Balanced Scorecard Using Balanced Scorecards

Balanced Scorecard

Using Balanced Scorecards to Optimize Organizational Performance

Defining, developing and managing to Balanced Scorecards (BSC) within the enterprise software industry require objectives that measure both performance and collaboration. The four dimensions that effective BSCs are based on include customer-based, financial, internal business process, and learning & growth objectives (Liedtka, Church, Ray, 2008). The synchronization of strategies around these four perspectives is critical for keeping any BSC balanced and capable of moving a company forward to its goals (Barrett, 2004). When applied to the enterprise software industry in general and to a given firm specifically, the alignment and synchronization is made all the more challenging by how quickly this industry changes amid very high levels of uncertainty as well. The intent of this Balanced Scorecard Analysis is to evaluate how Cincom Systems, a $100M privately held enterprise software company, manages five divisions that have potentially conflicting strategic directions and as a result, metrics on which to be measured by. Three specific objectives are provided for each perspective of the BSC framework, and for each objective, one quantifiable metric is provided. This analysis concludes with recommendations as to how Cincom can gain significant performance gains through the use of the BSC framework including the development of corrective and preventative actions. Critical for Cincom as an enterprise software vendor is the ability to continually create new opportunities to become more efficient, or lean in process, as their value proposition to companies purchasing their applications is the delivery of lean manufacturing strategies based on the use of their applications. The defining of lean manufacturing concepts and strategies is essential for sustained unique value propositions of enterprise software companies delivering these solutions (Bhasin, 2008).

Strategic Planning and Balanced Scorecards at Cincom Systems

The strategic objectives of Cincom Systems center on continually developing new enterprise applications that integrate together the call center, manufacturing business solutions (CMBS), document management, service lifecycle management and enterprise compliance and quality management (ECQM) product suites to ensure interprocess integration and data transparency. The strategic objective of Cincom is to deliver measurable, quantifiable value to its customers in Aerospace and Defense (A&D), industrial, discrete and process manufacturing industries. The company relies on a series of metrics to measure their contributions to customers from these industries through a Balanced Scorecard Approach (BSC), concentrating on results delivered. A second strategic objective is to quantify the performance of the actual software installation process to see if it met or exceeded the expectations of the companies purchasing Cincom's software. By taking a BSC-based approach to measuring both the quantifiable value of the software delivered and also measuring how efficient the installation process is vs. customers" expectations, Cincom can ascertain where their relative strengths and weaknesses are. Cincom takes the perspective of adopting BSC-based approaches to measuring the contributions of their ERP systems in customers' manufacturing and operations. The measuring of ERP systems' contributions and performance over time through a BSC-based approach can deliver significant insights into corrective action and continuous improvement strategies (Chand, Hachey, Hunton, Owhoso, Vasudevan, 2005). Transforming this aspect of their business practices into a replicable process is a strategic priority for Cincom Systems.

Strategic Objectives in the Cincom Manufacturing Business Unit (CMBS)

The Cincom Manufacturing Business Unit (CMBS) specializes in first analyzing the inconsistencies in their customers' manufacturing processes, and then selectively recommending which of their and their software partners' applications can best alleviate process inconsistencies while making clients more efficient. The strategic objective of this business unit is to define Business Process Management (BPM) improvements to manufacturing clients' existing operations to make them more efficient or lean, and therefore profitable over time. CMBS does this through the use of a series of BSCs aimed at measuring the financial impact and performance of ERP systems implementations. The empirical research suggests that measuring the ability of an organization to attain the perfect order, or the delivering of the right product, to the right customer, on the right date, is indicative of broader process efficiencies and is an excellent measure of ERP system performance over time (Fang, Lin, 2006). CMBS uses the perfect order as a metric to delineate which aspects of their ERP implementations are meeting or exceeding customer requirements based on their observations of how effective it is in measuring process performance. Another aspect of defining their performance by the perfect order is based on the level of process efficiencies within the supply chain as well (Gayon, Benjaafar, Vericourt, 2009). What CMBS is also discovering with regard to standardizing on the perfect order as their primary key performance indicator (KPI) is the fact that it measures the balance achieved in the systems they deliver between customer-facing and supply-chain facing systems. In effect, the perfect order measures how well CMBS has designed a customers' system to be demand-driven and agile in the face of significant economic and demand-based uncertainty. Simply put, the perfect order as a metric or KPI is an excellent measure of how balanced the strategies are of a company or not. CMBS is bound contractually via their Service Level Agreements (SLAs) to deliver at level or higher perfect order scores relative to the benchmarking done prior to their software being installed. As a result, the perfect order must show progress in each CMBS account for the company to deliver on the promises it makes in its SLAs. This is unique in the enterprise software arena yet shows how results-driven strategies are being used in a recessionary environment to sell more enterprise-wide software. CMBS relies on the perfect order as part of a broader baseline of KPIs and metrics that comprise the hierarchy of supply chain metrics (Hofman, 2004). This hierarchy was originally developed by the Supply Chain Council (SCOR) and has since been enhanced and made more relevant to the needs of those manufacturers and service companies using enterprise software to automate their operations. The perfect order is accumulative in the hierarchy of supply chain metrics (Hoffman, 2004) and therefore is more indicative of interprocess management on the part of CMBS in conjunction with its customers. As the perfect order forms the foundation of their BSC, CMBS also looks at the many other metrics that comprise the hierarchy of supply chain metrics as well. Figure 1, Hierarchy of Supply Chain Metrics, as defined by Dr., Deborah Hoffman (2004) of AMR Research shows the interrelationships if KPIs that comprise the perfect order.

Figure 1: Hierarchy of Supply Chain Metrics

Source: (Hofman, 2004)

As can be seen from Figure 1, there is a progression from Ground Level to Mid Tier followed by Top Tier series of metrics. The are a total of seventeen different metrics that comprise the Hierarchy of Supply Chain metrics and CMBS selectively uses these on a situational basis to define BSCs for their customers. At a strategic level the use of these seventeen metrics, selectively applied, measures the performance of a CMBS' client's value chain over time (Barber, 2008). In addition, SLAs or contracts of performance are also specifically designed using the collection of these KPIs over time. CMBS has been careful to also create longitudinal studies to measure the effects of creating batch vs. real-time integration across the various systems and process areas CMBS' clients need assistance with in automating their systems.

For many CMBS clients who rely on ERP systems to attain Demand Forecast Accuracy the perfect order and Supply Chain Management (SCM) Cost must be kept in balance to ensure that profitability is maintained. The need for balancing Demand Forecast Accuracy and production efficiency is how CMBS uses the hierarchy of supply chain metrics to ensure its clients balance business requirements with process improvements from a system design standpoint.

In defining objectives by each perspective of BSCs, CMBS has also found that there is a high level of interdependence present in across inventory, cash management, order process and planning accuracy in manufacturing-centric companies for example, while distribution-centric companies require entirely different sets of assumptions with regard to their BSC values. These variations are shown in Figure 2: Interdependence of Metrics (Hofman, 2004).

Figure 2: Interdependence of Metrics

Source: (Hofman, 2004)

Compensating for the wide variation in the metrics that comprise the hierarchy forces CMBS to take into account the inaccuracies present in customer processes and define an acceptable range of performance. Imperfections in the most critical process areas of manufacturing including the Ground level series of metrics shown in Figure 1 need to have performance ranges associated with them that compensate for changes in overall company performance as well (Gayon, Benjaafar, Vericourt, 2009). Due to this fact, CMBS creates a BSC with upper, middle and lower quartiles of performance for determining how their improvements of processes through the selective use of ERP systems increases a company's performance against KPIs over time. The hierarchy of supply chain metrics and the interdependence of matrix are invaluable concepts for putting into context the objectives defined by each of the four perspectives of a BSCs Cincom delivers to customers and also how they evaluate themselves as well. It is important to note that CMBS indexes bonuses and pay raises to the attainment of BSC metrics jointly agreed on with customers, which brings a very high level of process and measurement ownership into the measurement and improvement process. CMBS overcomes resistance to change by concentrating on quantifying customer satisfaction by asking for ratings of each aspect of a system installation after it has been installed. This gives each member of the team a high level of ownership in the metrics being measured, and over time they improve as CMBS system integration teams become more attuned to the unmet needs of their customers purchasing systems. In this regard BSC strategies with accountability for performance lead to continual efforts to improve scores on each metric defined as part of both the customers' expectations and the motivation CMBS integration teams have to improve their performance and gain greater financial results as well. In this way CMBS alleviates resistance to change by focusing on how to motivate employees to become active change agents for the good of the metrics measured on behalf of clients.

Defining BSC Perspectives for CMBS

The four perspectives of a BSC including customer, financial, internal business processes and learning and growth (Liedtka, Church, Ray, 2008), their objectives, and a quantified metric are discussed in this section. CMBS is heavily involved in Business Process Management (BPM) on behalf of its customers in conjunction with streamlining customer-facing processes. This latter aspect of their strategy necessitates that the company also integrate to Customer Relationship Management (CRM) systems as well, many of which are 3rd party, legacy or designed and built by the companies using them. As a result, CRM system integration is a critical aspect of the BSC perspectives for CMBS.

Objectives for the Customer Perspective of CMBS' BSC Model

The first objective of CMBS is to provide reliable and scalable integration between Cincom ERP systems and their customers' many CRM systems. To the extent a CRM system can become an integral part of an enterprise workflow is the extent to which customer-facing strategies can be measured and improved over time (Chang, 2007). The second objective is to significantly improve the performance of channel management, quote-to-order and configure-to-order workflows that are embedded in customers' CRM systems yet rely on tight integration to their ERP systems. Empirical studies have shown the greater the level of integration between quote-to-order, configure-to-order and mass customization systems in CRM systems to ERP systems, the higher the level of organizational performance over time (Kim, Suh, Hwang, 2003). This objective seeks to unify the supply chain centric processes the company has on the customer facing side, specifically their quoting systems, with the ERP systems which will need to fulfill the orders taken. The third objective is to define pricing and revenue management benchmarks and KPIs that will give CMBS the ability to measure he profitability by customer and by engagement or installation over time. When these three objectives are taken into account, the one quantified metric that matters most is increasing customers' percentage of orders that are fulfillment with no modifications -- which are in essence the percentage of orders that attain perfect order levels of performance.

Objectives for the Financial Perspective of CMBS' BSC Model

The three objectives for the financial planning perspective of the BSC Model include the development of revenue management guidelines and KPIs for CMBS to measure profitability by engagement, defining lifetime customer value and measuring how annual license revenues of ERP systems quantify this aspect of the CMBS customer base, and measuring the long-term impacts of indexing employee compensation to long-term customer value over time. In terms of quantifying one metric in this area, measuring lifetime profitability by customer is used. This metric includes lifetime customer revenue net of cost, so that a true measure of profitability by customer over their total time of engagement with Cincom is measured.

Objectives for the Internal Business Process Perspective of CMBS' BSC Model

The three critical objectives for Internal Business Process perspective as part of the BSC model include defining best practices for integrating customer-facing processes including quote-to-order, inquiry-to-order and configure-to-order workflows with ERP systems' components most dependent on these workflows for demand signals. This first process objective aims to interlink the customer-facing processes of advanced product configuration and quoting with ERP back-end systems including supply chain management to measure total process efficiency. The second objective is to define the cumulative effects of attaining best practices in perfect order performance relative to the ROI attained with an ERP system over time. Empirical studies suggest that the greater the level of integration at the process level between demand management and customer facing systems to ERP systems, the higher the potential level of ROI which an be attained (Velcu, 2007). The third internal business process objective is to define an empirically sound body of research that quantifies the impact of best practices in distributed order management and channel management, two critically important areas in any ERP system, to long-term financial performance of a firm. These empirically-derived metrics will provide a foundation for analyzing system performance over time and effectively managing SLAs with customers over the long-term. In this area the one most critical quantifiable metric is measuring the percentage of SLAs that are attaining or beating their performance targets as originally committed to customers over time. In conjunction with the best practices analysis of channel management and distributed order management systems, measuring the percentage of SLAs that attain or exceed their committed to levels of performance will also provide project managers at CMBS with critical insights into how best to structure SLAs so they are effective in the future as well.

Objectives for the Learning and Growth Perspective of CMBS' BSC Model

In terms of learning and growth, CMBS thrives on knowledge as it is critical to their overall business model, including staying current with the latest software development techniques and the development of Web Services. The three objectives from a learning and growth perspective as part of the BSC for CMBS center on educating customers about how to get more value of their investments in Cincom enterprise software. The first objective is to create an enterprise-wide knowledge management system that will provide customers with a knowledgebase they can draw from on specific questions regarding how to get CMBS software to manage a given task. This is partially a customer service objective, yet it is critical from a learning standpoint as well. The second objective is to create a more interactive, vide-based set of tutorials on how best to use CMBS' ERP software for managing channel strategies including partner relationship management-based (PRM) strategies over time. PRM strategies are focused on the indirect channels companies use to attain their selling objectives. A third learning and growth objective is the development of a CMBS University which can guide customers on how best to create their own unique applications and tools using the software toolkits provided. The quantifiable measure that is associated with this perspective of the BSC is the development of a measure of the percentage of customers who attain certification of the Socrates Development Environment and create a specific Web Service to automate their ERP processes more efficiently and cost-effectively as a result.

Defining Methodologies for CMBS BSC Metrics

Approaches and methodologies for each of the four BSC metrics are provided below. The use of CMBS analytics typically sold to customers is also used internally to derive these measures of performance as well.

Percentage of Perfect Orders Delivered

Using the project schedules by customer, CMBS can determine the percentage of modules that were initially installed correctly and integrated to the customers' requirements. This methodology also can index in their levels of customer satisfaction as well and provide a moving average of perfect order performance relative to customer satisfaction over time.

Lifetime customer profitability as a percentage of total revenue

Too often companies only measure lifetime revenue of their customers, not profitability. Using a series of financial reporting applications the lifetime customer profitability of each CMBS customer will be defined and then analyzed relative to perfect order performance and customer satisfaction. If causality exists across these factors then a model will be created that quantifies the contribution of each of these factors. The use of this methodology, if successful, will also lead to the development of an entirely new generation of financial analytics applications for CMBS as well. It has been shown that when companies create applications to better manage themselves they also lead to innovations for the company as well (Lee, Chen, Tong, 2008).

Percentage of Service Level Agreements (SLAs) that meet or exceed performance commitments

The SLAs that CMBS has with its customers is even more important than a contract in that it provides for remedies of a lack of performance on an ongoing basis. This translates into legal liabilities in ways unforeseen when an SLA is initially created. For CMBS to mitigate the level of financial and legal risk it is critical to know which SLAs they are meeting and exceeding performance on, and why this is happening. It is also critically important to manage the corrective actions surrounding this aspect of their business if they are going to profitably grow over time.