In: Accounting
QUESTION 1
Rockwater, a wholly owned subsidiary of Brown & Bread, a global
engineering and construction company, is a worldwide leader in
underwater engineering and construction. Norman Chambers, hired as
CEO in late 2019, knew that the industry’s competitive world had
changed dramatically. “In the 1990s, we were a bunch of guys in wet
suits diving off barges into the North Sea with burning torches,”
Chambers said. But competition in the subsea contracting business
had become keener in the 2000s, and many smaller companies left the
industry. In addition, the focus of competition had shifted.
Several leading oil companies wanted to develop long-term
partnerships with their suppliers rather than choose suppliers
based on low-price competition.
With his senior management team, Chambers developed a vision: “As
our customers’ preferred provider, we shall be the industry leader
in providing the highest standards of safety and quality to our
clients.” He also developed a strategy to implement the vision. The
five elements of that strategy were: services that surpass
customers’ expectations and needs; high levels of customer
satisfaction; continuous improvement of safety, equipment
reliability, responsiveness, and cost effectiveness; high-quality
employees; and realization of shareholder expectations. Those
elements were in turn developed into strategic objectives. If,
however, the strategic objectives were to create value for the
company, they had to be translated into tangible goals and
actions.
Rockwater’s senior management team transformed its vision and
strategy into the balanced scorecard’s four sets of performance
measures. One perspective included three measures of importance to
the shareholder. Return-on-capital-employed and cash flow reflected
preferences for short-term results, while forecast reliability
signaled the corporate parent’s desire to reduce the historical
uncertainty caused by unexpected variations in performance.
Rockwater management added two financial measures. Project
profitability provided focus on the project as the basic unit for
planning and control, and sales backlog helped reduce uncertainty
of performance. Rockwater wanted to recognize the distinction
between its two types of customers: Tier I customers, oil companies
that wanted a high value-added relationship, and Tier II customers,
those that chose suppliers solely on the basis of price. A price
index, incorporating the best available intelligence on competitive
position, was included to ensure that Rockwater could still retain
Tier II customers’ business when required by competitive
conditions. The company’s strategy, however, was to
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emphasize value-based business. An independent organization
conducted an annual survey to rank customers’ perceptions of
Rockwater’s services compared to those of its competitors. In
addition, Tier I customers were asked to supply monthly
satisfaction and performance ratings. Rockwater executives felt
that implementing these ratings gave them a direct tie to their
customers and a level of market feedback unsurpassed in most
industries. Finally, market share by key accounts provided
objective evidence that improvements in customer satisfaction were
being translated into tangible benefits.
From another perspective, Rockwater executives defined the life
cycle of a project from launch (when a customer need was
recognized) to completion (when the customer need had been
satisfied). Measures were formulated for each of the five
business-process phases in this project cycle: Identify: number of
hours spent with prospects discussing new work; Win: tender success
rate; Prepare and Deliver: project performance effectiveness index,
safety/loss control, rework; and Closeout: length of project
closeout cycle. Formerly, the company stressed performance for each
functional department. The new focus emphasized measures that
integrated key business processes. The development of a
comprehensive and timely index of project performance effectiveness
was viewed as a key core competency for the company. Rockwater felt
that safety was also a major competitive factor. Internal studies
had revealed that the indirect costs from an accident could be 5 to
50 times the direct costs. The scorecard included a safety index,
derived from a comprehensive safety measurement system that could
identify and classify all undesired events with the potential for
harm to people, property, or process. The Rockwater team
deliberated about the choice of metric for the identification
stage. It recognized that hours spent with key prospects discussing
new work was an input or process measure rather than an output
measure. The management team wanted a metric that would clearly
communicate to all members of the organization the importance of
building relationships with and satisfying customers. The team
believed that spending quality time with key customers was a
prerequisite for influencing results. This input measure was
deliberately chosen to educate employees about the importance of
working closely to identify and satisfy customer needs.
At Rockwater, improvements came from product and service innovation
that would create new sources of revenue and market expansion, as
well as from continuous improvement in internal work processes. The
first objective was measured by percent revenue from new services
and the
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second objective by a continuous improvement index that represented
the rate of improvement of several key operational measures, such
as safety and rework. But in order to drive both product/service
innovation and operational improvements, a supportive climate of
empowered, motivated employees was believed necessary. A staff
attitude survey and a metric for the number of employee suggestions
measured whether or not such a climate was being created. Finally,
revenue per employee measured the outcomes of employee commitment
and training programs.
The balanced scorecard has helped Rockwater’s management emphasize
a process view of operations, motivate its employees, and
incorporate client feedback into its operations. It developed a
consensus on the necessity of creating partnerships with key
customers, the importance of order-of-magnitude reductions in
safety related incidents, and the need for improved management at
every phase of multiyear projects. Chambers sees the scorecard as
an invaluable tool to help his company ultimately achieve its
mission: to be number one in the industry.
Required:
a) According to Kaplan and Norton, what characteristics/features
make the balanced scorecard so special for its worldwide adoption?
b) Outline the five-pronged strategy crafted by Rockwater in
developing the scorecard.
c) Using the balanced scorecard (tabular format), translate
Rockwater’s strategy into tangible goals and actions.
d) Outline the importance of the balance score card to Rockwater’s.
e) What factors aided Rockwater in its smooth switch to the
balanced Score card?
f) How beneficial can the scorecard be to UPSA Graduate School?
Answer:
a) Characteristics/features of balanced scorecard
The below are the key characteristics of the balanced scorecard according to Kalpan & Norton:
1. Balance score card takes the top down approach by starting with an initiation of top level management.
2. It clearly starts with the mission and vision of the business.
3. It identifies the key performance indicators from four different perspectives (i) Financial (ii) Customer (iii) Internal processes & (iv) Organisational capacity.
4. It also emphasises giving importance to non-financial measures.
b) Five-pronged strategy crafted by Rock water in developing the scorecard
The below are the five-pronged strategy crafted by Rock water in developing the scorecard
1. Services that surpass customers’ expectations and needs
2. High levels of customer satisfaction
3. Continuous improvement of safety, equipment reliability, responsiveness, and cost effectiveness
4. High-quality employees
5. Realization of shareholder expectations
c) Balanced scorecard
Perspective |
Strategy |
Tangible Goals/Actions |
Finance |
(a) Return-on-capital-employed (b) Cash flow reflected preferences for short-term results (c) Reduce the historical uncertainty |
1. Project profitability provided focus on the project as the basic unit for planning and control 2. Sales backlog helped reduce uncertainty of performance. |
Customer |
Recognize the distinction between its two types of customers: Tier I & Tier II |
1. Tier I customers were asked to supply monthly satisfaction and performance ratings. 2. A price index, incorporating the best available intelligence on competitive position, was included to ensure that Rock water could still retain Tier II customers’ business |
Internal Process |
Define the life cycle of a project from launch to completion |
Measures were formulated for each of the five business-process phases in this project cycle. |
Organizational Capacity |
Motivate its employees |
Increase in employee motivation and retentions. |
d) Importance of the balance score card to Rock water’s:
1. The balanced scorecard has helped Rock water’s management emphasize a process view of operations, motivate its employees, and incorporate client feedback into its operations.
2. It developed a consensus on the necessity of creating partnerships with key customers, the importance of order-of-magnitude reductions in safety related incidents, and the need for improved management at every phase of multiyear projects.
3. It helped the company to ultimately achieve its mission: to be number one in the industry.