Chapter 1: Balanced Scorecard Concepts

CHAPTER 1: BALANCED SCORECARD CONCEPTS

Objectives
The objectives are: Describe why scorecards are useful. Explain the four traditional strategic perspectives. Describe two commonly used implementation models. Identify the hierarchical component structure. Identify potential sources for performance data.

Introduction
Balanced scorecard concepts originate from the need to complement financial, bottom line oriented systems with a way to incorporate and measure less concrete factors that affect a companys bottom line. This section briefly introduces the concept origination for balanced scorecard and the processes supported by Microsoft Dynamics AX Balances Scorecard. The topics in this section describe: How scorecards can help a business understand its results. Commonly used implementation models. The components that give a scorecard balance, and how they are related. Where to find sources of useful performance data.

Scenario
Company executives engage in a strategy development meeting in which they hope to create an outline of what they want to achieve over the course of the coming year, and identify the strategic objectives that will enable the company to reach its goals.

Balanced Scorecard Concepts

The need for a balanced scorecard has emerged from a growing recognition that financial measures alone are not enough to manage a modern organization. Commonly used retrospective financial reporting models focus exclusively on the final results, without considering the intangible assets that produced the results, such as:
Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 9

Microsoft Dynamics AX Balanced Scorecard

Employee skills Internal processes Customer loyalty

Balanced scorecards can complement financial reporting models by enabling a company to create a set of transaction-based performance objectives and measures for employees, organizational units, or the company as a whole. These objectives and measures help identify the skills and processes that are essential to maintain and improve future performance. Balanced scorecards typically measure performance across one or more strategic perspectives. The four traditional strategic perspectives are: Financial - The financial perspective must contain strategies that affect the companys bottom line, that is, strategies that lead to revenue growth, or increased market share or profitability. Customer - Financial success is closely linked to customer satisfaction. Satisfied customers mean repeat business, referrals, and new business and thereby contribute to the financial status of a company. Internal Business Processes - Customer satisfaction is achieved through the operational activities of the company. The objectives and measures for this perspective focus on maintaining and improving processes related to satisfying customers, which in turn satisfy shareholders. Learning and Growth - The ability, flexibility, and motivation of staff to support all of the financial results, customer satisfaction, and operational activities measured in the other three perspectives of the balanced scorecard.

Establish a Clear Purpose

The preparatory work involved in designing a balanced scorecard is by far the most demanding and time consuming aspect of the project, however, this work is important to the success of the project.

FIGURE 1.1 DETERMINING INTENT

A companys business strategy drives all processes in a balanced scorecard. Therefore, the strategy must be clear and contain concise and communicable objectives and targets. Otherwise the organization may find itself without a clear focus.
Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 10

Chapter 1: Balanced Scorecard Concepts

Strategic focus must be confined to a few key perspectives. Within each perspective, a company must define strategic objectives and make certain that everything is directly connected to the strategy, vision, and values.

Cause and Effect Relationship

The balanced scorecard focuses on cause and effect relationships in business strategies, beginning with long term financial objectives linked to customer focused initiatives, internal operational processes, and investments in employees and systems that are combined to increase economic performance.

FIGURE 1.2 CAUSE AND EFFECT RELATIONSHIP

The cause-and-effect relationship between the four perspectives demonstrates the need for employees to develop strategic abilities to effectively serve customers. This leads to increased productivity, and increased value to the shareholder.
Example: Cause and Effect Relationships Improving employee skills (Learning and Growth) leads to reduced cycle times (Internal Business) that, in turn, lead to improved customer satisfaction and loyalty (Customer), thereby increasing sales revenue and leading to an increase in return on employed capital (Financial).

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 11

Microsoft Dynamics AX Balanced Scorecard

Figure 1.3 Sample Performance Drivers shows how to translate high-level strategy into quantifiable objectives and measures.

FIGURE 1.3 SAMPLE PERFORMANCE DRIVERS

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 12

Chapter 1: Balanced Scorecard Concepts

Top-Down and Bottom-Up Implementation
The top-down implementation model suggests that a balanced scorecard is shaped and initiated by executive level decision makers, and then cascaded down through the organization. Employing a top-down model makes it easier to align employee activities and performance with high-level strategies. Commitment to the balanced scorecard project by top-level decision makers is important for the long-term success of the project.

FIGURE 1.4 TOP-DOWN IMPLEMENTATION MODEL

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 13

Microsoft Dynamics AX Balanced Scorecard

Some organizations choose to implement a scorecard from the bottom up. The bottom up model involves first building a scorecard for small units one at a time, such as a particular organizational units or department. Starting on a small scale often gives companies a chance to better determine how a scorecard best suits its strategy, and can thereby better position itself for a large scale implementation.

FIGURE 1.5 BOTTOM-UP IMPLEMENTATION MODEL

Figure 1.6 Sample Implementation Workflow provides sample steps toward implementing a balanced scorecard. Notice that many steps involve work that is performed outside Microsoft Dynamics AX Balanced Scorecard.

FIGURE 1.6 SAMPLE IMPLEMENTATION WORKFLOW

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 14

Chapter 1: Balanced Scorecard Concepts

Hierarchical Framework
The scorecard framework is hierarchical, meaning that all components are dependent on others and cannot exist independently. For example, users cannot create objectives without linking them to a scorecard, and they cannot create measurements without linking to the objectives. The balanced scorecard framework is based on the following hierarchy: Scorecards Provide the framework in which to assemble the components used to implement a strategy and measure progress. Scorecards can be created for the company as a whole (corporate), or for individual organization units or employees. Perspectives Provide balance to a scorecard by representing multidimensional strategic viewpoints. Objectives Represent key tasks, goals, or achievements required in order to realize the strategy outlined in a scorecard. Measurements Define how to measure progress toward objectives in a scorecard. Measurements allow users to specify and monitor important strategic contributors. Measurement journals or elements Define how performance values contained in a measurement are updated. Users can update performance values either manually by using a measurement journal, or automatically by using measurement elements.

FIGURE 1.7 HIERARCHICAL FRAMEWORK

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 15

Microsoft Dynamics AX Balanced Scorecard

The scorecard framework allows for the administration of any number of scorecards at the employee, department or organizational unit, or corporate levels.

Collecting Performance Data

Users gain great advantages when they use the balanced scorecard functionality to query information from other modules in the Microsoft Dynamics AX solution, such as: CRM and Questionnaire (Customer perspective) General ledger (Financial perspective) Production (Internal processes perspective) Human Resources (Learning & Growth perspective)

When users create a data link, the scorecard can also collect data from external data sources such as Microsoft Excel spreadsheets, and other applications and databases. The section titled Updating Performance Values describes how to create and use data links.

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 16

Chapter 1: Balanced Scorecard Concepts

Conclusion
Businesses in the information age need to consider the intangible factors that influence their bottom line. Balanced scorecards enable businesses to identify and measure intangible factors by illustrating the cause and effect relationships between diverse yet interconnected perspectives. The interdependent component hierarchy ensures that objectives support the end result, and that the right information is being measured. Regardless of whether a business uses a top down or bottom up implementation model, commitment from all parties at all levels is important for ensuring that the strategy is successfully realized.

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 17

Microsoft Dynamics AX Balanced Scorecard

Lab 1.1 Developing Strategy

Scenario: Company executives engage in a strategy development meeting during which they outline their high-level objectives for the coming year. Each objective is noted in a series of bullet points. The executives then identify the strategic perspectives to which each objective contributes. Take a few minutes to think about what your companys overall strategy might be for the coming year. Write down the strategy as a heading. Next, make a list of objectives that will enable the company to implement the strategy. Finally, distribute the objectives into the various perspectives that will enable the company to work toward the strategy in a balanced way.

Need a little help?

The four traditional perspectives are customer, financial, internal business processes, and learning and growth.

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 18

Chapter 1: Balanced Scorecard Concepts

Test Your Knowledge Balanced Scorecard Concepts

1. Name the two most common balanced scorecard implementation models and describe the benefits offered by each. 2. Briefly describe how the four traditional perspectives are interconnected.

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 19

Microsoft Dynamics AX Balanced Scorecard

Quick Interaction: Lessons Learned

Take a moment and write down three Key Points you have learned from this chapter: 1.

2.

3.

Microsoft Official Training Materials for Microsoft Dynamics Your use of this content is subject to your current services agreement Page 20