The Balanced Scorecard: Translating Strategy Into Action (20 page)

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CORE EMPLOYEE MEASUREMENT GROUP

We have found most companies use employee objectives drawn from a common core of three outcome measurements (see Figure 6-1). These core outcome measurements are then supplemented with situation-specific drivers of the outcomes. The three core employee measurements are

Employee satisfaction
Employee retention
Employee productivity

Figure 6-1
The Learning and Growth Measurement Framework

Within this core, the employee satisfaction objective is generally considered the driver of the other two measures, employee retention and employee productivity.

Measuring Employee Satisfaction

The employee satisfaction objective recognizes that employee morale and overall job satisfaction are now considered highly important by most organizations. Satisfied employees are a precondition for increasing productivity, responsiveness, quality, and customer service. Rockwater noticed early in its scorecard implementation process that employees who scored highest in the satisfaction surveys tended to have the most satisfied customers. So, for companies to achieve a high level of customer satisfaction, they may need to have the customers served by satisfied employees.

Employee morale is especially important for many service businesses where, frequently, the lowest-paid and lowest-skilled employees interact directly with customers. Companies typically measure employee satisfaction with an annual survey, or a rolling survey in which a specified percentage of randomly chosen employees is surveyed each month. Elements in an employee satisfaction survey could include:

Involvement with decisions

Recognition for doing a good job

Access to sufficient information to do the job well

Active encouragement to be creative and use initiative

Support level from staff functions

Overall satisfaction with company

Employees would be asked to score their feelings on a 1 to 3 or a 1 to 5 scale, anchored at the low end with “Discontented” and at the high end with “Very (or Extremely) Satisfied.” An aggregate index of employee satisfaction could then be posted on the Balanced Scorecard, with executives having a drill-down capability to determine satisfaction by division, department, location, and supervisor.

Measuring Employee Retention

Employee retention captures an objective to retain those employees in whom the organization has a long-term interest. The theory underlying this measure is that the organization is making long-term investments in its employees so that any unwanted departures represents a loss in the intellectual capital of the business. Long-term, loyal employees carry the values of the organization, knowledge of organizational processes, and, we hope, sensitivity to the needs of customers. Employee retention is generally measured by percentage of key staff turnover.

Measuring Employee Productivity

Employee productivity is an outcome measure of the aggregate impact from enhancing employee skills and morale, innovation, improving internal processes, and satisfying customers. The goal is to relate the output produced by employees to the number of employees used to produce that output. There are many ways in which employee productivity has been measured.

The simplest productivity measure is revenue per employee. This measure represents how much output can be generated per employee. As employees and the organization become more effective in selling a higher volume and a higher value-added set of products and services, revenue per employee should increase.

Revenue per employee, while a simple and easy-to-understand productivity measure, has some limitations, particularly if there is too much pressure to achieve an ambitious target. For example, one problem is that the costs associated with the revenue are not included. So revenue per employee can increase while profits decrease when additional business is accepted at below the incremental costs of providing the goods or services associated with this business. Also, any time a ratio is used to measure an objective, managers have two ways of achieving targets. The first, and usually preferred, way is to increase the numerator—in this case, increasing output (revenues) without increasing the denominator (the number of employees). The second, and usually less preferred, method is to decrease the denominator—in this case, downsizing the organization, which might yield short-term benefits but risks sacrificing long-term capabilities. Another way of increasing the revenue per employee ratio through denominator decreases is to outsource functions. This enables the organization to support the same level of output (revenue) but with fewer internal employees. Whether
outsourcing is a sensible element in the organization’s long-term strategy must be determined by a comparison of the capabilities of the internally supplied service (cost, quality, and responsiveness) versus those of the external supplier. But the revenue per employee metric is not likely to be relevant to this decision.

One way to avoid the incentive to outsource to achieve a higher revenue per employee statistic is to measure value-added per employee, subtracting externally purchased materials, supplies, and services from revenues in the numerator of this ratio. Another modification, to control for the substitution of more productive but higher paid employees, is to measure the denominator by employee compensation rather than number of employees. The ratio of output produced to employee compensation measures the return on compensation, rather than return to number of employees.

So, like many other measures, revenue per employee is a useful diagnostic indicator as long as the internal structure of the business does not change too radically, as it would if the organization substitutes capital or external suppliers for internal labor. If a revenue-per-employee measure is used to motivate higher productivity of individual employees, it must be balanced with other measures of economic success so that the targets for the measure are not achieved in dysfunctional ways.

SITUATION-SPECIFIC DRIVERS OF LEARNING AND GROWTH

Once companies have chosen measures for the core employee measurement group—satisfaction, retention, and productivity—they should then identify the situation-specific, unique drivers in the learning and growth perspective. We have found that the drivers tend to be drawn from three critical enablers (see Figure 6-2): reskilling the work force, information systems capabilities, and motivation, empowerment, and alignment.

RESKILLING THE WORK FORCE

Many organizations building Balanced Scorecards are undergoing radical change. Their employees must take on dramatically new responsibilities if the business is to achieve its customer and internal-business-process objectives. The example, earlier in this chapter, illustrates how front-line employees in Metro Bank must be retrained. They must shift from merely reacting to customer requests to proactively anticipating customers’ needs and marketing an expanded set of products and services to them. This
transformation is representative of the change in roles and responsibilities that many organizations now need from their employees.

We can view the demand for reskilling employees along two dimensions: level of reskilling required and percentage of work force requiring reskilling (see Figure 6-3). When the degree of employee reskilling is low (the lower half of Figure 6-3), normal training and education will be sufficient to maintain employee capabilities. In this case, employee reskilling will not be of sufficient priority to merit a place on the organizational Balanced Scorecard.

Companies in the upper half of Figure 6-3, however, need to significantly reskill their employees if they are to achieve their internal-business-process, customer, and long-run financial objectives. We have seen several organizations, in different industries, develop a new measure, the strategic job coverage ratio, for its reskilling objective. This ratio tracks the number of employees qualified for specific strategic jobs relative to anticipated organizational needs. The qualifications for a given position are defined so that employees in this position can deliver key capabilities for achieving particular customer and internal-business-process objectives. Figure 6-4 illustrates the sequence of steps followed by one company in developing its strategic job coverage ratio.

Usually, the ratio reveals a significant gap between future needs and present competencies, as measured along dimensions of skills, knowledge, and attitudes. This gap provides the motivation for strategic initiatives designed to close this human resource staffing gap.

For the organizations needing massive reskilling (the upper righthand quadrant of Figure 6-3), another measure could be the length of time required to take existing employees to the new, required levels of competency. If the massive reskilling objective is to be met, the organization itself must be skillful in reducing the cycle time required per employee to achieve the reskilling.

Figure 6-2
Situation-Specific Drivers of Learning and Growth

INFORMATION SYSTEMS CAPABILITIES

Employee motivation and skills may be necessary to achieve stretch targets for customer and internal-business-process objectives. But they are unlikely to be sufficient. If employees are to be effective in today’s competitive environment, they need excellent information—on customers, on internal processes, and of the financial consequences of their decisions.

Front-line employees need accurate and timely information about each customer’s total relationship with the organization. This could likely include, as Metro Bank has done, an estimate, derived from an activity-based cost analysis, of the profitability of each customer. Front-line employees should also be informed about which segment an individual customer occupies so that they can judge how much effort should be expended not only to satisfy the customer on the existing relationship or transaction, but also on learning about and attempting to satisfy emerging needs from that customer.

Figure 6-3
Learning and Growth Measurement—Reskilling