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Business modelling aims to help the balanced scorecard work

The latest research "captures the value of the scorecard". By Liz Murby, technical project manager, CIMA.

The Business Modelling Approach (BMA) is the result of some of the very latest research into making the balanced scorecard work. The technique, proposed recently by Peter Brewer, associate professor in accountancy at Miami University, Ohio, USA, guides development and implementation of a fully integrated balanced scorecard.

The balanced scorecard was developed and introduced in the early 1990s by Robert Kaplan and David Norton and has been adopted as a performance measurement system by many organisations. It avoids damaging over-reliance on financial metrics as measures of organisational performance by adding three new perspectives:

the customer;
internal processes; and
learning and growth. (See article "Balanced scorecard breakthroughs" in March 2003 Insight.)

Since the scorecard's introduction, there has been much work on refining it, including the development of the so-called Value Dynamics Framework (VDF) by Brewer.

The VDF focuses on embedding the contribution of intangible assets (for example, income generating potential, brand value, reputation for customer service, culture, supplier relationships, leadership etc) in scorecard formulation. (See article, "Putting strategy into the balanced scorecard", in February 2004 Insight.)

Since developing the VDF, Brewer has now refined his thinking further to produce the BMA. Proponents of BMA claim that the methodology of the approach adds further value because it captures the potential value of the scorecard.

It does this by:
conceptualising and analysing the organisation as a process;
mapping the "if-then" relationships between critical operations by formulating three distinct matrices; and
using the matrices to identify key value drivers and the exact contribution of intangibles.
The BMA has thirteen steps (see below) which are, in turn, part of three distinct phases (see below).

Proponents of the BMA welcome the step-by-step guidance it provides to implementing a balanced scorecard. Following the prescribed methodology ensures that each step is tackled in turn. The organisation crystalises its strategic vision into a process-oriented business model, and in so doing gains a rich understanding of that model before selecting any scorecard related performance measures.

To provide meaningful answers to the questions associated with phase one (steps one to six), and to formulate the if-then matrices in phase two, input is required from all members of the management team. Thus the BMA methodology claims to capture a true diversity of opinion that its advocates suggest serves as a platform for a more inclusive group dialogue.

The BMA framework

Phase one - Characterising the organisation as a process
This is done by addressing six fundamental questions

1. What are the ultimate financial goals?
These may be independently generated or pre-determined (by a parent company or by corporate headquarters). They generally relate to one or more of the following: revenue growth, cost reduction, asset use or cash-flow.

2. What is the customer value proposition behind achieving our financial goals?
For example, the customer value proposition could be operational excellence, product leadership, or customer intimacy.

3. What are the key outputs - what does the organisation provide that enables delivery of this value proposition?

4. What processes need to function optimally so that this can be done?

5. What are the critical inputs that enable processes to function optimally?

6. Which suppliers provide these inputs?

Phase two - The critical strategy mapping process

This phase establishes three distinct cause and effect (or if-then) matrices. The first focuses on financial drivers and maps the specific customer value propositions and product / service outputs that drive attainment of each specified financial goal. The second focuses on customer value drivers. It maps the specific internal processes responsible for providing the products and services that drive the delivery of the customer value propositions into a matrix. Lastly, the process drivers matrix specifies which suppliers and inputs are responsible for driving optimal process performance.

Phase three - Using the matrices established in phase two to guide scorecard metrics selection

The financial drivers matrix maps the impact of customer value propositions on financial goals to guide selection of customer and financial drivers. The customer value drivers matrix maps the impact of core / support processes on customer value propositions to guide the selection of internal business process measures, and the process drivers matrix maps the impact of inputs / suppliers on core / support processes and is used to select learning and growth measures.

These three phases provide the high level framework of the BMA.

Advocates of the BMA stress the importance of tackling each of its thirteen steps in turn.

Step one: Define financial goals.
This is the starting point in phase one.

Step two: Define the customer.
The organisation should consider which customers are most profitable and why. They need to know why customers choose to do business with competitors.

Step three: Define the outputs.
What are the organisation's core strategic products / services?
Why do these succeed in the market place?
What will the next generation of successful products / services look like?
How many customer driven improvements are embedded in offerings?

Step four: Define processes.
What core and support processes are critical to satisfying customers?
What are the critical success factors for each of these (for example, quality, time, flexibility, cost)?
What functional departments must collaborate to optimise core and support processes?
What developing process technologies could threaten the competitive position?

Step five: Define inputs.
Which of the assets identified in the value dynamics framework are critical to supporting key core and support processes?
Which assets are not critical and could be divested or streamlined?
Which assets need to be developed to sustain the next generation of products / services?

Step six: Define suppliers.
Which suppliers are critical to the business?
Which are viewed as strategic alliances, cooperative partners or arms length suppliers?
Are suppliers' incentives aligned with organisational incentives?
Is there over-reliance on one or more supplier?
What competences do suppliers need to ensure success in the future?

Steps seven through to nine correspond to the second phase of the high level framework. (Step seven involves preparation of the financial drivers matrix, eight concerns the customer value drivers matrix and nine the process drivers matrix).

By formulating the if-then matrices, the organisation maps the hypotheses on which the business model is founded. Such matrices allow the organisation to drill down through the inter-relationships of the business model to identify the root causes of financial performance in term of the respective contributions of suppliers and inputs.

Steps 10 to 13 involve the selection of the balanced scorecard metrics, by reference to the if-then matrices prepared in phase two. The financial metrics should mirror the financial goals set out in the financial drivers matrix. The customer measures should assess customer perception with respect to the most important customer value propositions and outputs identified in the financial drivers matrix.

The learning and growth measures should motivate the organisation to cultivate the inputs and suppliers that enable process excellence, as identified in the process drivers matrix. The internal business process measures selected should assess the performance of the core and support processes identified in the customer value drivers matrix.

August 2004