Slide 1
Welcome to Chapter 16
This chapter is called “Management Control - The Balanced Scorecard”.
The author is Carlos Blanes.
Slide 2
The objectives for this chapter are to understand the objective and functions of management
control and the role of a balance scorecard as a management tool.
Slide 3
We will start by answering the question, what is management control? Management control
can be defined as a technique of leadership that basically consists of establishing objectives
in all the company’s responsibility levels, aligning the company’s strategy with operations,
quantifying the objectives through a budget and indicators, to periodically control and
evaluate the level of achievement of the objectives and to make decisions to adjust if
necessary. What does it mean? Strategy basically consists in defining the way we want to
compete in our activity. Management basically consists in leading the company to
accomplish the strategy, so management control will look after the fulfillment of the strategy
through the operations of the company, and it will use objectives and indicators for that
purpose.
Slide 4
Aligning strategy with operations is the first example. In companies, when aligning the
strategy with operations, we could say there are four steps. Please try to match the four
strategy levels with the four steps now.
Slide 5
Management systems are indeed an IT system. Therefore, we must start talking about
information and information technologies. At the beginning a company is small and has small
needs of information, the work asking for ad hoc reports can be managed when needed and you
can have them from transactional systems, which control all the company procedures (clinical,
financial, etc.). The problem is, transactional systems require high costs of preparation of
information, and consequently, when the company grows and the need of information grows with
the company, there is low capacity to respond to both internal and external demand. External
could be for example the government, where financial statements have to be presented each
year, and internal, when for example the presidents of the company will ask monthly updates on
how everything is running. The management control has to answer this question. The
technological evolution to strategic system allows you to capture, prepare, organize and access
information for management in the most efficient manner possible.
Slide 6
So this evolution leaves three levels of IT systems. The first level is transactional systems.
These are applications needed to support the company process and daily operations with very
specific information. Usually this is the enterprise resource planning system of the company
(ERP). You will be able to get specific information if required. These focus on operational staff.
The next levels are decision support systems and analysis systems, which focus on middle
management (in reproduction we are talking about gynecologists and biologists). It will be
essential to be able to do multi-dimensional analysis, and these are applications with more
complexity and detailed information. And finally we have the executive information systems,
which are applications with simple screens and very intuitive navigation, with consolidated
information. These focus on top management.
Slide 7
This slide shows additional examples on information systems. Please read the questions
carefully and try to understand why the correct answers are right.
Slide 8
The main objective that an executive information system must accomplish, depending on
information needs, is the transformation of data into useful information for management and
decision making.
Slide 9
Indicators should be established to make the Executive Information System (short EIS) or the
Decision Support Systems (short DSS) effective. There are some rules that can help identify and
evaluate potential indicators as good performance indicators by answering some questions: we
will go through all these characteristics within an example: the key performance indicator (short
KPI) we are looking at will be the patient’s level of satisfaction in this example.
Let’s say we collect data through a survey in which we ask our patients how they like the
facilities, the people at the reception desk, the health care assistance, the information given by
the doctor, etc. To evaluate this key performance indicator the following questions are useful:
1. Is the KPI “patient’s level of satisfaction” linked to an objective? The answer would be
yes, of course, our objective is to increase the satisfaction of our patients.
2. Can the result of an indicator be controlled by an area of responsibility of the
organization? Yes, we ask the patient “How do you like the doctor?” or “How do you like the
attention at the receptions desk?” We are then able to link the result with the responsible person.
3. Can we do something to improve the results? Of course, we can identify where we are
failing and we can act accordingly to correct the problems, and then we will evaluate if the index
is increasing.
4. Does the individual responsible accepts the KPI? The responsible has to understand the
indicator, accept that it is important and accept the responsibility. In the example the doctor
knows that the satisfaction of the patient in his area depends on his treat to the patient.
5. Is it easy to understand and easy to explain? We cannot establish an indicator based on a
strange formula that no one understands because no one will accept it.
6. Does it resist manipulation? And, is it consistent? Do we always get the information with
the same criteria? Can anyone manipulate the results? The objective is that no one can question
the result of the measure. It is better to have no indicator than having a non-reliable indicator.
7. Can it be related to other indicators both vertically and horizontally? It must be related
with other indicators, because usually you cannot give an opinion analyzing just one indicator.
For example, in this case it has a strong relation with the punctuality rate. To asses if you have a
problem or not you will need to have problems in both.
8. Can it be quantifiable? And, is it difficult to gather the information? You have to
establish a measure and an objective, for instance let patients rate their satisfaction regarding
certain aspects on a scale from 1 to 10.
Slide 10
An Executive Information System (EIS) is a complete balanced scorecard, when it is linked with
the strategic directives of the company. This new approach to strategic management was first
described in a series of articles and books by Drs. Kaplan and Norton. The balanced scorecard
approach provides a clear prescription as to what companies should measure in order to
'balance' their financial perspective. The balanced scorecard is a management system (not only
a measurement system) that enables organizations to clarify their vision and strategy and to
translate them into action. It provides feedback around both the internal business processes and
external outcomes in order to continuously improve strategic performance and results. When
fully deployed, the balanced scorecard transforms strategic planning from an academic exercise
into the nerve center of an enterprise.
Slide 11
This is a summary of what we have seen so far: when defining the balanced scorecard, at first
we have to state the mission and the strategy, that is: “what I want my organization to be and
what I have to do to get it”. This is not the subject of the session, but necessary to understand
the whole process. Then we start with the management control phase: establishing objectives in
all the responsibility levels of the company: strategic, top level, functional and departmental
goals. And finally we define the performance indicator to measure the fulfillment of the
objectives.
Slide 12
The traditional view of the balance scorecard identifies four perspectives to cover the whole
company. We have the financial, the customer, the internal process and the learning and growth
perspective. This traditional perspective is usually present through the strategy map.
Slide 13
It’s a good exercise to define the strategy map of the company. The strategy map represents the
grouping of strategic objectives in general categories, the Kaplan and Norton perspective. As
shown in the balanced scorecard figure, it is based on cause and effects relations that lead the
company to achieve the strategy. For example, the more a company invests in HR (learning and
growth perspective), the better improvement there will be in internal processes (clinical results),
so customers will be happier and will refer to other patients, which in turn can be translated in
more incomes and therefore earning more money, which is the final objective of every company.
Slide 14
Here is an example of transferring the Balance Scorecard Strategy Map „Down to earth“:
What does it all mean for the business strategy of an IVF Clinic? Developing the
competence leads us to better clinical results, therefore, to a higher patient satisfaction rate
followed by a higher recommendation rate which finally leads to an increased income.
Investing a part of the increased income back into competence developing is a good
investment in the future.
Slide 15
Why is it useful to have a balance scorecard? Because it is the perfect tool to communicate
information to different levels of the organization, and remember: the main goal is to define a set
of KPIs that link the strategy with the operations of the company. The second goal is to measure:
“everything that is measured improves”. Finally, the third goal is to adjust accordingly, to assist
to decision making.
Slide 16
Here are some recommendations for your further reading.