Performance Management Through Benchmarking and Balanced Scorecard

What is Benchmarking?

Benchmarking is the systematic way of improving performance by consistently identifying, developing, and applying best practices and processes. The search for “best practice” can take place both inside a particular industry, and also in other industries.

Managers compare the performance of their products or processes externally with those of competitors and best-in-class companies and internally with other operations within their own firms that perform similar activities.

The objective of Benchmarking is to find examples of superior performance and to understand the processes and practices driving that performance.

Benchmarking is a process to determine who else does a particular activity the best and emulating what they do to improve performance. It was initially practiced by Xerox Corporation in the 1979, as part of their response to international competition in the photocopier market.

Its scope was then enlarged to include business services and processes. Xerox now benchmarks nearly 240 performance elements although, when they started benchmarking several years ago, considerably fewer elements were benchmarked. Businesses such as AT&T, Motorola, Xerox, as well as most major corporations and many smaller ones have embraced benchmarking as standard operating procedure since the mid- to late 1980s.

Benchmarking is the practice of a business comparing core metrics of their operations to other similar companies. Companies use benchmarking as a way to compare core metrics to further businesses in an industry. This present companies to see how well they are doing their practices and identify ways they can become more competitive in the industry.

Benchmarking helps companies become more competitive. By looking at how other companies are performing, they can recognize areas where they are lacking. It also aids them accelerate the process of change because they have models from other companies in their industry to help guide their changes.

Benchmarking occurs across all types of companies (including private, public, non-profit, for-profit) as well as industries (e.g. technology, education, manufacturing).

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Purpose of Benchmarking

Benchmarking of business processes is usually done with top performing companies in other industry sectors. This is feasible because many business processes are essentially the same from sector to sector. The benchmarking process involves comparing one’s firm performance on a set of measurable parameters of strategic importance against that of firms’ known to have achieved best performance on those indicators.

Benchmarking should be looked upon as a tool for improvement within a wider scope of customer-focused improvement activities and should be driven by customer and internal organization needs.

The purposes of best practice performance benchmarking are:

• Development of an understanding of the fundamentals that create business success based on objective measurement of relative performance against relevant companies in areas involving official business processes.
  
  
• Focus on continuous improvement efforts bred on ongoing analysis of essential difference between similar processes in comparable business and the underlying causes for the variants.
  
  
• Management of overall as well as individual changes, involvement in achieving the improvement based on development action plans to measure the gaps between the companies and best in class companies with the most relevant key result variables.

Process of Benchmarking

The process of benchmarking is as follows:

• Step 1 – Determining Benchmark Focus: During this phase the company determines the specifics of the research project. (e.g., which companies will they include in the research, what types metrics they will compare).
  
  
• Step 2 – Planning and Research: During this phase the company puts the resources together to implement the project (e.g., develop surveys, seek cooperation from other companies, find databases already available).
  
  
• Step 3 – Gathering Data: During this phase the data is collected through the methodology determined in the planning and research phase.
  
  
• Step 4 – Analysis: After gathering the data, the company uses statistical techniques to examine and create the findings.
  
  
• Step 5 – Recommendations: After analyzing the data and areas where the company can improve, recommendations are developed.
  
  
• Step 6 – Implementation: After reviewing recommendations, the company implements those that are feasible.

Success of Benchmarking

Benchmarking offers the following benefits to companies and organizations:

• Highlights areas of practice and performance requiring attention and improvement. ‰
  
  
• Identifies strengths and weaknesses to other respondents. Establishes company’s true position versus the rest, making thus easier for the company to raise the organizational energy for change and develop plans for action.
  
  
• Helps measure current company performance
  
  
• Prevents reinventing the wheel (Why invest the time and costs ‰ when someone else may have done it already -and often better, cheaper, and faster?)
  
  
• Accelerates change and restructuring by:
  • using tested and proven practices,
  • convincing sceptics who can see that it works, and
  • overcoming inertia and complacency and creating a sense of urgency when gaps are revealed
    
    
• Leads to “outside the box” ideas by looking for ways to improve ‰ outside of the industry.

Pitfalls in Benchmarking

Following is a list of common pitfalls associated with benchmarking:

• Insufficient Commitment: Not sufficiently ‘high level’ or ‘sincere
  
  
• Not planning ahead: Insufficient planning; ‘this is easy, let’s just do it’ attitude
  
  
• Misunderstanding: Of iterative, continuous nature of benchmarking or conducting intellectual benchmarking
  
  
• Not linking Benchmarking to Process: Failure to ‘go behind’ measures and understand the ‘how
  
  
• Apples vs. Oranges: Comparison with insufficient process analysis or partner ‘fit’
  
  
• What gets measured: Measuring ‘easy’ factors, not those that will make a difference
  
  
• Not teaching people to fish: Lack of education and awareness-building in those responsible for, or involved in, benchmarking
  
  
• Lack of communication or unclear communication: Benchmarking not linked to other corporate activity / goals so communication and relevance blurred.
  
  
• Failing to prioritize: Trying to “change the world” at once ‰ and not identifying subjects which are linked to key business processes.

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What is Balanced Scorecard?

The balanced scorecard is a strategic management approach developed by Kaplan and Norton (1992). The balanced scorecard clearly prescribes what an organization should measure to balance its financial perspectives. In its true sense, the balanced scorecard can be better referred to as a management system rather than only a measurement tool to track the degree of balance in the financial results of an organization.

The balanced scorecard for performance measurement is in reality a mixture of financial and non-financial measures that ultimately leads effective assessment of organizational performance. A combination of the balanced scorecard metrics also provides the opportunity to the organization to compare and benchmark products and services against the competitors.

Through balanced scorecards, organizations can realize their vision and strategies, translating those into action plans. In the process of translating the activities into the balanced scorecard, organizations can develop the strategic framework and achieve the performance goals. Also the scorecard can set the direction to achieve the performance goals.

Kaplan and Norton described that the balanced scorecard while retaining the traditional financial measures, also helps the organization to measure the potentiality to create future value, accounting for the contributions in four perspectives, i.e., customers, finance, internal business process, and learning and growth.

Four Kinds of Measures

The scorecard seeks to measure a business from the following perspectives:

Learning and Growth Perspective

Kaplan and Norton emprise its need in every organization. They consider learning to be more important than training. Learning requires in-house mentors and tutors, free flow of communication, and employees’ access to their seniors when they face any problem in doing their jobs. Through learning, employees can grow and self- improve. Growth is a more holistic term than development. While development is momentary, growth is permanent. With development, an employee can achieve one-time performance results, while with learning reinforced growth employees can recurrently deliver better performance results.

Business Process Perspective

Kaplan and Norton, two proponents of the balanced scorecard, suggest employees’ performance focus on internal business processes. Knowledge of internal business process perspective enables employees to understand the way that the business is conducted in the organization, the extent of conformance of products and services to customers’ needs, the mission of the organization, the process of strategic management, etc.

Customer Perspective

When organizations are customer centric and are able to satisfy the customers, success can be achieved at much ease. No organization survives with dissatisfied customers. Inputs from all cross-sections of employees add to customers’ satisfaction. In other words, every employee adds value to the customers, irrespective of their nature of work.

A dissatisfied customer shifts to other suppliers and their dissatisfaction also influences the other prospective customers of the organization. This culminates in business failure. For all these reasons, employees must perform to meet the customers’ demand and make the customers satisfied. Thus, to measure employees’ performance from customers’ perspective, it is essential for the organization to develop various metrics analyzing the customers’ data.

Financial Perspective

As has already been stated, Kaplan and Norton did not make the need for financial results redundant. Finance and so also the financial results should continue to receive organizational priority. In fact, without discarding the need to focus on finance, they had also incorporated the need for future value addition potentiality of the organizations. Some of the important financial metrics like employees’ capability to assess the risk, capability to justify cost benefit, etc. are the most critical performance indicators for this perspective. Again, like in other perspectives, every cross-section of employee must also perform to meet the financial perspective.

Conclusion

Thus, balanced scorecard translates strategy into action. The concept takes the cues from the organizational vision and strategies and then develops key performance indicators in all the four perspectives. Each performance indicator is measured in terms of certain well-designed metrics against which the performance of an employee is compared.

Objectives, Measures, Targets and Initiatives

Each perspective of the Balanced Scorecard includes objectives, measures of those objectives, target values for those measures, and initiatives, as follows:

• Objectives – the major objectives a company must achieve—for example, profitable growth
  
  
• Measures – the observable parameters a company uses to measure its progress toward reaching its objectives. For example, a company might measure its progress toward the objective of profitable growth by growth in net margin.
  
  
• Targets – the specific target values for the measures – for example, +2% growth in net margin.
  
  
• Initiatives – action programs a company initiates to meet its objectives.

Purpose of the Balanced Scorecard

Kaplan and Norton found that organizations are using the scorecard to:

• Clarify and update strategy
• Communicate strategy throughout the company
• Align unit and individual goals with strategy
• Link strategic objectives to long term targets and annual budgets
• Identify and align strategic initiatives
• Conduct periodic performance reviews to learn about and improve strategy.

Process of Building a Balanced Scorecard

While there are many ways to develop a balanced scorecard, Kaplan and Norton defined a four-step process that has been used across a wide range of organizations.

• Define the measurement architecture: When a company initially introduces the balanced scorecard, it is more manageable to apply it on the strategic business unit level rather than the corporate level. However, interactions must be considered in order to avoid optimizing the results of one business unit at the expense of others.
  
  
• Specify strategic objectives: The top three or four objectives for each perspective are agreed upon. Potential measures are identified for each objective.
  
  
• Choose strategic measures: Measures that are closely related to the actual performance drivers are selected for evaluating the progress made toward achieving the objectives. ‰
  
  
• Develop the implementation plan: Target values are assigned to the measures. An information system is developed to link the top level metrics to lower-level operational measures. The scorecard is integrated into the management system.

Implementing Balanced Scorecard

Implementing the balanced scorecard system company-wide should be the key to the successful realization of the strategic plan/vision.

A balanced scorecard should result in:

• Improved processes
• Motivated/educated employees
• Enhanced information systems
• Monitored progress
• Greater customer satisfaction
• Increased financial usage ‰

There are many software packages on the market that claim to support the usage of balanced scorecard system. For any software to work effectively it should be:

• Compliant with your current technology platform
• Always accessible to everyone – everywhere
• Easy to understand/update/communicate

Feedback is essential and should be ongoing and contributed to by everyone within the organization. And it should be borne in mind that balanced scorecards do not necessarily enable better decision- making!

Benefits of the Balanced Scorecard

Some of the benefits of the balanced scorecard can be listed as under:

• It aligns key performance indicators with the overall strategy of the organization, and in the process facilitates effective measurement of realized strategy vis-à-vis the performance goals of the organization.
  
  
• Balanced scorecard makes available the holistic picture of business results; therefore, it can also be used as organizational health index.
  
  
• It enforces a positive work culture in the organization, as in the process of its development all cross-sections of employees need to get involved, communicate with each other, understand the business imperatives and the strategies of the organization, irrespective of the nature of their activities and hierarchical levels.
  
  
• It makes the performance assessment process transparent.

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Balanced Scorecard for Enhancing Performance

In such constantly shifting environments, managements must learn to continuously adapt to new strategies that can emerge from capitalizing on opportunities or countering threats. A properly constructed balanced scorecard can provide management with the ideal tool in reacting to the turbulent environment and helping the organisation to correct the course to success.

Scorecard provides managers with feedback, thus, enabling them to monitor and adjust the implementation of their strategy – even to the extent of changing the strategy itself. In today’s information age, organisations operate in very turbulent environments. Planned strategy, though initiated with the best of intentions and with the best available information at the time of planning may no longer be appropriate or valid for contemporary conditions.

As companies have applied the balanced scorecard, they have begun to recognize that the scorecard represents a fundamental change in the underlying assumptions about performance measurement.

The scorecard puts strategy and vision, not control, at the centre. It establishes goals but assumes that people will adopt whatever behaviours and take whatever actions are necessary to arrive at those goals. The measures are designed to pull people toward the overall vision. Senior managers may know what the end result should be, but they cannot tell employees exactly how to achieve that result, because the conditions in which employees operate are constantly changing.

Balanced Scorecard (BSC) Applied

Traditionally, health care providers tend to view their organizations as being mission-centered and driven. Based upon that perspective health care providers have often mistaken their commitment to vision as an application of the BSC; falling short on aligning their goals and strategies back to their mission.

Additionally, hospitals also shied away from financial measures in order to refrain from placing a numeric value on life. In 2001, Crandon hospital began utilizing the BSC in order to provide better financial reporting and more comprehensive information to its shareholders and board of directors. The hospital adapted the four BSC perspectives for their organizational purposes to include: customer satisfaction, clinical quality, operations, and financial.

The major benefits resulting from the implementation of the BSC were: being able to identify and respond negative trends in a timely fashion, a decrease in the rate of patient falls and board appreciation of how the BSC framework perspectives clearly highlight the correlations between customer, clinic and operation.

The organization was able to successfully apply the BSC framework to their business by adapting the perspectives and gaining buy-in from the leaders of the company and staff inclusion. Most importantly, Crandon tied all actions, objectives, and goals to the strategy, mission and vision of the company.

BIOCO, a mid-sized biopharmaceutical company successfully implemented the BSC at the corporate level and adapted it all the down to the individual employee level. This success was possible because they secured commitment from the top management, invested in training, defined strategy maps and articulated how progress would be tracked [13].

Implementation and development started at the corporate level and successfully cascaded to the departmental and individual employee levels. Eventually, BIOCO also added culture as a fifth perspective in order to allow for continued positive relations and communications with the IT department as a function of embracing the cultural differences that existed between the IT department and the rest of the organization.

Philips Electronics has implemented a scorecard system to align company views, to focus employees on how they fit into the big picture, and to educate employees on what drives the business. Philips management uses the scorecard as a guide at quarterly business reviews worldwide to promote organizational learning and continuous improvement.

In Philips Medical Systems North American (PMSNA), the balanced scorecard is being used to increase accountability for results. The scorecard is compiled using an automatic data transferring system that transfers data from internal reporting systems to the scorecard. This system allows employees to quickly see results each month, reduces the compilation time, and eliminates possible human error.

Employees are able to understand exactly what they need to do on a daily basis to impact results. Chris Farr, former Philips Vice President of Quality and Regulatory at PMSNA, says that scorecard metrics must be shared and visible so employees can succeed.

Philips has realized significant benefits due to implementing a worldwide scorecard system. Employees embrace and use the scorecard to improve results. Management uses the scorecard to communicate strategy and align employees with strategy. The scorecard is also used at all levels of the organization. Philips has implemented a balanced scorecard and succeeded in focusing the company on a diverse set of business measures.

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Key Terms

• Benchmarking: Benchmarking is the process of improving performance by continuously identifying, understanding, and adapting outstanding practices and processes found inside and outside an organization.
  
  
• Key Performance Indicators (KPIs): KPIs are the base elements of work that correlate with the strategic goals of the organization, and obviously on achieving the KPIs, organizations can achieve its performance goals.
  
  
• Balanced Scorecard: The balanced scorecard for performance measurement is in reality a mixture of financial and non- financial measures that ultimately leads effective assessment of organizational performance.
  
  
• Strategic Objectives: Strategic objectives in balanced scorecard signifies what will the strategy achieve in that perspective.
  
  
• Measures: These are actions of how progress for a particular objective will be measured.
  
  
• Targets: It signifies the target value sought for each measure.
  
  
• Initiative: These indicate what will be done to facilitate the reaching of the target.