Tempest, Inc.

(The balanced scorecard)

Planned changes to capital spending
In mid-july, Tempests board, which prided it self on its ability to make quick
decisions, responded. It was decided that, given market conditions, price must
remain flat. The heavy capital investment programmes had resulted in explosive
growth of depreciation expenses. In order to sustain income growth targets (which
had to be maintained as a separate issue from sales growth), costs of production
would have to be reduced. Simultaneously, return on investment targets was raised
to strengthen overall financial performance. Given this get better versus get
bigger philosophy, it was agreed that capital investment should be focused on
improvement rather than expansion. Capital investment should be focused on
improvement rather than expansion. Capital investment had to decrease as a
percentage of sales. Allowing continued growth of capital spending at current rates
would lead to depreciation charges which would significantly erode the bottom line.
The board hoped that this new focus would yield results in two ways : first, projects
that did not yield solid benefits would not be implemented and second, projects that
held the promise of very good returns would be implemented without excessive
spending. This new focus would allow more to get done with less (capital).
Many people asked bill what all this meant. Would capital projects already
begun be stopped? Were there particular types of projects that would not be funded
in the future? What was the target for the new capital budget? Bill was concerned. A
storm seemed to be brewing.
Cost-cutting teams were deployed throughout the company. A few examples
of the new focus were widely discussed in the company. In one instance, the
number of engineers scheduled to visit the USA to evaluate new equipment was
reduced from 14 to four. Some managers complained that instead of cutting fat,
muscle was being sliced away (translation : their budget had the biceps and should
not be cut). However, this was an expected reaction to the new lean focus.
Many agreed that this new cost-consciousness was appropriate. It stood in
conflict, however, with a major motivator for many managers. Many of Tempests
directors liked the power of having a substantial capital budget. Indeed, at times, it
seemed that the size of your capital budget, along with the number of staff in your
department, signalled your importance to the rest of the organisation. Thus much
attention became focused on the capital budget.
By the end of August, two camps had emerged. The first group consisted of a
stream of anxious visitors to Bill Jennings office. They (and their representatives)
had questions about how much would be cut out of the total budget. They

emphasised how important their projects were to the success of the company,
especially in the face of the emerging competitive threats. They also wanted to
know how their obviously superior projects could be guaranteed inclusion in the
capital budget. Perhaps there could be two tiers of projects : an A list (which would
presumably include many of their own projects) and a B list of inferior projects (of
which many seemed to be in a variety of departments other than their own). The
second camp seemed to have decided that the power of their influence with the
board and the obvious superiority of their projects would make them guaranteed
inclusion in the budget. Bill was unhappy. The waters were decidedly choppy.
This wasnt an easy time for Bill. The directors were a formidable group of
people with power to impact his career and they all expected that he could
recognise the unique value of their projects. He grew thin and pale. He wore a
hunted look and took to ducking into the nearest empty office when he saw a
director approach, to avoid painful discussions of why a particular projects just had
to be funded. He wished for the old days when he facilitated teams in their pursuit
of performance improvement. Joe Smith noticed Bills pain. Surely said joe, some
of those performance improvement principles could be applied to the capital
budgeting process. Bill felt sick. The waves were higher than he had ever seen
them.
Strategy and capital planning
In late August the board hired a consultant for advice on issues of strategic
importance. She had the board attend a senior management course on Competitive
Strategy. This was a change from previous strategy meetings where the board
would retire for a week to the sumptuous surrondings of a luxury resort. Directors
noted this and commented on it. When they returned, they assembled the
companys 6.000 employees in five cities for a satellite broadcast of a meetings at
which the chairman discussed the competitive challenges facing Tempest. strategic
Intent, Competitive Advantage and Critical Capabilities were addressed, as were
Cycle Time, Delighting the Customer and Empowerment. When the issues came
around to refocusing capital spending, the chairman referred to your chief
financial officer, Joe Smith and his team, who are working on a solution. The
chairman was confident that this revised capital strategy would re-energise the
company by allowing it to concentrate on only those opportunities that could deliver
the best results. In no way would the new capital plan impair Tempests ability to
compete. Cycle time would improve and manufacturing processes would become
more nimble as a result of this new focus. The chairman said he would have Joe
Smith report to the board in November on how the process redesign was
progressing and how he intended cutting $65 million from the capital budget. Joe
Smith smiled as the camera zoomed in on him. Bill was glad the camera crew did
not know who Joes team was. Bill felt the waves batter at him as he sank under
the surface.

That evening Joe and Bill had a long discussion. How would they manage the
expectations of the directors with ideas for capital investments? They had to
overcome the squeakiest wheel gets his/her project funded syndrome. How would
they deliver results to the board? How could they be sure that they could select the
best capital investment ideas and reject the rest? Should the value of a capital
project be measured only by a discounted cash flow? Should an attempt be made to
reflect what value the project could deliver to customers, the trade and the
employees? How did these issues relate to each other? Were some more important
than others? Were there other issues they were missing? Would this new process
take too long to implement? What if it didnt succeed? Should they work with a
group of directors to validate their thoughts?
Validaton, they dcided, was a must on two fronts first, to test how sound
their ideas were, but second and as important, to test the political ramifications of
a new approach. Bill recalled an approach he had read about, which may have some
application here the balanced scorecard model. 1 They called in Joyce Shu, the
director of strategic planning. Joyce had perhaps the best cross-functional overview
of how things should work in the company. The three worked late into the night and
when the meeting ended they had a plan.
Over the next few weeks Bill led Joe, Joyce and a small cross-functional team
of managers in two meetings where they identified a series of performance factors
that capital investments should impact. This brainstorming process ended with
close to a hundred such factors. There were too many to use effectively and Bill
referred to research papers for a method that would help narrow the list down to a
few key performance factors. He found one that worked : the Performance
Measurement Questionnaire. 2 The method was a democratic, consensus-oriented
way to distil a wide variety of potential measures of performance into a shortlist of
the few mos important to Tempest. It began with a list of all the performance
measures. Each member of the cross-functional team voted for each measure by
circling a number on a scale from 1 to 7 where 7 was most important. The measure
with the highest average scores became part of a final set of 25 measures.
Bill was amazed at how much he had contributed to the tool. He was back in
a mode of improving the performance of a process in this case, the capital
budgeting process. He was happy. The waves were rough, but he was riding them
well.