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Posts Tagged ‘Balanced Scorecard’

Managing bank performance with the Balanced Scorecard

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bank performance

Every day, there are millions of cash transactions taking place around us. The entities that allow for these cash transactions to be conducted in secure conditions are commercial banks. The reason that banks can provide this security is not that they are blessed with the necessary infrastructure to do so, but because we, as people, gradually discovered the need for such an infrastructure.

When we think of commercial banks, we envision money-making machines, and some people use this expression figuratively. This may arise from the popular misconception that banks outlive entire systems because they print out money whenever they feel close to bankruptcy.

Rockwater – Improving Customer Service through the Balanced Scorecard

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rockwater

For Rockwater Energy Solutions, the 1980s represented a rough time, with cutthroat competitors wanting to gain an edge on one side and them struggling to reach the finish line among the first, on the other. Nevertheless, despite, or maybe due to this difficult period, Rockwater was able to outgrow its beginnings as a small, low-tech deep-sea repair and construction diving company.

By 1993, Rockwater Energy Solutions, a Brown & Root/Halliburton subsidiary, was a global leader in underwater engineering and construction.

However, before reaching worldwide success, the company had to first face a new competitive landscape, in which the leading oil companies decided that it was more profitable to establish long term partnerships with their suppliers, instead of choosing them based on low-price competition. Because of these new expectations Rockwater needed to shift their focus towards building closer relationships with their customers, and towards strengthening customer relationships.

They decided to use a Balanced Scorecard, so that they could translate their strategy into definite goals and actions. The company’s senior management team developed a new vision statement that placed emphasis on customer relationships:

“As our customers’ preferred provider, we shall be the industry leader in providing the highest standards of safety and quality to our clients.”

They also developed five strategic elements to support this vision:

  • Services that surpass customers’ expectations and needs;
  • High levels of customer satisfaction;
  • Continuous improvement of safety standards, costs and effectiveness;
  • High-quality employees;
  • Realization of shareholder expectations.

These five elements were then developed into four different perspectives:

  • Financial;
  • Customer;
  • Internal;
  • Growth.

Rockwater’s senior management team adapted each perspective to the company’s profile, thus forming the Rockwater Balanced Scorecard set of performance measures.

  1. The Financial Perspective included three measurements that were meant for:
  • return-on-capital-employed;
  • long and short-term shareholder value;
  • cash flow monitored short-term returns.

These three measurements revealed Rockwater’s intentions to predict and manage longer-term performance.

success

  1. The Customer Perspective was based on the company’s two types of customers:
  • Tier I customers – oil companies who wanted to build long-term relationships with suppliers. For this type of customers, they employed an independent organization to conduct monthly and annual customer satisfaction surveys.
  • Tier II customers – oil companies that chose suppliers solely on the basis of price. In order to attract this second type of customers, Rockwater used an in-depth price index.

This approach took into consideration both the necessity of staying cost-competitive, and the need to deliver value to those customers who were looking for a more stable relationship.

  1. The Internal Perspective was concerned with defining the life cycle of a project from launch – when a customer need was recognized, to completion – when the customer need had been satisfied. To ensure that the internal processes were optimal, the team also developed a series of measures to evaluate five phases in each cycle: identify, win, prepare, perform and close out.

If in the beginning, the company placed more importance on performance for each functional department, now the new focus revealed a shift towards measures that integrated key business processes.

By refining the metrics used for the identification stage, the management team acknowledged their wish to have a metric that would make all members of the organization understand the importance of building relationships with and satisfying customers.

  1. The Growth Perspective included product and service innovation as well as improvement in financial, customer and internal process performance. It was comprised of two measurements:
  • percentage increase in revenue from new services – meant to measure the effectiveness of product and service innovation;
  • index of a range of improvements in safety and repeat business – which measured financial, customer and internal processes.

To be successful in these two areas, Rockwater realized that they needed empowered and motivated employees. A staff survey was conducted, which measured attitudes, along with metrics that tracked the number of employee-submitted suggestions; on top of this, they also made use of a revenue-per-employee measurement, which quantified the outcomes of employee commitment and training programs.

Ultimately, the Balanced Scorecard has not only helped Rockwater Energy Solutions acknowledge the importance of customer feedback metrics, but it has also transformed the company into a high-value, service and results-driven organization, which caters both to long-term customers, as well as to the short-term, price-concerned ones.

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Improving Performance Measurement in Supply Chains

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supply chain  

Performance measurement has been a topic of discussion in the last decades for both academicians and practitioners. In the 1990s, performance measurement suffered a huge transformation soon after some movements from academia and corporations commenced analyzing the existing lack of an effective way to measure performance, pushing for a new approach to evaluate organizational achievements.

The supply chain in the 90s

Since then, academics and practitioners have managed to develop better performance measurement methods, which brought a relevant revolution for performance measurement theory and practice.

Among these, the stand out was the Balanced Scorecard – the BSC, a strategic performance measurement system that allowed you to link strategic objectives with their respective measurements, by way of four main perspectives – Learning & Growth, Business Process, Customers, and Financial, creating a clear rationale for a bottom-up cause-and-effect relationship.

In the same vein as the growth of networking for businesses in the 1990s, when the concept of developed supply chains emerged, companies had to start measuring not only their exclusive threshold operations, but also their extensive downstream and upstream processes, including those with suppliers, retailers, and final customers.

In order to fulfill this objective, new approaches of performance measurement systems for supply chains began being discussed and implemented, which also included updating those already used for organizational performance measurements.

Modern-day supply chain challenges

As it is now widely-known, the COVID-19 pandemic has had a massive impact on supply chains. Disruptions have occurred in several industries, from healthcare and manufacturing, to finances and services. This has painfully highlighted that our supply chains were not resilient enough to avoid such disruptions.

Many factors may have influenced these supply chains’ vulnerabilities, including the supply chain strategy design and its planning and control. It is more than likely that performance measurement systems in these cases were not able to provide sufficient visibility on how deficient the supply chains’ strategies were in terms of their reaction time resilience to the threats generated by the pandemic’s effects.

Despite the visibility and transparency that the digital technologies of the Industry 4.0 age (e.g. Internet of Things, Blockchain) may bring to supply chain processes – technologies that focus on managing large amounts of data (i.e. the use of Big Data Analytics approach), Performance Measurement must nonetheless undergo a breakthrough transformation, as the environment around it has experienced sudden and significant changes.

The post-pandemic period requires new ways of measuring performance in supply chains. Digital technologies may certainly offer assistance, effectively supporting this transformation, but beyond that, performance measurement must be redesigned with a strategic risk-based approach that fundamentally transforms all of the measurement perspectives that supply chains have.

It must provide a clear view of how resilient a supply chain is in the face of an imminent threat, being able to highlight the pre-, current, and post-disruption trend status.

Moreover, it should be able to successfully support a supply chain’s decision-makers when they want to enact contingency actions, especially those concerning the main supply chain processes, such as sourcing, manufacturing, and delivery.

supply chain  

For instance, the performance measurement system must contain lead and lag indicators, depicting how a supplier’s base and retailers are at the moment of imminent disruption and how they will be able to jointly respond to the disruption’s effects.

Key Performance Indicators – KPIs, such as inventory levels in the downstream, upstream supply chain flows, readiness and effectiveness of joint contingency plans with suppliers and retailers, and level of disruption in supply chain entities may be useful indicators to effectively measure supply chain response in unexpected situations.

Furthermore, manufacturing and distribution processes must be measured in terms of their responsiveness to emergency situations (e.g. # Time to deliver unplanned orders, flexibility of mix and volume production to sudden demand variations, flexibility of goods delivery route changes).

In that sense, demand has to be properly evaluated and understood, considering aspects of current and upcoming customers’ behaviors amid the potentially rupturing event (e.g. KPIs as % Demand variation, $ Estimated demand).

The measurement of financial capacity is also paramount to evaluating not only how capable the organization is in terms of managing cash-flow and investments to keep its supply chain going, but also how performant its supply chain is in terms of operational costs and revenue contribution.

In order to evaluate the financial impact of disruptive situations to the supply chain, KPIs such as # Cash-to-cash cycle time and $ Value-added margin during the critical period, % Return on investments made for contingency initiatives and $ Extra operational costs may help supply chain specialists develop a better decision-making process.

Final thoughts

With all things considered, I believe that ultimately, the most important aspect, beyond simply adopting KPIs, is the supply chain leadership’s willingness to consider adopting a robust framework around which they can structure their performance measurement system during an exceptional period.

It has to come from a strategic point of view, with a clear cause-and-effect relationship outlined. For this purpose, the well-known frameworks such as the BSC and Performance Prism may be considered, with the due adaptations required for the new business environment.

The reality of it all is that this pandemic has generated an unprecedented level of deliberation and consideration amongst academics & practitioners alike. Performance measurement is no longer just “nice-to-have”. It must be a topic of deep consideration for the supply chain audience, in order to pursue a more effective management style that can withstand sudden and impactful events, such as 2020’s COVID-19.


About the author

Guilherme F. Frederico is a Professor of Operations, Supply Chain and Project Management at the Federal University of Paraná – UFPR – School of Management, Curitiba, Brazil. He is also Professor and Researcher at Information Management MSc, Ph.D. programs, and a Master’s Program in Business Administration in this same university.

He holds a Ph.D. in Industrial Engineering from the Federal University of São Carlos – UFSCar. His B.Eng (Civil Engineering) and MSc in Industrial Engineering were obtained from São Paulo State University – UNESP. Prof. Frederico has been working in collaboration with the Centre for Supply Chain Improvement from the University of Derby – UK as a Visiting Professor and affiliated Researcher.

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