Terrence Thomas

Financial Executives International

People Improve Operations
Robert Kaplan, Ph.D.
Baker Foundation Professor at the
Harvard Business School
Co-developer of activity-based costing
and the Balanced Scorecard
Improving Operations Panel
Moderator: Paul Houghton, Microsoft
Steven Hester, M.D., Norton Healthcare
Frank Modruson, Accenture
Mike Delgado, Panorama
How People Drive
Operational Improvements
Robert S. Kaplan
Baker Foundation Professor
Harvard Business School
City of Indianapolis: Activity-Based
Costing of Public Services
Government should be measured the same way
every other enterprise is measured: By its
results.

We shouldn’t talk in terms of programs funded or

salaries paid, but rather in terms of neighborhoods
protected and workers trained. If people aren’t
getting a dollar’s worth of service for every dollar
they pay in taxes, then government isn’t helping
them out—it’s ripping them off.

Mayor Stephen Goldsmith guest column,

The Indianapolis Business Journal, August 1992.
Time-Driven Activity-Based Costing!
First, calculate the cost per unit time of supplying
capacity in processes or departments.
Unit Cost = Cost of capacity supplied
Practical capacity of resources supplied
Departmental cost = $72,000 per month (salaries, payroll taxes,
supervision, assigned equipment, such as trucks, assigned support costs)
20 employees do the front-line work (filling potholes, repaving roads, …).
Each employee works 20 days per month (after weekends, holidays, and
vacations), 7.5 hours per day, and 60 minutes per hour, or 9,000 minutes per
month
The practical capacity of an employee: after breaks and training, produces
outputs for 6 hours day (80% of theoretical capacity) or 7,200 minutes per
employee.

Unit Cost = $72,000 = $0.50 per minute

7,200 * 20 = 144,000 minutes
R. S. Kaplan and S. Anderson, “Time-Driven Activity-Based Costing,”
Harvard Business Review (November 2004)
Second, Calculate the Time Used to
Accomplish Each Unit of Work by
the Department’s Resources

Estimate the time required by each type of work performed:

Fill pothole 150 minutes

Pave 100 meters of road 500 minutes
Install traffic sign 90 minutes
Third, Calculate the Department’s
Cost to Accomplish Work: Multiply
Capacity Cost Rates by Standard
(or Actual) Times
Calculation of department’s actual costs for work performed

Fill pothole 150*$0.50 $75/pothole

Pave 100 meters of road 500*$0.50 $250/100 meters

repaved

Install traffic sign 90*$0.50 $45/sign installed

Actions Taken by Indianapolis with
Activity-Based Costs of City’s Processes
1. Establish competition for provision of city services
City employees bid for future work against private sector
contractors
Compare city department’s costs against private sector bids

2. Encourage process improvements

City employees attempt to reduce cost per minute of supplying their
services (eliminate excess supervisors, fewer trucks, reduce truck
maintenance costs – the $85 oil change)
City employees reduce the time required to perform work (better
scheduling of work tasks, reduced idle time between jobs,
continuous improvement of work processes)
In six weeks, city employees reduced the cost of filling potholes by
35%
 Impact of Using ABC for Competition
City of Indianapolis
$550
$529 M

$500
Millions of Then-Year Dollars

$450

$439 M
$400

$350

$300

$250 $283 M

$200
82 84 86 88 90 92 94 96
Calendar Year
Mayor Stephen Goldsmith on Impact on
People after Using Activity-Based Costing
and Competition for City Services
“There’s a sense or reality now. City employees
have redesigned their tools and their teams to think
in different ways, and they win. People who aren’t
competitive are moved out or their departments are
eliminated. The ones that are left are convinced
that they are good at what they do. They have a
sense of pride that they are better than the private
sector. That makes a big difference in their whole
attitude towards work, the quality of the work they
do, and, frankly, how the rest of the citizens think
today about their city workers.”
 Using ABC to Reveal Hidden Profit
and Hidden Cost Customers

Revenues Apparent Profits

Hidden Costs
Hidden
Profits
Costs

Customer Customer Customer Customer

A B A B

Traditional Costing Activity-Based Costing

 A Insurance Company Example
160%

140%
Cumulative Economic Profit

120%

100%

80%

60%

40%

20%

0%

0%
%

%
%

%
0%

20

50

90
10

30

40

60

70

80

10
Most Profitable Least Profitable
Clients Clients
How An Insurance Company Managed
Its Customer Profitability
160%

140% Process Improve

(percent of total profits)

120%
Cumulative Profits

100% Maintain Transform

and Grow or Remove
80%

60%

40%

20%

0%
0%

0%
%

%
10

20

30

40

50

60

70

80

90

10
Most Profitable Least Profitable
Clients Clients
The Balanced Scorecard Strategy Map
Describes How the Enterprise Creates
Value for Shareholders and Customers
Financial
Sustained #1. Financial performance, a lag
Shareholder
Value indicator, measures the tangible
Productivity Revenue Growth
outcomes from the strategy
Customer
Customer Perspective
Product/Service Attributes Relationship Image

Price Quality Time Function Relation Brand #2. The customer value proposition
defines the source of value

Process

Operations Customer
Innovation Regulatory and
Management
Processes
Management
Processes
Processes Social Processes #3. Strategic processes create value
for customers and shareholders

Learning & Growth

Human Capital #4. Aligned intangible assets drive

Information Capital
improvement in the strategic processes

Organization Capital
Low Total Cost Customer Value
Proposition
Deliver a combination of quality, price, and
ease of purchase that no one else can match
Low Total Cost
Company Examples

Toyota
McDonalds
Dell Computer
Southwest Airlines
Vanguard Mutual Funds
Wal-
Wal-Mart

Best Buy

Low Total
Cost Lowest cost Consistently Speedy, easy Appropriate
supplier high quality purchase selection
Customer
Objectives
Operations Management Processes Deliver Low-priced,
High-quality, Easily-purchased Goods and Services for
the Low Total Cost Value Proposition
Productivity Strategy Growth Strategy
Financial Long-Term Shareholder Value
Perspective

Improve Cost Structure Increase Asset Utilization Expand Revenue Opportunities Enhance Customer Value

Customer Value Proposition

Customer
Price Quality Speed Selection Functionality Service Partnership Brand
Perspective
Product / Service Attributes Relationship Image

Operations Customer Management Innovation Regulatory & Social

Management Processes Processes Processes Processes

Internal Supply Selection Opportunity ID Environment

Perspective Production Acquisition R&D Pipeline Safety & Health
Distribution Retention Design/Develop Employment
Growth Ramp-Up Community
Risk Management

Human Capital

Learning &
Growth Information Capital
Perspective
Organization Capital
Culture Leadership Alignment Teamwork
 Tata Auto Plastics Systems (TAPS) Strategy Map
F6: Become
F1:Increase ROCE
Financial

F3: Increase industry cost

business with leader
F2: Increase
customer base above existing customers F4: Build Export F5: Maximize
required rate of above required rate Business above required asset
profitability of profitability rate of profitability utilization

C1: Preferred low cost full service provider of high value added products and services
Customer

C2: Full program management at C3: Provide value for money thru low cost
significantly lower costs and manufacturing meeting world class quality &
shorter lead times delivery expectations

P2:Upgrade mfg. P3:Upgrade delivery process P4:Optimise use of

P1:Build competencies to Processes to capability to meet delivery assets & build
integrate components to achieve customer requirements of Indian & processes to
achieve module/systems expectations on overseas customers in a cost minimize
Internal

supplies quality levels effective manner operations cost

P7:Improve capabilities
P6: Build partner relationship for
P5:Excel in new customer in
technology upgrade & business
relationship management -design, tooling ,testing
expansion
-project management
Learning & growth

L1: L2: L3:

Create climate for action through Build Competencies Integrate IT in all business
alignment and empowerment processes

L4:
Imbibe Values
Linking the Balanced Scorecard to
Quality and Process Improvements:
Will These Lead to Superior
Customer and Financial Outcomes?

Will an increase in product quality reduce

operating costs and profits as a % of sales?
Will an increase in product or service
quality lead to more growth in sales with
targeted customers?
 Objectives, Measures, Targets and
Initiatives Clarify and Focus the Strategy
Strategy Map
Section Of An Airline Strategy
Map
Financial
Return on Net
Assets Measure: How Target: Initiative:
Objective: One Projects or
performance The level of
Plane aspect of what programs
Utilization against the performance or
the strategy is required to
objective is rate of improvement
Customer trying to achieve reach the target
monitored needed
Attract & Retain
More Customers

Lowest
Prices Objectives Measures Targets Initiatives
Internal • On Ground Time • 30 Minutes • Six-Sigma non-
• Fast ground
Fast turnaround • On-Time Departure • 90% maintenance
Ground cycle time
Turnaround reduction

People &
Knowledge
Ground
Crew
Alignment
 Section Of An Airline
Initiatives are where the
Financial
Strategy Map
strategy gets executed
Return on Net
Assets Measure: How Target: Initiative:
Objective: One Projects or
performance The level of
Plane aspect of what programs
Utilization against the performance or
the strategy is required to reach
objective is rate of improvement
Customer trying to achieve the target
monitored needed
Attract & Retain
More Customers

Lowest
Prices Objectives Measures Targets Initiatives
Internal • On Ground Time • 30 Minutes • Six-Sigma non-
• Fast ground
Fast turnaround • On-Time Departure • 90% maintenance
Turnaround cycle time
Time reduction

People &
Knowledge Will a Six Sigma project close the
Ground
Crew performance gap of the target?
Alignment PURPOSE: Strategic
Target
initiatives should be
selected and funded
because they have a GAP
direct impact on
strategy advancement. Current
 Section Of An Airline
Initiatives are where the
Financial
Strategy Map

Return on Net
strategy gets executed
Assets Measure: How Target: Initiative:
Objective: One
Plane performance The level of Projects or
aspect of what
Utilization against the performance or programs
the strategy is
Customer objective is rate of improvement required to reach
Attract & Retain trying to achieve
monitored needed the target
More Customers

Lowest
Prices Objectives Measures Targets Initiatives
Internal • Fast ground • On Ground Time • 30 Minutes • Six-Sigma non-
Fast turnaround • On-Time Departure • 90% maintenance
Turnaround cycle time
Time reduction
People &
Knowledge Turnaround time between flights Lean techniques*
Ground
Crew A.Stricter controls on carry-on bags,
Alignment Current Best practice fewer passengers moving back in
Non maintenance activities minutes minutes per aisle to find bags
per step step B. Cleaning crew in position ahead
Unload passengers 5:14 4:38 of time
Wait for cleaning crew to board 0:24 :18 C.Standardized workflow, timing
and methods, such as prearranged
Clean airplane 10:48 7:40 kits
Wait for cabin crew to board 4:11 0 D.Visual signal from cabin crew to
Wait for first passenger to board agent when plane is ready to
4:06 0 board

Load passengers 17:32 14:00 E. Active management of overhead

storage bins by flight crew
Wait for passenger info list 1:58 :13
F. Passenger information list
Close aircraft door :57 :09 delivered by agent following last
Detach boarding ramp 1:39 :43 passenger on board
* Source: McKinsey Quarterly
Total non-maintenance cycle time 48:18 29:11 G.Agent ready at aircraft to close
door
Using the BSC and Quality
Assessment Models
(Baldrige, EFQM) Together
Set priorities for investment and projects

Strategic Improve to levels of Maintain high Competitive

quality excellence quality levels Advantage
Balanced
Scorecard
Improve to minimum
Potential to cut back
Non-Strategic acceptable quality “Hygiene”
current investment
levels

Weaknesses Strengths

Quality Assessment Model

BSC Adds to Total Quality Programs

Makes Explicit the Causal Links from

Operational Improvements
To a Customer-Based Value Proposition
To Productivity Gains and Financial Outcomes
Identifies Entirely New Processes for
Improvement
Aligns Quality (six sigma) Initiatives to
Strategic Priorities
Make Strategy Everyone’s Job
Leadership and Management Processes Move
Strategy Between the Top and the Bottom

CORP
SBU

Top-Down “Bridging Bottom-Up Process

Process” To Share COMMUNICATION to Internalize &
the Strategy & Align AND EDUCATION Execute the Strategy
the Workforce
PERSONAL GOAL ALIGNMENT
ALIGNED COMPENSATION
STRATEGIC COMPETENCIES

The Strategy Focused Workforce

Leaders Must Communicate the
Strategy Seven Times Seven Ways

Ask the
President

Management Newsletters
Meetings
Intranet

Mobil NAM&R
Balanced Scorecard
Training and Orientation Digest
Perspective Objective Measure

Financial

Customer
Freq. Baseline
1997 Actual Results
Current
Period
YTD
Amount
1997
Target

Date Plan Amount Date

Town Hall
Meetings
Internal

NBU’S WITH
Strategic Partners W / SCORECARDS INCENTIVE
Learning/ W / SCORECARDS COMPENSATION
Growth
SCEN
INITIATIVES ARIO
TECHNOLOGY PLAN
NING

Monthly Videos
Magazine
Bulletin Boards
 Chrysler
Monthly reviews
Group
of our performance
versus scorecard
targets have become an
integral part of how we
manage the company.

All employees
should strive to align
their performance goals
and target agreements
to business results
described in
the scorecard
February
February 8,
8, 2002
2002

President
President and
and CEO
CEO
Dieter
Dieter Zetsche
Zetsche calls
calls
the
the scorecard
scorecard “the
“the
main
main yardstick”
yardstick” and
and
“an
“an integral
integral part
part of
of
how
how wewe manage
manage the
the
company.”
company.”
Royal Canadian Mounted Police
V Division – Iqaluit (Baffin Island)
Use Extrinsic Motivation to Reinforces
Desired Behavior and Increase
Intensity of Employee Awareness
Align Personal Objectives: All employees learn
how they fit into the overall game plan
Corporate

Division

Business Unit

Department

Associate

Align Incentive Compensation: Link reward systems to

achievement of individual and organizational objectives
Unibanco: Aligning Employees
Best Practice
2002
Unibanco Management Agreement with Employees
Management Agreement - Example
NAME : CIF : CONCEPT :
AREA : PERIOD :
FUNCTION :
EVALUATOR : TOTAL (1+2):

UNIBANCO´S STRATEGIC THEMES

• Aggressive search for scale
• Continuous efficiency maximization
• Obtain excellence in Human Capital Management
• Effective domain of the credit and collect cycle

YOUR UNIT´S STRATEGIC THEMES

YOUR DEPARTMENT´S OBJECTIVES

 Unibanco: Aligning Employees Best Practice
2002
Management Agreement - Example
WORK PLAN
% Self- Manager Final
YOUR GOALS FOR THE YEAR evaluation evaluation evaluation
Financial
Customers
Process
Technology
People &

Total
Unibanco: Employee
Compensation System
2003
Human Capital Management Tools x BSC

BSC - Based Compensation Program

From – X% to + X% BSC
(lead indicators)
Total
Compensation
According to the 100%
Unit's financial
results (lag
indicators) Company's Vision
From -Y to +Y% achievement
(“Sustainable earning per
share annual growth of 15%”)
Case Study: Making Strategy
Everyone’s Job at Hilton Hotels
Education Personal Goals

Balanced Scorecard

Communication Incentive Compensation

Operational Efficiency Panel
Moderator
Paul Houghton, Microsoft East Region Vice
President
Panelists
Steven Hester, M.D., Chief Medical
Information Officer, Norton Healthcare
Frank Modruson, CIO, Accenture
Mike Delgado, Vice President, Panorama
Robert Kaplan, Ph.D., Marvin Bower Professor
of Leadership Development at Harvard
Business School
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