Performance management programs are used to align an organization with its strategic goals and tactical objectives. At the center of any performance management program is a framework on which the various alignment programs (measurement, goal setting, compensation, and investments) are focused. Historically, financial frameworks such as ROI or the annual budget have dominated. More recently, new performance management frameworks have evolved around quality, shareholder value, customer satisfaction, business processes, and core competencies. While each of these perspectives is important to the success of a business, each represents only a small part of a broader picture. To manage only one of these perspectives is to invite sub-optimization. The only logical focus for a performance management program is strategy. Leveraging the concept of the Balanced Scorecard the SAP Strategic Enterprise Management process puts strategy at the center to create strategic focus and strategic alignment and to enable organizations to translate strategy into action.

The Balanced Scorecard approach begins with the premise that financial measures are not sufficient to manage an organization. Financial measures tell the story of past events. They are not helpful to guide the creation of future value through investments in customers, suppliers, employees, technology, or innovation. The Balanced Scorecard complements measures of past performance (lagging indicators) with measures of the drivers of future performance (leading indicators). The objectives and measures of the scorecard are derived from an organization’s vision and strategy. These objectives and measures provide a view of an organization’s performance from four perspectives.

Source: Robert Kaplan and David Norton, "The Balanced Scorecard"

Figure 2: The Balanced Scorecard: Four Perspectives

1. Financial – the strategy for growth, profitability, and risk viewed from the perspective of the shareholder.
2. Customer – the strategy for creating value and differentiation from the perspective of the customer.
3. Internal Business Processes – the strategic priorities for various business processes, which create customer and shareholder satisfaction.
4. Learning and Growth – the priorities to create a climate that supports organization change, innovation, and growth.

Using the Balanced Scorecard, corporate executives can now measure how their business units create value for current and future customers. They can also learn what investments in people, systems, and procedures are necessary to improve future performance. While retaining an interest in financial performance, the Balanced Scorecard clearly reveals the drivers of superior, long-term value and competitive performance. The Balanced Scorecard tells the story of the strategy.

Once completed, a BSC will become the focus of organization change. People’s goals, investments, and activities should all be linked to the objectives and measures of the scorecard. It is essential, then, that this scorecard be designed in a way that accurately reflects the organization’s strategy. The design of a good Balanced Scorecard is based on three principles that link the measures to strategy:

1. Cause-and-Effect Relationships. A strategy is a set of hypotheses about cause and effect. A properly constructed scorecard should tell the story of the business unit’s strategy through a sequence of cause-and-effect relationships. The measurement system should make the relationships (hypotheses) among objectives explicit so that they can be managed and validated. Every objective selected for a Balanced Scorecard should be part of a chain of cause-and-effect relationships that communicates the meaning of the business unit’s strategy to the organization.
2. Outcomes and Performance Drivers. All Balanced Scorecards use certain generic measures. These generic measures (such as profitability, market share, and customer satisfaction) tend to be "outcome" measures, which reflect goals common across many strategies and industries. The performance drivers, the lead indicators, are the ones that tend to be unique for a particular strategy. A good Balanced Scorecard should have an appropriate mix of outcomes (lagging indicators) and performance drivers (leading indicators) that have been customized to the business unit’s strategy.
3. Linkage to Financials. With the proliferation of change programs under way in most organizations today, it is easy to become preoccupied with goals (quality, customer satisfaction, innovation, and the like) for their own sake. While these goals can lead to improved business-unit performance, they may not achieve their purpose if they are taken as ends in themselves. A Balanced Scorecard must retain a strong emphasis on outcomes, especially financial ones. Ultimately, causal paths from all the measures on a scorecard should be linked to financial objectives.

These principles can be illustrated in a case study. Pioneer Petroleum (a pseudonym for an actual company), a large integrated refining and marketing organization, was attempting to reposition itself. Traditionally, Pioneer relied exclusively on the sale of petroleum. While viewed by many as a commodity, Pioneer attempted to differentiate itself through quality and its trusted national brand image. Unfortunately, all other major national competitors had similar brand images and, hence, none realized an advantage with this strategy. Pioneer, therefore, attempted to shift from this undifferentiated, commodity-like strategy to a more consumer-driven focus. Pioneer would introduce convenience stores where petroleum was only a part of the business. To succeed with this approach, major shifts in culture and strategy would be required. Figure 3 illustrates the strategy that was deployed and the measures that were used to manage it.

Source: The Balanced Scorecard Collaborative, Inc.

Figure 3: Pioneer Petroleum Strategy Template

Financial Perspective. Every strategy has an over-arching financial objective that defines the long-term financial success of the organization. For some organizations this might be shareholder value. For others, it might be cash flow. For pioneer, a capital-intensive business, the highest level objective was to improve Return on Capital Employed (ROCE). A second financial objective, used more for short-term guidance, was profitability relative to competition. This allowed Pioneer to eliminate the distortions that price fluctuations had on its performance.

The financial strategy had two dimensions:

1. Revenue Growth Strategy – to grow and improve the quality of revenue by understanding customer needs and differentiating itself accordingly.
2. Productivity Strategy – to maximize the use of existing assets and integrate the business to reduce total cost.

The growth strategy had two components. First, new sources of revenue would be created by adding convenience stores around the gasoline business (Non-gasoline Revenue & Margin). Second, by understanding customer segments, Pioneer would appeal to customers who prefer premium grades of gasoline where the margins were higher (Volume vs. Industry, Premium Ratio). The productivity strategy also had two components. First, it focused on optimizing the use of existing assets (Cash Flow) and, second, on reducing operating costs in each area of the supply chain to industry-leading levels (Cash Expense vs. Competition).

Customer Perspective. It’s one thing to set financial objectives for growth and diversification. It’s another to make it happen. Pioneer began by carefully segmenting its customers to determine who would be attracted by a convenience store that sold gasoline, as well as those customers who tended toward premium brands of gasoline. Their analysis concluded that these target customers would be attracted by a combination of speed, friendly service, and clean facilities. A measurement program was set up to monitor performance on these criteria through the eyes of the customer (Customer Feedback, Mystery Shopper). Much of this buying experience was delivered by the dealers who ran the convenience stores/service stations. Thus, a similar effort was put in place to monitor dealer Satisfaction (Dealer Survey) and effectiveness (Dealer Profit Growth).

Internal Process Perspective. Organizations execute strategy through sets of activities. These activities can be grouped into "business processes" that describe the way work is conducted. While thousands of activities must take place in every organization, only a few are truly strategic. The design of a BSC requires the identification of those critical few activities that affect customer satisfaction and shareholder satisfaction. At Pioneer these activities fell into four categories. The Innovation Process ("Build the Franchise") focused on the creation of non-gasoline products and services. The strategic measure was New Program Introduction Rate. The Customer Management Process ("Increase Customer Value") focused on improving customer understanding (Target Segment Market Share) and improving the quality of dealers who ultimately delivered the value proposition to customers (Dealer Quality Rating). The Supply Chain Process ("Operational Excellence") focused on drivers of asset utilization (Unplanned Downtime, Inventory Levels) as well as cost drivers (Activity Costs vs. Competition, Quality). The Regulatory Processes ("Good Neighbor") focused on environmental and safety performance. In addition to being a good neighbor, these factors also had a significant link to productivity.

Learning and Growth Perspective. The ability to change the way work is done within the internal business processes requires an infrastructure that enables change. This includes the skills of the workforce, the tools and technology they have to work with, and the climate that motivates and empowers people. Pioneer concentrated first on the alignment of its workforce, making sure that employees understood the strategy (Employee Feedback) and were personally aligned with it (Personal Scorecards). Competency development focused on functional excellence, and leadership skills (The Strategic Job Coverage Ratio) measured the gap between what was needed and what existed. The many process improvements required by the new strategies necessitated a new foundation of information technologies. The SAP suite of ERP systems was the strategic solution selected by Pioneer. (Monitoring the Installation vs. Plan was the strategic measure.)

Source: The Balanced Scorecard Collaborative, Inc.

Figure 4: Pioneer Petroleum Balanced Scorecard

The Pioneer Balanced Scorecard is summarized in Figure 4. Over 20 measures are identified. Some ask: "Is it possible to remember 20 measures?" The answer is probably "No." The more relevant question, however, is: "Is it possible to remember one strategy?" The answer is probably "Yes." The logic that is displayed in Figure 3 translates Pioneer’s strategy into a few simple cause-and-effect relationships or hypotheses. There is a strategy for growth and a strategy for productivity. The growth strategy requires a new relationship with the customer, expanding Pioneer’s share of the "convenience" purchase beyond gasoline. The productivity strategy is focused on asset utilization and expense management. The details of these strategies commit easily to memory, and the 20 measures seem obvious.

When constructed in this manner, the scorecard becomes an effective way to communicate a strategy to an organization so that it can be understood and acted upon. It also provides the specificity to permit detailed targets, budgets, and initiatives to be planned and managed. Finally, it provides the basis for an executive team to monitor the strategy and to test the hypotheses in real-time.

Information technology that is capable of supporting an effective Strategic Enterprise Management system must be able to develop, maintain, communicate, and operationalize the Balanced Scorecard. This requires the the ability to:

• Enable smooth communication across the entire organization during the collaborative development and maintenance of corporate, business unit, and personal Balanced Scorecards.

• Leverage industry-specific best practice through ready-to-use key performance indicator (KPI) catalogs and cause-and-effect templates.

• Integrate BSCs fully into the Strategic Enterprise Management process to support BSC-based business planning and simulation, performance monitoring, and stakeholder communication.

• Link the Balanced Scorecard with the business execution system to speed up translation of strategy into action.

SAP’s Balanced Scorecard solution is fully integrated into the SAP Strategic Enterprise Management product (SAP SEM) and fully supports these capabilities. SAP SEM is a set of analytical applications that leverages investments in ERP systems (such as SAP R/3) and enables an organization to move to the next level in enterprise management excellence. SAP SEM allows a company to constantly increase value for its stakeholders by translating strategy into action within its day-to-day business and by constantly adapting strategy with real-time feedback from the transaction level. It supports the development and maintenance process of a Balanced Scorecard through the following functionality:

• Definition of strategic objectives and initiatives by the four perspectives of the Balanced Scorecard.

• Definition of an influence diagram (cause-and-effect linkage) to visualize dependencies among strategic objectives on a Balanced Scorecard. Industry standard templates provide a starting point for an organization to begin modeling its strategy.

• Definition of strategic measures for strategic objectives. The selection of measures is facilitated by the availability of industry-specific KPI catalogs. These catalogs can be extended through individually defined KPIs through the use of the KPI Builder. KPIs in a Balanced Scorecard are automatically populated with the appropriate data from ERP systems or external sources.

• Definition of multi-scorecard dependencies and linkages. Beginning with an already existing scorecard, related scorecards can be defined consistently across organizational levels (e.g., a Product Line BSC consistent with the Business Unit BSC) and dimensions (e.g., a shared service center BSC consistent with the BSCs of the supported operating units).

• Target setting for KPIs integrated across various levels and dimensions of the organization. The definition of targets is directly integrated with enterprise planning, resource allocation and the HR planning process. For example, the evaluation of competency gaps and training requirements can be directly input as planning assumptions in Web-based planning sheets together with other plan values relevant for enterprise planning such as personal targets, sales or activity estimates. This information on skills, training requirements and other resource gaps can be consolidated into e.g HR development and investment plans. Ultimately, final plan values are transferred back to the ERP, HR development and payroll systems.

• Scenario-based planning and simulation.

Once the Balanced Scorecard is developed and in place, ongoing performance monitoring is supported through:

• Single and multiple Balanced Scorecards displaying objectives and measures with targets and actual results for review and assessment by managers and staff. Each scorecard includes the capability for interactive simulation to support performance review and decision-making sessions and the ongoing definition of new initiatives and programs needed to achieve strategic targets.

• The Management Cockpit – an innovative approach to management meetings using the concept of an "Enterprise War Room." In a Management Cockpit, the Balanced Scorecard is displayed with appropriate visuals and graphics on the walls of an ergonomically designed meeting room. Using the "Flight Deck" of the Management Cockpit, interactive measurement drill-downs and simulation capabilities support performance assessment and decision making.

• Balanced Scorecards with the relevant KPI targets and actuals for important stakeholder groups. The scorecards can be accessed through a Web browser or used within the Management Cockpit room to support management, stakeholder, and analyst meetings.