Free Essay

Oprisk Score Card Approach

In: Business and Management

Submitted By Thilak
Words 3511
Pages 15
SCOREl Operational risk

An operational risk scorecard approach
Operational risk scorecards have been in the spotlight since the Basel Committee on Banking Supervision’s 2001 paper on op risk treatment under Basel II. In the first of two articles, Ulrich Anders and Michael Sandstedt of Dresdner Bank examine what, specifically, these systems seek to accomplish – and what implementing them entails he analysis of operational risk is a relatively new area, though it is increasingly essential. From market and credit risk it can easily be understood what risk is and how it can be assessed – market risk results from the market portfolio of the company, credit risk results from the credit portfolio of the company. But what do we want to assess in operational risk? Operational risk is the risk of a loss resulting from inadequacies or failures in processes due to technology, personnel, organisation or external factors.1 What is being assessed, therefore, is the business processes of the company that are operational therein. Compared with the market or credit portfolios of the company, the business processes of the company could also be called the operational portfolio. Once we have assessed the business processes of the company, we need to report on the results. The appropriate way to do this is via an operational risk scorecard. Many reports are called scorecards. They all use scores to reflect a particular situation. For example, the famous Balanced Scorecard2 is, in simple terms, a report that scores how a company has implemented its vision and strategy in the areas of finance, business processes, learning and growth, and customers. An operational risk scorecard is a report that shows the operational risk profile of a company or parts of that company, with the help of appropriate scores. This

T

scorecard must achieve several goals: ■ Reflect the level of operational risk: this is the primary goal that gives the op risk scorecard its name. The level of risk is determined via an assessment. ■ Explain from where in the organisation the operational risk comes: the scorecard should reveal what the op risk scores are related to, that is, to which part of the organisation, in connection to which products or business lines, which organisational units and which locations of the company. ■ Present what the causes of operational risk are: only when the causes of op risk are presented in the scorecard do people understand how the level of op risk is determined, why it is at the level at which it is reported in the scorecard and how it can be reduced. ■ Reflect the operational quality: the level of risk in an organisation depends on its operational quality, which includes the quality of the control environment. If the operational quality is low, the organisation will face a higher risk of losses. ■ Focus management attention: the scorecard should not only give a status of the op risk and quality level, but also encourage management to undertake actions to mitigate the risk via quality improvements. Therefore, the scorecard must relate the levels of op risk and quality to each other so management can set priorities for their actions.

It is useful to supplement the information provided by the scorecard with loss data3 resulting from operational risk and key op risk indicators4 to compare op risk assessments, losses and indicators. This task is usually performed by an operational risk management information system.

Risk and quality
The assessment of operational risk and quality is a difficult task. To explain it we will first consider what risk is and how it is assessed, then what quality is and how it is assessed, before we apply these concepts to the assessment of operational risk and operational quality. What do we mean when we talk about risk? We mean we could lose something with a certain probability. How much we could lose is called severity, the probability of losing it is called frequency. If we want to compare risks we must compare the dimensions of risk. For example, driving a motorbike is more risky than driving a car, since on the motorbike the severity of personal damage is usually higher, and accidents also occur more frequently. The risk of one situation compared with another is higher if the loss severity is higher given that loss frequencies are equal, or where the loss frequency is higher given that the loss severities are equal, or if both loss frequency and loss severity are higher. The measuring units for risk are obvious. The severity dimension needs to be measured in monetary units such as the euro. The frequency dimension can most conveniently be measured in number of
1

1. Factors affecting business processes
Operational risk

Technology

Personnel

Organisation

External factors

Information technology

Expertise of personnel resources Controls against unintentional errors Controls against ext. criminal activities

Decisions of management Information from reconciliation and reporting

External services incl. outsourcing Controls against ext. criminal activities

Infrastructure

Preparation for catastrophes

This definition is in principle similar to the Basel II definition, but it distinguishes between where op risk occurs (in processes) and why op risk occurs (due to technology, staff, organisation, external factors) 2 Kaplan R and D Norton, 1996, The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press 3 Losses are defined as all extra (out-of-pocket) expenses and financial liabilities as a result of a loss event. Losses due to op risk are caused by inadequacies or failures of technology, personnel, organisation and external factors (such as external suppliers) 4 Key risk indicators are defined as parameters resulting from business processes or areas, and are assumed to be predictive for changes in the op risk profile of these processes or areas 5 ISO 9000:2000, Quality management systems – Fundamentals and vocabulary

WWW.RISK.NET ● JANUARY 2003 RISK

47

Operational risk

l its ability to satisfy stated or implied needs’.5 Quality can be viewed in both objective and subjective lights. Objective quality is the degree of compliance of a thing with a predetermined set of criteria that are presumed essential to the ultimate value of the thing. On the other hand, we also have subjective quality, which is the level of perceived value reported by a person who benefits from this thing. The judgement of quality is then reported as good or bad quality value. To achieve a consistent judgement about operational quality across an organisation, it is key to determine the dimensions in which quality is to be assessed. For operational quality, the following three dimensions have proved useful: suitability and functionality, security and reliability, and availability and accessibility. These dimensions tell us whether the overall quality is high or low. For example, a good-quality car scores high in the dimensions suitability, reliability, security, etc. A poor-quality car does not. A good quality IT system satisfies the user needs, is suitable for the task at hand, is reliable, ensures data security and is always available. Quality can be measured in two ways: that of something gained or that of something lost. Either way, the tangible results of the quality should be a measure of the degree to which stated or implied needs are fulfilled. To assess the quality, a rating on a so-called Lickert scale – such as excellent, good, fair, weak, poor – for each of the quality dimensions is therefore most appropriate.

times per year. Assessing the risk means understanding (a) how much we would lose if something happens that affects what we own or are liable for, and (b) how frequently this ‘something’ would happen. Therefore, risk is always assessed by scenario analysis, that is, by evaluating the potential loss severities and frequencies of possible events. Quality is a concept that is open to a variety of definitions. One widely agreed definition of quality is that ‘the totality of features and characteristics... that bear on

2. The scorecard report
Operational risk scorecard
TE

Technology Information technology Infrastructure Personnel Personnel resources Unintentional errors Unauthorised activities Organisation Management Reconciliation and reporting External External services Ext. criminal activities Catastrophes

high

IT CA CA UA UA IN PE PR PE PE ES ES EX EX IT IT TE TE IN IN EC EC UE UE OG OG MA MA PR PR ER UA OG MA RR EX ES EC

IT

IN

PR ER UA MA RR ES EC CA

Suitability and functionality Security and reliability Availability and accessibility

Potential loss severity

medium low

medium high

Quality

Concept application
In operational risk, we want to assess the risk of loss arising from failures in the business processes of the organisation. For this, we need to understand what we mean by business processes. If we want to understand op risk in more detail, we need to understand what we mean by business processes. A (business) process is defined as a set of (business) activities that produce an output from a given input. The activities of business processes are, to varying degrees, dependent upon certain factors such as information technology, infrastructure, expertise of personnel resources, controls against unintentional errors, controls against unauthorised activities, management decisions, information from reporting and reconciliation, external services, controls against external criminal activities and preparation for catastrophes (see figure 1). The factors underlying a business process can also be called risk factors since their inadequacy or failure may result in a situation in which the activities in the process cannot be performed, and therefore the process cannot fulfil its purpose. This could potentially lead to an op risk loss. The risk factors can be assigned to risk causation categories such as technology, personnel, organisational or external factors. Below are two examples concerning business processes and inadequacies or failures of their risk factors6: ■ The process we could call ‘trading in Asia’ in Barings Bank would have needed a control against unauthorised activities. It has been stated that this control did not

Loss history Insurance cover Industry and banking experience Determine potential loss frequency Key risk indicators Qualtiy of controls (control environment) Business continuity planning

low

Determine potential loss severity

RR RR

low

medium low

medium high

high

CA

Potential loss frequency

3. Attributes to processes
Org-units Locations
Products/staff tasks

Process Key risk indicators for operational risks Process Self-assessments of operational risks

Losses resulting from operational risks

48

RISK JANUARY 2003 ● WWW.RISK.NET

exist – or was inadequate – so that Nick Leeson was ultimately not prevented from ruining the whole bank. ■ The process we could call ‘hedge fund trading’ in Long-Term Capital Managementwould have needed proper risk reporting and management decisionmaking. It was analysed that both seem to have failed so that $4.4 billion was eventually lost. To evaluate a business process’s op risk, one therefore needs to evaluate the risk of a loss due to a failure or inadequacy in one or more risk factors. In short, a failure of a risk factor underlying a process, such as an IT breakdown, might cause an operational risk loss. The severity of such a loss, together with its frequency of occurrence, determines the level of op risk due to this factor. Furthermore, it is obvious that the quality of the risk factors underlying a process significantly influences the level of risk incurred. Therefore, it is also necessary to evaluate the quality of the risk factors. This analysis allows management to focus attention on situations where the risk of loss in a process due to failure or inadequacy of the underlying risk factors is high, and the quality of the underlying risk factors is low. If the risk incurred by the risk factor in the process is high, but its quality is also high, the risk needs to be insured or accepted. Otherwise the logical consequence would be to close down the process.

Producing a self-assessment scorecard
The result of an assessment of op risk and quality for any particular set of business processes is input into a report called a scorecard report (see figure 2). As operational risk is broken down into the risk categories, each risk category has its own individual risk assessment, which is based on scenario analyses. The scorecard

therefore shows the risks caused by the failure of risk factors scored into a risk matrix in the dimensions of severity (in euro) as well as frequency (in number of times per year). The quality of each risk factor is scored by assessing the quality dimensions of the risk factor (in the form of a rating). This means it reveals: (a) how much is lost in the event that the corresponding risk factor breaks down, is inadequate or is unavailable so that the processes dependent upon it fail or are only able to function with significant limitations; (b) how frequently that will occur; and (c) how good the risk factor for the process is in quality. To generate a scorecard, the necessary information must be collected from within the organisation. Historic loss data or key risk indicators alone do not seem to be adequate choices for the assessment of op risk in business processes. Historic loss data is usually insufficient and not forward-looking. Key risk indicators need to be interpreted subject to the local context they stem from, and therefore do not possess a simple translation into risk. The better choice seems to be to make the organisation’s experts responsible for evaluating the internal risks based on their understanding of their business processes, their banking and industry experience, their knowledge of embedded controls, insurance cover and loss history, and existing key risk indicators. The way to make the experts responsible is via a self-assessment exercise. This is not a simple task, since a lot of effort needs to go into debriefing the experts so that their evaluations are consistent, are comparable, can be validated and are as reliable as possible. The exercise therefore has the following prerequisites: ■ If the self-assessment is supposed to be an exercise across the whole organisation, it needs to be applied to all essential business processes within the

organisation. For this, we need a process collection exercise, which is described in more detail below. ■ The experts who will assess the business processes need to be identified. They are selected according to their knowledge of these processes and according to their responsibility for certain products, locations or organisational units. The experts are then trained in workshops or presentations about how to fill in the self-assessment questionnaire. Additionally, they must be guided when filling in the questionnaire by means of help texts, interviewers or through a helpdesk. Once the experts have completed the questionnaire, the answers usually need to be approved by another person. The workflow of the self-assessment is presented in part two of this article next month. ■ Since a self-assessment is usually applied to a wide range of processes, the self-assessment logic needs to be well thought through. It is the basis for the questionnaire design, where the questionnaire must measure what it is supposed to measure, and the questions in the questionnaire must be easy to understand. The answering schemes must also be well explained, otherwise consistent results cannot be expected. ■ Once the self-assessment has been completed and approved, the results of the self-assessment need to be validated. This is performed by an independent operational risk oversight function. The quality of the overall op risk process is additionally reviewed by the internal audit function (as described further on).

Process collection
Before we can actually assess the business processes of the company, we must take stock of them. This means collecting the processes of the organisation so they can be named and listed in a structured format. This task is similar to bringing the market and credit portfolios together in one place before we can actually calculate their risks. The process collection exercise needs to fulfil three purposes: ■ It needs to ensure that the operational portfolio covers the entire organisation. ■ It needs to provide a structure for the operational portfolio in order to: (a) find the right experts in the organisation to assess the business processes without overlap; (b) be able to aggregate the reports of the assessments by products, location or organisational unit or combinations thereof; (c) subsequently allow for the comparison of the self-as6

4. Processes necessary for interest rate derivatives

See www.ic2.zurich.com

WWW.RISK.NET ● JANUARY 2003 RISK

49

Operational risk

l
Furthermore, any business process is usually run at one particular location and within the responsibility of one particular organisational unit. Consequently, each process belongs to: one or more products or staff tasks; one organisational unit; and one location. What we have said so far is schematically represented in figure 3. The three attributes – products or staff tasks, organisational units, locations – also help us to structure the portfolio, and later also to compare operational risk assessments, losses and indicators that will be attached to individual processes. The level at which processes are assigned to the hierarchies of products or staff tasks, organisational units, and locations also determines the level of granularity of the processes. At the highest hierarchical level, we only have a single process for the entire company that is the set of all activities in the whole organisation, all locations and in connection with all products or staff tasks. This overall process can now be broken down into more granularity in the products or staff tasks, organisational units, and locations. Using this mechanism allows us to specify the granularity of the processes. with losses and key risk indicators for operational risk relevant to the same processes. Figure 4 shows all the processes necessary for a certain product, that is, interest rate derivatives. The processes are marked with red triangles. The product is traded in Frankfurt in the organisational unit called investment banking. The processes show their location and organisational unit in square brackets. The five steps of the product flow (offer, sales, processing, settlement and related services) are similar to the supply chain model of Porter.7 (The five-step model does not have a particular necessity in this context, but it helps to structure the collection of the processes for a product.) The process collection is the basis for the self-assessment. Each self-assessment is the assessment of at least one process. However, processes can also be grouped and evaluated within one overall self-assessment questionnaire. In the example shown, five questionnaires will be set up, where each questionnaire relates to a set of individual processes. Whether processes should be assessed individually or in groups depends on the materiality and complexity of the processes, as well as on the granularity of information the organisation wishes to achieve. Since each process has the three attributes ‘organisational unit’, ‘location’, and ‘product’, the self-assessment resulting in these dimensions can be analysed later and also compared with losses or key risk indicators collected for the same organisational units, locations or products. ■ Ulrich Anders is head of operational risk and Michael Sandstedt is operational risk controller at Dresdner Bank

sessment of op risks with losses resulting from op risks and key risk indicators pointing to op risks. ■ It needs to define at what level of process granularity we wish to collect information and to subsequently report on operational risk assessments, losses and indicators. The less granular the processes collected, the fewer the number of specific op risk assessments, losses and indicators that can be assigned to particular processes in the organisation. We will now suggest a procedure for taking stock of processes that allows all three goals to be achieved. Since the purpose of any business process in the organisation is, ultimately, to enable the organisation to sell a product or fulfil a staff task, it makes sense to start the collection process at the level of products or staff tasks of the organisation. More precisely, any process should help to: ■ offer products, close deals, deliver products, get deals settled or administer products, or ■ fulfil a staff task, where staff tasks are tasks whose purpose is to fulfil internal or external requirements, for example, to produce a balance sheet, fulfil particular reporting duties, gather the information on which strategic decisions are based, etc. The idea is now to assign all processes to products or staff tasks. When we have a complete list of products or staff tasks we simply need to follow their product flows through the organisation and collect all processes we find on the way. Using this procedure, we are already able to achieve the goal of a complete coverage of the organisation.
7

Conclusion
Why did we concern ourselves with business processes? The answer is: ■ To specify what we are assessing and to ensure full coverage of the organisation. ■ To be able to report on the assessments in a structured manner in the different dimensions of products or staff tasks, organisational units or locations. ■ To be able to split the task of the assessment between different people in the organisation without overlap and doublecounting of risk. ■ To be able to compare the assessments

Porter M, 1985, Competitive Advantage: Creating and sustaining superior performance, The Free Press…...

Similar Documents

Free Essay

Balance Score Card

...BALANCE SCORE CARD E INDICADORES DE GESTION En los últimos años las empresas se han enfocado en el mejoramiento continuo de sus procesos para minimizar costos y ofrecer la mejor calidad a sus clientes. Sin embargo, al buscar este mejoramiento y desempeño continúo en las áreas hizo que estos mejoramientos no tuvieran una dirección, es decir, no había una relación entre objetivos y estrategias con el desempeño realizado por las áreas de responsabilidad basada en actividades. Por tal motivo se crea el Balance Score Card, es un método de contabilidad por áreas de responsabilidad basada en estrategias con el fin de tener una mejora continua dirigida, es decir que se alinea con las estrategias y objetivos. Contabilidad por áreas de responsabilidad basada en actividades en comparación con la contabilidad por áreas de responsabilidad basada en estrategias La contabilidad por áreas de responsabilidad basada en actividades ha generado una nueva forma de contabilidad por áreas de responsabilidad ya que se ajusta mejor a los ambientes que requieren mejora continua por causas competitivas o dinamismo del mercado. Este tipo de contabilidad se define por cuatro elementos importantes: 1. Asignación de la responsabilidad 2. Establecimiento de medidas de desempeño 3. Evaluación de desempeño 4. Asignación de recompensas Su objetivo principal es resaltar el desempeño financiero de las unidades de la empresa, para luego evaluar y recompensar el desempeño. Esta evaluación se...

Words: 947 - Pages: 4

Premium Essay

Balanced Score Card

...BALANCED SCORE CARD ORGANIZATION’S SUPPLY CHAIN MISSION / STRATEGY “Provide channel partners with the latest and competitive product range through a flexible and fast product distribution network while meeting organization’s organic growth objectives” OVERVIEW OF GOODS / SERVICES FLOW Consumer Wholesaler Consumer DC – Asia Mass Retailer Consumer Factory Europe Master Distributor Consumer Factory Asia DC – Europe Specialized Stores Consumer Wholesaler Consumer Page 1 DC – Africa Mass Retailer Consumer On-Line Stores Consumer BRIEF BACK GROUND STEKKO is a French marketing company which deals with the design, manufacturing, distribution & marketing of Consumer Electronics & Technology product range. 80% of the products are manufactured in China and Korea, shipped to distribution centers in Europe, Far East and Africa. STEKKO’s Tier-1 customers are Mass Retailers, Wholesalers, Specialized Stores and Master Distributors who are spread across 40 countries. Although the company’s key focus is on marketing and business development, because of its distribution driven business model, it relies heavily on a cost effective, efficient and fast supply chain network. The Balanced Score Card is a resourceful tool to illustrate the inter-relationship between various business units within STEKKO. Apart from identifying cause and effect dynamics which play out between different functional units, the exercise provides ample......

Words: 628 - Pages: 3

Premium Essay

Balance Score Card

...Balance Score Card (BSC) An active and engaged board is an essential part of shaping and executing a successful strategy. Followings are the primary responsibilities of corporate board of directors: 1. Approve and monitor the enterprise’s strategy, created and formulated by CEO and Executive Leadership Team 2. Approve major financial decisions 3. Select the chief executive officer, evaluate the CEO and senior executive team, ensure executive succession plans 4. Provide counsel and support to the CEO 5. Ensure compliance However, board of directors often fall short in carrying out their five responsibilities due to limited time they have available, and the inadequate information provided to them. The board members, burdened by limited time and limited information, can participate in a more effective and efficient governance process by implementing Balanced Scorecard program. The program starts with an Enterprise Scorecard enabling the board to become more informed about the enterprise’s strategy so that it can perform better its responsibilities. The board can also create a Board Scorecard, which defines its primary outcomes, board processes, and skills, information, and meeting dynamics for more effective governance. Finally, executive scorecards enable the Board to evaluate the performance of each senior executive and his or her succession plans. Enterprise Balanced Scorecard Enterprise Scorecard describes the strategy of the organization, including strategic...

Words: 1298 - Pages: 6

Premium Essay

The Balanced Score Card

...private, public, and nonprofit enterprises around the world, Robert Norton & David Kaplan extended and broadened the concept into a management tool for describing, communicating and implementing strategy It enables executives to truly execute their strategies (Kaplan, 2010, p.3). While we are presently using the term “balanced scorecard” the root of this approach have been created long time ago by the pioneering work of General Electric on performance measurement reporting in the 1950’s as well as in the early part of the 20th century by the work of French process engineers who have created a “dashboard” performance measures (Balanced Scorecard Institute, 2013). Moreover the name itself “balanced scorecard” derives from the perceived need of entities to “balance” financial measures that are oftentimes used exclusively in strategy evaluation and control with non-financial measure such as product quality and customer service (David, 2013, p. 135). . Balanced Scorecard Institute 2013, Balanced scored card basics, viewed 4 October 2013, . David, FR 2013, Strategic management concepts and cases: A Competitive Advantage Approach, 14th edn, Person, Boston, Mass. Hoggett, JR, Medlin, J, Edwards, L, Tilling, M & Hogg, E 2012, Accounting, 8th edn, John Wiley & Sons Australia Ltd., Milton, QLD. Kaplan, RS 2010, ‘Conceptual foundation of the balanced scorecard’, Working Paper 10_074, Harvard Business School, Harvard University, Cambridge, Mass (paper originally......

Words: 587 - Pages: 3

Premium Essay

Balanced Score Card

...Foundations of BSC David and Kaplan introduced balanced score card in 1992. It was based on a 1990 Nolan, Norton multi-company research project that studied performance measurement in companies whose intangible assets played a central role in value creation. Norton and Kaplan believed that measurement was as fundamental to managers as it was for scientists. Its roots lie in 1950s-1980s where a team of employees in GE did a project to find out non-financial metrics to measure the performance of a company. They came out with a single financial and 7 non-financial metrics. They are : 1. Profitability (measured by residual income) 2. Market share 3. Productivity 4. Product leadership 5. Public responsibility (legal and ethical behavior, and responsibility to stakeholders including shareholders, vendors, dealers, distributors, and communities) 6. Personnel development 7. Employee attitudes 8. Balance between short-range and long-range objectives This concept was later on carried out by many academic experts including Simon, Drucker and Anthony. Even Japanese also influenced this concept. By 1990 authors that companies should focus on improving quality, reducing cycle times, and improving companies’ responsiveness to customers’ demands. Doing these activities well, they believed, would lead naturally to improved financial performance. stakeholder theory was useful to articulate a broader company mission beyond a narrow, short-term shareholder......

Words: 342 - Pages: 2

Premium Essay

Balanced Score Card

...analysis | |Article type: |Research paper | |DOI: |10.1108/07363760610663295 (Permanent URL) | |Publisher: |Emerald Group Publishing Limited | |Abstract: |Purpose – The aim of this study is to identify what values and lifestyles best explain environmentally | | |friendly behaviours. | | |Design/methodology/approach – This paper adapts the Values and Lifestyle scale and the Environmental and | | |Attitude and Knowledge scale to the Spanish context in order to describe the ecological consumer profile.| | |The data were obtained from a questionnaire handed out to a random sample of 573 individuals. With the | | |information obtained, and after the scales validation process, a structural equation analysis has been | | |conducted. | | |Findings – Findings of the study highlight that environmental patterns and self-fulfilment values are | | ......

Words: 5096 - Pages: 21

Free Essay

Balance Score Card

...5 Performance measurement Nonprofit organizations need to view revenue as a resource needed to achieve their missions. Obviously, revenues must exceed expenses over the long-term or an NPO will not survive. —Glenn Rowe Key Topics: balanced score card, customer feedback, competitive comparison, strategic objectives, blue ocean strategy W hat makes an organization “good” at what it does? Or, as Jim Collins (2001) would ask, “What makes an organization great?” Most would acknowledge that accountability, effectiveness, and achievement of desired performance outcomes are minimal requirements for any organization’s success. These requirements demand a measurement system relative to an organization’s mission, vision, values, and strategic plan. This chapter discusses methods for establishing such systems. In doing so, we echo Worth’s (2012) concern that “nonprofit managers must be committed to performance measurement but should not become overly focused on it to the detriment of delivering their mission’s programs” (p. 157). Performance measurement Process Before engaging in performance measurement, it is vital to understand the level and scope of the process. Measurement can be conducted for effectiveness or performance at the program/project or organizational level. Effectiveness relates to achieving the mission, while performance is a broader concept that considers financial results and other variables related to the overall organization. Once the scope and level......

Words: 13827 - Pages: 56

Premium Essay

Balanced Score Card

...A Balanced Scorecard approach generally has four perspectives: Financial Internal business processes Learning & Growth (human focus, or learning and development) Customer Each of the four perspectives is inter-dependent - improvement in just one area is not necessarily a recipe for success in the other areas. Areas * Finance Return On Investment Cash Flow Return on Capital Employed Financial Results (Quarterly/Yearly) * Internal Business Processes Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation * Learning & Growth Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities * Customer Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate the Balanced Score Card introduces the drivers of future financial performance. (Figure 1) The drivers (customer, internal business process, learning & growth perspectives) are derived from the organization's strategy translated into objectives and measures. The Balanced Score Card is more than a measurement system it can be used as an organizing framework for their management processes. The real power of the Balanced Score Card is when it is transformed from a measurement system to a management system. It......

Words: 2497 - Pages: 10

Premium Essay

Balanced Score Card - Phlips

...implement this and were trained accordingly. The Balanced Scored card was used as an instrument to measure actual performance against set targets and to also formulate future plans. Philips used the traffic light system with the green light indicating a target that had been met, amber indicating performance in line with the target, and red denoting a problem area, to measure the level of achievement of the key indicators. Problem Area | In line with Target | Target has been met | Following is a Philips lighting market position report from 2001 which shows their use of traffic lighting reporting system. The BSC worked as a means to take key financial indicators and create a quantitative expression of business strategy. All the quarterly business of all subsidiaries were carried out using BSC. Philips has used the Balance Scorecard to align the company’s vision with employee focus by educating employees with what drives the business. Philips designed the Scorecard to provide an understanding of the Organization’s Strategic policies and vision of the future. The operating principle of the strategy is to determine factors that were critical for achieving the company’s strategic goals. This tool helped the company focus on various factors that were critical for the company’s success and align hundreds of indicators. The company determined four Critical Success Factors (CSF) under the Balance Scorecard approach to align indicators that measures markets, operations......

Words: 1760 - Pages: 8

Premium Essay

Balanced Score Card

...Mecklenburg County positioned for a tough economy through a Customer-Focused Balanced Scorecard Grantham University BA510 Accounting Professor Ezewuchi Amaefule March 24, 2015 Abstract Management’s ability to affectively plan, control, and make good financial decisions in accounting practices are an essential component to achieving organizational profitability. Budgetary restraints, increased operational costs, the economy, and the ultimately the needs of the customer must also be considered to achieve success. When the managerial approach is to evaluate the cause-and effect of both financial and process performance measures, properly aligned to the organization’s strategic goals and objectives, this poses organizations for success, such as, Mecklenburg County in position for a tough economy through a customer-focused balance scorecard, necessary to optimize sustainability and achieve the organization’s overall goals. Mecklenburg County in position for a tough economy through a Customer-focused Balance Scorecard Harvard University Professors, Kaplan and Norton, are credited as inventors of the Balanced Scorecard (BSC). A BSC is a tool organizations use to link strategic goals to operational objectives, through performance measures, to promote successful outcomes. (Snell, Scott & Bohlander, p. 372, 2013). Through BSC, management monitors performance measures from four......

Words: 792 - Pages: 4

Premium Essay

Balance Score Card

...Alignment - Using the Balanced Score-card to create Corporate Synergies By Robert S Kaplan & David P Norton, Harvard Business School Press, 2006 Introduction Most large organizations are divided into business units. The challenge is to coordinate the activities of these units and leverage their skills for the benefit of the organization as a whole Alignment is multidimensional in scope, involving financial synergies, cross selling of products and services to deliver unique solutions to customers and sharing of knowledge and expertise across the organization. Alignment needs to be planned and executed carefully to maximize shareholder value. Generating Synergy When an organization aligns the activities of its various business and support units, it creates additional sources of value in various ways. Corporate financial synergy revolves around issues such as where to invest, where to harvest, how to balance risk and how to create an investor brand. Customer synergy means enhancing customer relationships by offering a range of complementary products and services from different business units. Internal process synergies can be created by generating economies of scale in activities such as procurement, logistics and infrastructure. Learning and growth synergies can be generated by developing and sharing critical intangible assets including people, technology, culture and leadership. Despite various innovations in organization design, there is nothing like the best...

Words: 1991 - Pages: 8

Premium Essay

Balanced Score Card

...BALANCED SCORE CARD FINANCIAL PERSPECTIVE To drive revenue growth Sip-n-Sweet objectives concentrate on diversifying into new markets locally within North Luzon. As well as branching out into new customer markets and increasing the number of stores owned by Sip-n-Sweet. Each of these objectives chosen all tie in with Sip-n-Sweet’s overall strategy of expansion of the business in the near future. The key performance indicators incorporated into this perspective help to measure each objective for the business. The main similar measure here is percentage of increase in revenue growth in the overall business and individual store-level. To achieve these objectives they would have to be based upon implementing bonus and incentive schemes for employees so that they are motivated to achieve their task. They would also need to target larger segments of new customer markets by advertising in new locations such as near to universities to appeal to students or offices to appeal to the working customers. Another important objective within the financial section is improvement of operational efficiency, which is reducing wastage costs for the business. It is important to achieve this objective as it saves the company money and better for the environment. CUSTOMER PERSPECTIVE It is important to measure this objective, as it involves the public with collating feedback and results in reference to how the general public perceives Sip-n-Sweet as a business. This objective also gives......

Words: 675 - Pages: 3

Free Essay

Balanced Score Card

...BALANCED SCORE CARD Es una metodología para traducir la misión estratégica de una organización en un grupo de indicadores numéricos de desempeño que integran y enlazan todos los niveles y funciones de esa organización, asegurando así una correcta ejecución de la estrategia en tiempo y forma. Se utiliza para apoyar el alcance de las estrategias de recursos humanos que son: * Maximizar el recurso humano: contar con la presencia de personal con talento y con experiencia que sea capaz de crear valor * Maximizar la productividad: mantenimiento de los niveles apropiados de personal Los factores que se consideran para el BSC para la implementación de una estrategia que genere valor son: financiero, clientes, proceso empresarial interno, aprendizaje y crecimiento. Financiero: | Clientes: | Mejorar la estructura de costos Mejorar el uso de activos Identificar nuevas fuentes de ingresosIncrementar el valor de clientes clientes actuales | Costo total más bajoProducto líderImagenAtributos del producto | Proceso empresarial: | Aprendizaje y Crecimiento: | Excelencia operacionalDesarrollar relaciones conproveedoresProducir productos o servicios excelentesServicio al clienteRelaciones con clientesCrecer y profundizar las relaciones con clientesRetenerlosRegulaciones y comunidadMejorar la actuación en el ambiente, salud y seguridadCuidar y crecer a la comunidad | CompetenciasHabilidadesExperienciaConocimientoTecnologíaSistemasBases de......

Words: 334 - Pages: 2

Premium Essay

Balanced Score Card

...perspectives are found to be vital to overall success and growth, such as customer relations, internal business processes, learning and growth (Kaplan, 2007, p. 150). The use of the balanced scorecard is said to create several advantages to the long-term success of an organization and is also proven to increase strategic learning: “The balanced scorecard signals to everyone what the organization is trying to achieve for shareholders and customers alike. But to align employees’ individual performances with the overall strategy, scorecard users generally engage in three activities: communicating and educating, setting goals, and linking rewards to performance measures” (Kaplan, 2007, p. 154). This paper will illustrate a balanced score card for the Naval Ordnance Safety and Security Activity (NOSSA), specifically the budget execution process. NOSSA is a field activity of the Naval Sea Systems Command (NAVSEA) within the Department of Defense (DoD). NOSSA acts as the Technical Authority for Explosives Safety, providing technical policies, procedures, and designing criteria associated with weapons system safety across warfare sites. Through the balanced scorecard management system, NOSSA has been able to successfully and continuously ensure the effectiveness of mission capable explosive safety operations while mitigating measures of risks and assessment across DoD to protect and support the war fighters defending our freedom and security. I.......

Words: 3581 - Pages: 15

Premium Essay

Balanced Score Card

...and externally. Better Management Information – The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Improved Performance Reporting – companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Better Strategic Alignment – organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Better Organisational Alignment – well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation. Negative factors of Balanced Scorecard • The balanced scorecard takes forethought. It is not a tool you can just think up one night to solve a problem. • While the balanced scorecard gives an overall view of the four areas for concern in business growth and development, these four areas do not paint the whole picture. • Many companies use metrics that are not applicable to their own situation. Why Balanced Score Cards fail Due to the following reasons, most balanced scorecards......

Words: 961 - Pages: 4