Steve Sidney is currently the Honorary Treasurer of both the National Laboratory Association (NLA) and South African National Accreditation System (SANAS), as well as the Manager of the NLA. He is also an active member of a number of organisations such as Eurolab and International Laboratory Accreditation Co-operation’s (ILAC‘s) Laboratory Committee (LC) and Technical Accreditation Issues Committee (TAIC), in all cases representing the view of the laboratory stakeholders. Initially he worked for Fluke South Africa, which was a wholly owned subsidiary of the American company. Thereafter he started his own business, which was ultimately sold to Altech, a large multi disciplined Johannesburg Stock Exchange (JSE) Listed Electronics/Telecomm’s corporation. Mr Sidney was subsequently appointed the Managing Director of Altech Instruments in the mid 1980s, a position he held until 1997. After spending some time in a recruitment business, he elected to begin Steve Sidney Consulting cc, a management-consulting practice. Mr Sidney graduated from the Witwatersrand Technikon with a Higher National Diploma in Electrical Engineering Light Current. a report by Steve Sidney Honorary Treasurer of the National Laboratory Association and the South African National Accreditation System Introduction Since the early 1990s, when the idea of a balanced scorecard (BSC) was first proposed, many thousands of companies ranging from small to large, public sector as well as private, all over the world have adopted the BSC approach with many achieving remarkable successes. Since measurements form the backbone of all testing and calibration laboratories day-to-day operations, it is surprising that those who run and manage these laboratories have not considered using the BSC in order to meet their objectives. This article uses the scorecard to propose how a test or calibration laboratory could benefit from adopting a similar approach and thereby adopting solid business principles in order to improve the viability of the laboratory in whatever environment a particular organisation finds itself. The BSC Over many years, it was a well accepted business practice to evaluate the performance of a business by using the financial accounting model to measure whether the organisation, business unit or department was successful. Whilst the success of any business is essentially whether or not it makes a profit, it became obvious to many that only evaluating a company in terms of its financial performance was becoming less and less helpful in shaping and guiding the company in the modern era. In the early 1990s, Norton and Kaplan, were requested to develop a new performance measurement model. This was as a result of a study conducted by KPGM, which indicated that many companies were dissatisfied with their reliance on financial measures as the sole indicator of economic value and success. Companies operating in the 1990s were of the opinion that this approach was hindering their ability to create value and effect change. Norton and Kaplan began a process that culminated in the BSC, which proposes that various non-financial measures be used in order to balance the evaluation of the company. “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it you can’t improve it.” Norton and Kaplan established four critical areas that they considered sufficiently generic to establish a balanced view of the company but, more importantly, could be used by any organisation in order to create meaningful measures for itself. It should be remembered that financial measures are always at best an indication of the financial health of a company at a point in time (the balance sheet is the best example of this) or a reflection of past performance (the income statement being the best example in this case). Essentially, these two documents, which all companies, small and large, use for reporting purposes, are merely indications of past or current performance but do very little to indicate how the company will perform in the future. In addition, whilst it is true that these financial measures can be used to gain useful information such as the time it takes to collect outstanding debtors, debtors days, or use of cash, cash flow statement, it gives very little information about non-tangible issues such as efficiency or quality of the process or effectiveness, e.g. training programmes. One can see, therefore, how relying purely on the financial model, could impinge on a modern, knowledge-based organisation to understand whether it was successful or not since many non-tangible issues need to be monitored and evaluated if the organisation is to achieve success. Figure 1 is a generic model of the BSC and one can see how a number of very important aspects are covered in what is essentially one simple, easy-to- read overview. One of the most interesting aspects of this model is how it is the strategy of the organisation and often its need to implement change that sparked its development. It should be noted that the vision and strategy are located at the core, and that the various measures are used to focus on its communication to every level of the organisation as well as to ensure that the Using the Balanced Scorecard to Measure Laboratory Performance 38 Laboratory Management BUSINESS BRIEFING: LABTECH 2004
Transcript
Steve Sidney is currently the HonoraryTreasurer of both the National
Laboratory Association (NLA) andSouth African National Accreditation
System (SANAS), as well as theManager of the NLA. He is also an
active member of a number oforganisations such as Eurolab and
International Laboratory AccreditationCo-operation’s (ILAC‘s) Laboratory
Committee (LC) and TechnicalAccreditation Issues Committee (TAIC),in all cases representing the view
of the laboratory stakeholders.Initially he worked for Fluke SouthAfrica, which was a wholly ownedsubsidiary of the American company.
Thereafter he started his ownbusiness, which was ultimately soldto Altech, a large multi disciplinedJohannesburg Stock Exchange (JSE)
Listed Electronics/Telecomm’scorporation. Mr Sidney was
subsequently appointed the ManagingDirector of Altech Instruments in
the mid 1980s, a position he helduntil 1997. After spending some timein a recruitment business, he electedto begin Steve Sidney Consulting cc,a management-consulting practice.
Mr Sidney graduated from theWitwatersrand Technikon with a
Higher National Diploma in ElectricalEngineering Light Current.
a report by
S t e v e S i d n e y
Honorary Treasurer of the National Laboratory Association and the South African National Accreditation System
I n t r o d u c t i o n
Since the early 1990s, when the idea of a balancedscorecard (BSC) was first proposed, manythousands of companies ranging from small tolarge, public sector as well as private, all over theworld have adopted the BSC approach with many achieving remarkable successes. Sincemeasurements form the backbone of all testing andcalibration laboratories day-to-day operations, it issurprising that those who run and manage theselaboratories have not considered using the BSC inorder to meet their objectives.
This article uses the scorecard to propose how a test orcalibration laboratory could benefit from adopting asimilar approach and thereby adopting solid businessprinciples in order to improve the viability of thelaboratory in whatever environment a particularorganisation finds itself.
T h e B S C
Over many years, it was a well accepted businesspractice to evaluate the performance of a business byusing the financial accounting model to measurewhether the organisation, business unit or departmentwas successful. Whilst the success of any business isessentially whether or not it makes a profit, it becameobvious to many that only evaluating a company interms of its financial performance was becoming lessand less helpful in shaping and guiding the company inthe modern era.
In the early 1990s, Norton and Kaplan, were requestedto develop a new performance measurement model.This was as a result of a study conducted by KPGM,which indicated that many companies were dissatisfiedwith their reliance on financial measures as the soleindicator of economic value and success.
Companies operating in the 1990s were of the opinionthat this approach was hindering their ability to createvalue and effect change. Norton and Kaplan began aprocess that culminated in the BSC, which proposesthat various non-financial measures be used in order tobalance the evaluation of the company.
“Measurement is the first step that leads to controland eventually to improvement. If you can’t measuresomething, you can’t understand it. If you can’tunderstand it, you can’t control it. If you can’tcontrol it you can’t improve it.”
Norton and Kaplan established four critical areas thatthey considered sufficiently generic to establish abalanced view of the company but, more importantly,could be used by any organisation in order to createmeaningful measures for itself. It should beremembered that financial measures are always at bestan indication of the financial health of a company at apoint in time (the balance sheet is the best example ofthis) or a reflection of past performance (the incomestatement being the best example in this case).Essentially, these two documents, which allcompanies, small and large, use for reporting purposes,are merely indications of past or current performancebut do very little to indicate how the company willperform in the future.
In addition, whilst it is true that these financialmeasures can be used to gain useful information suchas the time it takes to collect outstanding debtors,debtors days, or use of cash, cash flow statement, itgives very little information about non-tangibleissues such as efficiency or quality of the process oreffectiveness, e.g. training programmes. One can see,therefore, how relying purely on the financial model,could impinge on a modern, knowledge-basedorganisation to understand whether it was successfulor not since many non-tangible issues need to bemonitored and evaluated if the organisation is toachieve success.
Figure 1 is a generic model of the BSC and one cansee how a number of very important aspects arecovered in what is essentially one simple, easy-to-read overview. One of the most interesting aspectsof this model is how it is the strategy of theorganisation and often its need to implementchange that sparked its development. It should benoted that the vision and strategy are located at thecore, and that the various measures are used tofocus on its communication to every level of theorganisation as well as to ensure that the
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measurement of the associated objectives are usedto drive the necessary change and/or performancegoals required. As a summary, therefore, BSCsreflect “the knowledge, skills and systems thatemployees will need (learning and growth) toinnovate and build the right strategic capabilitiesand efficiencies (internal processes) that deliverspecific value to the market (customer) and whichwill eventually lead to higher shareholder value(financial)”, for the organisation.
L e a d a n d L a g I n d i c a t o r s
Finally, a most important feature of this model is thefact that not only can a balanced view of anorganisation be obtained, but a mix of what are knownas lead and lag indicators/measures can be used. This ofcourse means that a much better view of futureperformance is represented and this leads toorganisations being in a good position to makeoperational corrections to their strategyimplementation, long before the traditional financialapproach provides feedback.
T h e B S C a n d t h e L a b o r a t o r y
Whilst the first step when a company implements aBSC is usually to construct a scorecard that reflects the
overall company’s strategy, the next step is to push themethodology down lower and implement scorecardsfor individual business units. Clearly, therefore, it isquite practical for a test or calibration laboratory toconsider using this approach and this could applywhere either the laboratory is part of the company orit is the company itself.
Figure 1: The Balanced Scorecard
Visionand
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sidney_BOOK.qxp 9/9/04 11:35 am Page 39
L a b o r a t o r y C o n s i d e r a t i o n s
Having been exposed to many different types oflaboratories, the author is of the opinion that there areessentially two generic types, which are as follows:
• Internal – the laboratory in this case forms part ofa larger operation and often its role is to supportthe other activities of the company. In this casethe financial motivation is often ‘break-even’, costreduction or even, in some cases, subsidisation.
• External – here the company provides bothtesting or calibration services, and these are theprime motivation for the company to exist. Inthis case it is vital that these services areprofitable since often there is no other form of revenue generation to support thelaboratory’s activities.
Some readers may be more comfortable with theterms ‘non-commercial’ and ‘commercial’ ratherthan internal and external, but in either case, theintention is to provide a term of reference forlaboratories where there is a real profit motive asopposed to one where the profit motive is break-even and/or cost reduction. It is thereforesuggested that when building a suitable strategy forthe laboratory, the following items need to beconsidered in order to ensure that a suitable BSC isconstructed:
• Customer needs/requirements– competent services;– scope of work;– speed of response;– level of uncertainties;– volume; and– onsite.
• Laboratory internal processes;– equipment required;– automation;– overheads (e.g. rent, water and lights, wages,
telephone, fax. etc.); and– staff skills.
Of course, none of the above, or for that matter manyof the other issues that may need to be taken intoaccount, are very unique for a specific laboratory.What is, or should be, unique is the individual strategythat a specific laboratory will embark on in order tosatisfactorily meet its mission and vision.
T e s t L a b o r a t o r y
Cal_Test Services is a hypothetical multi-disciplinarylaboratory whose main activities are in the area ofelectrical and temperature calibration. It seeks to serveits customers by providing calibrations to meet therequirements of ISO 17025 and has been accredited bythe national accreditation body. Whilst the owners ofthe laboratory have relied on measuring theperformance of the company purely in terms of itsprofitability, they have decided to implement a BSC inorder to improve and broaden their activities. Afterconducting a strategic planning exercise theyestablished the following mission and vision.
Miss ion
Cal_Test provides accredited electrical andtemperature calibration services to ISO 17025.
Vis ion
Cal_Test seeks to profitably meet its clients’ calibrationneeds in terms of quality, level of uncertainty and speedof response. The next step in this process wouldtypically be to establish the strategy that is required toachieve the mission and vision and then map thestrategy according to the four perspectives of thescorecard. In order to establish a suitable strategy, athorough planning exercise is required and the endresult is a strategy map that can be portrayed in anumber of different ways, but in all cases the objectiveis to provide an easy reference to enablecommunication of the map and the resultant measuresto both the organisation internally as well as outsidestakeholders. Figure 2 is an example of such map. It notonly illustrates the company’s strategy, it also provideslinks between the various perspectives and shows howthey can be used together to evaluate both theindividual areas and the overall strategy.
Back to Cal_Test
When Cal_Test had completed its strategy planning, itrevealed that a number of objectives were critical and,
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Laboratory Management
Figure 2: Example of a Strategy Map
Financial
Customer
Internal
Learning and growth
Great financialbenefit to theorganisation
Delivery ontime
Knowledge ofSix Sigma
Chrome plating
High returnon project
No faultyproducts tocustomer
Knowledge ofchrome plating
Chemicalprocessing
Project budgetsadhered to
Cheaper productsto customer
Knowledge ofchemical processing
Final inspectionand dispatch
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when placed in a table (see Table 1), one canimmediately see how they link upwards through allfour perspectives. It should be remembered that inorder to construct an effective scorecard, it is preferableto proceed in a top-down fashion. This is because theoverall goals of the organisation need to be establishedfirst, no matter what its size is. Only then can thestrategy of how to achieve this be worked out. In orderto follow the reasoning behind the map, we can seethat to grow the revenue stream, it was established thatthere are two main criteria that need to be focused on:one is the laboratory’s ability to respond to customerneeds; and the other is to gain more customers. Fromthese two hypothetical, but hopefully realisticobjectives, the laboratory’s strategy is to improve its
operational efficiency as well as to broaden the numberof services (types of calibrations) that it can offer toprospective clients.
Finally, one can then see how the knowledge andlearning required to support this strategy is reflectedin how it intends to enhance its skills and capabilitiesin the areas of engineering computer skills, anelectronic document system and metrologists whohave broader capabilities in terms of the types ofcalibrations they can perform. ■
This article is continued, with additional tables, in theReference Section on the website supporting this businessbriefing (www.touchbriefings.com).
Table 1: Cal_Test Strategy Map
Perspective Objectives
Shareholder value
Grow revenue
Customer Leader in response time Acquire more customers
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