In this video tutorial, accounting professor Kay Stice explains how internal processes measures in the balanced scorecard framework help a company monitor how the business is actually working. He focuses on three key areas of internal process measures, including innovation, operations and the service-after-sale.
- The internal processes measures in the balanced scorecard framework help managers monitor how the business is actually working. Let's organize these internal processes measures into three groups, innovation measures, operations measures, and service-after-sale measures. Innovation process measures reflect the process of identifying and creating new products. For many companies, innovation is where much of a company's competitive edge is created. It is important to the ultimate financial success of the organization that the critical effort to identify and develop new products and services is effectively managed.
For example, for companies operating in rapidly evolving markets, a discipline of spending money on research and development is crucial. So, one innovation process measure might be the percentage of revenue spent on R and D. For many companies, this percentage is remarkably stable from year to year, reflecting a company decision to keep plowing money back into R and D. For example, I happen to have this measure for several companies for 2012. During 2012, Intel spent 19% of its revenue on R and D and Intel consistently spends that high amount.
For Microsoft, the number was 13%. Again, Microsoft consistently spends that high amount on research and development. This measurement reflects a key change in perspective. Spending money on R and D is not a negative, it's a positive. These balanced scorecard measures remind managers that money must be consistently spent on key items in order to keep the company alive and growing. Without this perspective, the accountants and the budget cutters would slash R and D spending at the first sign of a temporary decline in profits and by so doing, they might ensure that the decline in profits becomes permanent.
Operations process measures reflect the activities directly related to sale of goods or services to customers, including receipt of customer orders, creation of products, and delivery of products. Earlier, I used the example of an internal processes measure for an eyeglasses store, the daily number of eyeglasses returned to the technicians because the glasses are broken, don't fit the prescription, or are not what the customer ordered. In the area of operations management, this is sometimes called Six Sigma. Six Sigma is the idea that operations processes should be so designed and monitored as to reduce the number of errors or defects to just a handful, three or four in a million.
Service-after-sale process measures are of two types. One type of service-after-sale process involves the billing and collection of payments from customers. The other type involves the organization's commitment to back its product, including efforts to repair or replace products and provide post-sale support and guidance in the use of the product. Now, billing and collection don't sound very exciting, but companies that aren't able to efficiently able to collect cash from customers, without alienating those customers aren't going to survive long.
So a good measure is really that old financial measure, average collection period, which is the number of days from the time of sale until cash collection. The success of continuing customer support can be measured by the time elapsed between the receipt of a customer request and a satisfaction of that request and this illustrates the interrelation of the balanced scorecard measures. Depending on a customer's experience with service after the sale, that customer is more or less likely to be satisfied and now recall that customer satisfaction is a leading measure in the customer section of the balanced scorecard.
Higher customer satisfaction means better customer retention, a customer outcome measure, and better customer retention means better financial results. None of this happens if the business operations are not functioning properly. The internal processes measures in the balanced scorecard framework help managers monitor how the business is actually working.
In this course, accounting professors Jim and Kay Stice explain what KPIs your business should consider in a balanced scorecard, from financial goals to employee and customer satisfaction. They describe how to craft a clear mission statement that complements your KPIs, and how to tie performance to incentives. Plus, get a look at KPIs in action, as Jim and Kay break down a case study examining a trucking company's balanced scorecard.
- The importance of KPIs and measuring performance
- Financial goals and measure
- Customer needs and satisfaction
- Employee growth
- Creating an effective mission statement
- Linking measurements and rewards
- Examining a KPI case study