Category Archives: Risk Management

Implementing Balanced Scorecard Model for Employee Engagement

The Balanced Scorecard Model (BSC) was introduced by Kaplan & Norton in their book “The Balanced Scorecard” (1996). It is one of the more widely used management tools in large organizations.

One of the major strengths of the BSC model is how the key categories in the BSC model links to corporate missions and objectives. The key categories which are referred to as “perspectives” illustrated in the BSC model are:

Financial Perspective:

Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the “unbalanced” situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.

Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups

Internal Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not necessarily something that can be developed by outside consultants. My personal opinion on this matter is that the internal business process perspective is too important and that internal owners or/and teams take ownership of understanding the process.

Learning and Growth Perspective

This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people — the only repository of knowledge — are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Kaplan and Norton emphasize that ‘learning’ is more than ‘training’; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers, the engagement of the workers, the potential of cross-training that would create pockets of bench strength and switch hitters, and other employee specific programs that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call “high performance work systems.”

Innovation Perspective

This perspective was appended to the above four by Bain and Company.  It refers to the vitality of the organization and its culture to provide the appropriate framework to encourage innovation. Organizations have to innovate. Innovation is becoming the key distinctive element in great organizations, and high levels of innovation or innovative thinking are talent magnets.

Taking the perspectives a step further, Kaplan and Cooper instituted measures and targets associated with each of those targets. The measures are geared around what the objective is associated with each of the perspectives rather than a singular granule item. Thus, if the objective is to increase customer retention, an appropriate metric or set of metrics is around how to measure the objective and track success to it than defining a customer.

One of the underlying presumptions in this model is to ensure that the key elements around which objectives are defined are done so at a fairly detailed level and to the extent possible – defined so much so that an item does not have polymorphous connotations. In other words, there is and can be only a single source of truth associated with the key element. That preserves the integrity of the model prior to its application that would lead to the element branching out into a plethora of objectives associated with the element.

Objectives, Measures, Targets and Initiatives

 

Within each of the Balance Scorecard financial, customer, internal process, learning perspectives and innovation perspectives, the firm must define the following:

Strategic Objectives – what the strategy is to achieve in that perspective

Measures – how progress for that particular objective will be measured

Targets – the target value sought for each measure

Initiatives – what will be done to facilitate the reaching of the target?

As in models and analytics, the information that the model spouts could be rife with a cascade of metrics. Metrics are important but too many metrics associated with the perspectives may diffuse the ultimate end that the perspectives represent.

Hence, one has to exercise restraint and rigor in defining a few key metrics that are most relevant and roll up to corporate objectives. As an example, outlined below are examples of metrics associated with the perspectives:

Financial performance (revenues, earnings, return on capital, cash flow);

Customer value performance (market share, customer satisfaction measures, customer loyalty);

Internal business process performance (productivity rates, quality measures, timeliness);

Employee performance (morale, knowledge, turnover, use of best demonstrated practices);

Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index);

To construct and implement a Balanced Scorecard, managers should:

  • Articulate the business’s vision and strategy;
  • Identify the performance categories that best link the business’s vision and strategy to its results (e.g., financial performance, operations, innovation, and employee performance);
  • Establish objectives that support the business’s vision and strategy;
  • Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets;
  • Ensure company wide acceptance of the measures;
  • Create appropriate budgeting, tracking, communication, and reward systems;
  • Collect and analyze performance data and compare actual results with desired performance;
  • Take action to close unfavorable gaps.

Source : http://www.ascendantsmg.com/blog/index.cfm/2011/6/1/Balanced-Scorecard-Strategy-Map-Templates-and-Examples

The link above contains a number of templates and examples that you may find helpful.

I have discussed organization architecture and employee engagement in our previous blogs. The BSC is a tool to encourage engagement while ensuring a tight architecture to further organizational goals. You may forget that as an employee, you occupy an important place in the ecosystem; the forgetting does not speak to your disenchantment toward the job, neither to your disinclination toward the uber-goals of the organization. The forgetting really speaks to potentially a lack of credible leadership that has not taken the appropriate efforts to engage the organization by pushing this structure that forces transparency. The BSC is one such articulate model that could be used, even at its crudest form factor, to get employees informed and engaged.

Free, Freemium, Pay-to_Play: Business Model Implications

free“Free” has become ubiquitous in the digital age. It has been touted widely as the only mechanism which is a necessary condition or an iron law for providing digital products and services across the Internet. More exactly, there is an inexorable pressure upon price points on digital products whose marginal cost of production is minimal. So business models are cropping up and encouraging the consumers to chart an “Internet Consumer Bill of Rights”: the business models painfully and reluctantly argue that the consumers’ personal information is being exchanged to get these “free” products which can be monetized by advertisements and the like. However, these toutings and exclamations by the pundits of “Free” have adversely impacted many industries that have been forced to go along with it, absent any immediate choice in that matter. Read the rest of this entry

Risk Management and Finance

If you are in finance, you are a risk manager. Say what? Risk management! Imagine being the hub in a spoke of functional areas, each of which is embedded with a risk pattern that can vary over time. A sound finance manager would be someone who would be best able to keep pulse, and be able to support the decisions that can contain the risk. Thus, value management becomes critical: Weighing the consequence of a decision against the risk that the decision poses. Not cost management, but value management. And to make value management more concrete, we turn to cash impact or rather – the discounted value of future stream of cash that may or may not be a consequent to a decision. Companies carry risks. If not, a company will not offer any premiums in value to the market. They create competitive advantage – defined as sorting a sustained growth in free cash flow as the key metric that becomes the separator.

John Kay, an eminent strategist, had identified four sources of competitive advantage: Organization Architecture and Culture, Reputation, Innovation and Strategic Assets. All of these are inextricably intertwined, and must be aligned to service value in the company. The business value approach underpins the interrelationships best. And in so doing, scenario planning emerges as a sound machination to manage risks. Understanding the profit impact of a strategy, and the capability/initiative tie-in is one of the most crucial conversations that a good finance manager could encourage in a company. Product, market and internal capabilities become the anchor points in evolving discussions. Scenario planning thus emerges in context of trends and uncertainties: a trend in patterns may open up possibilities, the latter being in the domain of uncertainty.

There are multiple methods one could use in building scenarios and engaging in fruitful risk assessment.
1.Sensitivity Assessment: Evaluate decisions in the context of the strategy’s reliance on the resilience of business conditions. Assess the various conditions in a scenario or mutually exclusive scenarios, assess a probabilistic guesstimate on success factors, and then offer simple solutions. This assessment tends to be heuristic oriented and excellent when one is dealing with few specific decisions to be made. There is an elevated sense of clarity with regard to the business conditions that may present itself. And this is most commonly used, but does not thwart the more realistic conditions where clarity is obfuscated and muddy.
2.Strategy Evaluation: Use scenarios to test a strategy by throwing a layer of interaction complexity. To the extent you can disaggregate the complexity, the evaluation of a strategy is better tenable. But once again, disaggregation has its downsides. We don’t operate in a vacuum. It is the aggregation, and negotiating through this aggregation effectively is where the real value is. You may have heard of the Mckinsey MECE (Mutually Exclusive; Comprehensively Exhaustive) methodology where strategic thrusts are disaggregated and contained within a narrow framework. The idea is that if one does that enough, one has an untrammeled confidence in choosing one initiative over another. That is true again in some cases, but my belief is that the world operates at a more synthetic level than pure analytic. We resort to analytics since it is too damned hard to synthesize, and be able to agree on an optimal solution. I am not creaming analytics; I am only suggesting that there is some possibility that a false hypothesis is accepted and a true one rejected. Thus analytics is an important tool, but must be weighed along with the synthetic tradition.
3.Synthetic Development: By far the most interesting and perhaps the most controversial with glint of academic and theoretical monstrosities included – this represents developing and broadcasting all scenarios equally weighed, and grouping interaction of scenarios. Thus, if introducing a multi-million dollar initiative in untested waters is a decision you have to weigh, one must go through the first two methods, and then review the final outcome against peripheral factors that were not introduced initially. A simple statement or realization like – The competition for Southwest is the Greyhound bus – could significantly alter the expanse of the strategy.

If you think of the new world of finance being nothing more than crunching numbers … stop and think again. Yes …crunching those numbers play a big part, less a cause than an effect of the mental model that you appropriate in this prized profession.

Inspirational speech – stay hungry, stay foolish

This is an inspirational speech. A must see for anyone who wants to follow their heart and believe that they can make a difference. Enough said. Enjoy.