BALANCED SCORECARD

BY: PURVI SHAH (39) (MMS II B)

CONTENTS
INTRODUCTION CASE STUDY 1 VINFENS BALANCED SCORECARD CASE STUDY 2 CORPORATION CASE CONCLUSION THE CIGNA

INTRODUCTION Traditional financial reporting systems provide an indication of how a firm has performed in the past, but offer little information about how it might perform in the future. For example, a firm might reduce its level of customer service in order to boost current earnings, but then future earnings might be negatively impacted due to reduced customer satisfaction.

A new approach to strategic management was developed in the early 1990's by Drs. Robert Kaplan (Harvard Business School) and David Norton. They named this system the 'balanced scorecard'. Recognizing some of the weaknesses and vagueness of previous management approaches, the balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and 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. Kaplan and Norton describe the innovation of the balanced scorecard as follows: "The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation." The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

The Customer Perspective The Financial Perspective

The internal capability Perspective The innovation Perspective The Four Perspectives

CASE STUDY - 1 4

VINFENS BALANCED SCORECARD As part of Vinfens quality improvement program, we have adopted the practices and principles of the Balanced Scorecard. Through the use of the Balanced Scorecard, Vinfen intends to translate its mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for customers and internal measures of critical business processes, innovation, and learning and growth. Vinfen intends to use the Balanced Scorecard as a strategic measurement system to manage our strategy over the long run. CUSTOMER PERSPECTIVE CRITERIA: Exceed payer expectations To meet payer needs Fair pricing and service effectiveness MEASURES: Value added business strategies Redesign business processes Influence legislators and payers FINANCIAL PERSPECTIVE CRITERIA Align budget processes and contracting processes Increase cost efficiency of administration MEASURES: The Finance Department measured the monthly costs to the organization of employees working overtime and the percentage of Vinfens total expenses that is spent on General Administration. INTERNAL CAPABILITY PERSPECTIVE

CRITERIA: To meet internal customer needs To make integrated internet information system MEASURE: Integrated goal directed CQI process for departments/divisions Redesign business processes Build a master plan for integrated internet information system INNOVATION PERSPECTIVE CRITERIA: Create an organizational culture of trust and teamwork Build employee competencies for implementation of the strategic plan Retain best qualified employees Recruit better quality of staff MEASURES: The Human Resources Department measured Turnover Rates, Promotion rates, First-Time MAP Pass Rates, First-Time Performance Appraisal Ratings, all

The balanced scorecard of Vinfens is illustrated in the following diagram

CASE STUDY -2
THE CIGNA CORPORATION CASE
The Property and Casualty division of CIGNA Corporation (P&C) implemented the Balance Scorecard into their organization. P&C were going through an extensive reengineering process where the Balance Scorecard was one of the new tools/processes implemented. They came up with eight main competencies, each of which needed improvement. These included the ability to: Select and enter new markets with above -average profit potential. Select and attract the right kinds of customers Select and manage the producers for those businesses Better identify exposures and hazards. Drive pricing more accurately toward the right risk assessment Form partnerships with customers in order to reduce claims frequency Reduce claims severity Manage claims performance to the required service level of each business unit. These strategies were then adapted into the framework of objectives in the Balanced Scorecard. Once the team members reached a consensus on these objectives, they focused on developing the strategic measures that would accurately reflect progress. These measures were composed of indicators showing the kind of support needed to increase performance. FINANCIAL PERSPECTIVE CRITERIA: Dramatically improve operating performance Business opportunity Identification MEASURES: Net operating income 8

 NWP Growth by business NWP Premiums Mix by business Combined ratio CUSTOMER PERSPECTIVE CRITERIA: Select & manage the producer Terminated unprofitable producers Build relations with target producers by: - Providing price competitive offerings - Effective loss-reduction activities - Terminate relations with unprofitable producers MEASURES: Loss ratio (calendar year) by producer Expense ratio by producer Producer triangle Premium run-off rate Performance against producer plans Average policy size INTERNAL CAPABILITY PERSPECTIVE CRITERIA: Underwrite the business to be profitable Manage the prevention and control of claims Upgrade the underwriting process Align claims. Loss control, premium audit, & underwriting

MEASURES: Loss ratio Expense ratio Price monitors Underwriting quality survey Claims frequency 9

 Claims severity Severity-Control monitors Loss-Control utilization INNOVATION PERSPECTIVE CRITERIA: Upgrade the competencies of our people to support the specialist strategy Upgrade competencies of our people Provide information technology to support our specialists MEASURES NWP per salary $ Net operating income per salary $ Competency development plan status Key staff turnover Key staff acquisition

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CONCLUSION The Balance Scorecard is much more like a "network" of linked indicators. The "BALANCED SCORECARD balances and links financial and non-financial indicators, tangible and intangible measures, internal and external aspects, performance drivers and outcomes. The advantages of the Balanced Scorecard are: The measures incorporated in the Balance Scorecard are grounded in the organization's strategic objectives and competitive demands. Therefore this set of critical indicators helps the organization focus its efforts on the strategic vision. The four perspectives of the Balance Scorecard enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth. The Balance Scorecard then becomes the cornerstone of the company's current AND future success. Also, by balancing external and internal measures, there is no trade-off among key success factors. Finally, managers can use the Balance Scorecard to: Clarify and gain consensus about the strategy, Communicate the strategy throughout the organization, Align departmental and personal goals to the strategy, Link strategic objectives to long-term targets and annual budgets, Identify and align strategic initiatives, Perform periodic and systematic strategic reviews, Obtain feedback to learn about and improve strategy.

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