The Balanced Scorecard: Quo Vadis©2006 Robert S. Kaplan 5 BALANCED SCORECARD Translate, Focus and...

The Balanced Scorecard: Quo Vadis

Keynote Speach5th Basel Balanced Scorecard Forum, March 22, 2006

Robert S. Kaplan

Baker Foundation Professor Harvard Business School

2©2006 Robert S. Kaplan

The Balanced Scorecard Model of Value Creation

“How do we have a social impact with our citizens/constituents?”

Mission (Customer) Perspective

“To have a social impact and to attract resources and support, at which processes must we excel?”

Internal Process

“How do we align our intangible assets to improve critical

processes?”

Learning & Growth

“How should we manage and allocate our resources for maximum social impact?”

Financial

“How do we attract resources and authorization

for our mission?”

Support Perspective

Public Sector OrganizationsPrivate Sector Organizations

"If we succeed, how will we look to our shareholders?”

Financial Perspective

"To achieve our vision, how must we look to our

customers?”

Customer Perspective

"To satisfy our customers and shareholders, at which processes must we excel?”

Internal Perspective

“How do we align our intangible assets to improve critical processes?”

Learning & Growth


Application of the Balanced Scorecard Framework has Expanded andEvolved Since its Introduction in 1992.

Measurement and

ReportingOffice of Strategy

Management

Strategy Management System

Leveraging Intangible Assets

1992 20001996 20041993 2005 2006

60% usage in Fortune 500

100,000 BSC on-line members

StrategyMaps

Aligning withStrategic Themes

Seven Harvard Business Review articles

12 translations18 translations 12 translations22 translations

500,000+ English copies sold of BSC books

http://www.amazon.com/gp/product/images/1591396905/ref=dp_image_0/103-5374003-8048646?%5Fencoding=UTF8&n=507846&s=books


Balanced Scorecard Hall of Fame for Executing Strategy By Industry 2001 – 2005


BALANCED SCORECARDTranslate, Focus and Align

STRATEGIC INITIATIVESSet priorities for the actions necessary to succeed

MISSIONWhy we exist

VALUESWhat’s important to us

VISIONWhat we want to be

STRATEGYOur game plan

EMPOWERMENT / PERSONAL OBJECTIVESMotivate employees

TOTAL QUALITY MANAGEMENTImprove local processes

STRATEGIC OUTCOMES

SatisfiedSHAREHOLDERS

Delighted CUSTOMERS

Efficient and EffectivePROCESSES

Motivated & PreparedWORKFORCE

The Balanced Scorecard solved the strategy implementation problem: How to link strategy to initiatives, process improvements and employees’ everyday actions.


The Hall of Fame Enterprises Execute Strategy with the Balanced Scorecard Following Five SFO Principles

5. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS

3. ALIGN THE ORGANIZATIONTO THE STRATEGY

4. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

2. TRANSLATE STRATEGY TO OPERATIONAL TERMS

1. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHP

STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


SFO Best Practices: Translate Strategy To Operational Terms



2.1 Strategy map developed2.2 Balanced Scorecard created

2.3 Targets established2.4 Initiatives rationalized

2.5 Accountability assigned


2. TRANSLATE STRATEGY TO OPERATIONAL TERMS 1. MOBILIZE CHANGE THROUGH

EXECUTIVE LEADERSHIP

STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


The Balanced Scorecard Strategy Map Describes How the EnterpriseCreates Value for Shareholders and Customers

Process

Financial


SustainedShareholder

Value

Operations Management Processes

Customer Management Processes

Innovation Processes

Productivity Revenue Growth

Price Quality Time Function Relation Brand

Product/Service Attributes Relationship Image

Regulatory and Social Processes

Learning & Growth

Human Capital

Information Capital

Organization Capital

#1. Financial performance, a lag indicator, measures the tangible outcomes from the strategy.

#2. The customer value proposition defines the source of value.

#3. Strategic processes create value for customers and shareholders.

Customer

#4. Aligned intangible assets drive improvement in the strategic processes


A good Balanced Scorecard connects a strategy map to measures, targets, and initiatives.

Strategic Theme: Operating Efficiency

Return on CapitalFinancial

Learning

Customer

Internal

The Strategy Map

Fewer planes

Grow Revenues

Ground crew alignment

Lowest prices

Fast ground turnaround

On-time Service

Attract & Retain More Customers

• Fast ground turnaround

Objectives

Strategic Objectives: What the strategy is trying to achieve.

• On Ground Time

• On-Time Departure

Measurement

Measures: How success

or failure (performance)

against objectives is monitored.

• 30 Minutes• 90%

Target

Targets:The level of performance

or rate of improvement

needed

Key action programs required to

achieve targets

Initiative

• Continuous improvement to reduce cycle times


Allfirst Community Banking Group

Mission Statement

“Our success comes from delivering great financial services which is all about developing and managing enduring relationships and being a great place to work.”


Strategy Map: Allfirst Community Banking GroupLe

arni

ng

and

Gro

wth

…and being a great place to work!”

Inte

rnal

Pro

cess

Cus

tom

er

…delivering great financial services,…

Fina

ncia

l

“Our success comes from…

…which is all about developing and managing enduring relationships…


Strategy Map: Allfirst Community Banking GroupLe

arni

ng

and

Gro

wth

Inte

rnal

Pro

cess

…which is all about developing and managing enduring relationships…

Cus

tom

er

…delivering great financial services,…

Fina

ncia

l

“Our success comes from…

C3 - “Appreciate me, and get things done easily,

quickly, and right.”

C1 - “Understand me and give me the right

information and advice.”

C4 - “Be involvedin my

communities.”

C2 - “Give me convenient access to the right products.”

Acquire New Relationships

Grow High-Potential and

Retain High-Value Relationships

Increase Quality and Productivity

F1 - Achieve sustainable double-digit net income growth

F2 - Maximize traditional

revenue sources

F4 - Manage financial resources for maximum

risk-adjusted return

F3 - Grow non-traditional revenue

sources

…and being a great place to work!”


Allfirst Community Banking Group StrategyLe

arni

ngan

d G

row

th and being a great place to work!

Inte

rnal

Pro

cess

which is all about developing and managing enduring relationships

Cus

tom

er

delivering great financial services,

Fina

ncia

l “Our success comes from

,C1 – Understand me and

give me the right information and advice

C4 – Be involvedin my communities

C2 - Give me convenient access to the right

products

recognize, retain, andL1 - “We develop,

hire great people.”

Acquire New Relationships Grow High-Potential andRetain High-Value Relationships

Increase Quality and Productivity

I4 - Sell the right products at the right time

I7 - Provide premium service to delight and retainvaluable customers

I1 - Segment marketsand target prospectsfor new opportunity

I5 - Identify andrecognize high-

potentialrelationships

I10 - Maximize efficiency andquality of business processes

I2 - Effectivelydevelop products

and access

I3 - Communicate the Allfirstbrand and value proposition

I6 - Demonstrate theAllfirst value proposition

I11 - Consistently deliver theAllfirst value proposition at the

right cost

I8 - Focus onthe critical

fewer

I9 - Enhancecritical internaland externalpartnerships

F1 – Achieve sustainable double digit net income growth

F2 - Maximizetraditional

revenue sources

F4 - Manage financialresources for maximum

risk-adjusted return

F3 - Grow non-traditional revenue

sources

information and tools weL4 - “We have the

need to do our jobs.”

C3 – Appreciate me and get things done easily, quickly,

and right

strategy and know whatL3 - “We understand the

we need to do.”

L2 - “We’re developingthe skills we need to

succeed.”


The Strategy Map is the starting point for Human Capital Alignment. (Case Study: Chemico, Inc.)

Improve Overall Productivity

Operational Excellence

Improve Feed-Stock

Sourcing

Improve Supply Chain

Planning

Supplier performance

index

Capacity utilization

1.0 90%

Increase Shareholder Value

Grow Revenue

Highest qualityat specified price Value pricing Offer reliable

delivery

Solve customerproblems through

innovative solutions

Basic level partnership

Knowledgeable partner

Inte

rnal

Pro

cess

Cus

tom

erFi

nanc

ial

Mea

sure

sTa

rget

s

Product LeadershipConduct Applied

Research

Partner in Product

Development

% of product pipeline from joint ventures

NPV of product pipeline

20% $XXX

Customer Intimacy

Create Value-Added

Partnerships

Improve Order Fulfillment

Time spent with target accounts

Perfect orders (%)

4 hrs/wk 98%

Social Responsibility

Improve Environmental Performance

Environmental Incidents

-50%

Product Service Attributes Relationships Image

Reduce fixed and variable costs

Optimize asset utilization

Build revenue from new products and

customers

Build revenue from existing products and

services


Alignment is created by identifying the “Strategic Job Families”needed to support each strategic process.

Improve Overall Productivity

Increase Shareholder Value

Grow Revenue

Reduce fixed and variable costs

Optimize asset utilization

Build revenue from new products and

customers

Build revenue from existing products and

services

Operational Excellence

Improve Feed-Stock

Sourcing


Planning

Highest qualityat specified price Value pricing Offer reliable

delivery

Solve customerproblems through

innovative solutions

Basic level partnership

Knowledgeable partner

Inte

rnal

Pro

cess

Cus

tom

erFi

nanc

ial

Product LeadershipConduct Applied

Research

Partner in Product

Development

Customer Intimacy

Create Value-Added

Partnerships

Improve Order Fulfillment

Social Responsibility

Improve Environmental Performance

Product Service Attributes Relationships Image

Supply Chain Specialist

Feed-Stock Trader

Solutions Engineer

Call Center Reps

Joint Venture program

managers

Senior Scientists

Environmental Engineers

(8) (5) (30) (20) (5) (25) (5)

Strategic Job Families


Measuring readiness requires the definition of a “competency profile” for each strategic job family and a test to determine who meets the requirements.

Operations Management

Improve Feed-Stock

Sourcing


Planning

Customer ManagementCreate

Value-Added Partnerships

Improve Order

Fulfillment

InnovationConduct Applied

Research

Partner in Product

Development

SocialResponsibilityStrategic

Processes Improve Environmental Performance

Strategic Job Families

Competency Profile

Number Required

• Industry knowledge

•Contracting skills

•Negotiation skills

•Relationship management

•Results oriented

•Subject matter expert

•Know the customer

•Business Acumen

•Project management

•Team player

HumanCapital Readiness

Joint Venture Program

SeniorScientists

5 25

1

2

Supply ChainSpecialist

Feed StockTrader

•Acknowledged SCM expert

•Consulting skills


•Change management

•Results Oriented


•Know the company

•Negotiating skills

•Results oriented

8 5

EnvironmentalEngineers

Solutions Engineers

Call-CenterRepresentatives


•Know the product

•Consulting skills

•Relationship management

•Customer partnership


•CRM System Mastery

•Results Oriented

30 20


•Know the company


•Change management

•Team Player

(Knowledge)

(Skills)

(Values)

5

25% 20%

RR RR

50% 75%

RR Y

40% 60%

RR Y

40%

RR

3


SFO Best Practices: Align The Organization To The Strategy



3.1 Corporate role defined3.2 Corporate – SBUs aligned

3.3 SBU – support units aligned3.4 SBU – external partners aligned

3.5 Board of directors aligned



1. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP

STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


Strategy-Focused Organizations create value by aligning business and support unit objectives to the corporate value proposition

Enterprise Value Is Created In Two Distinct Ways

Customer Derived Value

• The SBU is the building block of strategy

• SBU’s are the interface with the customer

• SBU’s have unique products, processes, and competencies

Enterprise Derived Value

• Enterprises are portfolios of SBU’s

• The enterprise headquarters adds value by creating synergies

– Economies of scale– Benefits of coordination– Common customers, shared

services, risk management

Corporate

Group

Division

SBU

+“The Customer Value Proposition”

“The Enterprise Value Proposition”


Sources of Enterprise Synergy

The Enterprise Scorecard

“How can we increase the shareholder value of our SBU

portfolio?”

Financial Synergies

Shared Services – Create economies of scale by sharing the systems, facilities and personnel in critical support processes.

Value Chain Integration – Create value by integrating contiguous processes in the industry value chain.

“How can we share the customer Interface to increase total customer

value?”

Customer Synergies

Sources of Enterprise Derived Value

Internal Capital Management – Create synergy through effective management of internal capital & labor markets.

Corporate Brand – Integrate a diverse set of businesses around a single brand, promoting common values or themes.

“How can we manage SBU processes to achieve economies of scale or value chain integration?’

Internal Process Synergies

Cross-Selling – Create value by cross-selling a broad range of products/services from several business units.

Common Value Proposition – Create a consistent buying experience, conforming to corporate standards at multiple outlets.

“How can we develop and share our intangible assets?’

Learning & Growth Synergies Intangible Assets – Share a competency around the development of human, information and organization capital.

Strategic Themes – Provide leadership in complex organizations through the management of strategic themes.


Cascading the Convergence Strategy at Media General

Media General Enterprise Scorecard

Media General Convergence

Scorecard

Enterprise Value Proposition (Convergence)

Fina

ncia

lC

usto

mer

l Pro

cess

Lear

ning

&

Gro

wth

KEY: Corporate Role Common / Linked Processes and Measures

Increase share of total

advertising

• Interdivisional cross-sold revenue• Advertising revenue growth

• # of hours devoted to multi-media / market sales training

• Advertiser satisfaction survey

• # Targeted convergence accounts successfully sold

• # New non-traditional advertisers

Deliver desired audience

Provide innovative

multi-media content and

sales

Focus on career and skill development

Objectives Measures

Tampa Convergence

Scorecard

Other Regions

Tampa Region Scorecard

Other Regions

TV Station

Newspaper

Internet Site


Media General Strategy Map

Profitable GrowthIncrease Revenue

Maximize Shareholder Value

Attract & Retain High

Quality Employees

Focus on Career & Skills Development

Optimize Asset ManagementManage

Costs

Be the Source for Accurate, Compelling &

Relevant Content

Excel at Integrity, Fairness & Objectivity

Cus

tom

erIn

tern

alLe

arni

ng

& G

row

thFi

nanc

ial

Promote Employee

Communication

Deliver Desired

Audience

Advertisers

LEVERAGE CONVERGENCE and SOUTHEAST FOCUS Through the Following:

Develop and Deliver Superior Content

and Expand Circulation,

Viewership & Users

Promote Public Trust & Identity

Deliver High -Quality Service Through

Continuous Improvement

Win New Advertisers and Increase Share

from Existing Accounts

Create and Acquire New Products and Services

Build Strong Community

Partnerships

Promote Culture of Change and

Employee Empowerment

Readers / Viewers / Users

Ensure Community Involvement

Provide Quality Service

Media General Core Values: Integrity Quality Innovation

Provide Innovative Multi-Media/Multi-Market Content &

Sales

CUSTOMERS


Sources of Enterprise Synergy

The Enterprise Scorecard

“How can we increase the shareholder value of our SBU

portfolio?”

Financial Synergies

Shared Services – Create economies of scale by sharing the systems, facilities and personnel in critical support processes.

Value Chain Integration – Create value by integrating contiguous processes in the industry value chain.

“How can we share the customer Interface to increase total customer

value?”

Customer Synergies

Sources of Enterprise Derived Value

Internal Capital Management – Create synergy through effective management of internal capital & labor markets.

Corporate Brand – Integrate a diverse set of businesses around a single brand, promoting common values or themes.

“How can we manage SBU processes to achieve economies of scale or value chain integration?’

Internal Process Synergies

Cross-Selling – Create value by cross-selling a broad range of products/services from several business units.

Common Value Proposition – Create a consistent buying experience, conforming to corporate standards at multiple outlets.

“How can we develop and share our intangible assets?’

Learning & Growth Synergies Intangible Assets – Share a competency around the development of human, information and organization capital.

Strategic Themes – Provide leadership in complex organizations through the management of strategic themes.


RCMP: 5 Strategic Theme Maps

Organized Crime

InternationalTerrorism

Aboriginal

Youth


Clients, Partners and Stakeholders

Innovation and Excellence in PolicingExcellence in Operations Bridge Building Management Excellence

Be innovative in our useof technology

L2

Educate employees aboutthe implications of

FAS / FAE

L3

Ensure members receiverelevant and timely,operational training

L1

Foster and recruitemployees, with an emphasis

on aboriginal recruitmentL4

Maximize officer safety,employee wellness and

development

L5

Be intelligence led I 10

Develop and facilitate implementation of

Restorative JusticeI 3

People, Learning, Growth and Technology

Market “G” Division internally and externallyI 1

Excel in the modern comptrollership

I 8

Instill commitment, support and understanding for the need for

accountability at all levelsI 9

Provide accurate, timelycommunication and reporting to our clients, partners, and stakeholders

I 7

“G” Division Strategy Map

Establish Diamond Protection Service as an

international centre of excellence

I 2

Expand and Strategically use Traffic

ServicesI 4

Clarify our role,and actively participate in

FAS preventionI 6

Reduce violence & victimization throughprevention, education and enforcement

I 5

outstanding contributionsto the safety, health and well being of

the peopleC 2

quality proactive police servicesfor the needs of the NWT

C 1 C 4

valued strategic partner in protecting Canada’s security and sovereignty in the

north

Provide a culturally sensitive

police service

Safer and healthier Aboriginal communities

C 3

Safe homes, safe communities

DRAFT


Shared (Corporate) Services

“We have done very little to define our strategy for corporate staff utilization. How does staff provide competitive advantage? Are they offering low cost or differentiated services? If they are offering neither, we should probably outsource the function.”

Larry D. BradyPresident, FMC Corporation


Strategic Support Services Form the Bridge Between Enterprise and Functional Strategy

HR

IT

FIN

Strategic Support Service Portfolio

Enterprise Strategy

(Strategy Map)

1 2

• Analytic and Decision Support Applications

• Transaction Processing Applications

• Technology Infrastructure

Strategic Information Capital Portfolio

• Strategic Competency Development

• Organization and Leadership development

• Performance Management Process

Strategic HR Service Portfolio

• Transactions, Controls & Processing

• External Compliance & Communication

• Planning and Decision Support Services

Strategic Financial Service Portfolio


HR Organization Strategy Map Template

Customer PerspectiveStrategic solutions Trusted coach and

advisorPositive work environment

Provide quality service

Business PartnersEmployees

RequirementsCompetency DevelopmentLeadership & ClimatePerformance Management

HR InitiativesXXXXXXXXX

HR BudgetXXXXXX

Internal (Process) Perspective

Learning and Growth Perspective

Strategic Competencies for HR

Strategic Technology for HR Climate for HR Action

Strategic HR Service Portfolio

Create shareholder value

Impact on enterprise outcomes

Cost of service

Budgetary discipline

HR EffectivenessHR Efficiency

Provide Strategic Support to Business

Develop Business Unit Partnerships

Achieve Operational Excellence

• Competency development• Leadership and culture• Performance management

• Relationship managers• Integrated planning• Service agreements• Client feedback• Show the value

• Compensation and benefits

• Staffing / talent management

• Learning / development• Communications

2

3


Linkage Scorecard


Information Technology Organization Strategy Map Template

Internal Process Perspective


Attract, develop, and retain employees with

key competencies

Provide IT tools and techniques that enhance

the IT function

Foster a business and customer-focused culture


Deliver basic services at

competitive costDeliver consistent, high quality service

CompetencyRequirements

Technology infrastructureTransaction systemsBusiness analytics/ Decision support

IT InitiativesXXXXXXXXX

IT BudgetXXXXXX

Strategic IT Service Portfolio

Contribution

Support business unit needs with IT-based

analytics

Drive business unit success with

innovative IT solutions

Achieve Operational Excellence

Maintain a secure and reliable infrastructure that ensures business

operations

Manage service quality; deliver on

schedule

Optimize IT processes; lower unit

costs

Create and Support Business Unit Partnerships

Improve business unit productivity and

profitability

Partner with customers;

understand their strategies

Develop effective decision support

systems

Provide Strategic Support to the Business

Propose and deliver transformational

applications

Understand emerging technology applications



Lower costs of IT services

Insure budgeting discipline

IT EffectivenessIT Efficiency

2


Linkage Scorecard

3


Finance Organization Strategy Map Template

Transaction Processing and Controls

Deliver consistent accounting and

reporting processes

Maintain financial and compliance

controls

Effective risk and tax management

practices

External Compliance and Communication

Ensure regulatory compliance; manage

internal/external audits

Enhance public understanding of

company

Provide Board with effective reporting

and decision support

Planning and Decision Support

Understand and satisfy internal and external customer

needs

Manage information and decision support

for value creation

Improve business managers’ financial

competencies

Internal Process Perspective


Enhance business knowledge and skills

Use technology to improve collection and delivery of

financial information

Build a culture of empowerment,

collaboration, and communication


External Constituents Requirements

Transaction processing and controlsExternal compliance and communicationPlanning and decision support

Finance InitiativesXXXXXXXXX

Finance BudgetXXXXXX

Strategic Finance Service Portfolio



Costs of services

Budgetary discipline

Finance EffectivenessFinance Efficiency

2

Provide clear, reliable

disclosures

Provide managerial reports and

advice

Create value-added relationships with business partners

Efficiently deliver core

services

Manage risk and

compliance

Internal Customers

Develop Business Unit Partnerships

Introduce relationship

managers and integrated planning

process

Develop service agreements and

solicit client feedback

Show the value of financial services


Linkage Scorecard

3


How to Align Boards and Shareholders: The Board Cascade

Organization Alignment

Are the various units, departments and constituents aligned with the corporate value proposition?

Corporate Role DefinedCorp-SBU AlignmentSBU- Support Unit AlignedExternal Partners AlignedBoard/Shareholder Aligned

√

√

√

N

S

MAN

AGEM

ENT

GO

VERNANCE

BSC provides a framework for describing strategy and managing its execution (“Strategy Focused Organizations”)

BSC provides a framework for aligning the governanceprocess and promoting greater transparency

SBU SBUSBUSBU

Employees

ShareholdersBoardCEO

SBU

Corporate

Group

Division

√


A three-part BSC program can become the cornerstone of the Corporate Governance System.

People

Financial Performance

Markets and

CustomersSolutions

Customer Value Proposition

Operations

Board Scorecard

People


Markets and

CustomersSolutions


Operations

Executive Scorecards

People


Markets and

CustomersSolutions


Operations

Enterprise Scorecard

“The Balanced Scorecard system helps us promote a high-performing and well-governed organization.”

James Trimarchi, Chairman of the Board, First Commonwealth Financial Corporation

Enterprise Balanced Scorecard • Describes the enterprise strategy, measures and targets • A tool to manage the performance of the enterprise

• A key information input to the Board


Enterprise Performance Reporting: Strategic Information for the Board

Business Enhancement Inte

rnal

Pro

cess

esPe

ople

&

Kno

wle

dge

F1 - Top Tier Earnings with Consistent Growth

C1 Provide FinancialSolutions For Life

-

I1- Leverage Client Information

I3- Use the Preferred Way of Selling

I2- Expand and Enhance Offerings

E4- We Will Recognize and Reward

High Performance

E2- We Will Develop the Competencies, Experiences and Leadership Expertise to

Succeed

E3- We Will Have Employees Who Contribute to Our

Communities

F2- Grow Revenues

F4- Manage Expenses

F5- Strategically Invest/Divest

F3- Maintain a High Level of Risk Management

I6-Proactively Manage Resource Allocation

I7- Continually Improve our Business Processes

C2- Deliver Quality Service

I5- Profitably Deliver Consistent Service

I4- Align and Enhance Channel Capabilities

E1- We Will be the Preferred Employer

Employees are our #1 Resource

Purpose: Maximize the long- term total return to our shareholders

High -Performing, World Class Sales Organization

Client Acquisition and Development

Fina

ncia

lC

lient

Client Service and Retention


A three-part BSC program is the cornerstone of the Corporate Governance System.

People


Markets and

CustomersSolutions


Operations

Board Scorecard

People


Markets and

CustomersSolutions


Operations


People


Markets and

CustomersSolutions


Operations




Executive Balanced Scorecards • Defines the strategic contributions of each executive • A tool to assess and reward the performance of executives• A key information input to the Board


People


Markets and

CustomersSolutions


Operations

Board Scorecard

People


Markets and

CustomersSolutions


Operations


People


Markets and

CustomersSolutions


Operations


Board Balanced Scorecard • Defines the strategic contributions of the Board • A tool to manage the performance of the Board and its committees• Clarifies the strategic information required by the Board

A three-part BSC program is the cornerstone of the Corporate Governance System.



Executive Balanced Scorecards • Defines the strategic contributions of each executive • A tool to assess and reward the performance of executives• A key information input to the Board


Jeff Immelt, CEO, on Role of Corporate Board at General Electric

Select, evaluate and compensate the CEO; oversee CEO succession planningProvide counsel and oversight on selecting, evaluating, developing, and

compensating senior managementReview, monitor and approve fundamental financial and business strategies and

major corporate actionsAssess major risks facing the company, and review option to mitigate these risksEnsure processes are in place for maintaining the integrity of the company,

including:– Integrity of financial statements– Integrity of compliance with law and ethics– Integrity of relationships with customers and suppliers– Integrity of relationships with other stakeholders


The board strategy map clarifies how the board intends to contribute.Pe

ople

&

Kno

wle

dge

Stak

ehol

der

Fina

ncia

l In

tern

al

S1- Approve Plan and Monitor Corporate

Performance

S2- Strengthen and Motivate

Executive Performance

S3- Ensure Corporate

Compliance

Compliance and Communication

I1- Approve Strategy and Oversee its

Execution

I2- Approve and Monitor Funding for Strategic

Initiatives I4- Oversee Succession

Planning for Key Positions

L1- Ensure Board Skills and Knowledge Match the Strategic Direction

L3- Assure Access to Strategic Information

L2- Foster Engaging Board Member

Discussion

I5- Evaluate and Reward Executive Performance

I6- Actively Monitor Risk and Regulatory

Compliance

I7- Ensure Disclosures are Clear and Reliable

Executive EnhancementPerformance Oversight

I3- Be an Advocate for the Corporation

F1- Maximize the Long -Term Total Return to Shareholders

F2- Grow Revenue

F5- Strategically Invest/Divest

F3- Maintain a High Level of Risk Management

F4- Manage Expenses


Summary: How First Commonwealth uses its three part BSC governance system.

The Balanced Scorecard has become the central strategy management tool –duplicative reports and meetings go away

The Enterprise Balanced Scorecard is reviewed at each board meeting

The Board Balanced Scorecard is formally reviewed on a semi-annual basis. Board committees work their respective objectives at each meeting

Executive Scorecards are discussed with the CEO on a quarterly basis. The Compensation and Governance Committee review these cards on an annual basis


Bank Director Magazine: First Quarter 2006

Governance Award: First Commonwealth Financial Corp.

Presented to a board that has instituted and practices corporate governance in a superlative manner.


SFO Best Practices: Motivate To Make Strategy Everyone’s Job



4.1 Strategic awareness created4.2 Personal goals aligned4.3 Personal incentives aligned4.4 Competency development aligned




STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


“Communicate the strategy seven times seven ways”

Monthly Magazine

Quarterly Town HallMeetings

MonthlyMonthlyManagement MeetingManagement Meeting

Perspective Objective Measure Freq. BaselineCurrentPeriod AmountDate Plan Amount Date

Target

Financial

Customer

Internal

Learning/Growth

1997 Actual ResultsYTD 1997

SCENARIOPLANNINGTECHNOLOGY

NBU’S WITHW / SCORECARDSStrategic Partners

W / SCORECARDSINCENTIVE

COMPENSATION

INITIATIVES

Balanced Scorecard

DigestTraining

Bulletin Boards

Ask the President

Newsletters

Videos

Intranet


Typical Compensation Schemes Involve Multiple Tiers of Performance

1. Local incentives reward individuals when they achieve their personal objectives

2. Business unit incentives reward all employees when their unit achieves its BSC targets

3. Corporate incentives align employees and business units to corporate-wide objectives

Payment of any award can be contingent on the business unit or corporation achieving a minimal level of financial performance (such as a pre-specified return on sales or return on invested capital; breakeven economic value added)


SFO Best Practices: Govern To Make Strategy A Continual Process

5. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS3. ALIGN THE ORGANIZATION

TO THE STRATEGY 5.1 Budgeting linked to strategy5.2 HR and IT planning linked to strategy

5.3 Initiative management linked to strategy5.4 Process management linked to strategy

5.5 Best practice sharing linked to strategy5.6 BSC reporting system established

5.7 Strategy review meetings conducted4. MOTIVATE TO MAKE

STRATEGY EVERYONE’S JOB



STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


Theme 3

Theme 2

The current BSC view of linking strategy to the budget: achieve visibility and funding for the strategic initiatives

Strategy Map Balanced ScorecardMeasure Target

Action PlanInitiative Budget

Them

e: “

Cro

ss-S

ell t

he P

rodu

ct L

ine”

• Human Capital Readiness

• Strategic Application Readiness

• Goals Linked to BSC

• Cross-Sell Ratio

• Hours with Customer

• Revenue Mix

• Revenue Growth

100%

100%

100%

2.5

1hr/Q

New = +10%

+25%

• Relationship Management• Certified Financial Planner

• Integrated Customer File• Portfolio Planning Application

• MBO Update• Incentive Compensation

• Financial Planning Initiative

• Integrated Product Offering

$ XXX$ XXX

$ XXX$ XXX

$ XXX$ XXX

$ XXX

$ XXX

Total Budget $XXX

Broaden Revenue Mix

Cross-Sell the Product Line

Strategic Job

Financial Planner

Strategic Systems

Portfolio Planning

Create Organization Readiness

Strategic Job

Financial Planner

Strategic Systems

Portfolio Planning

Create Organization Readiness

• Share of Segment

• Share of Wallet

• Customer Satisfaction

25%

50%

90%

• Segmentation Initiative

• Satisfaction Survey

$ XXX

$ XXX

Increase Customer

Confidence in Our Financial Advice

Rolling Forecast (Budget)

Strategy• Strategy Map

• Targets• Accountability

• Themes• Objectives• Measures

Balanced Scorecard

Strategic Initiatives

$ XXTotal Strategic Investment

Revenue• Direct Expense

Gross Margin• Indirect Expense

– Sales– Prof. Dev.– G+A

Contribution• R&D• Strategic Investments

EBITDA• ITDA

Net Income

XX(XX)

XX

(XX)(XX)(XX)

XX(XX)(XX)

XX(XX)

XX

100%(40)

60%

(10)(5)

(15)

30%(5)(5)

20%(5)

15%

$$ %

Cost Management Investment Management

Operational Plan/Budget

Integrated Strategy Planning

• OPEX • CAPEX

The black hole: budgeting for operating expenses


SFO Best Practices: Mobilize Change Through Executive Leadership

1.1 Top leadership committed1.2 Case for change clearly articulated

1.3 Vision and strategy clarified1.4 New way of managing understood

1.5 Office of Strategy Management established






STRATEGY-FOCUSED

ORGANIZATION

BEST PRACTICES


Case Study: The “Chief of Staff” Role in Executing Strategy at the Chrysler Group

Executive CommitteeMake decisions on new and corrective actions to move forward to achievement of Chrysler Group

goals

Sales &Marketing Procurement

& SupplyCOO

ITManufacturingCEO

Finance HR

CEO ObjectiveOptimize the focus of top management attention on

operational and strategic shortfalls

Roles of the “Chief of Staff”

1. Strategist:Developing the strategic direction

2. Scorekeeper:Reporting the scorecard measures

3. Gatekeeper:Setting the agenda/ corporate governance

Source: William Russo, Chrysler Group @ BSCol Annual Summit, October, 2002


Strategy Management: An Emerging Professional Group

Managing Strategy CSMO

Managing Customers

• Market Research• Brand Management

Managing Technology

• Engineers• Scientists

Managing Quality

• Black Belts• ISO Certified

Managing Money

• Accountants (CPAs)• Controllers

Executive Team

Held together bya shared view of

the strategy

Managing People

• Aligning and Developing Human Capital

CFO

CIO

CHCO

MKTG

OPS

CEO


Rationale for the Chief Strategy Management Officer

Formulate & Communicate The

Strategy

Oversee Execution of The

Strategy

CSMO

Managing Strategy Is Different Than Managing Functions

Traditional competencies are based on functional niches which create silos.

Strategic management requires cross-functional processes.

There is no logical home for cross-functional processes.

This is the role of the OFFICE of STRATEGY MANAGEMENT.


The Office of Strategy Management – Roles & Responsibilities(Core Roles: OSM Must Run These Processes)

OSM RoleSTRATEGY MANAGEMENT PROCESS

Scorecard Management – Design and report on the BSC measures1

The OSM should oversee development of strategy maps and Balanced Scorecards, run the target setting process, help identify/rationalize strategic initiatives, and educate others in design/use of BSC.

Cross-Functional Issues:Integration of measures and data from all functions and departments.

KEY

OSM must run the process





Organization Alignment – Ensure all business and support units are aligned with the strategy2

The OSM should define and run the process of cascading and alignment between enterprise, SBU’s and Support Units. The OSM insures consistent view of alignment by reviewing and approving all strategy maps and scorecards.

Cross-Functional Issues:Link Corporate to SBUs, SBUs to Support Units and External Partners.

KEY






Organization Alignment – Ensure all business and support units are aligned with the strategy2

Strategy Reviews – Shape the agenda for management strategy review and learning meetings3

OSM should run the Balanced Scorecard reporting system, run the management review meetings, coordinate the agendas and follow-up actions.

Cross-Functional Issues:Focus the executive team on cross-functional strategic themes.

KEY



The Office of Strategy Management – Roles & Responsibilities(Desirable Roles: OSM Should Run The Process)


Strategy Development – Help the CEO and executive team formulate and adapt the strategy4

The OSM should facilitate the strategy development process: perform external/competitive analyses, run strategy retreats and formulate strategy with the CEO.

Cross-Functional Issues:Define the enterprise value proposition; Integrate functional / departmental initiatives to enterprise strategy.

KEY


OSM should run the process





Strategy Communication – Communicate and educate employees about the strategy5

The OSM is responsible for the content and effectiveness of the communication of strategy to employees, integrating with others as required.

Cross-Functional Issues:Integrate strategy message into multiple media communication channels.

KEY







Strategy Communication – Communicate and educate employees about the strategy5

Initiative Management – Identify and oversee management of strategic initiatives6

The OSM should ensure that the strategic initiatives are being rationalized and managed.

Cross-Functional Issues:Rationalize and manage different categories of resources (e.g., training, hiring, technology, money) from different functional areas into integrated strategic initiatives.

KEY




The Office of Strategy Management – Roles & Responsibilities(Integrative Roles: OSM integrates strategy to process run by someone else)


CFO, HRO, CIO, CMO

Planning/Budgeting – Link financial, human resources, information technology, and marketing to strategy7

The CFO and other functional executives run this process but the OSM ensures that the strategy is embedded in the plan. The OSM role here is particularly important for the funding of strategic initiatives.

Cross-Functional Issues:Link functional / department budget architecture to cross-functional strategies.

KEY



OSM links strategy to a process run by someone else (X)X




CFO, HRO, CIO, CMO


HROHuman Capital Alignment – Ensure all employee’s goals, incentives and development plans link to strategy8

The Human Resource Officer runs these processes. The OSM works with HR to ensure that personal goals, incentives, and development are tied to the strategy.

Cross-Functional Issues:Link functional / department budget architecture to cross-functional strategies.

KEY







CFO, HRO, CIO, CMO


HROHuman Capital Alignment – Ensure all employee’s goals, incentives and development plans link to strategy8

CKOBest Practice Sharing – Facilitate a process to identify and share best practices9

In homogenous organizations, responsibility for best practice transfer should be centralized with the OSM. In heterogeneous organizations, responsibility can be localized.

Cross-Functional Issues:Move good ideas found in one part of the enterprise into others, crossing departmental and functional boundaries.

KEY





STRATEGIC ALIGNMENT:

DRIVING BUSINESS EXCELLENCE12-14 June 2006 – Hilton Diagonal Mar, Barcelona

• Understand Drs. Kaplan and Norton’s latest thinking on StrategicAlignment and Organisation-Derived Value• Celebrate the 2006 European Hall of Fame for Executing StrategyTM

Award winners and learn the secrets of their success• Collaborate in groups on a series of interactive exercises to help you put into practice the principles you will learn• Hear seven best-in-class case studies describe how they execute, enable and sustain strategy• Join 250+ senior managers for an unprecedented networking experience

We hope to see you in Barcelona! See full details at www.bscolevents.com

The Balanced Scorecard: Quo Vadis©2006 Robert S. Kaplan 5 BALANCED SCORECARD Translate, Focus and...

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