Lean Six Sigma can be overwhelming to an organization if implemented without regard for an organization’s change management history, culture and readiness. That said, the starting point for Lean Six Sigma – as well as any organized approach to effecting change that both enhances customer experience and impacts profitability – is actually having a strategy that includes the voice of the customer.
Companies deploying Lean Six Sigma must have a clear understanding of how Lean Six Sigma fits in their business model objectives and customer strategy. Too often, a company swings from emphasizing financial metrics over customer metrics, to the other extreme of customer focus over profitability. A business approach based on the voice of the customer must not be excessive in responding to customer needs outside of the context of strategy and of analytical discipline. A growth company using Lean Six Sigma for optimal impact must balance both financial and customer measures of success. The balanced scorecard is a great tool for doing exactly that.
Six Sigma and Balanced Scorecard Well Suited
The balanced scorecard – developed in the early 1990s by Dr. Robert Kaplan and Dr. David Norton – is a structured approach for developing strategic measurement systems. The Six Sigma continuous process improvement methodology is ideally suited for use with 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 with other key data attributes, including the voice of the customer. Thus, the balanced scorecard retains traditional financial measures, but, in addition, includes success metrics that allow management to view customer relationships, employee activity, supplier roles and process capabilities.
More than just a measurement system, the balanced scorecard enables organizations to clarify vision and strategy, and translate those into action. The format provides a simple, comprehensive and focused approach to measure success around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When used as a measurement and reporting tool within a Lean Six Sigma deployment, the balanced scorecard allows a company’s strategic planning process to have a real impact on the daily running of the business.
The balanced scorecard describes specific measures and performance commitments that track progress not only to concrete, current-year business plans, but also to the strategic three-to-five-year goals of the company. The balanced scorecard suggests that an organization be viewed from four perspectives – financial, customer, internal and growth – and that the organization develop metrics, collect data and analyze that data relative to each of these perspectives.
A Model for Developing a Balanced Scorecard
Following is the outline of a model for developing a balanced scorecard and the next level of detail for each of the four perspectives. The model was developed for a financial institution and should act as a practical example for building a balanced scorecard.
First are the places from which to derive balanced scorecard metrics for each of the four perspectives:
- Financial perspective – shareholders
- Customer perspective – customers
- Internal perspective – operations and management
- Growth perspective – innovation and learning
Next, use balanced scorecard development principles by linking measurements to the company’s strategy for meeting key business goals. Consider the following three questions in regard to each of the four perspectives:
- If our strategy is successful, how will results differ from each perspective?
- What are the critical success factors we must prioritize immediately?
- What are the critical measurements we need to have in place to support our critical success factors and monitor progress with our strategy? These measurements will form the foundation for our balanced scorecard and set the priority of ongoing Six Sigma process improvement efforts.
Then, consider the suggested metrics for each of the perspectives.
Scorecard Metrics for Financial Perspective
- Project expense: actual to budget, actual to forecast
- Operating expense: actual to budget, actual to forecast, fixed versus variable, customer facing versus non-customer facing
- Operating expense: cost per transaction for major delivery channels
- Initiatives: forecasted staff requirements, resources used versus forecasted, resource deployment percentages, base support versus initiatives
- Capital deployment: current system upgrades, capacity expansion, new technology, investment required by business initiatives, return on capital invested
- Vendor management and outsourcing effectiveness in unit cost reduction
Scorecard Metrics for Customer Perspective
- Customer satisfaction ratings
- Customer-driven volumes: accounts, requests, complaints, transactions (online, at ATMs, to call centers, in branches)
- Market share by product and by market
- Revenue achieved against revenue goals, by customer segment
- Failed customer interactions (FCI) by channel: each occurrence when a customer is unable to successfully use a bank-provided product or service
- Channel revenue loss per FCI: calculation of losses created (based on number and type of transactions customers could not complete)
Scorecard Metrics for Internal Perspective
- Application development: software design and delivery completion time
- Quality and availability of service: image archive availability, image capture rates, ad hoc image retrieval success percentages, network response times, host computer availability and any unscheduled outages, major application transaction volumes
- Support services: help desk speed of response and problem resolution, turnaround time on hardware moves/adds/changes, speed of password reset, info security access resolution
- Problem management: time to restore services on customer-impacting problems, problem resolution time for all high-severity incidents
- Risk controls: external data transmission controls, intercepts of non-secure transmissions, status of audit and compliance reviews/findings
Scorecard Metrics for Growth Perspective
- Product and service innovation: lead time to develop prototypes, time to deploy for commercial use, research and development initiatives under way
- Application innovation: application development delivery speed, software built versus bought as packages, reusable software components in repository and deployed into new applications
- Continuous improvement: Six Sigma process improvement projects under way, Six Sigma projects certified and quantified as successful
- Technology leadership: training statistics, externally sanctioned certifications, regional and national leadership in standards groups
- Employee attitudes: satisfaction survey results, voluntary turnover percentages, loss of key technology personnel, key technology positions unfilled, statistics on recognition for good results
|Example of Balanced Scorecard Measurements Used by a Bank|
Strategic Bank Objectives
Broaden revenue mix
|Cost per transaction for each channel|
Revenue mix by customer segment
|Increase customer satisfaction|
Increase customer loyalty
|Customer satisfaction rating|
Customer retention by segment
Shift customers to profitable channels
Minimize operational problems
Provide responsive service
Channel mix change
Customer-impacting service errors
Request fulfillment time
|Develop critical skills|
Provide strategic information
Align personal goals
|Critical skills training percentages|
Information availability to request ratio
Employee satisfaction and retention
Conclusion: More Effective Decisions
The adjacent table is just an example of the metrics in a balanced scorecard, but it does provide the most important elements for successful use of the tool. Ultimately, the value of the balanced scorecard is directly proportional to its usability and relevance in a company. Continuous improvement only occurs when an organization knows:
- What its customers want.
- Has a strategy to meet or exceed customer needs in a profitable fashion.
- Can actually measure the effectiveness of the tactical application of its strategy.
Therefore, metrics must be developed based on the priorities of the strategic plan, which provide information that managers care about most and can actually take action on. The goal of the balanced scorecard is to empower managers to see their company more clearly – from many perspectives – and thus make more effective long-term decisions.