• Explaining to the Executive Committee the need for a top level BSC to drive the execution of the Agency’s strategic priorities
• Influencing the CEO’s office to replace their CEO-centered process with one owned by the whole Executive Committee
• Engaging new Directors in the process who had not been part of the initial design
• Managing continued attack on the project from other Directors
• Clarifying users of the differences between priorities and the metrics used to monitor progress against those priorities. Also, persuading users to manage the objectives, not the numbers
3.4 BSC at MTETC
The MT Education and Training Center (MTETC) in Malaysia launched the BSC initiative in 2000, but rather than implementing it because the unit wanted it, the division was selected to be involved in this pilot initiative. MTETC is an outfit that, at the time of the BSC initiative was operating as a cost center, and once the initiative was started there was a debate whether the division should continue to operate as a cost center or become a profit center. Mr. Ahmad, CEO of the Malaysian Telco group at the time needed to reexamine MTETC’s direction, and it was felt that the BSC could help MTETC with this.
The BSC was also seen as a key element in carrying the directive from the parent company that all divisions and subsidiaries should develop a performance-oriented culture. A similar BSC initiative had been put previously on hold at MTETC during a change of the General Manager, who did not share his predecessor’s interest in the BSC. In 2001, and under a new General Manager, Mr. Yunus, the BSC initiative was brought back. Mr Yunus was committed towards making MTETC a profit center, and he was confident that MTETC could generate more business and revenue instead of serving as a training center. The BSC was seen as a useful tool to track performance at MTETC and help the division become a profit center.
MTETC’s corporate planners presented the BSC initiative in 2002, and in order to cascade MTETC’s goals, each manager was called to discuss with the CEO their Key Performance Indicators (KPI). Slight modifications were also done to the original four perspectives of the BSC in order to meet MTETC’s needs.
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The MTETC BSC team worked closely with the Corporate Strategic Planning department at the group level, but as expected, a number of issues arose once implementation started, especially when trying to develop indicators that would help the division migrate from being a cost center to a profit center. Given its history, units within MTETC never developed the habit or the information system to keep track of their expenses and income. A proper transfer pricing formula for inter-unit activities had not been developed, and at times, the data available at the units and the MTETC’s finance department did not match. This became an issue when trying to link individual performance with outcome, since it was almost impossible to attribute outcomes to individuals.
The team leading the BSC focused in developing KPI’s for financial issues, and the main reason was because the team found it necessary to orientate MTETC’s managers towards more accountability for bottom-line measures, something that historically had never been an issue for managers. Developing non-financial measures was even more difficult, according to the team.
Interviews with tier 2 managers took place in 2002 to examine their views on the BSC initiative being rolled out. They needed to measure the level of involvement and commitment of these managers since they were the ones heading the main functional units and they would be responsible for the implementation at those units. When the interviews were conducted, the BSC targets had not been cascaded to tier 3 managers yet.
The interviews helped to make some important observations that even today are still a problem when trying to implement a BSC.
1. The BSC was seen as something good. However, when asked about their views on the specific “good” things of the BSC, it became obvious that most managers did not have a clear understanding of what the BSC was about, and the majority of managers only understood that it was a mechanism to develop KPI’s.
2. The majority of managers saw the BSC as another fad that MTETC was trying without actually being serious about its implementation. One of the managers mentioned that MT had a habit of launching all kinds of new management initiatives, but never went beyond the launching ceremony.
3. The BSC initiative was seen as an arbitrary and top-down process. It was perceived that managers were just given a set of targets with little discussion related to the
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viability or where those targets came from.4. A common concern was a misalignment between the performance appraisal system that was under the group’s Human Resources function and the BSC performance measures being handled by MTETC’s Corporate Planning Unit. The HRM department assessed performance based on behaviors related to a set of competencies.
Performance outcome was not included in the appraisal. Employees recognized that ultimately, their salaries and bonuses depended on how they do in the performance appraisal and not so much in the goals that were being introduced. This lack of linkage between the performance appraisal system and the BSC initiative resulted in lower level employees not feeling accountable for the performance measures included in the BSC. Thus, the expected result of making employees more profit oriented and accountable to the BSC targets was not achieved
MTETC’s case highlights some important pitfalls when implementing a BSC. In this case the BSC was used arbitrarily and in a top-down manner, which led to skepticism and even passive resistance to the initiative. This was due to a lack of buy-in and commitment and also a lack of understanding of the initiative itself, which is something Kaplan and Norton warned in their original paper. They put a lot of emphasis on cascading the BSC through an iterative process that focuses on participation and commitment of all the areas that are going to be affected by it. The lack of participation from managers in MTETC BSC initiative is an indication that this was not done effectively.
Additionally, something else that in retrospective was missing in the implementation was a strategy map for MTETC. Even though the goal of making MTETC a profit center was clear to all managers interviewed, there was no consensus on how MTETC was planning to achieve this goal. MTETC’s case also shows that measuring performance was difficult without the proper information systems in place.
Lastly, MTETC’s case shows what happens when an organization seeks to adopt the management fad of the day without really assessing the needs of the organization. The managers interviewed were evidence that MTETC was suffering from this problem. They simply got tired of trying new management techniques, and this was also true for the BSC, especially when they were excluded in the decision to adopt it in the first place.
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3.5 More examples of the BSCThe BSC is currently one of the most widely used management techniques for measurement and management of enterprise business performance, and it is used by more than70% of the Fortune 500 companies. Additionally, despite its difficulties of implementation, there are numerous examples of implementation worldwide that have proven its effectiveness:
• Mobil Oil (North America) increased its cash flow by $1.2 billion and return on investment increased from 6% to 16% in three years after effectively implementing the BSC. Within 2 years of its implementation, Mobil moved from last place in industry profitability to first place, and it held that place for 5 years before it was acquired by Exxon.
• UPS also increased revenues by 9% and net income by 33% within two years of implementing the BSC.
• Three years after implementing the BSC, Wells Fargo Bank increased its customer base by 450% and was rated the Best Online Bank. Also, as a result of the BSC implementation, the company added 750,000 online customers over a 2-year period and decreased its costs per customer by 22%
• Saatchi and Saatchi, the world famous advertising firm achieved a five-fold increase in market capitalization to $2.5 billion within 3 years of implementing the BSC and iIt was ranked as the #1 creative agency 2 years in a row. The CEO was quoted as saying that the BSC helped the company manage human capital and helped transform the agency into being action-oriented and client-focused.
• Siemens IC Mobile increased sales 76% to 9 billion Euros within 1 year of BSC implementation.
Clearly these results are not due solely to the adoption of the BSC. The success of these stories is also associated to the proper systems in place to facilitate its implementation, clear visions and goals, engaged management team and more importantly, the proper implementation of the BSC following the right guidelines and based on what the company really needs. The BSC can be a powerful tool, as some of these examples have shown, but it can also be destined to failure if the inherent difficulties are not identified and overcome, as with the MTETC case.
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Despite its limitations and difficulties, the BSC remains a popular management tool in business. Increasingly, the BSC is also being used by non-profit, government and state-owned enterprises to improve performance and achieve strategic alignment and focus. In 1997, Dubai began designing an automated BSC system to monitor the performance of its government departments. The PRC, Thailand, Malaysia and Fiji are also some governments using the BSC to monitor and improve performance. It is also a popular management tool for public sector enterprises in the US, Australia and the United Kingdom.
• The US Postal Service (USPS) first implemented the BSC around 1996. Since then, USPS has increased on time delivery of mail by 20% and productivity by almost 3%
per year, while at the same time increasing employee and customer satisfaction.
• The Defense Accounting and Finance Service (DFAS) of the US Department of Defense implemented the first BSC in 2001. Since that year, DFAS has been able to increase customer satisfaction by 2% per year, increase employee satisfaction by 14%, cut its federal budget allocation by half, and more importantly, align and clarify its mission to its customer, employees and managers.
As stated before, these results are not due solely to the BSC implementation, but they are evidence that the BSC can be an effective tool to help organizations achieve their strategic goals more easily if implemented correctly.
4. PERSONAL EXPERIENCE WITH THE BSC 4.1 The Case of HSBC Latin America. Design and Implementation
HSBC Holdings plc is a global financial services company with headquarters in London, UK.
It is currently the sixth largest banking and financial services group and it has around 8,000 offices worldwide in territories across Africa, Asia, Europe, North and Latin America. In 2006, HSBC acquired Grupo Banistmo, a Panamanian banking group that owned Panama’s leading bank, and 106 other branches in Costa Rica, Honduras, Colombia and Nicaragua, as well as 56.2% of the holding company that owned Bancosal, the third largest bank in El Salvador at the time. The next year, HSBC extended two tender offers to acquire the remaining shares in that bank. In 2007, the bank changed its name to HSBC El Salvador.
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HSBC El Salvador became part of HSBC Latam (Latin America), and thus, became involved in all the initiatives of this unit. One of those initiatives was the implementation of a Balanced Scorecard to manage performance, and this initiative would include all countries in HSBC Latam. It would be the first time that many units hear of the Balanced Scorecard and many banks didn’t have the necessary systems in place for reporting according to the BSC methodology. All these elements posed a challenge for the project teams. This chapter chronicles some of the main difficulties faced during the implementation of the BSC in El Salvador, the successes and the opportunities for improvements.
The first BSC was launched in 2007 with support from Mexico, and the aim was to start using the BSC methodology in all local branches as the main input for the employees’ performance evaluation by next year. In retrospective, and after performing extensive research for this document, it is evident that some of the first steps taken during the implementation could be improved in order to follow the original design concept of the BSC posed by Kaplan and Norton.
The process suffered from many of the drawbacks that have already been highlighted in the previous chapter, and this made the process even more difficult, considering HSBC Latam was already dealing with project teams that were miles away and they couldn’t meet face to face for discussion of the goals and objectives, as suggested by the BSC methodology. The first BSC included the original four perspectives proposed by Kaplan and Norton.
The team in El Salvador worked closely with HSBC Latam to implement the BSC, but most of the work involved defining the way to calculate the indicators, rather than defining a strategy or a strategic linkage model, as suggested by modern best practices. Other difficulties faced by the team were:
• Imposing versus choosing. Just like MTETC’s case, this real life experience showed what happens when a BSC is imposed in an organization without showing first the real need for this management technique. The KPI’s assigned to the bank were indeed consistent with what a generic bank would expect, but at the time it was not clear how those measures aligned with a greater vision and strategy. Thus, the audio-conferences focused more on how to calculate the KPI’s, without actually addressing the issue of
“why?”. The teams were motivated, but without a clear destination.
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• Lack of buy-in of top management. As noticed with the cases in the previous chapter, and effective BSC implementation is not possible without support from top management for the important decisions that this methodology requires. The BSC was initially seen as a system to collect metrics and measure performance, rather than a strategic management tool. Thus, it did not have the impact it intended to. The fact that top management was not the main promoter of this idea also made second and third level managers unaware of the initiative, which made it difficult for the team to sell the idea and benefits of its implementation. This difficult was overcome later during the implementation process.
• Not aligned to the bank’s performance review. Again, just like with MTETC’s case, the first BSC’s indicators included measures that were not associated to the HR Department’s performance review. This added to the fact that third and fourth level managers did not see the BSC as something that would reflect their efforts and their department’s performance.
• Too many indicators. The original methodology proposed by Kaplan and Norton suggests 3 or 4 indicators for every perspective, but in this case, the first BSC had around 48 KPI’s , with most of them focused in the financial perspective. Focusing on the financial perspective is not wrong in itself, especially when the BSC was meant for a bank, but the KPI’s were too many for them to be meaningful. Additionally, some of the KPI’s were redundant, and they could have easily been simplified by identifying the key common drivers behind those KPI’s. Nonetheless, the initial 48 indicators remained as part of that BSC version for several months.
• Learning and Growth perspective was misunderstood. The first BSC named this perspective “People Perspective” and focused on KPI’s that ended up becoming sole responsibility of the HR department (average pay, rotation, training, etc), rather than being indicators of the actual growth expectations of the bank.
• Lack of systems in place to make the BSC implementation effective and easily deployable. The reporting systems and the reports obtained had been effective historically for the bank’s every-day activities, but some of the KPI’s required long calculations and a lot of time to obtain, which made the BSC a cumbersome task in some cases. Additionally, there wasn’t a system in place to communicate the
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information from the BSC to all managers in a timely manner, with the results lagging two months when they were presented. This made the BSC even less reliable.
• New concept for everyone. The BSC was a new concept to almost every manager, which is not a problem in itself, since it is the team’s responsibility to explain the methodology. The difficulties arose when explaining the concept and its importance while being affected by all the other problems explained above. Lack of initial support, lack of a clear strategy, lagging indicators, the fact that it had too many indicators, and more importantly, the fact that it wasn’t aligned with the already existing performance review made it difficult to actually “sell” the idea at the business units, which made the initial BSC look like a temporary fad that only affected the daily operations due to its complexity.
• Constant changes. The BSC went through several revisions, which is a good thing, considering that iterations and trial and error are all part of the ideal implementation methodology. However, this, when added to all the previous difficulties made it harder to establish consensus among managers about what was being measured and why.
These difficulties have already been highlighted in the selected cases in chapter three.
However, it is interesting to explore them in retrospective and after researching the BSC methodology for this document. Some of them could have been avoided, had the right procedure been taken, while others were simply part of the regular “adaptation” process.
The implementation had some positive aspects also, some of which were only evident after a second version of the BSC. Other positive aspects were found during the initial implementation as well.
• The BSC became a popular concept with managers. Despite the initial lack of interest, the team made the BSC concept known within the organization through training sessions and meetings with managers. Eventually, it would become part of the bank’s culture and performance management strategy, and managers would already be familiar with the concept, methodology and its goals.
• Gained support from upper management. This was without a doubt the change that had the biggest influence in the implementation. HSBC headquarters required local
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branches to follow a BSC approach to management and set the goals for the region based on this philosophy, which made the heads of each region pay more attention to the BSC. Even if it was still an imposed methodology, and the indicators had already been set for the region, the CEO started getting involved in the process and made sure that the BSC became a priority for second level managers as well. The change in attitude became evident.
• Developed new systems and methodologies. The trial and error experienced during
• Developed new systems and methodologies. The trial and error experienced during