The Balanced Scorecard: Translating Strategy into Actionby Robert S. Kaplan
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The Balanced Scorecard translates a company's vision and strategy into a coherent set of performance measures. The four perspectives of the scorecard--financial measures, customer knowledge, internal business processes, and learning and growth--offer a balance between short-term and long-term objectives, between outcomes desired and performance drivers of those outcomes, and between hard objective measures and softer, more subjective measures. In the first part, Kaplan and Norton provide the theoretical foundations for the Balanced Scorecard; in the second part, they describe the steps organizations must take to build their own Scorecards; and, finally, they discuss how the Balanced Scorecard can be used as a driver of change.
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Chapter 6: Learning and Growth Perspective
Measuring Employee Retention
Employee retention captures an objective to retain those employees in whom the organization has a long-term interest. The theory underlying this measure is that the organization is making long-term investments in its employees so that any unwanted departures represents a loss in the intellectual capital of the business. Long-term, loyal employees carry the values of the organization, knowledge of organizational processes, and, we hope, sensitivity to the needs of customers. Employee retention is generally measured by percentage of key staff turnover.
Measuring Employee Productivity
Employee productivity is an outcome measure of the aggregate impact from enhancing employee skills and morale, innovation, improving internal processes, and satisfying customers. The goal is to relate the output produced by employees to the number of employees used to produce that output. There are many ways in which employee productivity has been measured.
The simplest productivity measure is revenue per employee. This measure represents how much output can be generated per employee. As employees and the organization become more effective in selling a higher volume and a higher value-added set of products and services, revenue per employee should increase.
Revenue per employee, while a simple and easy-to-understand productivity measure, has some limitations, particularly if there is too much pressure to achieve an ambitious target. For example, one problem is that the costs associated with the revenue are not included. So revenue per employee can increase while profits decrease when additional business is accepted at below the incremental costs of providing the goods or services associated with this business. Also, any time a ratio is used to measure an objective, managers have two ways of achieving targets. The first, and usually preferred, way is to increase the numerator-in this case, increasing output (revenues) without increasing the denominator (the number of employees). The second, and usually less preferred, method is to decrease the denominator - in this case, downsizing the organization, which might yield shortterm benefits but risks sacrificing long-term capabilities. Another way of increasing the revenue per employee ratio through denominator decreases is to outsource functions. This enables the organization to support the same level of output (revenue) but with fewer internal employees. Whether outsourcing is a sensible element in the organization's long-term strategy must be determined by a comparison of the capabilities of the internally supplied service (cost, quality, and responsiveness) versus those of the external supplier. But the revenue per employee metric is not likely to be relevant to this decision.
One way to avoid the incentive to outsource to achieve a higher revenue per employee statistic is to measure value-added per employee, subtracting externally purchased materials, supplies, and services from revenues in the numerator of this ratio. Another modification, to control for the substitution of more productive but higher paid employees, is to measure the denominator by employee compensation rather than number of employees. The ratio of output produced to employee compensation measures the return on compensation, rather than return to number of employees.
So, like many other measures, revenue per employee is a useful diagnostic indicator as long as the internal structure of the business does not change too radically, as it would if the organization substitutes capital or external suppliers for internal labor. If a revenue-per-employee measure is used to motivate higher productivity of individual employees, it must be balanced with other measures of economic success so that the targets for the measure are not achieved in dysfunctional ways.
SITUATION-SPECIFIC DRIVERS OF LEARNING AND GROWTH
Once companies have chosen measures for the core employee measurement group -satisfaction, retention, and productivity - they should then identify the situation-specific, unique drivers in the learning and growth perspective. We have found that the drivers tend to be drawn from three critical enablers (see Figure 6-2): reskilling the work force, information systems capabilities, and motivation, empowerment, and alignment.
RESKILLING THE WORK FORCE
Many organizations building Balanced Scorecards are undergoing radical change. Their employees must take on dramatically new responsibilities if the business is to achieve its customer and internal-business-process objectives. The example, earlier in this chapter, illustrates how front-line employees in Metro Bank must be retrained. They must shift from merely reacting to customer requests to proactively anticipating customers' needs and marketing an expanded set of products and services to them. This transformation is representative of the change in roles and responsibilities that many organizations now need from their employees.
We can view the demand for reskilling employees along two dimensions: level of reskilling required and percentage of work force requiring reskilling (see Figure 6-3). When the degree of employee reskilling is low (the lower half of Figure 6-3), normal training and education will be sufficient to maintain employee capabilities. In this case, employee reskilling will not be of sufficient priority to merit a place on the organizational Balanced Scorecard.
Companies in the upper half of Figure 6-3, however, need to significantly reskill their employees if they are to achieve their internal-business-process, customer, and long-run financial objectives. We have seen several organizations, in different industries, develop a new measure, the strategic job coverage ratio, for its reskilling objective. This ratio tracks the number of employees qualified for specific strategic jobs relative to anticipated organizational needs. The qualifications for a given position are defined so that employees in this position can deliver key capabilities for achieving particular customer and internal-business-process objectives. Figure 6-4 illustrates the sequence of steps followed by one company in developing its strategic job coverage ratio.
Usually, the ratio reveals a significant gap between future needs and present competencies, as measured along dimensions of skills, knowledge, and attitudes. This gap provides the motivation for strategic initiatives designed to close this human resource staffing gap.
For the organizations needing massive reskilling (the upper righthand quadrant of Figure 6-3), another measure could be the length of time required to take existing employees to the new, required levels of competency. If the massive reskilling objective is to be met, the organization itself must be skillful in reducing the cycle time required per employee to achieve the reskilling.
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Robert S. Kaplan is the Marvin Bower Professor of Leadership Development at Harvard Business School and chairman of the Balanced Scorecard Collaborative. David P. Norton is founder and president of the Balanced Scorecard Collaborative.
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First published in 1996, this management literature classic builds a bridge between traditional, short-term oriented management systems and a more balanced approach integrating new types of measurements into a comprehensive strategy. This book looks senior managers in the eye and asks, 'Are you ready for the future?' Some executives respond to the challenge of change by tinkering, adding a few nonfinancial metrics to the 'instrumentation cockpit' that tells them how their corporate ship is running. Others have spurned Balanced Scorecard because it requires CEOs to accept feedback from all levels of their organizations so they will know if their assumptions remain relevant amidst rapid change. To date, however, more than 300 major organizations have used this system to enhance their performance, and future prospects. Abraham Lincoln once said that the best thing about the future is that it comes only one day at a time. With apologies to Lincoln, we recommend this book to all senior executives and managers - because the future will be here sooner than you think.