Balanced Scorecards as Business Intelligence

Defining your functional and technical requirements is the first step in successfully implementing a balanced scorecard solution

By Pratish Kanani

The executive management committee at your organization has requested your presence at a meeting to discuss an enterprisewide balanced scorecard implementation. Due to your previous success with implementing data warehousing solutions, your task is to define the technical requirements of the balanced scorecard and examine a possible synergy with the tools and technologies your organization already has in place. But you've never implemented a scorecard before, and you don't quite know where to begin.

Balanced scorecards fall into the category of performance measurement systems that resemble data marts built using OLAP systems. Scorecards differ from traditional performance measurement systems, however, and understanding this difference is key to implementing a successful solution. Although performance measurement systems focus on departmental or functional business analysis and reporting, balanced scorecards focus on managing and communicating strategic initiatives across an organization. Several vendors have recently introduced balanced scorecard applications specifically designed for this market. To implement a robust and flexible solution that supports reuse within your organization, it's critical to recognize measures, dimensions, and views within the system.

Balanced Basics

The balanced scorecard, as defined by Robert Kaplan and David Norton in a seminal article published in the Harvard Business Review ("The Balanced Scorecard: Measures that Drive Performance," January-February 1992), offers a framework for translating strategic objectives into a set of key performance measures that apply at all organization levels. This framework lets companies develop tactical goals that support their objectives. It also gives employees a mechanism to understand the elements that are benefiting from and contributing to the organization's strategic initiatives.

Implementing a balanced scorecard is not a trivial undertaking. You have to define your organization's strategy, set objectives, and measure performance toward the objectives in an environment that supports the testing of hypothesis and what-if scenarios to refine the strategy execution. The scorecard provides a feedback loop that lets individual employees examine how or whether their efforts are contributing toward the organization's goals. It also requires a reward system aligned with the strategic objectives.

Figure 1 describes the location of the balanced scorecard system within the suite of decision- support tools. It's not meant to replace current departmental or functional decision-support systems used to manage and control business activity. Instead, the balanced scorecard coexists with these systems, using the data warehouse as a source of data and serving as a communication and management tool for strategic initiatives.

 

 

The recent alliance between Norton's consulting firm Renaissance Worldwide and OLAP vendor Gentia Software introduced a balanced scorecard application that Gentia developed for Renaissance. It underscores the importance of the synergy you can achieve by using OLAP tools for performance measurement. Other vendors, including Panorama Business Views Inc. and CorVu Corp., are also targeting this highly lucrative market with their own scorecard implementations. Recognizing the need for a robust solution, CorVu entered into an agreement with Arbor Software Inc. in October 1997 to develop an Essbase-ready scorecard system. Understanding the balanced scorecard framework will help you define your functional and technical requirements that can be mapped back to existing tools and technologies within the organization. It will also help narrow down your vendor-selection process.

Framework Fundamentals

In its simplest form, a balanced scorecard is a multidimensional database cube, and understanding the nuances sets up a framework for storing the data. The aggregation of data is handled similarly in any OLAP system where the information is loaded at the lowest level and aggregated upward. The aggregation and storage of the information at the various dimensional crosspoints lets you drill down and across the data.

The strategic objective of a scorecard tends to be broad in nature--increase revenue productivity, for example. Rather than being assigned a numerical value, each objective contains an assessment that indicates its status. Assessments may be displayed in textual format such as improvement/no change/decline or in graphical format such as +/*/- or even |/-/X. An assessment serves as a summary so users don't have to try to provide their own interpretation of the information provided by the measures.

A balanced scorecard system lets a department manager or division head enter an assessment into the system. Manually entering the assessment takes any nonnumeric information and external factors into consideration, and lets them capture and communicate this knowledge through the scorecard. Like traditional performance measurement systems, balanced scorecards involve highly structured data but they also address textual and unstructured data. Scorecards need to have the option of calculating the assessment automatically based on the percentage of target achieved by the detailed measures.

The balanced scorecard tracks four categories of measures: financial, customer, internal perspective, and learning and growth. The theory is that learning and growth within an organization, coupled with internal process efficiency and effectiveness, will lead to products or services of increased value to customers and improve financial results. This approach differs from traditional executive information systems and dashboard alternatives that focus primarily on financial measures, which are lagging indicators, and report the outcome of organization activity. Rather, balanced scorecards emphasize the use of both financial measures, which typically provide a retrospective view of the results, and nonfinancial measures, which let employees manage activities that will have a causal effect on the financial results of the organization.

Business managers use measures to study performance based on analytical information obtained from the warehouse or external sources. The number of measures is usually limited, and they relate directly to the strategic objectives. This approach differs from that of traditional OLAP systems, which track a vast number of measures to help with analysis and provide exception reporting. The measures in a balanced scorecard, however, are also similar to OLAP system ones because they can be aggregated across dimensions such as organization and time.

You can classify measures on the scorecard as leading or lagging indicators based on their effect on another measure. For example, improving service standards may measure average talk time per call. This measure may be a leading indicator for calls answered within 30 seconds, a measure used to increase customer satisfaction, which is an objective in the customer category.

By reducing the average talk time per call, the calls answered within 30 seconds measure would increase and improve the level of customer service. The link between these leading and lagging indicators and objectives serves as the foundation for the cause and effect model you can use to document expected results and test hypotheses about the strategy execution.

Balanced scorecard implementers typically find that the customer, internal, and innovation categories generate new measures not previously calculated within the organization. This possibility poses the challenge of identifying these new measures, compiling data to calculate them, and loading data into the balanced scorecard.

The Scorecard in 3D

In order for a balanced scorecard to be successful, three dimensions have to be in place. At the forefront is the organization. Each of its levels has to be supported by the scorecard. A typical hierarchy may start with strategic business units and divisions, followed by departments, teams and individuals.

The hierarchy must be robust enough to accommodate current organizational requirements while being flexible enough to support business restructuring. There should be support for situations such as individuals transferring from one team to another or teams being consolidated under one department. Information stored in a DSS may have two organizational views, the historical (as it was reported) and the current (according to the present organization hierarchy). Be sure to define your scorecard requirements for historical reporting. Different departments in the organization will have their own scorecard implementations to track their role in strategy. As a result, the balanced scorecard takes the form of multiple, aggregated OLAP cubes (see Figure 2). This architecture is often called cascading the strategy through the use of nested scorecards. The OLAP cube at the highest level defines the measures and dimensions that apply to the corporate level. Division and department level scorecards will have detailed measures and dimensions that roll up to the higher level corporate measures and dimensions. This way the corporate strategy is communicated down the organization, while performance is measured and reported up through the organization. OLAP tools that can support a compound OLAP architecture and link cubes together will provide the best fit with this architecture.

 

 

In balanced scorecards, you have to establish a hierarchy for aggregating information through the time dimension. The measures should be brought together using, for example, a calendar view to roll up days to months to quarters to years, and a separate roll up for days to weeks. Both of these hierarchies must exist because weeks can't roll up to months, quarters, or years. You may need a separate reporting hierarchy for calendar year reporting vs. fiscal year reporting. The time hierarchy would appear this way:

• Year
• Quarter
• Month
• Week
• Day

The scorecard must be able to load the measures at the lowest level of the time frequency used to report the measure. Some measures, such as productivity, may be loaded daily. Others, such as revenue or expenses, may be loaded on a weekly or monthly basis. Those measures loaded on a monthly basis should load in the warehouse without having to be loaded on the first or last day of the month. If the monthly data is loaded on a specific date, the data appears as a spike on a trend view of the data. The weekly data must only appear on a weekly view (since there are no higher aggregations) and the monthly data on a monthly, quarterly, and annual view. The target dimension lets you compare actual performance to an anticipated result. As an example, the actual values of the measures should be compared to the following target values:

Baseline: The current performance level.
Tolerance: The minimum acceptable performance.
Target: The recommended performance level.
Stretch Target: The target value for exceptional performance.

Although your own scorecard implementation may differ, make sure you can set up multiple targets to track the actual performance.

Finding Your Way Around

Navigation in the scorecard gives you a way to analyze data by presenting various views of the information in the system. Figure 3 displays examples of standard views supported by a balanced scorecard in use at a call center unit. Table 1 shows sample objectives and dimensions in a balanced scorecard for a manufacturing corporation.

The objectives summary view is the status of the strategic objectives that need to be achieved. It captures the essence of the scorecard by displaying the objectives along with their nonnumerical assessment. The ability to compare the objective assessment of the current time period to the prior one lets you view the progress for each objective.

The numerical view is useful for reviewing the detail under an objective assessment and examining the deviation from target. The values of the measures change depending on the selection of the organization, time, and target dimension values. For example, you could use this view to examine an individual's performance yesterday or the organization's performance for the last month, all by selecting the appropriate organization and time-dimension values.

The graphical view across time displays the historical trend for measures and objectives. The view of an objective over time displays the historical information on the assessment or status of the objective based on the measures associated with it. In a manually-updated assessment, you can use this view to determine the accuracy of the assessment based on the underlying measures. The graphical view across time lets you spot trends and patterns.

The graphical view across the organization lets you compare performance of organization members including individuals, teams, and strategic business units. This data, sorted in a descending order, makes it possible to evaluate member performance toward similar goals, but it's not very useful if the organization members have different goals. The graphical view identifies strong and weak performers, which can help you identify employees who use the best practices and those who need additional training or improvement.

The graphical view across measures lets you compare measures' deviation from the target. Because measures typically capture different information and use different scales, they can't be compared to each other. For example, a measure such as revenue may be in the billions of dollars while a measure such as number of employees may be in the thousands.

Cause and effect diagram serves as documentation for the relationships or hypotheses that exist between objectives and measures. The causal relationships that exists among innovation and learning, internal processes, customer satisfaction and loyalty, and financial results filters down to the objectives and measures, and they detail the basis on which the strategy has been formulated. Each measure associated with objectives should be part of this relationship, with the goal of improving the outcome of the dependent objectives and measures leading to improved financial results.

Is a Balanced Scorecard for You?

A balanced scorecard goes above and beyond a traditional DSS by providing a framework to manage and communicate the implementation of strategic initiatives within an organization. Traditional DSSs are control systems that provide business analysis and reporting capability for departmental or functional areas and involve highly structured data. Balanced scorecards work with traditional systems; they don't replace them.

If you're considering implementing a balanced scorecard system, you won't be alone in your endeavor. Several vendors and system integrators have the necessary technical and functional skills to help you successfully meet your goal. Meanwhile, it is important for you to understand the balanced scorecard methodology and identify your requirements up front. This will help you better understand the level of involvement you'll need from a vendor or system integrator. Try to identify measures that will work together to achieve your strategic objectives. When you have your requirements and objectives in place, you'll be better prepared to take your project to vendors or system integrators.
 

Pratish Kanani is a manager for Ernst & Young LLP in Chicago. You can reach him at pratish.kanani@ey.com.
 
 

25 Questions for Your Vendor or Systems Integrator

Implementing an organizationwide balanced scorecard may involve vendors as well as system integrators. These solution providers typically specialize in certain areas of the scorecard implementation. Some solutions provide focus on the strategy components, while others focus on the technology solutions. Many of the larger consulting firms provide services for the entire scorecard implementation.
 

This checklist will help you select a solution provider and take stock of your own requirements:

0. Does the system support the scorecard concept as defined by Kaplan and Norton?
1. How does the scorecard differ from traditional performance measurement systems?
2. Does the scorecard support a vision statement?
3. Is there support for categories, objectives, and measures in order to track performance?
4. Can actual performance be compared to multiple targets?
5. Does the system support range limits and highlighting of exceptions?
6. How sophisticated is the support for input of assessments and textual notes?
7. Are there additional communication or commentary features in the scorecard?
8. Can measures be linked to internal projects and initiatives?
9. Does the system support the standard presentation views? (See Figure 3 and Table 1.)
10. Can the system trend assessments associated with objectives?
11. Does the system support cascading scorecards down to the individual level?
12. Does the system support relationship definitions to provide cause and effect modeling?
13. Is the system a packaged solution?
14. Does the system implement setup wizards?
15. What are the system's multidimensional capabilities?
16. Can the system be run in a standalone environment?
17. Does the system support integration with email systems?
18. Is there built-in security, and if so, what functionality does it provide?
19. What are the standard reports that can be printed from the system?
20. Can the system be deployed on the Web?
21. Is there integrated support for an automated scheduler?
22. What data sources does the system support?
23. How robust and flexible is the system for enterprisewide implementation?
24. Does the system link measures and objectives with individuals to stress accountability?

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