Balanced Scorecard and KPIs for Small and Medium-sized Contractors in Vietnam

Strategic planning is one of the radical responsibilities of senior management in any company. It involves the survey of business environment and analysis of the company’s performance and main resources, from that a competitive strategy can be drawn (Warszawski, 1996). Therefore, strategic planning is a way to understand the company’s current situation and to plan for the future by a long-range perspective. In other words, strategic planning helps people prepare for the future by simulating the future. It focuses on long-term issues which are how the company succeeds and thrives. Strategic planning sets up major goals that the company must strive for, instead of being overwhelmed with short-term and immediate problems. It has been proven that the companies concentrating on long-term directions by strategic planning tend to outperform the ones not caring about long-term goals.

However, the application of strategic planning in construction sector and especially in construction SMEs is not straightforward. Even when a construction company applies strategic planning, there is a chance that the execution of strategies will not be thorough. And it is an often-heard story. Right after the launch of strategic plan, it becomes secondary and is dominated by daily activities and the compulsion of meeting immediate milestones of ongoing projects. In addition, being obsessed by business precariousness, top management is too eager for any opportunities of new projects, even though they could be a deviation from strategic objectives. Andersen et al. (2001) has mentioned the risk of neglecting established long-term goals. After a time, senior executives look at one another and wonder why so little progress has been made toward strategic goals. Here, they are devoid of a framework to pursue the determined strategies.

The above obstacles and problems bring the role of a comprehensive strategic management system to prominence. Such systems are effective means of strategic planning and execution. Nowadays, the most popular management system is the Balanced Scorecard (BSC). Created in the early-1990s by two professors R. Kaplan and D. Norton from Harvard University, the BSC is now utilized widely all over the world. Its usefulness and effectiveness have been taken for granted for nearly two decades. It is believed that 60% of Fortune 500 companies have applied or experimented with the BSC.

The BSC puts strategic planning at the center of value creation of the company, then translates strategies into objectives and sets up a set of key performance indicators (KPIs) to measure these objectives. By this way, strategy execution is monitored and evaluated. So the BSC provides a framework for strategic planning and execution. It aligns the whole company performance with strategic goals. Furthermore, the BSC is not based on separate functions of the company. In contrast, the BSC gives an outlook from four perspectives (Financial, Customer, Internal Business and Learning & Growth), which cover all respects of the company’s overall performance. Besides, the BSC is also an effective means to communicate strategies and objectives throughout the company. It interprets strategies to all levels of the company in a plain and intelligible manner.

In a nutshell, the BSC is an approach of ‘3 in 1’: a performance measurement system, an effective communication tool, and above all - a strategy management method.

Though the BSC system has been very popular worldwide for nearly two decades and its benefits are beyond dispute, the BSC is still a nascent concept and is hardly known in Vietnam. Since the visit of R. Kaplan, one of the authors of the BSC, to Vietnam in 2011 the awareness of the BSC has an increase. Nevertheless, the application of the BSC system in Vietnam is still extremely rare. Very few enterprises have adopted the BSC and they all are the large-sized.

Mr. Tran Xuan Le made a case study to explore the possibility of BSC adoption in construction SMEs in Vietnam. The four main objectives were to : (i) conduct strategy formulation; (ii) develop the BSC model; (iii) establish KPI set to support the BSC; and (iv) propose a process of BSC deployment.

Conclusion

(1) The Final Balanced Scorecard Model

Balanced Scorecard (BSC) development here comes to the last step. So far we have conducted the assessment of overall situation of the company and carried out strategy formulation. We have also translated the strategies into strategic objectives and established set of KPIs to support those objectives. During the establishment of KPIs, setting targets and weight factors for each KPI was discussed. And initiatives and programs is the final key component of the BSC. In addition, to launch the BSC into real use, a process of BSC deployment was proposed and discussed.

Now the BSC has been accomplished. There is still a great length to go and a lot of encumbrances ahead waiting for the company when realizing the BSC and its goals. But now is the time to look at the result obtained: the Balanced Scorecard model of the company.

In Financial perspective, there are KPIs that represent short-term results (F1.1 Return on Equity), long-term results (F2.1 Revenue growth rate) as well as performance process indicators (F3.1 Cash flow, F3.2 Backlog). In Customer perspective, KPI C1.1 Target customer satisfaction needs direct involvement of customers, whereas C2.1 Rate of target customers share and C3.1 Profit margin from customers use indirect customer assessment.

KPIs in Internal Business perspective cover all stages of the project life cycle (see Figure 4.2). In which, I2.1 PM Competency has very high weight factor since it reflects the project-based nature of a contractor and competency of project management is the crucial determinant of the company’s success. Finally, KPIs in Learning & Growth perspective specify the quality of workforce – the fundamental drivers of performance outcomes in the three upper perspectives. They include both qualitative indicators (L2.1 Employee attitude, L1.1 Employee competency) and quantitative indicators (L2.2 Key staff turnover rate, L3.1 Employee productivity).

When comparing the BSC model of CBM JSC in this particular case with theories, the following can be drawn:

-     The core of the BSC, as we’ve known, is strategic planning. According to Warszawski (1996), the appropriate strategy for smaller companies is “focus” strategy. This matter is partly true in the case of CBM JSC. The company has chosen a certain type of customers (foreign investors of small-medium scale) to focus on, finding out their particular needs, and then trying to acquire advantages by satisfying these focused customers.

-    Kaplan and Norton (2000) pointed out three generic differentiators of the value proposition in Customer perspective: operational excellence, customer intimacy and product leaderships. CBM JSC has opted for customer intimacy since it is the strong point of the company comparing with the other two. SMEs usually do not have an excellent management system and high technologies to pursue operational excellence and product leaderships. Furthermore, as indicated earlier, construction industry is to sell directly to individual customers, not to massive market. This nature stresses the importance of customer relationships and customized services.

-      To prepare the Internal Business perspective, companies should specify their internal-process value chain, and measures should be formulated for all phases (Kaplan and Norton 1993, 2000). It can be seen that KPIs in this perspective of CBM JSC would cover all stages of its value chain, here is project life cycle:

(i) Identify customer needs: extensive services rate;

(ii) Offer services & win (tender): tender winning rate, tender price index;

(iii) Prepare and perform: PM competency index, change order rate, committed cost rate;

(iv) Closeout: payment & close-out cycle.

 

It can be concluded that no enterprise is too small for strategic planning. Conversely, strategic planning must be the backbone of any enterprise. The BSC can be entirely exerted in construction SMEs and it provides a framework for strategic management. In order to conduct strategic planning, managers must have a profound understanding of current situation of the enterprise, and from that critical issues and solutions should be pointed out. Strategic planning and a management system is a vital choice, a guarantee to stable growth and future success for enterprises; no matter they are small or large.

Recommendations

Now when this study comes to the final section, some recommendations can be obtained:

-       Due to the limitations of the study framework, not all the details of the company’s BSC have been clarified. In order to launch this BSC to real use, a further elaborate study is needed and it must be a collective effort of BSC development team. For examples, KPIs must be more in-depth with respect to setting targets for each KPI, designing survey forms, making up assessment and scoring criteria system, assigning responsibilities, setting procedures for collecting and computing data, and so on.

-       BSC approach can be recommended to any kind of company. However, the BSC model in this study is proposed for the particular case of CBM JSC. Different companies will have different demands, problems and circumstances, and thus lead to different strategies and objectives. There is no common BSC for all. Moreover, the BSC theory was originally created for large and mega enterprises. Companies should adapt the concepts and develop the most suitable BSC for them. They should not force themselves to adopt a Harvard’s mould.

-    BSC should be continuously monitored and reviewed to ensure the fitness for the company. Some adjustments and modification could be made. Besides, even if the company succeeds in deploying the BSC and develops stably, strategies should be still revised after 3 – 5 years. The rapid increase in the company’s size (in case of success) and changes in business environment will create new requirements and demands to be assessed and dealt with.

The last words of this study are to convey the message of Alan Fell, a famous BSC specialist,

Small and medium-sized enterprises not thinking of strategy will be small and medium for ever and will always be in the situation of struggling for survival.

On the contrary, enterprises with in-depth strategic planning will get giant leaps and will attain great achievements, and Balanced Scorecard is the very means.

  

His thesis abstract is copied and posted.

Abstract

Originated in the early-1990s, the Balanced Scorecard (BSC) has now evolved as one of the most widely used models of strategic management all over the world. Made up from a balanced and coherent set of Key performance indicators (KPIs), the BSC provides a holistic and comprehensive view of the organization’s performance from four perspectives: Financial, Customer, Internal Business and Learning & Growth. Moreover, the BSC turns strategic planning into the backbone of any organization. It helps to translate vision and strategies into concretized objectives and targets to monitor and control the strategic execution.

Although the prominent benefits of the BSC system have been taken for granted worldwide for the last two decades, yet it still seems to be rather a nascent concept in Vietnam. The application of the BSC is very rare especially as far as small & medium-sized construction contractors are concerned. There is still an ambivalent attitude towards such a strategic management system among small & medium-sized enterprises (SMEs) due to their nature of flexibility and limited resources.

The aim of this study is to explore the possibility of BSC adoption in small & medium-sized contractors in Vietnam. A typical medium-sized contractor was selected for the case study. The procedure of BSC development consisted of five steps as following: First, an in-depth survey of business environment and company’s performance was conducted, which leaded to second step - strategy formulation. Mission, vision and strategies were set up. Third, strategic objectives and strategy map, which transformed the vision and strategies into specific terms, were built based on four perspectives. Fourth, a set of KPIs was established to measure and track the progress toward strategic objectives. And in the last step, initiatives and programs needed to realize strategic objectives were put forward. Finally, the study would be accomplished by proposing a process of BSC deployment, which is necessary to launch the BSC into real use, and discussing potential benefits of the BSC for the particular case of this study.