphasise traditional financial measurements, such as return on capital
employed, operating income, and gross margin.
Investment projects for businesses in the sustain category will be evaluated by
standard, discounted cash flow, capital budgeting analyses. Some companies will employ
newer financial metrics, such as economic value added and shareholder value. These metrics
all represent the classic financial objective---earn excellent returns on the capital provided to
the business.
The financial objectives for the harvest businesses will stress cash flow. Any investments
must have immediate and certain cash paybacks. The goal is not to maximise return on
investment, which may encourage managers to seek additional investment funds based on
future return projections. Virtually no spending will be done for research or development or
on expanding capabilities, because of the short time remaining in the economic life of
business units in their harvest phase.
Some of the objectives together with a measurement measures
Objectives Measures
Survive Cash Flow
Prosper Increase in Market Share
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Profitability Return on Equity
Cost Leadership Unit Cost
2. Customer Perspective - How should we appear to our customers?
The customer perspective addresses the question of how the firm is viewed by its customers
and how well the firm is serving its targeted customers in order to meet the financial
objectives. Generally, customers view the firm in terms of time, quality, performance, and
cost. Most customer objectives fall into one of those four categories.
In the customer perspective of the Balanced Scorecard, managers identify the customer and
market segments in which the business unit will compete and the measures of the business
units performance in these targeted segments.
The customer perspective typically includes several generic measures of the successful
outcomes from a well-formulated and implemented strategy. The genetic outcome measures
include customer satisfaction, customer retention, new customer acquisition, customer
profitability, and market and account share in targeted segments. While these measures may
appear to be generic across all types of organisations, they should be customised to the
targeted customer groups from whom the business unit expects its greatest growth and
profitability to be derived.
I. Market and Account Share
Market share, especially for targeted customer segments, reveals how well a company
is penetrating a desired market. For example, a company may temporarily be meeting
sales growth objectives by retaining customers in non-targeted segments, but not
increasing its share in targeted segments. The measure of market share with targeted
customers would balance a pure financial signal (sales) to indicate whether an
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intended strategy is yielding expected results.
When companies have targeted particular customers or market segments, they can
also use a second market-share type measure: the account share of those customers
business (some refer to this as the share of the customers wallet). The overall
market share measure based on business with these companies could be affected by
the total amount of business these companies are offering in a given period. That is,
the share of business with these targeted customers could be decreasing because these
customers are offering less business to all their suppliers. Companies can measure-
customer by customer or segment by segment-how much of the customers and
market segments business they are receiving. Such a measure provides a strong focus
to the company when trying to dominate its targeted customers purchases of products
or services in categories that it offers.
II. Customer Retention
Clearly, a desirable way for maintaining or increasing market share in targeted
customer segments is to retain existing customers in those segments. Research on
the service profit chain has demonstrated the importance of customer retention.
Companies that can readily identify all of their customers-for example, industrial
companies, distributors and wholesalers, newspaper and magazine publishers,
computer on-line service companies, banks, credit card companies, and long-distance
telephone suppliers- can readily measure customer retention from period to period.
Beyond just retaining customers, many companies will wish to measure customer
loyalty by the percentage growth of business with existing customers
III.Customer Acquisition
Companies seeking to grow their business will generally have an objective to increase
their customer base in targeted segments. The customer acquisition measure tracks,
in absolute or relative terms, the rate at which a business unit attracts or wins new
customers or business. Customer acquisition could be measured by either the number
of new customers or the total sales to new customers in these segments. Companies
such as those in the credit and charge card business, magazine subscriptions, cellular
telephone service, cable television, and banking and other financial services solicit
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new customers through broad, often expensive, marketing efforts. These companies
could examine the number of customer responses to solicitations and the conversion
rate- number of actual new customers divided by number of prospective inquiries.
They could measure solicitation cost per new customer acquired, and the ratio of new
customer revenues per sales call or per dollar of solicitation expense.
IV. Customer Satisfaction
Both customer retention and customer acquisition are driven from meeting customers
needs. Customer satisfaction measures provide feedback on how well the company is
doing. The importance of customer satisfaction probably cannot be over-emphasised.
Recent research has indicated that just scoring adequately on customer satisfaction is
not sufficient for achieving high degrees of loyalty, retention, and profitability. Only
when customers rate their buying experience as completely or extremely satisfying
can the company count on their repeat purchasing behaviour.
V. Customer Profitability
Succeeding in the core customer measures of share, retention, acquisition, and
satisfaction, however, does not guarantee that the company has profitable customers.
Obviously, one way to have extremely satisfied customers (and angry competitors)
is to sell products and services at very low prices. Since customer satisfaction
and high market share are themselves only a means to achieving higher financial
returns, companies will probably wish to measure not just the extent of business
they do with customers, but the profitability of this business, particularly in targeted
customer segments. Activity-based cost (ABC) systems permit companies to
measure individual and aggregate customer profitability. Companies should want
more than satisfied and happy customers; they should want profitable customers. A
financial measure, such as customer profitability, can help keep customer-focused
organisations from becoming customer-obsessed.
The customer profitability measure may reveal that certain targeted customers are
unprofitable. This is particularly likely to occur for newly acquired customers, where
the considerable sales effort to acquire a new customer has yet to be offset from
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the margins earned by selling products and services to the customer. In these cases,
lifetime profitability becomes the basis for deciding whether to retain or discourage
currently unprofitable customers.
Newly acquired customers can still be valued, even if currently unprofitable, because
of their growth potential. But unprofitable customers who have been with the
company for many years will likely require explicit action to cope with their incurred
losses.
VI. Beyond the Core: Measuring Customer Value Propositions
Customers value propositions represent the attributes that supplying companies
provide, through their products and services, to create loyalty and satisfaction
in targeted customer segments. The value proposition is the key concept for
understanding the drivers of the core measurements of satisfaction, acquisition,
retention, and market and account share. For example, customers could value short
lead times and on-time delivery. They could value a constant stream of innovative
products and services. Or they could value a supplier able to anticipate their needs and
capable of developing new products and approaches to satisfy those emerging needs.
While value propositions vary across industries, and across different market segments
within industries, Kaplan and Norton have observed a common set of attributes that
organises the value propositions in all of the industries where we have constructed
scorecards. These attributes are organised into three categories.
Product/Service Attributes
Customer Relationship
Image and Reputation
Product and service attributes encompass the functionality of the product/service,
its price, and its quality. The image and reputation dimension enables a company
to pro- actively define itself for its customers. The customer relationship dimension
includes the delivery of the product/service to the customer, including the response
and delivery time dimension, and how the customer feels about the experience of
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purchasing from the company.
In summary, the customer perspective enables business unit managers to articulate their
unique customer and market-based strategy that will deliver superior future financial returns.
Some of the objectives together with a measurement measures
Objectives Measures
New Product % of sales from new product
Customer Relationship % of retained customer
Responsive Supply On time Delivery
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3. Internal Business Processes Perspective - What must we excel at?
Internal business process objectives address the question of which processes are most critical
for satisfying customers and shareholders. These are the processes in which the firm must
concentrate its efforts to excel.
In the internal business process perspective, executives identify the critical internal processes
in which the organisation must excel. The critical internal business processes enable the
business unit to deliver on the value propositions of customers in targeted market segments,
and satisfy shareholder expectations of excellent financial returns. The measures should be
focused on the internal processes that will have the greatest impact on customer satisfaction
and achieving the organisations financial objectives.
The internal business process perspective reveals two fundamental differences between
traditional and the Balanced Scorecard approaches to performance measurement. Traditional
approaches attempt to monitor and improve existing business processes.
They may go beyond just financial measures of performance by incorporating quality and
time-based metrics. But they still focus on improving existing processes. The Balanced
Scorecard approach, however, will usually identify entirely new processes at which the
organisation must excel to meet customer and financial objectives. The internal business
process objectives highlight the processes most critical for the organisations strategy to
succeed.
The second departure of the Balanced Scorecard approach is to incorporate innovation
processes into the internal business process perspective. Traditional performance
measurement systems focus on the processes of delivering todays products and services to
todays customers. They attempt to control and improve existing operations - the short wave
of value creation. But the drivers of long-term financial success may require the organisation
to create entirely new products and services that will meet the emerging needs of current and
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future customers. The innovation process-the long-wave of value creations, for many
companies, is a more powerful driver of future financial performance than the short-term
operating cycle. But managers do not have to choose between these two vital internal
processes. The internal business process perspective of the Balanced Scorecard incorporates
objectives and measures for both the long-wave innovation cycle as well as the short-wave
operations cycle.
Some of the objectives together with a measurement measures
Objectives Measures
Manufacturing Excellence Cycle Time per Unit
Safety incidence Index Number of Accidents
Increased design Productivity Engineering Efficiency
Increased Product Launch Days Actual Launch Days Vs Plan
4. Learning and Growth Perspective - Can we continue to improve and create
value?
Learning and growth metrics address the question of how the firm must learn, improve, and
innovate in order to meet its objectives. Much of this perspective is employee- centered.
The fourth Balanced Scorecard perspective, Learning and growth, identifies the infrastructure
that the organisation must build to create long-term growth and improvement. The customer
and internal business process perspectives identify the factors most critical for current and
future success. Businesses are unlikely to be able to meet their long-term targets for
customers and internal processes using todays technologies and capabilities. Also, intense
global competition requires that companies continually improve their capabilities for
delivering value to customers and shareholders.
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Organisational learning and growth come from three principal sources: people, systems, and
organisational procedures. The financial, customer, and internal business process objectives
on the Balanced Scorecard will typically reveal large gaps between existing capabilities of
people, systems, and procedures and what will be required to achieve targets for
breakthrough performance. To close these gaps, businesses will have to invest in re-skilling
employees, enhancing information technology and systems, and aligning organisational
procedures and routines. These objectives arc articulated in the learning and growth
perspective of the Balanced Scorecard. As in the customer perspective, employee-based
measures include a mixture of generic outcome measures- employee satisfaction, employee
retention, employee training, and employee skills- along with specific drivers of these generic
measures, such as detailed indexes of specific skills required for the new competitive
environment. Information systems capabilities can be measured by real-time availability of
accurate customer and internal process information to front-line employees. Organisational
procedures can examine alignment of employee incentives with overall organisational
success factors, and measured rates of improvement in critical customer-based and internal
processes.
Some of the objectives together with a measurement measures
Objectives Measures
Technology Leadership Time to develop new product
Manufacturing Learning Time to new process maturity
Product Focus % of product representing 80% of sales
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6.3.The Four Perspectives: Cause and Effect Relationship
The four perspectives as mentioned above are highly interlinked. There is a logical
connection between them. The explanation is as follows If an organization focuses on the
learning and the growth aspect, it is definitely going to lead to better business processes. This
in turn would be followed by increased customer value by producing better products which
ultimately gives rise to improved financial performance.
Figure 2: The Cause and Effect relationships among the four perspectives
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6.4.The Balanced Scorecard Model
Explanation:
Following steps are to be taken so as to utilize the Balanced Scorecard as a strategic
management tool:
1. The major objectives are to be set for each of the perspectives.
2. Measures of performance arc required to be identified under each of the Objectives
which would help the organization to realize the goals set under each of the
perspectives. These would act as parameters to measure the progress towards the
objectives.
3. The next important step is the setting of specific targets around each of the identified
key areas which would act as a benchmark for performance appraisal. Hence, a
performance measurement system is build around these critical factors. Any deviation
in attaining the results should raise a red signal to the management which would
investigate the reasons for the deviation and rectify the same.
4. The appropriate strategies and the action plans that arc to be taken in the various
activities should be decided so that it is clear as to how the organization has decided
to pursue the pre-decided goals. Because of this reason, the Balanced Scorecard is
often referred to as a blueprint of the company strategies.
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To achieve our vision, how will we sustain our ability to change and improve?Learning and GrowthObjectives Measures Targets Initiatives
To achieve our vision, how should we appear to our customers?Customer Objectives Measures Targets Initiatives
To Satisfy our shareholders and customers, processes must we excel at?Internal Process Objectives Measures Targets Initiatives
To succeed financially, how should we appear to our shareholders? Financial Objectives Measures Targets Initiatives
Vision and Strategy
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Figure 3:- The Main framework of Balanced Scorecard
6.5.Balanced Scorecard as a Measurement Tool
To illustrate the use of todays main measurement tools, Kaplan and Norton bring the
following example:
Imagine entering the cockpit of a modern jet airplane and seeing only a single instrument
there. How would you feel about boarding the plane after the following conversation with the
pilot?
Q: I am surprised to see you operating the plane with only a single instrument. What does
it measure?
A: Airspeed. I am really working on airspeed this flight.
Q: That good. Airspeed certainly seems important. But what about altitude? Would an
altimeter be helpful?
A: I worked on altitude for the last few flights and Ive gotten pretty good on it. Now I have
to concentrate on proper airspeed.
Q: But I notice you do not even have a fuel gauge. Wouldnt that be useful?
A: You are right; fuel is significant, but I cannot concentrate on doing too many things well
at the same time. So on this flight Im focusing on airspeed. Once I get to be excellent at
airspeed, as well as altitude, I intend to concentrate on fuel consumption in the next set of
flights.
We suspect that you would not board the plane after this discussion. Even if the pilot did an
exceptional job on airspeed, you would be worried about colliding with tall mountains or
running low on fuel. Clearly, such a conversation is a fantasy since no pilot would dream of
guiding a complex vehicle like a jet airplane through crowded air spaces with only a single
instrument. Skilled pilots are able to process information from a large number of indicators to
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navigate their aircraft. Yet navigating todays organisations through complex competitive
environments is at least as complicated as flying a jet. Why should we believe that executives
need anything less than a full battery of instrumentation for guiding their companies?
Managers, like pilots, need instrumentation about many aspects of their environment and
performance to monitor the journey toward excellent future outcomes.
7.IMPLEMENTING BALANCED SCORECARD TO HUMAN RESOURCE
7.1.Integrating HR into the performance measurement system
To integrate HR into a business performance measurement system, managers must identify
the points of intersection between the HR and the organisations strategy implementation
plan. These points are commonly called the HR deliverables. They are the outcomes of the
HR architecture that serve to execute the firms strategy. This is in contrast to the aspects
of HR that focus on HR efficiency and activity. The deliverables can be classified into two
groups, namely the performance drivers and the enablers. Performance drivers are core
people-related capabilities or assets such as employee productivity and satisfaction. There
is no single correct set of performance drivers. Each firm needs to identify its own set
based on its unique characteristics. Enablers reinforce performance drivers. E.g. Preventive
maintenance can be considered an enabler of on-time delivery, which is a performance driver.
A performance driver can have several enablers. Most of the time, each enabler separately
may seem rather mundane but its the cumulative effect that has strategic importance.
Performance Drivers:
HR managers tend to focus on performance drivers in an attempt to demonstrate their
strategic impact. However, in most cases although they do stress on these drivers they
are unable to make a solid case for it since they do not have the right measures. Without
measures one cannot display HRs actual contribution to the overall mission. Most of the
measures used are very simplistic and it undermines HRs credibility in the organisation. This
credibility is very important since it is what matters when a manager is faced with a conflict
between financial and non-financial reports. For example, if people measures are good but
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financial measures are bad, the manager will go for the solution that supports the credibility
of finance or HR. In most cases it is finance and the immediate decision is reducing bonuses
etc. as the CFO might feel it is not warranted when there is no proof of performance. The
point that is being missed is that the CFO is looking at the lagging indicators. Balanced
performance needs one to look at the leading indicators such as HR measures as well since
these are the ones that create value in the organisation. High HR scores in the face of low
finances actually signal improved finances in the future (provided other leading indicators are
also on the positive side). Similarly, strong financial measures and weak leading measures
such as HR measures are indicative of a financial problem in time to come. Thus, managers
must interpret these measures in a balanced manner looking at the past and into the future.
Identifying HR performance drivers can be very challenging since it is unique to the firm. It
is important to identify the performance drivers and integrate them directly into performance
criteria giving them equal weight with the more traditional performance measures. For
example, one half of the bonus pays can be based on the financial results while the other half
is based on the employees adherence to the value behaviours.
HR enablers:
HR enablers reinforce the core performance drivers. If employee productivity is identified as
a performance driver, re-skilling and training can be considered an enabler. Some enablers
might be specifically HR focused i.e. they enhance the effectiveness of HR performance
drivers. There might also be some HR enablers that do have profound positive effects with
respect to the other perspectives as well, such as customers, operations and the financial
segment. It is important to identify these and keep them up to date with the current goals of
the organisation. Without the properly aligned enablers, it is not possible to implement new
strategies. The systemic aspect of HR once again comes to the forefront, whereby the entire
HR system can influence employee behaviour from different points. Thus, HR managers
should evaluate the degree to which their firms system of enablers support the HR as well as
non-HR performance drivers as listed in their Balanced Scorecards. By identifying the links
between enablers and universal performance drivers, the HR team can play a much larger role
and suggest ideas that can affect other sectors in the firm as well.
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7.2.The Seven-Step Model for Implementing HRs Strategic Role
Ulrich et al. discuss a seven step model for formalising the strategic role of HR. They are
summarised below:
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Periodicallytest HR
measuresagainst the
firms strategymap andadjust asrequired
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Figure 4:- Model for implementing HRs Strategic Role
1. Defining Business Strategy:
HR managers should focus on implementation of strategy. By doing so, they can facilitate
discussion about how to communicate the firms goals throughout the organisation. When
strategic goals are not developed with an eye towards the implementation detail, they tend
to be too generic and abstract. These vague goals will tend to confuse employees and they
would not know how exactly to implement the strategies. The important thing for HR
managers is to state the goals in such a way that the employees understand what exactly
their role in the organisation is and thus the organisation knows how to measure success in
achieving these goals.
2. Building a case for HR as a strategic asset:
Once a firm clarifies its strategy, HR professionals need to build a clear case for the strategic
role of HR. In concrete terms, they must be able to explain how and why HR can support the
strategy. It is important to look at as much of case histories and internal as well as external
research while going through this phase. Although it is not wise to imitate others, one can
learn a lot by looking through past experiences of others. Basically, the direct impact on
the HR systems high performance characteristics is non-linearly related to the increase in
market value. This is because in the lower ranges of performance, increase in market value
is basically because HR stops making mistakes it used to make in the past. It is almost like it
is getting out of the way and avoids blunders and wrong practices that worsen the situation.
In the middle range of performance, HR starts consolidating its efforts. It is learning from its
mistakes and in the process does not actually add much to the market value of the employees
and the company, but once a certain threshold is crossed indicating that the firm has adopted
the appropriate HR practices and implemented them effectively, the market value soars
exponentially. This is mainly because the HR system starts getting integrated into the
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overall strategic system of the firm. Basically, the firms must consolidate the appropriate
HR policies and practices into an internally coherent system that is directly aligned with
business priorities and strategies that are most likely to create economic value. This can lead
to significant financial returns to the company. It is this plan that must be made concrete and
shown as a strong case to make senior management believe in HRs potential.
It is important to note however, that simple changes in an HR practice do not make a
difference. The HR measures describe the whole HR system and changing the system to cross
the threshold mentioned above needs time, effort, insight and perseverance since results are
not directly proportional. This clearly indicates the requirement of an HR transformation
rather than a change. It is this very character of transformation, which is difficult and time-
consuming to achieve, that makes HR a strategic asset.
Figure 5: A High Performance Work System
Along with value creation, there must also be a strong case for HRs role in strategy
implementation. Strategy implementation rather than strategy content separates the successful
from the unsuccessful firms. It is easier to choose an appropriate strategy than to implement
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Knowledge Management
System
Strategic Alignment System
Performance Measurement
System
Employees who are strategically focused
The Firms capacity to implement the Strategy
The Overall performance of the firm
A High Performance Work System
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one. This once again shows the strategic nature of HRs role in performance improvements.
Successful strategy implementation is driven by employee strategic focus, HRs strategic
alignment and a balanced performance measurement system. The most important HR
performance driver is a strategically focused workforce. Effective knowledge management
combined with the above-mentioned factors creates a strategically focused organization.
3. Creating a Strategy Map:
The first two steps clarify the firms strategy. This paves the way for the implementation
process. But, before this is done, the firm must get a clear understanding of its value chain.
The value chain is the complex cumulative set of interactions and combinatorial effects that
create the customer value in the products and services of the firm. It is important that the
firms performance management system must account for each of the links and dependencies
in the value chain. The Balanced scorecard framework refers to this process and creating a
strategy map. These are basically diagrams that show the links in the value chain. It shows
how different components in different layers interact. It is what provides managers and
employees the big picture of how their tasks affect the other elements in the firm and how it
affects overall strategy. This process should involve managers from all over the organisation,
not just HR. The broad participation is required to improve the quality of the strategy map. It
also allows each member of the team who is an expert in his or her domain to provide his or
her own insights into what is accomplishable.
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Learning and Growth
Internal/Business
Processes
Customer
Financial
Figure 6: Simple Strategy Map
The following questions have been identified as the key ones to be asked during the strategy
map creation process:-
1. Identify the critical strategic goals from the generic ones.
2. Identify the performance drivers for each goal.
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On-time Delivery
Customer Loyalty
Return on the capital employed in the business
Process Quality
Process cycle time
Employee skills
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3. Think about how one can measure progress towards these goals.
4. Identify barriers to the achievement of each goal.
5. Recognise the employee behaviours needed to ensure that the company achieves
its goals.
6. Identify missing employee competencies and check if HR is providing the
necessary competencies.
7. Finally, decide what needs to change.
These basic questions generate a wealth of information about how well a firms HR has been
contributing to the success of the organisation. Along with these discussions, it is useful for
the company to conduct surveys within the organisation to identify the extent to which each
employee understands the organisational goals. Once the whole picture of the firms value
chain is highlighted, the firm can then translate the information into a conceptual model using
language and graphics that make sense to the members of the organisation. The model should
then be tested for understanding and acceptance amongst the leaders and the employees.
The strategy map essentially contains predictions about which organisational processes drive
firm performance. The company can validate these hypotheses only after achieving the goals
set for each of the performance drivers and then measuring their impact on overall firm
performance. The graphical nature of the strategy map helps the senior management as well
as the employees have more confidence in the strategy implementation plan.
4. Identifying HR deliverables within the strategy map:
HR creates much of its value at the points of intersection between the HR system and the
overall strategy implementation system of the organisation. Thus, to leverage this to the
maximum possible extent it is important that there is a clear understanding of both sides of
this intersection.
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In the past, HR managers lacked the required amounts of knowledge about the business side
and general managers did not fully understand the HR side. It is HRs responsibility to depict
HR deliverables including performance drivers as well as HR enablers in the strategy map of
the firm. Performance drivers such as employee competence, motivation and availability are
very fundamental and so it might be difficult to locate these precisely on the strategy map. It
is important to identify those HR deliverables that support the firm-level performance drivers
on the strategy map. The focus should be on the kind of strategic behaviours that depend on
competencies, rewards and work organisation. E.g. Employee stability improves R&D cycle
time, the latter being a firm-level performance driver. Thus, employee stability becomes an
important HR enabler. Once this enabler has been identified, the firm can design policies
such as bonus schemes etc. that would encourage R&D staff to continue working for the firm.
5. Aligning the HR architecture with the HR deliverables:
The above-mentioned steps encourage the top-down thinking approach, whereby strategy
decides what HR deliverables the firm needs to focus on. It is also important to consider
how the HR system made up of the rewards, competencies; work organisation etc. needs
to be structured to provide the deliverables that are identified in the strategy map. This step
enhances the value creation aspect of the firm by aligning the HR system with the firms
larger strategy implementation system. For this, internal alignment and external alignment
are important. Internal alignment refers to the aligning components within the HR system.
External alignment refers to the alignment of the HR system with the other elements in the
firms value creation process. These two are not isolated processes. They are closely related.
Internal alignment is necessary but not sufficient in itself for external alignment to occur.
Basically, highly cohesive HR strategies will work as long as they are aligned well with the
overall strategy of the company. It will fail if it is not periodically reshaped so as to align it
with the overall strategy.
However, for a particular fixed overall strategy, all firms need an internally aligned HR
strategy in order to achieve the overall goals. Misalignment between the HR system and the
strategy implementation system can destroy value. In fact, the wrong measurement system
can have the exact opposite effect than intended.
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6. Designing the Strategic HR measurement system:
The above steps guide the development of the HR architecture and lay the groundwork
necessary to measure the performance relationship between HR and the firms strategy. The
next step is to design the measurement system itself. This requires a new, modern perspective
on measuring HR performance. It also requires HR to resolve several new technical
issues that it might not be familiar with. To accurately measure the HR-firm performance
relationship, it is imperative that the firm develops valid measures of HR deliverables.
This task has two dimensions.
Firstly, HR has to be confident that they have chosen the correct HR deliverables.
This requires that HR have a clear understanding of the causality in the value chain
for effective strategy implementation.
Secondly, HR must choose the correct measures for those deliverables. During this
process of developing the HR scorecard, the firm might go through several stages of
increasing sophistication.
The first stage is normally the traditional category of measures. These mainly include
operational measures such as cost per hire, activity counts etc. These are not exactly strategic
measures. In the second stage, HR measures have a strategic importance but they dont
help much in making a case for HR as a strategic asset. Firms may declare several people
measures such as employee satisfaction as strategic measures and these might be included
directly into the reward systems.
In this stage, there tends to be a balance between financial and non-financial measures
but there is less of an agreement on how exactly they combine together to implement the
strategy. These are normally hasty decisions and the firms might have not gone through all
the previous steps mentioned above.
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The next stage represents a transition point whereby the firm includes non-financial measures
such as HR measures into its strategic performance measurement system. The links between
the various measures are also identified i.e. they are placed appropriately in the strategy map.
The HR measures now actually track HRs contribution to strategy implementation.
In the final stages, the HR measurement system will enable the firm to estimate impacts of
HR policies on firm performance. If the value chain is short and the strategy map is relatively
simple, the complete impact of HR on the overall performance can be measured. For more
complex value chains, the impact can be more accurately measured on local segments or
sectors of the strategy map. These local impacts can then be assimilated to give a good
measure of the total impact on the firms performance. Thus, each level of sophistication of
the measurement system adds value to the non-financial measures and forces in the firm and
enables a better performance appraisal.
7. Implementing the strategy by using the measures:
The previous step completes the HR scorecard development process. The next step is to
use this powerful new management tool in the right way. This tool not only helps the firm
measure HRs impact on firm performance, but also helps HR professionals have new
insights into what steps must be taken to maintain HR as a strategic asset. It helps the HR
professionals dig deeper into the causes of success and failure and helps them promote the
former and avoid the latter. Implementing the strategy using the HR scorecard requires
change and flexibility as well as constant monitoring and re-thinking. The process is not
a one-time event. HR professionals must regularly review the measures and their impacts.
They must review the HR deliverables identified as important and see to it that the drivers
and enablers and internally as well as externally aligned. Special reviews of the HR enablers
must be conducted as these have the maximum direct impact on specific business objectives.
Enablers that do not tend to play a positive role should be replaced.
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8. BENEFITS OF THE DEVELOPING HR SCORECARD
The HR Scorecard offers the following benefits:
1. It reinforces the distinction between HR do-ables and deliverables:
The HR measurement system must clearly distinguish between the deliverables that
influence strategy implementation and do-ables that do not. Policy implementation is
not a deliverable until it has a positive effect on the HR architecture and creates the
right employee behaviours that drive strategy implementation. An appropriate HR
measurement system will encourage HR professionals to think both strategically as
well as operationally.
2. It enables cost control and value creation:
HR is always expected to control costs for the firm. At the same time, HR has
to fulfill its strategic goal, which is to create value. The HR scorecard helps
HR professionals balance the two and find the optimal solution. It allows HR
professionals to drive out costs where appropriate, but at the same time defend
investments in intangibles and HR by outlining the benefits in concrete terms.
3. It measures leading indicators:
Just as there are leading and lagging indicators in the overall balanced performance
measurement system, there are drivers and outcomes in the HR value chain as well. It
is thus important to monitor the alignment of the HR decisions and systems that drive
the HR deliverables. Assessing this alignment provides feedback on HRs progress
towards these deliverables and lays the foundation for HRs strategic influence.
4. It assesses HRs contribution to strategy implementation:
The cumulative effect of the HR Scorecards deliverable measures provides the
answer to the question regarding .HRs contribution to firm performance. All
measures have a credible and strategic rationale. Line managers can use these
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measures as solutions to business problems.
5. It lets HR professionals effectively manage their strategic responsibilities:
The scorecard encourages HR managers to focus on exactly how their decisions
affect the successful implementation of the firms strategy. This is due to the systemic
nature of the scorecard. It provides a clear framework to think in a systemic manner.
6. It encourages flexibility and change:
The basic nature of the scorecard with its causal emphasis and feedback loops helps
fight against measurement systems getting too standardised. Standardisation is good
for things that dont tend to have a dynamic nature but firm performance is a dynamic
phenomenon. Every decision needs to be taken based on the past and future scenarios.
One of the common problems of measurement systems is that managers tend to get
skilled to obtain the right numbers once they get used to a particular measurement
system. The HR scorecard engenders flexibility and change because it focuses on
the firms strategy implementation, which constantly demands change. With this
framework, measures simply become indicators of the underlying logic that managers
accept as legitimate. It helps them look at the bigger picture and since there are no
perfect numbers it makes it easier for managers to change direction when needed.
We see talent as the emerging single sustainable competitive advantage in the future. To
capitalize on this opportunity, HR must evolve from a Business Partner to a critical asset
manager for human capital within the business. The HR scorecard is designed to translate
business strategy directly to HR objectives and actions. We communicate strategic intent
while motivating and tracking performance against HR and business goals. This allows each
HR employee to be aligned with business strategy and link everyday actions with business
outcomes.
Garrett Walker, Director HR Strategic
Performance Measurement, GTE
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9. CASE STUDY: VERIZON
To clarify the HR Scorecard framework it is important to summarise a case study.
This section explains the details of the HR scorecard developed by Verizon, a leading
telecommunications provider in the United States.
9.1.Introduction: VerizonVerizon HR has effectively designed and implemented a strategic management system, which
is based upon the balanced scorecard model of Dr. David Norton and Dr. Robert Kaplan of
Harvard Business School. The HR Balanced Scorecard was conceived with new economy
organisational dynamics in mind. The scorecard uses a broad range of leading and lagging
indicators which include overall strategy