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BALANCED SCORCARD for BAE System Ltd with emphases on Platform Solutions Magic Johnson University of Maryland University College AMBA 630 Section 9048 Professor: Sue Billko September 01, 2010 EXECUTIVE SUMMARY Managers analyzing a company’s perspectives are better able to convert the company’s strategy into actionable objectives and in doing so, can quantify how well a strategic plan is executed. A Balance Scorecard will be used as a management system to map BAE systems’ Platform Solutions’ strategic objectives into performance metrics. There are four perspectives involve: financial, internal processes, customers, and learning and growth “These perspectives provide relevant feedback as to how well the strategic plan is executing so that adjustments can be made as necessary” (NetMBA, 2010). Platform Solutions caters for the aerospace and defense industries with products and technologies that improve operational safety and enhance mission effectiveness. The business supports a comprehensive array of commercial and military platforms including rotary and fixed wing aircraft, and land vehicles with capabilities in power management, vehicle management and human to machine interface. Platform Solutions designs and manufactures fly-by-wire flight controls; autopilots, pilot sticks, and inceptors; full-authority digital engine controls; cockpit, head-up, and helmet-mounted displays; data distribution and flight-deck systems; hybrid electric propulsion systems and vehicle power management systems. Platform Solutions also is at the developmental stages of integrated capabilities for prognostics and health management, all-weather operation, air traffic management, power management, and real time cockpit information. The business is based in Johnson City, New York. Platform Solutions employs more than 4,200 people at 10 facilities around world. There are three organizations within Platform Solutions, Commercial Avionics, Defense Avionics and Power & Energy Management. Platform solutions’ U.K and middle East Fixed Wing Market Group serves BAE Systems’ Military Air Solutions business, Eurofighter, Panavia, Saab, and their U.K., European, and Middle East end users. INTRODUCTION Platform Solutions balanced scorecard has four perspectives of which have three specific objectives. The first perspective is Financial with its main objectives revenue growth, operating profit growth and long term solvency. The next perspective is Customer Service which has its objectives of continuously improving customer satisfaction, Maintaining Transaction Size and efficiency and retaining customers. The third perspective is Internal Process with its objectives being Product Improvement, Ratio of New to Old Products and Maintain Market Share. The fourth perspective is learning and development which objectives includes competitive employee compensation, enhanced employee training and development courses offered, and minimize employee turnover. The Balance Scorecard will measure Platform Solution’s current financial performance and evaluates efforts for future improvement In addition to measuring current performance in financial terms, the Balance Scorecard evaluates the firm's efforts for future improvement using process, customer, and learning and growth metrics. Balance Scorecard system establishes links between Platform Solutions’ objectives. Improving the right organizational capabilities (Internal Process), Platform Solutions will improve its business processes (Internal Process and Learning and Development), which result in improved customer perceptions (Customer Service), which in turn, lead to meeting our financial (Finances) objectives and achieving our vision. The balanced scorecard represents the four perspectives upon which future growth and success would depend. Strategic objectives of the entire organization Platform solutions strategic objectives for the entire organization were put in place to transform and frame the business initiatives for future growth and success. The following strategic actions were identified: Focus Value proposition Lean enterprise Value chain management Customer affinity See and understand the market Be Bold Focus- Platform Solutions has decided to focus on integrated vehicle controls, vehicle subsystems and mission system.Value proposition- Platform Solutions is the most dependable provider, anticipating and rapidly delivering the innovative cost-effective solutions. Lean enterprise- eliminates non-value added tasks and infrastructure to realize productivity gains, allowing reinvestment in the business to generate sustained growth. Value chain management- from the end users’ perspectives, implement effective value streams through horizontal and vertical partnering, both internally and externally. Customer affinity- Execute actions to enhance customer relationship at all levels throughout the opportunity life cycle. See and understand the market- develops a leading capability to identify industry trends and emerging customer needs to deliver the right solutions at the time. Be Bold- proliferate a leadership culture at all levels that empowers people and enables them to achieve elevated levels of personal and business growth, and performance. The Secondary objectives for Defense Avionic Unit Perspective Objective Metric Target Value Financial Revenue Growth Operating Profit Growth Long-term Solvency Annual Rate of Growth % EBIT/Sales Long-term Debt/Equity > 6% > 5% < 30% Customer Increase Number of Customers Maintaining Transaction Size Improve Customer Satisfaction Annual rate of Customers Increase Average Transaction Size Median Score: Customer Survey > 5% >$2billion > 90% Internal Product Improvement Ratio of New to Old Products Maintain Market Share % R&D Expense to Revenue Ratio of New to Old Products Market Share % > 4% > 8% > 24% Learning Employee Training Employee Turnover Employee Compensation Annual Hours of Employee Training  Employee Turnover  Average Compensation > 30,000 < 2% > $38,000 FINANCIAL The Balanced Scorecard system will translate BAE Systems’ Platform solutions’ vision and strategy based on the above four perspectives. According to authors Kaplan and Norton, “financial performance measures define the long-run objectives of the business unit. While most businesses will emphasize profitability objectives, other financial objectives are also possible” (Kaplan and Norton, 1996, p.3). The Finance perspective will aid Platform Solutions in achieving its vision. The objectives associated with Platform Solution’s finance are revenue growth, operating profit growth and long-term solvency. The target revenue growth would be greater than 6% from the previous year. To achieve this, the unit would have to identify opportunities that have the potential of raising our aggregate growth rate over the coming year such as truck power management and engine controls for business jets. Growth in Platform Solutions’ revenue is imperative and depends on meeting customers’ needs. The unit’s performance should exceed against internal financial commitments to the company and its shareholders. The unit should meet or exceed all of its obligations to BAE Systems, including orders received, revenues generated, profits achieved, and cash collected. This develops corporate trust and confidence in its ability to perform, and with that trust, benefiting with corporate investments for growth. To calculate 6% revenue growth, we need to identify the revenue for the previous year and multiply it by 6% and add the answer to 2009 revenue which should give us the target revenue for 2010 Perspective Objective Metric Target Value Financial Revenue Growth Operating Profit Growth Long-term Solvency Annual Rate of Growth % EBIT/Sales Long-term Debt/Equity > 6% > 5% < 30% Platform Solutions 2009 revenue was $33.4 billion. To calculate target revenue, we compute 6% of $33.4 billion. Therefore the target revenue is 0.06*33.4billion + 33.4billion = 2.004+33.4billion = $35.404billion. To generate this level of revenue we need to look at new sources of income. There is a huge market for new technologies and by channeling resources to developing leading capabilities to identify industry trends and emerging customer needs to deliver the right solution at the right time. The European consortium is one customer that continually seeks to modernize its military equipment and willing to invest millions into each new project. The latest technology could easily generate revenue income of $200 million per month multiply by 12 months will generate an additional yearly income of $2.4 billion Another viable source of income is to fast track S.E.C.U unit orders by allowing faulty boards to be quickly replaced with new boards and shipped to customer. Back orders are been mentioned in our monthly meetings but nothing ever get done to resolve this issue. It is estimated that if this issue is eliminated Platform Solutions could likely generate an extra $20,000 per board and there are four boards per unit which makes it $80,000 per unit. We produce 16 units per day therefore creating revenue of approximately $460,800,000 per year. The second objective is operating profit growth. It is important that Platform Solutions strife towards achieving operating profit growth while providing quality service and products to its clients. Platform Solutions target would be to reducing operational costs by 5%. Platform Solutions can reduce operational cost by integrating electronic manufacturing departments into one department. This action will save on salary, software license and increase work productivity. The current departmental structure has more work force than it needs to carry out the same task. Restructuring the department would entail transferring affected workers to other job openings as determined by the workers skills and experiences. This would save the company salary compensation of 10 employees which includes 2 supervisors on a salary of $70,000 and 8 technicians on $40,000. A total of $460,000 would be saved if no new employees are hired for the position in which the affected employees would be moved. The operating profit growth is greater than our 5% target value. Earnings Before Interest & Tax (EBIT) is an indicator of Platform Solutions’ profitability, calculated as revenue minus expenses, excluding tax and interest (EBIT = Revenue - Operating Expenses). EBIT= $33.4billion-$93million= $3.3307billion, EBIT/Sales= $3.3307billion/$209million=$159.363664 5% of $93000000=$4,650,000 The third objective in finance is long term solvency. Platform Solutions’ long term solvency can aid in analyzing the company performance compared to other similar businesses on a long term bases. Long term debt would include debt incur from banks and organizations to purchase state of the art test and manufacturing equipment and analysis software licenses. Equity would include the value of an ownership interest in property, including shareholders' equity in a business. Computing long term solvency ratio we will need Platform Solutions’ Long-term Debt/Equity = $3,503million/781million= 0.4485. The long term solvency is less than our 30% target value. CUSTOMER Perspective Objective Metric Target Value Customer Enhance Customer Satisfaction Increase Number of Customers Maintaining Transaction Size Median Score: Customer Survey Annual rate of Customers Increase Average Transaction Size > 90% > 5% > $2billion Platform Solutions’ next perspective is Customer. The objective is to enhance customer relationships at all levels, throughout the opportunity life cycle. We identified both internal and external behavior and skills critical to establishing and maintaining strong relationships with our customers. To foster these behaviors, we have to examine our internal policies and procedures and adjusted those that may have been inhibiting customer affinity. We will implement knowledge management tools to share customer information more effectively within our business and roll out a comprehensive business-wide training program to enhance customer relationship. We would allocate 1% of Platform Solution’s yearly income to improving customer satisfaction to purchase data sharing software, adequately train customer service teams. Conducting customer surveys is crucial in understanding our customer’s point of views and therefore better able to deal with any concerns raised as a result of these surveys. This will in no doubt satisfy more than 90% of our customers. Platform Solutions second objective is to increase the number of customers. This is very important to Platform Solution place in the world arena of defense avionics. To better understand the defense market, Platform solution will take the initiative to develop a benchmark capability to identify industry trends and customer needs and formulate comprehensive market-area plans leading to customer endorsed product development roadmaps. Identifying opportunities such as truck power management and engine controls for business jets. These have a lot of potential for raising our aggregate growth rate over the coming years to more than 5%. Platform Solutions third objective is maintaining transaction size. A critical goal is to grow our avionics supply and support positions on BAE Systems’ Platform Solutions. This will include establishing a strategic position to support Saudi Arabia’s new fleet of Eurofighter Typhoons. We must also increase our proportion of international sales outside the United States, United Kingdom, and Europe from 10 percent in 2010 to more than 25 percent by 2013. We will have to improve our team’s performance in our U.S Fixed-Wing Market Group, which serves Lockheed Martin and Boeing and directly supports the U.S. Department of Defense. These included 100% on time delivery for F-22, head-up displays and sticks, delivery of F-35 sticks for initial flight trials, EA-6B digital flight control computer (FCCs), quick-turn C-17 software update to solve pilot-induced oscillation issues and demonstration of the autonomous approach landing capability. These actions can easily increase our transaction size to figures greater than our targeted $2billion. INTERNAL PROCESS Perspective Objective Metric Target Value Internal Product Improvement Ratio of New to Old Products Maintain Market Share % R&D Expense to Revenue Ratio of New to Old Products Market Share % > 4% > 8% > 24% Platform Solutions’ third perspective is internal processes with objectives being to improve current products by invest in state of the art testing and analysis software and equipment that will ensure the manufacturing and testing procedures are adhered to and investigate areas which need improvement, ratio of new to old product and maintain market share. Platform Solution’s objective is Product Improvement. Product improvement is possible through investment in state of the art testing and analysis software and equipment. Some of our computers are over 25 years old and as you guessed, runs on DOS platform. There hard drives are less than 20megs in size. This creates a problem for our technicians as these computers are extremely slow and are prone to crashing more often than they should. The manufacturing and testing software were also created 25 years ago. A lot of time is currently being wasted where an operator could not continue a job because of equipment breakdown. Also outdated stand-alone test equipment breaks down and causes a backlogged in the system. Nothing makes a customer look to our competition faster than missing a delivery. It is essential that we deliver on our commitment. Having updated software, new computers and other vital equipment will improve our on time delivery to 95 percent. This metric for Product Improvement is expressed as a percentage of revenue R&D/Sales Ratio, calculated by dividing research and development expense by total revenue. % R&D Expense to Revenue = $1,460million/$33.4billion= 0.437. This will definitely increase our target value by more than 4%. Platform Solution’s second is ratio of new to old products. Although it is good idea to have new products that will help put our company ahead of our competitors, it is also important to retain old products that would help reduce our debt amount. Platform Solution’s third objective is to Maintain Market Share. Establishing a lean infrastructure will fuel growth and focus on value. We must drive out unnecessary cost throughout the business such as equipment down time where an operator is standing around and not being productive due to equipment failure. One way of addressing the need is by outsourcing some jobs to our partner Wipro in India. Seeing and understanding the market, and innovating to meet current and future customer needs would be an advantage. We will focus on understanding the future needs of the market, and will invest in developing innovative products that will take us ahead of the market. We should commit to completing at least three product investments for new products and new customers and to develop a competitive offering to the unmanned aerial vehicle prime contractors. This should increase our chances of exceeding our target value of 24%. LEARNING AND DEVELOPMENT Perspective Objective Metric Target Value Learning Employee Training Employee Turnover Employee Compensation Annual Hours of Employee Training  Employee Turnover  Average Compensation > 80,000 < 2% > $38,000 Platform Solution’s fourth perspective is learning and development with objectives employee training and development courses offered, competitive employee compensation, minimize employee turnover. Platform Solution’s objective is employee training and development. Develop our people and cultivate positive work environment. We will conduct a number of strategy workshops and presentations to engage with customers and communicate the Avionic strategy to the employees. The top 40 leaders in the business will attend a “see and understand” strategic workshop with representative from a few participating customers. This is one process that could be valuable in creating one-team, one-culture environment, and linking our strategy with that of a customer. Sustained growth requires a priority on developing and promoting leadership and talent throughout our workforce. Developing a leadership culture at all levels and across all roles enables agility, improves our effectiveness, and gives our business a competitive edge. We will invest $8.5million in employee development, with an average of 40 hours of training per employee (1,200 employees). Personal growth is as important as business growth in developing future opportunities. Therefore, learning and development will continue to be a major thrust for this business, with a broad range of opportunities including classroom instruction, experimental learning, online learning, and tuition reimbursement. Platform Solution’s second objective is employee turnover. Disgruntled employees are more likely to look for alternative employment than continue to endure such conditions with that employer. An employee will not be motivated to do a job if they are dissatisfied with their wages. The cost of hiring and training new employees can be reduced by retaining current employees to take on positions in different areas of the business. We could save by retaining our employees by paying competitive wages; provide a platform for every employee to voice their thoughts regarding their work environment. We could also conduct an independent work culture survey and implement popular request stated by employees. Platform Solution turnover target value is 3%. In order to achieve this metric we would actively encourage staff members to transfer between departments instead of leaving the organization. To compute our target value, I assumed that three employees will turn in their resignation each year. There are 1,200 members in 8 departments. If three employees are to leave the company from each department per year, then we will have a total of 24 employees leaving Platform Solutions each year. This reduces our target value to fewer than 2%. Platform Solution’s objective is employee compensation. To attract valuable talents we would have to offer our employees more than our competitors are willing to pay in compensation. The average compensation for working at Platform Solutions is $40,000 per annum. Our target value is greater than $38,000. To calculate this metric, we look at the average salary that our competitors pay their staff which is $35,000, the amount of technical experience the employee has which is four years and average salary of employees already in this position. CONCLUSION In conclusion, it is my observation that a balanced scorecard is very important to an organization success. It can help to minimize waste by locating unnecessary expenses and indicate areas that may need funding to ensure an organizations long term survival in the industry. According to authors Epstein and Manzoni, “The Balanced Scorecard should be part of a form of interactive control rather than being used as part of management by exception where indicators are discussed only if they fail to reach some preset standard” (Epstein and Manzoni, 1997, p.6). Platform Solutions managements teams should pay regular attention to these target value and the metric system so they would have the opportunity to discuss anything they believe is not realistic and give reasons. REFERENCES Balanced Scorecard. (n.d.) Retrieved September 11, 2010 from the NetMBA website: http://www.netmba.com/accounting/mgmt/balanced-scorecard/ Duke University Health System. Duke Medicine. 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