Operations must be aligned to create value from data and new technologies
In 1992, Robert Kaplan and David Norton turned the business world on its head when they proposed the idea that financial health was an insufficient indicator of business success. Could there be more to measuring success than just solvency? Kaplan and Norton said yes.
Dollars and cents, as important as they are, take a rear-view mirror look at a business – where it’s been, not where it’s going. Numbers alone provide no insight on how to remain competitive and profitable. To be fully understood, financial ratios need to be interpreted through the lens of other hard and soft performance measurements.
Kaplan and Norton proposed the balanced scorecard. It’s a management tool that helps executives translate their strategic objectives into four categories:
- internal capabilities – what the company is doing well
- organizational capacity – what the company needs to do better in the future
- customer perspective – client satisfaction
- financial performance – solvency
- Within each category, leaders select performance measures to audit on a regular basis.
Here’s the logic: when executives treat employees well by offering them training and support and creating a culture of respect and information sharing (organizational capacity), employees feel respected. Respected employees, without being asked, increase their productivity and work in ways that make the company run efficiently and effectively (internal capabilities). Happy employees want to exceed the customer’s expectations (customer satisfaction). Happy customers buy more of what you’re selling (financial performance).
The Fourth Industrial Revolution
But, today we are in the Fourth Industrial Revolution and it’s vastly different from the industrial and digital revolutions that came before. The speed of innovation is evolving exponentially, and the breadth and depth of these changes require the transformation of entire production, management, and governance systems. If your industry has not been impacted by the repercussions of the Fourth Revolution today, it will be tomorrow.
The Fourth Industrial Revolution offers businesses huge opportunities for efficiencies and for insight – but it also creates new competitors, threatens established models of operation and creates new risks to a company’s security and reputation. Deloitte’s 2017 report, The Fourth Revolution is Now: Are you ready? proposes that at the epicentre of this storm is production.
Updating the balanced scorecard that defines success
To keep pace, the balanced scorecard needs an upgrade – a new perspective, labelled operations, with a focus on measuring the leader’s response to pressures from the convergence of computing, data overload, universal connectivity, automation and artificial intelligence. Some of the key questions are:
- How is the organization evolving against the increasing demands of customer expectations?
- How is production absorbing the unrelenting pull of automation?
- What are the gains and losses associated with collaboration and business alliances?
- How can the cost structure be redefined for growth and reinvestment?
Brian Householder, president and chief operating officer, Hitachi Vantara (Deloitte Industry 4.0) believes the next challenge for chief executives is “changing how we [CEOs] think, and work using data – to create value from the findings obtained through advanced technologies.” Business leaders must move from just piloting (flying) their business, to navigating through the Fourth Revolution.
Navigating your business to success
In the industrial age, where mass production of goods lowered the unit cost and drove the bottom line, using dollar and cents to determine business success was fine. Society paid little heed to the impact of poor working conditions on the income statement. When production moved from a mechanistic mentality to information and knowledge driving performance (digital revolution), society pressured businesses to expand the definition of success to include soft measures such as employee and customer satisfaction, organizational culture and climate. Kaplan and Norton describe this as the difference between flying and navigating an airplane.
Flying keeps the plane moving through the air. Flying equates to solvency. Solvency allows the business to open tomorrow. Flying eventually gets you to your destination, albeit neither efficiently nor effectively. Flying works in short run not the long run.
Navigation is a process. It’s about monitoring activities that accurately ascertain one’s position in real time, yet assuming a forward-looking outlook. It encompasses the planning needed to get the plane to cruising altitude. Navigating is the real-time assessment of adjusting to production variations and looking to the future – what can be done better tomorrow? Navigating your business gets you to your destination on time and on budget and pushes the company to apply what it has learned. Navigation encompasses management’s ability to select those few key performance indicators from robust management information systems that result in sustainable increased profits and customer satisfaction.
The Fourth Industrial Revolution is here. Executives need to be mentally ready to meet it head on. It is clear that solvency doesn’t make a successful company. CEOs who want to get the biggest return on investment from the Fourth Revolution are those who know how to embrace all of the opportunities it brings. And, that willingness is measured by the addition of the fifth dimension, operations, to the Kaplan and Norton’s original balanced scorecard.
Balanced Scorecards then and now
The Balanced Scorecard 2.0
Kaplan and Norton’s four key perspectives that a company must monitor are grounded in the organization’s strategic objectives and competitive demands: where do we expand our business and how do we meet our competitors head on? Here’s how their original scorecard could be applied.
Customer/stakeholder perspective: How do the customers see you?
Assesses performance from the point of view of the customer, based on:
- Value for money
- Competitive pricing
- Hassle-free relationship
- Value added services that complement the customer’s product
Internal process: What must the company excel at?
Views performance through the lenses of production quality and efficiency, including:
- Estimation time
- Number of worker touches per job
- Data entry inefficiencies
- Reduction of human and production errors
Organizational capacity: What must be done better tomorrow?
Views capacity from the point of view of improvements, including:
- Continuous improvements, total quality management LEAN techniques
- Product and client service innovations
- Customer service improvements
- Employee training and development
- Employee salary, benefits and recognition
Financial: Is the company solvent?
Often renamed stewardship or other more appropriate names in the public sector, views financial performance based on:
- Return on capital
- Cash flow
- Per-job profitability
- Performance reliability
The Balanced Scorecard 4.0 – added fifth dimension
An updated Balanced Scorecard adds a fifth dimension to assessing success. It looks like this:
Operations: How do leaders address Fourth Revolution pressures?
Looks at the operation from these additional perspectives:
- Number of channels of information and influence
- Redesigning processes for automation – redeployment of staff
- Number of seamless alliances and partnerships that complement the values chain
- Investment in lean technologies for reinvestment tomorrow