EVA and BSC
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Transcript of EVA and BSC
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Copyright 2006 by Stern Stewart & Co. All rights reserved
This document is strictly confidential and intended solely for the use by the client to whom it is addressed. No part of this presentation may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system without the express written consent of Stern Stewart & Co. EVA is a registered trademark of Stern Stewart & Co.
Printed: 1/26/2006 2:20 PM
EVA and Balanced ScorecardEVA and Balanced Scorecard
30 January 2006
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Agenda
EVA and EVA Governance System
Executing Strategy Using Balanced Scorecard
Integrating Balanced Scorecard with EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Stern Stewart is the originator of EVA and EVA Governance System
Stern Stewart & Co. is founded in 1982 as a management development and consulting firm
Developed EVA as a measure of economic profit, which is now globally recognized to be the internal performance measure most closely aligned with shareholder value creation
Developed the EVA Governance Framework Focuses on behavioural & organisational change Operationalizes shareholder value and good internal governance
Objective, fact-based, value-anchored approach to advisory services is our hallmark.
We transfer the knowledge, technology & tools developed from 20 years of experience and hundreds of EVA implementations worldwide to our clients
Stern Stewart's principals have written three leading business books: "The Quest For Value", "EVA: The Real Key to Creating Wealth", and "The EVA Challenge"
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Stern Stewart developed EVA as a measure of economic profit
Revenue 2,000- Operating Expenses 1,600- Economic Tax @ 30% 120= NOPAT 280
Invested Capital 2500Cost of Capital x 10%
- Capital Charge 250
= EVA 30
REVENUE
OPERATINGEXPENSES
ANDTAX
=
CAPITALCHARGE
EVA
NETOPERATING
PROFITAFTER
TAX(NOPAT)
2,000 1,720
280 250
30
Illustrative
Bars in graph are not to scale
Trading profits, as if all-equity financed, after
paying cash taxes
Trading profits, as if all-equity financed, after
paying cash taxes
A "rental charge" for using all the assets of
the business
A "rental charge" for using all the assets of
the business
Note: *Capital charge includes total cost of operating asset funding from both debt and equity. Interest expense is part of capital charge.
EVA measures economic profit - a real profit for shareholders. This is different from accounting profit because it charges revenues for the cost of all capital employed, including the cost of shareholders' funds.
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Stern Stewart believes that the primary focus of the firm is to create wealth for its shareholders by maximizing MVA
Total ValueCash out
InvestmentCash in
Wealth creation
Can shareholders get their money out more than they put in?Can shareholders get their money out more than they put in?
Market Value Added (MVA) measures
shareholder wealth created
MarketEnterprise
ValueInvestedCapital
MVA
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Net Operating
ProfitAfterTax
(NOPAT)
EVA (Economic Value Added) measures economic profit it is a single period measure of performance
EVAResidual income after all operating and capital costs
... and managing for EVA ensures the clear focus on wealth creation
CapitalCharge
Cost of Debt Capital
+
Cost of Equity Capital
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
MarketValue
CapitalEmployed
MVAYears
EVA1
EVA2
EVA3EVA4
Discounting
MVA is equal to the present value of all future EVA this key identity is the basis of the EVA Governance System
Maximizing wealth creation means maximizing MVA
The operational way to do this is to focus on maximizing the present value of future EVA
This is very different to trying to maximize the current year's EVA
EVA AND EVA GOVERNANCE SYSTEM
EVA improvements are the basis for sustainable wealth creation
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The economic relationship of risk and required return will dictate how to state enterprises invests or undertake initiatives to increase MVA
Return on Capital
1. Creating Value (MVA )
2. Neutral (MVA ~)
3. Destroying Value(MVA )
Assets/Projects
Cost of Capital
Risk
Required Return
RoA, RoE, RoIC, RoCE, IRR can mislead toward value destroying behaviorsRoA, RoE, RoIC, RoCE, IRR can mislead toward value destroying behaviors
Retail Developer
RiskFreeRate
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
EVA
Costof Capital
Capital
X
Net Operating
Profit After Taxes
(NOPAT)
Value CreationValue Creation
Market Value
InvestedCapital
MVA
Wealth CreationWealth Creation
Shareholders and MVAThe shareholders objective is to increase wealth. Wealth equates
to MVA, which is the present value of all future EVAs
EVA measure managers like owners. If managers are rewarded for improving
long-term EVA, their interests will be aligned with those of the shareholders
Managers and EVA
EVA is a measure of period-by-period value created by managers
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
EVA System is an integrated and value-aligned system of internal corporate governance
2. Redesign the Management Systems so that strategic planning, capital budgeting, resource allocation and performance management focus on creating value, i.e. make decisions based on whether the resultant present value of future EVA is positive
4. Reshape the corporate Mindset through training, coaching and communication to make managers more entrepreneurial, capital conscious, and value-focused
3. Motivate managers to create value by tying their rewards to value creation, i.e. reward managers for increasing the present value of future EVA
1. Focus Performance Measurement on the underlying economics of value and wealth creation, i.e. measure performance in terms of economic profit (EVA), because NPV (wealth) = Present Value of future EVA.
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Many state enterprises around the world have adopted EVA to improve their economic performance and internal governance
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
In Thailand, these leading organizations have also used EVA in managing their organization
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
PTT Public Company Limited
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
From our experience, EVA Implementation Project is typically divided into five modules: Mobilization, Measurement, Management, Motivation, and Mindset
To reshape the mindset of all stakeholders, including employees and investors, such that they understand why the EVA Framework is being applied, what it is and how it will lead to value creation within the organisation.
To mobilize the project team for implementation of EVA System and refine the work plan based on an assessment of current situation
To ensure that performance measurement focuses on the underlying economics of value and wealth creation, and provides insights into where and how value is being created
To redesign strategic planning, capital budgeting, resource allocation, and performance management systems to drive and support long-term value creation
To motivate senior managers to change mindset, make decisions and take actions that improve overall long term performance, and to retain high caliber employees
Mobilization Module
Mobilization Module
Measurement Module
Measurement Module
Motivation Module
Motivation Module
Management Module
Management Module
Mindset ModuleMindset Module1
2 3 4
5
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The first step in implementing EVA Governance is to identify sources of value creation and destruction
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
257
138
7335 8 4 1 -40
-5 -4
100
200
300
400
500
600
BU A
BU B
BU C
BU D
BU E
BU F
BU G
BU H
Corp
orate
Cente
r*
Inves
tmen
t A
Inves
tmen
t BGr
oup
Million Baht
-32438
EVA Performance by EVA Center in FY2002 Illustrative
Note: * Corporate Center includes corporate function units such as planning, finance & accounting, human resource and IT
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The next step is to plan strategies and allocate resources to improveEVA in future
EVA = NOPAT - CoC x Capital
100 = 200 - 10% x 1,000
(1) Improve Operating Efficiencies
+5
105 = - 10% x 1,000205
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
+5
(3) Increase Profitable Growth
10% x +100
105 = 215 - 10% x 1,100
+5
10% x -100
(2) Enhance Asset Management
105 = 195 - 10% x 900
+5
Negative
Positive
ImproveOperating Efficiency
Econ
omic
Pro
fitab
ility
1
% of Invested CapitalLow High
Enhance Asset Management
Increase Profitable Growth
2
3
EVA VALUE CREATION MATRIX
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Value-enhancement strategies are mapped to performance targets through the Integrated EVA Scorecard
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
EVAEVA
NOPATNOPAT
Capital ChargeCapital Charge
RevenueRevenue
X
Cost of CapitalCost of Capital
Invested CapitalInvested Capital
-
-
Operating ExpenseOperating Expense
Fixed AssetsFixed Assets
Net Working CapitalNet Working Capital
PassengerPassenger
Cargo BusinessCargo Business
Other revenueOther revenue
Cost of EquityCost of Equity
Cost of DebtCost of Debt
Debt to Equity RatioDebt to Equity Ratio
Fuel ExpenseFuel Expense
Labour CostLabour Cost
Maintenance ExpenseMaintenance Expense
Other Expense Other Expense
DepreciationDepreciation
Economic TaxEconomic Tax
-
Airline Illustrative
Operational Drivers
For example:
RPK
Share of route
RASK
Yield
Load factor
Customer satisfaction
CASK
Accident rates per 100,000 departures
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The performance targets are linked to rewards, such as EVA Bonus, to motivate managers to create shareholder wealth
Business &Financial Planning
ResourceAllocation
PerformanceMeasurement
RewardManagement
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
What gets rewarded, gets done! Straight line Tied to value creation,
decoupled from budgets Unlimited upside, but
with downside risk Bonus banking Self-financing Multi-year targets.
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
TrainingTraining
Formal Training Program Workshops Know Why Workshops Know How Train the Trainer Sessions
"Role Play" Exercises and Games
Web-based training program Library of Case Studies Layered Problem
Solving Workbooks
Intranet Website Resources
Formal Training Program Workshops Know Why Workshops Know How Train the Trainer Sessions
"Role Play" Exercises and Games
Web-based training program Library of Case Studies Layered Problem
Solving Workbooks
Intranet Website Resources
The implementation is supported by a tailored program for mindset changes, consisting of training and internal/external communications
CommunicationsCommunications
Internal Communication CEO Messages Awareness building program Internal newsletters
External Communication Financial reports Public relations Analyst meeting Investor road-shows
Internal Communication CEO Messages Awareness building program Internal newsletters
External Communication Financial reports Public relations Analyst meeting Investor road-shows
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
See the Value
UnderstandValue Creation
EncourageValue Creation
Manage for Value
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The EVA Governance System integrates the key management processes with clear accountability for improving EVA and maximising shareholder value
3. PerformanceManagement Process
Assign decision rights Define accountabilities Monitor and report
performance Adjust strategies or
management to achieve outcomes
3. PerformanceManagement Process
Assign decision rights Define accountabilities Monitor and report
performance Adjust strategies or
management to achieve outcomes
4.Rewards Management Process
Link rewards to performance outcomes
Base rewards on cumulative performance to balanceshort- and long-term performance
4.Rewards Management Process
Link rewards to performance outcomes
Base rewards on cumulative performance to balanceshort- and long-term performance
1. Strategic Planning Process1. Strategic Planning Process Set goals Develop and value alternative strategies Select best strategy
Set goals Develop and value alternative strategies Select best strategy
Year 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5
Develop Strategies
Set Targets, Milestones and
KPIs
2. Resource Allocation Process2. Resource Allocation ProcessYear 1Year 1 Year 2Year 2 Year 3Year 3 Year 4Year 4 Year 5Year 5
Prepare budgets & fund projects to achieve strategy
Prepare budgets & fund projects to achieve strategy
Allocate Resources
Performance MandatePerformance Mandate
Define Desired OutcomesDefine Desired Outcomes
Define Mission and Measures of
Success
Inputs Outputs
Execute Strategy
EVA-based Management Platform Enterprise Value
EVA Improvement
2002 2003 2004 2005 2006 2007
BU 1 BU 2 BU 3 Others Total
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Organizations that have fully adopted Stern Stewarts EVA System have realized very high returns
58.0%
20.2%
18.5%
64.5%
16.1%
7.2%
- EVACompensation
- EVAMeasurement
- S&P Peers
Total Return from Market Peak(March 2000 June 2002)
5-Year Total Shareholder Return(July 1997 June 2002)
Source: Stern Stewarts Empirical Research, October 2002 Source: Stern Stewarts Empirical Research, October 2002
- EVA Compensation
- EVA Measurement
- S&P Peers
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
PSA Corporation is one of the good examples of organization which adopted EVA as a platform for transformation
PSA is the worlds single largest container terminal, handling about 10% of the worlds container throughput. In 1996 PSA produced operating income of S$2.048 billion and surplus after tax of S$994 million on net assets of S$8.077 billion. PSA employs about 7,000 people, of which about 1,000 are in senior and middle management
PSA has four main business units: Container Terminals, Warehousing and Logistics, Properties, and International Business
The Port of Singapore Authority was corporatized on 1 October 1997, and became PSA Corporation. The corporatization process transformed PSA from a statutory board into a commercially-run organization.
Chairman of PSA Corp. has used EVA informally as a management principle since 1994
In 1998, PSA Corp. decided to adopted EVA formally throughout organization
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Stern Stewart helped PSA implementing EVA Governance System. The implementation program was divided to three phases
PHASE 1 - EVA DEFINITION
Information Gathering
EVA Calculation
EVA Reporting
Draft Phase 1 Report
PHASE 2 - DESIGN EVA TOOLS & INCENTIVES
EVA-Based Cash Incentive Design
Eva-Based Operating Decisions
EVA-Based Investment Decisions
EVA-Based Strategic Decisions
PHASE 3 - COMMUNICATION & TRAINING
Documentation
Strategy & Implementation Plan Development
Training
Communications
Feb MarSep Oct Nov DecJun Jul Aug Jan1998 1999
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
EVA Governance System has transformed PSA to be a commercial-oriented company which being responsive to customers and the market
As a firm believer and champion of EVA, the former chairman, Dr Yeo Ning Hong, led Port of Singapore Authority transforming itself from a government agency into a world-class corporation through EVA Governance System during the last decade
(Dr. Yeo) championed a strong business-minded culture built on the Economic Value Add (EVA) concept, putting in place a focus on value-enhancement and cost consciousnessTestimony to Dr Yeo's highly effective leadership over the past eight years is the improving trend of Economic Value Add (EVA)...
PSA Corp.s PortView August 2002
PSA had to transform itself from a government agency into a value-focused corporation
"PSA focuses on Economic Value Added, or EVA. Our compensation system puts emphasis on the long-term EVA performance of the company thus giving consistent returns to the shareholder.
Grace Fu, Deputy Group PresidentPSA Corp.s PortView June 2002
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
while creating value for Temasek Holdings, its only shareholder, from grassroots level to the top of organization
EVA AND EVA GOVERNANCE SYSTEM
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Agenda
EVA and EVA Governance System
Executing Strategy Using Balanced Scorecard
Integrating Balanced Scorecard with EVA
- 25 -
Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
In the past, manages have been challenged executing strategy
Less than 10% of strategies effectively formulated are effective executed.Why CEO Fail Fortune Magazine, June 1999
77% of executives believe their managers do more operations than strategy.Bain & Company, April 2000
Strategies most often fail because they arent executed well.Execution: The Discipline of Getting Thing Done
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Four barriers to strategy execution
The Vision Barrier
Only 5% of the workforce understand the strategy.
The People Barrier
Only 25% of managers have incentives linked to
overall strategy.
The Management Barrier
85% of executive team spendless than one hour a month
discussing strategy.
The Resource Barrier
60% of organizations do not link budgets to strategy.
9 of 10 companies fail to execute strategy.
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Translating Strategy Building the Balanced Scorecard
At the highest level, the Balanced Scorecard is a framework that help organization
translate strategy into operational objectives that drive both behavior and
performance
In Strategy-Focused Organization, Balanced Scorecard is Change Program, not
Measurement Program
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The Balanced Scorecard converts strategy into an integrated system defined across four business perspectives
The Strategy
FinancialTo satisfy our shareholders, what financial objectives must we accomplish?
Financial PerspectiveObjectives Measures Targets Initiatives
Profitability
Growth
Shareholder Value
CustomerTo achieve our financial objectives, what customer needs must we serve?
Customer PerspectiveObjectives Measures Targets Initiatives
Image
Service
Price/Cost
InternalTo satisfy our customers and shareholders, in which internal business processes must we excel?
Internal PerspectiveObjectives Measures Targets Initiatives
Cycle time
Quality
Productivity
Learning & GrowthTo achieve our goals, how must our organization learn and innovate?
Learning & Growth PerspectiveObjectives Measures Targets Initiatives
Market Innovation
Continuous Learning
Intellectual Assets
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The Balanced Scorecard (BSC) uses measurement in a unique way: measurement to communicate, not to control
Financial Customer
Internal Learning & Growth
Things that the organization delivers
Things that the organization does
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
A good Balanced Scorecard contains themes that tell the story of your strategy
Vision/Destination
We will maximize profits through revenue growth and reducing our cost per customer for the bank, growing PBIT to $800MM in 2004.
Add and RetainHigh ValueCustomers
IncreaseRevenue Per
Customer
ReduceCost Per
Customer
Add & Retain Theme Revenue Theme Cost Theme
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Strategic objectives form a theme through a set of cause and effect relationships
Add & Retain Theme
Financial Perspective
Customer Perspective
Internal Perspective
Learning & Growth Perspective
Attract andretain key players
Increase managerialand functional skills
Continue to develop culture
Developsuperior service
capability
Growrevenue
Maximizeprofit
Maximizereliability
Develop/executeeffective marketing
programs
Add and retain high value and highpotential customers
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Natural Cause-and-Effect logic
Knowledge, Skills, Systems and ToolsEquip our people
to build the strategiccapabilities
to deliver unique sets of benefits to customers
to drive financial success
And realize the Vision
Internal Capabilities
Customer Benefits
Financial Results
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
A good Balanced Scorecard communicates not only expected outcomes, but also the specific performance and strategy requirements to drive those outcomes
Financial Perspective
Customer Perspective
Internal Perspective
Learning & Growth Perspective
Objectives Lead MeasuresLag MeasuresMaximize profitPBIT
Grow non-branded revenueRevenue by Product/Service
Reduce cost per customer% Active Online Customer
Add and retain high value customersCustomer Satisfaction Survey
Migrate customer onlineNumber of customers online
Increase efficiency Response time (on screen)% Weighted Internal Availability
Develop superior service capability
Telephone service factor(% customer service within 40 sec)Bill claim ratio
Attract and retain key players & staffs Top recruit hit rateKey job retention rate
Enhance bench strength and succession planning Hours training per employeeStrategic job coverage
Each objective require a lag measure. Not every objective requires a lead measure
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Linking initiatives is a critical final step in translating strategy into operational terms for the organization
Initiatives are defined to help close the Performance Gap
OBJECTIVE
Improve OrderFulfillment
Objectives articulate the components of our strategy
Measure
Target
MEASURE / TARGET INITIATIVE
Time from order to shipment
12 hours
Time(Hours) 18
12Performance Gap
Actual Target
Upgrade internet connectivity
Measures track our progress toward achieving and communicating the intent of the objectives
Initiatives help close the Gapbetween our current and desired performance
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
A good Balanced Scorecard has
Executive Involvement Strategic decision makers must validate and own the strategy and related measures
Cause-and-Effect Relationships Every objective selected should be part of a chain of cause-and-effect that represents the
strategy
Performance Drivers A balance of outcome measures and leading measures facilitates anticipatory management
Linked to Financials Every objective can ultimately be related to financial results
Change Initiatives Aligned to strategic initiatives that change the behavior of the organization
A GOOD BALANCED SCORECARD WILL TELL THE STORY OF YOUR STRATEGY
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
A good Balanced Scorecard connects the strategy map objectives to measures, targets, and initiatives
Strategic Theme:Revenue Growth
F1 Growfinancial base
& marginF2 Growtargeted
client base
C1 Providepersonalized
service
P2 Keepclient
informed
P1 Delivera personalexperience
L1 Understand& deliver on
strategy
Objectives Measurement Target Initiative
Keep clientinformed
Service levelspot checkrating
2004 3.5 2005 4.0 2006 4.3
Customer servicetraining
Strategy Map: Diagram of the causeand effect relationships between strategic objectives
Statement of what strategymust achieveand whats critical to itsSuccess
How successin achievingthe strategy will be measured and tracked
The level ofperformance or rate of improvementneeded
Key actionprograms required toachieveobjectives
BALANCED SCORECARD
Source: Balanced Scorecard Collaborative
- 37 -
Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Agenda
EVA and EVA Governance System
Executing Strategy Using Balanced Scorecard
Integrating Balanced Scorecard with EVA
-
- 38 -
Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Balanced Scorecard and EVA Governance System have been frequently
misunderstood or misrepresented as two different systems
Myth Reality
EVA and BSC are two new management systems that are different from each other
EVA and BSC are two new management systems that are different from each other
EVA focuses on finance. BSC will help me balancebetween four different, equally important perspectives
EVA focuses on finance. BSC will help me balancebetween four different, equally important perspectives
EVA and Balanced Scorecard both focus on the same thing creating wealth through successful strategies
EVA and Balanced Scorecard both focus on the same thing creating wealth through successful strategies
BSC ultimately focuses on Financial Performance. Each perspective is hierarchically subordinate to the one above and is causally linked to it
BSC ultimately focuses on Financial Performance. Each perspective is hierarchically subordinate to the one above and is causally linked to it
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
How EVA can overcome some drawbacks of BSC?
How EVA can enhance BSC?Why using BSC alone does not work?
BSC does not prioritize importance and define magnitude of 4 aspects: financial, internal process, customer, and learning and growth perspectives
Some measures have weak linkages with shareholder value
Some non-financial measures can be subjective
EVA links non-financial and operational measures with financial measures and shareholder value
EVA provides strong linkages with Total Shareholder Return as it focuses on value creation Improve efficiency Enhance asset management Invest in profitable projects
EVA calculation is more objective and mathematically precise
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Kaplan and Norton recommend EVA as the overarching objective of the
balanced scorecard
We start with the destination. What are we trying to achieve? We feel that what for-profit companies should be delivering is great financial performance....we're certainly very comfortable with the newer financial metrics like EVA as the overarching objective. If you were just using earnings per share or net income, you'd run into problems of over investment--investing too much in capital to generate earnings or net income
Robert S. Kaplan - co-founder of Balanced Scorecard conceptCFO Magazine February 2001 (emphasis added)
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Clarity of purpose
Flexibility in altering strategy
and measures
Objectivity and transparency
required for incentive link
EVA
Vision and
Strategy
CUSTOMERGoals MeasuresDriversStrategies
FINANCIALGoals MeasuresDriversStrategies
INTERNAL BUSINESS PROCESSGoals MeasuresDriversStrategies
LEARNING AND GROWTHGoals MeasuresDriversStrategies
Making long term EVA growth the overarching objective can maximise the
effectiveness of the BSC
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Integrated with EVA
Frees managers to focus on the business, rather than the weightings
Helps implementation of Balanced Scorecard as reduced emphasis on weightings
Where relationships can be mapped, Du Pont style analysis can describe linkage between sectors & measures and long term EVA growth
Clarity of Purpose: Making long term EVA growth the overarching
objective reduces the importance of getting weightings 100% right
What weightings should be applied to balance the scorecard?
How can customer be weighted more highly than learning and growth and vice versa?
Why should one measure within a sector get a higher weighting? How much is appropriate?
EVA
Vision and
Strategy
CUSTOMERGoals MeasuresDriversStrategies
FINANCIALGoals MeasuresDriversStrategies
INTERNAL BUSINESS PROCESSGoals MeasuresDriversStrategies
LEARNING AND GROWTHGoals MeasuresDriversStrategies
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
The combined EVA and Balanced Scorecard will make increasing EVA the overarching goal and measure of success
EVA = (Revenue - Cost) x CapabilitiesEVA = (Revenue EVA = (Revenue -- Cost) x CapabilitiesCost) x Capabilities
Drive revenue and/or customer premium margin
Drive total costs through process effectiveness &efficiency
Drive learning, change and growth
Value Added, EVA and financial value drivers
Balanced Scorecard Perspectives
FinancialFinancial CustomerCustomer ProcessProcess LearningLearning
Embed EVA into Balanced Scorecard
EVA will also help the managers focused on improving the EVA when there are some conflicting scorecards/KPIs
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Integrated with EVA
Scorecard can be fine tuned as required
Allows front-line managers to adapt quickly to changes in competitive position
No need for one size fits all across every business unit
Flexibility: Making long term EVA growth the overarching objective
increases flexibility
How frequently should scorecard be reset? What if poor strategy? Inflexibility exacerbated by any link to
compensation.
EVA
Vision and
Strategy
CUSTOMERGoals MeasuresDriversStrategies
FINANCIALGoals MeasuresDriversStrategies
INTERNAL BUSINESS PROCESSGoals MeasuresDriversStrategies
LEARNING AND GROWTHGoals MeasuresDriversStrategies
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
One of our clients, Singapore Food Industries, has been success in integrating BSC, EVA, Six Sigma, and Learning Organization together
Source: Singapore Food Industries Website
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
In summary, integrating Balanced Scorecard into EVA Governance System will focus the organization toward shareholder value creation
EVA Governance and Balanced Scorecard both focus on creating shareholder wealth
You can develop an integrated EVA scorecard through the following steps: Develop valuation targets & strategies to achieve the targets Value each strategy by forecasting EVA drivers Embed drivers is scorecards Create accountability & track performance Link rewards to outcomes
The advantages of this integrated scorecard are: Explicit link with valuation Annual EVA the ultimate target/measure Clear link between valuation, strategy and operations No problems rolling up measures
INTEGRATING BALANCED SCORECARD WITH EVA
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Copyright 2006 by Stern Stewart & Co. All rights reserved. EVA is a registered trademark of Stern Stewart & Co.
EVA and Balanced Scorecard Printed: 1/26/2006 2:20 PM
Should you have any question ?
Anotai AdulbhanCountry ManagerStern Stewart & Co.11Flr CRC Tower, All Seasons Place, 87/2 Wireless Road, Lumpini, Phatumwan, Bangkok 10330, Thailand
Phone: (662) 685-3614Mobile: (661) 344-3314Fax: (662) 685-3618E-mail: [email protected]: www.eva.com