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Controlling and Berlin Balanced Scorecard Approach by

Prof. Dr. Wilhelm Schmeisser Dipl.-Kffr. (FH) Lydia Clausen Dipl.-Kffr. (Univ.) Rebecca Popp Dipl.-Kfm. (Univ.) Carsten Ennemann and

Olaf Drewicke with the collaboration of

Falko Schindler Nico Hönighaus Frank Herbrechter and

Edith Teschner

Oldenbourg Verlag München

Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar. © 2011 Oldenbourg Wissenschaftsverlag GmbH Rosenheimer Straße 145, D-81671 München Telefon: (089) 45051-0 www.oldenbourg-verlag.de Das Werk einschließlich aller Abbildungen ist urheberrechtlich geschützt. Jede Verwertung außerhalb der Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Bearbeitung in elektronischen Systemen. Lektorat: Anne Lennartz Herstellung: Constanze Müller Titelbild: thinkstockphotos.de Einbandgestaltung: hauser lacour Gesamtherstellung: Grafik + Druck GmbH, München Dieses Papier ist alterungsbeständig nach DIN/ISO 9706. ISBN 978-3-486-70565-2 eISBN 978-3-486-70774-8

Preface The Balance Scorecard (BSC) is known as instrument for the implementation of strategies and bridging-instrument between operative and strategic planning. Even though, on principle, it is creative and targeted towards a profit oriented controlling, it achieved only limited acceptance in the 90s and in this decade in economy as new instrument. The reason is that its creators, Kaplan and Norton alleged that the Balance Scorecard can only to certain extent be applied in a quantitative way. The charm, however, which the BSC has, lies in the calculability of strategies, which only the Berlin Balanced Scorecard Approach fulfils. It shows with the classic accountancy instruments that each perspective can be calculated and that the perspectives can be connected for a controlling approach. Moreover, the Berlin Balanced Scorecard can be rendered dynamic for company assessment models. Thus, it is possible to provide companies with visions with a comprehensive controlling instrument. Strategic thinking generally departs from a substantial target, i.e. an innovation. The market oriented strategy answers the question at to how with which steps and actions the company reaches its targets in a best possible way with regard to accidental and planned influences and measures of third parties and competitors. The objective should be to examine the value chain of the strategy for phase specification and compatibility of the instruments and to optimize it. Therefore, a second, internal or resource oriented strategy is needed. The resource oriented strategy asks about the phase specific necessity of the value chain, in order to incorporate the market oriented strategy in the overall strategy. This means more specifically the answer to the question about which functions in the company with which employees and managers including external partners guarantee the implementation of the strategy. At the same time the phase consistency has to be permanently accompanied via the Berlin Balanced Scorecard in a controlling-like way. The precondition is a controlling logic, which is fulfilled by the Finance Oriented Human Resource Management and the Berlin Human Capital Assessment Model as Resource Oriented Approach. The Innovation Return Calculation as controlling instrument as controlling instrument of a market oriented approach fulfils the other part of the implementation of the overall strategy. In the context of the implementation of the overall strategy with the help of the Berlin Balanced Scorecard Approach the Financial Point of View is added via the Finance Controlling, which e.g. in the course of an innovation project incorporates step by step via the Innovation Return Calculation the perspective of capital markets as guideline for external capital markets in the management decision. We thank all supporters and our families for the help in composing this book. Berlin, Nuremberg

The authors

Author’s list Lydia Clausen, Dipl.-Kffr. (FH), graduated in business administration and is currently a freelance research assistant and a doctoral researcher of the Kompetenzzentrum Internationale Innovations- und Mittelstandsforschung, Berlin (www.mittelstandsforschung-berlin.de). Her main areas of research are investment and finance, controlling, accountancy, innovation and HR Management Olaf Drewicke studied politics and economics at the University of Bremen. Working in different HR functions for international companies since more than 10 years, he is currently holding the position Head of HR for the Muehlhan Group. He promotes the impact of human capital measurement as an enabler for sustainable growth and success for value driven organizations. Carsten Ennemann, Dipl.-Kfm. (Univ.), graduated in business administration. After working as financial auditor and in leading positions for international companies, in 2006 he took over the CFOposition for the Muehlhan Group. In this function he initiated the Muehlhan bonus program, which combines the individual management compensation with the performance of Muehlhan’s subsidiaries – and their positive input on the Muehlhan Group. Rebecca Popp, Internationale Dipl.-Kffr. (Univ.), graduated in international business administration at the University of Nuremberg and is currently a freelance research assistant and a doctoral researcher with the Kompetenzzentrum Internationale Innovations- und Mittelstandsforschung, Berlin (www.mittelstandsforschung-berlin.de). She is the translator of the book. Wilhelm Schmeisser, Prof. Dr. habil., holds the chair of business administration. He is a director and speaker of the Kompetenzzentrum Internationale Innovations- und Mittelstandsforschung (Competence Centre for Innovation and SME Research), Berlin, as well as of the Forschungsstelle Europäisches Personalmanagement und Arbeitsrecht (Research Centre for European HR Management and Industrial Law, EPAR) at the University of Paderborn.

Protecting Assets Muehlhan Group is a global specialist in high-quality surface protection and industrial services. The excellent quality of our service, our high degree of organization, our technical expertise and almost 130 years of experience are what set us apart. With our workforce of around 2,300 employees at 40 locations worldwide, we utilize our leadership position as a stable foundation to further expand our business.

www.muehlhan.com

COMPETENCE CENTRE INTERNATIONAL INNOVATION AND SME RESEARCH, BERLIN KOMPETENZZENTRUM INTERNATIONALE MITTELSTANDSFORSCHUNG, BERLIN

INNOVATIONS-

UND

“Making innovation, human resources and strategies calculable” OUR PRODUCTS     

Controlling and Berliner Balanced Scorecard Approach Berliner Human Resources Evaluation Model Innovation Performance Accounting Financing Decisions and Risk Assessment of Innovation Processes Technology Management

OUR SERVICES  Evaluations of strategies  Calculations and approaches to innovation evaluation  Managing Human Resources: Financial Approach

IF YOU NEED SUPPORT, PLEASE DO NOT HESITATE TO CONTACT US! Email: [email protected]

www.mittelstandsforschung-berlin.de

Mittelstandsbank

Passgenau finanzieren: mit Kompetenz und Verständnis Strategischer Partner für Ihre Unternehmensfinanzierung

Wir entwickeln im Dialog mit Ihnen maßgeschneiderte Finanzierungsund Strukturierungslösungen für Ihr Unternehmen. Dazu verbindet sich bei unseren Experten aus dem Financial Engineering fachliche Expertise mit hohem Verständnis für die Anforderungen mittelständischer Unternehmen. Gemeinsam mit Ihnen identifizieren wir die Lösung, die den mittel- und langfristigen Bedarf Ihres Unternehmens am besten deckt. www.commerzbank.de/firmenkunden

Gemeinsam mehr erreichen

Ziele direkt erreichen. Ganz gleich, was Sie sich für heute und morgen vorgenommen haben: Mit unseren umfassenden, zukunftsorientierten Versicherungs- und Vorsorgelösungen begleiten wir Sie bei allen Ihren Unternehmungen – im Beruf und im Privatleben.

www.hdi-gerling.de

Contents Abbreviations

Chapter I

XXI

1

Preliminary thoughts: Controlling with the aid of the Berlin Balanced Scorecard as Performance Measurement approach in companies

1

1

Performance Management Basics

1

2

Traditional Performance Measurement Concepts as predecessor of the BSC 10

2.1

DuPont system.......................................................................................................... 10

2.2

ZVEI-ratio system .................................................................................................... 12

2.3

Profit-Liquidity-ratio system .................................................................................... 13

2.4

Critical appraisal of traditional Performance Measurement concepts ...................... 14

3

BSC – an ideal and practicable, modern Performance Measurement concept 15

Chapter II

19

About the issue of the use of the Balanced Scorecard as Controlling Instrument within a value oriented business management

19

1

Starting point and problems concerning the Balanced Scorecard

19

2

Basics of controlling with the help of Balanced Scorecard

21

2.1 2.1.1 2.1.2

Overview over Strategic Management and Controlling ........................................... 21 Approaches regarding Strategic Management and Controlling ................................ 21 About the Strategic Management Process ................................................................ 23

2.2 2.2.1 2.2.2 2.2.3

Past management trends ........................................................................................... 26 Total Quality Management (TQM) .......................................................................... 26 Business Process Reengineering (BPR) ................................................................... 27 Management by Objectives (MbO) .......................................................................... 27

2.3

Existing management problems ............................................................................... 29

2.4

Balanced Scorecard as a solution for the performance measurement topics ............ 31

XIV

Contents

3

Balanced Scorecard as Strategic Management Instrument

3.1

Conception of the Balanced Scorecard .................................................................... 33

3.2 3.2.1 3.2.2 3.2.3 3.2.4

The four generic perspectives in accordance with Kaplan/Norton ........................... 35 Financial Perspective ............................................................................................... 35 Customer orientation ................................................................................................ 36 Perspective of internal processes.............................................................................. 37 Perspective of learning and development ................................................................. 38

3.3 3.3.1 3.3.2 3.3.3 3.3.4

About the strategy implementation with the Balanced Scorecard ............................ 38 Formulation and implementation of vision and strategy .......................................... 38 Communication and coordination of strategic aims and measures .......................... 42 Planning, determination of objectives and coordination of strategic initiatives ....... 48 Strategic Feedback and Learning ............................................................................. 49

3.4 3.4.1 3.4.2 3.4.3 3.4.4

Implementation of the Balanced Scorecard.............................................................. 51 Course of action ....................................................................................................... 51 Success factors ......................................................................................................... 53 Experiences of implementation ................................................................................ 55 Strengths and weaknesses of the concept ................................................................. 56

4

Indicators and indicator systems as first necessary step…

4.1

Terminological basics about indicators .................................................................... 58

4.2 4.2.1 4.2.2

Indicator types .......................................................................................................... 58 Cardinal numbers ..................................................................................................... 58 Ratios ....................................................................................................................... 59

4.3 4.3.1 4.3.2 4.3.3

Ratio systems as Performance Measurement ........................................................... 60 About the Du Pont-ratio system ............................................................................... 60 The ZVEI-ratio system............................................................................................. 62 The profit-liquidity ratio system .............................................................................. 63

4.4 4.4.1 4.4.2

Evaluation methods .................................................................................................. 64 Static analysis ........................................................................................................... 64 Comparative Analysis .............................................................................................. 64

4.5

Generic problems with the use of indicators ............................................................ 66

5

Balanced Scorecard as indicator system

5.1

Use of strategic indicators ........................................................................................ 70

5.2 5.2.1 5.2.2

Determination of a well-balanced indicator mix ...................................................... 70 Well balanced proportion of early and lagging indicators ....................................... 70 Balance between financial and non-financial indicators .......................................... 72

5.3 5.3.1 5.3.2

Indicators connected through cause-effect chains .................................................... 73 Cause-effect relations of the BSC ............................................................................ 73 About the generation of causal relations .................................................................. 75

33

58

68

Contents

XV

5.4 5.4.1 5.4.2 5.4.3 5.4.4

Indicators of the particular Balanced Scorecard perspectives .................................. 77 Financial perspective ................................................................................................ 77 Customer Perspective ............................................................................................... 85 Internal process perspective ..................................................................................... 88 Learning and growth perspective ............................................................................. 90

5.5

Application Problems ............................................................................................... 94

6

About the calculability of the Berlin Balanced Scorecard Approach…

6.1

Illustration of and connection between customer perspective and financial perspective................................................................................................................ 96 Contribution margin accounting as earning analysis in the customer perspective ... 96 Return of Investment as parameter of the financial perspective ............................... 98 From the customer to financial perspective via contribution margin analysis ......... 99

6.1.1 6.1.2 6.1.3 6.2 6.2.1 6.2.2 6.2.3

95

Calculability of the internal process perspective and connection to the potential and financing perspective.............................................................................................. 102 Quantification of the internal process perspective via analysis of value creation .. 102 Productivity as parameter for economic efficiency ................................................ 103 Connection of finances with internal business processes and internal potentials through value creation ............................................................................................ 104

6.3

Connection of the customer perspective with the potentials via an optimal production program in the case of given capacities................................................ 106

7

Closing words

109

8

Literature

111

Chapter III

121

Quantification of the potential perspective, employee perspective or of human resources in the context of the Berlin Balanced Scorecard without cost-utility analysis

121

1

Cost and capitalized value-oriented quantification

122

1.1 1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 1.1.8

Differentiation of relevant costs ............................................................................. 123 Salaries and wages ................................................................................................. 123 Absenteeism ........................................................................................................... 126 Fluctuation.............................................................................................................. 128 Employee suggestion system.................................................................................. 131 External labor costs ................................................................................................ 131 Costs of material..................................................................................................... 132 Interests and similar expenses ................................................................................ 133 Administrative costs and costs of distribution ........................................................ 133

XVI

Contents

2

Calculation of a contribution margin per employee

2.1

Interpretation of the employee contribution margin ............................................... 134

2.2

Extrapolation to the employee cash flow ............................................................... 135

2.3

Investments appraisal based aggregation ............................................................... 137

2.4

Determination of the discount rate ......................................................................... 137

2.5

Possibilities of usage and interpretation of results ................................................. 138

3

Indicator hierarchy of the Berlin Human Capital Assessment Model

139

4

Conclusion and outlook

141

5

Literature

141

Chapter IV

133

147

Berlin Human Capital Assessment Model exemplified with football player values with benefit analysis

147

1

Introduction

147

2

Side note: previous considerations on the controlling logic in the area of human capital

149

3

Soccer associations

154

3.1

Legal basis ............................................................................................................. 154

3.2

Reasons for a transformation ................................................................................. 155

3.3

Externalization of the contract player department ................................................ 156

3.4

Legal steps of externalization................................................................................. 157

3.5

Possible legal forms and their advantages and disadvantages ................................ 158

3.6

Example of the structure of a soccer capital corporation ....................................... 159

4

Revenues and expenses of soccer associations

4.1 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5

Sources of income .................................................................................................. 161 TV revenues ........................................................................................................... 162 Merchandising structure ......................................................................................... 166 Spectator revenues ................................................................................................. 167 Jersey advertisement .............................................................................................. 167 Merchandising ........................................................................................................ 168

4.2 4.2.1

Expenses ................................................................................................................ 168 Stadium rent ........................................................................................................... 168

161

Contents

XVII

4.2.2 4.2.3

Player remunerations .............................................................................................. 169 Other operational expenses .................................................................................... 169

5

Identification of player capacity on the balance sheet

5.1

Definition: Intangible assets ................................................................................... 170

5.2

Side note: Principle of entry as asset in accordance with the HGB (German Commercial Code) .................................................................................. 170

5.3 5.3.1 5.3.2

Examination of the possibility of entry of player abilities under IAS 38 ............... 172 Abstract possibility of entry as asset ...................................................................... 172 Concrete possibility of entry as asset ..................................................................... 173

5.4 5.4.1 5.4.2

Self-created immaterial assets ................................................................................ 176 Booking conditions in accordance with the HGB .................................................. 177 Booking conditions in accordance with IAS/IFRS ................................................. 177

5.5 5.5.1 5.5.2 5.5.3

Evaluation of access to “intangible assets” ............................................................ 180 Hand money or “Signing Fee” ............................................................................... 181 Player agent and commission ................................................................................. 182 Purchase tax related dealing with the purchase payment and the agency commission .......................................................................................... 184

5.6

Subsequent valuation of the “Intangible Assets”.................................................... 185

5.7

Systematic amortization ......................................................................................... 186

5.8

Extraordinary depreciation ..................................................................................... 187

5.9

Appreciation ........................................................................................................... 188

5.10 5.10.1 5.10.2 5.10.3

Contract term .......................................................................................................... 189 Contents of labor contracts ..................................................................................... 189 Formation compensation ........................................................................................ 190 Transfer Fee............................................................................................................ 191

5.11

Special presentation of player values in the balance sheet ..................................... 192

5.12

Interim conclusion .................................................................................................. 193

6

Balanced Scorecard

6.1

Definition ............................................................................................................... 194

6.2

Composition ........................................................................................................... 195

6.3

The seven central ideas of the Balanced Scorecard ................................................ 196

6.4 6.4.1 6.4.2 6.4.3 6.4.4 6.4.5

Standard Model ...................................................................................................... 197 Vision ..................................................................................................................... 197 Mission ................................................................................................................... 198 Strategies ................................................................................................................ 198 The four target perspectives ................................................................................... 201 Cause-effect relations ............................................................................................. 206

170

194

XVIII

Contents

7

Case study: Balanced Scorecard illustrated with a soccer club

7.1 7.1.1 7.1.2 7.1.3

Frame conditions .................................................................................................... 207 Venues, administrative panel and specialties ......................................................... 207 Club team ............................................................................................................... 208 Structure of revenues and expenses ....................................................................... 209

7.2 7.2.1 7.2.2 7.2.3 7.2.4 7.2.5 7.2.6

Balanced Scorecard of the “FC Hagen 09 e.V.” .................................................... 210 Company strategy .................................................................................................. 210 Financial perspective.............................................................................................. 210 Customer perspective ............................................................................................. 214 Internal process perspective and employee perspective ......................................... 221 Sportive perspective ............................................................................................... 224 Cause-effect relations ............................................................................................. 228

7.3 7.3.1 7.3.2

Scenario.................................................................................................................. 232 Sportive targets ...................................................................................................... 232 Internal process and potential perspective.............................................................. 233

8

Case study: Application of the Berlin Balanced Scorecard

8.1

Application of the Berlin Balanced Scorecard ....................................................... 238

8.2

Assessment of the player performance................................................................... 238

8.3

Assessment of the additional value ........................................................................ 243

8.4

Determination of the player value .......................................................................... 244

8.5

Connection of the player with the financial perspective ........................................ 245

9

Conclusion

246

10

Literature and sources

247

Chapter V

207

238

261

Value increasing performance control with the help of the Berlin Balanced Scorecard Approach: Further Development of the financial perspective via the capital flow calculation and the Working Capital management 261 1

Introduction

261

2

Cash Flow Statement

262

2.1

Basic principles for establishing a Cash Flow statement ....................................... 263

2.2

Special questions of attributions ............................................................................ 265

2.3 2.3.1 2.3.2

Structure of the Cash Flow statement .................................................................... 266 Cash flows from operative activities ...................................................................... 267 Cash flows from investing activities ...................................................................... 268

Contents

XIX

2.3.3

Cash flow from financing activities ....................................................................... 268

3

About Working Capital

3.1

Determination of the Working Capital ................................................................... 270

3.2

About management of Working Capital ................................................................. 270

3.3 3.3.1 3.3.2 3.3.3

Tasks of Working Capital Management ................................................................. 272 Management of receivables .................................................................................... 272 Management of inventories .................................................................................... 273 Management of liabilities ....................................................................................... 273

3.4

Control of Working Capital .................................................................................... 274

3.5

Effects of the Working Capital management.......................................................... 275

3.6

Interactions between Working Capital and Cash Flows ......................................... 276

3.7

Interactions between Working Capital and ROI..................................................... 277

4

The connection of Shareholder Value, Cash Flow Statement and Working Capital with the Berlin Balanced Scorecard 280

4.1

Determination of the adequate target rate............................................................... 280

4.2 4.2.1 4.2.2 4.2.3

Mathematical connection of SHV, Cash Flow Statement, WC and BSC ............... 281 Management of the operative Cash Flows ............................................................. 282 Management of Cash Flows from investing activities ........................................... 283 Management of Cash flows from financing activities ............................................ 283

5

Conclusion

283

6

Literature

284

7

Closing words and outlook

285

269

Abbreviations ABC AktG b&b BB BBSC BCG BetrVG BFH BFuP BGBl. BHAM BPR BSC BuW CF CFROI CM CM comp. CVA DB DCF DP e.g. EBIT ed. EFQM Empl. EQA ESS EVA f. FCF ff. Fig. GAAP HR i.e. IFRS

Activity Based Costing Aktiengesetz, German Stock Companies Act bilanz & buchhaltung (magazine) Betriebs-Berater (magazine) Berlin Balanced Scorecard Boston Consulting Group Betriebsverfassungsgesetz, German Works Constitution Act Bundesfinanzhof, German Federal Fiscal Court Betriebswirtschaftliche Forschung und Praxis (magazine) Bundesgesetzblatt, German Federal Law Gazette Berlin Human Assessment Model Business Process Reengineering Balanced Scorecard Betrieb und Wirtschaft (magazine) Cash Flow Cash Flow Return on Investment Contribution Margin Controller Magazin (magazine) compare Cash Value Added Der Betriebswirt (magazine) Discounted Cash Flow Data processing for example Earnings before Interests and Taxes Editor European Foundation for Quality Management Employee, employed, employer European Quality Award Employee Suggestion System Economic Value Added following page Free Cash Flow following pages Figure Generally Accepted Accounting Principles Human Resources that means International Financial Reporting Standards

XXII KonTraG MbO MCE MVA NOPAT OTD P&L p. Perm PIMS PM ROA ROC ROCE ROE ROI ROS s. SBU SWOT TQM WC wh WHU ZfB ZfCM ZGR ZVEI ZWF

Abbreviations Gesetz zur Kontrolle und Transparenz im Unternehmensbereich, Corporate Sector Supervision and Transparency Act Management by Objectives Manufactoring Cycle Effectiveness Market Value Added Net Operating Profit after Taxes On Time Delivery Otto-Beisheim-Hochschule, Vallendar (Scientific Management University) Profit and Loss page Permanent Profit Impact of Market Strategy Performance Measurement Return on Assets Return on Capital Return on Capital Employed Return on Equity Return on Investment Return on Sales Section Strategic Business Unit Strengths, Weaknesses, Opportunities, Threats Total Quality Management Working Capital working hours Wissenschaftliche Hochschule für Unternehmensführung Zeitschrift für Betriebswirtschaft (German Business Magazine) Zeitschrift für Controlling & Management (German Magazine for Controlling and Management) Zeitschrift für Unternehmens- und Gesellschaftsrecht (German Magazine for Law on Companies and Corporations) Zentralverband der Elektronischen Industrie e.V., Central Association of the Electronic Industry Frankfurt/Main, Zeitschrift für wirtschaftlichen Fabrikbetrieb, (German Magazine for Economic Factory Management)

Chapter I Preliminary thoughts: Controlling with the aid of the Berlin Balanced Scorecard as Performance Measurement approach in companies 1

Performance Management Basics

Performance Measurement has been an often discussed topic in science and practice for decades. In an analysis with regard to research questions in publications in six leading American accountancy and controlling magazines from 1990–1996 Performance Measurement comes in second place.1 Despite the fact that different Performance Measurement approaches have existed for a long time, there is no clear Performance Measurement definition or accepted controlling logic. The term Performance can be used in many different research areas: There is a technical performance that is connected with the analysis and character of data processing systems and networks. In financing and business in securities the term refers to the investment-risk-return of a portfolio or an investment.2 Lebas clarifies the term with the aid of a tree, showing the interrelations between success factors and factual results (comp. Figure 1-1): “Performance is not just the result of the sale compared to the cost (…) it is also the set of consequences of the business operations.”3

1

Comp. Sandt (2005), p. 429.

2

Comp. Hilgers (2008), p. 30.

3

Lebas (1995), p. 28.

2

Chapter I

service delivery dependability quality costumer satisfaction time work conditions flexibility reliability innovations

Sales costumers turnover monetary outcome

processes

performance

competences

information social bonds business flow maintenance ethics investments brand measures market retlations market knowledge knowledge with suppliers situation

education

=

cost

cooperations and alliances

Figure 1-1: Performance Tree Source: Lebas (1995), p. 28.

While the roots – competences, market knowledge etc. – are the basis for success, effective and efficient processes in the log are preconditions for the fruits of the work in the treetop (price, quality, innovation). The fruits of the work lead to financial success via a causal chain. The fruit that has fallen from the tree represents costs that result from Performance.1 In addition to this impressive depiction of the term “Performance” many other Performance definitions exist. Interestingly, definitions used in English speaking countries are different from those used in German speaking countries. In order to point the variety of definitions out, Krause summed some definitions up as can be seen in Figure 1-2 below.

1

Definition or explanation

Author

... (is) the action of performing, or something performed ... The carrying out of command , execution, fulfillment, working out of anything ordered ..., action, the capability of a machine, the observable or measurable behavior of a person ... ... (is) achievement, accomplishment, execution, doing, work ... is about deploying and managing well the components of the causal model(s) that lead to the timely attainment of stated objectives within constraints specific to a firm and to the situation.

Oxford 1989

Comp. Hilger (2008), p. 31.

Urdang 1992 Lebas 1995

Performance Management Basics ... (ist) die Wertentwicklung eines Investmentfonds als Ergebnis der Leistung des Managements.1 ... eines Prozesses wird durch die Ausprägungen Zeit, Qualität und Kosten bestimmt.2 ... (is) a complex interrelationship between seven criteria: effectiveness, efficiency, quality, productivity, quality of worklife, innovation, ... is the level to which a goal is attained. ... ist der bewertete Beitrag zur Erreichung der Ziele einer Organisation. Dieser Beitrag kann von Individuen und Gruppen von Mitarbeitern innerhalb der Organisation sowie von externen Gruppen (z.B. Lieferanten) erbracht werden.3 ...(ist) der Grad der Zufriedenheit der relevanten Anspruchsgruppen.4 ... has replaced the old productivity and is generally accepted to cover a wide range of aspects of an organization – from the old productivity to the ability to innovate, to attract the best employees, to maintain a sound environmentally outfit, or to conduct business in an ethical manner. “Unter Performance wird der bewertete Beitrag zur Erreichung der Ziele einer Organisation verstanden. Dieser Beitrag kann von Individuen und Gruppen, von Mitarbeiter innerhalb der Organisation sowie von externen Gruppen (z.B. Lieferanten) erbracht werden.“5 ... is the level of attainment achieved by an individual, team, organization or process.

3 Dietl 1998 Gaitanides 1994 Rolstadas 1998 Dwight 1999 Hoffmann 2000

Wettstein 2002 Andersen 2002

Hoffmann 1999

EFQM 2003

Figure 1-2: Definitions of the term performance Source: Krause (2005), p. 18f.

 Krause deduces the following performance definition from these explanations: “Performance refers to the degree of target achievement or the potentially possible performance with regard to characteristics of an organization which are relevant to the stakeholders. Performance is therefore only specified through a multidimensional set of criteria. The source of performance is the action of the participants in business processes.”6 Thus, not

1

“the further development of an investment fund as result of the management`s achievement” (own translation).

2

“of a process is determined by the characteristics time, quality and costs” (own translation).

3

“Is the evaluated contribution to the achievement of an organization`s aim. This contribution can be made by individual persons or employee groups from within the organization or external groups (suppliers for example)” (own translation).

4

… (is) the degree of satisfaction relevant demand groups have reached” (own translation).

5

“Performance can be understood as the evaluated contribution to reach aims in a corporation. This contribution can be made by individual persons and groups, employees from within the company and external groups (suppliers e.g.)” (own translation).

6

Krause (2005), p. 20, own translation.

4

     

Chapter I only the interests of the shareholders, but also the interests of other stakeholders are taken into consideration. Hilgers departs from a pluralistic performance term and defines performance as follows: “Performance is the consequence of efficient and/or effective actions on all levels of operation and decision in an organization against the background of satisfying various interests in the context of multidimensional goals.”1 In conclusion some characteristics can be deduced from the above named definitions, which determine the performance content.2 Performance refers to the essential characteristics and the benefit an organization, product, machine etc. contributes. In the case of organizations, performance refers to financial and non-financial values and company-internal as well as external factors. Performance is a multidimensional construct. The multidimensionality expresses itself by the fact that Performance Measurement-Systems do not only measure the financial, but also the non-financial success factors. Performance depends from the situation and the perspective. Performance is future oriented. Actions are the source of performance. Performance can be assessed by measurement or judgment.

Especially in Anglo-American literature performance measurement is an often discussed approach, whose field of application and use is so multifaceted and heterogeneous, that it seems to be a problem to find a concrete definition.3 Schreyer has analyzed some Performance Measurement definitions which are presented in Figure 3. His definition is based on Neely’s definition and who defines it as “[…] process of quantification of effectively and efficiency of managerial measures and actions.” Definition or description

Researcher

“Performance Measurement is the key to effective management supervi- Anthony/Dearden sion and control of people in organizations. But it is also an effective tool et al. (1989) for guiding the direction of organizational subunits. The aim of performance measures is to minimize losses and to reward quality performance by comparing actual with desired performance.” “The objective of any measurement system should be to motivate all man- Kaplan/Norton agers and employees to implement successfully the business unit’s strate- (1996a) gy.” “If there is a unifying theme to performance measurement, then it lies in Carter/Klein the genuflection to the ties of economy, efficiency, and effectiveness, and et al. (1995) the production of measures of input, output, and outcome.”

1

Hilgers (2008), p. 33.

2

Comp. Krause (2005), p. 19.

3

Comp. Hilgers (2008), p. 35.

Performance Management Basics

5

“A vital part of the control process, and one with which accounting is Emmanuel/Otley particularly concerned, is the measurement of actual performance so that it et al. (1990) may be compared with what is desired, expected or hoped for. However, it is important to stress that performance measurement is but one stage in the overall control process; it is also necessary to set standards, and to take appropriate action to ensure that such standards are attained.” “Performance Measurements, evaluation systems, and reward systems are Dhavale (1996) indispensable management tools. They can help motivate employees to work toward fulfilling the organization’s strategic tives. By contrast, poorly designed or poorly implemented performance measurement systems courage dysfunctional and suboptimal behavior throughout an organization.” “Performance measurement can help or hinder an organization’s ability to Sink/Tuttle compete, depending on how measurement systems are developed and (1989) utilized.” “Performance Measurement is relative measurement. In order to interpret performance measurement data, one must have something with which to compare the measures. Commonly used alternatives are standards, goals, or baselines.” Figure 1-3: Overview over Performance Measurement definitions (continuation) Source: Schreyer (2007), p. 27.

There is no doubt that the utmost aim of a company lies in financial success. The financial success, however, is only the result of decisions and activities of company agents. I.e. a high return rate can be the result of strong customer loyalty. Based on this thought, the financial success represents a dependant variable, while the customer loyalty is an independent variable. The Performance Measurement reasoning is based on this deliberation. Gleich defines Performance Measurement in a similar way as Schreyer as “[…] construction and utilization of several quantifiable measures of several dimensions (e.g. costs, time, quality, capacity for innovation, customer satisfaction). These are employed for the assessment of effectivity and efficiency of the performance and of performance potentials of different objects in the company (business units of different sizes, employees, processes.”1 From this definition follows that besides the financial indicators also non-financial variables can be generated for Performance Measurement. In order to be able to use the potential of nonfinancial indicators, they have to be connected with financial indicators. In conclusion, the Performance Measurement Approach has three core characteristics: consequent reference to strategy, generation of non-financial indicators and their connection with the financial indicators.2

1

Comp. Gleich (1997), p. 115.

2

Comp. Berens/Karlowitsch/Mertes (2001), p. 280f.

6

Chapter I

A definition for Performance Measurement systems can be deducted from Gleich’s Performance Measurement term, which goes into the same direction as the Berlin Balanced Scorecard, but does not reach it. Thus, the Performance Measurement system represents a certain amount of multidimensional indicators which are interconnected between each other and are used for measuring the efficiency and effectivity of managerial measures and decisions.1 Indicators are a crucial element of each Performance Measurement system. Indicators are key figures that capture quantitatively measurable factors in a concentrated form.2 After defining and describing Performance and Performance Measurement, tasks and goals in connection with Performance Measurement systems are represented. Thus, Performance Measurement serves the measurement and control of multidimensional, strategic and operative aspects of company success and its determining factors.3 One goal of Performance Measurement consists in a successful operationalisation and implementation of strategic goals. Via effective planning and controlling procedures Performance Measurement shall contribute to an improvement of performance. A further goal consists in the exhaustion of employee potentials in order to achieve the best possible performance.4 For Performance Measurement planning, coordination and supervision tasks are in the limelight. Thus, the following tasks of Performance Measurement can be achieved:5  Operationalisation of the company strategy First of all, the company management connects the operationalization of the company strategy with the introduction of Performance Measurement. Performance Measurement serves for operationalising business activities.  Performance assessment A further task of Performance Measurement is the supervision of effectivity and efficiency of the business performance. Thereby the performance potential of a company shall be assessed and the willingness to perform of the employees shall be evaluated. Hereby, the transparency of the performance shall be raised and the performance improved.  Description of the actual situation The description of the actual situation is of special importance for the Performance Measurement approach. In this context, all information about all relevant facts describing the actual situation shall be available. As a result, strategic and operative measures can be deducted.  Identification of success factors The operationalization of the company strategy via the identification of success factors is another important task of Performance Measurement. Therefore, monetary as well as non-monetary aims of the stakeholders have to be considered. 1

Comp. Schreyer (2008), p. 29.

2

Comp. Reichmann (2006), p. 19.

3

Comp. Baum/Coenenberg/Günther (2007), p. 362.

4

Comp. Jetter (2004), p. 44.

5

Comp. Piser (2004), p. 117–118 and Schreyer (2007), p. 31–34.

Performance Management Basics

7

 Demonstration of potential cause-effect relations Amongst other things, Performance Measurement serves to demonstrate cause-effect relations of certain decisions and measures. Besides, individual relation intensities have to be quantified and indicators have to be deducted.  Resource planning and controlling Set targets can be defined and supervised via Performance Measurement. Therefore, Performance Measurement can be considered as instrument for planning and controlling resources.  Increase of motivation The aim is the increase of motivation of the persons involved as consequence of the implementation of Performance Measurement systems in the company. Via Performance Measurement the personal responsibility is increased and the self control of departments and company areas is made possible. This leads to an increase of the employee motivation. The connection between Performance Measurement and the motivation system makes performance related remuneration possible.  Communication Performance Measurement systems lead to a stimulation of cross functional, vertical and horizontal communication processes. With Performance Measurement systems company goals and measures can be explained in a better way.  Learning Processes Performance Measurement contributes to the support in learning processes of managers and employees and thereby promotes continuous improvement processes within the company. The limitation between Performance Measurement and Performance Management is therefore blurred. In academic texts different understandings about the distinction between both terms can be found. In accordance with Hoffmann, Performance Management is directly connected with Performance Measurement, but goes further than the simple Performance Measurement and can be identified with controller logic. Performance Management comprehends instruments, with which managers can plan, control and improve the performance of their employees in coordination with superior company goals.1 In accordance with Gleich, Performance Management occurs directly after the analysis of causes for deviation. The tasks of Performance Management are the demonstration of activities, measures and ways for higher effectivity.2 Performance Measurement can be regarded to be the core of Performance Management. For an active influence on the performance, measures shall be targeted towards the value/success

1

Comp. Hoffmann (1999), p. 29.

2

Comp. Gleich (2001), p. 24.

8

Chapter I

drivers and not towards goals in a first step. Thus, Performance Management is an indicator based, target oriented management system and comprehends the following elements.1    

Performance Examination/Measurement/Assessment Performance Influence/Direction and Improvement Performance Planning Performance Communication

Hilger’s Model goes further than the classic Performance Measurement concept, because the business performance is not only measured, but also actively influenced and produced. Thus, each Performance Measurement concept, i.e. also the Berlin Balanced Scorecard approach is closely linked with the logical controlling concept, as provided by the finance oriented human resource management. The target of the logical controlling concept is to direct and influence the members of the organization, especially the manager, in order to secure or raise the probability of target achievement in the company. The Performance Measurement-system is part of controlling systems or of subsystems of controlling with the focus on supporting strategy implementation. Performance Measurement, which as the controlling system represents an interface between planning, directing and information systems, enriches controlling not only with regard to time, facts and interest, but also with reference to the content of information, i.e. extensive translation of qualitative information into even more expressive quantitative information. The result is that controlling has to deal not only with internal dimensions oriented towards cost accounting but also more and more with external financial indicators, as it is required in accordance with IFRS. In academic discussion, this is treated as convergence between internal and external accountancy in Germany. Thus, a successful Performance Measurement system has to fulfill a row of conditions. On the basis of weaknesses of traditional indicator systems Gleich has compiled requirements for Performance Measurement systems (see Fig. 1-4).2

1

Comp. Hilgers (2008), p. 52-53.

2

Comp. Jetter (2004), p. 43 and Klingebiel (2001), p. 20.

Performance Management Basics

9

Requirement Description Compensation of All relevant stakeholders and their goals have to be considered when stakeholder interests constructing an indicator system in Performance Measurement. Balance

Flexibility

Integration into strategic control systems Management Acceptance Protection against manipulation and sub-optima Consistency with the organizational structure Connections with the strategy Connection of the system of incentives and remuneration

Cost effectiveness

The indicators have to be well balanced with regard to the following factors: financial/non-financial/short term/long term/internal/external/results and driver indicators. The system should be flexible enough to be easily adjusted to slightly changed parameters by altering the indicators, integrating new or disposing of old measurements. The indicators in Performance Measurement shall be part of the strategic control system for Performance Measurement and Assessment. The indicators in Performance Measurement must be accepted by the top management and shall be actively applied. In an indicator system indicators have to be coordinated in such a way that economies of scope, manipulations or undesired sub-optima are detected. The Performance Measurement system has to be consistent with the organizational structure in the area of its application. Strategic targets shall be depicted with the help of indicators. The indicators in a Performance Measurement indicator system represent the basis for agreements on targets for the responsible persons with regard to performance levels. In order to create incentives for high performance, a good connection between the incentive and remuneration system has to be established. Effectiveness requirements are also valid for Performance Measurement. Complexity of measurement, flood of information and complexity of the system have to limited by concentrating on core indicators as far as possible.

Reliability of the When designing a core indicator system, it is necessary to think about measurement method the methods and their reliabilities. One has to pay attention that measuring a situation several times always leads to the same results. Figure 1-4: Requirements of the Performance Measurement systems Source: Gleich (2001), p. 226f.

In order to be able to fulfill all above mentioned requirements, an integrated overall Approach which comprehends all company areas and stretches across the whole production process is necessary. The Berlin Balanced Scorecard Approach fulfills all requirements, as is to be proved.

10

Chapter I

2

Traditional Performance Measurement Concepts as predecessor of the BSC

The traditional concepts for the evaluation of performance development in companies are also primarily concentrated on monetary planning and controlling calculations. The main issue of classic Performance approaches is the monetary expression of the company’s occurrences and their monetary effect on the company’s profit.1 The target of traditional Performance Measurement concepts is to display the capacity and value flows within the company that provide basic information for corporate management. In the past few decades a multitude of classic Performance Measurement systems – which are basically monetary ratio systems – were developed.2 A ratio system can be understood as an entity of quantitative variables that bring the single business ratios into a factually and timely reasonable operational and mathematical structure, are complementary to each other and are all in all orientated towards a joint, overarching goal.3 In accordance with the type of link between the ratio classification systems, calculation systems and mixed systems can be told apart. A classification system is a key figure system in which key figures are brought into an order in accordance with practical logic. In the calculation system the starting point is a key performance indicator that is linked with other indicators in accordance with mathematical and practical reasoning. In this system the alteration of an indicator leads to the alteration of the key performance indicator (e.g. DuPont-system). If a ratio system has characteristics of both types of connection, this is called a mixed system (e.g. ZVEI indicator system).4

2.1

DuPont system

The DuPont system is considered to be the oldest and most well-known ratio system. It was developed by the American Chemical Corporation E.I. DuPont de Nemours and Company in 1919. On the top of the pyramid of financial ratios the capital net yield – also Return on Investment (ROI) – can be found, which is seen as the most important company aim (comp.

1

Comp. Hilgers (2008), p. 61.

2

Comp. ibid., p. 62.

3

Comp. Reichmann (2006), p. 22.

4

Comp. Preißler (2008), p. 17–22.

Traditional Performance Measurement Concepts as predecessor of the BSC

11

Fig. 1-5).1 The ratio system serves to evaluate the company performance2 and is an extensive planning and controlling instrument. Return on Investment =

Earnings as % of sales

Turnover

=

=

Sales

Earnings

:

Sales

Earnings

:

=

=

Contribution margin

Fixed costs



Perm. Investment

=

Sales

Working Capital

+

=



Variable costs

Cash

+

Inventory

+

Accounts Receivable

Figure 1-5: DuPont-ratio system Source: Comp. Gladen (2008), p. 93.

The key figure Return on Investment is mathematically and practically broken down in its components in accordance with the annual report in statement of financial position and the profit and loss statement. In a first step of breaking it down – foreseen by the DuPont system – the ROI is separated into earnings as percentage of sales in accordance with the profit and loss statement and turnover in accordance with the assets or liabilities of the statement of financial condition.3 The sub-ratios based on the annual report statement or financial statement analysis support the further cause analysis and show potential for improvement of the ROI. The earnings as percentage of sales express whether a company can sell its output/achievements at good prices and whether it is able to produce them expense- and costefficiently. The turnover is seen as expression of the intensity of usage of the assets that can be found in the statement of financial condition. On a third level only absolute factors are analyzed. On this level the emergence of sales and costs as important profit factors as well as 1

Comp. Gladen (2008), p. 82f.

2

Comp. Sandt (2005), p. 431.

3

Comp. Gladen (2008), p. 93.

12

Chapter I

the amount and composition of the assets are analyzed.1 By splitting the ratios earnings as percentage of sales and turnover mathematically, a detailed financial and success oriented analysis is made possible and possibilities for improving the key figure ROI are identified by means of external or internal accounting.2 In specialized literature several points of critique with regard to the DuPont-ratio system are discussed:3  A relative ratio like the ROI does not permit to distinguish directly between an alteration of the numerator and denominator of the ROI.  Sector oriented ROI can lead to suboptimal results for the whole company.  The DuPont System is appropriate for divisions, i.e. company sectors, where a profit can be identified. For areas like the purchasing department, production department or administration etc. the ROI cannot be calculated.  There is the danger of a short-term, entrepreneurial orientation of the management towards the ROI, especially when the ROI performance indicators are codetermining for the variable determination of their salary.  The DuPont-ROI can only express a part of the interactions in the complex system and process of the business. The ratio system is not appropriate for profounder analysis. The analyses of cost-effectiveness, liquidity or other qualitative factors are not taken into consideration.

2.2

ZVEI-ratio system

The ratio system was developed by the Zentralverband der elektronischen Industrie (ZVEI)4 on the basis of the DuPont ratio system in 1969. The ZVEI-ratio system shall be used as an analytical actual instrument and as a planning instrument for corporate management. The analytical actual instrument analyses the company’s situation via additional time and company comparisons.5 The ZVEI-ratio system consists of the growth analysis (comparison of important ratios of the previous period) and the structural analysis (comparison of relative ratios for the efficiency analysis).6 The growth analysis examines four areas – sales activities, result, capital commitment, and value creation/occupation – with nine absolute figures (e.g. sales, sales related result, period result, Cash Flow, inventories, fixed assets). In the growth analysis the single indicators are used in an isolated way. The structural analysis, which is the core of the ZVEI1

Comp. Gladen (2008), p. 82 f.

2

Comp. Engel (2006), p. 73.

3

Comp. Klingebiel (2001), p. 44.

4

German Electrical and Electronic Manufacturers` Association

5

Comp. Sandt (2005), p. 432.

6

Comp. Preißler (2008), p. 51.

Traditional Performance Measurement Concepts as predecessor of the BSC

13

ratio system, evaluates the efficiency of a company. The different ratio groups examine either the revenue or the risk component. The key figure of the ratio system is the Return on Equity (ROE). This key figure is again divided into its single components, which are interconnected (profitable efficiency, liquidity, assets, capital/funding/investment, expenses, sales, costs, occupation, productiveness).1 The ZVEI ratio system consists of 210 indicators, of which 88 ratios are used most of the time. The rest of the indicators serve as mathematical interconnection with the main indicators. Most of the indicators are financial ratios, while non-financial ratios, as employee turnover or headcount are rather seldom used. The ZVEI ratio system uses above all data from the annual financial statement, but does not completely renounce the use of figures from cost and activity accounting. In most of the cases this ratio system is criticized because of its multitude of ratios reducing its transparency.2 Furthermore, this ratio system has weaknesses in connection with the strategic target system and the organizational structure.3 Just as the DuPont-System it is above all appropriate for a divisional management of the company.

2.3

Profit-Liquidity-ratio system

The Profit-Liquidity ratio system (PL-ratio system) of Reichmann and Lachnit shall provide decision-relevant information in the context of the planning and controlling process. The PLratio system goes further than the pure profit reasoning and is multidimensional. The ratio system consists of a general part and a special part. The general part is composed of a liquidity and a profit part. The key figures are further subdivided and – in contrast to the ZVEI-ratio system – there is no mathematical but a factual link between them. The key figure of the profitability part is the annual profit and deficit. It is composed of the ordinary and the extraordinary operating income. The ordinary operating income consists of the ordinary operating and financial result. Both partial results have to be planned and controlled for short periods of time. As the absolute result does not give any information on the success of a company, it has to be put in relation with the corresponding employment of capital. Further ratios of the profit part are the Return on Assets, Return on Investment, rate of capital turnover, sales return, rate of material turnover, rate of turnover of accounts receivable etc.4 The central value of the liquidity part is liquid assets. The availability of liquid assets has a signaling function and a deviation can lead to a cause analysis. Further indicators of the liquidity part are Cash flow, current surplus revenue, surplus scheduled, Working Capital.

1

Comp. Reichmann (2006), p. 30f. and Preißler (2008), p. 52.

2

Comp. Sandt (2005), p. 432, Preißler (2008), p. 52 and Gladen (2008), p. 88f.

3

Comp. Engel (2006), p. 78.

4

Comp. Reichmann (2006), p. 32–38 and Gladen (2008), p. 90–92. This footnote is valid for the following passages.

14

Chapter I

The special part covers indicators that are necessary to complete the indicators of the general part in accordance with the individual company in dependence of the sector. Factors that influence profit and liquidity are examined. Possible indicators are percentage of sales per product type, contribution margin etc. The PL-ratio system also gives recommendations with regard to the reporting. In this sense, the annual, quarterly, monthly and weekly reporting are differentiated.1 Later both authors, Reichmann and Lachnit, enlarged the original system in the PL-financial statement ratio system and the PL-controlling ratio system. The PL-financial statement ratio system corresponds to the original ratio system. The PL-controlling ratio system is sector specific and consists mainly of financial ratios with regard to the functional areas: purchase, production, sales and logistics. In the special part organization related rations (ratios about input, output, potentials and processes) have to be used for a detailed profitability and liquidity control.

2.4

Critical appraisal of traditional Performance Measurement concepts

Financial ratios, which form the core of the classical Performance Measurement concepts, have – despite their many possibilities of usage – numerous weaknesses. Because of the past oriented data from accounting financial ratios only evaluate the actual situation and are past oriented. The future relevant actions and decisions of the management, which can be reflected in innovations, quality and customer’s satisfaction, cannot be measured by financial ratios. Thus, an analysis of future related measures and targets on the basis of past oriented ratios is only partially possible. Financial ratios cannot reflect long term management activities.2 Because of the short term orientation on the short term profit and liquidity targets traditional Performance Measurement systems are not always appropriate to develop long term success potentials. The sources of possible successes or failures are only known with a certain time delay. Often there is also a lack of connection between ratios, strategies and strategic aims. The demands with regard to a Performance Measurement system are strongly coined by the requirements of market and resources, which have to be absorbed by the system because of their success relevant meaning.3 Analysis from the recent past shows that the emphasis with regard to company targets has shifted. While studies from 1985 demonstrated that the profit has a very high priority in company aims, studies from 1985 and 1992 show a tendency to-

1

Comp. Sandt (2005), p. 432–433. This footnote is also valid for the next passage.

2

Comp. Becher (2007), p. 69.

3

Comp. Klingebiel (2001), p. 46.

BSC – an ideal and practicable, modern Performance Measurement concept

15

wards relativizing of the profit target. Profit is not the only dominant company target any more.1 Because of the rise of importance of the customer in competition, customer related targets have become an indispensable component of the company policy. Because of the rising pressure of competition also process and potential related targets of employees and organization are indispensable for a successful orientation of the company. That means, as result of the rise of dynamic in competition in the sense of strategies of differentiation, in accordance with Porter, innovation, quality and time targets are the areas of competition in future business activities. There is no doubt that it is not possible for companies anymore to target financial goals only. There is consensus on the fact that financial success plays an important role, however the company efforts generally tend to substituting the hypothesis of profit maximizing by pluralistic target systems.2 Traditional finance oriented Performance Measurement instruments are only limited to finance related goals and, therefore, do not correspond to the current demands of the market. Due to the weaknesses of traditional Performance Measurement systems described above, modern multidimensional, future oriented instruments for performance measurement are not restricted to measuring monetary targets only but also consider non-monetary, however quantitative goals.

3

BSC – an ideal and practicable, modern Performance Measurement concept

Multiple Performance Measurement concepts are existent. They reach from a simple unstructured link of cost-, time- and quality ratios up to mathematically highly complex models.3 It can be distinguished between concepts that have been developed in an academic context with consulting practice, and concepts developed by the company itself.4 The following table provides and overview over chosen Performance Measurement concepts:

1

Comp. Engel (2006), p. 31.

2

Comp. Engel (2006), p. 33–36.

3

Comp. Horváth (2006), p. 563.

4

Comp. Vorbeck (2007), p. 39.

16

Chapter I

Performance Measurement concept

Evaluation of the concept

Balanced Scorecard

 Deduction of strategically relevant ratios and operationalization of the strategy (implementation of strategy)  Well balanced ratio design  4-phase-process as management system  Cause-effect relations support a strategic discussion  Approach for strategic feedback and learning

Kaplan/Norton

 Innovative point of view with regard to the origin of Performance Sveiby  Support of the management in raising the company value  Well balanced ratio design in the Intangible Assets Monitor Performance Pyramid  Focuses the strategy implementation by a satisfactory deduction from Performance indicator groups Lynch/Cross  Is seen as integrated in the Balanced Scorecard Quantum Performance  Deduction of strategy conform indicators  Link with several instruments as enablers Arthur Anderen Consult Breakdown of ratios in different dimensions ing  Process oriented performance measures as leading indicators Tableau de Bord  Strategically relevant ratios to support the implementation of the strategy Lauzel/Cibert  Well balanced ratio design in different tableaux  Use of early indicators possible  Integrating of locally available information in the tableau in question of the area of responsibility Intellectual Capital

Figure 1-6: Overview over Performance Measurement-concepts Source: Piser (2004), p. 120f.

The above mentioned Performance Measurement concepts are marked by the fact that they show the company performance from different points of view and with different targets, especially bearing in mind non-monetary ratios. Distinctive for all approaches is the special consideration for the strategic orientation as well as the illustration of cause-effect relations of entrepreneurial actions involving processes, qualities and times. However, they are no ready instrument for management, but only general models that have to be adapted to each company.1 For several years, empirical studies on the occurrence and applicability of Performance Measurement approaches have been conducted. Piser examines the concepts with regard to the question whether they are appropriate to strategic management and strategic control. He comes to the conclusion that the Balanced Sco1

Comp. Hilgers (2008), p. 66f.

BSC – an ideal and practicable, modern Performance Measurement concept

17

recard shows most potential for strategic supervision among the Performance-Measurement concepts.1 Gleich has evaluated several “modern” Performance Measurement concepts with regard to their fulfillment of the demands of eleven criteria regarding Performance Measurement concepts (e.g. strategy adhesion, stakeholder adjusted target differentiation, consideration of several performance levels etc.). He has come to the conclusion that the Balanced Scorecard is the most appropriate concept with regard to fulfillment of the criteria and therefore can be considered to be an effective Performance Measurement-concept.2 Klingebiel compares the Performance approaches developed by consulting companies via 18 criteria. Because, in most of the cases, the Balanced Scorecard was used as base for the development of the other concepts, he uses the Balanced Scorecard as reference model, to which the other concepts are compared. He considers none of the consulting concepts as alternative for the Balanced Scorecard.3 Günther and Grüning analyzed the practical use of Performance Measurement systems on the basis of 181 companies in Germany. The result of the study was that the Balanced Scorecard was most commonly used in German companies. As the Balanced Scorecard finds a special amount of consideration, both in science and practice, and has a lot of potential as instrument of strategic management and strategic control,4 the focus of this book lies on it.

1

Comp. Piser (2004), p. 168.

2

Comp. Gleich (2001), p. 88–91.

3

Comp. Klingebiel (2000), p. 109–121.

4

Comp. Schreyer (2008), p. 193.

Chapter II About the issue of the use of the Balanced Scorecard as Controlling Instrument within a value oriented business management 1

Starting point and problems concerning the Balanced Scorecard

Today’s orientation and direction of a company is marked by a growing dynamic and complexity. More and more activities are carried out on a global level and have to stand up to a more and more intensive national and international competition. Further characteristics of today’s business environment are: changes of information, research and production technologies, shortening integrating product life cycles as well as modified necessities on the customer side. Companies have to answer the growing customer demands and changing framework requirements with innovations and flexibility. Creating and preserving customer relations, providing customer specific, high quality, innovative products and services and continuous process and product improvements belong to today’s challenges. One of the key success factors is to make the organization more flexible and to mobilize abilities and motivation of the employees. There is a necessity to check the used strategies as well as the internal structures and processes continuously in a controlling oriented way and – if necessary – to integrate changed framework conditions as quickly as possible into scenario-like calculations. In recent years, multiple management concepts, like Total Quality Management (TQM), Business Process Reengineering (BPR) and Management by Objective (MbO) were developed, in order to lead companies successfully through the growing competition. The weakness of these concepts is often their unidirectional focus, i.e. the exclusive orientation towards one success factor like quality, costs, targets or time.

20

Chapter II

That is where the Berlin Balanced Scorecard (BBSC) as a calculable, many-sided complex and value oriented management and controlling approach comes to action, as it comprises a holistic, accountancy oriented approach for the calculability of a strategy, an innovation success calculation1, as well as for the consideration of influence factors as well as of company perspectives. Therefore, it is reconstructed in accordance with the Balanced Scorecard concepts that were developed by Kaplan and Norton in the beginning of the nineties with the following four well balanced perspectives: Finances, Customers, Internal Processes as well as Learning and Growth. Furthermore, the BSC creates a framework for the integration of strategic measures that helps to translate a company mission and strategy into a transparent performance measurement system and, thus, to cope with the problems of implementing the strategy and to measure the company performance adequately via Performance-Reporting. The interdependence between perspectives with their qualitative as well as quantitative target and measured variables, however, is rarely intensely studied by Kaplan and Norton or any of their uncritical imitators. The main complaint that is brought forward regards the lack of hierarchy between the single perspectives with ratios or ratio systems. I.e. there is a lack of an operational and mathematical link between the four BSC perspectives. Commonly it is brought forward that the entrepreneurial bridging problem is solved, but the promise is not kept. Moreover, it is criticized that Kaplan and Norton had not lived up to the dynamization of the Balanced Scorecard over the course of several periods either. These critical problems are intensified by the fact that there is a lack of theoretical or generally logical structure in controlling and accountancy for Performance Measurement. Therefore, it is impossible to integrate the Balanced Scorecard as a logical controlling instrument in the Performance Measurement and in the Performance Measurement Reporting. The evaluation and measurement problem is intensified by the fact, that now one Balanced Scorecard perspective has been magnified to the status of human resource evaluation, without having proved or shown in a theory or by an example how companies have to proceed controlling-wise. This book treats all the unsolved problems via the Berlin Balanced Scorecard and shows how in this sense e.g. a Berlin Human Capital Evaluation Model should be created. At the same time, a logistic controlling concept for the IFRS-accountancy, for the Berlin Balanced Scorecard Approach as well as for the human resources etc. is developed, in order to allow using the BBSC for all perspectives and instruments. The perspectives shall be interconnected and dynamizable and – for the strategy implementation – controllable and calculable.

1

Schmeisser, W. et al. (ed.): Innovationserfolgsrechnung. Springer-Verlag, Berlin, 2008.

Basics of controlling with the help of Balanced Scorecard

2

Basics of controlling with the help of Balanced Scorecard

2.1

Overview over Strategic Management and Controlling

2.1.1

Approaches regarding Strategic Management and Controlling

21

In the 80s Strategic Management1 was established as autonomous discipline in practice and science as a result of a four step development process that had began in the post-war period with the orientation towards budget planning, which was followed by a phase of prognosis oriented long term planning due too the intensifying external framework requirements. Strategic planning was meant to anticipate discontinuities in the business environment by analyzing opportunities and risks, own weaknesses and strengths and deducing strategies in order to reach long-term competitive advantages though innovations. The changes in the relationship between companies and their surroundings call for a growing ability of adaptation and innovation, with the result that finally the Strategic Management with its consideration of technological, social and societal aspects, as for example the company culture, the human resource evaluation, the patent assessment in line with IFRS, the research and technology controlling or the innovation profit and loss account.2 The original meaning of the term “strategy” is derived from the Greek word strategos meaning art of arranging troops.3 In the forties the term was transferred from the military context into a business context. Ansoff defines strategy as measure for securing a long-term company success; Mintzberg differentiates between five kinds of application: “plan, ploy, pattern, position, perspective (Ps of Strategy).”4 The strategic approach has to go far beyond the area that has to be managed and has, amongst other things, to integrate a long-term, holistic, target-oriented, reality-linked, risk-sensible and value-oriented reasoning.5

1

About the institutional and functional management term as well as their development: comp. Steinmann/Schreyögg, Management (2000), p. 3–65, also especially: Müller-Stewens/Lechner: Strategisches Management, 3.ed.,( 2005), p. 3–53.

2

Comp. Bea/Haas, Strategisches Management (2001), p. 11–14 and Becker/Fallgatter, Unternehmensführung (2002), p. 31–34.

3

Strategos = military leader.

4

Comp. Ansoff, Managementstrategie (1966), p. 125–143 and Mintzberg, Strategy (1987), p. 11–24.

5

Comp. Gälweiler, Strategische Unternehmensführung (1990), p. 65–69 and Müller, Strategisches Management (2000), p. 16.

22

Chapter II

The main challenge of Strategic Management is that the business environment cannot be anticipated, that a multitude of incidents can occur that they can be contradictory and ambivalent and that complex problems are difficult to break down.1 The strong dependence of the companies on their instable and insecure environment makes an intense external orientation necessary, in order to be able to react as quickly as possible to changes of the business environment. Also a corresponding internal orientation with regard to flexibility, creativity, capacity and willingness of innovation and a scenario-based calculation are essential.2 The adjustment of the entrepreneurial competence profile to the demands of the business surroundings, i.e. the strategic fit is the bridging problem between operative and strategic controlling. But also problems regarding the weighting of external risks and opportunities and internal strengths and weaknesses for the setting of aims and strategy are main tasks of the Strategic Management. The external chances, like the ones deriving from markets, customers, technology and competitors are to be harmonized with the internal resources, as e.g. core competences, capacities and strengths of human resources with the help of appropriate strategies.3 A basic orientation framework for central company decisions is worked out, in whose context the operative Management can carry out concrete measures of daily business.4 There is such a multitude of theoretic Strategic Management approaches that for this book only one characteristic of those can be named that significantly treat the identification of strategic success factors: The marked-based view that is derived from industrial organization5 and that describes the Structure-Conduct-Performance-Paradigm explains competitive advantages (Performance) by the structure of the sector and the strategic conduct of a company. In this sense an outside-in-perspective is adopted with the result that the market requirements determine the success factors of a company and adequate product-marketstrategies have to be deduced from them. Porter’s publications on competitive strategies and advantages6 have fundamentally coined this approach in recent decades. Empirical studies on the experience curve7 und on the PIMS-program8 underline Porter’s approach even more.9

1

Comp. Müller-Stewens/Lechner, Strategisches Management (2001), p. 13f.

2

Comp. Bea/Haas, Strategisches Management (2001), p. 9f.

3

Comp. Bea, strategieorientierte Unternehmensrechnung (1997), p. 397 and Staehle, Management (1999), p. 615f.

4

Comp. Steinmann/Schreyögg, Management (2000), p. 149.

5

Industrial Organization deals with the relations between market structure, market strategy and market results, comp. Bea/Haas, Strategisches Management (2001), p. 24f.

6

Comp. Porter, Competitive Strategy (1980) and Competitive Advantage (1985).

7

The experience graph describes the connection of long term costs per unit and total amount of production of a company. Principle assertion: when the cumulated amount produced is doubled the inflation adjusted costs per item decrease potentially by 20–30%, comp. Henderson, Erfahrungskurve (1984).

8

The PIMS-program deals with the identification of stratgic sucess factors and their mode of operation. From the manifold empirical company data five main influence factors on the ROI are determined. Comp. Buzzell/Gale, PIMS-Programm (1989).

9

Comp. Bea/Haas, Strategisches Management (2001), p. 23–26 and Becker/Fallgatter, Unternehmensführung (2002), p. 34–38.

Basics of controlling with the help of Balanced Scorecard

23

The resource-based view created because of the criticized predominance of market-based views focuses internal resources (inside-out perspective). The quality of the resources1 – as technology, human resources, structures and processes of the organization – are seen as source of a long-term and sustainable company success. Further tasks of Strategic Management are the creation, maintenance and development of specific resources as well as their well-targeted use and appropriate combination. Bea/Haas distinguish two types of resourcebased approach: The concept of core competences by Prahalad/Hamel2 and the knowledgebased view that sees the knowledge (patents, know-how) as the decisive source of company success in a dynamic environment. The theory of evolution considers a company as a complex system, in order to transform it via rational analysis and strategies into the desired condition. I.e. the freedom of the management is limited and the managers can only create general conditions to improve the company’s transformation processes.3 This means that the human resource evaluation approach provided by the Berlin Balanced Scorecard is the nest step. A further turnabout in strategic reasoning, triggered by the capital market globalization, is the value-based Orientation of Strategic Management by Rappaport. In this approach further financial aspects are integrated in the strategic considerations. The Shareholder-Valueconcept4 that asks for the alignment of all management activities with the increase of the company value that was published by Rappaport in 1986 provides the basis for this concept. However, the focus on the shareholder interests at the expense of other stakeholder is strongly criticized. On the other hand the Social Responsibility approach does not provide an alternative model to logically deal with that problem.5

2.1.2

About the Strategic Management Process

The process of Strategic Management which is exemplarily displayed in figure 2-1 and which shall not be understood as norm comprises the strategic planning with target setting, environment analysis, company analysis and choice as strategy as well as implementation and strategic controlling.

1

About the classification of ressources: Comp. Staehle, Management (1999), p. 792–794.

2

Comp. Prahalad/Hamel, Core Competence (1990), p. 79–91.

3

Comp. Bea/Haas, Strategisches Management (2001), p. 26-32 and Becker/ Fallgatter, Unternehmensführung (2002), p. 38–40.

4

Shareholder Value refers to the value of a company for is shareholders/market value of equity. Comp. Rappaport, Shareholder Value (1999).

5

Comp. Wehling, Unternehmensführung und Personalmanagement (2001), p. 149f. About the Shareholder Value Approache see excursion below.

24

Chapter II

Target setting Environment: Opportunies/risks

Choice of Strategy

Implementation

Company: Strengths/Weaknesses Strategic Controlling

Figure 2-1: Process model of Strategic Management Source: Following Steinmann/Schreyögg, Management (2000), p. 157 and Beal Haas, Strategisches Management (2001), p. 54.

The main task within the strategic planning context is to find future bearers of success to secure existing and to create new success potentials in order to secure long-term company success.1 Gälweiler describes success potentials as “… arrangement of both product- and market specific conditions relevant for success.”2 An important task of Strategic Management is firstly to formulate strategic aims for the coordination, motivation, control etc. of managers and employees. They can be translated into a hierarchy of ratio objectives that leads from the vision, via the company mission to the aims of the company, business and functional areas. The target setting is linked to the other components of the Strategic Management process in the form of processes of feed-forward and feedback via ratios, chosen instruments and methods symbolized by the grey arrows in Fig. 2-1.3 According to Steinmann/Schreyögg, the analysis of the situation of the environment as well as the analysis of internal possibilities and limits with the aim to give information on the kind, intensity and interaction of the influences of the company and its environment can be considered as pillars of strategy planning. In the environmental analysis the external surroundings are viewed for indications of threats to the actual business, as well as for new chances and possibilities, e.g. through the portfolio method. The portfolio method refers to the competitive surroundings as well as to the further reaching environment e.g. the general technological development, social flows and changes, and political and legal conditions.4 Porter distinguishes five basic competitive forces having

1

Comp. Gilles, BSC zur strategischen Steuerung (2002), p. 50f.

2

Gälweiler, Strategische Unternehmensführung (1990), p. 26 (own translation).

3

Comp. Bea/Haas, Strategisches Management (2001), p. 67–76.

4

Comp. Steinmann/Schreyögg, Management (2000), p. 157–180.

Basics of controlling with the help of Balanced Scorecard

25

influence on the profitability of a sector and, thus, on its market attractiveness in the sector analysis of the market as close-by environment.1 The company analysis – directed towards the internal situation of resources comprises e.g. the consideration of potentials of employees and technology in the company and compares them to the situation of the most important competitors. Strategic success factors deduced from it define the strengths/weakness profile of the company. Some possible instruments are the life cycle analysis, portfolios, the value chain and calculation and the analysis of potentials though the model for human capital evaluation.2 The company reacts to environmental chances and risks by choosing and implementing appropriate strategies considering the identified strengths and weaknesses. Porter distinguishes three generic strategies: cost leadership strategy, differentiation strategy and focus on core areas.3 Hamel/ Prahalad have publicized a strategy paradigm regarding basic renewals in competition in future going further than reorganization and process improvements.4 On the basis of the chosen generic strategy, the strategies of subordinated business areas and functional areas are deduced. Through the evaluation of strategies, finally, the alternative is chosen that is most likely to have success – taking success dimensions as well as aspects of management philosophy and social responsibility into consideration. Then, the created strategic programs support the orientation within operative planning and acting. The strategy implementation comprises the operationalization and continuous actualization of measures to put the strategies into effect and the adequate allocation of resources in the context of the bridging problem.5 Through the continuous strategic control, divided into control of assumptions, implementation and efficiency, the critical observation and measurement of strategic initiatives and their effects on the continuous control of underlying assumptions is realized. They are meant to discover errors and signalize necessities of change, with the aim of being able to take actions in due time.6 However, in practice, there are problems with the process model described here, with regard to consequent strategy planning and –implementation as well as to an adequate performance measurement, as will be analyzed later-on.7

1

About the competitive forces danger through new competitors, danger trough substitute products, negotiating power of customers, negotiating power of consumers, rivalry between competitors: Comp. Porter, Wettbewerbsstrategie (1999), p. 33–64.

2

Comp. Becker/Fallgatter, Unternehmensführung (2002), p. 82–108.

3

Comp. Porter, Wettbewerbsstrategie (1999), p. 70–85.

4

Comp. Hamel/Prahalad, Strategien (1995), p. 50–55.

5

Comp. Kreikebaum, Strategische Unternehmensplanung (1997), p. 70–74 and p. 87–91.

6

Comp. Müller-Stewens/Lechner, Strategisches Management (2001), p. 514–517.

7

Comp. Chapter 2.3

26

Chapter II

2.2

Past management trends

In order to be able to deal with the dynamic environment with its ever new challenges, a holistic reasoning with flexibility and future-orientation is needed. In the past, management concepts with new ways of thinking developed from these new requirements for companies. At this point three of these approaches will be described. However, they have to be regarded with suspicion and shall not be seen as the ideal solutions, as for every company an individually appropriate combination and form of implementation has to be found.1

2.2.1

Total Quality Management (TQM)

Total Quality Management refers to a comprehensive quality management, i.e. quality awareness and quality securing are integrated in all phases of the value chain and into the conduct of all managers and employees. As a comprehensive approach for reasoning and acting, TQM is reflected in the company philosophy as well as in the concrete management concepts of a company.2 This new comprehension of quality was developed starting with the quality control in special departments at the beginning of the 20th century, then in quality assurance systems of the 60s and in the norm system DIN ISO 9000-9004 in the eighties. The European Foundation for Quality Management (EFQM) worked a European TQM-model out which is based on the specific intercultural starting points and the liberal value system in Europe and which has served as basis for the annual European Quality Award (EQA) since 1992.3 A closer examination of Total Quality Management occurs with the aid of the analysis of its three components:  Total stands for the integration of all stakeholder groups in the process of quality assurance (suppliers, functional areas, employees). It is deduced from the necessity to settle the quality assurance and, thus, the quality responsibility, directly where the mistake could possibly occur.4  Quality expands in this approach the unilateral understanding of quality as technical product quality that refers to the fulfillment of all quantitative and qualitative minimum requirements of products by the quality in all stages of customer contact with the aim of customer satisfaction. In this context, all specifications for the product are deduced from customer requirements with the result that all fundamental requirements regarding the market performance and the communication with the customers can be fulfilled.  Total Quality requires a comprehensive and target-based management with the task to initiate quality production as a systematic process in the whole organization. It comprises 1

Comp. Kumpf, BSC in Praxis (2001), p. 31f.

2

Comp. Töpfer/Mehdorn, Total Quality Management (1995), p. 8.

3

Comp. Dalluege, Total Quality Management (2001), p. 396f.

4

Comp. Wonigeit, Total Quality Management (1996), p. 56f.

Basics of controlling with the help of Balanced Scorecard

27

the management of the company with regard to the reorganization in accordance with the criteria quality, time and costs.1

2.2.2

Business Process Reengineering (BPR)

In the context of Business Process Reengineering the courses of action of the company are radically redefined focusing the performance and the business processes. This new approach of restructuring was developed in North America in the eighties due to the competitive pressure of the Japanese industry that had already recognized the necessity of comprehensive, integrated and team-oriented reasoning. In the beginning of the nineties Hammer and Champy developed for the first time a comprehensive reengineering concept.2 However, no uniform BPR approach has emerged with the result that different models of procedures and applied methods dictate the business practice.3 There are still three generic thoughts that characterize the approach: firstly the process-based, transsectoral view of company actions, secondly the transfunctional reconstruction of the organizational actions with the help of modern IT. The main interest lies on the third aspect – the customer-oriented creation of value. I.e. the core thought is the holistic view, i.e. the consideration of the whole process and value chain with the aim to optimize them with regard to time, cost and quality. Initiative and responsibility as well as motivation of the employees are considered to be main success factors of this approach.4

2.2.3

Management by Objectives (MbO)

Management by Objectives is a method of objective-oriented management through agreement of goals. It had already become popular in the sixties above all with Odiorne and Humble, and today it is considered as one of the most reliable Management-by-models in practice. MbO has the target to efficiently fulfill the objectives, so that is future and result oriented. The essence of this management approach is personnel management though participative target setting.5 Trigger for the focus on employee goals were amongst other things a lack of understanding of the strategy on the employee side, an inadequately defined attribution of their own actions to the company targets, uncertain performance expectations and a lack of definition of the objectives as well as deficiencies of identification and motivation. MbO considers a strong

1

Comp. Töpfer/Mehdorn, Total Quality Management (1995), p. 9f. and Wonigeit, Total Quality Management (1996), p. 57f.

2

Comp. Kröger, Transforming the Enterprise (1995), p. 49f.; Engelmann, Business Process Reengineering (1995), p. 2–6 and Kumpf, BSC in Praxis (2001), p. 37f.

3

Comp. Becker/Kugeler, Business Process Reengineering (2001), p. 490.

4

Comp. Staehle, Management (1999), p. 749 and Becker/Kugeler, Business Process Reengineering (2001), p. 490.

5

Comp. Stroebe, Führungsstile (2003), p. 9–12 and Staehle, Management (1999), p. 852.

28

Chapter II

orientation towards performance and goals in the reasoning and actions of the employees to be essentially determining the success of the company.1 In the MbO approach target setting results in the aspired clarity and transparency of the company strategy. The process of target setting starts with the formulation of superordinate goals derived from the vision and the overall company goals as common decision of management and employees. This shall make sure that the employees can identify better with the aims and, thus, are more motivated to reach the targets. The formulated objectives shall be realistic, but demanding, precisely formulated and, thus, measurable and free from contradictions.2 Thereafter, the employees act on their own responsibility and in a target-based way in their own area of responsibility. However, team goals support the cross-sectoral cooperation. The success is expressed by the fulfillment of targets, which has to be controlled on a regular basis. Target-performance comparisons provide a basis for discussions with employees, who for example talk about the discrepancy between targets and results and work possibilities of improvement out. However, critics of this approach criticize amongst other things that there is too much emphasis on the pure praise-blame system and that quantifiable aspects of tasks are overestimated in comparison with qualitative aspects of the tasks.3 The aim of all the management concepts that were described is to ensure the company’s survival in changed environment-conditions. Whereas TQM defines quality as success factor, processes are more important in a BPR context. Motivated employees determine decisively the success of these concepts, but are not focused by these concepts. MbO on the other hand centers the performance and result orientation of the employees. Thus, it is difficult to take a decision in favor of or against one of the concepts described above, as a unilateral focus, for example on business processes entails that other important influences are neglected. Quality is as important as optimized processes and concrete target setting for the employees deduced from a well formulated company strategy. Only a combination of the different approaches can lead to the desired success – and that is what the Balanced Scorecard does.4 According to Weber and Schäffter the management concepts correspond only to a fad that follows the typical lifecycle of modern management concepts and vogues. I.e. it receives a lot of attention in the beginning, and is then only half-heartedly put into action, with the result that it cannot keep-up to its promises and finally comes to a halt and disappears from the scene.5

1

Comp. Kumpf, BSC in Praxis (2001), p. 38f.

2

Comp. Stroebe, Führungsstile (2003), p. 12–14 and p. 26–44.

3

Comp. Staehle, Management (1999), p. 853–854 and p. 968.

4

Comp. Kumpf, BSC in Praxis (2001), p. 45.

5

Comp. Weber/Schäffer, Balanced Scorecard (1998), p. 7.

Basics of controlling with the help of Balanced Scorecard

2.3

29

Existing management problems

Despite the trials to survive in a more and more complex and dynamic competition, there are the following management problems, which are considered as the trigger of the introduction of the Balanced Scorecard in companies. A long-lasting planning process and slow implementation of strategies Rather bureaucratical planning conditions, marked by long planning sequences and lengthy planning and coordination procedures with considerable use of resources characterize the current management practice. I.e. the planning process needs a simplification and acceleration in order to make a quicker reaction to the changed competitive situation possible.1 This results in the necessity to reduce the time of validity of strategies in today’s tumultuous business environment. The reaction to the short duration of strategies is their quick and efficient implementation, which is decisive for the company’s success.2 This is, however, where most problems emerge in the strategy process, as shall be seen with help of the four hurdles of the implementation of a strategy identified by Kaplan/Norton. 1. Vision and mission cannot be implemented The first hurdle of implementing the strategy named by Kaplan and Norton is that mission and vision cannot be implemented because they are not sufficiently concrete, because there is no agreement over the factual content of the strategy or because the strategy formulation is unclear and, thus, not quantifiable. This makes it possible for the actors to deduce different strategy interpretations and to recognize different goals. Thus, there is no clearly defined, company-wide, uniform overall strategy, whose implementation is collectively aimed for and controlled. 2. Lack of link between strategy and set targets Furthermore, in practice, the long-term strategy exigencies are not set down in the set targets of departments, teams and employees. Instead, the budget determines the sectoral goals. Or the short-term tactical department goals determine the team’s and employees’ goals. Performance extras connected with the set targets are determined by short-term financial goals with the result that employees and managers are not motivated to put the strategy into effect. 3. Lack of connection between strategy and resource allocation A third hurdle results from the separation of the long-term strategic planning and the shortterm annual budgeting. As a result, the strategic priorities are often not integrated on an operative level and for the resource allocation strategic aspects are not taken into consideration. The organizational separation between strategy, staff and controlling results in interface problems, e.g. because of uncertain planning-assumptions. For an efficient implementation of the strategy a joint, integrated approach would be necessary. 1

Comp. Meissner, Strategieplanung und -umsetzung (2000), p. 452.

2

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 3f. and Müller-Hedrich, Fachkonferenz BSC (2001), p. 34.

30

Chapter II

4. Lack of strategic feedback Furthermore, there is not enough feedback about the state of the strategy implementation as well as about the reasons for wrong developments. Often there is a comprehensive tactical feedback with target-performance comparisons and explanations on their deviations, but at the cost of strategic feedback. The comprehensive, mostly intransparent information from accountancy do not correspond to the demands of strategic management information.1 Further triggers of the introduction of the Balanced Scorecard are the three management problems: Dominance of classical financial indicators and control variables Starting point for the development of the Balanced Scorecard was the criticism of the classical ratio systems with their control quantities which were only based on financial data.2 According to Kaplan/Norton financial ratios “are not appropriate to lead companies though the competition and to evaluate them. They are only weak indicators for value creation or for the mistakes made in the past period under review. Financial ratios show one, but not all sides of past actions and do not inform about what has to be done now or in future for the financial value creation.”3 Especially in the German-speaking area the reporting is extremely accountancy oriented due to existing detailed accountancy systems; the customer-focused management on the other hand is less pronounced. Non-financial variables like customer and employee satisfaction or capacity of innovation are rather rarely applied.4 Schmeisser and Clausen show some reservation with regard to these arguments, because they do not apply neither under entrepreneurial nor under strategic aspects, as will be shown later in the context of the Berlin BSC approach... Insufficient external reporting A further trigger for the use of non-financial variables is the need of information by the shareholders and potential investors. The exclusive provision of financial variables is no longer sufficient. They ask for non-financial variables as indicators for the financial capacity of the company that render transparency with regard to strategic potentials possible.5 Also in this case, it can be argued that Kaplan and Norton had never thought about the calculation of strategies, as their knowledge of accountancy was and is limited. Strategists refuse to deal with drudgeries of controlling and accountancy.

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 184–189 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 4f.

2

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 3 and Müller-Hedrich, Fachkonferenz BSC (2001), p. 34.

3

Kaplan/Norton, BSC-Umsetzung (1997), p. 22. own translation.

4

Comp. Müller-Hedrich, Fachkonferenz BSC (2001), p. 34.

5

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 4f.

Basics of controlling with the help of Balanced Scorecard

31

Requirements of the Act on Control and Transparency in the Business Area (KonTraG) The Act on Control and Transparency in the Business Area1, which came into effect in Germany on the 1st of Mai of 1998, demands amongst other things for the establishment of a risk management system. Sec. 91 subs. 2 AktG n.F. (Shareholding Act new edition) obliges the board of directors, “to take the right measures, particularly to introduce a system of supervision that makes it possible to recognize developments that might endanger the company’s survival in an early moment.”2 The legislator adds authority by sect. 93 subs. 2 AktG where a liability for damages of the board of directors as joint and several debtor and a shift of the burden of proof in the case of a violation of duty is set down.3 With the help of systems of foresight, an early detection of threats and the initiation of countermeasures is possible in due time. Furthermore, chances can and have to be identified.4 A control of the existing risk management system in the company considering the KonTraG can, thus, be a trigger for the introduction of the Balanced Scorecard.

2.4

Balanced Scorecard as a solution for the performance measurement topics

In 1990 Robert S. Kaplan and David P. Norton carried a one year research project about the performance measurement5 topic in twelve American companies out. This was triggered by the dominance of financial key figures and the awareness of the dependence of the economic success on influences behind the financial targets. Thus, the Balanced Scorecard was developed, the term “balanced” standing for the targeted balance of short-term and long-term objectives, financial and non-financial indicators, early and lagging indicators, as well as external and internal performance perspectives. 6 Enhancements of the approach with regard to the connection of the BSC indicators with the company strategy went further than the pure ratio system for performance measurement.7 The aim was to create an instrument that focuses the strategy of a company, transforms it 1

KonTraG of 27.April 1998 – BGBl. 1998 I, p. 786–795.

2

Own translation.

3

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 72 f.

4

Comp. Krystek/Müller, Frühaufklärungssysteme (1999), p. 177. and Horváth & Partner (ed.), Früherkennung (2000), p. 9–11.

5

Performance Measurement can be understood as the construction and use of – in most cases – several indicators of different dimensions (e.g. cost, quality, innovation capacity), that serve to evalutate the effectiveness and efficiency of performance and performance potentials of different objects within the company. Comp. Gleich, Performance Measurement (2002), p. 447.

6

About the results of the study conducted by Kaplan/Norton: Comp. Kaplan/Norton, Measures (1992), p. 71–79.

7

About the finding with regard to strategic key figures: Comp. Kaplan/Norton, BSC to Work (1993), p. 134–147.

32

Chapter II

into operative aims and makes though measures and ratios the implementation of the strategy measurable.1 Thus, the Balanced Scorecard appeared as a strategic management system for the long term strategy assertion.2 It supports the strategic management process and helps especially to get over the described hurdles of strategy implementation.  The development process of a Balanced Scorecard in the upper managements leads to the clarification of as well as a consent with regard to strategic goals. Thus, the company vision can be translated into strategic key issues and a further mediation and implementation in the whole company can take place.  Through programs of communication and further education and connection of the BSC with goals of the teams and single employees as well as with motivation systems, a uniform target orientation of the company’s actors is reached. Thus, a continuous strategic reasoning and acting replaces the short-term success reasoning, which can often be found instead.  Via BSC the company strategy is also anchored in the resource allocation. After formulating the long-term demanding goals and identifying critical company wide strategies, the bridging problem between operative and strategic accountancy is solved.  Feedback concerning the strategy is guaranteed by the integrated strategic feedback and learning process. The success indicators of the strategy collected here make a control of hypothesis on interdependencies between strategic goals and carried out measures possible. On that basis developments and problems can be adapted. The strategic feedback also allows the executors to observe the own contribution for the achievement of the overall strategy.3 The consideration of four different perspectives (finances, customers, internal processes, learning and development) impedes the unidimensionality that was criticized in the management concepts described above.4 Through the perspectives the BSC solves the problems of strategic management with regard to unilateral, isolated considerations and disregard of important factors and integrates the market, resource and value-based approach.5 The high number of publications on the Balanced Scorecard topic in an academic as well as in a practicable context shows that it is not just hype like the management trends described above. According to an empirical study conducted by the Balanced Scorecard Collaborative Inc.6 300 businesses and other organizations all over the world had introduced the BSC or were introducing it. Horváth and Gaiser on the other hand criticize the lack of empirical 1

Comp. Kaplan/Norton, Strategic Management System (1996), p. 75–85.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. VII–IX and 7–10.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 184–189.

4

Comp. Chapter 2.2.

5

Comp. Wehling, Unternehmensführung und Personalmanagement (2001), p. 150 and Chapter 2.1.

6

Organization founded by Kaplan Norton in 1998 with the aim to support the dispersion of the BSC concept and to evaluate experiences with the concept. For further information see www.bscol.com.

Balanced Scorecard as Strategic Management Instrument

33

studies on the state of implementation in the German-speaking area.1 More recent studies provide information about this question. According to the WHU2-study “Erfolg durch Kennzahlen”3 of 2000, 7% of companies of different sectors use the Balanced Scorecard. The spectrum of users reaches from large companies, over SMEs to public institutions. 54% of the companies planning the introduction or further development of a ratio system intend to introduce the BSC.4 According to the Brabänder/Hilcher’s empirical study, 16% of the interviewed companies had introduced the BSC, more than one third of them were planning a further revision of the system and 58% planned its introduction.5 There are even more studies that prove how flexibly the BSC concept can be used. Its application is not limited to certain sectors or company sizes.6 These developments in practice reflect the efficiency and practicability of the Balanced Scorecard concept. From the multitude of publications some are chosen to help to introduce the concept.

3

Balanced Scorecard as Strategic Management Instrument

3.1

Conception of the Balanced Scorecard

The Balanced Scorecard model developed by Kaplan/Norton characterizes a cross-linked multidimensional management system for strategic management consisting of two elements – a ratio system and a management system.7 The following figure 2-2 demonstrates its conceptual design.

1

Comp. Horváth/Gaiser, Implementierungserfahrungen (2000), p. 18f.

2

University-level institution for management (Wissenschaftliche Hochschule für Unternehmensführung) – OttoBeisheim-Hochschule, Vallendar.

3

“Success through indicators”.

4

Comp. Weber/Sandt, Erfolg durch Kennzahlen (2001), p. 22.

5

Comp. Brabänder/Hilcher, Balanced Scorecard (2001), p. 253–260. Töpfer/Lindstädt/Förster, Nutzen BSC (2002), p. 79f. obtained similar results.

6

Comp. Gilles, BSC zur strategischen Steuerung (2002), p. 184 f.; Krey, Wunderwaffe BSC (2003), p. 325–333 and Zdrowomyslaw/von Eckern/Meißner, Akzeptanz und Verbreitung der BSC (2003), p. 356–359.

7

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 7–11 and Gilles, BSC zur strategischen Steuerung (2002), p. 25.

34

Chapter II Process of development

Ratiosystem

Vision Strategy

Managementsystem Formulation and implementation of vision and strategy

Strategic Goals Financial Ratios Customer

Vision and Strategy

Internsl Business Processes

Specifications Strategie Reviews

Learning and development

Measures Strategie Reviews

Communication and interconnection Planning and specificatiions Strategic Feedback and Learning

Figure 2-2: General model of the Balanced Scorecard Source: Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 9f. and Gilles, BSC zur strategischen Steuerung (2002), p. 39.

In the ratio system a customer-based, an internal process and learning and development perspective complete the criticized exclusive financial point of view, with the result that anteceding indicators or performance or value drivers are considered in addition to traditional success indicators.1 More details on the Balanced Scorecard as ratio system are given in chapter II section 5. As management system the BSC serves to support the process of strategic management and functions as connector between development of a strategy and its implementation. Through the Balanced Scorecard it is possible to substantiate, illustrate and pursue the strategies, as it translates the company strategy into concrete activities. Strategic aims deduced from vision and strategy are the decisive and success-relevant aims of the company and are defined for each of the four perspectives. For planning and pursuing the aims, indicators are allocated to the different aims and provide the basis for the target-performance comparison. Strategic actions, equipped with the corresponding time and budgets requirements and responsibilities shall ensure the achievement of the targets. Only the combination of the aims reflects the strategy of the company completely.2 In accordance with Kaplan/Norton the Balanced Scorecard as strategic frame of actions contains four components: consent building, implementation of vision and strategy, communication and combination of strategic aims and measures, planning and setting of aims and adjustment of strategic initiatives as well as securing strategic feedback and learning.3 Section

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 8.

2

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 14f., as well as Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 9–13.

3

Comp. Kaplan/Norton, Strategic Management System (1996), p. 75–85 and Kaplan/Norton, BSC-Umsetzung (1997), p. 10f.

Balanced Scorecard as Strategic Management Instrument

35

3.3 examines the implementation of strategy via BSC in more details. Firstly, the four classical BSC-perspectives in accordance with Kaplan/Norton are introduced.

3.2

The four generic perspectives in accordance with Kaplan/Norton

For Kaplan and Norton the Balanced Scorecard means “… as the dials in an airplane cockpit: it gives managers complex information at a glance.”1 Only the consideration of different perspectives makes it possible to consider all relevant business topics as a whole and to provide complex information. The equally weighted consideration of the perspectives for the deduction of strategic aims results in a well-balanced target system that impedes one-dimensional reasoning and displays the generic business logic of the company and its organizational units.2 The BSC authors suggest on the basis of their company and sector based experiences the four perspectives finances, clients, internal process and learning and development, in order to offer them as model for companies.3 This suggestion is considered to be simple and comprehensive and convinces as starting hypothesis for the construction of a BSC. It shall, however, not be understood as straitjacket: adaptations are still possible. For determining the types and number of perspectives factors as company size, sector, ownership structures, organizational structure, as well as vision and business strategy of the company have to be taken into consideration.4 Further perspectives could be suppliers, creditors or the environmental perspective.5

3.2.1

Financial Perspective

As multi-target-oriented approach the Balanced Scorecard integrates the value orientation of the management via the financial perspective. Hereby, the financial expectations of the shareholders determine the company targets. The main question is how the shareholders see the company, respectively how the company has to act with regard to the shareholders in order to be successful.6 Thus, in first place, it is important to fulfill the goals of the shareholders (profit and growth aims). All strategies, programs and initiatives are targeted towards the achievement of the 1

Kaplan/Norton, Measures (1992), p. 71.

2

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 25f., 28.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 33f.

4

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 79–81; as well as Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 28f.

5

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 197–203, as well as Kumpf, BSC in Praxis (2001), p. 17f.

6

Comp. Wehling, Unternehmensführung und Personalmanagement (2001), p. 152.

36

Chapter II

long-term company aim, the generation of financial profits for the investors. The financial perspective as final objective is related to the customer, internal process and learning and development perspective via cause-and-effect relations. When defining financial goals, life cycle phases of the products of a business unit are considered – namely growth, maturity and yields.1 In the context of the strategy process the financial perspective shows whether the implementation of the strategy contributes to an improvement of the result. Thus, it can be seen as the standard for success or failure of a strategy. Finally it is documented whether the aim of all business actions – the achievement of a long-term economic success – could be realized.2

3.2.2

Customer orientation

The customer perspectives comprise strategic aims of a company with regard to customers and market segments, on which it wants to compete. The satisfaction of costumers with their specific expectations is conditional for the achievement of financial goals.3 Because the customers – as buyers of the products – have influence on the earnings of a company, it is necessary to identify those characteristics of a company which have a positive influence on the purchase decision. Questions with regard to the market appearance and positioning are to be answered in this context, i.e. questions regarding which customers are targeted, which use shall be offered and how customers shall perceive the company.4 The customer perspective shall be developed starting from the perceived value from the customers’ point of view (relative fulfillment of the customers’ demands) and from the benefit potentials (e.g. degree of solution of problems, value for money).5 Via this perspective the approach of market-based management is included into the BSCsystem. Porter’s publications on the analysis of sectors and competitors as well as regarding the different types of strategy to reach competitive advantages are central in this perspective. Cost leadership, differentiation and focus are called the relevant strategic alternatives in his approach.6 The customer perspective answers the question how to face the customers effi-

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 47–49, 60; Weber/Schäffer, BSC und Controlling (2000), p. 3f. and Kumpf, BSC in Praxis (2001), p. 18f.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 24 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 27.

3

Comp. Maschmeyer, Management by Balanced Scorecard (1998), p. 76.

4

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 27f.

5

Comp. Comp. Müller-Hedrich, Fachkonferenz BSC (2001), p. 35.

6

Cost leadership: achieving a comprehensive cost advantage by aggressively building up manufacturing plants of efficient size, using experience related cost reductions, optimizing the cost structure. Differentiation: Creation of a product which is unique in quality and service in the whole sector. Concentration of focal areas: concentration on niches, i.e. focus on a certain, strictly limited consumer segment, comp. Porter, Wettbewerbsstrategie (1999), p. 70–85.

Balanced Scorecard as Strategic Management Instrument

37

ciently in order to implement the generic perspective with most success.1 Indicators of this performance are, for examples, the market share or the customer loyalty, but also the product and service characteristics as well as the customer relations are important.

3.2.3

Perspective of internal processes

The resource oriented approach of strategic management is mirrored in the perspectives processes and learning and development. Prahalad and Hemel’s publications describe how customer problems can be solved and competitive advantages are achieved though the development of core competences2 through a specific combination of available and developing resources.3 Therefore, internal potentials of the company have to be considered. The internal process perspective displays business processes that are especially important to reach the targets of the financial and customer perspective.4 The customer loyalty results from the fulfillment of the customers’ value requirements, with the result that the shareholders’ expectations with regard to financial profits are fulfilled. To satisfy the customers it is necessary to have competitive internal systems and performance processes. The condition is the ability to identify success-relevant core processes.5 In this context not only the existing processes that are most relevant for the success of the company strategy shall be taken into consideration but also reflections on new processes shall be undertaken.6 Thus the whole value chain7 of the internal processes has to be displayed. In accordance with Kaplan/Norton the value chain of internal business processes can be broken down into innovation process (creation of new products or services to fulfill new desires of current or future customers), the internal business process (consideration of the production process with regard to cost, quality, time and performance characteristics) and the customer service process (guarantee and maintenance services, handling of mistakes and claims and payment).8

1

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 29.

2

A core competence is a bundle of capacities, which are characterized by difficulties of production, imitation and substitution and lead to an essential customer benefit, are unique and expandable. Together with other core competences they are the basis for core products and finished products of the company based on them. Comp. Prahalad/Hamel, Core Competence (1990), p. 79–91 and Hamel/Prahalad, Strategien (1995), p. 307–314.

3

Comp. Wehling, Unternehmensführung und Personalmanagement (2001), p. 149.

4

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 4.

5

Comp. Maschmeyer, Management by Balanced Scorecard (1998), p. 76.

6

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 25f.

7

As an analytical instrument the value chain divides the company activities in operative activities and activities of strategic relevance (value activities), which can be sources for cost- or differentiation advantages in comparison with competitors. Comp. Porter, Wettbewerbsvorteile (1999), p. 63–76.

8

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 25f., 92–103.

38

Chapter II

3.2.4

Perspective of learning and development

The learning and development perspective identifies the necessary infrastructure for the achievement of aims in the first three perspectives that secure long-term growth and improvement. It is crucial to invest in the future with regard to the qualification of the employees, capacity of performance of the information system and motivation and targetorientation of the employees in order to survive in the intense global competition. Strategies for a better performance demand for significant investments into people, systems and processes, as they account for the company’s potentials.1 The perspective defines targets with regard to these potentials in order to be up to current as well as future challenges. Employees, knowledge, force of innovation and creativity as well as technology and information systems as company potentials determine the implementation of the prevailing strategy, but also the creation of a basis for the company’s future ability for changes and adaptation.2 Well and comprehensively trained, motivated employees can contribute with more and better performance to the company success. One condition is the availability of comprehensive, up-to-date information. Indicators as employee satisfaction, employee loyalty and employee productivity are integrated in the concepts of strategy implementation through this perspective.3

3.3

About the strategy implementation with the Balanced Scorecard

Via the Balanced Scorecard as strategic management system the strategy of a business unit in a cycle process is clarified step by step, translated into concrete aims and ratios in the perspectives, communicated and via planning of requirements and measures finally put into action. Strategic feedback and learning make a continuous control possible when the strategy is implemented and close the circle.4

3.3.1

Formulation and implementation of vision and strategy

Mission and vision as starting point When translating strategic reasoning into strategic actions, concrete ideas about the mission and vision of a company are necessary, because they determine the managerial actions, i.e.

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), S 27 and Weber/Schäffer, BSC und Controlling (2000), p. 4.

2

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 27f.

3

Comp. Kumpf, BSC in Praxis (2001), p. 21f.

4

Comp. Kaplan/Norton, Strategic Management System (1996), p. 75–77 and Fig. 2, p. 20.

Balanced Scorecard as Strategic Management Instrument

39

the organization of target-oriented strategic acting.1 Strategic reasoning is based on the experiences of actions and should determine the basic lines of all actions at the same time. It comprises the analysis of hitherto developments and experiences, the consideration of own interests and power structures within as well as outside of the company amongst other things. Thus, it uses the individual as well as collective learning capacity.2 Figure 2-3 represents this strategy process.

Strategic reasoning

Mission (general orientation)

Vision (overal aim)

Strategic paths

Strategic actions

Figure 2-3: Strategy process Source: Friedag/Schmidt, BSC und Budget (2000), p. 435.

The long-term central goal orientation of a company is shown in its definition of its mission and vision. The mission or general orientation expresses how the company wants to be perceived on the market. The question is the determination of the competences of the company, especially with regard to the customers.3 They are also the main addressees of the mission, but also other addressees as market partners (suppliers, competitors, credit institutes), socially relevant groups (employer associations, labor unions), media or universities are important. The mission has a motivating influence on employees as internal addressees. A concise slogan like “your fast bank” shall communicate the company mission to the addressees.4

1

Comp. Friedag/Schmidt, BSC und Budget (2000), p. 436.

2

Comp. Friedag/Schmidt, My Balanced Scorecard (2000), p. 30f.

3

Comp. Kotler et al., Marketing (1999), p. 110–113; Friedag/Schmidt, BSC und Budget (2000), p. 435 and Binder/Sürth, Strategieentwicklung und BSC (2002), p. 360.

4

Comp. Friedag/Schmidt, BSC und Budget (2000), p. 435; Friedag/Schmidt, Balanced Scorecard (2002), p. 14 and Ehrmann, Balanced Scorecard (2002), p. 23.

40

Chapter II

While the mission wants to operate outside, the vision is targeted towards the own company. The vision or the company’s overall aim informs about the targeted state of the company, describes the future objective of the top-management and the desired future development.1 It also contains information of where the company wants to be in five or more years, mostly in form of vague top objectives that are only concretized in the course of time.2 Friedag and Schmidt consider the appearance of the vision “… as the combination of practical knowledge of ones own competences (“to stand in life”), social overview (“see above the limits of ones own daily life”) and of utopian inspiration (“design an image for the future”, “get wind of opportunities“).”3 A vision can only unfold its target setting and target oriented effect as creative force if it is far reaching and far sighted as well as achievable and has a creative force.4 For the formulation of a vision time-, market-, customer-, competition-, as well as product related aspect are considered.5 Vision contents of a purely financial type are more and more completed by targets with regard to growth on strategic markets, preservation of the company as independent unity, or image. The shorter the wording of a vision is, the better it can be remembered and the easier it is to translate it into aims and strategies. “We are going to be the most profitable regional bank” could be the vision. A qualitative and quantitative determination is necessary, as only a clearly and misunderstandably formulated aim can be consequently pursued by everybody. An early participation of the employees in the target setting process supports the identification with and internalization of the vision.6 How the created general orientation and objective of a company shall be realized is shown by the strategic paths. Strategies – paths to the achievement of goals Strategies shall now make clear how the defined company aims can be reached. They characterize the basic approach of the company, in order to stand out from the competitors in the fulfillment of the long-term objectives. The competitive situation shall be considered and questions regarding the necessary products, type of market entry or adequacy of the customer portfolio shall be answered. 7 It is necessary to determine the success potential on the focused business areas. When developing the strategy, it is important, to identify the “right things” for the achievement of the

1

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 424 and Bea/Haas, Strategisches Management (2001), p. 67.

2

Comp. Friedag/ Schmidt, BSC und Budget (2000), p. 435, as well as Ehrmann, Balanced Scorecard (2002), p. 21f.

3

Friedag/Schmidt, My Balanced Scorecard (2000), p. 33, own translation.

4

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 424.

5

Comp. Binder/Sürth, Strategieentwicklung und BSC (2002), p. 360f.

6

Comp. Friedag/Schmidt, BSC und Budget (2000), p. 435f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 14 and Ehrmann, Balanced Scorecard (2002), p. 22.

7

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 19–23.

Balanced Scorecard as Strategic Management Instrument

41

goals.1 In order to the example-wise mentioned mission and vision of a bank two main paths had been determined: the amplification of the private building loan business to attract a new group of customers and the intensification of Home Banking to reduce costs. In concrete, the strategic aims are: “we decide within 24 hours about building loans” and “in the next four years at least 50% of all transactions with our customers shall be winded up through ebanking.”2 However, Kaplan/Norton realize that the Balanced Scorecard shall not be understood as instrument for the formulation of strategies. It rather calls for a coherent strategy for the business unit or the company. The BSC creates a framework for mediation of the strategy, it helps to make the strategy understandable and comprehensible and, thus, communicable and applicable.3 Via BSC the existence of concrete strategies is examined, strategic goals are considered with regard to their precision, accuracy and applicability and an impulse of priorization in the case of too much complexity of the target bundle is given4 Horváth & Partner have developed a process of strategy clarification (Fig. 2-4), in which the existing understanding of strategies is critically reassessed on the basis of corresponding strategic analysis and in which a common understanding of strategic position and direction of impact is found.5 Input: Current Strategy

Throughput: Strategy check

Output: Joint Strategy

SWOT Check (official) company strategy Individual understanding of the strategy Methodes: - Questionnaires - Document analysis - Semi-constructed interviews I - Access to the workshop

What does the market say? Market fources (opportunities/ risks)

Joint under- De-termination standing of the of strategic strategy approaches

Market potentials Customer exspectations What is constricting us? Where are we better? Strenghts/weaknesses What impedes us?

Methodes: - Workshop - Coordination with the decision makers

Methodes: - Workshop - Additional Analyses

Figure 2-4: Approach of strategic clarification Source: Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 107.

1

On the differentiation of the available strategies: Comp. Ehrmann, Balanced Scorecard (2002), p. 83–86.

2

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 15 and 95–100.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 23, 36.

4

Comp. Weber/Schäffer, Balanced Scorecard (1998), p. 52.

5

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 106–108.

42

Chapter II

Consent on vision and company strategy has to be found through team work of the topmanagement, reaching beyond the different work experiences and the functional expert knowledge of the managers. The verbally formulated strategy can be translated into specific medium-term strategic aims and ratios. Starting from the financial perspective in each perspective the strategic core-elements, core objectives and performance drivers are displayed, which are decisive for a successful implementation of the strategy.1

3.3.2

Communication and coordination of strategic aims and measures

Successful strategy alignment: top down and bottom up The development of the long-term company aim in form of mission and vision, of the company strategy and the development of the BSC construction belong to the tasks of the top management. Therefore, the Balanced Scorecard starts with the top down planning.2 In this so called retrograde planning the management provides a long-term framework for further planning, and from the prescribed aims sub-objectives for the business and functional areas are deducted on a retrograde basis.3 Advantages of the vertical method of coordination are amongst other things the clarity with regard to the planned requirements, the target congruence and the elimination of coordination work. There is, on the other hand, crititzism with regard to the lack of motivation on subordinate levels that can arise because of lack of acceptance, if these levels can not sufficiently participate in the planning. Intense communication of the BSC-contents, for example, can help to prevent this. A stronger identification with the strategic contents and a boost of motivation of the people involved can be achieved with the help of bottom-up planning (so called progressive planning). The planning starts from lower hierarchical levels, aim and measurement plans are more and more expanded from level to level. Thus, operative planning is transformed into strategic planning, work share plans transferred into department and finally company plans. However, there is the danger that the planning contents might deviate from the ideas of the management. The down-up coordination (so called counter current method) combines elements of the named methods using the advantages and avoiding their named disadvantages. The management sets up overall goals as framework conditions for the whole company, the functional areas have the task to work strategies and targets within this framework out and use bottom-up elements. Permanent feedback is characteristical for this coordination method.4

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 11f. and Gilles, BSC zur strategischen Steuerung (2002), p. 33.

2

Comp. Ehrmann, Balanced Scorecard (2002), p. 62f.

3

Comp. Kreikebaum, Strategische Unternehmensplanung (1997), p. 205.

4

Comp. Kreikebaum, Strategische Unternehmensplanung (1997), p. 205f.; Bea/Haas, Strategisches Management (2001), p. 197 and Ehrmann, Balanced Scorecard (2002), p. 61f.

Balanced Scorecard as Strategic Management Instrument

43

In the Balanced Scorecard the necessity of each area determines the kind of realization of the company aims, i.e. strategies are jointly worked out by the management and the next hierarchical level, while controlling supports the process.1 All local actions necessary for a successful strategy implementation cannot be set up on a management level and thereafter be communicated. The integration of employees in this process is necessary and promotes motivation.2 After the introduction of BSC in a top down way bottom up elements are in fact integrated.3 An intense communication is necessary towards the management and the shareholders in the bottom up as well as in the top down method.4 Kaplan/Norton see three methods of communicating the strategy and of conveying and anchoring it in the local targets. Carrying out communication and training programs, setting up corresponding target arrangements with departments and employees and coordination of the aims with an incentive system.5 Communication and training programs In order to direct the reasoning and actions of the employees towards the company strategy, a comprehensive and continuous communication of the formulated strategic aims in the whole company is necessary. A strategy consciousness shall be created, so that all employees understand the long-term aims and strategies of the corresponding business unit and, thus, can act in a motivated, strategy conform way.6 First, announcements with regard to the aim and content of the Balanced Scorecard as well as explanations of BSC perspectives introduce the communication process. Regular reports on the state of development and already existing results of the BSC can be communicated to the employees via circulars, company magazines, bulletins or internal mailing systems. In practice, also brochures are good methods to show the company aims, target requirements and initiatives. They are periodically actualized with information on trends and performance. Reports on the contribution of a department to the achieved performance create identification figures and raise the motivation. Computer networks and groupware (e.g. Lotus Notes) offer amongst other things the possibility to visualize the BSC contents in video clips. Some companies communicate the main aspects of the BSC without concretely naming the BSC as new management method, in order to avoid the employees’ resistance.7 To convey basic knowledge informational events and workshops shall take place to sensibilize and train the em-

1

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 102.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 192f.

3

Comp. Ehrmann, Balanced Scorecard (2002), p. 63.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 192 and 201–203.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 193.

6

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 12f., 195 and Friedag/Schmidt, My Balanced Scorecard (2000), p. 195f.

7

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 195–199 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 89.

44

Chapter II

ployees.1 Finally it is important to combine the available instruments in a communication and further training program, which takes the informational needs of every target group into consideration.2 Under the aspects of secrecy and discretion one has to ponder, who shall obtain which information at which point of time. Through broad communication of strategic development at an early point of time competitors can obtain confidential information. Despite of this, open statements about strategic priorities are a condition for the successful implementation of the strategy. Thus, e.g. general results and performance drivers shall be published, while only chosen employees shall obtain publications with regard to specific customer segments and competitors.3 The management also has to communicate the strategy for the company and the business sections bottom up, i.e. to the managing board and board of directors, whose task is the active supervision of the strategy and company performance. The communicated BSC is, thus, obliged to give account to this supervisory board. Often the communication of the BSC contents is not part of the communication program, the information rarely exceed the legal requirements. Kaplan/Norton explain this by the fact that information might be lost to competitors, liability problems might arise when targets are not reached and by a lack of interest in long-term strategy indicators.4 Target setting programs After communicating the basic understanding of the strategy, measures have to be deduced in such a way that every member of the company can recognize their contribution to a successful implementation of the strategy and act correspondingly. Via programs of target building, the superior strategic targets shall be transformed into targets for teams and individuals. An integrated performance model of the strategic business unit is developed with coordinated cause-effect-relations between strategic aims and ratios. Thereby, the driving force of strategic performance is defined. From this, the targets on all levels can be deduced and finally, the Scorecards for departments, teams and individual employees are created.5 For the deduction of department or team scorecards from the BSC of the strategic business area, in practice, firstly the super-ordinate strategic goals and indicators that could be influenced by the team were worked out. Then the local measures and indicators could be deduced from this. Another company gave a small, foldable, personal BSC to all employees with targets and indicators of the company, the deduced aims of the business unit in question 1

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 86–90.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 199f and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 89f.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 200f. and Friedag/Schmidt, My Balanced Scorecard (2000), p. 196.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 201–203.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 193, 204f. and Gilles, BSC zur strategischen Steuerung (2002), p. 35.

Balanced Scorecard as Strategic Management Instrument

45

and the defined personal targets of the team and the employee including the next steps for achieving the goals. The MbO1 programs for target building for departments, teams and individuals, which are in existence in most companies, can and should be used – in connection with the targets and ratios of the BSC.2 Connection with the motivation system The success of the implementation of strategy and objectives is decisively determined by the conduct and motivation of the managers. An intrinsic (primary, inner) and an extrinsic motivation (secondary, motivation from outside) have to be distinguished.3 The current dynamic competitive situation demands for creativity and enthusiasm for innovation of the employees, for which intrinsic motivation is needed. Employees who work in an independent, flexible and foresighted way and whose personal aims and actions match those of the business unit, are a decisive competitive factor, with the result that inner motivation gains more and more importance. By underlining the connection of the actions of the single employee and the achievement of long-term company aims, the BSC can foster intrinsic motivation. But also motivation from outside or through awards for the reached targets play an important role. In order to achieve the company aims desired on a long-term basis, motivation and remuneration systems should be connected with the fulfillment of BSC aims.4 Incentive systems underlie certain requirements as e.g. transparence, justice, cost effectiveness, flexibility and individuality. In order to achieve the desired motivational effect, the incentive system has to be transparent and understandable.5 In this context, the manager has to choose indicators relevant for remuneration, because in the case of integrating all BSC ratios it would become to complex.6 Transparence is also a condition for the judgment of justice, another requirement for incentive systems. The assessment of the market justice (remuneration in accordance with the amount usual on the market for similar performance) and performance justice (appropriate incentive-performance relation) determine the subjective understanding of justice of the involved persons. A consent on the target values agreed

1

About Management by Objectives comp. Chapter 2.2.3.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 206–209 and Wickel-Kirsch, BSC als Instrument im Personalcontrolling (2001), p. 282f. About the different variants of connection with the MbO see Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 305–310.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 213f.; Steinmann/Schreyögg, Management (2000), p. 747f. and Ehrmann, Balanced Scorecard (2002), p. 161.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 193, 213f.; Ehrmann, Balanced Scorecard (2002), p. 161. It has to be paid attention to the crowding out effects of extrinsic incentives at the expense of intrinsic motivation. Comp. Steinmann/Schreyögg, Management (2000), p. 748f.

5

Comp. Winter, Managementanreizsysteme (1996), p. 71–91; Ehrmann, Balanced Scorecard (2002), p. 162 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 38f.

6

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 62f.

46

Chapter II

upon and a clear communication of the performance benchmarks for example in target agreement debates promote the feeling of a just remuneration.1 Furthermore, the incentive system has to be organized in accordance with organizational efficiency. In the context of connections, the question has to be asked until which hierarchical level employees should be involved. On a company-individual basis those should be taken into consideration that think in strategic dimensions and answer strategic questions of principle. While in the case of offerers of homogeneous mass products, e.g. a steal producer, those would only be the top managers, in the case of a company pursuing a strategy of differentiation with regard to the raise of customer benefits, all employees with customer contact come into question.2 However, the German Labor Law restricts the company’s free decision in accordance with section 87 subs. 1 number 10 BetrVG (German Law on Labor Management Regulations). The introduction, application and change of forms of remuneration are generally subject to the agreement of the workers’ council. Also regulations obtained by collective bargaining limit the area of decisions of the company. The remuneration policy for managers as employees receiving above the standard salaries and executive employees is based on individual contracts, which means that the regulations lie in the hands if the contractual partners.3 Further demands to the incentive system are flexibility, capacity of adaptation to different as well as changed objectives, as well as individuality in the sense of the adaptation of the incentive system to the corresponding motivational structure of the executives.4 “If the organizational remuneration policy is meant to effectively support the strategic goals of a company, a manifold remuneration menu has to be created…”5 According to Cisek there are the following remuneration components for managers: the fix salary in form of a basic salary, fix special payments, guaranteed management bonuses and parts of organizational social benefits, like the risk salary, which contains other parts of the organizational social benefits, personal performance extra-pays or bonuses and a result dependent strategy bonus. The remuneration components have different timely effects as incentives (short-, middle- and long-term), which are implemented by different instruments. The fix basic salary for example has a short-term motivational nature and is agreed upon on the basis of scopes, while the long-term motivational effect of the result-dependent strategy bonus for example is integrated through stock option programs etc. For the design of the remuneration menu a wellbalanced combination of short-, middle and long-term instruments and an appropriate emphasis of the components in percent has to be taken into account. The relation of fix and risk salary has to be determined individually for each company or function. In practice the fix 1

Comp. Winter, Managementanreizsysteme (1996), p. 75f. and Weber/Schäffer, BSC und Controlling (2000), p. 63.

2

Comp. Ehrmann, Balanced Scorecard (2002), p. 161 and Weber/ Schäffer, BSC und Controlling (2000), p. 63.

3

Comp. Gilles, BSC zur strategischen Steuerung (2002), p. 61 and Steinmann/Schreyögg, Management (2000), p. 745.

4

Comp. Winter, Managementanreizsysteme (1996), p. 78–80 and Weber/Schäffer, BSC und Controlling (2000), p. 64.

5

Cisek, Entgeltmanagement (2000), p. 370, own translation.

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47

salary corresponds to 50 to 80 percent of the annual remuneration, the risk salary to 20 to 50 percent. To implement the long-term strategic aims, an overestimation of the fix salary, which is mostly connected with short-term objectives, should be avoided and instead more components of the risk salary should be integrated.1 Kaplan/Nornton name different strategies for the integration of the BSC in the incentive system of managers. Financial interests of the management for example can be connected with the achievement of strategic business segment objectives, when the bonus for the upper management depends, e.g. 50% from the achievement of aims in connection with the raise of value and 50% from the achievement of non-financial goals. The BSC can also serve as exclusive basis of calculation with the result that, for example, 60 percent of the bonuses are determined by financial performance measured by different indicators and 40 percent are determined by indicators of the three other perspectives. A further approach is the calculation of the bonuses through the board of management that considers the difficulty of the targets set by the managers themselves with the help of external comparisons and subjective judgment and decides on the bonuses on this basis. However, the remuneration of the managers depending on the competence, commitment and quality of decisions is always problematic due to the difficult observation and measurement. The active application of the BSC, i.e. the continuous dialogue between managers and board of directors, creates transparence with regard to the observation of performance.2 Recent empirical studies show that currently the evaluation of management performance in Germany is above all based on balance sheetbased indicators as profit or sales and only partially on non-monetary values as product quality or market share, while value oriented factors and indicators (CF, Shareholder Value, EVA) are rather rarely taken into consideration.3 Studies found out that in Germany the connection of the remuneration system and the achievement of targets is only realized on a mid-term basis. According to the empirical studies conducted by Gilles on the level of top and middle-management only in 50% of the companies a connection could be found, on the lower management and on the operative level the percentage was considerably lower with only 20 percent.4 Weber and Schäffer recommend the connection not from the beginning, but one or two years after introducing the concept, in order to protect the BSC development process against too strong involvements of self-interests of all involved persons.5 Also Kaplan and Norton describe the careful use of the BSC as basis for remuneration at the beginning; a fact that the companies explain by the incertitudes resulting from the first-time creation of hypotheses about cause-effect relations

1

Comp. Cisek, Entgeltmanagement (2000), p. 370–383; Becker/Fallgatter, Unternehmensführung (2002), p. 182f. and Schmeisser, Entgeltpolitik (2004), p. 45–54.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 209–214. For another example comp. Norton/Kappler, BSC Best Practices (2000), p. 19f.

3

Comp. Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 41f.

4

Comp. Brabänder/Hilcher, Balanced Scorecard (2001), p. 256 and Gilles, BSC zur strategischen Steuerung (2002), p. 198.

5

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 65f.

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between the indicators. However, one has to turn away from the short-term financial results as remuneration basis.1

3.3.3

Planning, determination of objectives and coordination of strategic initiatives

In the third partial process of a strategic management system the Balanced Scorecard is integrated into the strategic planning and budgeting process with the aim of a strategy conform use of financial and material resources. Often companies neglect the existing strategy when deducing operative planning values and distribute the resources without considering the development during the year with regard to the indicators of the strategic aims. Here, the planning of measures, budgeting and resource allocation and the formulation of milestones is connected with the strategy. Thus, resources are used in line with the strategy and the connection with the operative company practice remains ensured.2 The integration of the Balanced Scorecard starts with the determination of high aims for the BSC indicator, i.e. ambitious financial aims (e.g. duplicating the return on invested capital) and – to reach those aims – long-term aims with regard to customers, internal business processes, learning and development. The cause-effect-relations3 of the BSC help to identify the value-driving factor for the achievement of financial goals. The determined target requirements for the next three to five years are the planned or targeted value for the achievement of objectives; the strategic goal is operationalized and controlled by later actual values by deviation analyses.4 Now follows the identification of adequate initiatives to realize the exigent long-term aims, examining, bundling and coordinating current and new programs of action and crossbusiness unit initiatives. Executives have to decide whether the gap between the current performance and the ambitious aims can be closed with the help of continuous improvement (TQM-program) or one time radical changes (reengineering). At the same time all current measures have to be examined with regard to their contribution to the achievement of one or several BSC aims. On a business unit spanning or, respectively, company-wide basis, synergy potentials as know-how-transfer, coordination of marketing plans or a joint use of production or distribution resources has to be identified and made accessible.5 Furthermore the planning with regard to investments and short-term spendings are adjusted to strategic goals, with the result that investment decisions are not only based on financial 1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 211f.

2

Comp. Kaplan/Norton, Strategic Management System (1996), p. 76 f., 82–84; Kaplan/Norton, BSC-Umsetzung (1997), p. 13f., 216–240 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 286–293.

3

For more details with regard to cause effect-relations comp. Chapter 5.3.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 216, 218–220.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 216, 224–226, 235f.; Friedag/Schmidt, BSC und Budget (2000), p. 437f. and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 288f.

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key figures like amortization or Discounted Cash Flow (DCF) as often found in practice. Thus, the BSC indicators can be used for the decision on the advantage of any potential investment. Corresponding to the ponderation with the emphasis on financial indicators, but also with a corresponding consideration of drivers of future financial performances, an order of the single investment plans is created, with the result that taking the available investment budgets into consideration, a choice can be made.1 Finally the strategic planning is connected with the annual budget planning. In the budgeting process2 detailed short term provisions for sales, costs, profit and spendings for investments or research and development are worked out, which finally come together in the approved budget. For a successful transformation of the vision, however, a connection with strategic planning is necessary because the exclusive use of accountancy figures is not enough. Also short term performance presettings for strategic aims of the indicators of the other BSC perspectives have to be incorporated. The three to five year objectives for the strategic measures are transformed into specific short-term requirements, so called milestones, for each measure in the following accounting year. Thus, the first year of a five-year plan is transformed in operative budgets for the strategic goals and indicators and the calculation of short-term progresses within a long-term plan is made possible. The result of the connection characterizes an enforced target and future orientation and, thus, a renunciation of the extrapolation mentality of the operative planning process.3

3.3.4

Strategic Feedback and Learning

In the last partial process of the management system the Balanced Scorecard is integrated into a strategic learning process.4 In today’s complex and dynamic environmental conditions knowledge and learning of the employees have become a strategic competitive factor of the company. Learning is seen as crucial for dealing adequately with changes and successfully implementing the strategy. The strategy process itself has to be organized as a constant learning process, so that observations, experiences and developments can lead to a continuous adaptation of the company’s strategy.5 Through the learning process the company as learning organization continuously generates new knowledge, which is used for the reorganization of the knowledge base in form of adaptation and development strategies. Thus, organizational knowledge is the continuous organization wide process of knowledge enlargement by new

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 226–234.

2

About budget and budgeting process comp. Steinmann/Schreyögg, Management (2000), p. 356–367.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 238f.; Friedag/Schmidt, BSC und Budget (2000), p. 437f. and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 289–293.

4

Comp. Kaplan/Norton, Strategic Management System (1996), p. 77 and Kaplan/Norton, BSC-Umsetzung (1997), p. 15–17.

5

Comp. Hilse, Verzahnung Strategie- und Lernprozesse (2003), p. 137f.

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modes of actions and combinations, triggered by discrepancies between current base of knowledge and relevant environmental changes.1 Argyris/Schön distinguish three levels of learning in the feedback oriented learning processes: the “single-loop”, “double-loop” and “deutero-learning”.2 In the case of “ingleloop learning” as simple feedback process, the action-directing theory of the organization (theory-in-use) is adapted to the changes of the company surroundings. There is a fixed reference framework with binding values, standards and basic codes of conduct. These basic assumptions are not reassessed. Planning and controlling systems supervise the fulfillment of the strategic plans laid down on the management level. Deviations are declared as implementation mistakes and trigger measures of correction to adapt the current state to the desired state. The original strategy, however, is not reconsidered.3 This kind of learning, however, is not sufficient in today’s tumultuous business environment. A continuous reassessment of aims and attitudes is necessary, because strategies planned in the past can be inappropriate under current circumstances. The “double-loop learning” goes beyond the “single-loop learning” and integrates the reassessment and changes of mental ways of thinking. Thus, it additionally offers the possibility of adapting the strategy to changed circumstances and to introduce elementary strategy changes. A reassessment and, if necessary, modification of fixed basic orientations and patterns of action requires openminded, unprejudiced members of the organization. The „learning“of existing orientations is crucial to this. “Deutero-Learning” makes the learning process itself the object of learning (“learning how to learn”). Knowledge of past learning processes, – contents and -results is collected, critically examined and discussed with the goal to secure the continuous willingness to learn of the organization and to constantly improve the learning processes.4 Strategic feedback and learning are the basis for the successful implementation of the company strategy that has been concretized and communicated by the BSC. Kaplan/Norton describe three components of an effective strategic “double-loop” learning process. They consider the joint vision, which clearly defines the company’s aims, to be the point of origin. The BSC as joint performance model, later as Berlin Human Resource Assessment model, lets the employees recognize the implications of their efforts for the achievement of the company aims. The feedback process as second element makes the supervision of the application of the strategy possible. Here, performance indicators are collected. On this basis, management reviews examine whether the milestones that were obtained from the strategic aims have been reached and a forecast for the future is deduced. Via information from the feedback system, hypotheses for the strategy development are examined at the same time, i.e. 1

Comp. Steinmann/Schreyögg, Management (2000), p. 463–466 and Bea/Haas, Strategisches Management (2001), p. 412–414.

2

Comp. Argyris, How to learn (1991), p. 99f. and Argyris/Schön, Organizational Learning (1996), p. 20–29.

3

Comp. Argyris/Schön, Organizational Learning (1996), p. 20f.; Kaplan/Norton, BSC-Umsetzung (1997), p. 16, 241f. and Steinmann/Schreyögg, Management (2000), p. 467.

4

Comp. Argyris/Schön, Organizational Learning (1996), p. 21–29; Kaplan/Norton, BSC-Umsetzung (1997), p. 16f., 242; Steinmann/Schreyögg, Management (2000), p. 467f.; Bea/Haas, Strategisches Management (2001), p. 414f. and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 278.

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51

whether the assumptions concerning cause-effect-relations or reaction times are still relevant under the current conditions and experiences. This can be done by measuring the correlation between the measured variables. The third component is a continuous strategy development, a reassessment of the strategy preconditions in regular strategy reviews. Cross-functional teams analyze the performance data, discuss whether the strategy is appropriate with regard to the latest developments and new strategic opportunities and orientation is generated. This can lead to an adaptation of the strategy to the changed circumstances, but also to a fundamental change of the strategy.1 In conclusion it can be said that via Balanced Scorecard as strategic management system the company strategy is operationalized via strategic aims, indicators, annual requirements and measures and is, thus, made measurable. The strategic feedback and the resulting double-loop-learning process as “the most innovative and important aspect of the whole Scorecard Management”2 complete the circle and lead back to the determination of vision and strategy, to the original BSC-introductory process.

3.4

Implementation of the Balanced Scorecard

3.4.1

Course of action

The successful results of the Balanced Scorecard in the company are mainly determined by the quality of its implementation, which needs a differentiated and well-deliberated structure.3 In literature, numerous suggestions and recommendations can be found about the procedural method of the BSC implementation. The degree of differentiation reaches from an onion model with three stages to four and six stage models, the single steps, however, are always similar.4 Kaplan/Norton suggest ten steps for the implementation: 1. Clarification of the vision 2. Communication to the middle management/development of the BSC for the strategic business unit 1

Comp. in more detail Kaplan/Norton, BSC-Umsetzung (1997), p. 15-17, 241–261. Weber/Schäffer criticize the almost exclusive focus on the execution control, the lack of attention to premises control as well as of strategic control in the deliberations on strategic control with BSC. Companies have to go further than the suggestions by Kaplan/Norton in order to escape the problem of lack of consideration of the conceptional holistic view and the danger of blocking new findings and orientations. Comp. Weber/Schäffer, Balanced Scorecard (1998), p. 19– 22. About the elements of strategic control: Comp. Chapter 2.1.2, p. 9 und Steinmann/Schreyögg, Management (2000), p. 245–248.

2

Kaplan/Norton, BSC-Umsetzung (1997), p. 15.

3

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 62.

4

Comp. Horstmann, Balanced Scorecard-Ansatz (1999), p. 196; Weber/Schäffer, BSC und Controlling (2000), p. 94–100; Horváth/Gaiser, Implementierungserfahrungen (2000), p. 21–31; Hoch/Langenbach/Meier-Reinhold, Implementierung (2000), p. 57–60; Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 10–46 and Zdrowomyslaw/Eckern/Meißner, Theorie und Praxis der BSC (2003), p. 269–271.

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3. Elimination of non-strategic investments/starting programs of restructuring 4. Review of the BSC by the business units 5. Specification of the vision 6. Conveying the BSC to the whole company/creation of individual performance goals 7. Revision of long-term plans and budgets 8. Carrying out monthly and quarterly controls 9. Carrying out an annual control of the strategy 10. Interconnecting the performance of all employees with the BSC1 On this basis, Horváth & Partner have developed a model especially for the German company scenery with its many medium sized companies, which has already proved itself in consultancy practice. 2 The relatively fix, logically structured and convincing system of instruments and structures consisting of five phases is displayed in Figure 2-5. Create an organizational framework

Clarify strategic fundamentals

Develop a BSC

Manage roll-out

Assure continuous use of BSC

Determine BSC architecture

Examine strategic conditions

Deduce strategic aims

Determine project organization

Strategic direction of impact

Create causeeffect relations

Design course of project

Integrate BSC in strategy development

Chose indicators

Break down BSC for downstream units

Determine targeted values

Adjust BSCs between the units

Determine strategic actions

Secure quality and document results Support BSC by risk management

Assure information, communication and participation Standardize methods and contents and communicate them

Introduce BSC on a company-wide basis

Consider critical sucess factors

Integrate BSC in management and control, as well as planning and reporting systems Manage employees with help of the BSC Connect BSC and shareholder value

Connect BSC and target costing Support BSC by DP

Figure 2-5: Phases of the Horváth & Partner model for the BSC implementation Source: Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 62.

In phase I, the perspectives are determined and a decision is taken for which organizational units and levels Balanced Scorecards are developed in order to design the BSC architecture. Furthermore, the tasks that are usual in the project management context are part of this phase: the determination of the project organization, the project course, the information and

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 265–270.

2

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 62.

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53

communication concept, the methodical standards and the success factors. In phase II the strategic analysis of opportunities/risks and strengths/weaknesses, life cycle phases and critical success factors, as well as the determination of the fundamental strategic approach follow providing the top-management with a uniform understanding. The core of the implementation is phase III with the development of the BSC. After the roll-out, phase V finally serves to consequently align decisions and conducts with the current strategy.1 Such models for the implementation of the BSC are useful and helpful for the comprehensive and complex process, however, one should be aware of the danger of an unreflected application, because the Balanced Scorecard of a company or business unit is always highly individual. This implicates the necessity of an implementation procedure adapted to the specific company situation, i.e. to the individual company aims, business cultures and business conditions.2

3.4.2

Success factors

The company practice allowed generating success factors that decisively influence the quality of the implementation process. According to Weber/Schäffer the most important success factor is a precise planning of the introduction process, i.e. an exact definition of the extent of the project and its aims. For the introduction of the Balanced Scorecard as management system communication and implementation of existing strategies, the creation of a framework for strategic activities and their quantification or support in the process of strategy development can be possible aims. Planning problems often arise because of too narrow time or cost budgets, due to data mining or DP realization problems. Furthermore, support by the top-management throughout the whole BSC process is necessary in correspondence with the successful implementation in order to add a binding and continuous character to the Balanced Scorecard.3 By realizing a pilot scheme the first successes can be quickly achieved and communicated. This leads to a sooner enthusiasm of all persons involved and motivates for the sector/company-wide BSC implementation. Selection criteria for the “pilot” are amongst other things the likelihood of success, the urgency of the introduction of the BSC, the availability and commitment of team members, the learning potential as result of the possibility to compare the unit with the rest of the company sectors and the acceptance within the company.4 In literature, the clarification of the strategy and, if necessary, the development of the strategy are also seen as important success factors. The strategic starting point and aims have to be

1

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 63–72.

2

Comp. Hoch/Langenbach/Meier-Reinhold, Implementierung (2000), p. 63–65 and Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 10.

3

Comp. Norton/Kappler, BSC Best Practices (2000), p. 16f.; Dahmen/Maier/Kamps, BSC-Erfolgsfaktoren (2000), p. 22 and Müller-Hedrich, Fachkonferenz BSC (2001), p. 36.

4

Comp. Bodmer/Völker, Erfolgsfaktoren bei der Implementierung (2000), p. 481; Weber/Schäffer, BSC und Controlling (2000), p. 102 f. and Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 47.

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clearly defined. In leadership-workshops with discussions about strategy – as basis of the BSC development – and about business possibilities one has to achieve a uniform joint understanding of the business in question in connection with the essential interdependencies.1 For a successful development of the Balanced Scorecard one has to take care of the balance between company individual perspectives, assidual choice of demanding as well as realistic aims, systematic detection and weighting of value drivers, adjustment of different sectoral aims, careful choice of indicators with the support of controlling and creation of a clear catalogue of measures taking current activities and projects into account. At the same time the culture and willingness to change of the sectors in question have to be considered.2 Another success factor for the implementation is the composition of the BSC team taking the variety of perspectives, adequate size of the team and stability into consideration. A team that is too large often leads to a higher need of coordination, whereas constant changes of responsibility are irritating. An efficient project management is a success factor of any project, i.e. tight project planning as well as a strong project leader also determine the success of the project “introduction of BSC”. The first-time implementation is a process taking up to one year, in which team members of different functions are participating. This demands for detailed planning and coordination, a clear distribution of the tasks and the definition of milestones.3 Also an open and continuous communication, as well as additional internal or external support have proved to be relevant for success. External consultants functioning as moderators are supposed to guarantee a professional implementation via objectivity and methodological expert knowledge. The level of involvement of external moderation depends on the structures of the sectors; however the main actors have to be internal persons in charge.4 Finally it is necessary to consider the BSC as a continuous process with constant performance control and not as one-time project developed only by a few chosen persons.5 For the successful company-wide implementation appropriate software applications are necessary. Those shall make the necessary data easily accessible, be flexible for the adaptation to changes and be compatible with existing systems, make the use of different users at the same time possible, as well as the integration of huge data amounts and manifold data analysis, amongst other things. In practice the interest in and use of the BSC software have risen considerably, but because of the lack of calculability of the different perspectives, the lack of quantitative connections between the perspectives and the dynamization of the Balanced Scorecard by Kaplan/Norton throughout several years, no adequate software could be offered. 1

Comp. Dahmen/Maier/Kamps, BSC- Erfolgsfaktoren (2000), p. 22; Bodmer/Völker, Erfolgsfaktoren bei der Implementierung (2000), p. 479f. and Müller-Hedrich, Fachkonferenz BSC (2001), p. 36.

2

Comp. Dahmen/Maier/Kamps, BSC Erfolgsfaktoren (2000), p. 23–25 and Weber/Schäffer, BSC und Controlling (2000), p. 103f.

3

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 104–107; Steinle/Thiem/Lange, Strategieumsetzung (2001), p. 34, 36 and Zdrowomyslaw/Eckern/Meißner, Theorie und Praxis der BSC (2003), p. 271f.

4

Comp. Norton/Kappler, BSC Best Practices (2000), p. 17f.; Dahmen/Maier/Kamps, BSC Erfolgsfaktoren (2000), p. 22 f. and Weber/Schäffer, BSC und Controlling (2000), p. 107f.

5

Comp. Dahmen/Maier/Kamps, BSC Erfolgsfaktoren (2000), p. 25.

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The conditions and solutions of the problems of the original BSC to create software are only fulfilled by the Berlin Balanced Scorecard Approach.1 Finally Weber/Schäffer conclude their reflections with the following words: “the introduction of the Balanced Scorecard is as well planable as its success. The introductory process permits to have the named success factors under control, at least most of the times …”2

3.4.3

Experiences of implementation

According to studies in the German speaking area, in most companies where BSCs are applied 50%–75% of the hierarchical levels are covered by the BSC, i.e. Scorecards are created up to the department/team level. The majority use Kaplan/Norton’s four standard perspectives, some chose individual perspectives. On the average 4–6 indicators are defined per perspective.3 The BSC is essentially used for strategic controlling. Most of the users essentially realize the aims connected with the BSC introduction and estimate the use of the concept as high or even very high.4 The companies using the BSC see the positive effects of the BSC implementation above all in the translation of the strategy into concrete measures and the improvement of strategic reasoning and acting of all employees. Furthermore, the BSC makes the strategic alignment of the company easier to communicate. At the same time a considerable improvement of the transparence of critical success factors is positively assessed – a fact that finally has positive influence on the strategy contents and the optimization of existing business processes. Also the improvement of the information on the state of performance of the company is seen as positive effect. Some companies even recognize changes of financial indicators like sales or Shareholder Value, already.5 Despite this, often a stronger strategy orientation in the actions of subordinated levels, a quicker conversion of the strategies into operative actions and an earlier recognition of changes in requirements for actions are expected.6 In practice, the gap of knowledge with regard to a successful BSC implementation, the difficulties of the quantification of strategic aims and cause-effect relations1 and the calculation 1

Comp. Norton/Kappler, BSC Best Practices (2000), p. 22; Morris, Analytic Application Integration (2002), p. 15f. and Marr/Neely, BSC Softwareanwendung (2003), p. 237–240. For an example of a software-based BSC process comp. Blaudszun/Pielniok, BSC-Software (2003), p. 178–181.

2

Weber/Schäffer, BSC und Controlling (2000), p. 108.

3

Comp. Brabänder/Hilcher, Balanced Scorecard (2001), p. 254–256; Steinle/Thiem/Lange, Strategieumsetzung (2001), p. 32–34 and Gilles, BSC zur strategischen Steuerung (2002), p. 192.

4

Comp. Zimmermann/Jöhnk, Unternehmenspraxis mit BSC (2000), p. 602f.; Töpfer/Lindstädt/Förster, Nutzen BSC (2002), p. 83 and Gilles, BSC zur strategischen Steuerung (2002), p. 206f.

5

Comp. Zimmermann/Jöhnk, Unternehmenspraxis mit BSC (2000), p. 603; Brabänder/Hilcher, Balanced Scorecard (2001), p. 259 and Gilles, BSC zur strategischen Steuerung (2002), p. 209.

6

Comp. Töpfer/Lindstädt/Förster, Nutzen BSC (2002), p. 82.

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of indicators and the low quality and availability of data are problems and burdens for the implementation. Acceptance problems and resistance of the employees are additional problems, which can be solved by the creation of a company culture where leadership and employees jointly work on aims and determine them, by communication and information, active integration of all persons engaged in the project and by reciprocal trust. The danger of wrong staff decisions for the BSC team is regarded as just as problematic as the duration of the implementation, which is considered as too long. A further problem in practical use is considered to be the connection of the achievement of BSC targets with financial incentives.2 The support of the BSC implementation with the help of an integrated DP solution is too timeand resource-intensive for most users, with the result that according to Gille’s study only 10% of the users use an automized control of the BSC. In most cases there is a partial DP support, for most of the companies an automization is desirable, however.3

3.4.4

Strengths and weaknesses of the concept

In conclusion the following strengths of the BSC concept can be named above all:  The BSC gives a holistic sight on the company and has still an easy and practicable structure. Its use avoids a unilateral direction of the company and integrates different management concepts.4  The capacity to put the strategy into operation and its communication are seen as outstanding strengths. The BSC use provokes the question about the strategy itself including its assumptions. The company wide communication of strategic aims creates strategic transparence that is finally leading to an improved concentration on daily actions and to a unified strategic direction of the employees. Thus, the BSC solves bridging problems between strategic and operative planning and serves as close and practicable framework for the transformation of strategies into operative and measurable variables. It enables and even nearly demands for measuring the strategic success.5  A further strength is the consequent orientation towards the success potentials of the business unit. The value and competence creating factors are shown and compared to the customers’ requirements. A special focus is on the promotion and use of employee potentials.6 1

For more details see chapter 5.3.2.

2

Comp. Zimmermann/Jöhnk, Unternehmenspraxis mit BSC (2000), p. 604; Brabänder/Hilcher, Balanced Scorecard (2001), p. 258; Steinle/Thiem/Lange, Strategieumsetzung (2001), p. 34f.; Gilles, BSC zur strategischen Steuerung (2002), p. 200f.; Töpfer/Lindstädt/Förster, Nutzen BSC (2002), p. 82f.; Jenny, Akzeptanz der BSC (2003), p. 222f.

3

Comp. Gilles, BSC zur strategischen Steuerung (2002), p. 201, 212 and Zdrowomyslaw/Eckern/Meißner, Theorie und Praxis der BSC (2003), p. 271.

4

Comp. Wickel-Kirsch, BSC als Instrument im Personalcontrolling (2001), p. 285 and Haaßengier, Rechnet sich die BSC (2002), p. 108.

5

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 74–77; Weber/Schäffer, BSC und Controlling (2000), p. 173; Müller, Strategisches Management (2000), p. 127 and Gilles, BSC zur strategischen Steuerung (2002), p. 214, 216.

6

Comp. Müller, Strategisches Management (2000), p. 127.

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 The clarification of the connections and dependences between strategic aims via causeeffect relations depict the concept and make it understandable and easy to communicate and finally demands for the motivation of the persons involved.1 The following weaknesses of Kaplan/Norton’s concept may not be forgotten:  A conceptional gap, especially for companies in the German speaking area is the disregard of important strategic elements resulting from the focus on measurable targets. Strategic generic decisions, leadership axioms, visions and missions have to be available according to Kaplan/Norton. Via the BSC the strategy shall only be visualized and implemented.2  Kaplan/Norton provide poor suggestions on the interactions between the perspectives and their target and measured variables.3  Furthermore, the concept is accomplished neither in practice nor in science, with the result that there is no model for operationalizing the cause-effect relations and for breaking the targets down on underlying hierarchical levels. An appropriate incentive system in connection with the achievement of BSC targets, strategic and assumption control, the integration of IT systems and the connection with the management oriented towards the company value still have to be developed.4  Additional problems are the high efforts of time and staff used for the development and implementation, especially for the creation of IT-applications and regular reviews and BSC updates.  The high complexity of the concept leads to a huge effort for explanations and communication, as well as for data collection.5 Knowing and taking these weaknesses into consideration the multiple advantages of the BSC concept can be used. The challenges for management and controlling are to connect the positive effect of the idea and wording of the BSC with the company individual design and implementation.6

1

Comp. Müller-Hedrich, Fachkonferenz BSC (2001), p. 35 and Wickel-Kirsch, BSC als Instrument im Personalcontrolling (2001), p. 285.

2

Comp. Greiner/Tretter, Erfahrungen mit der BSC (2001), p. 498–502.

3

Comp. Müller, Strategisches Management (2000), p. 130.

4

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 75; Steinle/Thiem/Lange, Strategieumsetzung (2001), p. 37 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 410.

5

Comp. Gilles, BSC zur strategischen Steuerung (2002), p. 215f.

6

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 173 and Müller, Strategisches Management (2000), p. 130. About the assessment of the BSC concept comp. also chapter 5.5.

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4

Indicators and indicator systems as first necessary step…

4.1

Terminological basics about indicators

After intensive terminological discussions in the past,1 today a generally accepted, relatively uniform indicator term exists. According to this understanding, indicators are highly compacted variables reflecting a quantitatively measurable situation in a concentrated way. They inform in a compacted way in accordance with the needs of the decision makers about complicated entrepreneurial facts, processes and connections and, thus, give a quick and comprehensive overview.2 Indicators have to be understood as technical medium for calculations serving for the quantification of information on different decision issues. As decision support it provides target oriented knowledge for concrete business situations ex post or ex ante, gives an overview over planned or factual performance or the overall development of the company or the different business sectors. Furthermore, they function as targets and instrument for the implementation of an efficient control. Within the Balanced Scorecard concept, indicators are used to specify the formulated strategic aims, to measure the achievement of goals with the help of indicators and instruments based on indicators, as ROI, the Berlin Balanced Scorecard, and to follow the processes for reaching the targets.3

4.2

Indicator types

In literature and practice there are multiple possibilities to classify indicators. Now a division in accordance with the statistical form in absolute and relative key figures is made.4

4.2.1

Cardinal numbers

Absolute numbers or cardinal numbers are single numbers, sums, differences or arithmetic means. They are directly obtained from the annual balance sheet (e.g. sales, total assets, Working Capital or Cash Flow). Because of the lack of a benchmark, the significance of 1

For a short overview over the key figure discussion comp. Reichmann, Controlling (1997), p. 19.

2

Comp. Reichmann, Controlling (1997), p. 19f. und Küting/Weber, Bilanzanalyse (2000), p. 23.

3

Comp. Reichmann, Controlling (1997), p. 20f.; Baier, Praxishandbuch Controlling (2000), p. 197; Küting/Weber, Bilanzanalyse (2000), p. 23 and Ehrmann, Balanced Scorecard (2002), p. 48.

4

Comp. Reichmann, Controlling (1997), p. 21f.; Baetge, Bilanzanalyse (1998), p. 26–30; Küting/Weber, Bilanzanalyse (2000), p. 24–26 and Ehrmann, Balanced Scorecard (2002), p. 49 f.

Indicators and indicator systems as first necessary step…

59

absolute indicators is limited, though, if no international, cross-sectors, cross-business or time benchmarks are realized.1

4.2.2

Ratios

For an economically significant assessment of the situation of the company two absolute numbers are related as quotient in the financial statement analysis and, thus, obtain, relative numbers, so called ratios. They show the significance of single parameters in comparison to other circumstances and make a comparison possible without disclosing the absolute amount of the original data.2 Ratios can be divided into quotas, reference numbers and index numbers. If one considers a share parameter in relation to the corresponding whole parameter, this is called quotas. The equity ratio is an example for a quota and compares the equity of a company with its total capital. To get a picture about the real scales, however, the absolute numbers should still be considered as well. In order to obtain reference numbers, different parameters with a logical connection between them in the sense of a mean-ends relation are combined. The return on equity for example reflects the relation between annual profit as caused parameter and equity as causing variable. The explanatory power of the reference numbers is determined by the special inner connection between the parameters. Index numbers show the timely changes and developments of a variable. In this case the value of the starting point in time is determined as 100 and further values of different points in time are compared to it. The choice of the starting value determines the explanatory power of the index numbers.3 In order to be economically acceptable the parameters in the numerator and denominator have to be consistent with regard to time, subject and value.4 The power of information of single ratios is still limited; the ambiguity in the interpretation and the examination of single ratios for the illustration of complex situations can lead to wrong decisions. Therefore, ratio systems are frequently applied in practice for Performance Measurement. They can help to avoid ambiguity as well as loss of information and shed light on causes of changes.5

1

Comp. Coenenberg, Jahresabschluß (1997), p. 577; Baetge, Bilanzanalyse (1998), p. 26f. and Küting/Weber, Bilanzanalyse (2000), p. 24.

2

Comp. Baetge, Bilanzanalyse (1998), p. 26f. and Küting/Weber, Bilanzanalyse (2000), p. 25.

3

Comp. Coenenberg, Jahresabschluß (1997), p. 577–579; Baetge, Bilanzanalyse (1998), p. 27f. and Küting/Weber, Bilanzanalyse (2000), p. 25f.

4

Comp. Baetge, Bilanzanalyse (1998), p. 28–30.

5

Comp. Reichmann, Controlling (1997), p. 22 and Küting/Weber, Bilanzanalyse (2000), p. 27.

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4.3

Ratio systems as Performance Measurement

A ratio system, in literature also often called ratio combination, is the totality of ordered ratios giving economically meaningful information about the company or parts of the company. Hereby, single ratios are combined to a system of interdependent and complementing ratios with the aim to raise the quality of the overall explanatory force. As management instrument, the ratio systems are used for planning, monitoring and control. They serve to provide information, clarify essential correlations and certain economic circumstances.1 To create a ratio system a chosen key performance indicator (e.g. return on equity or asset turnover) is structured, i.e. it is subdivided, substituted or amplified. In connection with its subdivision the numerator and/or denominator is splitted into its single components. Thus, the analysis of the main influence factors on the key performance indicators is done in several steps and a system of factually, meaningfully in a vertical and horizontal way connected ratios is created. The division shows cause-effect-relations and weaknesses, with the result that necessary measures for correction can be initiated. In the context of substitution, numerator and/or denominator are substituted by other variables without changing the value of the ratio. Likewise an amplification of the key performance indicator in the numerator/ and or the denominator by the same variable is possible. If the types named above are connected in a mathematical way, a calculation system is obtained. A good example is the Du Pont-key figure system described in 4.3.1. If the ratios are just logically allotted into different groups (e.g. fields of activities) without quantifying the interdependences, i.e. if a mere systematical connection is achieved, this is called a classification system. The RL-ratio system is named as an example in 4.3.3.2

4.3.1

About the Du Pont-ratio system

The Du Pont-ratio system, which is referred to as basic model in literature, was designed by the chemical group Du Pont3 and has been used there since 1919. It is the generally most well known ratio system. In practice it is far spread and accepted, because it summarizes the annual statement and serves as framework for a comprehensive planning and controlling instrument. As calculation system the Du Pont-system is designed as a pyramid, the so called Du-PontTree or ROI-Tree (Fig. 2-6). It creates a connection between aspects regarding accountancy, costs and finances. The Return on Investment (ROI) serves, as a relative profit resulting from a certain employment of capital, as a first comparison with saving deposits in a bank or alternative investment potentials. By adding the sales, the autonomous ratios net profit ratio or

1

Comp. Reichmann, Controlling (1997), p. 23–25; Baetge, Bilanzanalyse (1998), p. 518f. and Küting/Weber, Bilanzanalyse (2000), p. 27–31.

2

Comp. Küting/Weber, Bilanzanalyse (2000), p. 27–30 and Baetge, Bilanzanalyse (1998), p. 519f.

3

E.I. Du Pont De Nemours and Company, Wilmington, Delaware.

Indicators and indicator systems as first necessary step…

61

rate of turnover of total assets1 are obtained. These are further broken down in the pyramid and retraced to their origins. Using absolute numbers, it is possible to analyze expenses, costs, earnings, performance, assets and capital. The ratio system makes clear whether a change of the return of capital returned results from a change of the return on sales, of the rate of asset turnover or from both factors. It provides information on the question whether an improvement of the asset turnover shall be achieved by augmenting the sales or reducing the invested capital or whether an improvement of the sales profitability shall be targeted.2 Gross-sales Net-sales contributionmargin Return in % of sales Return in % of invested capital

-

Profit

:

Proportional costs 2

Sales cash Sales

: invested capital

Workingassets

+ Fixedassets

1

Reduction of earnings

Fixed costs 1

x Assetturnover

-

-

+ accounts receivable

+ inventories

Fixed cost as sum of production, material, administration and selling overheads costs as sum of production material, production salaries and other variable overheads

2 Proportional

Figure 2-6: Du Pont ratio system Source: adapted from Küting/Weber, Bilanzanalyse (2000), p. 33.

The ROI, however, does not provide a complete overview of the cause-effect relations and, therefore, additional ratios should be used in relation to the economic efficiency of the use of resources and liquidity, but also of qualitative kinds (e.g. customer satisfaction analyses, employee interviews).3

1

Return on Sales as achieved operation-related profit per sold item, how well a company sells it products/services on the market and how cost effective the production is. The capital turnover shows how often the invested capital was turned over by sales and how intensely the assets are used. Comp. Reichmann, Controlling (1997), p. 36.

2

Comp. Baetge, Bilanzanalyse (1998), p. 521–532; Küting/Weber, Bilanzanalyse (2000), p. 31–34 and Baier, Praxishandbuch Controlling (2000), p. 199f.

3

Comp. Baier, Praxishandbuch Controlling (2000), p. 200.

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4.3.2

The ZVEI-ratio system

The ZVEI1-ratio system was presented for the first time by the Zentralverbad der Elektronischen Industrie in 1970 with the aim to generate an instrument for analysis and planning for the management. It serves for the analysis of the company situation as well as for the specification of the business targets by setting target values. In Germany it has become a well known, far spread ratio system that can be used in all sectors.2 The mixed calculation and classification system – which is also called multifunctional ratio system – is designed as ratio pyramid. Figure 2-7 illustrates the schematical construction. Ultimate aim of the ZVEI-system is to investigate the company efficiency through growth and structure analysis. In the growth analysis sales activities, results, capital commitment, value creation and employment are considered. In the structural analysis, as main part of the ZVEI system the earning power and the risk of the company is analyzed by means of the key performance indicator Return on Equity.3 Through reference indicators and classification indicators the efficiency of the company is analyzed. The area of analysis in this context is divided into the four sectors profitability, result building, capital structure and capital commitment.4 The elements of the system are divided into main and auxiliary ratios. While main ratios (88) mark the analytical train of thought and need further analysis, auxiliary ratios (122) serve as mathematical explanation of the main ratios. For each of the resulting main ratios a definition sheet is created with the definition of the main ratio via the connected auxiliary ratios. The system contains ratios and absolute numbers, uses information of the annual statement as required in commercial law, but also data from cost and performance accounting, as well as the internal earning statement. Variables regarding values and quantities are used. By taking additional circumstances relevant for decision-making into account, the ZVEI system satisfies the information requirements of internal and external addressees. However, the danger of an overabundance of information as well as the suffering efficiency of the acquisition and handling of information has to be watched.5

1

Zentralverband der Elektronischen Industrie e.V., Frankfurt/Main German Electrical and Electronic Manufacturers` Association.

2

Comp. Reichmann, Controlling (1997), p. 30 and Küting/Weber, Bilanzanalyse (2000), p. 34.

3

Return on Equity refers to the relation of total profit and used capital and shows the shareholders how successfully their capital is used. Comp. Reichmann, Controlling (1997), p. 81.

4

Comp. Küting/ Weber, Bilanzanalyse (2000), p. 34–36.

5

Comp. Baier, Praxishandbuch Controlling (2000), p. 201f. and Küting/Weber, Bilanzanalyse (2000), p. 35–37.

Indicators and indicator systems as first necessary step…

Sales activies

Growth analysis

reults

Structural analysis

63

Capital commitment

Return on equity Sector I: Earning power indicators Type B (profitability)

Period result

Return on sales

Company earnings Contribution margin

Sector III: Risk indicators Type A (capital structure)

Return on Investment

Sector II: Earning power indicators Type A (result building)

Earning power in the narrower sense

sales

Cash flow

Equity ratio

Equity to fixed assets ratio

Capital turnover

Productivity

Sector IV: Risk indicators Type B (capital commitment)

liquidity

Capital commitment per capita

Types of expenses Staff expenses

value creation employment

in days

employment

Costs of management

Figure 2-7: ZVEI-ratio system Source: Reichmann, Controlling (1997), p. 31, own translation.

4.3.3

The profit-liquidity ratio system

Against the background of in many cases inappropriate information of cost accountancy for the management and a disappointing standard of calculation with ratios and ratio systems as well as incomplete or too complex ratio systems, Reichmann and Lachnit have developed the profit-liquidity ratio system. The classification system takes profit and liquidity into consideration at the same extents. Liquidity is seen as crucial condition for the survival of the company. The profit-liquidity system consists of two parts: the profitability part with the ordinary result as core parameter and the liquidity part with liquid assets1 as core parameter. The key performance indicators are split up under logical aspects: the ordinary result is divided into Return on Equity and Return on Total Assets2, Return on Investment, Capital Turnover Ratio as well as Return on Sales. The liquid assets are divided into Cash Flow and Working Capi1

The ordinary result is a central success value, which shows the trend of sustainable success from operative and financing activities. Liquid assets are the amount of money and monetory assets a company needs in accordance with its sales and expense planning. Comp. Reichmann, Controlling (1997), p. 78 and 85.

2

Comp. Reichmann, Controlling (1997), p. 80f.

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tal.1 These indicators are then further broken down. Ratios as well as absolute numbers from external and internal accountancy are used for this purpose.2 The profit-liquidity ratio system is used as instrument for planning and control. It reports in a concentrated way over the situation of profitability, liquidity, sources of success and company structure that is needed by the management. It opens the possibility to talk about the situation of the company in comparison with other periods, competitors and sectors and uses annual, quarterly, monthly and weekly periods of analysis. A general part of the system serves for the current planning, monitoring and control, a special part contains company specific characteristics for deeper analysis of causes and control.3

4.4

Evaluation methods

The data obtained from ratios and ratio systems are evaluated via statistical and comparative analysis.

4.4.1

Static analysis

For the static analysis (individual analysis) variables of the same point in time or the same period without consulting comparative values are considered. Thus, the analysis of the balance sheet is just a snap shot, in which the course of time is not incorporated. The analysis of a single annual report has proved to be insufficient. The calculation of indicators alone, even in the case of indicator systems does not provide a basis for judgment on the company’s economic situation. The static analysis is only a basis for further going evaluations.4

4.4.2

Comparative Analysis

The economic assessment of data requires comparative standards in order to be able to classify single balance sheet positions by size and value of the indicators. The comparative analysis uses here the values of former periods and moments, values of other companies or normative target values (golden finance or balance rule) and compares them with the actual value of the indicators.

1

The Cash Flow as finance and success indicator shows to what extend the company generates financial assets through business sales activities on its own account. Working Capital is the difference between circulating assets and short-term liabilities. Comp. Reichmann, Controlling (1997), p. 86–88.

2

Comp. Baetge, Bilanzanalyse (1998), p. 532–534; Reichmann, Controlling (1997), p. 32-38 and Küting/Weber, Bilanzanalyse (2000), p. 37–42. For an overview about the PL indicator system comp. e.g. Küting/Weber, Bilanzanalyse (2000), p. 40f.

3

Comp. Küting/Weber, Bilanzanalyse (2000), p. 38f.

4

Comp. Baetge, Bilanzanalyse (1998), p. 41f. and Küting/Weber, Bilanzanalyse (2000), p. 42f.

Indicators and indicator systems as first necessary step…

65

Similar variables of different periods or different companies or different business sectors are considered. A condition for the comparative analysis is the processing of the data under the same principles before forming the indicators and the comparability with regard to contents of the data of different periods and circumstances, especially the evaluation in accordance with the same or comparable principles.1 Comparisons of indicators can be carried out as comparisons of time, set-actual comparisons, and cross company comparisons.2 In the context of comparisons of time values of different moments/periods with regard to a certain object are compared. It is of eminent importance for the company analysis and assessment of the previous business development. An advantage of comparisons of the balance over several periods is that on the long run balance arrangements, which have been undertaken because of company internal aims, are compensated. Furthermore, it is easier to identify one-time or accidental, so called extraordinary3 incidents, with the result that the analyst can relativize their effects. Only a regular annual result, adjusted by extraordinary incidents is an appropriate indicator of the results. Another advantage is that changes of accounting policy do not have so much influence. However the comparison of time shows only changes the way they can be found in the annual statement and does not inform about the causes of changes. There is the danger that unrecognized manipulations and pretended development lead to possible mistaken interpretations.4 The set-actual-comparison integrates planned values with normative character into the analysis. Their achievement is controlled via the actual values and on this basis, analysis of deviations can be carried out. Usually, empirical values from the past or average values of several periods are taken as guidance values. Planned data as future oriented values of analytical budgeting are generated separately from past data; the problem is to predict informative target data.5 The cross company comparison comprises a (international) comparison of companies of the same or different sectors, also of different enterprises within the same company or with enterprises of other companies. The target of this comparison is to identify the specific strengths or weaknesses of a company/enterprise and possible starting points for remedying the weak points. In a comparison between sectors the indicator of one company is compared to the average value of selected, representative companies of the same sector or the average 1

For the annual financial statements as required by German financial law the principle of consistency in the assessment is codified as Generally Accepted Accounting Principle in sec. 252 Subs.1 N°6 HGB. In accordance with it the assessment methods have to be applied consistently, same situation in the course of time have to be reflected likewise in the annual financial statements.

2

Comp. Coenenberg, Jahresabschluß (1997), p. 576; Baetge, Bilanzanalyse (1998), p. 41f. and Küting/Weber, Bilanzanalyse (2000), p. 43.

3

Those success components are regarded as extraordinary in accordance with the management result breakdown which can be ascribed to activities of other businesses or other periods. Comp. Baetge, Bilanzanalyse (1998), p. 45.

4

Comp. Coenenberg, Jahresabschluß (1997), p. 576; Baetge, Bilanzanalyse (1998), p. 44–47 and Küting/Weber, Bilanzanalyse (2000), p. 43–45.

5

Comp. Baetge, Bilanzanalyse (1998), p. 47–49 and Küting/Weber, Bilanzanalyse (2000), p. 45.

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Chapter II

of the sector. In the context of benchmarking1 a comparison with the best competitors as direct competitors of the company is undertaken. However, there is the problem of a lack of comparability2 of the companies, because their structure is rarely equal. As absolute numbers can only be compared, if the companies have the same size, mostly ratios are used. Under the condition that a sufficient amount of companies is integrated into the analysis in order to cover the whole spectrum of possibilities and that present differences between the companies are pointed out, the comparison between companies is a useful instrument of analysis for the financial analyst.3 For a comprehensive assessment of indicators and -systems the observer can well combine the named comparative methods and, thus, compare companies at different points of time or simultaneously with a set-actual comparison.4

4.5

Generic problems with the use of indicators

The force of information of indicators and indicator systems is decisively determined by the quality of the used basic information, which suffers under the strong orientation towards the past, the incompletion and the target oriented susceptibility to manipulation.5 The accountancy information used refer to a completed period of the past on the one hand, on the other side, months can pass between the balance sheet key date and its publication depending on kind and size of the company with the result that out-dated values are used. Indicators might be out-dated and obsolete; there is the danger of a wrong orientation and incorrect decision and investment due to this fact, especially if there are significant changes of internal or external conditions of the company’s services in the meantime.6 Because of the exclusive consideration of quantifiable circumstances, the data does not comprise all information which is relevant for the financial and economical assessment of the company. Information relevant with regard to customers and competitors, which is becoming more and more important, as well as specifications on internal processes are missing. The

1

In the context of Benchmarking a company considers differences and potentials for improvement in comparison with “best-practice” companies as an instrument of competitor analysis. Kotler/Bliemel, MarketingManagement (1999), p. 406–408 and Bea/Haas, Strategisches Management (2001), p. 231f.

2

Two objects are comparable, if all characteristics are similar except one (structural equality). Comp. Baetge, Bilanzanalyse (1998), p. 42.

3

Comp. Coenenberg, Jahresabschluß (1997), p. 576; Baetge, Bilanzanalyse (1998), p. 42–44 und Küting/Weber, Bilanzanalyse (2000), p. 45.

4

Comp. Küting/Weber, Bilanzanalyse (2000), p. 46f.

5

Comp. Reichmann, Controlling (1997), p. 22 and Friedag/Schmidt, Balanced Scorecard (2002), p. 60–63.

6

Comp. Coenenberg, Jahresabschluß (1997), p. 564f.; Horváth/Gleich, Balanced Scorecard (1998), p. 562f.; Küting/Weber, Bilanzanalyse (2000), p. 48; Weber/Schäffer, Kennzahlensysteme (2000), p. 1 and Friedag/Schmidt, Balanced Scorecard (2002), p. 51f.

Indicators and indicator systems as first necessary step…

67

data from the annual statement are – resulting from its primary function of profit identification – limited to real business transactions. In the same way the aspect of incompleteness of data results from the principle of careful accounting and assessment under German law (section 252 (1) n° 4 HGB1) and its characteristics from which an undervaluation of net assets as well as an advanced calculation of expenses results. This leads to a rather pessimistic image of the company’s situation and distorts the real company’s situation. Furthermore the set-targets are defined on a subjective basis, whereas an objective comparative standard is missing.2 Because of the present possibilities to choose between several accounting and assessment approaches and the interpretation of the scope of discretion a target oriented assessment policy is possible.3 Thus, the data from the financial statement underlie a subjective evaluation process and can be influenced. This has a negative effect on their information content, with the result that one has to assume that the situation is not depicted in a reliable way. Thus, higher ranking aims of the company policy determine its policy of accounting and assessment.4 The new IFRS-accounting, from 2005, helps to avoid some problems of the German Commercial Code. Another limit of the calculation with indicators is the strong compression of complex correlations. Indicators provide a simplified vision with the result that important insights into single positions are lost and that one might come to mistaken conclusions. Therefore, there is a growing need of indicator systems like the Berlin Balanced Scorecard that offer more transparence and render an easier and more exact interpretation possible. However, there is always the danger of misinterpretations because of wrong estimations, incorrectly interpreted correlations and wrong conclusions.5 Also the principle of economic efficiency and relevance restricts the calculation with indicators, as the information content of indicators has to justify the expenses. When creating the indicators, i.e. in the context of the collection and preparation of the basic material, the costs of the collection of information should not be higher than the benefit resulting from them. In the indicator analysis, only facts should be integrated which make an improvement of the insight into the company’s situation possible and have an influence on the decision taking process.6 In conclusion it can be observed that the informational value of indicators is limited by important factors. If one does not have expert knowledge or disregards the limits shown, there

1

German Code of Commerce.

2

Comp. Coenenberg, Jahresabschluß (1997), p. 565–567; Horváth/Gleich, Balanced Scorecard (1998), p. 563; Küting/Weber, Bilanzanalyse (2000), p. 49f. and Weber/Schäffer, Kennzahlensysteme (2000), p. 1.

3

As examples serve the the leeways in the assessment of production costs of unfinished and finished products (sec. 255 subs. 2 HGB), choices of the entry of start-up and business expansion expenses (sec 269 HGB) and the open depreciation of received advance payments for inventories (sec. 268 subs. 5 p. 2 HGB).

4

Comp. Coenenberg, Jahresabschluß (1997), p. 566f. and Küting/Weber, Bilanzanalyse (2000), p. 49–51.

5

Comp. Küting/Weber, Bilanzanalyse (2000), p. 50–53 and Baier, Praxishandbuch Controlling (2000), p. 209.

6

Comp. Küting/Weber, Bilanzanalyse (2000), p. 53f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 62f.

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is always the danger of momentous incorrect decisions. Despite this, companies do not abandon using indicators. To the contrary, it plays a key role in the interpretation of complex company information. It provides target oriented knowledge for concrete moments of decision-making on company or sector levels.1 If one considers the calculation with indicators with regard to its strategic relevance, it becomes clear, that the common indicator systems are most appropriate for past data, without focusing management bottlenecks. Therefore, a mountain of useless figures with little information results. The multitude of existing data and indicators often distracts from the essential problems of strategic management in the company.2 Often the monitoring concepts based on financial indicators do not directly refer to the company or business strategies. Furthermore, the use of financial key figures already enhances the focus on short term considerations for improvement, losing sight of the long-term value creation, especially of immaterial and intellectual assets that support further growth.3 The insufficient purely financial focus of traditional indicator systems should be replaced by a combined use of quantitative and qualitative information. The BSC as “novel”, “modern” indicator system (Performance Measurement System) demands for a broad, well-balanced basis of indicators. It complements the classical, financial indicators by data about customers, internal process perspective as well as the perspective of learning and development and tries to achieve a “balanced” vision of critical parameters of the supply chain.4 Thus, the transparence in comparison to conventional indicator systems can be raised by applying the BSC.

5

Balanced Scorecard as indicator system

While the presented traditional, money- and past-oriented indicator systems are primarily targeted to the control of the degree of realization of financial aims, the Balanced Scorecard undertakes a strategy calculation with reference to customers and the future via the Berlin Balanced Scorecard and a control of the implementation of the strategy. Aspects to improve the business processes, the employees’ performance and ultimately the performance of the whole company in terms of Performance Measurement are generated.5

1

Comp. Baier, Praxishandbuch Controlling (2000), p. 209 and Küting/Weber, Bilanzanalyse (2000), p. 54.

2

Comp. Weber/Schäffer, Kennzahlensysteme (2000), p. 1 and Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 78.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 20–22 and Horváth/Gleich, Balanced Scorecard (1998), p. 563 and Müller, Strategisches Management (2000), p. 26–28.

4

Comp. Reichmann, Controlling (1997), p. 22 and Weber/Schäffer, Kennzahlensysteme (2000), p. 1f. The critizism of the traditional balance-oriented indicators lead also to the development of the shareholder-valueapproach. Comp. Rappaport, Shareholder Value (1999), p. 15–38.

5

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 78.

Balanced Scorecard as indicator system

69

To overcome the described deficits and problems of traditional indicator systems, in the Anglo-Saxon area the Performance Measurement as a new way of processing indicators was developed at the end of the eighties. It stands for integrated indicator systems that contain several indicators of different dimensions (e.g. time, costs, quality, capacity for innovation, customer satisfaction) for the assessment of effectiveness and efficiency1 of the performance and performance potentials in the company. The incorporation of non-financial guide values that have a decisive influence on future financial performances, as well as the connection of financial and non-financial indicators of different performance levels within the company corresponding to their causal relation are distinctive for this type of measurement. The performance transparency shall contribute to a performance improvement on all levels by more effective monitoring and control processes. Furthermore, performance related and – overlapping communication processes, motivation and additional learning effects are promoted.2 In the Balanced Scorecard, which is the Performance Measurement approach which dominates in practice3, a performance measurement in four perspectives, which is oriented towards the company strategy, is undertaken. Financial

Targets Indicators Requirements Measures Internalbusiness process

Customer

Targets Indicators Requirements Measures

Vision and strategy

Objectives Indicators Requirements Measures

Learning and development

Targets Indicators Requirements Measures

Figure 2-8: Performance Measurement via the Balanced Scorecard Source: Adapted from Kaplan/Norton, BSC-implementation (1997), p. 9. 1

Effectiveness is oriented towards a concrete target and the corresponding output. It compares the achieved benefit of the production with the planned benefit (“doing the right things”). Efficience as measure of economic efficinece of the use of resources refers to the relation between the value of the output and the input (“doing the right things”). Comp. Wogersien, Effektivität – Effizienz (2001), p. 548f. and Gleich, Performance Measurement (2002), p. 447.

2

Comp. in more detail Horváth/Gleich, Balanced Scorecard (1998), p. 563f.; Gleich, Performance Measurement (2002), p. 447–454 and Günther/Grüning, Performance Measurement-Systeme (2002), p. 5–12.

3

About the results of different economical studies: Comp. Gleich, Performance Measurement (2002), p. 450f.

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5.1

Use of strategic indicators

Via concrete indicators, the connection between strategic targets and company mission/vision and their realization are shown to all persons involved. At this point strategic indicators have to be differentiated from diagnostic indicators. Strategic indicators define a strategy and are important for the achievement of targets. They are mainsprings for the competitive success. In order to draw the attention of management and employees on dominant competitive factors, only up to 15 to 25 of these indicators should be used, equally considering performance drivers and indicators concerning results. Furthermore, strategic indicators are determined via their connection in cause-effect relations1.2 Diagnostic functions on the other hand have a surveying function; they signalize threatening or exceptional events, permitting to intervene. In addition to the Balanced Scorecard they can be used in a nearly unlimited number – respecting the principle of economic efficiency.3

5.2

Determination of a well-balanced indicator mix

5.2.1

Well balanced proportion of early and lagging indicators

The use of indicators of different indications with regard to time makes it possible to connect past and future and to create a link between operative planning, or respectively the budget and the Balanced Scorecard.4 Lagging indicators characterize final points or areas targeted in the course of time. They represent the major share of the indicators used in the company and come from positions in the income statement and the balance sheet and from financial indicators identified in them. I.e. they are based on data that are measured at the end of organizational processes. In the BSC they reflect the targets of strategies. Kaplan/Norton provide generic/strategic core aspects for each perspective that are basically relevant strategic fields for any company. On the basis of the strategy long-term strategic goals and lagging indicators are formulated. Lagging

1

For deliberations on cause-effect-relations comp. 5.3.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 156f.; Ehrmann, Balanced Scorecard (2002), p. 93f.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 156–160; Gilles, BSC zur strategischen Steuerung (2002), p. 26f. and Ehrmann, Balanced Scorecard (2002), p. 93f.

4

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 108.

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71

indicators are, for example, sales, ROI, market share, customer satisfaction or employee qualification.1 In addition to the objectively quantifiable lagging indicators subjective leading indicators of the lagging indicators are integrated in the analysis. Leading indicators are oriented towards the beginning or an early stage of a process and focus those processes guaranteeing the achievement of future goals at the present moment. They describe specific competitive advantages of the company and depict how results should be achieved. For each perspective the activities and parameters which have the most influence on the achievement of strategic aims of the lagging indicators are identified with the help of the specific strategy of the business unit. These are for example financial drivers of profitability, especially internal business processes and targets for the learning and development perspective in order to be able to create the demanded values for the target customers and target market sectors. Examples for leading indicators are customer relations, image/ reputation, employee potentials and technical infrastructure.2 In accordance with Kaplan/Norton “a good Balanced Scorecard should feature a well balanced mixture of lagging indicators and leading indicators of the business strategy.”3 A backlog of lagging indicators neglects information about how the results are to be achieved; an early feedback about the successful implementation of the strategy is missing. A backlog of leading indicators on the other hand leads to a lack of results about the improvement of the overall result.4 Leading and lagging indicators are mutually dependent; they form a system of values that are interconnected with regard to logic and time. The classification of an indicator as leading or lagging indicator is relative and depends on the point in time from which a process is considered (Fig. 2-9). At the moment t0 a certain cause triggers a process leading to a certain effect at the point in time t1, which is represented by the indicator A. This indicator represents a lagging indicator in t1 because it marks the end point or the result of a completed process. If a further point in time t2 is considered the achieved effect is a cause for further processes itself, showing at the moment t2 through the indicator B its effect. In t2 the indicator A is not any more the end point of a process, but characterizes a way point instead. It is still a lagging indicator of a process, but in the direct relation between the indicator A as cause and indicator B as effect it is a leading indicator.5

1

Comp. Ehrmann, Balanced Scorecard (2002), p. 100–105 and Friedag/Schmidt, Balanced Scorecard (2002), p. 110. For more examples on leading and lagging indicators of the individual BSC-perspectives comp. chapter 5.4.

2

Comp. Ehrmann, Balanced Scorecard (2002), p. 100–105 and Friedag/Schmidt, Balanced Scorecard (2002), p. 42.

3

Kaplan/Norton, BSC-Umsetzung (1997), p. 30.

4

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 5. The balance of indicators is one aspect of the balance of the BSC. The Prenzlau cube shows its three dimensions (perspective, time pattern, indicator). Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 10 and Friedag/Schmidt, Balanced Scorecard (2002), p. 42f.

5

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 111f.

72

Chapter II

t0

t1 Lagging indicator Indicator A Indicator B

Cause

t0

Effect Cause

Effect

Leading indicator

Lagging indicator

t1

t2

Figure 2-9: Relativity of lagging and leading indicators Source: Friedag/Schmidt, Balanced Scorecard (2002), p. 112.

5.2.2

Balance between financial and non-financial indicators

Traditional indicators generally assume that all economic facts and approaches can be captured by a financial assessment. Thus, financially measurable success factors have a crucial role in any company.1 For the long-term creation of competitive advantages, however, more and softer (non-financial) factors, especially intellectual capital like knowledge or the employee capacity, effective processes or an excellent customer loyalty and orientation are decisive. Therefore, the Balanced Scorecard implies that the economic success is based on influences behind financial values that are causes determining whether the aims can be achieved.2 A multitude of non-financial success factors contribute to the overall result (e.g. quality, customer and employee satisfaction), however, they are not as easy to measure as the values of cost accounting. They are exclusively approximated in purely notional measurement methods. Success potentials in the customer relations, innovative capabilities of the employees, cooperation with suppliers etc. form a manifold relationship network. The collection and processing of available information, as well as the understanding of them are becoming more and more important and make target oriented actions possible. Thus, non financial measurement methods have to be identified, that serve the processing of the information about indicators received. Non-financial methods as for example surveys, portfolio analyses and weaknesses-strengths diagrams are useful for the depiction. Despite of their difficult measurement 1

Comp. Ehrmann, Balanced Scorecard (2002), p. 106.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. Kaplan/Norton, BSC-Umsetzung (1997), p. V and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 47f. The demand for a comprehensive consideration of non-financial indicators is anything but new. Comp. Weber/Schäffer, BSC und Controlling (2000), p. 5f.

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non-monetary variables are as useful, but also as diffuse and defective as financial variables, which pretend to be much more accurate than they really are.1 The BSC combines quantitative, easily measurable and assessment-based qualitative variables in a comprehensive information system for management and employees making the identification of the long term success including its sources possible and creating transparence reaching across hierarchical levels.2

5.3

Indicators connected through cause-effect chains

5.3.1

Cause-effect relations of the BSC

Baier points today’s necessity to use mathematically connected indicator system out establishing besides the logical connection also a cause-effect relation.3 Kaplan/Norton affirm in this context: “A strategy is a bundle of hypotheses about causes and effects. An indicator system should clarify the relations (hypotheses) between aims (and indicators) from different perspectives in order to permit their monitoring and assessment. The chain of causes and relations should reach over all four Balanced Scorecard perspectives.”4 Thus, the Balanced Scorecard is not just a loose collection of indicators in four perspectives, it is also meant to guarantee coherence between the single perspectives. For this, the perspectives have to be connected logically via cause-relation connections, permitting a better communication of the strategy and the orientation of all resources and activities towards the implementation of the strategy. At the same time the Scorecards of different organizational units will be connected via cause-effect-relations.5 The causal relations translate a collection of strategic aims into a concept to describe the desired changes and targeted focal points.6 Any parameter chosen for the BSC should be an element of the chain of cause-effectrelations.7

1

Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 47; Friedag/Schmidt, Balanced Scorecard (2002), p. 68–70 and Ehrmann, Balanced Scorecard (2002), p. 106.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 8–10; 37f.; Müller, Strategisches Management (2000), p. 29f. and Ehrmann, Balanced Scorecard (2002), p. 106.

3

Comp. Baier, Praxishandbuch Controlling (2000), p. 210.

4

Kaplan/Norton, BSC-Umsetzung (1997), p. 28, own translation.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 159f.; Wall, Ursache-Wirkungsbeziehungen (2001), p. 66f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 214–219 and Ehrmann, Balanced Scorecard (2002), p. 107– 109.

6

Comp. Horváth/Gaiser, Implementierungserfahrungen (2000), p. 27.

7

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 31 and Weber/Schäffer, BSC und Controlling (2000), p. 7f.

74

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Indicators are connected in a first step via the above described definition of targets and of appropriate lagging indicators and leading indicators in the four perspectives.1 This makes clear from which influences the achievement of the results mainly depends. The causal connection between leading and lagging indicators is not only established within the perspectives but also across perspectives. The cause-effect chains are hierarchically geared towards the financial perspective with the result that lagging indicators of a lower BSC perspective act as driving factors for indicators of higher-ranking perspectives. Thus, the financial indicators are connected through all four perspectives with their driving factors.2 Fig. 2-10 depicts such a connection in a simplified example. Financial Perspective

ROCE

Customer Perspective

Custom Loyalty

Delivery on Time

Internal (Business Process) Perspective

Process Quality

Learning and Growth Perspective

Process Cycle Time

Expert Knowledge of Employees

Figure 2-10: Simplified Example of a Cause-Effects Chain Source: Kaplan/Norton, BSC-Umsetzung (1997), p. 29.

In the typical case, a better process quality results from more expert knowledge of the employees, while the necessary process lead-time is reduced. This leads to the possibility of on time deliveries (OTD) having a positive effect on customer relations and finally leading to a growing Return on Capital employed (ROCE)3.4 Cause-relation-chains point the causal assumptions of the strategy chosen out. This permits to orient all business activities towards the strategy and to control the implementation of the 1

Comp. chapter 5.2.1.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 142–145; Kumpf, BSC in Praxis (2001), p. 27–30 and Wall, Ursache-Wirkungsbeziehungen (2001), p. 65f. and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 29.

3

The Return On Capital Employed (ROCE) can be understood as operationalised ROI, i.e. only capital employed for operative activities is taken into consideration in the Return on Capital. Comp. Kumpf, BSC in Praxis (2001), p. 117. About the ROI components comp. chapter 4.3.1.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 28f.

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75

strategy at an early point in time. Thus, also the contribution of soft, long-term success factors becomes transparent and controllable.1

5.3.2

About the generation of causal relations

Kaplan/Norton make few comments on the identification of causal relations. They recommend the generation of hypotheses in the management system that are meant to be confirmed by correlation analyses.2 Those cause-effect relations are considered as “correct” that depict the management consensus and prove to be consistent with the respective company aims in the examination of reality.3 The identification of cause-effect connection is seen as big challenge in literature and is a crucial success factor of the BSC concept.4 In accordance with Wall there are basically two different approaches for the identification of such connections: the logical and the empirical deduction. In the logical deduction the structure between the indicators is fixed on the basis of logical relations between indicators and via mathematical transformations (Du Pont-indicator system). However, it is not realistic to connect the relevant variables of a company on a logical basis. In empirical-theoretical deductions hypotheses on connections of reality are formulated on the basis of theoretical concepts that can be empirically verified. Because of the limited number of empirically confirmed hypotheses in business administration this form of deduction is rarely applied. During the realization of a new strategy that requires decisions under uncertain conditions in an unknown context, the extrapolation of known factors for the future reaches its limits. An empirical-inductive deduction implies the generation of indicators from experiences via statistical data analyses, e.g. the correlation analysis. For hypothesizing, factor analyses could be used; in the case of existing assumptions of connections structure-examining techniques as for example the regression analysis are possible. According to Wells this is the technique which is most appropriate for the BSC. It makes it possible to incorporate the experiences of managers on the one hand and to resort to theoretical, academic knowledge on the other hand.5 There is the principle of selection for the generation of indicators, instead of the rope of sand to be able to recognize everything from reports. The identification of strategic success fac1

Comp. Wall, Ursache-Wirkungsbeziehungen (2001), p. 66 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 179f.

2

Horváth & Partner as well as Weber/Radtke/Schäffer advise caution with repect to the correlation analyses. Cause-effect-chains of the BSC are not subject to an algorithmic logic; they should if their employement is possible be used as support. Comp. Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 43f. and Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 26.

3

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 8 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 188f. Weber/Schäffer question the analytical deduction of the “right” cause-effect-relation on this basis. Comp. Weber/Schäffer, BSC und Controlling (2000), p. 8f.

4

Comp. Bodmer/Völker, Erfolgsfaktoren bei der Implementierung (2000), p. 480; Wall, Ursache-Wirkungsbeziehungen (2001), p. 65 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 179, 185.

5

Comp. Wall, Ursache-Wirkungsbeziehungen (2001), p. 67–69.

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tors, e.g. with the support of the PIMS program helps to select the perspectives. The parameters can be deducted – always on the basis of the company individual strategy – via supporting matrices.1 In accordance with the schematic approach by Juran the connection of perspectives is possible via so called planning matrices. Weber/Schäffer criticize: “The use of matrices suggests easily that the connections are analytically exactly to ascertain.”2 According to them this is not the case. An interactive connection process carried out in management workshops can do justice to the identification of complex connections between parameters. In practice the obtained cause-effect relations are visualized in cross-linked causal models (according to Gomez/Probst), so called Strategy Maps depicting positive as well as negative effects and their strengths. Also in this case a corresponding selection is necessary because an exceedingly complex and intransparent illustration becomes quickly meaningless. A formulation in continuous text is also possible (so called Strategy Story).3 It is necessary to carry out a critical examination of the generated cause-effects chain, which in its totality depicts the strategy itself, because there is no permanently existing, consistent network of cause-effect relations.4 At the end, in each perspective, indicators and target values, as well as measures are deducted from the generated causal relations and responsibilities are determined. This guarantees the implementation of the strategic aims on an operative level.5 There is often a high level of instrumental, conceptual as well as mental preliminary work, i.e. instead of developing numerous new indicators the important ones should be selected. In accordance with the consulting experiences of Weber/Schäffer in a BSC with twenty key figures ten to twelve can be obtained directly from the company, four to six have to be newly collected and the rest needs further clarification.6 For the determination of the target value one has to take care of an adequate requirement level considering emerging conflicts of aims.7

1

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 22–27 and Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 50.

2

Weber/Schäffer, BSC and Controlling (2000), p. 28, own translation.

3

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 22–29; Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 39–41, 180f., 185; Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 26–29. About the possible methods of deduction of cause-effect-relations comp. also Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 181–183.

4

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 81f.

5

Comp. Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 29–36.

6

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 29 and Weber/Radtke/Schäffer, Erfahrungen mit der BSC (2001), p. 32.

7

Comp. in more detail Horváth & Partner (ed.), Balanced Scorecard umsetzen (2001), p. 51f. and 214f.

Balanced Scorecard as indicator system

5.4

Indicators of the particular Balanced Scorecard perspectives

5.4.1

Financial perspective

77

The indicators of the financial perspectives are supposed to translate the strategic targets of the company/business unit into the language of the shareholders, whose capital, which they have left to the company, shall be used in such a way that the investment in comparison with other possible alternatives is the best solution for them.1 In the area of tension between guaranteeing liquidity, profitability and stability (magic triangle of finances) the financial goals of the company are defined.2 They serve as focus for aims and indicators of all other Scorecard perspectives. On the one hand they define the financial performance which is expected from the strategy and on the other hand they are the final targets for the goals and indicators of the other three perspectives.3 The indicators of the financial perspective as lagging indicators measure past performances – as well as the course and the achievement of targets of strategic projects and actions. If for the course of time of targets milestones are defined, preceding milestones are leading indicators for succeeding ones. The indicators can as well be leading indicators in the cause-effectcontext, if financial results are conditional for other measure, e.g. employee training. Furthermore, indicators as the cash-to-cash cycle have a considerable early warning potential for the development of liquidity. Risks and fluctuations of returns via risk controlling and – management can be taken into consideration by integrating a target comprehending the risk dimension (e.g. diversification of income sources) with a corresponding indicator. In practice there are a lot of financial indicators: profitability and sales indicators as well as more liquidity-oriented parameters as the Cash Flow. For the BSC the indicators with a strong strategic weight have to be chosen.4 Income or Cash Flow as basis For the selection of indicators as instruments for strategic management one has to ask the question, which financial parameters are more appropriate, e.g. more income- or more cashflow-based indicators. 1

About the characteristics of the single perspectives comp. Chapter 3.2.

2

Additionally the aspect of independence may be integrated. Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 183f. For more details on the finance political aims: Comp. Spremann, Investition und Finanzierung (1996), p. 197–199 and Kern, Investitionsmanagement (2002), p. 20–28.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 46, 60 and Friedag/Schmidt, Balanced Scorecard (2002), p. 143f.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 59; Müller, Strategisches Management (2000), p. 105f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 183–189 and Friedag/Schmidt, My Balanced Scorecard (2000), p. 251f.

78

Chapter II

Traditional balance-sheet oriented key figures In chapter 4 traditional indicators and indicator systems as well as their defaults have already been treated.1 Often related indicators as relations of a defined success or of values determining this result are used.2 Return on Sales (ROS) 

Operating Income Sales

Return on Capital (ROC) 

Earnings Befor Interests and Taxes Capital Employed

Return on Assets (ROA) 

Profit Pr ofit  Total Assets Total Capital

Return on Investment (ROI) 

Return on Equity (ROE) 

Profit Fixed Capital  Working Capital

Income Befor Tax Equity

The profit-targeted performance measures are often criticized in literature and called “deficient scales for measuring the business success…”3 especially because of:4  Lack of correlation between indicators oriented on the annual statement and the value development on the capital market  Existing manipulation scopes via the legal assessment choices, possibilities of reserves and depreciation forms  Lack of illustration of investments in net working and fixed assets for growth financing  Negligence of the time value of money (“time preference”)  Lack of consideration of risks  Negligence of economic assessments after the assessment period  Past orientation.

1

Comp. Chapter 4 as well as Schmeisser/Clausen/Hannemann, Bankcontrolling mit Kennzahlen (2009).

2

Comp. Coenenberg, Jahresabschluß (1997), p. 706 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 20f. ROS – Return on Sales, ROE – Return on Equity, ROC – Return on Capital.

3

Rappaport, Shareholder Value (1999), p. 15.

4

Comp. Copeland/Koller/Murrin, Unternehmenswert (1998), p. 12, 54–57; Rappaport, Shareholder Value (1999), p. 15–38; Günther/Landrock/Muche, Performancemaße (2000), p. 70; Schmid-Grotjohann, Wertorientiertes Management (2001), p. 380f. and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 21f.

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79

Cash Flow Thus, the informative value of the profit and the indicators deducted from it as indicators of business performance is considerably limited. They show the factual rise of value in an insufficient manner, and do not provide a sustainable future-oriented image of the company. The Cash Flow as result of the payment flows does not depend on these limitations. There are far fewer manipulation possibilities via balance political measures – e.g. a change of the assessment methods has no effect on the Cash Flow of a company and its economic value. Therefore, it is more appropriate for the depiction of the real financial results and is more and more common in German. The Cash Flow only considers incidents which are cash-relevant. As finance and success factor it indicates to which extent a company is or was able to earn financial sources on its own account via the company’s sales activities.1 Company value-oriented indicators Value oriented management The Shareholder Value approach, which has become well known especially in the basis of Rappaport’s publication “Creating Shareholder Value” (1986), picks the points of critique of the traditional balance oriented values up. In the core of the approach is the assessment of the company as actual cash value of further Cash Flows and the guiding principle to target all management activities on the elevation of the Shareholder Value (market value of equity. The economical value of an investment is estimated by discounting forecasted future cash flows with a weight average cost of capital (Discounted Cash Flow/DCF proceedings). Thus, the long-term future, the actual value of money as well as capital costs including risks are considered. Market values instead of balance values are used, generally leading to a considerable deviation of the Shareholder Value from the equity on the balance sheet.2 In the Entity Approach, the most common DCF-Approach3 the company value results from the actual value of the free Cash Flow during the explicit forecast period, the residual value as present value for the period after the explicit forecasted period and the present value of essential assets. The Shareholder Value results from the difference between company value and market value of Debt Capital (Fig. 2-11).4 The Free Cash Flow as financing-neutral Cash Flow is the financial variable available for the payout to the investors or outside creditors. It can amongst other things, as Fig. 2-10 demonstrates in a simplified manner, be calculated in

1

Comp. Küting/Weber, Bilanzanalyse (2000), S 39, 122–124. However, one has still to consider limitations to the informative force, comp. Küting/Weber, Bilanzanalyse (2000), p. 210f.

2

Comp. Spremann, Investition und Finanzierung (1996), p. 459–463; Rappaport, Shareholder Value (1999), p. 39; Loitz, Shareholder Value Ansatz (2000), p. 702f. and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 1.

3

The different methods of the DCF approach (Entity approach/gross approach, WACC approach, total cash flow approach, APV approach and equity approach/Net approach) are based d on different methods of determining the Shareholder value (direct/indirect) and different definitions of the assessment relevant cash flows and discout reates (capital costs). Comp. Drukarczyk, Unternehmensbewertung (2001), p. 204–213; Kern, Investitionsmanagement (2002), p. 300–305 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 4–16.

4

Comp. Rappaport, Shareholder Value (1999), p. 39f.

80

Chapter II

a retrograde way via the correction of the annual net income by cash-expenses of the profit and loss statement- as non-cash revenues.1 The capital structure is only captured via the internal discount rate, the Weighted Average Cost of Capital (WACC).2 WACC  rE

with

r E: E: t: rCC: CC:

E CC  rCC (1  t ) E  CC E  CC

cost of equity equity tax rate cost of credit capital credit capital

Determination of the Shareholder Value

Indirect Identification of Free Cash Flows

Company Value F ina l Va lue Disco unting Go ing C o nc e rn Va lue Liquida ting Va lue

Free Cash Flow

Non-business relevant assets

Present value of the available business relevant assets in the year ix

Value

Present Value of Free Cash Flows Value of nonbusiness-relevant assets

+

Annual net income Expenses for Interests Earnings before Interest after taxes

+/- Depreciations/ Appreciations Market Value of

Disco unting

Disco unting

Share holde r

Credit Capital

+/- Raise/Decline of long-term provisions Gross Cash Flow +/- Changes of the net working capital - investments Fre e Cash Flow

Figure 2-11: Evaluation of the Shareholder value in the Entity Approach Source: Adapted from Müller, Strategisches Management (2000), p. 44; Schmeisser/Dittmann, Shareholder ValueAnsatz (2004), p. 6; Kern, Investitionsmanagement (2002), p. 300.

The Credit Capital costs rate rCC can be calculated as the average of the interests due to the creditors. In the shareholder-value-concept the costs of equity rE are regularly calculated on the basis of the Capital Asset Pricing Model (CAPM) as follows:1

1

Comp. Copeland/Koller/Murrin, Unternehmenswert (1998), p. 160–162, 195–199. About the possibilities of determining the FCF comp. Günther/Landrock/Muche, Performancemaße (2000), p. 71 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 4–8.

2

So called WACC approach of entity methods, comp. Drukarczyk, Unternehmensbewertung (2001), p. 273–280; Copeland/Koller/Murrin, Unternehmenswert (1998), p. 20, 161f. and Kern, Investitionsmanagement (2002), p. 303. In accordance with Rappaport this is the appropriate rate to discount CF flows. Comp. Rappaport, Shareholder Value (1999), p. 44.

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81

rE  i  (r  i) M

In accordance with this approach they consist of the risk free interest i and an additional risk rate, which results from the company specific risk value β, multiplied by the capital market risk premium (the difference of expected capital market return rM and risk free interest i). Whereas for the risk-free interest i the rate of return of long-term government loans is applied, in the case of the capital market return rM generally a long-term historic average of a well-diversified market portfolio is used as approximate value. The risk value β as company specific value indicates how sensitively a company share of the business examined reacts to capital market fluctuations.2 At the end, value is only created for the capital owners, if the income realized from the investments is higher than the capital costs.3 Value Oriented Performance Measures Company value based success factors are more and more common in Germany.4 A further development of traditional indicators is the Cash Flow Return on Investment (CFROI). This development of the Boston Consulting Group is calculated as internal interest rate of the expected Cash Flow profile. Respectively, an interest rate is identified for which the present value of the Gross Cash Flow (CF before interests, rent expenses) and of the assets which cannot be depreciated is equal to the present value of the performed investments (gross investments – as historic inflation-adjusted acquisition costs – investment capital and Working Capital).5 The CFROI can be determined as follows: CFROI 

Gross Cash Flow - Economic Depreciation Gross Investment

1

Comp. v. Werder, Shareholder Value-Ansatz (1998), p. 72; Rappaport, Shareholder Value (1999), p. 46–48; Loitz, Shareholder Value Ansatz (2000), p. 704 and Copeland/Koller/Murrin, Unternehmenswert (1998), p. 378–380.

2

Comp. Bühner, Shareholder Value (1997), p. 167f.; v. Werder, Shareholder Value-Ansatz (1998), p. 72; Rappaport, Shareholder Value (1999), p. 44–48 and Loitz, Shareholder Value Ansatz (2000), p. 704f.

3

Comp. Copeland/Koller/Murrin, Unternehmenswert (1998), p. 17. Amongst other things the Shareholder Value is criticized for the impreciseness of the FCF prognosis as well as for its unilateral focus on the Shareholder – which means neglecting other stakeholder. Comp. v. Werder, Shareholder Value-Ansatz (1998), p. 70f. and Müller, Strategisches Management (2000), p. 45f.

4

Comp. Günther/Landrock/Muche, Performancemaße (2000), p. 69.

5

Comp. Stelter, Wertorientierte Unternehmensführung (1997), p. 144–148 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 22f. The gross CF which are constant over the expected useful life are reduced by the economic depreciations, i.e. by the amount charged with the capital costs, which has to be kept in order to dispose of the original investment maount at the end of the useful life. Comp. Günther/Landrock/Muche, Performancemaße (2000), p. 72.

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Value is created if the CFROI as internal interest rate is higher than the capital costs. Finally, the CFROI expresses the average return on the total capital invested in a business at a certain moment. There is no projection of the CF for the future, the Gross CFs are constant.1 Also published by the BCG the Cash Value Added (CVA) is based on the CFROI. It represents the absolute value that remains after payment of the real market deducted capital costs on the Gross Investment Basis in the company. Thus, the CVA shows the created value of a period which exceeds the costs of equity and credit capital.2

CVA  (CFROI  Re al Capital Costs) Gross Investment Basis The Economic Value Added (EVA) was developed by Stern Stewart & Company and represents just as the CVA performance indicator based on a residual value, considering the difference between a cash flow value and its capital costs. At first, the Cash Flow Returns of an investment for a certain year t are identified (Stewarts Rt):3 The respective value of numerators and denominators is deducted from accounting values, making corrections of the balance and profit and loss statement positions (conversions).4 EVA calculates the value exceeding the capital costs to be paid for the investment. EVA t  NOPATt  WACC t * Investment t

An Economical Value Added (EVA) is only created in a period if the earned NOPAT5 exceeds the capital costs of the employed capital.6 The Market Value Added (MVA) was also published by Stern Stewart & Company. As cumulated success parameter it indicates the created or destroyed market value, for both the equity

1

Comp. Günther/Landrock/Muche, Performancemaße (2000), p. 72 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 22–24. Generally the extremely simplifying assumptions for the determination of the CFROI are criticized. Comp. Copeland/Koller/Murrin, Unternehmenswert (1998), p. 12–14.

2

Comp. Günther/Landrock/Muche, Performancemaße (2000), p. 72f. and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 24.

3

Comp. Günther/Landrock/Muche, Performancemaße (2000), p. 72.

4

Via Operating-, Funding-, Sharholder- and Tax-Conversion financing and non-operative influences are eliminated and operative parts which are not contained are additionally determined. Comp. Fischer, Economic Value Added (2001), p. 169f. The application of the usual key figures of external accountancy and the closeness to traditional concepts linked with it are positively as well as negatively evaluated in literature. Comp. Mensch, EVA (1999), p. 444–447.

5

Net Operating Profit After Taxes (NOPAT).

6

Comp. Mensch, EVA (1999), p. 442f.; Günther/Landrock/Muche, Performancemaße (2000), p. 72 and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 24–26.

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and credit capital, for the whole life of the company. It results from the difference between the total company value and the invested capital to reach that market value.1 MVA t  Total Company Valuet  Investment t

Finally the choice of the indicator basis – profit or cash flow based – has to be taken on a company individual basis. It is also important to consider the difficulties in the Cash Flow prognosis, the identification of the discounting factor and the determination of the future capital structure in this choice.2 Consideration of life cycle phases Financial aims can be different in dependence of the different phases of the life cycle of a business unit. Therefore the following reflections integrate the life cycle phases: growth, mature, cash-cow. Figure 2-12 gives an overview over the measurement of financially relevant strategic topics in the named life cycle phases.3

Mature Cash Cow

Business Segment Strategy

Growth

S trategic Topics Income growth and

cost reduction

Use of

-mix

productivity improveme nt

asse ts

Sales Growth per Segment Revenue/Employee Percent of revenues from new products, services and clients

Investment (in % of sales) F&E (in % sales)

Share of target customers Cross-Selling Revenue in % from new applications Profitability of clients and pruduct line

Costs of the company in comparison to the competitors Cost reduction approaches Indirect costs (Sales in %)

Indicators for the Working Capital (Cash-to-cash-cycle) ROCE per main assets category Rate of equipment usage

Profitability of clients and pruduct line unprofitable customers in %

Unit cost (pe output unit, per transaction)

Amortisation Performance

Figure 2-12: Measurement and assessment of strategic financial topics Source: Kaplan/Norton, BSC-Umsetzung (1997), p. 50.

1

Comp. Mensch, EVA (1999), p. 441f. and Schmeisser/Dittmann, Shareholder Value-Ansatz (2004), p. 26f. The key figures used are adapted accountancy figures as in the case of the EVA, i.e. they are approximated to cash flow conform variables.

2

Comp. Kern, Investitionsmanagement (2002), p. 293–295 and Jockel, EVA (2003), p. 352.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 47, 49f. About the product life cycle comp. Kotler/Bliemel, Marketing-Management (1999), p. 563–603 and Bea/Haas, Strategisches Management (2001), p. 122–127.

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In the growth phase a business unit has to carry high development and capital commitment costs. Problems of the tendency of rising capital commitment and development problems with regard to the abilities of employees, enlargement of the process organization, external relations to customers, suppliers, banks etc. are part of this phase. As a balanced and long term company development often renounces short term gains, a negative Cash Flow and low capital returns are characteristical.1 Approaches of liquidity securing as the Cash-to-Cash Cycle (e.g. as comparison of the sum of expenses of development projects and the sum of incomes from the development projects) or the scope of financial solvency are especially important. Parameters are amongst other things the company growth, share of new products/new customer in the total revenue, CashFlow-Indicators.2 High market shares, diminishing growth and generally high contribution margins are typical for the situation of a business unit in the maturity phase. The financial aim is targeted towards profitability, i.e. toward the generation of an excellent return from the capital available. Targets refer to result oriented data as the contribution margin or liquidity related values as the Cash Flow in relation to the use of productive hours, Working Capital3 or Fixed Capital. Contribution margins per productive time unit (e.g. hour), value creation4 per time unit, ROI, ROCE, CF per thousand €, fixed assets and EVA are examples for parameters in the maturity phase. Also benchmarks from the cost context and cost reduction targets can lead to corresponding aims in this phase.5 Business units in the Cash-Cow-Phase use the created potentials; important investments are not carried out any more. The achievement of high liquidity inflows, above average product and customer profitability as well as capital amortization are targets of this phase. The maximization of the Cash-Flow-backflow (Cash Flow in relation to the employed capital) is seen as main aim. Financial total targets are the Operating Cash Flow (before depreciations) and reduction of the necessary net Working Capital. An indicator for the efficiency of the working-capital-management is the Cash-to-Cash Cycle, which considers time of storage and turnover of credits. It shows the necessary time, to transform payments to suppliers into revenues from clients. A differentiation into operative business activities, investments and financing in the sense of a cash-flow-statement is useful from time to time.6

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 47 and Friedag/Schmidt, Balanced Scorecard (2002), p. 189f.

2

Comp. Friedag/Schmidt, My Balanced Scorecard (2000), p. 253–255 and Friedag/Schmidt, Balanced Scorecard (2002), p. 189f.

3

Net current assets, as well as receivables, inventories and liabilities.

4

Sales revenues minus used material and external labor.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 47f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 190f.

6

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 48, 56–58; Friedag/Schmidt, Balanced Scorecard (2002), p. 191 and Ehrmann, Balanced Scorecard (2002), p. 112.

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Finally the special financial situation and the aims of the business unit are decisive for the choice of the indicators. Because of the life cycle stages replacing each other in the course of time the choice of targets and indicators should be continuously – at least annually – examined and reconsidered – and, if necessary, be adapted to the changed conditions of a new or changed life cycle stage.1

5.4.2

Customer Perspective

The indicators of the customer perspective (Fig. 2-13) shall represent the view of the customers on the company. In market segmentation the different market and customer segments with their expectation with regard to price, quality, functionality, image and service have to be identified, in order to define target customers and market segments of the company.2 Core Indicators

Market Share Customer acquisition

Custome profitability

Customer loyalty

Customer satisfaction

Value proposition: Characteristics of products and services Functionality

Quality

Price

Image

Customer Relations

T ime

Figure 2-13: Core Indicators and Leading Indicators of the Customer Perspective Source: Adapted from Kaplan/Norton, BSC-Umsetzung (1997), p. 66, 72.

Core Indicators The core indicators are rater lagging indicators; they characterize the market position of the company.3 The indicators, which already exist in many companies, namely market share,

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 49.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 62–65 and Friedag/Schmidt, Balanced Scorecard (2002), p. 113. About market segmentation and target market determination comp. Kotler/Bliemel, MarketingManagement (1999), p. 425–470.

3

Lagging indicators can also become leading indicators. As example serves the market share/growth of market share comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 116f.

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customer loyalty, acquisition of new customers, customer satisfaction and customer profitability, are valid for all companies in its basic form.1 The market share characterizes the size of a business (number of customers, sales or sold units) in a specified market (sector, served market or several important competitors). Estimations about the market size are available from sector associations, commercial organizations, government statistics and other public sources. If a company targets specific target segments it can also determine the customer share (share of the “customer’s moneybag”), i.e. the share in the businesses of a customer. Especially for medium sized companies, for which it is difficult and rather complicated to calculate the market share, the customer share, which can be generated by economic customer interviews, is an important parameter.2 In order to maintain or raise the market share in the target segment existing customers should become loyal customers at first, because it is expensive to gain new customers. The customer loyalty describes the extent to which a business unit maintains or establishes durable relations to its customers. It is rather easy and economic to identify the parameter, e.g. via the share of sales to known customers, the growth of the granted discounts for loyal customers or the share in the purchase volume of loyal customers. The share of existing customers should have a high priority as indicator of the BSC because of its qualitative information for example about image and reputation, quality of products and customer services.3 The acquisition of new customer contains the rate of new or interested customers of a business unit, expressed in absolute or relative numbers. Desired overproportional sales augmentations can be reached by the acquisition of new customers. The related advertising expenses are overproportional on the one hand, but offer considerable potentials on the other. Possible indicators with regard to the customer acquisition are the share of new customers or total sales to new customers, augmentation of new customer contracts, share of sales to new customers in the total sales or revenue from new customers per monetary unit invested in marketing.4 The customer satisfaction examines the degree of satisfaction of the customers of a company on the basis of specific performance criteria within required values. It measures the success of a company. Customer loyalty and customer acquisition depend on the customer desires. Only if a purchase is perceived as highly satisfactory the purchase would be repeated. Satisfaction results from the perception of the customer through a comparison of the perceived increase in value resulting from the purchase and the expected increase in value before the purchase. Unhappy customers churn and report statistically five to ten times about their ex1

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 113, 116.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 67; Kotler/Bliemel, Marketing-Management (1999), p. 1187 f. and Friedag/Schmidt, My Balanced Scorecard (2000), p. 226–228.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 68; Ehrmann, Balanced Scorecard (2002), p. 117 and Friedag/Schmidt, Balanced Scorecard (2002), p. 119.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 68; Friedag/Schmidt, My Balanced Scorecard (2000), p. 223f.; Ehrmann, Balanced Scorecard (2002), p. 117f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 120.

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periences. Satisfied customers, on the other hand, report only one to three times about them. Factors as reputation or image of the product/ the brand determine the customer satisfaction as well. They can be measured via voluntary assessments by the customers or regular surveys by the company via questionnaires per mail, telephone interviews or personal interviews. Examples of indicators in this context are the survey results concerning the general customer satisfaction, the share of recommendations as well as the amount of positive feedback.1 Not every customer can be satisfied in a way that would be profitable for the company. Thus, a company should decide which customers it wants to serve and which combination of benefit and price it wants to offer and to which customers it cannot offer it. On the long-run, it is crucial to part with unprofitable customers and products. Recommendable instruments are ABC-analyses, break-even-analyses or portfolio analyses. The customer profitability measures the net profit of a customer or a segment considering the one-time expenses spent for the customer. A profitable customer is a customer who for the duration of the relation contributes a Cash Flow that exceeds the costs of the company for acquisition and service by an acceptable minimum. Customer profitability should be measured in a differentiated way in accordance with customers, customer groups or products, e.g. via the collection and processing of order details per customer/customer group (number of orders in relation to the total number of orders, overproportional growth for certain customer groups).2 Value propositions to customer As important – if not even more important for the monitoring of the company – are the leading indicators for the customer success indicators. They answer the question what a company has to offer to its customers of the target market segments to maximize the degree of satisfaction, loyalty, acquisition and market share. The leading indicators are the value propositions to the customers. Despite their company individual characteristic they can be divided into product and service characteristics, customer relations and image and reputation.3 The product and service characteristics cover functionality, quality and price of a product/a service. Customers take it for granted that their ideas regarding product qualities, i.e. functionality and quality of the purchased item are met. The offered product or service qualities are determined by the company strategy (quality or low-cost-offerer on the market). Indicators with regard to quality are amongst other things the rate of product failures, the rate of returns, claims, use of the customer service and service guarantees. Comparisons of the net price with the one of competitors or the percentage of successful offers in tender proceeding show the business unit’s competitive force with regard to prices. A quick and reliable

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 68f.; Kotler/Bliemel, Marketing-Management (1999), p. 52–60; Müller, Strategisches Management (2000), p. 82–85 and Friedag/Schmidt, Balanced Scorecard (2002), p. 117–119.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 69–71; Kotler/Bliemel, Marketing-Management (1999), p. 81–83; Ehrmann, Balanced Scorecard (2002), p. 118; Friedag/Schmidt, My Balanced Scorecard (2000), p. 224–226 and Friedag/Schmidt, Balanced Scorecard (2002), p. 120f.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 71.

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reaction to customer desires and a shortened and reliable cycle time, belong to the service qualities that are gaining more and more importance. On Time Delivery (OTD)1 in comparison with the desired delivery dates of the specific customer – is seen as the most important leading indicator for customer satisfaction and -loyalty. Indicators with regard to service quality are the share of On Time Deliveries, Availability of Service Units, but also the range of offered services as well as the comprehensibility of the instruction books.2 The aspect of customer relations comprehends the delivery of products or services to the customers including reaction and delivery times as well as the customer satisfaction with the purchase. The quality of the purchase experience as well as personal relations are decisive in this context. The construction and development of relations to the customer has a huge influence on the company success. Therefore, customer expectations have to be identified and, if necessary, directed by marketing measures in order to find adequate answers to them. Friendliness and competence of the employees, contact intensity, availability, and waiting time for orders are possible parameters.3 Image and reputation of a company are immaterial factors rendering a company attractive for the customers and leading to customer loyalty beyond the material aspects of product and services. According to marketing experts 80 percent of the purchase decisions are gut decisions. In this case, image and reputation of a product/a brand/a company are decisive. By conveying a certain image via sales activities and effective media and public affairs work certain companies can define and address their ideal customers and influence their purchase decisions. In terms of sales revenues successes because of image and reputation are barely directly measurable, on the long run; however, they are always effective. There are various possibilities of indirect measurement, for example via growth of the advertising budget, number of reports in media (especially print media), and number of visitors of company events.4

5.4.3

Internal process perspective

In the business process perspective all processes critical for the company strategy are identified. Indicators of this perspective are concentrated on processes contributing to the realization of the aims formulated by customers and shareholders. The value chain of internal business processes in accordance with Kaplan/Norton comprehends a bundle of company specific processes for the value creation for customers and for achieving targeted financial results. It consists of three main business processes: innovation, business processes, customer service.5

1

On Time Delivery (OTD).

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 83–88; Friedag/Schmidt, My Balanced Scorecard (2000), p. 213f.; Müller, Strategisches Management (2000), p. 81–84 and Friedag/Schmidt, Balanced Scorecard (2002), p. 122f.

3

Comp. Ehrmann, Balanced Scorecard (2002), p. 119f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 124f.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 73f.; Ehrmann, Balanced Scorecard (2002), p. 120; Friedag/Schmidt, My Balanced Scorecard (2000), p. 213–218 and Friedag/Schmidt, Balanced Scorecard (2002), p. 124.

5

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 89–93.

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Innovation The innovation process important for the actual and future financial success involves the identification of existing and new desires of new customers in new markets as well as the creation of appropriate service and/or product offers. Market size, peculiarities of customer desires and price key points are identified, being an input for the proper product-/service development process. Possible parameters are the number of newly identified customer desires, the degree of implementation of the identified customer desires, the share of sales resulting from new products, share of new products in comparison to the competitors, Time to Market1, relation between operational profit and costs of development.2 Process cost rate 

process cos ts Input  process amount Output

Business processes The business processes involve the purchase as well as production and sale of existing products and services. It is focused on an efficient, continuous and punctual delivery. With regard to strategic performance processes, speed and quality of the implementation process play an important role. It has to be pondered whether speed and quality are always necessary and to be defined as strategic guideline of the company. Characteristics with regard to quality, time, performance and costs guaranteeing sales should be identified. Via target-costing3, after detecting the customer expectations concerning a product, the target costs, which the fulfillment of the desires can feature, can be identified.4 Important parameters for the description of internal business processes are the indicators on cycle time, quality and process costs. An indicator on the response time is the Manufacturing Cycle Effectiveness (MCE).5 MCE 

processung time cycle time

Generally the cycle time exceeds the processing time by far with the result that an improvement of the relation towards an MCE equal to 1 should be targeted. A deterioration of the 1

Time to Market can be understood as the time from having an idea to readiness for market.Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 144.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 94–100; Friedag/Schmidt, My Balanced Scorecard (2000), p. 228–231; Müller, Strategisches Management (2000), p. 101f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 141–144 and Ehrmann, Balanced Scorecard (2002), p. 121f.

3

About Target-Costing comp. Coenenberg, Kostenrechnung (1997), p. 545–472 and Bea/Haas, Strategisches Management (2001), p. 315–321.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 100–102 and Friedag/Schmidt, My Balanced Scorecard (2000), p. 131f.

5

In the case of MCE (Manufactoring Cycle Effectiveness) the production and processing time is the time needed for production of goods or services, the cycle time is the sum of production and processing time, time for control, transport, waiting time and storage time. Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 113.

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relation indicates problems in the business course of actions at an early point in time and helps to avoid additional costs, delays etc. associated with them. Thus, the MCE represents an effective leading indicator.1 Indicators regarding the process quality are for example the number of products going through the production process without remediation (success rate in the first cycle), material waste or number of return. Via activity based costing2 cost indicators of business processes can be generated, and cost-drivers can be identified. Through the deduction of process cost driver rates the considered processes can be described with regard to costs. Thus the relation of process costs for the processing of customer orders p.a. and the number of customer orders p.a. can be indicated.3 Customer service Also decisive for the success on the market is the customer service process, which involves maintenance and guarantee works, correction of defects, handling of claims, payment processing and services beyond. The follow-up care for customers exceeds the pure warranty. Questions regarding experiences with the product/ the service, advices and criticism of the customer are asked, claims and complaints are used for internal improvement. Thus, further customer desires, also unpronounced needs can be identified and solutions can be offered, with the result that the follow-up care can lead to follow-up orders. The share of customers that are taken care off, the spent time and costs for the market care, the reaction time for questions and claims and the number of customers who are satisfied with the followup care are indicators of this process.4

5.4.4

Learning and growth perspective

In this perspective the targets and indicators (Fig. 2-14) for the promotion of learning and developing in the organization are generated. The learning and growth perspective creates the necessary infrastructure to achieve the targets of the other perspectives and is of special importance because of its long-term effect. The employees shall be capacitated to realize the strategic aims. Often it is denied that employee capabilities like motivation, inner or social attitude or capacities for teamwork can be measured. But capabilities, i.e. rather soft factors,

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 112f. und Friedag/Schmidt, Balanced Scorecard (2002), p. 145f.

2

The Activity Based Costing/ABC attributes the general costs of indirect areas not by addition to the individual costs of the products, but in corresponsance with the processes necessary for the production, with the aim of reaching the (cost) transparence in the indirect production areas. Comp. in more detail Coenenberg, Kostenrechnung (1997), p. 220–241.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 100–102, 114–118; Müller, Strategisches Management (2000), p. 102f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 144–147 and Ehrmann, Balanced Scorecard (2002), p. 122f.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 102f.; Ehrmann, Balanced Scorecard (2002), p. 123 and Friedag/Schmidt, Balanced Scorecard (2002), p. 147–150.

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can be measured and influenced – even if only with difficulties and indirectly.1 The Berlin Balanced Scorecard Approach is the first approach to introduce employee contribution margins. Core indicators:

Results Employee loyalty

Employee productivity Employee satisfaction

Earky indicators: Employee training

Employee motivation

T echnological infrastructure

Figure 2-14: Indicators of the learning and growth perspective Source: Adapted from Kaplan/Norton, BSC-Umsetzung (1997), p. 66, 72, own translation.

Core indicators In order to fulfill the growing customer desires and needs flexible, well trained employees are necessary, being capable and willing to continuously improve and develop the products. It is important to promote and develop the know-how-basis, i.e. the employees with direct process and customer contacts in order to generate ideas about processes and performance improvements. Indicators about employee potentials (lagging indicators) are employee satisfaction, employee loyalty and employee productivity.2 The employee satisfaction is regarded to be a driving factor for employee loyalty and productivity. Satisfied employees are conditional for an improvement of productivity, capacity to react, quality and customer service with the result of a high correlation between employee satisfaction and customer satisfaction. Transfer of responsibility and recognition of achievements are decisive influence factors, but also the general work conditions and the employee potentials determine the employee satisfaction. A representative employee interview can help to measure these factors, amongst other things, via questions about participation in decisions, kind of recognition of achievements, general satisfaction with the company. The average status of employees’ illness, the willingness to special efforts and the rise of job applications

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 121 and Friedag/Schmidt, Balanced Scorecard (2002), p. 163–166.

2

Comp. Müller, Strategisches Management (2000), p. 90–94; Wickel-Kirsch, BSC als Instrument im Personalcontrolling (2001), p. 277f.; Ehrmann, Balanced Scorecard (2002), p. 125 and Friedag/Schmidt, Balanced Scorecard (2002), p. 167.

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of candidates from the employees’ surroundings also give information about the employee satisfaction in the company.1 Loyal employees as bearers of value in the organization, of knowledge about company processes and the sensitivity of customer desires as well as the considerable effort of instructing new employees provoke that companies want to bind good employees to the organization. Later considerations on human assets are made. The organizational performers secure growth and survival of the company on the market. Some companies detect a correlation between employee loyalty and customer satisfaction. Adequate parameters depending from the company specific and economic situation are employee turnover rate, the rate of resignations and the average company affiliation in years.2 The employee productivity informs about the results of the employee capacities. More satisfied employees have more potential and can use it better, which leads to higher employee productivity. The output of the employees shall be connected with the necessary number of employees. Return per employee, sales revenues per employee (despite the fact that the costs are neglected), contribution margin per employee or their growth are possible key figures. Individual-related productivity measurements, however, are frowned upon in Germany, are regarded as control by the employees and are counterproductive at the end. Therefore, department specific activities and successes are more commonly measured, i.e. concluded contracts, decrease of mistakes or claims, publication of the press office in the specialized press.3 Performance drivers Up to today the performance drivers of the core variables of the learning and growth perspective are rather generic and not as far developed as the other Scorecard perspectives. The identification of situation specific driving forces (“enablers”) of the described variables requires intensive discussion in the company, which is often neglected. Now reflections on further education and training, employee motivation and potential of information systems as performance drivers will be made.4 Further education and training of all employees – in a continuous and systematical way – is crucial with regard to today’s fast obsolescence of knowledge. Target-oriented, developed know-how of employees is necessary. There are indicators regarding the quality of further training as well as the number of necessary measures. The sum of the ideas/suggestions for improvement gained from workshops or the rate of cancellations of educational trainings as 1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 124f.; Friedag/Schmidt, My Balanced Scorecard (2000), p. 243–245; Friedag/Schmidt, Balanced Scorecard (2002), p. 168 and Ehrmann, Balanced Scorecard (2002), p. 125 f.

2

Comp. Müller, Strategisches Management (2000), p. 94; Friedag/Schmidt, My Balanced Scorecard (2000), p. 245–247 and Friedag/Schmidt, Balanced Scorecard (2002), p. 168f.

3

Comp. Friedag/Schmidt, My Balanced Scorecard (2000), p. 247f.; Friedag/Schmidt, Balanced Scorecard (2002), p. 169f; Ehrmann, Balanced Scorecard (2002), p. 126.

4

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 138f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 170.

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indicators of the training attitude of the employees/management are possible parameters. Via an employee competence-analysis it can be discussed which further educational measures are necessary on which employee levels. The “strategic coverage number” shows the relation between the number of employees who are qualified for special strategic tasks and the need of qualified employees.1 The employee motivation has an essential influence on the improvement of results with the result that a climate has to be created which motivates and stimulates employees. The company culture, which is often coined by distrust, prejudices, dishonesty and lack of communication has to make way for a culture of trust. The motivation of employees can be recognized from the readiness for action for the company (share of employees organized in internal boards), the commitment in company related institutions (share of employees committed to social projects) as well as the interest in not directly company related activities (share of participants at company outings). Furthermore, the following aspects are contributed to the employee motivation: the procedure for improvement and suggestion to actively integrate employees in the improvement of the company performance. Possible indicators are the number or augmentation of improvement suggestions per employee/team, number of suggestions put into action and measured cost-saving potential as indicators of suggestion quality or the sum of awards for suggestions for improvement. The target orientation shows to which extent the management uses the developed strategies in the company. Team capacity can be promoted through team awards for achieving team targets, but also by team company sports. Possible indicators are the number of team projects, number of regular team tasks, number/amount of team awards.2 In order to gain comprehensive information about internal processes, customers, suppliers, and financial effects of decisions, it is important to actively use potentials of information systems, i.e. the modern possibility of collecting and processing information (e.g. internet, data base management). This is a condition for the participation in future market actions. Exact information in due time with regard to the relations of the customer with the client, for example, the identification of the customer profitability via Activity Based Costing, increases the transparence with regard to the question to which sector the customer belongs. It also helps to examine the expenses for satisfying the customers and shows potentials for diminishing cost and augmenting revenues. Parameters for the potentials of information systems can be the number of hours of DP usage by the management, share of employees with direct customer contact and online-access to customer data, accessibility of available evaluations as well as the promptness of closing reports.3

1

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 127–129; Friedag/Schmidt, My Balanced Scorecard (2000), p. 240f. and Friedag/Schmidt, Balanced Scorecard (2002), p. 170f.

2

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 134–136; Friedag/Schmidt, My Balanced Scorecard (2000), p. 238–240; Friedag/Schmidt, Balanced Scorecard (2002), p. 171–174; and Ehrmann, Balanced Scorecard (2002), p. 126f.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 130; Friedag/Schmidt, Balanced Scorecard (2002), p. 174– 182.

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As conclusion, Fig. 2-15 represents an excerpt of an example of a Balanced Scorecard that is meant to show the composition of the BSC as indicator system. Extract from a BS C

S trategic aims

F ina nc ia l P e rs pe ktiv e : Which targets can be deducted fro m the financial expectatio n o f o ur s o urces

Which aims have to be s et with regard to the requirements o f o ur cus to mers to reach financial aims ? P ro c e s s P e rs pe c tiv e Which aims have to be s et co ns idering o ur pro ces s es to achieve targets o f financial and cus to mer pers pective?

Which aims have to be s et co ns idering o ur targets to be up to future challenges ?

Target values 2003

S trategic Actions

CFROI clearly ris ing

CFROI

18%

co s truct co mpetitive co s t s tructure

% o f to tal co s ts o f s ales revenues % o f dis tributio n and adminis trative co s ts to tal s ales revenues % s ales no n-EU/ no n USA

80%

defined in the fo llo wing pers pectives defined in the fo llo wing pers pectives

1bn EUR 450 m EUR

Market s tudy "Middle-Eas tern Euro pe" Tas k Fo rce „P acific"

Affo rdable but go o d: po s itio n s imple devices o n the market excellence in co pying in the high perfo rmance s ecto r rais e functio nal certainty mo re active des ign o f cus to mer as s is tance

market s hare in the mas s s ecto r evaluatio n index s uppliers market s hare in the highprice s ecto r value o f image/cus to mer number o f accidents

12%

marketing o ffens ive

75 index po ints 16%

rate o f res ales vis its /target cus to mer

75% 2 p.a.

s et up s upplier fo rum des ign s tudy Revis io n Marketingmaterial technical adjus tment RCP pro ject gro up „No excus es " Key Acco unt Management o rientatio n dis tributio n meeting

s tandardize pro ducts

co mmo n part co s ts in relatio n to the to tal co s ts fo r material pers o nal co s ts in % o f s ales s ynergy repo rt rate o f co re techno lo gies

65%

Benchmarking with Hyo to mo dular analys is

8,5%

detect s ynergy guideline initiate s ynergy cycle

pro mo te internatio nal gro wth

Cus to me r P e rs pe c tiv e

P o te nc ia l P e rs pe c tiv e

Parameters

us e s ynergies adapt manufacto ring penetratio n to co mpetences rais e internal cus to mer o rientatio n rais e gro wth po tentials us e new media rais e emplo yee mo tivatio n

7%

88 index po ints -45%

no target value 80%

index o f inters ectio n interviews

75 index po ints

as s es s ment values (R&D, Dis tributio n, P ro ductio n, Management) o rdering pro cedure via internet

80 index po ints

withdrawal o f key emplo yees values o f emplo yee interviews

+125% 3% 85 % index po ints

definitio n o f co re co mpetences adaptatio n pro ductio n layo ut initiate s ynergy cycle (as abo ve) intro ductio n pro ces s management recruiting o ffens ive partners hip with Stuttgart Univers ity Redes ign o f Webs ite o ffens ive advertis ement o f Web pres ence intro ductio n emplo yee interview revis e feedback s ys tems

Figure 2-15: Excerpt of the example of a Scorecard Source: Horvàth & Partners (ed.). (Balanced Scorecard)

5.5

Application Problems

When the Balanced Scorecard is applied as indicator system, in practice, there are often reservations and difficulties with regard to the identification of value drivers (soft factors) and the quantification of their effects on the parameters.1 As already shown in 3.2. of this chapter, the identification of cause-effect relations is considered to be a big challenge. The description of influences and their interactions are connected with difficulties, resulting from the high complexity of interdependencies, individual effects going into different directions, reciprocal and indirect relations as well as limits to the capability of quantification. When

1

Comp. Friedag/Schmidt, Balanced Scorecard (2002), p. 212–214 and Ittner/Larcker, Nonfinancial PM (2003), p. 88–95.

About the calculability of the Berlin Balanced Scorecard Approach…

95

establishing causal relations, it is therefore necessary to simplify and abstract to be able to preserve the advantage of the concept – its simplicity.1 According to Müller, in practice, the financial indicators are dominating after all. Therefore, attention has to been drawn on the identification of the performance drivers guaranteeing the success of the strategy.2 Kaplan/Norton criticize the low number of enablers especially in the learning and growth perspective as well as the lack of effort on the company side with regard to their generation. They consider this as indicator for a lack of connection between strategic goals and activities for employee training, provision of information, orientation of individuals/teams/business units towards the company strategy and long-term targets. The danger of neglecting this important perspective should at least be verbally faced, if indicators have not been developed and are not available, in order to create awareness of the problem.3 Kaplan/Norton’s often non-committal openness characterized by numerous undifferentiated normative organizational recommendations is also responsible for this situation in accordance with Weber/Schäffer. They provide, as already mentioned, only few suggestions on the interactions between the perspectives and their target values and indicators.4 Finally, the fact that there is a lack of connection between the BSC perspectives because of their qualitative and quantitative key figures is what is most commonly criticized in literature. However, if the techniques and instruments of the internal and external accounting are used and connected, the connection proves to be possible. In the following chapter this will be demonstrated by the Berlin Balanced Scorecard Approach.5

6

About the calculability of the Berlin Balanced Scorecard Approach…

According to Schmeisser the Balanced Scorecard can be made calculable with help of the known models and instruments of the internal and external accountancy. In his approach he demonstrates this with a given strategy by means of methods and instruments for all four

1

Comp. Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 81–83; Wall, UrsacheWirkungsbeziehungen (2001), p. 69–74. Klingebiel suggests a simultaneous model for the identification and quantification of value drivers and provides an example. Comp. Klingebiel, Werttreiber (2000), p. 565–568.

2

Comp. Müller, Strategisches Management (2000), p. 95, 97, 130. See also the results of the study by Weber/Sandt, Erfolg durch Kennzahlen (2001), p. 12–16.

3

Comp. Kaplan/Norton, BSC-Umsetzung (1997), p. 138–140.

4

Comp. Weber/Schäffer, BSC und Controlling (2000), p. 172. See also Müller, Strategisches Management (2000), p. 130 and Eberenz et al., Meinungsspiegel Balanced Scorecard (2000), p. 82.

5

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 30f., 48–51;.originally the BBSC approach was called Schmeisser Approach.

96

Chapter II

BSC perspectives and connects them between each other (Fig. 2-16). Thereby the calculation and implementation of the strategy can finally be monitored and controlled.1 The Balanced Scorecard ROI Finances

break even

ROI

sales

break even analysis

decrease of of capital BSC and costs

Custom ers

LP-Modell Chose products with with max contribution margin

activity based costing

assumption Outsourcing of a value creatinginstitution

Internal processes

value added analysis

processorganisation productivity of employees Potentials



productivity per employee management by objectives Assumption: given customers, work to capacities

Figure 2-16: Schmeisser’s approach on the calculability of the BSC Source: Schmeisser, BSC-Quantifizierung (2002), p. 30.

6.1

Illustration of and connection between customer perspective and financial perspective

6.1.1

Contribution margin accounting as earning analysis in the customer perspective

As short term analysis in the customer perspective the contribution margin calculation permits the planning and analysis of successes of the individual success factors for the customers (e.g. products/services, product groups, divisions, business sectors or regional sectors) and, thus, also the control of the strategy performance.2

1

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 30.

2

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 30.

About the calculability of the Berlin Balanced Scorecard Approach…

97

In the contribution margin accounting there is a separate registration of activity variable and –fix costs, while a breakdown of fix costs is neglected. The contribution margin is the difference between the revenues and the variable costs of the products. It indicates to which extent the individual products/product groups etc. have contributed or will contribute to covering the fix costs, which – as costs of availability – have to be covered by all products. The fix costs are then subducted from the contribution margins, and not broken down to the individual products as in the full cost accounting.1 In Direct Costing fix costs are summarily deducted. However, there is still a differentiation with regard to their nature or to the degree in which they can be assigned to business activities.2 Figure 2-17 demonstrates the composition of Direct Costing based on the performance measurement in accordance with the cost of sales accounting.3 The step-wise contribution margin analysis breaks fix costs down in e.g. product related fix costs, product related group fix costs, sector related fix costs and company related fix costs with the result that a step by step hierarchized collection and assignment of fix costs takes place. More evidence in comparison with Direct Costing is possible if the fix costs are considered in dependence of the possibility of break-even.4 Products Gross proceeds Reduction of earnings (Discounts) Net proceeds variable distibution costs variable costs of the sold products DB I in % of net proceeds - Fix costs of the period - production - administration - sales = =

= company earnings (profit)

A 240.500 7.000 233.500 7.700 138.000 87.800 37,6%

63.200 1.000 62.200 1.800 42.700 17.700 28,5%

B 74.900 2.000 72.900 2.200 48.100 22.600 31,0%

C 102.400 4.000 98.400 3.700 47.200 47.500 48,3%

39.150 9.500 29.550 9.600

Figure 2-17: Product related single step contribution margin accouting Source: In adaption from Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 65, 68 and Braunschweig, Kostenrechnung (1999), p. 98.

1

Comp. Schmeisser, Kostenrechnung (1997), p. 66; Coenenberg, Kostenrechnung (1997), p. 247 and Braunschweig, Kostenrechnung (1999), p. 129.

2

Coenenberg, Kostenrechnung (1997), p. 247.

3

In the case of the cost of sales accounting the operating profit results from the difference between revenues of the accounting period and the costs caused by the sales. Changes of inventories are not explicitely considered. Comp. Braunschweig, Kostenrechnung (1999), p. 127.

4

Comp. Coenenberg, Kostenrechnung (1997), p. 247–252; Schmeisser, Kostenrechnung (1997), p. 71 and Braunschweig, Kostenrechnung (1999), p. 99–102.

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The detection of contribution margins provides important initial information for the organizational analysis. Decisive variables are the contribution margin per piece/per type of item, contribution margin in percent of net proceeds. As long as a product achieves a positive contribution margin, it remains part of the production program because taking the product out would decrease the possible profit. At the end, the contribution margin should be maximized in order to achieve – beyond covering the fix costs – the highest company earnings possible. If one considers the composition of the production and distribution program, existing synergies on the distribution markets as well as the possibility to cover fix costs, a product with a negative contribution margin could also remain in the production program.1 With regard to the connection between customer perspective and financial perspective the advantage of the contribution margin accounting is the illustration of quantitative relations between sales, costs and profit, making an analysis of earnings and profit possible.2 After shortly considering the calculability of the financial perspective this will be discussed in more details.

6.1.2

Return of Investment as parameter of the financial perspective

For the assessment of the income situation of a company/company sector – profitability indicators are often used in practice. They inform about the success or failure of an entrepreneurial activity including the strategies. Profitability characterizes the relation of an obtained result (in this case e.g. the profit as interest yield of the invested capital) and the necessary use of resources.3 The employed capital or assets (return on capital, return on total assets, ROI, ROCE) as well as the sales leading to the result (return on sales, gross profit margin) are used as influencing parameters.4 As a static profitability parameter the ROI is generally defined as:

Return on Investment (ROI) 

Pr ofit Total Capital Employed

The result of expanding the numerator and denominator by the sales revenue is the product of Return on Sales and Capital Turnover:

1

Comp. Schmeisser, Kostenrechnung (1997), p. 67 and Braunschweig, Kostenrechnung (1999), p. 101.

2

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 31.

3

Comp. Baetge, Bilanzanalyse (1998), p. 423 and Schmeisser, BSC-Quantifizierung (2002), p. 31.

4

Comp. Coenenberg, Jahresabschluß (1997), p. 700f.

About the calculability of the Berlin Balanced Scorecard Approach…

Return on Sales ROI

=

99

Profit Sales Revenue

x Capital turnover

=

Sales Total Capital

Thus the ROI represents the relation between entrepreneurial success (profit), sales and employed capital.1 Breaking the ROI down into its components Return on Sales and Capital Turnover permits a detailed cause analysis in the case of a change of return or a deviation from the defined target profitability. The change or deviation can be traced back to the level of the individual income, cost or asset position.2 A lower Return on Sales could result from the raise of costs or a reduction of sales revenues, which could have resulted from lost market shares because of a failure in the implementation of the strategy, for example.3 Also the performance drivers, which had been identified and integrated by means of the BSC, should be considered in the analysis of deviations. Moreover, a prediction of effects of changes of single income, cost and asset positions on the profitability is possible. On this basis interim and company goals up to the level of operative sub-goals can be deducted and the interconnections of the whole target structure can be illustrated in the sense of a Balanced Scorecard.4

6.1.3

From the customer to financial perspective via contribution margin analysis

Taking a closer look at the ROI component “Return on Sales” one obtains the profit from the represented contribution margin accounting of the customer perspective. As instrument of success analysis and profit planning the contribution marging accounting permits the connection of contribution margins and Return on Investment, i.e. of the customer and financial perspective5, as shall now be demonstrated. The contribution margin accounting gives an overview over the quantitative connections between sales, costs, profits or losses for alternative degrees of activity. The break-evenpoint (BEP), which can be graphically and mathematically determined, is the quantity of sales for which the income just covers the total costs, i.e. for which the contribution margin just covers the fixed costs and for which neither profit nor loss is obtained. Therefore, the

1

Comp. Baetge, Bilanzanalyse (1998), p. 521f. and Küting/Weber, Bilanzanalyse (2000), p. 295–297. About the ROI comp. also Fig. 6 as well as the deliberations of chapter 4.3.1, p. 56–58.

2

Comp. Coenenberg, Jahresabschluß (1997), p. 709.

3

Comp. Baetge, Bilanzanalyse (1998), p. 526f.

4

Comp. Coenenberg, Jahresabschluß (1997), p. 709 and Schmeisser, BSC-Quantifizierung (2002), p. 31, 48.

5

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 31.

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Chapter II

BEP characterizes the critical revenue-quantity-combination, from which on the company earns profits. This critical value can be calculated by equalizing the arising costs of sales and the obtained revenue. The break-even-quantity of sales x is defined by the fixed costs of a period Cf and the variable costs per unit cv as follows:1 x

Cf p  cv

Hereby, the term p – cv represents the contribution margin (cm). The break-even-revenue of sales is the result from the product of the critical amount x and the revenue per unit p.2 Fig. 2-18 illustrates the possibility of a graphical determination of the BEP in the case of a oneproduct-company.3

Sales revenue line (S) p x

S, C CM

profit

total costs line (T) Cf + cv x

loss

profit

contribution margin line x (p - cv )

loss

Kf BEP

x

Figure 2-18: Graphical determination of the break-even-point Source: Adapted from Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 89.

The BEP-analysis serves the monitoring and controlling of the company and its products. Thus, the influence of a change of the fix costs, the amount of variable piece costs, the quan1

Comp. Coenenberg, Kostenrechnung (1997), p. 274–277.

2

Comp. Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 88.

3

Assumptions of the presented basic model: knowledge of the cost function and division of costs in fix and variable parts, linear course of costs and sales revenues, operating level as sole influence factor, variable costs exclusively dependent on the operating level, known and constant prices, production of one single product, no inventories. Comp. Reichmann, Controlling (1997), p. 139f. and Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 88.

About the calculability of the Berlin Balanced Scorecard Approach…

101

tity of sales, the price on the profit and, thus, on the ROI can be analyzed.1 The percentage can be detected by which the actually obtained sales may decrease without falling below the BEP. The detection of the minimum amount of sales to cover the costs completely, the consideration only of cash-flow relevant fixed costs with regard to the liquidity protection (cashpoint) as well as a differentiation of the fixed costs in types of costs to determine further critical amounts is possible.2 In the context of profit planning the quantity of sales can be determined via BEP-analysis which is necessary for the desired profit in a period P (resulting from a certain ROI target). If in the initial equation the targeted profit is equal to the difference between contribution margin and fix costs, P  x (p  c v )  Cf

after solving the equation for the quantity of sales x one receives:3 x

Cf  P Cf  P  p  cv cm

It is also possible to consider taxes on profit, which is highly relevant in practice.4 If it is not the profit alone which shall be considered but a Return on Sales RS, targeted in the ROI the critical amount produced can be determined for achieving this target. The Return on sales RU as quotient of profit and sales can be expressed by: RS 

cm x  Cf p x

As result the critical amount produced is determined by:5 x

Cf cm  R S p

The descriptions of the connection between customer and financial perspective are based on the basic model of the break-even-point analysis. Its application, however, can also be transferred to companies with several products. In this case the specific break-even-points, for 1

Comp. Coenenberg, Kostenrechnung (1997), p. 274 and Braunschweig, Kostenrechnung (1999), p. 105–108.

2

Comp. Coenenberg, Kostenrechnung (1997), p. 278f.; Schmeisser, Kostenrechnung (1997), p. 68 and Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 92.

3

Comp. Coenenberg, Kostenrechnung (1997), p. 279; Schmeisser, Kostenrechnung (1997), p. 67f. and Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 92.

4

Comp. Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 94f.

5

Comp. Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 94, 96.

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Chapter II

example for main product groups or sales segments, take average contribution margins per item into consideration.1

6.2

Calculability of the internal process perspective and connection to the potential and financing perspective

6.2.1

Quantification of the internal process perspective via analysis of value creation

The BSC-perspective of internal business processes or process organization (operational structuring) can be described by means of process management and activity based costing on an internal basis with the help of controlling or the value-creation-analysis. Schmeisser’s initial approach is based on the value-creation-analysis as external accounting instrument.2 The creation of value as sum of revenues of all groups participating in the company shows the contribution of the company to the national net domestic product, i.e. the increase of value created by the company’s activities (internal activities of the company). The value created by a company can be found out via the calculations on the production or on the distribution side (Fig. 2-19). Methods of calculation of creation of value calculation on generation side (subtracting method)

calculation on distribution side (adding method)

value of production - advance payments

return on equity (annual net profit) + return on employement (salaries, pensions) + return on credit capital (interests) + common returns (taxes)

= created value

= created value

Figure 2-19: Detection of created value in a single economy Source: Baetge, Bilanzanalyse (1998), p. 496, own translation.

1

Comp. for more details Reichmann, Controlling (1997), p. 140f.; Hieke, Teilkosten- und Deckungsbeitragsrechnung (1998), p. 93 and Küting/Weber, Bilanzanalyse (2000), p. 328–331.

2

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 48.

About the calculability of the Berlin Balanced Scorecard Approach…

103

In the subtraction method the value created is calculated as difference between value of production (defined as total performance plus the parts of other business proceeds relevant for the created value) and advanced payments. The adding method calculates the created value as sum of incomes of all parties involved in the value creation (employees, sources, State, companies).1 There are numerous terminologically and factually deviating definitions with regard to the calculation of the added value. They have to be modified taking the single case and the targeted information into consideration. In the context of internal company analysis the calculation is based on the cost and activity accounting of the company. In the case of determination by an external balance analyst only a reconstruction of the published profit and loss statement is possible. Especially a profit and loss statement based on the cost of sales method renders matters difficult.2 The targets of analysis pursued by the analysis of added value are the illustration of the income distribution, the evaluation of productivity and capability to perform of the company, the analysis of the production depth and company size/growth as well as comparison of the development of added value in the company with the macroeconomic income development.3 On the basis of the calculation on the generation side a conclusion on the production depth is possible. The ratio of value creation as quotient of added value and total performance characterizes the percentage of production value created by the company itself. The calculation on the distribution side permits a conclusion on the income distribution of the company. Thus the wage ratio of the company can be determined as quotient of work yields and added value. The absolute figure of added value is seen as indicator for company size and company growth.4

6.2.2

Productivity as parameter for economic efficiency

One aim of the calculation of the value added is to determine the productivity which shows the efficiency of the factors of production used (degree of efficiency of factors used) during one period. It is generally defined as:5 Productivity 

Output Input

Return of factors Use of factors

The productivity can be raised by reducing the use of factors maintaining the amount produced (cost strategy), or by increasing the revenues by ideal customer orientation (differen1

Comp. Baetge, Bilanzanalyse (1998), p. 495f. and Küting/Weber, Bilanzanalyse (2000), p. 307–309.

2

Comp. ausführlicher Baetge, Bilanzanalyse (1998), p. 497–507; Schmeisser/Clermont/Kriener, Wertschöpfung (1998), p. 39f. and Küting/Weber, Bilanzanalyse (2000), p. 320f.

3

Comp. Küting/Weber, Bilanzanalyse (2000), p. 322.

4

Comp. Baetge, Bilanzanalyse (1998), p. 495–497; Schmeisser/Clermont/Kriener, Wertschöpfung (1998), p. 38f. and Küting/Weber, Bilanzanalyse (2000), p. 306–324.

5

Comp. Haller, Wertschöpfungsrechnung (1997), p. 298.

104

Chapter II

tiation strategy). Depending on the point of view the productivity can be broken down in efficiency (cost side) and effectiveness (performance side). The added value is seen to be an appropriate output variable, because it eliminates prior, purchased performances and, therefore, demonstrates the individual company performance only. Thus, the added value parameters avoid that results from consecutive production levels are counted twice. Moreover, the vertical integration depth, company size and growth are considered in the productivity comparisons.1 The total productivity (including all production factors) can be divided in several partial productivities depending on the reference, the most common values being work and capital productivity. The work productivity, as indicator depicting the potential perspective of the BSC, expresses the relation of value creation and work input (number of employees, working hours, costs of labor). The presented definition of the employee productivity allows a conclusion on the average value creation per employee. The capital productivity as further partial productivity is defined as: capital productivity 

added value average capital input

There is a multiplicative relation between the shown partial productivities with the character of average productivities (comp. Fig 19)2, with the result that a rise of the labor productivity can also result in a higher use of capital.3

6.2.3

Connection of finances with internal business processes and internal potentials through value creation

Productivity, vertical integration and company size and growth are generally seen as success determinants of the company earnings/returns, which is partially examined in empirical studies. The interrelation between productivity and company returns has been statistically proved. The PIMS study for example shows a positive correlation between labor productivity and ROI. Higher labor productivity contributes to a bigger company success. The degree, however, depends on the given market and company individual framework requirements. Therefore, the productivity is seen as crucial determining factor for the company success.4

1

Comp. Haller, Wertschöpfungsrechnung (1997), p. 299f., 302 and Schmeisser, BSC-Quantifizierung (2002), p. 48.

2

Comp. Chapter 6.2.3.

3

Comp. Haller, Wertschöpfungsrechnung (1997), p. 303–305; Schmeisser/Clermont/Kriener, Wertschöpfung (1998), p. 39f. and Baetge, Bilanzanalyse (1998), p. 509.

4

Comp. Haller, Wertschöpfungsrechnung (1997), p. 297, 311–327.

About the calculability of the Berlin Balanced Scorecard Approach…

105

If one relates productivity and profitability as in Schmeisser’s approach, the company success can be broken down into the real economic component of labor and capital productivity – illustrated in the potential perspective – and in the financial component of profitability (ROI) as component of the financial perspective of the BSC. From this subdivision of the company results – of the added value – resulted the connection of the financial perspective, internal process perspective and potential perspective. The production side of the added value calculation can be expressed via the productivity, the distribution side by the profitability of the factor usage.1 Figure 2-20 represents the link between productivity and company success/profitability. By means of value creation influence factors become apparent showing the connection between productivity and ROI. The capital productivity as key factor of the connection determines the profitability through the connection between the share of profit in the value creation on the one hand, on the other it determines the employee productivity as product of the employee related capital intensity. The capital productivity in connection with the profitability determines the labor productivity; the capital productivity in connection with the labor productivity determines the profitability.2 labour productivity

VC number of employees

capital productivity

=

Capital number of employees

x

VC capital

profitability

x

profit VC

=

profit capital

=

=

sales number of employees

profit sales revenues

x

x

VC sales revenues

sales revenues

Figure 2-20: Connection between value creation and profitability indicators Source: Haller, Wertschöpfungsrechnung (1997), p. 316.

1

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 48.

2

Comp. Haller, Wertschöpfungsrechnung (1997), p. 316f.

capital

106

Chapter II

A low connection between capital and number of employees connected with high labor productivity leads to high yields, while high capital intensity connected with a low labor productivity lead to low profitability (ROI).1 The evaluated productivity/economic efficiency represents the bridge between productivity and profitability assessing input and output of the productivity variables with prices. Thus, different values of the used and produced goods/services are integrated into the calculation. Economic efficiency is defined as:2

Economic Efficiency 

Revenues Expenses

Production Costs

Thereby, causes for deviating profitabilities from the targeted ROI can be analyzed. Via activity based costing etc. processes which should be improved can be identified and necessities for economization can be recognized by means of the relation between labor and capital productivity. Finally, investment possibilities can be used to improve the customer perspective.3

6.3

Connection of the customer perspective with the potentials via an optimal production program in the case of given capacities

As presented above, the potential perspective can be calculated via the (labor) productivity as component of the value added statement, on which all innovations as well as learning and development processes of the employees have a positive effect. In the context of the connection of potential and customer perspective Schmeisser assumes a value creation center “personnel” in his approach4, a fictive personnel GmbH within the group. Under the presumption of given operating grades of products/personnel services (e.g. A, B and C), there are several allocation possibilities of the capacities with A, B, or C, with deviations of the resulting profits. Thus, the most profitable combination of the products/personnel services has to be

1

Comp. Haller, Wertschöpfungsrechnung (1997), p. 317 and Schmeisser, BSC-Quantifizierung (2002), p. 50.

2

Comp. Haller, Wertschöpfungsrechnung (1997), p. 299 and Küting/Weber, Bilanzanalyse (2000), p. 288f. und Schmeisser, BSC-Quantifizierung (2002), p. 51.

3

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 51. About activity based costing comp in more detail Schmeisser/Clermont, Prozesskostenrechnung (1998), p. 62–70 and Däumler/Grabe, Prozesskostenrechnung (2000), p. 128–133, 176–179.

4

Comp. Schmeisser/Clermont/Kriener, Wertschöpfung (1998), p. 37f.

About the calculability of the Berlin Balanced Scorecard Approach…

107

determined, i.e. the optimal production program with given capacity, which as special calculation of the cost and income statement connects the potential and customer perspective.1 In case of a given capacity a contribution margin calculation has to be carried out for determining the optimal program in accordance with the customer perspective. In the case of exclusive consideration of variable costs finally the product with the highest contribution margin has to be promoted.2 If, however, there are shortages, the linear programming helps to plan the optimal production program. A possible version of the planning program asks about the allocation of the available capacities to the products/services in order to maximize the overall contribution margin (capacity perspective). The relevant basis for decisions with regard to the optimal capacity management is the relative contribution margins, i.e. the absolute contribution margin of the different alternatives in relation to the capacity unit. The resulting economic value of the capacities reflects the return on products in relation to the capacities.3 Thus, the consideration automatically integrates the aspect of opportunity costs, the amount of the resulting lost benefits when one alternative is abandoned and replaced by another alternative.4 If in the comparison of contribution margins in relation with capacity shortages, there is an obvious profitability advantage of one product, the planning problem is solved. In case of a conflict situation (product A has a profitability advantage with capacity I and product B with capacity II), the optimal quantity combination of the products is determined with the help of linear programming. The linear programming determines graphically or mathematically the extreme values (in this case maximal contribution margin) taking limitations or side conditions in form of linear inequations into consideration. The optimal solution is calculated iteratively with the help of the simplex method. Starting from a first acceptable solution it is examined whether the optimal program is already on hand or whether the contribution margin can be raised. If the latter is the case, a new, improved solution is determined, which in turn, is checked for its optimality. The improved solution is determined in form of a table (simplex tableau), with the operations in each line resulting from the matrix calculation. Thus, step by step, the solution is improved until the optimal combination with maximal contribution margin is determined.5 With the help of this approach of optimization finally the customer and the personnel perspective can be linked. The potential perspective shall provide the infrastructure for the strategic product-market-concept for reaching the financial aims of the company, which are determined by the customer perspective. Possible capacity shortages demand for an optimal

1

Comp. Schmeisser, BSC-Quantifizierung (2002), p. 51.

2

Comp. Coenenberg, Kostenrechnung (1997), p. 307 and Schmeisser, BSC-Quantifizierung (2002), p. 51.

3

Comp. Steinmann/Schreyögg, Management (2000), p. 310–312 and Schmeisser, BSC-Quantifizierung (2002), p. 51.

4

Comp. Coenenberg, Kostenrechnung (1997), p. 307-314 and Schmeisser, BSC-Quantifizierung (2002), p. 51.

5

Comp. in detail Coenenberg, Kostenrechnung (1997), p. 314–323 and Steinmann/Schreyögg, Management (2000), p. 312–325.

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allocation of the short resources as well as for a decision with regard to the promotion and development of potential in correspondence with the production program received from the contribution accounting in the customer perspective. A shortage related optimal production program can be obtained via linear programming. Only in the further development of the Berlin Balanced Scorecard the optimal production program in the potential or employee perspective is replaced by an employee Cash Flow or an employee contribution accounting. Dynamization of the approach by implementing the Shareholder Value concept The above presented approach of Schmeisser for the calculability and connection between the BSC perspectives was based on the static traditional profitability ratio Return on Investment – which is designed for one year. For a consideration and statement over several periods or years more value oriented variables are needed, which integrate Cash Flows as future oriented time series as for example a company assessment model with the help of the Discounted Cash Flow Method. EVA (Economic Value Added) can be chosen as a value oriented ratio, because it is based on ratios regarding the profit of the period and is relatively easy to integrate into the Berlin Balanced Scorecard Approach. The use of accounting values as in the case of the ROI makes the EVA easily applicable. The proximity to traditional profit ratios suggests familiarity and creates acceptance.1 EVA can be obtained as difference of cash-flow-value and the weighted costs of the capital employed.2 The company value is only increased if the earned NOPAT exceeds the capital costs. For the determination of the Net Operating Profit after Taxes (NOPAT), corrections are carried out departing from the profit after taxes, determined in accordance with accounting standards, so that a ratio results which is assessed in accordance with business management (not balance sheet related) standards and which reflects a long term business activity – depending on the operative purpose. The corrections in the ratio comprehend the elimination of non-operative components, i.e. the complete recording of all financial assets and the additional determination of the expenses, which serve to obtain future, operative profit and to correct tax expenses on the long run. The invested assets as sum of working and fixed assets used for operative purposes, reduced by short-term interest-free liabilities, have to be corrected as well in correspondence with NOPAT. Thereby, equity equivalents are added, i.e. besides undisclosed reserves, especially created success potentials.3 Along the lines of the ROI-Tree an EVA driver tree can be presented as follows:

1

Comp. Mensch, EVA (1999), p. 444 f. and Fischer, Economic Value Added (2001), p. 170.

2

Comp. Fischer, Economic Value Added (2001), p. 169.

3

Comp. Mensch, EVA (1999), p. 443f. and Fischer, Economic Value Added (2001), p. 169f. In detail about the calculation comp. Günther, Unternehmenswertorientiertes Controlling (1997), p. 233–238.

Closing words

109

EBIT NOPAT

-

taxes EVA

contribution margin fixed costs

net sales revenues -

capital costs

x

invested assets

Working Capital + fixed assets

revenue reductions

variable costs

-

WACC

gross sales revenues

working assets s ho rt-term liabilities

liquid assets + receivables + inventories

Figure 2-21: EVA-driver tree Source: On the basis of Fischer, Economic Value Added (2001), p. 169 and Voggenreiter/Jochen, Wertmanagement und BSC (2002), p. 618.

The EVA-driver tree shows the main influence factors for the increase of value and shows possible potentials for increasing value. A supervision and analysis of causes of changes of the value is possible, just as in case of the ROI, as well as the connection with the customer perspective via break-even-point-analysis. If EVA-values for future planning periods are determined in addition to the values of the current projects, the cash-value of this time series can be determined. Unlike the ROI EVA represents a future related value. The interest in value orientation of the Shareholder Value has become more and more important over the last years. The necessary implementation of the value oriented strategy up to operative levels as well as the identification of relevant value gears has not been carried out early enough. The Berlin-BSC makes a connection of value management and Balanced Scorecard possible. It helps to identify the operative value gears and, therefore, makes a continuous value-oriented management possible.1

7

Closing words

The Balanced Scorecard unifies the management systems of the recent past in order to handle the fast changing company environment and integrates the market, resource and value oriented approach of strategic management. One could call it an umbrella for the described unilaterally focused “fads”. The fast spread around the world is no surprise, because it is the successful trial to combine a multitude of 1

Comp. Voggenreiter, Jochen, Wertmanagement und BSC (2002), p. 615–621 and Ries/Burggraf, Wertorientiertes Controlling (2003), p. 334–341.

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sometimes scattered, fundamentally well-known perceptions about strategy finding and – formulation. It also implies the implementation of strategies on an operative level as well as the creation and display of indicators in a coherent overall concept. As holistic management system, which goes further than a pure measuring instrument, the BSC’s greatest strength is to make it possible to operationalize and communicate the strategy. The application as strategic management system demands for transparency in the decision structures and strategy assertions, clarity with regard to the alignment as well as consensus oriented decisions on the management level. Strategic transparency improves the strategic reasoning and acting of the employees and the consequent orientation towards potentials for success is made possible. Furthermore, a continuous measurement of the strategic aims worked out in consensus and of the deduced indicators has to take place, in order to be able to recognize deviations at an early stage. The BSC as indicator system targets towards avoiding a unilateral past oriented focus of financial indicators and uses generic and specific indicators as well as driving factors in different perspectives. The goal is to achieve a balance with regard to external and internal, quantitative and qualitative as well as lagging and leading indicators. The Balanced Scorecard helps to implement the central perception “if you can measure it, you can manage it!” as far as possible. This way, standards are set for determining factors, which can be objectively measured and, at the same time, the expectations of the company management clear and communicate them. The orientation towards a long-term strategy, the necessity to identify targets and their indicators, as well as their connection via cause-effect-relations often represent big challenges for the companies. Because strategic aims as well as cause-effect-relations are difficult to quantify, financial indicators are still dominating. In this book, possibilities to generate cause-effect relations are worked out, whose high complexity is often problematic, and indictors of all perspectives are shown. The problems concerning the lack of hierarchization of the perspective, of connection and dynamization, which is stated in academic literate, is solved in the Berlin BSC approach. The explanations have made clear that techniques and instruments of internal and external accountancy are absolutely appropriate for displaying and connecting the BSC perspectives. In order to be able to achieve the goals with the help of the BSC, its application has to go further than the function of a pure indicator system and has to be integrated in accordance with IFRS and to be understood as strategic planning instrument for calculating, controlling and influencing the future. The challenge for the management is to design and implement it in a company individual, consequent way. However, the BSC concept is completed neither in science nor in practice. Especially the combination of the Balanced Scorecard and the Shareholder Value Approach promises a most effective strategic and value oriented direction.1

1

Comp. Schmeisser et al. (ed.): Innovationserfolgsrechnung, Berlin (2008).

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-/ Clausen, L./Hannemann, G. (ed.):Bankcontrolling mit Kennzahlen. Berlin 2009 Schmid-Grotjohann, Wolfgang [Wertorientiertes Management (2001)]: Wertorientiertes Management – Ein Vergleich von Shareholder Value und Economic Value Added, in: CM, 26th annual edition (2001), p. 380–383 Spremann, Klaus [Investition und Finanzierung (1996)]: Wirtschaft, Investition und Finanzierung, in: IMF – International Management and Finance, 5., fully rev. and ext. ed., Munich/Vienna: Oldenbourg, 1996 Staehle, Wolfgang H. [Management (1999)]: Management – eine verhaltenswissenschaftliche Perspektive, 8. ed., revised. by Peter Conrad/Jörg Sydow, Munich: Vahlen, 1999 Steinle, Claus/Thiem, Henning/Lange, Morten [Strategieumsetzung (2001)]: Die Balanced Scorecard als Instrument zur Umsetzung von Strategien, in: CM, 26th annual edition (2001), p. 29–37 Steinmann, Horst/Schreyögg, Georg [Management (2000)]: Management – Grundlagen der Unternehmensführung; Konzepte – Funktionen – Fallstudien, 5th. ed., Wiesbaden: Gabler, 2000 Stelter, Daniel [Wertorientierte Unternehmensführung (1997)]: Wertorientierte Unternehmensführung, in: Perlitz, Manfred et al. (ed.): Strategien im Umbruch – Neue Konzepte der Unternehmensführung, Stuttgart: Schäffer-Poeschel, 1997, p. 133–162 Stroebe, Rainer W. [Führungsstile (2003)]: Führungsstile – Management by Objectives und situatives Führen, 7., überarb. ed., in: Crisand, Ekkehard (ed.): Arbeitshefte Führungspsychologie, volume 3, Heidelberg: Sauer-Verl., 2003 Töpfer, Armin/Mehdorn, Hartmut [Total Quality Management (1995)]: Total Quality Management – Anforderungen und Umsetzung im Unternehmen, 4th rev. ed., Neuwied/Kriftel/Berlin: Luchterhand, 1995 Töpfer, Armin/Lindstädt, Gerhard/Förster, Kati [Nutzen BSC (2002)]: Balanced Score Card – Hoher Nutzen trotz zu langer Einführungszeit, in: Controlling, 14th annual edition (2002), p. 79–84 Voggenreiter, Dietmar/Jochen, Martin [Wertmanagement und BSC (2002)]: Der kombinierte Einsatz von Wertmanagement und Balanced Scorecard – Das systematische WerthebelManagement, in: Controlling, 14th annual edition (2002), p. 615–621 Wall, Friederike [Ursache-Wirkungsbeziehungen (2001)]: Ursache-Wirkungsbeziehungen als ein zentraler Bestandteil der Balanced Scorecard – Möglichkeiten und Grenzen ihrer Gewinnung, in: Controlling, 13th annual edition (2001), p. 65–74 Weber, Jürgen/Schäffer, Utz [Balanced Scorecard (1998)]: Balanced Scorecard, in: Advanced Controlling, 2nd Annual edition, volume 8, Vallendar, 1998

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- [BSC und Controlling (2000)]: Balanced Scorecard & Controlling – Implementierung – Nutzen für Manager und Controller – Erfahrungen in deutschen Unternehmen, 3rd rev. ed., Wiesbaden: Gabler, 2000 - [Kennzahlensysteme (2000)]: Entwicklung von Kennzahlensystemen, in: BFuP, 52nd annual edition (2000), p. 1–16 Weber, Jürgen/Radtke, Björn/Schäffer, Utz [Erfahrungen mit der BSC (2001)]: Erfahrungen mit der Balanced Scorecard, in: Advanced Controlling, 4th annual edition, volume 19, Vallendar, 2001 Weber, Jürgen/Sandt, Joachim [Erfolg durch Kennzahlen (2001)]: Erfolg durch Kennzahlen – Neue empirische Erkenntnisse, in: Advanced Controlling, 4.Annual edition, volume 21, Vallendar, 2001 Wehling, Margret [Unternehmensführung und Personalmanagement (2001)]: Unternehmensführung und Personalmanagement mit der Balanced Scorecard, in: Clermont, Alois/Schmeisser, Wilhelm/Krimphove, Dieter (ed.): Strategisches Personalmanagement in Globalen Unternehmen, Munich: Vahlen, 2001, p.147–165 Werder, Axel v. [Shareholder Value-Ansatz (1998)]: Shareholder Value-Ansatz als (einzige) Richtschnur des Vorstandshandelns?, in: ZGR, 27th annual edition (1998), p. 69-91 Wickel-Kirsch, Silke [BSC als Instrument im Personalcontrolling (2001)]: Balanced Scorecard als Instrument im Personalcontrolling, in: Clermont, Alois/Schmeisser, Wilhelm/Krimphove, Dieter (ed.): Strategisches Personalmanagement in Globalen Unternehmen, Munich: Vahlen, 2001, p. 273–289. Winter, Stefan [Managementanreizsysteme (1996)]: Prinzipien der Gestaltung von Managementanreizsystemen (zugl.: Berlin, Humboldt-Univ., Diss., 1996), Wiesbaden: Gabler, 1996 Wogersien, Anke [Effektivität – Effizienz (2001)]: „Die Dinge richtig tun – Die richtigen Dinge tun“ Begrifflicher Ansatz: Effektivität, Effizienz, Zweckmäßigkeit, Ergebnisqualität, in: CM, 26th annual edition (2001), p. 548f. Wonigeit, Jens [Total Quality Management (1996)]: Total Quality Management – Grundzüge und Effizienzanalyse (add.: Bamberg, Univ., Diss., 1993), 2nd ed., Wiesbaden: DUV, 1996 Zdrowomyslaw, Norbert/Eckern, Veiko von/Meißner, Andrè [Theorie und Praxis der BSC (2003)]: Theorie und Praxis der Balanced Scorecard – Einsatz, Vorgehensweise und Problemlösung bei der Einführung, in: BuW, 57th annual edition (2003), vol. 7, p. 265– 272 - [Akzeptanz und Verbreitung der BSC (2003)]: Akzeptanz und Verbreitung der Balanced Scorecard, in: BuW, 57th annual edition (2003), vol. 9, p. 356-359

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Zimmermann, Gebhard/Jöhnk, Thorsten [Unternehmenspraxis mit BSC (2000)]: Erfahrungen der Unternehmenspraxis mit der Balanced Scorecard – Ein empirisches Schlaglicht, in: Controlling, 12th annual edition (2000), p. 601–606

Chapter III Quantification of the potential perspective, employee perspective or of human resources in the context of the Berlin Balanced Scorecard without cost-utility analysis Today, intangible assets contribute more and more to the differentiation in the competition and to the rise of the company value. With regard to the term “intangibles” (patents, licenses, human capital) it can be stated that financial assets and physically tangible, material assets do not belong to this category. In the following chapters they are summarized under the term financial capital. The difference between the financial capital (book value) and the market value of a company is ascribed to intangible assets, which are considerably contributing to the company value and Shareholder Value. The intangible assets – also referred to as intellectual capital – can be found in the potential perspective of the Balanced Scorecard and can be divided into human, structure and relation potentials. The human potential comprises knowledge, competences, capabilities as well as experiences of the employees. The structure potential refers to the performance potential of the company organization (processes/process organization), systems and brands and patents, which can reflect a certain awareness level as well as social recognition of a company. The relation potential comprises also the potential of partnerships within a value chain.1 The customer relations have to be especially outlined in this context, as they have direct influence on the profitability of the whole company.2 The following illustration depicts the relevant components of the company potentials/the intellectual capital.

1

Comp. Stoi (w/o date), p. 1f. and Schmeisser/ Schindler, DStR 34/2005, p. 1459ff.

2

Comp. in detail: Schmeisser/Clausen, DStR 51-52/2005, 2198ff.

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Processes

Human potentials competences capabilities knowledge experience

Potentials Structure potentials

processes systems brands patents

Customers Relations potentials investors partners customers research institutes associations suppliers

Figure 3-1: Presentation of company potentials Source: adapted from Stoi (w/o date), p. 2.

Now the Berlin Human Resource Assessment model is introduced on the basis of internal and external accounting making the quantification of human potential/intellectual potential possible.1 This way it is possible to quantify the potential of employees, i.e. the human potential, and thus to improve the explanation of the profitability of the whole company and finally raise it with the help of intangibles (human capital, patents, licenses etc.).

1

Cost and capitalized value-oriented quantification

In this chapter a possibility of quantification of intellectual capital is introduced through the detailed description of costs and revenues. Starting from the revenues of a (service) business an employee contribution margin is determined, which is projected under the differentiated consideration of non-cash-relevant labor costs and labor related investments to an employee cash flow. Furthermore these data are used to calculate the employee relevant part of the Shareholder Value.

1

The Berlin Human Capital Assessment Model is part of the Berlin Balanced Scorecard Approach.

Cost and capitalized value-oriented quantification

1.1

123

Differentiation of relevant costs

In the following considerations employee related costs are presented in a differentiated way, in order to show potential for savings and optimizations as well as in order to serve as starting point for possible motivational incentives. Furthermore, these cost data are used to find out an employee contribution margin.

1.1.1

Salaries and wages

The costs for salaries and wages include, with regard to the analyzed period, continuously repeated cash-relevant costs (for example basic salaries/wages, compulsory social benefits, apprenticeship pays etc) as well as sporadically appearing allowances (e.g. extra pays as Christmas bonuses, holiday allowances etc.), payments for additional work, additional pays (piece rate, night turn, extraordinary labor conditions etc.) etc. as well as non-cash relevant costs contributions to the accrual for pensions or company pensions. The following figure provides a summarizing overview. Costs: Salary/wage

Basic salary/wage Extra pays (Weihnachtsgeld, Urlaubsgeld, etc.) Additional pays (Akkord, Nachtarbeit, außerordl. Arbeitsbedingungen, etc. ...)

Additional work pays

Asset creating

Terminal bonuses

Interim pensions

Other pays

Compulsory social benefits

Pensions/ company pensions

Contribution to the accuals

Figure 3-2: Cost factors salaries/wages

Apprenticiship pays

Other labour costs

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Indicators wage/salaries The costs in the areas salaries/wages are also referred to as “labor expenses”.1 The use of the total cost accounting (TCA) leads to the following indicator: rate of labour expenses 

labour expenses total output

This indicator shows to what extent the business output is due to the payment of wages and salaries (section 275 subs. 2 n° 6a HGB2), social benefits and expenses for old age provisions and support (section 275 subs. 2 n° 6b HGB). If the method of cost of sales accounting (CSA) is used, the labor expenses have to be related to the sales revenues instead to the total output. rate of labour expenses 

labour expenses sales revenues

In order to raise the informative force of this indicator the above mentioned indicator can be expanded by the average number of employees. Then, the expanded rate of labor expenses can be determined as follows: 3 modified rate of labour ex. (TCA)  

modified rate of labour ex. (CSA)  

1

Comp. Baetge (1998), p. 399ff.

2

German Commercial Code.

3

Comp. Baetge (1998), p. 400.

labour expenses * average n of empl. average n of empl. * total output wage level productivity of staff

labour expenses * average n of empl. average n  of empl. * sales revenues wage level productivity of staff

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125

In both methods (TCA/CSA) the wage level is calculated in the same way: wage level 

labour expenses average n of employees

The productivity is calculated as follows: productivity of staff (CSA) 

sales revenues average n of employees

In order to obtain a more detailed analysis of the costs in the wage/salary area, several more indicators can be used, which – depending on whether the TCA or CSA method is used – are based on the total output or the sales revenues of the company. If the share of the costs in relation to the total labor expenses is to be identified, a relation between the partial costs and the total labor expenses is established. To give some examples: rate of pays for additional work 

additional work in working hours ( wh ) average n of employees

rate of pays for additional work (TLE) 

additional work in wh * costs per wh total labour expenses

rate of pays for additional work (TCA) 

additional work in wh * cos ts per wh total labour expenses

rate of pays for additional work (CSA) 

additional work in wh * cos ts per wh sales of revenues

1

Despite today’s labor market conditions extra hours are the rule. Thereby, a higher volume of working time is achieved, which should normally be achieved by additional employees. Usually, it is called extra hours, if the working hours in the company are momentarily extended. The advantage of extra working hours is that a more flexible handling as in the case of addition employees is possible. At the same time capacity reductions are less difficult than redundancies due to business operation.

1

TLE = Total Labour Expenses.

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Results and disadvantages of permanent extra hours on the employees’ side can be:  discontent due to permanent additional work  decrease of motivation and/or  possible health effects. A permanent rate of extra hours points to a higher need of staff from a human resource point of view. The steady development of labor time models has lead to the fact that additional work is generally not financially compensated, but by additional free time. A look on indicators regarding basic wages/salaries permits conclusions on the payment strategy of the company. In order to identify the percentage of certain salary ranges, first the number of employees in certain wage and salary ranges or in corresponding remuneration categories (piecework wage, bonus wage, time wage) is put in relation to the total number of employees. number of employees with wage / salary range / remuneration category *100 total number of employees

With respect to the results of such an analysis it has to be examined whether with regard to the work requirements this remuneration structure is obligatory or whether there are other reasons for these remuneration regulations.

1.1.2

Absenteeism

Costs for hours absent accrue in the case of paid as well as unpaid hours absent. In the case of paid hours absent the costs accrue in the form of payments. Furthermore, there are sales revenue losses because of the performance deficit. As long as the performance can be compensated by the remaining staff, costs for additional labor, extra pays for night shifts etc. can result. In first place, the unpaid hours absent lead to losses of sales revenues and profits, productivity losses and depending compensation costs. The different positions leading to costs are shown in the following illustration.

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127

Hours absent

Paid hours absent

Unpaid hours absent

Incapability to work due to illness Incapability to work Work accidents Rehabilitation measures Rehabilitation measures Unpaid vacation

Maternity leave Agreed vacation

Other unpaid hours absent

Spezial leave Educational leave Figure 3-3: Hours absent leading to costs

Indicators of hours absent In order to identify the numbers regarding situations and developments with respect to hours missed, the following numbers can be recommended, as they give a quick and comprehensive overview: incapacity for work 

missed days dueto illn ess set working time in days

The rate indicates how many days are missed due to illness. For a deeper analysis of incapacity to work due to illness, it is sensible to differentiate between employee groups, periods, hierarchical levels and/or ages. With reservations, conclusions about job satisfaction and work climate can be made from these results. Due to today’s labor market situation they are to be carefully interpreted, though.1 share of costs of incapacity for work 

1

missed days dueto illn ess * cos ts per day * 100 total labour exp enses

Comp. Spiegel online, (w/o author) “Deutsche feiern aus Angst um den Arbeitsplatz weniger krank“.

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The formula indicates the share of costs of incapacity to work due to illness in the total labor expenses. For an employee oriented work and even because of the fiduciary duty, it is useful to reduce the number of accidents. A first approach is a differentiated identification of the frequency and time of accidents. For a more detailed identification it can be useful to differentiate between types of accidents (work accident/commuting accident), employee groups, departments, locations and/or moments. frequency of accidents 

moments of accidents 

number of accidents * 100 average head count number of days missed due to accidents *100 sum of set working days

In order to calculate the total costs of accidents the following positions have to be considered: Internal costs  Paid missed days of accident victims  Paid missed days of people involved  Costs of accidents due to damages at work places  Additional labor costs due to catching up or replacing working capacity  Production deficits in depending work places  Expenses for the company’s medical services  Costs for replacement (e.g. temporary work)

External costs  Contributions to employer mutual insurance association  Employer contribution to health insurance

Figure 3-4: Cost components for accidents

Calculation: Total costs of accidents = internal costs + external costs

1.1.3

Fluctuation

Fluctuation can be differentiated in accordance with the following criteria:  Fluctuation initiated by the company (transfers, dismissals)  Fluctuation desired by the company (hereby dismissals for operational reasons can be avoided).

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 Fluctuation not initiated by the company (denouncements); these emissions are considered as fluctuation in a narrower sense.1 For a closer analysis, discussions with leaving employees are necessary in order to find out the reasons in detail (discontent with working conditions etc.). Fluctuation entails certain risks, especially relevant for susceptible company areas as customer loyalty, research and development, construction, sales and innovation. In these named areas the relevant cost positions can be deducted as illustrated in the following figure. Cost factors fluctuation  Costs for newspaper/web ads  Fees for external employee relation advisers  Reimbursement of interview costs  Removal costs, costs for house hunting  Trainings during the probation/adjustment time  Partial personnel costs (internal) (choice of staff, adjustment)  Loss of sales, deficits due to unfilled jobs, delays of product innovations, loss of customer loyalties Figure 3-5: Cost factors fluctuation

The rate of fluctuation can be calculated with the following formula. In the first formula the narrower definition is used, while in the second case there is no differentiation between the causes for the fluctuation. The applicable periods are three months, six months or a year. For a detailed identification an additional differentiation between employee groups is possible. BDA - Formula :

n  of voluntarily leaving emplyees *100 average number of employees

Schlüter- Formula:

number of leavings*100 initial number of employees  entrances in the respective period

Indicators of fluctuation For a differentiated calculation of the fluctuation it is sensitive to use indicators which correspond the employment structure of the company. For example the differentiation between blue- and white collar workers is possible. Further differentiations can be made with regard to the kind of leaving, as early pensioning, dismissals, renouncements, cancellation agreements etc. as well as with regard to premises and company areas. In these cases the respective number of leavings it put into relation with the total number of the corresponding group. Furthermore, the entries shall be recorded the same way. As comparison for the analysis a 1

Comp. Blom/Germann/Krüger/Pepels (2004), p. 61.

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periodical as well as a set-actual comparison can be used. With the help of a detailed detection saving potentials in the area of personnel recruitment can be identified and be realized in the sense of economical use of company resources. Here some examples for indicators for the calculation of these relations: leavings of whitecollar wor ker s * 100 total number of employees leavings of bluecollar wor ker s *100 total number of bluecollar wor ker s

cancellation agreements of employees * 100 total number of employees

dismissals *100 total number of employees renouncements * 100 total number of employees leavings of bluecollar wor ker s *100 total number of bluecollar wor kers

employee leavings * 100 employees

employees entries *100 all employees

Further indicators are the recruiting costs per employee on the one hand and the percentage of recruiting costs in the total personnel costs on the other hand, as presented in the following formulas. total recruiting cos ts number of new employements

total recruiting cos ts * 100 total personnel cos ts

Cost and capitalized value-oriented quantification

1.1.4

131

Employee suggestion system

The costs of the employee suggestion system (ESS) result from the paid approval award, which is to be multiplied by the number of implemented/not implemented but awarded suggestions for improvement. The following formula can be used: Costs of ESS = approval award * number of implemented suggestions for improvement Costs of ESS = approval award * number of non-implemented suggestions for improvement Indicators of the employee suggestion system In order to quantify the employee suggestion system and to analyze the resulting data, the following indicators can be used. They can be interpreted in a comparison of time within the company or in a set actual comparison. number of suggestions for improvemt per period total number of employees number of awarded and implemented suggestions for improvemt per period total number of employees number of awarded suggestions for improvemt per period total number of employees number of awarded non implemented suggestions for improvemt per period total number of employees number of non implemented suggestions for improvemt per period total number of employees number of suggestions for improvemt per period * paid awards personnel cos ts or sales

1.1.5

External labor costs

In a broad interpretation all costs shall be subsumed under the term external labor costs that are caused by the supply of external service providers, e.g. costs for repairs, travelling, control, insurances or external research and development.

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In order to identify the share of external labor costs in the total output (TCA) or the sales (CSM), the following methods can be used.

1.1.6

share of external labour cos ts (TCA ) 

Costs of external labour Total output

share of external labour cos ts (CSA ) 

Costs of external labour Sales

Costs of material

The prices of used raw materials, auxiliary supplies and operating supply items are referred to as costs of material. The most important position is raw material, comprising all costs of such material which becomes an essential part of the product. These are calculated by individual costs. Auxiliary supplies are also directly assimilated in the product, but only with a complementary function and a small share in value. These costs are generally identified as general expenses. Operating supply items do not become direct parts of the product, but serve to maintain and execute the production. The costs can only be calculated as general expenses.1 Indicators about material In order to supervise and analyze the costs of material, they can be put into relation with the sales revenues (CSM) or with the total output (TCA) with the help of expense ratios. Expense ratios also allow an easy comparison, e.g. as plan vs. actual comparisons. It is recommendable to identify cost ratios for individual costs of raw material, of auxiliary supply and operating supply items, in order to be able to detect inefficiencies.

The material costs rate (industry), which is presented in the following formula, corresponds to the cost rate of goods and materials employed (costs of goods and materials employed/ sales revenue) in trade. Furthermore, the productivity can be determined by dividing the output (in pieces, kg, m, l or other) by the input (in hours, kg etc.). This way, indicators can be created for all factors of production. material cos t rate (TCA / CSM ) 

1

Comp. Corsten (1993), p. 460.

total cos ts of material Total output / sales revenues

Calculation of a contribution margin per employee

material productivity 

1.1.7

133

output in pieces raw material in kg

Interests and similar expenses

Mostly it concerns interests for credits due, discounts for acceptance bills and checks, as well as credit commissions and similar administrative costs as well as the share of interests for accruals for pensions.1

1.1.8

Administrative costs and costs of distribution

These are all costs emerging in the areas sales and administration – without personnel costs, however. Costs for merchandising, advertisement, the network of representatives and the stock of sales can be named in this context. Furthermore, itemized costs of sale accrue – as e.g. costs for package material, freight, commissions, order-related advertisement costs and shipping charges. The administrative costs include e.g. expenses for management, controlling, the legal department and security. Besides, costs for material, pro-rata depreciations, as well as company social services accrue.

2

Calculation of a contribution margin per employee

A service company is taken as example for calculating, with the help of contribution-marginaccounting, an employee contribution margin for a previously defined period. First, sales revenues, which were achieved with a defined group of employees (e.g. specialized division, department, subsidiary etc.) are calculated. Thereafter, the revenue deductions (e.g. allowances, discounts) are deducted in order to obtain net revenues. Then, the individual costs are subtracted from the net revenues step by step.

1

Comp. Baetge (1998), p. 380f.

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Employee contribution margins of a service company Sales revenues empl. – Revenue reductions = Net revenues empl. Net revenues empl. – Salary/wage – Times absent – Fluctuation – Company suggestion scheme = Employee contribution margin I – External labor costs – Costs for material – Itemized costs for sales and administration (without personnel costs) – Interests and similar expenses = Employee contribution margin II – Administrative costs and costs of sales (without personnel costs) – Other costs = Employee contribution margin III Figure 3-6: Calculation of the employee contribution margin

2.1

Interpretation of the employee contribution margin

As only costs directly resulting from labor utilization are incorporated into the employee contribution margin, this contribution margin shoes directly which share of the output in the considered period would not have been produced without labor utilization. Through the detailed classification of the labor costs and components of a service company, factors as e.g. hours absent and fluctuation can be determined which do not generate sales revenues. Here, the target is to analyze where the causes are, to be able to systematically countersteer. A further application possibility is given, if one considers the “personnel area” of a company as independent “personnel service provider”. In this case the identified personnel costs (if applicable including a mark-up) represent the transfer prices for other company areas and show directly the share of the personnel area in the obtained total revenues. The employee contribution margin II can be calculated after deducting the individual costs necessary for the production. The employee contribution margin III can be calculated after deducting the general expenses which can not be clearly referred to a certain order. On the other hand, it has to be pointed out that especially in the service sector an order related classification of the remaining gener-

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135

al expenses in the activity based costing1 is possible and sensible, because – as described above – the personnel costs have already been assigned in this way. The employee contribution margin can be used for supporting the strategic planning, as with its help starting points for the improvement of profitability can be recognized. The profitability of an employee is changing during the whole cycle of the work/employment condition. Generally, it can be supposed that at the beginning of the work relation e.g. due to a necessary longer adjustment stage, training measures etc. the relation of sales revenues and costs do no correspond to the desired result. In later stages, due to experiences or learning effects,2 the relation becomes positive and generally only profits are obtained. Therefore, it should be taken into consideration in which stage the labor relation is, as otherwise erroneous decisions can be taken, as for example the hasty termination of a work relation because of negative contribution margins. A possible solution to raise the contribution margins it the make working hours more flexible. Through an improved concept of labor utilization, which takes fluctuation of capacity utilization into consideration expensive additional hours and pays as well as possible “unoccupied times”of the employees can be avoided. Furthermore, the current and future requirements of the market, the competitive surroundings as well as the economic environment should be taken into consideration for interpreting the employee contribution margin of a service company.

2.2

Extrapolation to the employee cash flow

In order to calculate the employee cash flow, the calculation scheme of the employee contribution margin is used concentrating on its Cash Flow relevant components. Revenues, corrected by revenue reductions, are relevant for cash anyway, while for costs this is not always the case. Therefore, cost components on a pure value basis, as accruals and depreciations, have to be deducted. For a previously defined planned period considerable differences between the amount of actual and cash relevant costs can emerge. The following figure gives an overview over the detailed identification of the employee cash flow.

1

Comp. in more details Schmeisser/Clausen, DStR 51-52/2005, 2198ff.

2

Comp. Coenenberg (1999), p. 199ff.

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Employee cash flow calculation Sales revenues empl. – Revenue diminutions = Net revenues empl. Net revenue empl. – wage/salary – hours missed – fluctuation – company suggestion scheme + cash irrelevant personnel costs, as e.g. depreciations, accruals for pensions = Cash-based empl. contribution margin I – – – – + =

Costs for external services Costs for material Itemized administrative- and sales costs (without personnel costs) Interests and similar expenses Payment irrelevant individual costs Cash-based empl. contribution margin II

– – + = – =

Cost for administration and sales (without personnel costs) Other Cash irrelevant general costs Cash-based empl. contribution margin III Payments due to investments Employee cash flow

Figure 3-7: Employee cashbox calculation

In order to obtain the employee cash flow, first the revenue reductions are subtracted from the sales revenues, in order to obtain the net revenues. In a next step the personnel costs are subtracted, as well as the cash irrelevant costs, which have already been subtracted within the corresponding cost types – as for example depreciations and pension accruals. A similar procedure will be applied to itemized and general costs. Finally, only those investment related payments have to be deducted where the original payment is part of the considered period. In the context of the personnel area, investments in personnel development have to be especially considered, which can be calculated as the sum of the individual cost items, as expenses for hours absent, costs for travelling, tutorial fees etc. Furthermore, one should pay attention that there is no time difference between expenses and revenues, as in the case of sales of deferred terms or obtained advance payments. In the case of sales on differed terms the excess of incoming payments is lower than the Cash Flow; in the case of advance payments on the other hand, the situation is exactly inverse. Also time differences of Cash Flow and expense, as, purchases on deferred terms or advance payments to suppliers have to be

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137

considered. In the case of advance payments to suppliers, however, the revenue surplus is lower than the Cash Flow.1

2.3

Investments appraisal based aggregation

The employee cash flows based on the period identified form the series of payments for the investment appraisal. In order to identify the value of human capital or the potential value of staff, a procedure of dynamic investment appraisal, the net present value method, is used. The net present value method identifies the actual cash value. In this context the future employee Cash Flows, e.g. the difference of future incoming payments and out payments, are discounted with a discount rate to the present.2 The formula to calculate the value of human capital (VHC)/potential value (PV) can be described as follows: PV = e0 – a0 + (e1 – a1) * (1 + i)-1 + (e2 – a2) * (1 + i)-2 + …. + (en – an) * (1 + i)-n with:

et: predicted employee specific incoming payments in period t at: predicted employee specific out payments in period t i : discount rate t : period (t = 0, 1, 2,...,n) n: duration of the business relation

Now the determination of the accounting interest rate is described in more details.

2.4

Determination of the discount rate

In order to obtain the net present value, the predicted cash flows have to be discounted with an appropriate discount value. As the value of human capital is a part of the capital value of a company, it is suitable to resort to the procedures of company assessment and assessment of investment projects.3 In order to be able to fulfill the requirements of the investors, the weighed average cost of capital (WACC) can be used as minimum interest. The weighed capital costs can be calculated as follows:4

1

Comp. Perridon/Steiner (2003), p. 564f.

2

Comp. Perridon/Steiner (2003), p. 61.

3

Comp. Fischer/von der Decken (w/o date), p. 25.

4

Comp. Schmeisser/Tiedt/Schindler (2004), p. 78.

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Chapter III WACC  rE

with:

E D  rD * (1  t ) ED ED

rE: equity costs rD: dept costs

E: equity D: depts

t: tax rate

The equity cost rate can be determined on the basis of the capital asset pricing model (CAPM)1. The target of the CAPM is to determine for each capital investment an appropriate risk adjusted rate of return.2 The equity costs are composed as follows: Equity costs = risk free interest rate + risk premium of equity Risk free rate = “real”interest rate + expected rate of inflation Risk premium = Beta * (expected market return– risk free interest rate) The market risk premium represents the additional return required by investors to invest in a company instead of investing in more reliable assets.3 To determine the costs for depts the average of all costs of debts accruing in the planning period shall be considered.

2.5

Possibilities of usage and interpretation of results

By identifying personnel costs, which represent the most important cost factor in service companies in detail, intangible components are identified and individually assessed in monetary terms. This way it can be determined to which extent certain personnel costs have lead to revenues. For example, it can already be examined in the planning stage whether the measures to be undertaken are in due proportion with the expected benefit. Furthermore data can be used in order to evaluate the current personnel configuration in the sense of a status analysis. Although until now the formation of intangible assets, as the creation of a brand or the training of an employee, was from a balance focused point of view not seen as investment, it is still possible in the presented model to carry out an investment appraisal (on a company internal basis). The presented potential and human assets value makes an assessment of the intangible creation of value as well as a prognosis of the resulting future income exceeds possible. Furthermore, one can relate on the prospective results as value for defining output targets and controlling whether set targets have been reached. 1

For more details see: Perridon/Steiner (2003), p. 119ff. and Kern (2003), p. 265–280.

2

Comp. Perridon/Steiner (2003), p. 119ff. and Fischer/von der Decken (w/o date), p. 26.

3

Comp. Rappaport, A. (1999), p. 46 f.

Indicator hierarchy of the Berlin Human Capital Assessment Model

3

139

Indicator hierarchy of the Berlin Human Capital Assessment Model BSC potential persective SHV

x

(predicted) empl. Cashflow Emp. CM

-

Sales revenues

WACC

Investments

+

Cash irrelevant costs

-

costs

Revenue reduction

wage/salaries Hours missed

discounts allowances

Fluctuation Company suggestion scheme costs for contracted services Costs for material Costs for administration and sales (or pers. costs) Interests and similar expenses

Figure 3-8: Indicator hierarchy of the potential perspective

The indicator hierarchy of the potential perspective represents the connection between the BSC-perspective and the created Shareholder Value. When we consider the individual perspective of the BSC as business areas of a company, it becomes clear that the sum of the predicted cash flows is the basis for calculating the Shareholder Value that is composed as follows according to Rappaport:1

1

Comp. Rappaport (1999), p. 40.

140

+ + = – =

Chapter III Present value of predicted business cash flows Present value of the remaining value Market value of shares traded on stock exchange Company value Market value of debts Shareholder Value

After identifying the employee contribution margin (empl. CM) the cash flow irrelevant costs are added and investments subtracted, in order to obtain the employee cash flow. In the context of the potential perspective of the Balanced Scorecard, investments in employee development have to be given special consideration, even if those have to be booked as expense and, thus, are generally not appropriate for an investment appraisal. In this case this share of the costs is drawn into the investment area on purpose, in order to underline that especially formation and training of employees represent an investment in the future of the whole company. Thereafter, the employee cash flows are predicted for a previously defined period and multiplied with the weighed average cost of capital (WACC). The employee cash flows are predicted through the following formula: empl.  CFt 0 n t  empl.  CFt * (1  d) t  1 n

with: empl-CF = Employee-Cash flow t = single period of the planning period from 0 to n (1+d)-t = discount rate of the period t or n By the above mentioned formula a factor is determined expressing the current performance of staff, which can be used as growth factor for the prediction of future exceeds of incoming payments, based on the determined employee cash flows. The factor can be determined through the ratio between the current employee cash flow and the discounted sum of previous years as well as by the current employee cash flow and the discounted cash flow of the previous year. If the factor is >1, it shows a continuous growth potential, with regard to the considered period. After predicting the employee cash flows these can be integrated in the above described evaluation scheme of the Shareholder Value.

Conclusion and outlook

4

141

Conclusion and outlook

Until now companies have concentrated too much on tangible assets for raising their company values. The intangible assets as proper source of the company success are neither determined in a structured way, nor are they systematically controlled. In future, only companies will have success on the long run, which are aware of the importance of intangible assets with regard to the rise of the company value. By the quantification of the individual Balanced Scorecard perspectives and the shown connection with the Shareholder Value the effects of strategic decisions on the company value can be illustrated. By the determination of quantitative values for each Scorecardperspective, here demonstrated through the employee perspective, value raising and diminishing components of the Shareholder Value can be explicitly identified. As soon as problems are recognized, they can be solved via a detailed cause analysis within the corresponding indicator hierarchy through the value determining cost factors.

5

Literature

Baetge, Jörg: Bilanzanalyse, Düsseldorf: IDW- Edition, 1998 Rappaport, Alfred: Shareholder Value – Ein Handbuch für Manager und Investoren, [transl. by Wolfgang Klien], 2nd fully revised and extended edition, Stuttgart: SchäfferPoeschel edition, 1999 Corsten, Hans (ed.): Lexikon der Betriebswirtschaftslehre, 2nd slightly changed edition, Munich, Vienna: R. Oldenbourg edition, 1993 Fischer, Thomas M./Decken von der, Tim: Kundenprofitabilitätsrechnung in Dienstleistungsgeschäften – Konzeption und Umsetzung am Beispiel des Car Rental Business, Ingolstadt: without year Perridon, Louis/Steiner, Manfred: Finanzwirtschaft der Unternehmung, 12th revised edition, Munich: Vahlen edition, 2003 Rappaport, Alfred: Shareholder Value – Ein Handbuch für Manager und Investoren, [transl. by Wolfgang Klien], 2nd fully revised and extended edition, Stuttgart: SchäfferPoeschel edition, 1999 Schmeisser, Wilhelm: Balanced Scorecard – Quantifizierung der Personalarbeit, in: HRServices, volume 2 and 4–5/2002, p. 28–31 and p. 48–51 Schmeisser, Wilhelm/Schindler, Falko: Neuerer Ansatz zur quantifizierten Verknüpfung und Dynamisierung der Balanced Scorecard-Perspektiven, in: DStR, 44/2004, p. 1891– 1896

142

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Schmeisser, Wilhelm/Tiedt, Anja/Schindler, Falko: Neuerer Ansatz zur Quantifizierung der Balanced Scorecard – unter besonderer Berücksichtigung der Dynamisierung des Ansatzes von Schmeisser, Munich, Mering: Rainer Hamp edition, 2004 Ahn, Heinz/Dickmeis, Petra (2000): Einführung der Balanced Scorecard bei der ABB Industrie AG – Projektergebnisse und Erfahrungen. In: krp-special volume. Zeitschrift für Controlling, Accounting & System-Anwendungen, 2000, vol. 2, p. 17–23 Bach, Norbert (2006): Analyse der empirischen Balanced Scorecard Forschung im deutschsprachigen Raum. In: Zeitschrift für Controlling & Management, 50th annual edition, 2006, vol. 5, p. 298–304 Baum, Heinz-Georg/Coenenberg Adolf G./Günther, Thomas (2007): Strategisches Controlling. Stuttgart: Schäffer-Poeschel, 4th revised edition Becher, Manuel (ed.) (2007): Entwicklung eines Kennzahlensystems zur Vermarktung touristischer Destinationen. Wiesbaden: DUV. 1st edition Becker, Wolfgang (ed.) (2004): Strategisches Performance Measurement. In: Piser, Marc (ed.)/Weber, Jürgen (ed.): Schriftreihe Unternehmensführung & Controlling. Wiesbaden: DUV, 1st edition Berens, Wolfgang/Karlowitsch, Martin/Mertes, Martin (2001): Performance Measurement und Balanced Scorecard in Non-Profit-Organisationen. In: Klingebiel, Norbert (ed.): Performance Measurement & Balanced Scorecard. Munich: Franz Vahlen, p. 280–295 Diederichs, Marc (2005): Risikomanagement und Risikocontrolling. Risikocontrolling – ein integrierter Bestandteil einer modernen Risiko-management-Konzeption. Munich: Franz Vahlen Engel, Andreas (2006): Wertschöpfungsorientierte Balanced Scorecard. Entwicklung und Ausgestaltung eines strategieumsetzungsorientierten Ziel- und Kennzahlensystems. Hamburg: Dr. Kovač Füser. Karsten/Gleißner, Werner (2001): Rating und Interne Kreditrisikomodelle: neue Perspektiven durch Basel II. In: Gleißner, Werner (ed.), Meier, Günter (ed.): Wertorientiertes Risiko-Management für Industrie und Handel: Methoden, Fallbeispiele, Checklisten. Wiesbaden: Gabler, 1st edition, p. 309–334 Gladen, Werner (2008): Performance Measurement. Controlling mit Kennzahlen. Wiesbaden: Gabler, 4th revised edition Gleich, Ronald (1997): Performance Measurement. In: Die Betriebswirtschaft, 57th annual edition, 1997, vol. 1, p. 114–117 Gleich, Ronald (2001): Das System des Performance Measurement. Theoretisches Grundkonzept, Entwicklungs- und Anwendungsstand. Munich: Franz Vahlen Günther, Thomas/Grüning, Michael (2002): Performance Measurement-Systeme im praktischen Einsatz. In: Controlling, 14th annual edition, 2002, vol. 1, p. 5–13

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Hemetsberger, Georg (2001): Balanced Scorecard & Shareholder-Value. Die Umsetzung wertorientierter Unternehmensstrategien. Linz: Rudolf Trauner, 1st edition Hilgers, Dennis (2008), Performance Management. Leistungserfassung und Leistungssteuerung in Unternehmen und öffentlichen Verwaltungen. Wiesbaden: Gabler, 1st edition Hoffmann, Olaf (2000): Performance Management. Systeme und Implementierungsansätze. Stuttgart: Paul Haupt, 3rd edition Homann, Klaus (2001): Immobiliencontrolling. Ansatzpunkte einer lebenszyklusorientierten Konzeption. Wiesbaden: DUV, 1st edition Horváth & Partners (ed.) (2007): Balanced Scorecard umsetzen. Stuttgart: Schäfer-Poeschel, 4th revised edition Horváth, Péter (2006): Controlling. Munich: Franz Vahlen. 10th fully revised edition Horváth, Péter/Kaufmann, Lutz (1998): Balanced Scorecard – ein Werkzeug zur Umsetzung von Strategien. In: Harvard Business manager, 20th annual edition, 1998, 5/1998, p. 39–48. HSH Nordbank (2007): Value-Added-Investments: von Leerständen profitieren. In: Real Estate Finance, 2007, edition 3/07, in: http://www.hsh-nordbank.de/media/pdf/ kundenbereiche/immobilien_1/newsletter/HSH_Nordbank_Newsletter_Real_Estate_ Finance_3_2007.pdf, status: 14.11.2008. IPD Investment Property Databank (2007): Renditedefinitionen. In: www.ziadeutschland.de/zia/assets/images/06_Mitgliederbereich/06_Ausschuesse/ 10_Transparenz_und_Benchmarking/070719_IPD_Renditedefinitionen.ppt., status: 12/10/2008 Jetter, Wolfgang (2004): Performance Management. Strategien umsetzen, Ziele realisieren, Mitarbeiter fördern. Stuttgart: Schäffer-Poeschel, 2nd revised and extended edition Kaplan, Robert P./Norton, David P. (1997): Balanced Scorecard. Strategien erfolgreich umsetzen. Stuttgart: Schäffer-Poeschel Kaufmann, Lutz (2002): Der Feinschliff für die Strategie. In: Harvard Business manager, 24th annual edition, 2002, 6/2002, p. 35–41 Klingebiel, Norbert (2001): Impulsgeber des Performance Measurement. In: Klingebiel, Norbert (ed.): Performance Measurement & Balanced Scorecard. Munich: Franz Vahlen, p. 10–21 Klingebierl, Norbert (2000): Integriertes Performance Measurement. Wiesbaden: DUV, 1st edition Krause, Oliver (2005): Performance Management. Eine Stakeholder-Nutzen-orientierte und Geschäftsprozessbasierte Methode. Wiesbaden: DUV, 1st edition

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Kuhn, Lothar (2007): Das Ende des Kostenkürzens. In: Harvard Business manager. 29th annual edition, 2007, 7/2007, p. 10–12 Lebas, M. (1995): Performance Measurement and Performance Management. In: International Journal of Production Economics, 41st annual edition, 1995, V. 9, p. 23–36. Niven, Paul R. (2003): Balanced Scorecard – Schritt für Schritt. Einführung, Anpassung und Aktualisierung. Weinheim: Willey-VCH, 1st edition Osadnik, Wolfgang (2003): Controlling. Munich, Vienna: Oldenbourg, 3rd edition Pierschke, Barbara/Pelzeter, Andrea (2008): Facilities Management. In: Schulte, KarlWerner (ed.): Immobilienökonomie. vol. I, Betriebs-wirtschaftliche Grundlagen, Munich: Oldebourg, p. 343–390 Preißler, Peter R. (2008): Betriebswirtschaftliche Kennzahlen. Formeln, Aussagekraft, Sollwerte, Ermittlungsintervalle. Munich: Oldenbourg Reichmann, Thomas (2006): Controlling mit Kennzahlen und Management-Tools. Die systemgestützte Controlling-Konzeption. Munich: Franz Vahlen, 7th revised and extended edition Sandt, Joachim (2005): Performance Measurement. Übersicht über Forschungsentwicklung und –stand. In: Zeitschrift für Controlling & Management, 49th annual edition, 2005, V. 6, p. 429–441 Schäfers, Wolfgang (1997): Strategisches Management von Unternehmensimmobilien. Bausteine einer theoretischen Konzeption und Ergebnisse einer empirischen Untersuchung. In: Schulte, Karl-Werner (ed.): Schriften zur Immobilienökonomie. Vol. 3, Cologne: Rudolf Müller Schäffer, Utz (2003): Strategische Steuerung mit der Balanced Scorecard. In: Freidank, CarlChristian/Mayer, Elmar (ed.): Controlling-Konzepte. Neue Strategien und Werkzeuge für die Unternehmenspraxis. Wiesbaden: Gabler, 6th fully revised and extended edition, p. 487–520 Schreyer, Maximilian (2007): Entwicklung und Implementierung von Performance Measurement Systemen. Wiesbaden: DUV Schulte, Karl-Werner/Leopoldsberger, Gernit (2006): Bewertung von Immobilien. In: Drukarzczyk, Jochen (ed.)/Ernst, Jochen (ed.): Branchenorientierte Unternehmensbewertung. Munich: Franz Vahlen, p. 429–450 Schulz-Eickhorst, Antje/Focke, Christian/Pelzeter, Andrea (2008): Art und Maß der Baulichen Nutzung. In: Schulte, Karl-Werner (ed.): Immobilienökonomie. vol. I. Betriebswirtschaftliche Grundlagen. Munich: Oldenbourg, p. 143–165 Schweiger, Michael (2007): Immobilienmanagement: Best Practice. Steuerung von Konzernimmobiliengesellschaften mit wertorientierten Balanced Scorecards. In: Lück, Wolf-

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gang (ed.): Schriftreihe Managementorientierte Betriebswirtschaft. Konzepte, Strategien, Methoden. vol. 8, Sternefels: edition Wissenschaft & Praxis Steinle, Claus/Andreas Daum (ed.) (2007): Controlling. Kompendium für Ausbildung und Praxis. Stuttgart: Schäfer-Poeschel, 4th edition Stock-Homburg, Ruth (2003): Der Zusammenhang zwischen Mitarbeiter- und Kundenzufriedenheit. Direkte, indirekte und moderierende Effekte. Wiesbaden: DUV, 2nd edition Stöger, Roman (2007): Balanced Scorecard – eine Bilanz. In: OrganisationsEntwicklung, 2007, V. 4, p. 25–33, in: www.pharma-marketing.de/Content/ShowPdf.aspx? _s=300667, status: 12/01/2008 Vorbeck, Johannes (2007): Performance Measurement in der Wohnungswirtschaft. Weiterentwicklung des strategischen Controlling. Saarbrücken: VDM edition Dr. Müller. Wallenburg, Carl Marcus/Weber, Jürgen (2006): Ursache-Wirkungsbeziehungen der Balanced Scorecard – empirische Erkenntnisse zu ihrer Existenz. In: Zeitschrift für Controlling & Management, 50th annual edition, 2006, V. 4, p. 245–253 Weise, Frank/Wöhler, Barbara (2003): Eine BSC entwickeln. Eine Anleitung für professionelle Vorbereitung, Durchführung und nachhaltige Implementierung (part 3). In: http://www2.horvath-partners.com/fileadmin/media/PDF/de/04_Publikationen/ Horvath___ Partners_Eine_ BSC_entwickeln.pdf, Status 11/14/2008 Welge, Martin K./Al-Laham, Andreas (2008): Strategisches Management. Grundlagen, Prozess, Implementierung. Wiesbaden: Gabler, 5th fully extended edition edition

Chapter IV Berlin Human Capital Assessment Model exemplified with football player values with benefit analysis 1

Introduction

“Certainly, football is big business. But it also plays an important role in the country’s social and cultural life”1, was the statement of the world famous football trainer Alex Ferguson. Today the income of many German football clubs can be compared with the one of medium sized companies in Germany.2 The German Bundes League Clubs do not only influence the “communal economic development” as “incentive for occupation, but also as flagship vehicle”3 in some regions. 340.000 people are in the stadiums of the Bundes League clubs every week.4 They watch the spectacle played by the dribble artists on the football ground. During the last years the revenue of the Bundes League clubs has continuously risen – apart from the Kirch5 crisis in the year 2002. The revenues of 18 football clubs in the First Bundesliga amount to 1.28 billion Euros in the completed season 2006/2007.6 Since the season 1995/96 the sales revenues of the big leagues in Europe have almost tripled.7

1

Comp. http://www.football-research.org [Alex Ferguson, 1999], (status: 12/26/2007; 12:51 CET).

2

Comp. http://www.zeit.de [Fußball als Markt, 26.1.2007], (status: 12/26/2007; 14:53 CET).

3

Quotation: http://www.idw-online [Borussia Mönchengladbach, 6/19/2006], (status: 12/27/2007; 13:57 CET), own translation.

4

Comp. w/o author, Kicker-Sportmagazin [Special issue, Bundesliga, 2007/08], p. 149.

5

A big German Media concern, fighting agains insolvency in 2002.

6

Comp. w/o author, DFL-Report [Bundesliga, 2007], p. 48–53.

7

Comp. http://www.deloitte.com [Annual Review of Football Finance, 8/8/2003], (status: 12/29/2007; 20:58 CET).

148

Chapter IV

The enormous raise of TV revenues from 99.7 million Euros in the season 1995/96 to 420 million Euros for the current season 2007/08 has contributed a lot to this fact.1 Also in future, rising incomes from TV advertisement for the transmission of Bundes League games are predicted. The sales revenues of English and Italian clubs accounted for a far higher revenue of 2.1 and 1.4 billion Euros at the moment. This will lead to considerable problems for the German clubs in future. Successful foreign clubs from England, Italy or Spain can reach higher TV-incomes from individual marketing as German clubs from the central marketing of the Bundes League. A company can earn about between 120 and 150 million Euros for one season through individual marketing.2 In the course of an ever stronger international competition, ever higher investments in strong players are necessary. In addition, the requirements of football supporters with regard to their clubs and stadiums are continuously rising. The previous years have shown that Bundes League clubs cannot keep up with the clubs of other associations any more. Thus, the final round of international club competitions has been entirely in the hand of English, Italian and Spanish clubs for some time. The star players of national clubs of Brazil, Italy or France can be mostly found in England, Italy and Spain. Because of the Bosman-ruling3 in 1995 the player salaries for star players have extremely risen4. Because of the higher financial resources English, Italian and Spanish clubs can bind and finance top players. “Without raising the equity […] we are going to play in the 2nd League again in the medium term,”5 said Martin Kind, the chairman of the board of the Hannover 96 GmbH & Co. KGaA, recently to the press. According to him, investments in a strong squad and an improvement of the convenience of the stadiums are necessary, in order to be able to survive on a national and international basis in future. Annual revenues of 45 million Euros, earned from purely operative business, are not enough for some clubs any more.6 A capital increase targeted towards the incorporation of shareholders or the capital market, however, leads to changes in accounting and disclosure obligation for the emitter of shares. The Borussia Dortmund GmbH & Co. KGaA is as listed company under greater pressure than other football corporations, trading under the name of GmbH7. Because of the fact that the Borussia Dortmund GmbH & Co. KGaA is listed on the stock market, it is bound to have success in sports. As more than 40% of the balance of a football corporation consist of player

1

Comp. http:// zeit.de [Fußball als Markt, 1/26/2007], (status: 12/26/2007; 14:53 CET).

2

Comp. http://www.faz.net [Milliardengeschäft, 6/5/2007], (status:12/27/2007; 18:57 CET).

3

The decision allowed professional football players in the European Union to move freely to another club at the end of their term of contract with their present team.

4

Comp. http://www.welt.de [Bosman-Urteil und die Folgen, 12/15/2005], (status: 12/28/2007; 16:15 CET).

5

Comp. http://www.handelsblatt.com [Martin Kind, Interview, 12/13/2007], (status: 12/26/2007; 15:36 CET), own translation.

6

Comp. http://www.handelsblatt.com [Martin Kind, Interview, 12/13/2007], (status: 12/26/2007; 15:36 CET).

7

Type of legal entity in Germany. The name of the GmbH form emphasizes the fact that the owners of the entity are not personally liable for the company’s debts.

Side note: previous considerations on the controlling logic in the area of human capital

149

values, an exact assessment of players is extremely important. The aspiration towards higher financial assets leads to a critical examination of capital assets by third parties. The target of this chapter is to illustrate the financial situation of a football corporation, showing the human capital of the company in relation with its economic benefit. In the context of the Berlin Balanced Scorecard Approach the Berlin Human Capital Assessment model is carried out, which shows the financial situation of the club in more details than the accounting values of the players in the balance would. At the same time it gives an example of how the Berlin Balanced Scorecard can be used.

2

Side note: previous considerations on the controlling logic in the area of human capital

In order to adequately understand and classify the football player example, we shortly point out that a finance oriented personnel management approach is used and followed (see Figure 4-1). Football players are replaced in other clubs, for example. They are recorded and assessed as license players in the balance and, thus, incomes are obtained. The players have to be paid; after a certain time they are transferred to other clubs or they drop out of the professional business. The finance oriented personnel management is a theoretical management approach, which can be classified in the tradition of the economization of personnel management. It uses the classical instruments and data of accountancy, i.e. bookkeeping, annual balance sheet, the cost accounting as well as financing and investments, in order to apply them to personnel management decisions. The finance oriented personnel management uses the convergence ideas of accountancy of IFRS in the business management theory formation and deducts its data basis directly from the annual financial report and/or the salary/wage accounting. It uses models and instruments of remuneration management and of the partial retirements and deals with business pension schemes, the Berlin Human Capital Assessment Model, the Berlin Balanced Scorecard Approach, the Value Creation Assessment and their indicators, the social plan for personnel reduction etc. In Fig. 4-1 the logic of the finance oriented personnel management is illustrated in the context of the Berlin Balance Scorecard Approach and a general Performance Measurement Approach in the context of accountancy as well as of Performance Reporting is shown.

150

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Approaches of the Berlin Human Capital Assessments in the context of finance oriented personnel management Investors

Capital procurement/ employee procurement

Capital outflow e.g. by: personnelreductions

Utilization of Capital

redundancy

investmentsin property

Capital flowbacks

Utilization of Capital Personneldevelopment

Products and Solutions are sold to customers

Use ofCapital

Utilization of Capital Labour

Negative Berlin HCB

investments in labour

Know-how

etc.

Positive Berlin HCB

Figure 4-1: Sales process as circuit of use and transformation of capital under special consideration of human capital in the company Source: On the basis of: v. Känel/Siegwart (1996) p. 33, Coenenberg/Haller et.al. (2007), p. 73 as well as Schmeisser (2008) Finanzorientierte Personalwirtschaft.

Side note: previous considerations on the controlling logic in the area of human capital

151

Accountancy (IFRS) Group balance sheet (IFRS) - accounting Wage/salary Annual balance sheet (IFRS) Annual balance sheet analysis via individual instruments/techniques of finance oriented personnel management (free cash-flows, value added statement, capital flow, ROI etc.)

Indicators

Value oriented corporate management/performance controlling (Shareholder Value)

Personnel controlling

Employee contribution margin/ employee cashflow

Berlin Balanced Scorecard Approach (strategy controlling)

Remuneration systems stock option programs corporative pension schemes

Human capital

Behavioral control of managers and employees I In-house controlling l

Intangibles (IFRS 38); data of accountancy are the basis for optimal future innovative decisions

Figure 4-2: Logic of finance oriented personnel management

If one examines the logic of finance oriented personnel management, the trend towards internationalization of accountancy (International Financial Report Standards) benefits the approach, as internal and external accountancy are combined in this context. Thus, accountancy has to satisfy two concrete needs of information:  Give account for economic action, i.e. also for actions regarding personnel management of the past e.g. via personnel controlling in the company and

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 Arrange for the provision of information, through which the economic development of the company, especially of the accompanying measures regarding personnel management can be estimated with the help of chosen controlling techniques and indicators.1 Thus, the finance oriented personnel management can be also empirically controlled by all companies. The corporative information problem exists in two ways for accountancy in this context (1) Information of accountancy in accordance with IFRS are already needed for the recognition or formulation of decision making problems (with regard to personnel management), e.g. for outplace measures or the social compensation plan2, decisions for the corporative pension scheme, stock option plans etc. (2) Furthermore, information for an assessment with regard to personnel management on consequences of alternative decisions are necessary, e.g. strategy calculation, human capital assessment and their consequences for the research and development teams, the employment of personnel, calculation of cash flows, capital flow calculations, value creation assessment and their consequences for the prosecution of strategy etc. (3) First logical and practical findings as well as interim hypotheses are the result. They can be deducted as heuristic concepts from the IFRS financial accounting rules: Groups and corporations listed on the stock market applying IFRS are inclined to apply finance oriented personnel management, without knowing the name. Strictly speaking, personnel management instruments, actions and indicators of such companies can be typologically assigned to the following financial “indicators”. a) They have a personnel controlling which deducts indicators from the IFRS corporative balance sheets and IFRS balance sheets as well as from wage and salary calculations and provides figures for quarterly reports for the stock market, the rating and the annual balance sheets. b) They have a stock option program for top-managers, for managerial employees and employees which demands for the success of the annual balance sheet in the sense of a shareholder-value orientation and is based on it. c) They have a corporative pension scheme and/or employee participation schemes which are permanently controlled on a financial basis. d) Finance oriented personnel management deals with financial burdens of partial retirement schemes, which can then be found in the profit and loss statement and in the annual statement etc. A further hypotheses is that companies, which at least implicitly apply a progressive finance oriented personnel management, recognize that:

1

Comp. Pellens et al., 2008, p. 7.

2

Comp. Schmeisser, 2008, p. 1ff.

Side note: previous considerations on the controlling logic in the area of human capital

153

(1) Group, company and business unit strategies can be more appropriately governed, accompanied and controlled. This can be reached through the Berlin Balanced Scorecard Approach, the Berlin Human Assessment Model or intangible value drivers (patents, licenses, human capital etc.). (2) Also a merger, a factory closing, a partial business relocation abroad, an outplacement etc. have to be accounted for and assessed in a finance oriented personnel management based way. Thus, the finance oriented personnel management serves the accountability for the creditors via stock market reports, namely:  As arrangement support for investments in order to be able to assess a current research program with the help of relevant and reliable information with regard to its chances of success. In order to decide on an investment the investor in the pharmaceutical industry finally has to be able to assess the development of pharmaceutical products and of human capital potentials of the researchers on the basis of patents as well as the resulting cash flows and EBITs.  As an instrument of behavior control of management in the sense of a Shareholder Value philosophy. Shareholders/equity owners accord managers relatively far reaching decision making powers, but demand regular information on the course of business and reserve the right to withdraw the managers on the next board meeting or general assembly. To make sure that managers behave the way shareholders want them to, they can and will assure them a certain share of the net balance sheet by contract, namely in the context of management remuneration schemes in the variable part. More concretely, these are additions, which can be deducted from the human capital assessment or be reflected in the employee contribution margins, e.g. in the form of stock option programs.  As information instruments for third persons, in order to process specific information of the value added statement in a target oriented way, for example for the works council and the responsible labor union in the context of collective bargaining and company agreements. Because of the close adhesion of the finance oriented personnel management to the accountancy, this approach is especially useful in practice. Neither the behavioral personnel management nor the personnel economy reaches this academic and practical handling of personnel questions in the companies.

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3

Soccer associations

3.1

Legal basis

An association is a voluntary union of persons, which is established on a permanent basis and persecutes a certain joint target.1 Associations can be divided into profitable (sec. 22 German Civil Code) and non-profitable associations (sec. 21 German Civil Code). The characteristic of profitable associations is that they perform for remuneration on a methodical and permanent basis. The legal capacity of profitable associations is based on federal law (AktG2, BGB3, GmbHG4 and GenG5) or on a state conferment. Associations whose objective is not targeted towards a profitable business are non-profitable associations (ideal associations). By registration in the association registry these associations obtain their legal capacity and are then seen as “incorporated societies”.6 In 2003 soccer associations of the first and second federal soccer league were predominantly organized as associations in the sense of sec. 21 BGB. According to sec. 21 BGB a nonprofitable association is an association “[…], whose objective is not targeted towards a profitable business […].”7 The targets of a sport association are the encouragement of sports, international understanding, physical training and youth exchange.8 Through the privilege of secondary aims, the persecution of profitable aims, it is possible for the association to finance the main aim, the encouragement of sports. As profitable activities get more and more important and offer permanent performances (in the form of entertainment) to non-members, Malatos calls the choice of the legal form “association” for soccer associations an “error in legal form”.9 Through the decision of the 24th of October 1998 the German Soccer Federation has reacted in this context, and has declared the demerger of the license player departments in corporate entities as admissible.

1

Comp. w/o author, Meyers Enzyklopädisches Lexikon [vol. 24, 1980], p. 444.

2

Companies Act.

3

German Civil Law.

4

Limited Liability Companies Act.

5

Cooperative Society Act.

6

Comp. w/o author, Alpmann Brockhaus [Fachlexikon Recht, 2005], Stichwort „Verein“.

7

Sec. 21 BGB, own translation.

8

Comp. Dehesselles [Vereinsführung, 2002], p. 7.

9

Comp. Malatos [Berufsfußball, 1988], p. 66.

Soccer associations

155 Legal forms of the licence player business in the clubs of the first an d second Federal Soccer League State: June 2003

24

Incorporated societies

1. FC Köln Arminia Bielefeld Borussia Dortmund Hannover 96 Hertha BSC Berlin MSV Duisburg Werder Bremen 8

GmbH & Co. KGaA

Eintracht Frankfurt Bayern München

Bayern 04 Leverkusen VFL Wolfsburg

2

2

AG

GmbH

Corporate entities

Figure 4-3: Overview over the legal forms of the associations of federal league 1 Source: Von Freyberg, [Transfergeschäfte der Fußballbundesliga, 2005], p .8 .

3.2

Reasons for a transformation

There are several other reasons for the transformation of an association into a capital society than the error in legal entity. For financing stadium projects, training areas and rehabilitation clinics of an international competitive team, the so called “inner financing” in the form of ticket incomes is not sufficient for most German clubs any more.2 Furthermore there is the danger of being deprived of the legal capacity. In accordance with sec. 43 subs. 2 BGB (German Civil Code) an association an association can be deprived of its legal personality if its object is not commercial business in accordance with the articles of association and if it pursues objects different from those in the articles of association.3

1

GmbH & Co.KGaa: German Limited Partnership that has shares, but the entity with unlimited liability is a GmbH (≈ Ltd.) instead of a person; AG: German stock corporation; GmbH: Translates to “Company with limited liability.” In Germany, a GmbH means that the company is incorporated, but it is not publicly traded.

2

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 2 and Hovemann [Perspektiven von Börsengängen im Profisport], p. 6.

3

Cited from: Sec 43 subs. 2 BGB (German Civil Code), own translation.

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Under certain circumstances the association members might be personally and fully liable for the liabilities of the association.1 By the transformation in a capital society a personal and unlimited liability of the association members is avoided.

3.3

Externalization of the contract player department

By the Law for the Rectification of the German Transformation Act (UmwG) of 28th of October 19942 (pronounced on 8th November 1994)3 ideal associations were given the possibility to transform into corporations. 4 By externalizing the contract player department, parts of the assets are transferred to an already founded corporation (sec. 123 subs. 3 n° 1 UmwG5) or a corporation to be founded (sec. 123 subs. 3 n° 2 UmwG) by the grant of shares. With regard to the balance sheet for the initial corporation or head association, this is an accounting exchange of capital assets on the assets side. In the case of an accounting exchange on the assets side the whole value of the positions is transferred into the position “shares in affiliated companies” (§ 266 sub 2 n° A III clause 1 HGB6).7 In accordance with sec. 16c of the Articles of Associations of the German Soccer Association the externalized contract player department obtains a license for the games business, if the association holds a majority of the shares of the corporation.8

1

Comp. Bäune [Kapitalgesellschaften im bundesdeutschen Lizenzfußball, 2001], p. 193. Note: In 2001 the debths of the First Leagues in the Federal League amounted to about DM 1.3 billion – comp. Bäune [Kapitalgesellschaften im bundesdeutschen Lizenzfußball, 2001], p. 193.

2

Comp. Ott/Rummel [Verschmelzung von Unternehmen, 2003], p. 8.

3

Comp. BGBl I 1994, 3210.

4

Comp. Heermann/Schießl [Idealverein als Konzernspitze], p. 7.

5

Transformation Act.

6

German Commercial Code.

7

Comp. Comp. Heermann/Schießl, H. H. [Idealverein als Konzernspitze], p. 8.

8

Comp. Kipler [Investitionsaspekte beim Börsengang von Sportunternehmen], p. 8 and Comp. w/o author, Deutscher Fußball-Bund [DFB-Satzung], sec. 16c Subs. 2.

Soccer associations

157

Structure of a sports association Ideal Corporation Overall corporation Champions e.V. Ideal Areas

Economic Business Area

License player-soccer department

Several amateur and youth departments: soccer, basketball, handball, Leichtathletik, Badminton and chess

Figure 4-4: Structure of a soccer association Source: Schwendowius [Finanzierung- und Organisationskonzept, 2002], p. 26.

3.4

Legal steps of externalization

For the transfer of an asset reduced in value or partially deducted there is the danger of a subsequent taxation (sec. 61 subs. 3 AO1), as there is the violation of the formation of assets of an association based on common public interest (sec. 55 subs. 1 n° 4 AO).2 In the sense of Sec. 52 AO those supporting targets of sports can be seen as serving the public good, which are selflessly supported. A violation against the principle of the formation of assets happens “[…] in the case of the dissolution or abolishment of the corporation or in the case of the disappearance of its former objective […]”3, if the assets exceed the capital shares of the members, including the general value, which is declared as real investment of the members. As in the case of an externalization of assets no reduction takes place, but only an accounting exchange on the assets side or a transfer of assets in the balance, no tax disadvantages arise. An externalization in accordance with sect. 123 subs. 2 UmwG4 would cause a loss of influence and an enrichment of the association members.5 This provides an essential reason for an externalization as choice of restructuration. A change of legal form would bear the danger of a succeeding taxation in accordance with sec. 61 subs. 3 AO or the violation by exceeding the privilege of additional business because of the change of the company target. For the

1

German Fiscal Code (Abgabenordnung).

2

Comp. Heermann/Schießl [Idealverein als Konzernspitze], p. 9.

3

Comp. sec. 55 Subs. 1 n° 4 AO.

4

Transformation Act.

5

Comp. Bäune [Kapitalgesellschaften im bundesdeutschen Lizenzfußball, 2001], p. 6.

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decision for transformation or the change of the association target, the presence and consent of all association members on the meeting of members would be necessary. In practice, this would be nearly impossible. Therefore, a separation of economic and non-profit targets agrees best with the externalization.1

3.5

Possible legal forms and their advantages and disadvantages

When determining the legal form of the excluded contract player department a choice between GmbH, AG and KGaA2 can be made.3 An externalization into a Personengesellschaft is not worth considering because of the risks of liability.4 For the soccer corporations the maintenance of the majority of votes and the inclusion of external capital are of crucial importance. For the protection of the legal requirements of the association, it must directly or in form of a fully owned subsidiary hold the majority of the soccer corporation. For the transformation of a soccer corporation into a GmbH a permanent external raising of capital is not practicable. However, this legal form permits the integration of sponsors as shareholders, who are able to contribute with one-time payments in the form of initial contributions. Commerce of shares as in the case of stock corporations is practically impossible, as the transfer of business shares needs notarial authentication.5 The transformation of the contract player department into an AG (Stock Corporation) is limited by the majority shareholding of the association. Because of the majority of votes, only 49% of the shares can be sold on the trading floor. This leads to the fact that the corporation receives only of a smaller volume of capital. For associations disposing of little capital assets this legal form is inappropriate because of a smaller sales volume.6 It is true that the emission of non-voting preferred shares does not lead to a change in the distribution of voting rights, but preferred shares “[…] may only be sold up to the 50% of the equity capital.”7 The preferred share gains the right to vote, if “[…] the preferred dividend is not or not fully paid in one year and the residual payment is not paid in the next year with the full preference 1

Comp. Heermann/Schießl [Idealverein als Konzernspitze], p. 10–11.

2

AG = German Stock Corporation; GmbH = German form of Ltd.; KGaA = German Partnership limited by Shares.

3

Comp. von Billerbeck [Einflussnahme an Kapitalgesellschaften in der Bundesliga, 2001], p. 4.

4

Comp. Schmeilzl [Marketing des DBV, 2002], p. 6.

5

Comp. Sec.15 Subs. 3 GmbHG (German Act regarding Limited Liability Corporations) and Preußer [Gesellschaftsrecht, 2004], p. 115f.

6

Comp. Balzer [Umwandlung von Vereinen, 2001], p. 179.

7

Quotation: sec. 139 Subs. 2 AktG, own translation.

Soccer associations

159

of this year […]”1. The soccer corporations are subject to positive results, which influence the majority in shares in the soccer corporation. In case of the transformation of the externalized license player department in a KGaA (partnership limited by shares) shareholders are limited liability shareholders. The KGaA is a mixture of KG (Limited Partnership) and AG (Stock Corporation).2 The partner with unlimited liability (general partner) has the right to manage the business. The partner with unlimited liability of this corporative form has to be a fully owned subsidiary of the association. 3 It is not strictly necessary that the subsidiary has a majority of the shares in the initial capital of the KGaA, as the general partner’s right to manage the business maintains the influence of the association. The legal form of the general partner could be a GmbH for example.4 Through the emission of shares on the capital market equity can be raised, without influencing the majority of rights to vote. Forced purchases as in the case of the AG, which lead to the maintenance of the majority of rights to vote on the one hand and to a reduced solvency on the other, are not necessary.5

3.6

Example of the structure of a soccer capital corporation

The example of the ball sport association Borussia 09 Dortmund clarifies the externalization of the contract player department as partnership limited by shares (KGaA) and the resulting company structure. Besides the externalization of the contract player department a transfer of the female handball department, of the junior A soccer players and of the soccer amateurs to the Borrusia Dortmund GmbH & Co. KGaA6 took place.7 The general partner of the Borussia Dortmund GmbH & Co. KGaA is the Borussia Dortmund Geschäftsfühungs-GmbH (Management Ltd.), which holds 100% of the soccer association Borussia Dortmund e.V8. The contract player department is externalized into a KGaA (partnership limited by shares).

1

Quotation: sec. 140 Subs. 2 p. 1 AktG, own translation.

2

Comp. http://www.seefelder.de [GmbH & Co KG auf Aktien], (:from 12/9/2007; 18:23 CET).

3

Comp. w/o author, Deutscher Fußball-Bund [DFB-Satzung], sec. 16c Subs. 2.

4

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2006], p. 1ff.

5

Comp. http://www.seefelder.de [GmbH & Co KG auf Aktien], (from: 12/9/2007; 18:23 CET).

6

German Limited Partnership that has shares, but the entity with unlimited liability is a GmbH (≈ Ltd.) instead of a person.

7

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2001], p. 11.

8

German Incorporated Association.

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Chapter IV

Ball sports association Borussia 09 e.V. Dortmund board of directors

economic affairs council

electa

appointa

Ball sports association Borussia 09 e.V. Dortmund Borussia Dortmund Management GmbH (General Partner) appoints and supervises Advisory Board

managing directors

Borussia Dortmaund GmbH & Co. KGaA Supervisory Board

conaiata of membera no right of appointment, only right of auperviaion

elects General Assembly

consists of members of the board of directors and the econimic affairs council

Figure 4-5: Organization of direction and control of the Borussia Dortmund GmbH & Co.KGaA Source: w/o author, Borussia Dortmund [Geschäftsbericht, 2006], p. 39.

The group incorporates a merchandising corporation, a sports article producer, an IT company, a stadium corporation, a travel agency and a medical performance and rehabilitation center. Besides, the Borussia Dortmund GmbH & Co KGaA holds 99.74% of the shares in the BVB stadium GmbH through the sportswear producer goool.de sportwear GmbH. The remaining shares are hold by the registered association BV Borussia 09 Dortmund.1

1

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2006], p. 90–93.

Revenues and expenses of soccer associations

161

Borussia Dortmund GmbH & Co. KGaA

94,9% 100%

100%

100%

100%

51%

GmbH

goool.de sportswear GmbH

5,1% 94,9%

BVB BeteiligungsGmbH

BVB Stadionmanagement GmbH

5,1% BV. Borussia 09 e.V. Dortmund

BVB Merchandising GmbH

Sports & Bytes GmbH B.E.S.T.

49%

Borussia Euro Lloyd Sports Travel GmbH 33,33%

BVB Stadion

Orthomed GmbH

Euro Lloyd Reisebüro GmbH & Co. KG

66,67%

Sonstige

Figure 4-6: Company structure and business segments of the Borussia Dortmund GmbH & Co. KGaA Source: w/o author, Borussia Dortmund [Geschäftsbericht 2006], p. 38.

4

Revenues and expenses of soccer associations

4.1

Sources of income

The revenues of soccer associations consist of TV-advertisement (about 20%), sponsoring (about 30%), ticketing (about 20%) as well as the merchandising sales and transfer revenues, which jointly form the remaining revenues.1 In this case, the transfer revenues cannot be considered as fix permanent value, because there are no regularities in the sales of soccer players.2

1

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2005], p. 37.

2

Comp. von Freyberg, B. [Transfergeschäfte der Fußballbundesliga, 2005], p. 154.

162

4.1.1

Chapter IV

TV revenues

TV merchandising variates in correspondence with the different competitions (League DFB1cup, UEFA Cup and Champions League), with the result that the responsibility alternates between association and confederation. TV-merchandising in the Federal League The German Soccer League is responsible for the games business and the licensing in the First and Second Federal League. In the season 2004/05 the German Soccer League took the independent merchandising of media rights of the Federal Soccer League in Germany over. While beforehand the marketing agency Infront was responsible for the merchandising of rights between the offerer of rights in form of the German Soccer League and the users of rights in form of ARD, ZDF, Premiere, DSF2 and other channels, now the German Soccer League itself is responsible.3 The three-years-contract concluded in December 2005 with the users of rights amounted to Euro 1.26 billion. This corresponds to annual revenues of EUR 420 million.4 These EUR 420 million have to be divided between the First and Second League in a relation of 79:21.5 In England and France the revenues from TV merchandising from the season 2007/2008 amount to one billion or at least EUR 600 million.6 The distribution of the inner German TV-revenues of the Federal Leagues to the associations has to be identified via a certain factor (see 4:3:2:1). The average places of the last for seasons are taken into consideration for this purpose, the current place having the factors four and the oldest place having the factor 1. The yearly revenues for the inner-German marketing are distributed in accordance with the corresponding league rank. The German Champion obtains 5.8% of the yearly TV-merchandising income, whereas the last place only receives 2.9%.7 Thus, the German Champion of the season 2006/2007, VFB Stuttgart, obtained 26.18 million Euros from the inner-German merchandising of the Federal League.

1

German Soccer Association.

2

German TV-channels with rights to broadcast Federal Soccer League games.

3

Comp. Süßmilch/Elter [FC €uro AG, 2004], p. 62.

4

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2006], p. 46 and comp. http://www.spiegel.de [Rechteverwerter mit Dreijahresvertrag, 5/29/2007], (status: 11/2/2007; 16:14 CET). Note: In accordance with a newspaper article from 8.10.2007 Leo Kirch offers EUR 1.5 billion for a three-years-contract. Comp. http://www.satundkabel.de [Leo Kirchs Gebot, 10/8/2007], (from: 3.11.2007; 16:50 CET).

5

Comp. http://de.eurosport.yahoo.com [VfB, 22.5.2007], (status: 11/17/2007; 0:35 CET).

6

Comp. http://www.medienmaerkte.de [Fußball-Rechte, 8/11/2006], (status: 11/2/2007; 16:31 CET).

7

Comp. http://www.medienmaerkte.de [Fußball-Rechte, 8/11/2006], (status: 11/2/2007; 16:31 CET).

Revenues and expenses of soccer associations

163

Chosen associations and their TV revenues from inner-German merchandising of the German Federal League in the season 2006/2007 Asssociation TV-revenues VFB Stuttgart 26.18 mio. Schalke 04 25.85 mio. Werder Bremen 25.52 mio. Bayern München 25.19 mio. Energie Cottbus 12.45 mio. Figure 4-7: Overview over TV-revenues of selected German Federal League associations from the season 2006/2007 Source: http://www.spiegel.de [Rechteverwerter mit Dreijahresvertrag, 29.5.2007], (from: 2.11.2007; 16:14 CET).

Other than for inner-German merchandising, the merchandising agency Sportfive is responsible for the Federal League abroad. Merchandising abroad amounts to about 16.5 million Euros.1 Only the current season is important for the merchandising of foreign TV-revenues.2 The champion obtains four million, the vice-champion three million, the third placed two million and the association at the bottom of the league receives 518.000 Euro on average from the merchandising of the German Federal League abroad.3 TV-merchandising in the UEFA-Cup The promotion of the UEFA-Cup-games lies in the hands of the soccer associations themselves for the first rounds or they engage a marketing agency for these purposes. The association uses its right to directly conclude contracts with a national and international TVchannel.4 The FC Bayern München obtained 10 million Euros from self-merchandising in connection with the private channel Pro 7 during the first five home games in the UEFA Cup 2007/08. A merchandising agency as Sportfive or DSM is not contracted by FC Bayern München.5 From the quarter finals onwards the promotion of the broadcasting rights is centrally regulated by UEFA. The UEFA estimated revenues for merchandising amounting to about 45 million Euros for the season 2006/2007. 75% – which corresponds to 33.75 million Euros – are distributed to associations taking part in the group phase and to the eight third placed associations in the group phase of the Champions League, which join in at a later point in time. 40 associations in eight groups are in the group phase. However, only the first three and the eight third places from the Champions League-preliminary round are qualified for the round of sixteen. In addition to the money for playing amounting to 70,000 Euros,

1

Comp. http://www.abendblatt.de [HSV, TV-Gelder, 8/11/2006], (status: .11/4/2007; 12:53 CET).

2

Comp. w/o author, DFL-Report [Bundesliga Report, 2006], p. 105–106.

3

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2007], p. 47.

4

Comp. w/o author, Arminia Bielefeld [Prospekt zur Emission einer Anleihe, 2006], p. 23.

5

Comp. Kicker-Sportmagazin [Special issue, UEFA-Cup, 2007/08], p. 15.

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40,000 in case of a victory and 20,000 Euros in case of a tie can be obtained.1 This corresponds to a maximum amount of awards of 230.000 Euro per group phase. The following awards are foreseen for moving up:  Round of 32 (70,000 Euros only for associations moving up from the UEFA-Cuppreliminary round)  Round of sixteen (70,000 Euro)  Quarter-finals (300,000 Euro)  Semi-finals (600,000 Euro)  Underlying finalist (1.5 million Euros)  Winner of the UEFA-cup (2.5 million Euros) Besides, with the help of the market pool 13.5 million Euros are distributed to the associations, which reach the quarter-finals. Half of the amount is distributed in accordance with a certain procedure. For this procedure the number of associations of a nation is of importance. The more associations of a nation reach the quarter-finals, the more is allotted to the associations of a nation in total. The percentage per association diminishes on the other side.2 The other 50% have to be contributed in proportion with the TV-market value.3 TV-merchandising in the UEFA Champions League The UEFA directly concludes TV- and merchandising contracts with the users of rights for the UEFA Champions League. The merchandising via the New Media needs a contractual basis with the UEFA Services – such as Mobile Devices4 and UMTS In the season 2006/07 sales revenues amounting to 772.8 million Euros have been achieved and 579.6 million Euros were distributed to the Champions League participants.5 Each Champions League participant receives money for playing amounting to 3.0 million Euros. In the group phase, besides the money for playing of 2.4 million Euros, a prime for the game result can be obtained: for a victory 600,000 are won and for a tie 300,000 Euros. Only in the group phase money for playing and point prizes can be received. The FC Chelsea, e.g., obtained 8.1 million Euros in this phase with four victories, one tie and one lost game.6 For reaching the round of sixteen, quarter-finals, semi-finals and finals, further primes can be obtained. All associations, which are qualified for the round of sixteen (first and second 1

Comp. Kicker-Sportmagazin [Special issue, UEFA-Cup, 2007/08], p. 15.

2

Comp. Kicker-Sportmagazin [Special issue, UEFA-Cup, 2007/08], p. 15.

3

Comp. w/o author, UEFA [Vorabinformation zur Verteilung der Einnahmen, 2006], p. 2.

4

Note: Mobile Devices as general term for notebooks, mobile phones, PDA, pocket pcs, flatpads, communicators etc.

5

Comp. Kicker-Sportmagazin [Issue 55, 5.07.2007], p. 26.

6

Comp. Kicker-Sportmagazin [Issue 55, 5.07.2007], p. 26.

Revenues and expenses of soccer associations

165

placed teams in one of the eight groups), obtain 2.2 million Euros. For the quarter-finals 2.5 millions and for the semi-finals 3.0 millions are foreseen. While the winner of the UEFA Champions League obtains 7.0 million, the underlying association of the final is awarded with 4.0 million Euros.1 Besides these revenues, the associations obtain an amount of money, which depends from the corresponding TV-market. The number of associations of a nation which can take part in the Champions League is of equal importance. The more associations of a nation are in the Champions-League, the less every individual association gets.2 Champion Vice Champion Third place Fourth place

4 Teams 40% 30% 15% 15%

3 Teams 45% 35% 20%

2 Teams 55% 45%

1 Team 100%

Figure 4-8: Contribution of market pool in percent to the participants of the same nation Source: N.N. UEFA [Vorabinformation zur Verteilung der Einnahmen, 2006], p. 3.

In the Champions League Season 2006/2007 271 million Euros were assigned via the market pool contribution. Spectator revenues are individual and direct revenues of the associations.3 Borussia Dortmund gained 33.7 million Euros less because of losing the qualifying game for the Champions League in the season 2003/20044. Instead, 2.9 million Euros were received via two home games in the UEFA-Cup (including the TV-broadcasting of the qualifying games for the Champions League) via international TV-merchandising.5 Paul Sibianu talks about at least 15 million Euros, which are obtained by an association in the Champions League.6 TV-merchandising in the DFB-cup In the DFB-cup the association running the match receives 650.000 Euros from the TVchannel for a live broadcast. For the broadcast of the DFB-cup match of the Hamburger SV against Bayern München in December 2005 the ARD7 paid 677.000 Euros. In the next cup

1

Comp. Kicker-Sportmagazin [Issue 55, 5.7.2007], p. 26.

2

Comp. w/o author, UEFA [Vorabinformation zur Verteilung der Einnahmen, 2006], p. 1–3.

3

Comp. w/o author, Arminia Bielefeld [Prospekt zur Emission einer Anleihe, 2006], p. 23.

4

Note: Borussia Dortmund lost on 27.8.2003 in penalty kick against the FC Brügge.

5

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2004], p. 86.

6

Comp. http://www.abendblatt.de [Millionenspiel, 8/29/2003], (status: 11/22/2007; 13:54 CET).

7

Arbeitsgemeinschaft der öffentlich-rechtlichen Rundfunkanstalten der Bundesrepublik Deutschland – “Consortium of public-law broadcasting institutions of the Federal Republic of Germany”.

166

Chapter IV

round the TV-money rises to about one million Euros.1 “At the moment any of the 64 participants in the first DFB cup main round receive 52.000 Euros from the TV-pot. By reaching any further round this sum is doubled each time. Furthermore, for each cup match with live broadcasting at least one million Euros are awarded, which are distributed in a 6:4 relation between the hosts and guests.”2

4.1.2

Merchandising structure

Some soccer associations contract external companies to deal with the merchandising. These merchandising agencies are service companies being active in the area of advertising jerseys, advertising boards, stadiums, hospitality (catering), websites or international TV-rights management. A big company in this sector is the Sportfive GmbH, which besides mediating a jersey sponsor for SV Werder Bremen also negotiated with TV enterprises for the international presentation of the soccer club.3 The contracts between soccer associations and the mediators are manifold. Besides fixed prices also revenue splitting (80% association, 20% mediator) or guarantees with a percental participation from a certain size onwards are possible. While certain associations transferred their complete merchandising to external companies, there are certain associations which act independently.4 Extract of chosen national league teams of the season 2004/2005 and their merchandising Soccer company Sales house Marketing rights SV Werder Bremen Sportfive Internal TV-rights, jersey advertising DSM Boards and stadium advertisement Own Hospitality FC Bayern München Own Complete marketing Hertha BSC Berlin Sportfive Complete marketing Bayer 04 Leverkusen Sportfive Internal TV-rights Own Boards, stadium advertisement Own Jersey advertising and ticketing Borussia Dortmund Sportfive Internal TV rights, boards, stadium, jersey advertising and ticketing Figure 4-9: Marketing landscape of the Bundesliga associations Sourrce: Süßmilch/Elter [FC €uro AG, 2004], p. 6.

1

Comp. http://www.stern.de [Finanzspritze DFB-Pokal, 12/22/2005], status: 11/7/2007; 22:18 CET).

2

Quotation: Kicker-Sportmagazin [Issue 5, 16.1.2006], own translation.

3

Note: Sportfive [Interview, 10/10/2007].

4

Comp. Süßmilch/Elter [FC €uro AG, 2004], p. 34–36.

Revenues and expenses of soccer associations

4.1.3

167

Spectator revenues

The spectator revenues constitute, after sponsoring and TV-revenues, the third and sometimes second most important revenue group of an association. In the case of the ball sports association Borussia Dortmund the ticketing of the season 2006/07 occupied with 18.3 million Euros the third place, after 30.5 million Euros for sponsoring and 21.5 million Euros for TV-marketing.1 In the case of the FC Bayern, the spectator revenues in the Champions League can be put at about two million Euros because of higher entrance fees. For the four home games (three games in the group stage as well as one home game in the round of sixteen) spectator revenues in the amount of eight million Euros can be calculated.2

4.1.4

Jersey advertisement

In the season 1973/74 Eintracht Braunschweig was the first association of the Bundesliga to play with jersey advertisement. The image of the stag head, the logo of the spirits company of Wolfenbüttel, was printed on the yellow-blue jersey and lead to earnings of 160.000 DM for the association.3 This can be considered to be the cornerstone of soccer advertisement. The sponsoring revenues have grown in the course of the years and account for a multiple amount of the former revenue. From the season 2007/08 onwards the SV Werder Bremen has had the company logo of the Düsseldorf banking house on its jersey. The marketing partner ISPR/Sportfive was responsible for this contract. The duration of the sponsoring contract is three years, plus the possibility of prolongation of one year. The logo shall not only be visible on jerseys, but also on boards, in VIP-lounges, on tickets and during promotional events of SV Werder Bremen.4 Association Bayern München Borussia Dortmund Werder Bremen Hertha BSC Berlin VFB Stuttgart Hamburger SV Bayer 04 Leverkusen

Sponser T-Home Evonik Citibank Deutsche Bahn EnWB Emirates TelDaFax

Revenues Up to 20.0 mio. Up to 12.0 mio. Up to 9.5 mio. Up to 8.0 mio. ca. 6.5 mio. ca. 5.0 mio. ca. n.s.

Figure 4-10: Revenues from ticket sponsoring of chosen Bundesliga associations Source: own presentation, http://www.sportbild.de [Trikotsponsoren, 10.7.2007] and http://www.sport-rekord.de [Trikotsponsoren, 2007/2008]).

1

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2007], p. 55.

2

Comp. http://www.fussball24.de [FC Bayern, 11/23/2005], (status: 11/29/2007; 19:20 CET).

3

Comp. http://www.netzeitung.de [Braunschweig, 7/25/2005], (status: 10/31/2007; 22.25 CET).

4

Comp. http://www.finanznachrichten.de [Citibank, 5/18/2007], (status: 11/2/2007; 13:13 CET).

168

4.1.5

Chapter IV

Merchandising

The revenues from merchandising sales, which includes the sale of jerseys, scarves, shirts, cups etc. accounted for 5.2 million Euros in the season 2006/2007 (4.1. million Euros in the year before) in the case of the Borussia Dortmund GmbH & Co KG.1 The merchandising sales serve as remunerative additional income of the associations. Because of the growing popularity of soccer players ever bigger revenues can be achieved from this sector. In the season 2002/03 the First League associations received revenues of 4.2 million Euros from this merchandising field.2

4.2

Expenses

4.2.1

Stadium rent

While some soccer companies as the FC Bayern München, VFL Wolfburg or the Bayer 04 Leverkusen own the stadium, other association only rent the sports grounds for their games. The costs for stadium rent of the Signal-Iduna-Park (spectator capacity: 80,7083) amount to 11.7 million Euros, which Borussia Dortmund pays to the fully owned subsidiary BVB Stadium management GmbH.4 Other associations as the Frankfurter Eintracht or the Karlsruher Sport-Club rent the stadium for the game day in question. Selection of soccer associations which currently are not owners of a soccer ground5 Association Name of stadium Capacity Costs per season Eintracht Frankfurt Commerzbank-Arena 52,300 7 to 8 mio. including UEFACup games Karlsruher SC Wildparkstadion 29,699 3.5 m. (including heating) 35 % of revenues 1. FC Kaiserslautern Fritz-Walter-Stadion 48,500 3.2 mio. Figure 4-11: Stadium rent of selected Bundesliga associations Source: own presentation, http://www.fr-online.de [Eintracht Frankfurt, 14.2.2007] and http://www.ksc.de [KSC, Stadionmiete, 6.9.2007] and http://www.faz.net [Kaiserslautern, 26.9.2007].

1

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2007], p. 44.

2

Comp. Süßmilch/Elter [FC €uro AG, 2004], p. 44.

3

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2007], p. 16.

4

Comp. http://www.fussball24.de [BVB, 03/16/2005], (status: 11/01/2007; 18:33 CET).

5

Note: The Karlruhe SC has to pay 35% of jersey revenues as rent.

Revenues and expenses of soccer associations

4.2.2

169

Player remunerations

The player remunerations account for a big part of the expenses in the profit and loss statement. In the season 2005/2007 personnel costs accounted for 39.7% of the total revenues. On the average, associations of the First Bundesliga paid 28.4 million Euros in player remunerations, which corresponds to a rise of 3% in comparison with the preceding season 2004/2005.1 In the case of Borussia Dortmund, the management reduced the amount from 67 million Euros in the season 2002/2003 to 40 million Euros.2 Currently the personnel costs amount to 34.26 million Euros per season.3 The labor expenses of the Hertha BSC Berlin account for around 27.7 million Euros.4 Players receive fix remuneration as well as performance bonuses. Thus, the total player remuneration of the 1.FC Nürnberg during the season 2006/07 was 25 million Euros with nine million Euros in bonuses.5

4.2.3

Other operational expenses

Other costs besides the stadium rent and player remunerations are for example costs for the game operation, marketing measures and administration. In the season 2004/2005 this accounted for more than 85.8 million Euros in the case of Borussia Dortmund. Though the other operations expenses in the season 2006/07 have been reduced to 42.7 million Euros, they still constitute the biggest cost pool of the company.6 Other operation expenses of the Borussia Dortmund in the season 2004/2005 (in thousand €) Borussia Dortmund GmbH Borussia Dortmund group & Co. KGaA 30.06.2005 30.06.2004 30.06.2005 30.06.2004 Games Operation 26,603 30,261 26,553 30,112 Advertising 13,084 12,188 12,735 12,186 Transfer 2,763 18,511 2,763 18,511 Media and print products 1,929 2,092 1,949 2,518 Administration 11,734 8,891 11,849 8,294 Other 29,735 4,262 29,833 4,612 85,848 76,205 85,682 76,233 Figure 4-12: Other operational expenses of the Borussia Dortmund GmbH & Co. KGaA as well as of the Borussia Dortmund group in the season 2004/05 Source: w/o author, Borussia Dortmund [Geschäftsbericht, 2005], p. 73.

1

Comp. w/o author, DFL-Report [Bundesliga Report, 2007], p. 56.

2

Comp. http://www.stern.de [Ausverkauf, 6/2/2005], (status: 11/7/2007; 21:25 CET).

3

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2007], p. 92.

4

Comp. http://www.fussball24.de [Hertha BSC, 7/1/2007], (status: 11/16/2007; 16:42 CET).

5

Comp. http://www.sportgate.de [Roth, 10/8/2007], (status: 11/29/2007; 19:27 CET).

6

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2007], p. 93.

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5

Identification of player capacity on the balance sheet

5.1

Definition: Intangible assets

In German understanding the term intangible generally is defined by the aspects “lack of physical substance and incorporation”1. Amongst other things commercial copyrights, concessions and similar rights belong to this category. Also the purchase of a football player belongs to the immaterial assets in accordance with IAS 38.8. Besides, intangible assets have to be determinable and not monetary.2 Financial instruments do not belong to the Intangible Assets in accordance with IAS 38, even though they correspond to this description on the short run, but underlie the regulations of IAS 32.3 The company producing the balance sheet has the possibility to identify them and to control the assets and can attribute the existence of a future economic success to it (abstract possibility of entering an asset in the balance sheet). The possibility to identify it implies the separation from the goodwill (IAS 38.11).4

5.2

Side note: Principle of entry as asset in accordance with the HGB (German Commercial Code)5

The principle of entry as asset determines whether an asset can or must be booked on the asset side of the balance sheet. In this context, the abstract and concrete possibility of entering assets in the balance sheet can be distinguished. Requirements for the abstract possibility of entering assets in the balance sheet are:  The asset has to represent an economic value for the company producing the balance sheet.  It has to be possible to evaluate the asset on its own (economies of scope which can not be individually determined do not fulfill this criterion). 1

Comp. w/o author, Meyers Enzyklopädisches Lexikon [vol. 12, 1980], p. 478.

2

Comp. Lüdenbach/Hoffmann [IFRS Praxis Kommentar, 2007], p. 512 and p. 530.

3

Comp. Küting/ Dawo [BFuP, Issue 4, 2003], p. 397.

4

Comp. Coenenberg [Jahresabschluss und Jahresabschlussanalyse, 2005], p. 144–145.

5

Comp. Ruhnke [Rechnungslegung nach IFRS und HGB, 2005], p. 204–206.

Identification of player capacity on the balance sheet

171

 The asset has to be individually negotiable (the item to be entered into the balance sheet must not be an individual object of the legal relations, the individual usability is sufficient). The concrete possibility to enter something on the asset side of a balance sheet refers explicitly to legal requirements. Thus, it is possible that an item, which does not have the abstract possibility of entry as asset can still be found among the assets, e.g. the starting expenses during the foundation of a company. According to sec. 269 s. 1 HGB there is a right to opt for the entry as asset, which means that this is a case of concrete possibility of entry as asset. On the other hand there can be a prohibition of entry as asset despite the abstract possibility of booking as asset.1 Example: In order to attract more spectators for the next home game of a soccer association, the Wall AG is engaged to produce posters with dates, opponents and times and to put them into the bus stops of the city. Solution: An economic value of putting up posters can be proven, as we can assume that more spectators come into the stadiums, if they get more information on it. The individual possibility of assessment is given, because costs for material, personnel and rent can be clearly identified. The requirement of individual usability is also fulfilled, because the number of advertising spaces can be freely chosen and they are individually sold. The requirement for the abstract possibility of entry as asset are fulfilled, however the advertisements costs may not be added to the production costs in accordance with sec. 255 subs 2 s. 6 HGB. Thus, distribution costs have to be booked as effecting the P&L statement. The question whether individual or general costs are concerned, is not relevant in this context. Besides advertising costs, also costs for retraining of sellers, samples and patterns as well as traveling costs have to be added in the sales area.2

1

Comp. Ruhnke [Rechnungslegung nach IFRS und HGB, 2005], p. 204–206.

2

Comp. Koller/Roth/Morck [HGB-Kommentar, 2006]: sec. 255 HGB.

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5.3

Examination of the possibility of entry of player abilities under IAS 38

5.3.1

Abstract possibility of entry as asset

Under F.49(a) an asset is defined as follows:  As an economic resource which is under control of the company publishing the balance sheet.  As resulting from incidents of the past.  From which the company expects to generate future economic benefits. The player value represents a controllable economic resource, even if the soccer corporations do not have any legal power of disposition or property rights.1 According to sec. 13 Lizenspielerordnung (license player regulations) a soccer player is only allowed to play for a new association, if there are no old contractual relations with his previous associations. By this exclusive right in the federation statutes, the contracting association has the only right to use the player in official encounters during this time span. This regulation remains unaffected in the case of international matches and official tournaments for the contraction of national players.2 In accordance with sec. 26 a license player statute, the DFB gives automatically the permission to play if there is a work contract and if the health check was successful. The object characteristic in the sense of sec. 90 BGB as well in German balance law is irrelevant. Therefore, the legal understanding of the declaration saying that things are only physical objects is not applicable.3 Furthermore, Kaiser points out that professional soccer players are not property in the sense of sec. 240 HGB, as they can not be put in line with sec. 90 BGB. When a soccer player is purchased there is no sales contract in the traditional sense in accordance with sec. 433 BGB between the selling company and the receiving company. The sales amount, which is defined as contract of dissolution, serves only the dissolution of the existing contract of the selling company. This payment is seen as necessary precondition for the receiving company to obtain the basis for the petition with the DFB for the right to play. The commercial adequacy is only the basis for the economic determination, while the right to play is booked as “asset” in the balance sheet. Furthermore, something is only an asset, if the object to be booked in the balance is due to the obtention of the right to play (amounting to the payment for dissolution). The procurement of the right to play has to be considered as result of previous events. The asset has to have been under the control of the company before the balance sheet key date.4 Generally the 30th of June is the balance sheet key date for soccer 1

Note: „Spielerwert als Analogie zum Sklavenhandel“, comp. Hoffmann [BC, Issue 6, 2006], p. 130.

2

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 222.

3

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004, p. 1443.

4

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 222.

Identification of player capacity on the balance sheet

173

corporations. Moreover, corporations listed on the stock market trading shares, present an IFRS consolidated financial statement at the 30th of June as well as an opening balance sheet at 1st of June. The emitters of shares have the duty to present the IFRS-consolidated financial statement only at 30th of June 2008.1 Initial booking (consideration of net amount) Purchase of a center player 1. July 2007

Dt: Player values

Liabilities

Assets

5m€

5m€

Cr: Bank

By the later use at soccer events2, achievement of revenues from the sale of intangible assets or through other advantages from own usage, e.g. advertising campaigns or press conferences, further future economic benefits are generated.3 Basing on the fact of the procurement of the right to play and the result following from it that the player is from now on used for the association, Lüdenbach/Hoffmann opine that one can count on future benefits. A future economic benefit is not given, if the purchasing association has to assume a mental or physical deterioration or even sports invalidity.4 Therefore, the requirement of an expectation of a future economic benefit in accordance with IAS 38.17 is fulfilled.5

5.3.2

Concrete possibility of entry as asset

In accordance with F.83, in addition to the requirement of abstract possibility of entry as asset the concrete possibility has to be fulfilled. The latter consists of two requirements, which both have to be fulfilled:  sufficient probability of additional benefit  necessity of a reliable possibility to measure and evaluate the asset As for investors only decision relevant information are presented in the balance sheet, an examination of the essentiality regulation of F.29 in connection with F.25 is necessary. In accordance with F.29 the essentiality is relevant because leaving out facts or misrepresenting them could influence economic actions. 6 In accordance with IAS 38.22 the probability of a future economic benefit shall be estimated with the help of reasonable, provable assumptions

1

Comp. Lüdenbach/Hoffmann [IFRS Praxis Kommentar, 2007], IFRS 6 and Lüdenbach/Hoffmann [Der Betrieb, Issue 27/28, 2004], p. 1442.

2

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004], p. 1443.

3

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 222.

4

Comp. von Keitz [Immaterielle Güter, 1997], p. 183.

5

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 222.

6

Comp. w/o author, Deloitte/IAS PLUS [Framework], (status 8.10.2007; 13:29 CET).

174

Chapter IV

at the balance sheet key date. Thereby, the economic period of usage of the asset can be forecasted at the best. For the “reliable assessability” the evaluation by costs or on the basis of a value free of arbitrariness based on the estimations in accordance with F.86 are possible.1 Besides these two requirements, IAS 38.8 regulates additional criteria for intangible assets, as they are assets without physical substance, which are identifiable, controllable, non-monetary and non-financial2 (in the sense of IAS 32).3 In the following section the identifiability and controllability of the assets are focused. In the case of identifiability the examination is done through the separation of the intangible asset from goodwill.4 The determination is realized in two stages. Is there a contractual or legal right to the asset in accordance with IAS 38.12(b)? Permission to play is existent.

There is no such right.

It is an intangible asset in accordance with IAS 8.12(b)

Can the asset be sold, rented, transferred, licensed of exchanged separately from the business? (Feature “seperable” in accordance with IAS 38.12(a))

Yes, the asset is seperable.

No, the asset is not seperable.

It is an intangible asset in accordance with IAS 38.12(a)

It is not an intangible asset.

5

Figure 4-13: Examination of the requirements to enter the permission to play as asset in the balance sheet

By the provision of the right to play the association obtains a contractual right. The player has the right to play and may be deployed. The contractual right is seen as the fulfillment of the criterion of the identifiability.6

1

Comp. Coenenberg [Jahresabschluss und Jahresabschlussanalyse, 2005], p. 146 and Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 222.

2

Comp. Küting/Dawo [BFuP, Issue 4, 2003] p. 397.

3

Comp. Lüdenbach/Hoffmann [IFRS Praxis Kommentar, 2007], p. 512 and p. 530.

4

Comp. Coenenberg [Jahresabschluss und Jahresabschlussanalyse, 2005], p. 144–145.

5

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 223.

6

Comp. Homberg/Elter/Rothenburger [KoR, Issue 6, 2004], p. 253.

Identification of player capacity on the balance sheet

175

The examination of the controllability expands the control of the economic resources to the abstract possibility of entry as asset. Zingel calls this “disposition power” of the company publishing the balance sheet.1 In accordance with 38.13 control can be assumed, if the use leads to an economic advantage and the access possibilities are denied to third persons during the contract period. Instead of entering the human capital in the balance sheet, the player value is balanced, which is reflected by the amount for the player’s purchase.2 The future economic benefit of the know-how of the staff is not seen as sufficiently controllable in accordance with IAS 38.15, as the employees could resign any moment.3 Therefore, the controllability over the soccer player is seen as existent. Examination of the sufficient probability of additional benefits In accordance with IAS 38.21 one has to objectively assume an additional benefit of the intangible asset. Herefore, realistic and well-reasoned assumptions have to exist for the additional benefit in accordance with IAS 38.20.4 In accordance with Dawo, assets only lead to return flows if they are employed for their purpose of use.5 The permission to play on its own does not provide any probability of a future additional benefit. However, if the fact is added that the player is used in official games, the probability criterion is fulfilled. Even if the player is not employed in an official encounter, the employment in training sessions is enough for the criterion. Wehrheim refers to it as the “corporative performance producing process” which has to be fulfilled. An exact applicability of the revenues from games to single players cannot be determined in monetary terms according to Wehrheim. The termination payment is to be defined as “special purchase costs” in accordance with IAS 38.2 because they indicate a future benefit of the association.6 Examination of the reliable possibility to measure and assess the value of the asset F.86 regulates the reliable possibility to measure the value of an asset. The framework prescribes that the asset is composed from production and purchase costs or another value replacing them. It is not impossible that the well-founded assessment is based on the estimation of costs or values.7 An annual balance sheet has to be based on reliable information. In accordance with F. 31(f) one has to assume reliability if the information does not contain es-

1

Comp. Zingel [IFRS und IAS, 2007], p. 86.

2

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 223 and Lüdenbach/Hoffmann [Der Betrieb, Issue 27/28, 2004], p. 1443.

3

Comp. Lüdenbach/Hoffmann [IFRS Praxis Kommentar, 2007], p. 514.

4

Comp. K Küting/Dawo [BFuP, Issue 4, 2003], p. 397.

5

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 200.

6

Comp. Wehrheim/Zulauf [ PiR, Issue 8, 2007], p. 223.

7

Comp. von Keitz [Immaterielle Güter, 1997], p. 185.

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Chapter IV

sential flows and distorting influences.1 F. 33 uses the term “Faithful Representation” meaning that the reliability of information is only existent if a faithful representation of the business incidents can be found in the balance sheet. The impartiality of the annual balance sheet has to be maintained, in order to prevent the selection of certain incidents from influencing the decision, as F. 36 states. However, it is improbable that there might be a 100% coinciding representation of the incidences in the balance sheet.2 Therefore, prudence needs to be applied in order to balance uncertain incidents. However, only a manipulated overestimation of liabilities or expenses and the subestimation of assets or revenues are prohibited and do not fulfill the requirements of reliability and neutrality of F. 37.3 If the intangible assets do not fulfill the requirements of the abstract and concrete possibilities of entry as asset, the expense is realized via settlement in the profit and loss statement. In accordance with IAS 38.68 the expenses affecting the P&L statement are booked in the period in which they have arisen. A later entry as asset of earlier expenses relevant to the P&L statement is not allowed under IAS 38.71.4

5.4

Self-created immaterial assets

The license player regulation prescribes for the season 2006/2007 in order to encourage young talents that at least four players who have received a right to play in the sense of the so called “self-made players” have to be in the Bundesliga team. In accordance with sec. 5a of the license player regulation the Bundesliga associations receive the right to play for selftrained players aged between 15 and 21 years under the term “self-made players”. Another condition is that the player has had the right to play for at least three seasons in the association or a federation within the Federal Republic of Germany. For the season 2008/2009 the minimum number of “self-made players” has been increased to eight players.5

1

Comp. http://www.eskript.unibas.ch [Framework, Verlässlichkeit], (status: 10/11/2007; 22:31 CET).

2

Comp. von Keitz [Immaterielle Güter, 1997], p. 185.

3

Comp. Karai [Rechnungslegungsgrundsätze, 2002], p. 84.

4

Comp. Coenenberg [Jahresabschluss und Jahresabschlussanalyse, 2005], p. 145.

5

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 224.

Identification of player capacity on the balance sheet

177

FW

MF

DF

Overview over the four self-made players of the FC Bayern München1 Backnumber/Name

Born on

32 Hummels, Mats

16.12.1988

36 Fürstner, Stephan

11.09.1987

39 Kroos, Toni

04.01.1990

34 Wagner, Sandro

29.11.1987

Figure 4-14: Young talents of the FC Bayern München.

5.4.1

Booking conditions in accordance with the HGB

In accordance with sec. 248 subs. 2 HGB intangible assets not obtained for money may not be booked as assets.2 Thus, there is a prohibition of entry as asset for self-trained soccer players.

5.4.2

Booking conditions in accordance with IAS/IFRS

There are additional requirements for intangible assets under IAS 38.51 to 38.67, which serve to distinguish them from goodwill. As in research and development in the traditional area (development of products, medicals, website layouts etc.) these are also divided into two stages in the case of the human resource area.3 Through the division of research and development costs it is examined whether the intangible asset in form of a “self-made player” is able to generate a future economic benefit and whether the resulting training costs can be reliably determined4:  In accordance with IAS 38.57(a) it has to be proven that the creation is possible and provides a future benefit (also possible in form of marketing).  In accordance with 38.57(b) the management must intend to transform the “product” – the player – into a starter.

1

Comp. Kicker-Sportmagazin [Special issue, Bundesliga, 2007/08], p. 79.

2

Comp. sec. 248 subs. 2 HGB.

3

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/28, 2004], p. 1444.

4

Comp. Kirsch [Internationale Rechnungslegung nach IAS/IFRS 2003], p. 55.

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Chapter IV

 In accordance with IAS 38.57(c) the associates must have the competence to promote the player.1  The “self-made player” has a foreseeable, economic benefit in accordance with IAS 38.57(d) with directly attributable yields.2 Furthermore, in connection with IAS 38.60 belated spending, which arise after the determination and which have a positive influence on the originally estimated earning power, do not have to booked in the P&L statement but as assets.3 The achievable yields have to be calculated on an annual basis, as they are intangible assets which are not yet available for use.4  The association has to have appropriate resource from a technical, economic and other point of view, in order to finalize the development of the player. The use and marketing after finalization has to be guaranteed (IAS 38.57 (e)).  In accordance with IAS 38.57(f) competence for a reliable determination for the arising development costs is needed.5 Determination of the expenses in the course of time on the balance sheet Costs of research Costs of development ss t0

expenses are

t1

affecting the P&L statement

t2

Suitability for Bundesliga

t3

Expenses can be entered as assets

Figure 4-15: Distinction between research and development costs

In accordance with IAS 38.54 expenses for intangible assets, which arise in the research stage, have to be booked on the P& L statement in the period in which they have arisen. In accordance with Sellhorn, a future economic benefit cannot be expected in this early stage. Wehrheim agrees with this, because practice shows that only few talented players sign a license player contract at a later point. The secure controllability of talented players in accordance with IAS 38.15 as well as the connected future benefits are problematic for that reason.6

1

Note: The initiative of the German Soccer association is “demand and promote talents”, comp. http://www.dfb.de [Talente fordern und fördern], (status: 10/13/:2007; 15:22 CET).

2

Comp. w/o author, Deloitte/ IAS PLUS [SIC-32], (status: 10/14/2007; 16:12 CET).

3

Comp. w/o author, Deloitte/ IAS PLUS [IAS 38], (status: 10/14/2007; 16:17 CET).

4

Comp. w/o author, Deloitte/ IAS PLUS [IAS 36], (status: 10/14/2007; 16:22 CET).

5

Comp. Kirsch [Internationale Rechnungslegung nach IAS/IFRS, 2003], p. 55.

6

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 224.

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179

The later training costs arising in the development phase in which the suitability for Bundesliga is assumed, have to be entered as assets in accordance with IAS 38.57. The prohibition of capitalization in accordance with IAS 38.67 is not applied. Educational costs have to be regarded as research and development costs for the case of soccer association contract players at an early age and promote them correspondingly.1 One example is the Dutch association Ajax Amsterdam which by its encouragement of young talents has laid the cornerstone for a successful international era. Already in the training as young players, the future employees learn the game system of license players.2 The formation does not end when coming of age. The conclusion of the first license contract and the award of the permission to play by the DFB are regarded as sign for the suitability for Bundesliga. Therefore, the controllability in accordance with 38.15 does not have to be questioned any more and a growth of benefits by the deployment in official events can be assumed. The regulations of IAS 38.57 are regarded as fulfilled if the association has proofs for the economic and technical quality of the “intangible assets” in the development phase as well as of the company itself. A registration in the balance sheet is therefore possible.3 The targets set by the management are criteria for the fulfillment of the development of the player. If the aim is achieved, the development in accordance with IAS 38.97 is regarded to be finalized and the formation as finished.4 Example:5 The 1. FC Champions invests 250.000 Euros for the training of a young player. When the player comes of age, a long-term labor contract is concluded. Many soccer experts opine that the player will be a starter in the Bundesliga in the near future. Solution: By signing the contract the club disposes of the necessary control (power of disposition) over the player value. On the basis of expert opinions the player is suitable for the Bundesliga (“Technical Feasibility”). With the suitability for the Bundesliga the future economic benefit is sufficiently probable. From this point in time, the arising training costs do not have to be booked as research costs but have to be booked as assets among the development costs. The development is finalized from the point in time (IAS 38.53) when the player plays as starter in the Bundesliga or when the target set by the management can be regarded as fulfilled (IAS 38.97). Even if the player is not part of the national team, this is no argument against their suitability for the German soccer league according to Lüdenbach/Hoffmann.1 Homberg/Elter/

1

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 224.

2

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 85.

3

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004], p. 1444.

4

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004], p. 1444–1445.

5

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004], p. 1444–1445.

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Rothenburger argue differently: In their opinion the production costs can not be exactly determined. The separation of costs for rehabilitation measures and training can be assessed individually, however in the case of costs for the usual training one cannot distinguish between recovery and retraining.2 Therefore, the development costs for a new self-made player cannot be booked as asset.

5.5

Evaluation of access to “intangible assets”

In accordance with IAS 38.24 the access to intangible assets has to be booked among the costs of purchase or production. In case of player purchase the purchase costs have to be determined.3 The BFH4 decided on the 26th of August of 1992 that transfer amendments cannot be considered as immediately deductible operational expenses.5 The purchase price or the termination payments are the fundament of IAS 38.27(a). The non-reimbursable purchase tax as well as the reduction of prices belongs to the purchase price in accordance with 38.27 IAS because of early payment or quantity-connected reductions. The commissions for player advisors as well as the signing fees have to be added to the purchase price and booked as asset, as well. In accordance with IAS 1.68 the signing fee does not have to be registered separately from the termination fee. The sole minimum entry contents in this standard are sufficient.6 The signing fee, however, can be found under the “Other Assets” on the balance sheet, i.e. separately from the termination fee. The commissions to the player agent are defined as remunerations in accordance with IAS 38.28(b). This is contradictory to the prohibition of entry as asset in accordance with § 248 HGB, which declares the commission as indirect trade-off and negates the entry as assets.7 The signing fee, which is paid to the player who is willing to change for his signature is determined by the IAS 38.28(a).8 The IAS 38.7 interdicts the addition of subsequent purchase costs valid under sec. 255 subs. 2 c. 2.9

1

Comp. Lüdenbach/Hoffmann [Der Betrieb, Issue 27/ 28, 2004], p. 1444–1445 and Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 225.

2

Comp. Homberg/Elter/Rothenburger [KoR, Issue 6, 2004], p. 262.

3

Comp. Ruhnke [Rechnungslegung nach IFRS und HGB, 2005], p. 242.

4

German Federal Fiscal Court (Bundesfinanzhof).

5

Comp. Jansen [FR, 13/95], p. 464.

6

Comp. Ruhnke [Rechnungslegung nach IFRS und HGB, 2005], p. 242.

7

Comp. Baetge/Kirsch/Thiele [Bilanzrecht-online, IAS, Kommentar], p. 27.

8

Comp. http://www2.jura.uni-hamburg.de [Immaterielle Vermögenswerte, 2005], (status: 17.10.2006; 20:57 CET), p. 15.

9

Comp. http://www.fibumarkt.de [Anschaffungskosten], (status: 10/18/2007; 13:15 CET).

Identification of player capacity on the balance sheet

5.5.1

181

Hand money or “Signing Fee”

In connection with the Bosman decision from 1995 the negotiating power of the player in contract negotiations has grown. Schwendowius classifies players with regard to their quality into star players and average players. The number of star players is limited and the star players use this fact to their advantage.1 Imagination, applied game intelligence and creativity are characteristics of a player who disposes over high executive abilities. An average player tries to compensate deficiencies with endurance, assiduity and discipline. The amount of transfer fees and salaries of star players in relation to those of an average player are many times higher. In order to avoid labor unrest between the players, in some cases it is tried to pay hand money as financial compensation to the star players. Due to this technique there is no big salary difference between average players and star players.2 Negotiating power in player contracts3

Growth negotiating power – players

Negotiating power players Star players

Relatively strong negotiating power player

Compromise solution

Average players

Compromise solutions

Relatively strong negotiating power club

Small Market Club

Big Market Club

Negotiating power club

Growth negotiating power -club Figure 4-16: Negotiating power of star players Source: Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 90.

Schwendowius classifies the clubs into “Small Market Clubs” and “Big Market Clubs”. Size and attractiveness of the club are significant for this classification. Thus, clubs with locations in an economically better off region which can present past and present successes and clubs with a bigger catchment area have more negotiating power.4

1

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 97.

2

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 71, p. 101.

3

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 90.

4

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 8.

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Generally, the player receives the hand money once, when the contract is signed.1 The costs of the hand money have to be depreciated over the duration of the contract. This is conforming to the accrual principle of IAS 1.25(f).2 Incoming and outgoing payment instruments have to be disclosed in the period which they have to be assigned to.3 Example:4 Sebastian Deisler (born January 5th 1980), is a professional soccer player of Hertha BSC Berlin who changed at the age 22 years for a signing fee of about ten million Euros from his Berlin club to the German record champion FC Bayern München.

5.5.2

Player agent and commission

Presently the number of player agents has reached about 800. The first professional player agent was Wolfgang Fahrian, who started off in the 70s. Besides some “big fishes” in the business like Rogon GmbH & Co. KG5 or “Stars & Friends6” more and more smaller agents like “CT Creative Talent7”, a subcompany of the DEAG Deutsche Entertainment AG, pop up in the jungle as intersection between players and clubs. Besides these respectable player agents, there are more and more black sheep, whose target is quick money. A recent example is the player advisor of Timo Hildebrand, a young gate keeper, who in the season 2007/2008 changed from his secure regular contract with the officiating German champion VFB Stuttgart to the bench of the FC Valencia.8 From a legal point of view the contractual relationship between players and agents can be considered as a brokerage agreement (sections 652–655 BGB). In case of a successful job or the conclusion of a labor contract between player and association the agent receives a maximum commission of 14% of the annual salary of a player.9 “A person who […] promises a broker commission for the agency of a contract is only liable to pay the salary, if the contract is entered as result of the agency of the broker.”10

1

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 97.

2

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 225.

3

Comp. w/o author, Deloitte/IAS PLUS [Framework], (status: 22.10.2007; 19:03 CET).

4

Comp. http://www.fd21.de [Starspieler], (status: 10/18/2007; 14:48 CET).

5

Comp. http://www.rogon.tv [Spielervermittler], (status: 10/20/2007; 13:08 CET).

6

Comp. http://www.starsandfriends.net [Spielervermittler], (status: 10/20/2007; 13:10 CET).

7

Comp. http://www.creative-talent.net [Spielervermittler], (status: 10/18/2007; 23:21 CET).

8

Comp. Die Zeit [n° 33, 8/9/2007], p. 23.

9

Comp. Schmeilzl [Rechtliche Rahmenbedingungen, 2004], (status: 10/18/2007; 23:33 CET), p. 3.

10

Comp. sec. 652 Subs. 1 p.1 BGB.

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183

Besides the regulations in the broker law the regulations of the sections 296 to 298 SGB III1 have to be followed for the intermediation of labor, as far as they are applicable for the group of “professional athletes”.2 Since March 2002 unlicensed agents are allowed to take part in this business. The expungement of the section 291 SGB III had had this effect. Before, prospective agents had to stand an exam, after which they received a license. With this license they could hand in a petition for a permission to carry out the business with the Federal Labor Agency. The FIFA still demands in its constitution to allow only licensed agents under the threat of penalties, but in accordance with many jurisprudents this collides with the German constitution, which provides professional freedom in its article 12.3 Player agents have no further contractual relations with the players besides the agency. Contract drafting or changing as well as negotiations do not belong to their activities, as – apart from a lawyer as agent – they do not have the right to carry out legal matters of other persons and to give legal advice. Attorneys4 and notaries are consulted for these purposes. If the agent acts contrary to this regulation, this is a violation of sec 1 RBerG5. The consequences are a regulatory offence with fines leading to the invalidity of the advisor contract because of the violation of the legal prohibition of section 134 BGB and the refund of the commission. Furthermore, exclusivity clauses (violation of § 297 number 2 SGB III) and contracts with a long duration are invalid and lead to the voidness of the complete contractual relation (§ 139 BGB). In this context, adhesion contracts and excessive commissions have to be included.6 Nowadays almost all players are represented or intermediated by their advisors. Holger Hiernonyms, manager of the German Soccer League, calls the agent landscape in the Bundesliga a “grey market”, in which the club managers consider the agents as “arms dealers”. A professional advisor is important for the future career of a player, because he has solid knowledge about the needs and salary budget ideas of the clubs.7 The agency costs are paid by the purchasing club.

1

Third Volume of the German Social Security Code.

2

Note: sec. 296 Subs. 3 SGB III in connection with sec. 421g Subs. 2 SGB III cannot be applied to the group of “athletes”.

3

Note: Including a licensed lawyer; comp. Schmeilzl [Rechtliche Rahmenbedingungen, 2004], (status: 18.10.2007; 23:33 CET), p. 4–5.

4

Note: Lawyers are largely protected by their professional indemnity insurance.

5

German Law of Legal Advisors.

6

Note: There is always the possibility to warn the agent subject to costs because of unfair competition, (sec. 1 UWG), comp. Schmeilzl [Rechtliche Rahmenbedingungen, 2004], (status: 18.10.2007; 23:33 CET), p. 5–6.

7

Comp. Die Zeit [n° 33, 9.8.2007], p. 23.

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This way, the agent of Michael Ballack gained a commission amounting to about 1.29 million to 1.45 million Euros (including purchase tax) for his change to FC Chelsea (assuming the highest possible percentage of 14%).1

5.5.3

Purchase tax related dealing with the purchase payment and the agency commission

Purchase tax related dealing with the purchase payment In accordance with UStR2 1 subs. 4 “[…] the „Release of a soccer player and license player against payment of a transfer compensation […] can be seen as service exchange […] between selling and receiving club […]”3. Also if a player moves abroad, this corresponds to “miscellaneous services” in Germany. As a result the place to miscellaneous services has to be applied in accordance with section 3a UStG4. The transfer of TV broadcasting and the liberation of a professional soccer player against purchase payment are similar rights in the sense of § 3a subsection 4 n° 1 UStG.5 In accordance with section 3a subs. 3 UStG the place of the miscellaneous services is the place where the recipient of the miscellaneous services or the player is located.6 Therefore, the sales revenue is subject to tax. § 4 UStG provides only a tax exemption if the player goes abroad. The change of a player within the Bundesliga is subject to tax and a purchase tax of 19% is due. The assessment base for the purchase tax in accordance with § 10 subs. 1 UStG is the purchase payment in the amount of the remuneration. Purchase tax related dealing with the agency commission The purchase tax for the agency of a sportsman varies in accordance with the target country of the transaction. The assumption is the change of a player within Germany. The agency commission corresponds to a miscellaneous service in accordance with sec. 1 subs. 1 nr 1 in connection with sec 3 subs. 9 in connection with sec 3a subs. 4 s. 1 UStG. The agent fulfills the provision of the sec 2 subs. 1 UStG and the agent has to be considered as entrepreneur. The place of service is Germany in accordance with sec. 3a subs. 4 nr. 10 in connection with sec. 31 subs. 1 UStG. As remuneration is paid, the procedure is controllable. There is no provision for tax liberation for an agency within Germany. Thus, the payment is

1

Comp. http://www.sport.ard.de [Ballack, 2/28/2006], (status: 10/20/2007; 12:45 CET), Comp. http://www.bronline.de [Ballack, 2006], (status: 10/20/2007; 12:47 CET).

2

Umsatzsteuerrichtlinien, German Value Added Tax Guidelines.

3

Quotation: UStR [Besteuerung von Transferzahlungen, 8/31/1955], (status: 11/23/2007; 13:46 CET).

4

German Value Added Tax Act.

5

Quotation: w/o author, Beck`sche Textausgaben [Umsatzsteuer, 1999], UStR 39, catalog of the sec. 3a subs. 4 n° 1 to 11 UStG.

6

Note: Under the assumption that the recipient is a company in accordance with sec. 2 UStG.

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185

subject to taxes. The assessment basis for the purchase tax is the commission amounting to the remuneration in accordance with § 10 subs. 10 s. 1 UStG. The purchase tax is 19%.

5.6

Subsequent valuation of the “Intangible Assets”

There are two choices of amortizing an intangible asset. Besides the Amortized cost-model (IAS 38.74), also the revaluation model (IAS 38.97ff) is possible. The first model is based on the purchase costs. The purchase costs consist of:  Rescission costs  Commission  Potential hand money (“Signing Fee”) to the player They are amortized over the duration of the contract and recorded with effect on net income. The latter model uses the actual cash value as basis. This “Fair Value” is identified at the moment of the new assessment. For its application the asset has to be balanced at least once with its purchase or fabrication costs (IAS 38.64). Thus, only in the second year after the purchase at the earliest, this method can be applied. The precondition is the availability of an active market (IAS 38.75). Estimations of the market value are not acceptable in the case of an “Intangible Asset”.1 The soccer player market in the soccer area does not correspond to the requirements of an active market. The player market lacks the fungibility of the asset, as the value of a permission to play cannot always be assessed by sufficient demanders and offerers.2 An assessment of the “Fair Value” by the revaluation model is therefore not applicable. Therefore, the subsequent evaluation has to be carried out in accordance with the Amortized cost-model. Booking: Purchase of a midfield 1st July 07 Player values debited Input tax (19%) 1st July 07 Hand money debited 1st July 07 Commission debited Input tax (19%)

Bank credited Bank credited Bank credited

Debit 5.0 m € 0.8 m € 1.3 m € 0.7 m € 0.133 m €

Figure 4-17: Activation of the player in the balance sheet

1

Comp. Ruhnke [Rechnungslegung nach IFRS und HGB, 2005], p. 465–466.

2

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 226.

Credit 5.8 m € 1.3 m € 0.833 m €

186

5.7

Chapter IV

Systematic amortization

For the amortization of an “Intangible Asset” in accordance with IAS 38.98 three different methods can be chosen. Besides the performance-related and digressive, generally the linear method has to be applied. As it is not possible to determine the economic benefit course1 reliably, the linear method in accordance with IAS 38.88 IAS is often used in practice.2 In case of the linear depreciation method the income-relevant value is calculated by the purchase costs divided by the useful economic life. Thus, a constant depreciation amount has to be booked annually.3 The useful economic life corresponds to the contract period, as with the expiration of the contract the permission to play is invalid in accordance with section 13§ n° 5 license player regulation.4 Hereby an exact useful economic life-span is determined. In the case of the factors in accordance with 38.90(a) IAS to (h), which define the determination of the useful economic life-span, the IAS 38.90(g) represents the basis for the application of the contract duration as useful economic life-span. The power of disposition of the club over the player is decisive.5 A useful life span, which is chosen on a longer basis as the power of disposition, is not consistent with IAS 38.94. In accordance with IAS 38.94 the contractual duration or the useful life span has to be determined on an annual basis. The conclusion of a contract extension of an expiring contract leads to the adaption of the annual depreciation.6 This is different in the case of a contract prolongation clause. According to the BFH (German Federal Finance Court) decision of 26th of August 1992 for labor contracts with such option clauses the probability of such a case has to be determined. If such a probability cannot be determined, the depreciation period is prolonged (contract duration plus option).7 Booking of a depreciation with a three year contract duration Depreciation of the mid center player Debit 30th June 08 Dt. depreciation Cr. player values 1.67 m EUR 30th June 08 Dt. depreciation Cr. signing fee 0.43 m EUR 30th June 08 Dt. depreciation Cr. agency commission 0.23 m EUR

Asset 1.67 m EUR 0.43 m EUR 0.23 m EUR

Figure 4-18: depreciation of a player after one business year

When the player is used the first time the depreciation starts. The first depreciation of a transferred player in the new season starts on the 1st of July of the year at the earliest. The pure

1

Comp. Kirsch [Internationale Rechnungslegung nach IAS/IFRS, 2003], p. 62.

2

Comp. Dawo [Immaterielle Güter in der Rechungslegung, 2003], p. 222.

3

Comp. Coenenberg [Jahresabschluss und Jahresabschlussanalyse, 2005], p. 169–170.

4

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 226.

5

Comp. Kirsch [Internationale Rechnungslegung nach IAS/IFRS, 2003], p. 62.

6

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 220.

7

Comp. BFH decision [I R 24/91, 8/26/1992], (Status: 25.10.2007; 13:51 CET).

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187

signing of the contract for the next season does not represent an expense in the profit and loss statement yet. At the end of the duration of usage the residual value is reduced to zero.1 However, if there is a residual value, the depreciation has to be adapted. As, in accordance with the Bosman decision, no termination fees have to be paid for ending contracts2, the residual value is not relevant in such cases. A residual value can only exist, if a third person buys the player in the middle of the running contract or in the case of young soccer players, for whom a formation compensation3 is due. In both cases the depreciation has to be adapted taking the residual value in accordance with IAS 38.100(b) into consideration. A consideration in accordance with IAS 38.100(a) is not applicable because there is no active market. Under IAS 38.104 the depreciation period and method have to be examined and, if necessary, adapted at least once a year.4

5.8

Extraordinary depreciation

For an extraordinary depreciation IAS 38.97 indicates the impairment test under IAS 36. In this procedure the value of intangible assets is examined at the balance sheet key date (30th of June of the respective year). The IAS 36.9 contains indicators which are applied for the determination of an extraordinary depreciation. Thus, in the case of quoted companies, a lower market capitalization than the accounting value of the equity capital implies the examination of the value of the invested capital. Besides these developments with regard to a human resource intensive company it is important whether physical damages have occurred. A comparison with past values under IAS 36.12 is carried out.5 In the case of soccer players it is hard to determine extraordinary depreciations. The lack of an active market leads to the problem that the exact amount cannot be determined. The IAS 36.20 provides help because it considers another possibility for the determination of the “Fair Value”. If the “Fair Value” minus the selling costs cannot be determined, the amount can be determined via the use value.6 Wehrheim considers this as problematic, because the total use value of a contract player department cannot be objectively attributed to each player.

1

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 220.

2

Comp. Pflister [Bosman-Urteil, 1998], (Status: 25.10.2007; 15:02 CET), comp. w/o author, EuGH [Bosman, 15.12.1995].

3

Comp. http://www.anwaltzentrale.de [Ausbildungsentschädigung, 7/12/2006], (Status: 10/25/2007; 15:17 CET).

4

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 226.

5

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 224–226.

6

Comp. w/o author, Deloitte/ IAS PLUS [IAS 36], (Status: 10/25/2007; 18:22 CET).

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Chapter IV

Only precisely recognizable occurrences like a “sports invalidity” lead to an extraordinary depreciation under IAS 36.12(f). The result is that the book value of the player is zero on the balance sheet. The ordinary depreciation does not have to be carried out anymore.1

5.9

Appreciation

For the appreciation to the accounting value the impairment test has to be carried out. By this it is examined whether the extraordinary depreciation is still existent or whether an improvement should be expected. The value that has formerly be deducted on an extraordinary basis has now to be added again, if in relation to a soccer player a sports invalidity cannot be assumed any more.2 The examination has to be carried out on an annual basis (IAS 36.96).3 A well known example is the Bundesliga player Gerald Asamoah, who was playing for the Hanover 96. When he was 20, doctors found out that he was suffering from a septal hypertrophy. Under own responsibility a defibrillator for the case of a cardiac arrest is therefore available at the sideline of the game.4 The value appreciation is limited to the amount of the extraordinary depreciation (IAS 36.117), so that the new accounting value corresponds to the value which would have resulted with the ordinary depreciation in the first place.5 If signing fees have been paid during the contractual negotiations they have to be booked as asset.6 Example: The contractual duration of a player is three years. The company has had purchase costs amounting to nine million Euros. At the beginning of the second year a well known association shows great interest in contracting the player for ten million Euros. At his moment the booking value is six million euros. Solution: Because there is no active market, an appreciation to the “Fair Value” cannot be carried out. When the player is sold, this is booked in the profit and loss statement. However, there is the possibility to adapt the depreciation if a residual value exists. There is a residual value, if the selling club is obliged to the sale of a third person.7 In accordance with IAS 38.103 the “residual value”of an asset can rise up to the amount which corresponds to or surpasses the book

1

Comp. Wehrheim/Zulauf [PiR, Issue 8, 2007], p. 226–227.

2

Comp. w/o author, Deloitte/ IAS PLUS [IAS 36], (Status: 10/25/2007; 18:22 CET).

3

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 244.

4

Comp. http://www.ndr.de [Gerald Asamoah], (Status: 10/27/2007; 19:49 CET).

5

Comp. w/o author, Deloitte/ IAS PLUS [IAS 36], (Status: 10/27/2007; 20:50 CET).

6

Comp. Dawo [Immaterielle Güter in der Rechnungslegung, 2003], p. 220.

7

Comp. w/o author, IDW [IFRS/ IAS, 2006], IAS 38.100.

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189

value. If this is the case the depreciation amount of the asset falls to zero, as long as the residual value has not subsequently fallen under the book value of the asset.1

5.10

Contract term

The soccer players conclude a labor contract with the soccer companies. The soccer players are employees of the association and earn their income on the basis of employment in accordance with sec 19 subs. 1 s. 1 n 1 EstG (German Income Tax Act). The reason for this is that they are bound by instruction and that there is a long contractual duration.2 The labor contracts between the soccer association and the player are temporary. In accordance with the transfer amended 2001, a contract term between one and five years is provided.3 While before the Bosman decision4 the high dissolution fees after the termination of contracts prevented form leaving the association and the opportunity risks were limited, this is not the case anymore. The higher competitive pressure between clubs leads to longer contract terms with fixed dissolution fees. By longer contract terms the clubs try to protect themselves form losses of assets and revenues.5

5.10.1

Contents of labor contracts

The legal relation between the player and the association is an employment relation.6 After signing, the contract has to be presented to the passport offices of the respective regional association. In the case of a labor contract as category of service contracts the sections 611ff. BGB have to be applied. For player contracts further contract contents are important.7 Amongst other things, a sample contract contains the following issues, which indicate the player regulations of the DFB and, thus, expand the provisions of a “normal” labor contract. Both contract parties agree with the following contents:

1

Quotation: w/o author, IDW [IFRS/ IAS, 2006], IAS 38.103.

2

Comp. Jansen [FR, 13/95], p. 461.

3

Comp. w/o author, FAZ [issue 56, 3/7/2001], p. 46.

4

Comp. BFH decision [I R 24/91, 8/26/1992], (Status: 10/25/2007; 13:51 CET).

5

Comp. w/o author, Deloitte & Touche [Annual Review of Football Finance, 1999], p. 23 and Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 90–91.

6

Comp. Kaiser [Der Betrieb, Issue 21, 2004], p. 1110.

7

Comp. http://www3.mkd.de [Spielervertrag], (Status: 10/29/2007; 16:40 CET).

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 With the determination of the status of a soccer player in accordance with sec. 8 player regulation, where a distinction between amateurs, non-amateurs1 and non-amateurs with license is made.  With the provision of the permission to play of the DFB. regulations regarding the right to play in compulsory games and friendly games as well as information in the player passport (sec. 10 player regulations).  The contract duration lasts until the end of the season (30th June). The association has to be informed on contract prolongations (sec. 22 player regulations).  For the settlement of disputes regarding the transfer regulations the arbitration committee of the DFB or a regional member association have to be contacted (sec 26 a player regulations).2  Presence at the respective provided association event (especially games3, training, meetings and other) has to be respected.  It is obligatory to wear the sports wear of the supplier.  Prohibition of sport bettings4 in games in which the player takes part. Also players of other teams of the club are concerned.  The club has the right to use the personal rights of the player, e.g.: name (also nicknames and stage names), signature, photographs (group and individual pictures) and game recordings, and to benefit from them commercially for multimedia applications (PC-games, internet, online-services etc.), broadcasts or other merchandising products.  Holidays can only be chosen in the time when no compulsory games take place.5

5.10.2

Formation compensation

In the case of a move of an amateur to a professional club a formation compensation is due in accordance with sections 27–28 license player regulations.6 The Bosman-decision changed the transfer modalities within the EWU7. The regulations of the sports clubs indicated, that when a contract of player expires transfer, formation or promotion compensations are due. This violates Art. 48 of the EWU contract. In the course of the implementation of the Art. 48 EWU contract in the sports area the foreigners’ clause for EU citizens was created. A payment of transfer, formation or promotion compensations which were effected before the

1

Annotation: The term “non-amateur” has been gradually replaced by the term “professional player”, comp. w/o author, FIFA-Reglement [Kommentar, 2006], p. 10–11.

2

Comp. w/o author, Deutscher Fußball-Bund [DFB-Statuten].

3

Annotation: Presence as substitute is also included.

4

Note: Violations belong to contract violations and correspond to the offense of unsportive conduct in accordance with 1 n° 2 of the code of law and procedure of the DFB, comp. http://www3.mkd.de [Spielervertrag], (status: 29/10/2007; 18:49 CET), p. 4.

5

Comp. http://www3.mkd.de [Spielervertrag], (status: 10/29/2007; 16:40 CET).

6

Comp. Kaiser [Der Betrieb, Issue 21, 2004], p. 1110.

7

Erste Westernreiter Union Deutschland eV.

Identification of player capacity on the balance sheet

191

decision cannot be reclaimed.1 The International Federal Association of Football FIFA decided on 1st April 1997 the extension of the decision to EU/EWR-foreign persons, who are playing in Europe.2 The formation compensation has to be paid to former clubs:  If the player signs a professional contract.  For each transfer up to the player’s 23rd birthday. If the 23rd birthday is reached within one season, the claim for compensation payments ends at the end of the season.3 The age of 23 is regarded as the end of the formation. If it can be proven and if it is publicly known that the player has finished his formation before reaching his 21st birthday, the 21st birthday is decisive. In the case of talented players, who e.g. conclude a professional contract at the age of 17 and receive short employments in professional soccer, the end of formation at 18 years of age is decisive. The actual end of the formation counts.4 The formation compensation is due, as soon as the young player signs his first professional contract or moves as professional player under 23 years to a club of another federation. In case of the move of a professional player to an amateur club no formation compensation is due. If the selling club dissolves the contract without sound reason, only payments to former clubs have to be effected and the selling club does not receive any compensation.5 As soon as the player has signed his first professional contract, the formation compensation has only to be paid to the former club in case of a move before his 23rd birthday. In other cases the forming clubs for which the player has played between the age of 12 and 23 receive a corresponding amount of money for each season. For the calculation of the training costs and thus for the formation of the players, all clubs are divided into four national categories. The formation compensation serves as solidarity contribution for amateur clubs.6 With regard to accountancy the formation compensation has to be treated like the transfer fee.7

5.10.3

Transfer Fee

The transfer fee for the termination of an existing contract is paid to the selling club.8 The transfer fee for a player whose club is relegated is generally lower. The league rank of the 1

Comp. w/o author, EuGH [Bosman, 12/15/1995], p. 25f.

2

Comp. Galli [Rechnungswesen, 1997], p. 239.

3

Comp. w/o author, FIFA-Reglement [Kommentar, 2006], S 61.

4

Comp. w/o author, FIFA-Reglement [Kommentar, 2006], p. 111–112.

5

Comp. w/o author, FIFA-Reglement [Kommentar, 2006], p. 117.

6

Comp. w/o author, FIFA-Reglement [Kommentar, 2006], p. 117–127.

7

Comp. Kaiser [Der Betrieb, Issue 21, 2004], p. 1110.

8

Comp. Jansen [FR, 13/95], p. 464–465.

192

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club serves as indication for the quality of a player. As a result of the difficult liquidity situation potential buyers of the player will try to beat down the price.1 While at the beginning of the 1990s the amount of the transfer sum consisting of own paid transfer payment, performance and reputation determined the market value, many factors are of importance nowadays.2 Besides the sportive performance of the soccer player, glamour factors become more and more important. Example:3 The Spanish soccer club, Real Madrid, engaged the English national player David Beckham in summer 2003 for 36 million Euros. This led to more sales in the merchandising area (growth by 60% or 53 million Euros), to an increase of the number of viewers, to higher sponsorships (growth by 137% or 44 million Euros) as well as an increase of the awareness level of the club on a worldwide basis. In accordance to information of the consulting and audit company Deloitte Touche Tohmatsu the club has obtained 440 million Euros which can be attributed to Beckham’s contraction. The five most expensive transfers in the German Soccer Bundesliga (status 2005) Year Transfer fee Name Former Club New Club 2001 EUR 25.6m Marcio Amoroso AC Parma Borussia Dortmund 2003 EUR 17.5m Roy Makaay La Coruna FC Bayern München 2001 EUR 12.8m Tomas Rosicky Sparta Prag Borussia Dortmund 2004 EUR 12.0m Lucio Leverkusen FC Bayern München 2001 EUR 10,7m Jan Kollar Porto Alegre Borussia Dortmund Figure 4-19: The five most expensive transfers in the German professional soccer area Source: CA$H-L€AGUE (2005), p. 48–49.

5.11

Special presentation of player values in the balance sheet

The purchase of professional and amateur players requires special positions in the balance sheet. Furthermore, a bail because of the membership in the League Federation is put among the financial assets.4 Therefore, a soccer company is different from companies in other sectors.

1

Comp. Schwendowius [Finanzierungs- und Organisationskonzept, 2002], p. 81.

2

Note: Fleischmann [CT Creative Talent GmbH, Interview, 2007].

3

Comp. http://www.diepresse.com [Beckham, 7/6/2007], (status: 11/19/2007; 0:29 CET).

4

Comp. Littkemann, J./ Brast, C./ Stübinger, T. [StuB, Issue 24, 2002], p. 1197.

Identification of player capacity on the balance sheet

193

Shortened classification scheme of the balance sheet in accordance with appendix VII LO Balance Sheet Assets Liabilities A. Non-current assets A. Club funds/Equity I. Intangible assets I. Share capital ... II. Capital reserve 2. Goodwill III. Revenue reserve 3. Player values1 ... 4. Prepaid expenses for players IV. Retained profit/loss II. Tangible Assets V. Annual surplus/debit carryover III. Financial Assets B. Debit carryover ... C. Liabilities 7. Bail – League Federation ... 5. Liabilities from Formation and B. Current assets Promotion compensations I. Stock ... II. Receivables and other assets ... 2. Receivables from formation and promotion compensations ... 5. Receivables against legal and/or natural persons who are directly linked with the members of organs of the licensee III. Shares IV: Checks, cash assets, Cash at bank and in hand, deposits in banks C. Accruals

D. Accruals

Figure 4-20: Shortened Version of a Balance Sheet of a Bundesligaverein Source: Littkemann/Brast/Stübinger [StuB, number 24, 2002], p. 1197.

5.12

Interim conclusion

With regard to purchased players the balancing in accordance with IAS 38 is prescribed. The capitalization of self-made players is not possible, as the development costs can not be exactly determined.

1

Comp. BFH of 8/26/1992–IR 24/91, BStBI II, p. 977.

194

Chapter IV

The depreciation is based on the duration of the contract. In the case of contract extensions the depreciation amount has to be adapted correspondingly. Besides the transfer payments and the player agency commission also the hand money belongs to the purchase costs. Since March 2002 the agents need no license for player agency anymore, since this violates the German constitution. However, the FIFA advises to contract licensed agents only. The agency activities belong to a broker contract. The player value cannot be attributed with the help of offers of other clubs. The player transfer market does not correspond to an active market, with the result that a new assessment because of offers of other clubs is not possible. An active market is characterized by homogenous goods, which is not the case with regard to permissions to play. Therefore, methodically adjusted purchase costs form the upper value limit. Only when the transfer of risks takes place the book value profit has to be booked as profit or loss. One has to point out, that in case of a contractual obligation with a third party, a residual value (amounting to the transfer payment) materializes. Because of this residual value the book value has to be adapted. If the residual value exceeds the book value, with the result that no adapted book value can be balanced without carrying out an appreciation, the depreciation has to be completely abandoned. In the case of trade-offs, where besides the player move also a deviation payment is affected, the play value can be manipulated. As only the compensation fee is determined, the scale may be freely chosen. Such businesses can contain a danger because the assets “player value” can be overestimated. Here, the Berlin Balanced Scorecard comes into play, as it determines the player value of each individual player, which reflects the corresponding market value. Thereby, the financial situation of the company is exactly described.

6

Balanced Scorecard

6.1

Definition

The Balanced Scorecard is a controlling instrument, which was developed by Robert S. Kaplan and David P. Norton in collaboration with the consultancy company KPMG at the beginning of the 1990s.1 In the year 1992 an article titled “The balanced scorecard – measures that drive performance“ appeared in the Harvard Business Review. This was the first time for the two US-Americans to present the Balanced Scorecard.2 “The term “Balanced Scorecard” refers to a strategic management system, which allows a holistic control of the company by considering all success relevant perspectives and dimensions in a well balanced way. They 1

Comp. http://www.controllingportal.de [Balanced Scorecard], (status: 11/5/2007; 14:54 CET).

2

Comp. Kaplan//Norton [Balanced Scorecard, 1992], p. 71.

Balanced Scorecard

195

form the framework for translating vision and strategy into actions.”1 “The balanced scorecard […] provides executives with a comprehensive framework that translates a company’s strategic objectives into a coherent set of performance measures.”2

6.2

Composition

The standard model consists of four perspectives, which depend on each other. Composition of the standard model of the Balanced Scorecard

Customer “To achieve our vision, how should we appear to our customers?” Objectives Measures Targets Initiatives

Learning and Growth “To achieve our vision, how will we sustain our ability to change and improve?” Objectives Measures Targets Initiatives

Financial Vision and

“To succeed financially, how should we appear to our shareholders?”

Strategy

Internal Business Processes

“To satisfy our shareholders and customers, what business processes must we excel at?” Objectives Measures Targets Initiatives

Figure 4-21: Balanced Scorecard Source: Kaplan/Norton [Balanced Scorecard, 1997], p. 9.

1

Comp.: Ackermann [Balanced Scorecard, 2000], p. 18, own translation.

2

Quotation: Kaplan//Norton [Balanced Scorecard, 1992], p. 134, own translation.

Objectives Measures Targets Initiatives

196

Chapter IV

The Balanced Scorecard completes the monetary control system. Thus, targets and indicators of non-monetary nature in relation to financial indicators are the result. In order to relate them, cause-and-effect relations have to be analyzed. Financial key figures are barely appropriate, in order to control certain targets and motivations in the executing area. Therefore, the non-monetary indicators complete the monetary indicators by considering further perspectives.1 “The performance of an organization as a whole is therefore represented as balance of the four perspectives on a clear display (“Scorecard”) – therefore the name “Balanced Scorecard”.” 2

6.3

The seven central ideas of the Balanced Scorecard

The wording of the company strategy is important for planning all individual targets. For future arrangements the Balanced Scorecard departs from an acting company which conceives strategies and determines targets. The targets should be of short, middle or long term nature. Its purpose is not to measure historic performances.3 The shareholder-consideration has to be replaced by the stakeholder consideration. The extension leads to the consideration of customer interests and the integration of the staff, because without both no permanent success is possible. For the system idea the connection of the four perspectives in different ways is necessary. Besides the horizontal connection, which links perspectives and their target, the vertical connection concentrates on the specific decision. In this context there is a connection of the company strategy with the operative and tactical measures of the individual perspectives. Finally the target setting and the choice of adequate individual targets is necessary. This is of importance for realizing the company targets.4 The Balance Scorecard is limited to essential perspectives. The focus lies on the most important company targets. For reaching the targets the consideration of the most important actions within the fixed period is crucial.5 Part of the core ideas of the Balanced Scorecard is as well, that the Balanced Scorecard is applicable to many companies regardless of their sector and size. The formal orientation framework can be individually adopted.6

1

Comp. Ackermann [Balanced Scorecard, 2000], p. 15.

2

Quotation: Horváth/Kaufmann [Balanced Scorecard, 1/2004], p. 9, own translation.

3

Comp. Ackermann [Balanced Scorecard, 2000], p. 15–16.

4

Comp. Ackermann [Balanced Scorecard, 2000], p. 17.

5

Comp. Ackermann [Balanced Scorecard, 2000], p. 17.

6

Comp. Ackermann [Balanced Scorecard, 2000], p. 17.

Balanced Scorecard

6.4

197

Standard Model

The standard model consists of four perspectives as well as vision and strategy as starting point. Between the vision and strategy the mission is interposed as connector. In addition to these elements there are targets, measures and indicators which are applied for the execution.

6.4.1

Vision

The vision of a company can be understood as the presentation of the future position of the company. In the near future a mission statement can result from this idea. Besides this idea of the future also the ideal position and the future progress as well as business ideas belong to the basic visions of the company.1 Also extra-economic aspects count among the visions. The vision does not underlie any timely limitations.2 Visions shall not be unrealistic, but represent a challenge.3 In accordance with Ackermann the vision has a function of motivation, identification, control and coordination. Certain visions lead to higher staff motivation.4 Example: The manager of the sport club Karlsruhe announced at the annual association meeting in the middle of November that despite the surprisingly good performance the seasonal goal is to stay in the league. The identification function has the result that involved persons follow the same objects and form a community. An identification with the company or the club results.5 With reference to soccer associations the control and coordination function is apparent with regard to the rotation. In clubs where the squad has reached a certain size, the trainer is responsible for avoiding any discontent of the substitutes. The rotation provides relief in this regard. Through a consistent physical stress of all players the risk of injury for each individual player is diminished. When the trainer announces that it is not the season target to win a certain cup, he chooses the controlling function in order to relief the pressure on the team and to reduce the risks of injury.

1

Comp. Ackermann [Balanced Scorecard, 2000], p. 20–21.

2

Comp. http://www.controllingportal.de [Balanced Scorecard, Script], p. 27.

3

Comp. Ehrmann [Balanced Scorecard, 2007], p. 21.

4

Comp. Ackermann [Balanced Scorecard, 2000], p. 21.

5

Comp. Ackermann [Balanced Scorecard, 2000], p. 20–19.

198

6.4.2

Chapter IV

Mission

The company mission displays which importance the company wants to have in society and in economy. Therefore, the difference of a profit oriented company and a non-profit organization contains another company mission. While on the one hand the increase of the Shareholder Value is targeted, societal, cultural and social targets have priority. Therefore, the mission is strongly connected with the company vision.1 Contrary to the vision, where the target group is within the company, the mission’s target group is company-extern. The mission should embody a concise positive presentation of the company. Among the addressees of a mission of a soccer company are many different groups as:  Media (TV, radio, print media).  Business partners (banks, merchandising agencies, League federation, suppliers, assurance companies, competing and friendly clubs).  Collectives relevant for society (soccer trade union, own and extrinsically organized fan clubs, parties and churches).  Other target groups (adolescents at schools, unorganized fans, educational institutions).  Soccer players (future, present and former players of the association). A mission that fits the club has a promotional effect on the players.2 Example: A very popular club situated in the Ruhr Basin follows the following mission: “FC Schalke 04 – in heart of the Ruhr Basin”. Together with the vision the mission forms the basis for the strategy of the company.3

6.4.3

Strategies

In business management the development of strategies means setting up principles, which concern all departments of a company without any exception. Through the strategies alone the business plans are put into practice. They shall serve as positive differentiation from competing companies. The strategy provides information on how potentials of the company can be utilized for appearing changes in the environment.4 Success potentials are the strengths of a company. They contain strategic success factors, which cover external and internal sources and influence the success.5 Among external

1

Comp. Ackermann [Balanced Scorecard, 2000], p. 22.

2

Comp. Ehrmann [Balanced Scorecard, 2007], p. 23.

3

Comp. Rehbein [Balanced Scorecard, Diplomarbeit, 2003], p. 12.

4

Comp. Ehrmann [Balanced Scorecard, 2007], p. 24–25.

5

Comp. Ehrmann [Balanced Scorecard, 2007], p. 24–25.

Balanced Scorecard

199

sources are e.g. the market share of a soccer company or the growth of the player market. In April the FC Bayern München had a market share of 19.23% in soccer enthusiastic German citizens (7.9 m fans), while Eintracht Frankfurt had only a share of 3.18% (1.3 m fans).1 Also the development of TV-marketing incomes has to be mentioned in this context. The dropdown of revenues in this area, triggered by the Kirch insolvency in 2002, led to lower monetary transfer activities of the clubs of the Bundesliga in the following seasons.2 Internal sources of the strategic success factors are e.g. the management quality, the player quality, training methods, development and research status of the game strategy and tactics, as well as the investment intensity of the club. The strategy is based on these success factors.3 Strategies need planning, in order to find out and implement possibilities. Furthermore, hazards have to be eliminated with the help of strategies as far as possible and lacks in performance capacity have to be reduced. The own potentials have to be maintained and extended.4 Strategy division with regard to their extent Company strategy Company strategies cover the single strategies of the whole company, which are divided into activity and functional areas. The company strategy is targeted on essential decisions, which the company follows over a longer, fixed period of time. On the long run the club determines the performance program, profit policy, sportive path, the targeted reputation of the club as well as the market elaboration on a basic level. Besides these areas, there is the fundamental attitude towards how the club deals with horizontal or vertical cooperations between the competitors and with the direct competitors.5 Also the policy of financing and attracting young, average and star players is crucial. What should the training conditions be like? Is simple turf sufficient or is it better to use artificial turf to protect the joints and stability? The specifications applied in the business are strategies. Advantages by cost leadership, attractive soccer and special target groups are part of it.6 “The soccer corporation Borussia Dortmund GmbH & Co. KG follows the company strategy, […] to establish itself in the medium term behind the FC Bayern München as one of the leading German soccer clubs.”7

1

Comp. Mrazek [CA$H-L€AGUE, 2005], p. 174.

2

Comp. Mrazek [CA$H-L€AGUE, 2005], p. 62.

3

Comp. Ehrmann [Balanced Scorecard, 2007], p. 25.

4

Comp. Ehrmann [Balanced Scorecard, 2007], p. 26.

5

Comp. Ehrmann [Balanced Scorecard, 2007], p. 27.

6

Comp. Rehbein [Balanced Scorecard, Diplomarbeit, 2003], p. 18.

7

Comp. w/o author, Borussia Dortmund [Geschäftsbericht 2007] p. 53.

200

Chapter IV

Business segment strategies The business segment strategies deepen the business strategies. Thus, some soccer companies apply cooperations for their talented but not yet experienced players. In 1998 there was a cooperation agreement between the English Premier-League-Club Manchester United and the Belgian Club Royal Antwerp Football Club. On the long run talents from England receive game experience in the Belgian Jupiler League. The English club in return, promotes the talents of the Belgian club in its training camps.1 By emitting bonds, the Armenia Bielefeld aims at the integration of the own fans in financing politics. The Eastern Westphalians as emitters try to obtain up to three million euros.2 Functional area strategies The adaptation of or connection of business strategies can be understood by functional area strategies. Especially Personnel, Investments, Marketing but also Research and Development strategies as well as Organizational strategies are meaningful.3 An example is the investment activity of the FC Bayern München and the TSV 1860 München, which united in 2001 in order to build a stadium in the Munich district Schwabing Freimann.4 For a successful course of the season, nowadays soccer clubs need information on their adversaries. This comprehends formation, positional play in special game situations and special information on individual players.5 Clubs address offerers as the IMPIRE AG for this purpose, i.e. a company, which with over 70 employees records the data and facts about all soccer players in the Bundesliga stadiums on a daily basis.6 Strategy classification with regard to ranking Strategies can be categorized into norm strategies and deducted strategies. Norm strategies can be subdivided into growth, absorption and selective strategies.7 With regard to soccer companies, absorption strategies which lead to a one time effect are basically not imaginable. Only clubs, which are relegated because of sportive, financial and legal reasons and have to reduce costs by selling players, are an exception. Successful clubs generally follow a growth and investment strategy, while clubs in the lower third of the league ranking often consider a mixture between growth and divestment strategy. The deducted strategies serve to implement the norm strategies. Procurement, marketing and personnel strategies are among these.8

1

Comp. http://derstatusard.at [Antwerp, 20.8.2002], (status: 11/9/2007; 21:07 CET).

2

Comp. w/o author, Arminia Bielefeld [Prospekt zur Emission einer Anleihe, 2006], p. 1ff.

3

Comp. Ehrmann [Balanced Scorecard, 2007], p. 28.

4

Comp. http://www.allianz-arena.de [Imagebroschüre, 4/19/2007].

5

Comp. http://sports.fim.uni-linz.ac.at [Statistik, 2001], (status: 11/10/2007; 14:53 CET), p. 24–31.

6

Comp. http://www.bundesliga-datenbank.de 09/11/2005].

7

Comp. Ehrmann [Balanced Scorecard, 2007], p. 27.

8

Comp. Ehrmann [Balanced Scorecard, 2007], p. 28.

[Fußballdaten]

and

http://www.stern.de

[Fußballflüsterer,

Balanced Scorecard

201

Strategy classification with regard to the market conduct Because of the competitive situation, the company has to think about how to behave in relation to its competitors. Besides the attack and displacement strategy also status-quo and conflict avoidance strategies can be pursued. In case of the attack strategy conflicts with competitors are accepted. Thus, product differentiations, product innovations, price reductions, changes in design as well as the involvement in legal disputes are imaginable. The displacement strategy is an accumulation of that and aims at the increase of the market share. The Status-Quo-Strategies shall support the maintenance of a certain market position. These are often applicable after reaching a certain market position and are targeted towards small industry companies. The conflict avoidance strategy aims at evading competition and defending market niches.1 While second league soccer clubs or regional league clubs search their customers on a niche market, the focus of the Bundesliga clubs lies on the satisfaction of all soccer fans. As soccer fans have often already chosen a certain club, price reductions are only applicable to a certain limit. With regard to guerilla strategies, which belong to attack strategies, they can well be considered. They, however, are not targeted towards the attraction of soccer fans, but towards their sportive developments.2

6.4.4

The four target perspectives

The Balanced Scorecard comprehends four basic perspectives. These are generally the financial perspective, customer perspective, internal process perspective as well as learning and development perspective. For soccer clubs a change is appropriate in which the learning and development perspective is added, whereby a fourth, the sportive perspective is generated.3 Financial Perspective The Financial Perspective is the most important perspective. Here it is pointed out, which economic results the measures of the other perspective have had on the company. Besides this benchmark for aims and indicators of other perspectives, it serves as translation of the strategic aims for the shareholders.4 Over cause-effect relations indicators of the remaining perspectives are connected with the aims of the financial perspective.5

1

Comp. Ehrmann [Balanced Scorecard, 2007], p. 28–29 and Weis, C. [Marketing, 2001], p. 91.

2

Note: From time to time there are disputes between the top clubs in the Bundesliga with regard to the sportive performance of the competitor. As sportive performance has effect on the finances of a club, this can, in my opinion, be understood as guerilla strategy.

3

Comp. Staudt [Balanced Scorecard, 2004], p. 6.

4

Comp. Pietsch/Memmler [Balanced Scorecard erstellen, 2003], p. 39.

5

Comp. Ehrmann [Balanced Scorecard, 2007], p. 34.

202

Chapter IV

“The financial perspective gives insight in whether the realization means an improvement of profits.”1 The company strategy determines the selection of the indicators. For this reasons financial key figures, which are strongly connected with the strategy, can be found in the financial perspective.2 New as well as traditional indicators count among them, as:      

Shareholder Value Return on Investment Discounted Cash-Flow-return Net profit ratio Return on Equity Growth in sales

The selection of aims and indicators depends on the conditions within the company and its situation.3 Customer perspective This perspective is focused on company relevant customer and market segments. “The demand for consequent customer orientation of all business activities and processes as crucial precondition for winning and securing market shares is reflected in the consideration of an individual BSC perspective “customer”.”4 In order to work with this target group aims, indicators and measures have to be determined.5 Example:6 The target group of a Bundesliga club is different from the one of a regional amateur club. While the Bundesliga club addresses as target groups soccer fans in Germany and abroad, the target groups of regional league clubs are concentrated on the region – maybe also on Germany. There are general and more specific indicators. Market share, customer satisfaction, customer loyalty as well as profit contributions and return rate are part of the general indicators. More specific indicators determine, how far the customer loyalty reaches and when the point is reached when customers are lost. The determination of cycle times, on-time-delivery, reaction time and time to respond to customer desires, can provide important information.

1

Quotation: Ehrmann [Balanced Scorecard, 2007], p. 33, own translation.

2

Comp. Pietsch/Memmler [Balanced Scorecard erstellen, 2003], p. 39.

3

Comp. Ackermann [Balanced Scorecard, 2000], p. 27–28.

4

Quotation: Ackermann [Balanced Scorecard, 2000], p. 28, own translation.

5

Comp. Ehrmann [Balanced Scorecard, 2007], p. 34.

6

Note: Türkiyemspor Berlin disposes over fans even outside of Berlin. Therefore, the target group of the upper league player is not exclusively limited to Berlin. Comp. Tuncay [Türkiyemspor Berlin, Interview, 2007].

Balanced Scorecard

203

Therefore, big importance has to be attributed to this perspective. Without pursuing customer aims, the targets of the financial perspective cannot be fulfilled.1 Internal process perspective Hereby it has to be determined, which aims have to be pursued in the process perspective, in order to realize the targets of the financial and the customer perspective.2 Through the internal process perspective another change of the control system in a traditional area is achieved. It is characterized by a bigger importance of the financial point of view. The internal process has a higher influence on securing and winning permanent competitive advantages.3 In accordance with D’Aveni there are four possible competitive advantages through development in competition, which exist or can still be achieved:4    

Time and knowledge advantages Cost and quality advantages Big financial possibilities Singular market position.

This perspective deals with the determination of such processes, which are necessary for an optimal realization of the company strategy. The control of existing processes and their improvement is not necessary.5 The company has to be considered as value chain, in which individual value activities are interconnected. For example the inbound and outbound logistics, marketing and sales, personnel management and the company infrastructure have to be considered as value activity. In order to achieve competitive advantages in relation to the competitors, value activities have to be more economic with regard to resources (for cost leadership) or be set up in such a way, that the differentiation from the competitive products is clearly visible.6

1

Comp. Ehrmann [Balanced Scorecard, 2007], p. 34.

2

Comp. Horváth & Partners [Balanced Scorecard, 2004], p. 4.

3

Comp. Ackermann [Balanced Scorecard, 2000], p. 29.

4

Comp. Weis [Marketing, 2001], p. 91.

5

Comp. Ehrmann [Balanced Scorecard, 2007], p. 35.

6

Comp. Ackermann [Balanced Scorecard, 2000], p. 29–30.

204

Chapter IV Innovation process

Customer desire identified

Market identified

Creation of the offer of products/ services

Operational process

Production of the product/ service

Releasing products/ services

Customer service process

Serve Customer the desire customer satisfied

Figure 4-22 Model of the internal process perspective through the value chain Source: Kaplan/Norton [Balanced Scorecard, 1997], p. 93.

For reaching financial and customer specific aims the value chain is divided into three main processes. Besides the innovation process, there are the operational process and the customer service process.1 The consideration of the innovation process is an important criterion in the internal process perspective, as by the identification of the customer desires new products or services can be developed.2 The operational process contains the production and the later delivery or execution of the products or services. In the customer service process all forms of services which can be engaged after the purchase are subsumed. These are amongst other things the maintenance, rectification, guarantee, reclamation as well as training services by employees of the customer-oriented company.3 The internal process perspective has the following aims4:  Shorten the process times  Improve the process quality  Reduce the process costs Example: By reducing the process times the customer orders are quickly dealt with, with the result that the customer satisfaction rises and that an early backflow in the form of payments is realized. By improving the process quality less consultations with the customers result, with the effect that the customer satisfaction rises and the financial situation is not negatively stressed. The decrease of the process costs has a positive effect on the income statement.

1

Comp. Ackermann [Balanced Scorecard, 2000], p. 29–31.

2

Comp. Ackermann [Balanced Scorecard, 2000], p. 30–31 and Ehrmann [Balanced Scorecard, 2007], p. 35.

3

Comp. Ackermann [Balanced Scorecard, 2000], p. 31.

4

Comp. Ackermann [Balanced Scorecard, 2000], p. 31.

Balanced Scorecard

205

For the internal process key figures as:1     

Cycle times Innovations in relation to the competitors Error rates Share of innovations in the sales and Material waste

are used. Potential perspective The potential perspective is a synonym for the learning and development perspective. The task of this perspective is to provide the necessary infrastructure for the achievement of the goals of the other three perspectives. The infrastructure consists of processes, systems and of the most important resource – of the personnel, which occupies a correspondingly significance place. If the targets and desired values of the remaining perspectives are achieved, depends on the staff.2 Therefore, the targets of the potential perspective are essential for the results of the remaining perspectives.3 The framework for key figures of the potential perspective: Core key figures

Profits

Employee loyalty

Employee productiveness Employee satisfaction

Performance drivers Staff potentials

Technological infrastructure

Figure 4-23: Indicators of the potential perspectives Source: Kaplan/Norton [Balanced Scorecard, 1997], p. 124.

1

Comp. Kaplan/Norton [Balanced Scorecard, 1997], p. 97ff.

2

Comp. Ackermann [Balanced Scorecard, 2000], p. 32–33.

3

Comp. Pietsch/Memmler [Balanced Scorecard erstellen, 2003], S 42.

Working climate

206

Chapter IV

Because the potential perspective is regarded as driver for the company development, the targets of this perspective are of crucial importance. These targets can be divided into staff related targets and situation specific drivers. Among the staff-related targets are the employee loyalty, employee productivity as well as employee satisfaction. The situation specific drivers are influences effecting the employee satisfaction. They are the performers of the company. Through measures of further education, integration of employees in financial areas, transfer of responsibilities and motivation the employee satisfaction can be influenced.1

6.4.5

Cause-effect relations

The strategic targets and key figures of the four perspectives are interconnected and are influencing each other.2 To what extent the individual targets influence each other becomes clear via the Strategy Map, where the targets are related via “if-then-statements”.3 Schematic presentation of a cause-effect relation: Finances Secure profit situation Broader basis of revenues

Reduce fluctuation Reduce operation costs

Customers Customer loyalty

More old members

Perceived service

Processes CrossSelling

Higher assistence intensity

Customer Oriented processes

New ways of employee assistance

Employees More effective sales

Reduce employee fluctuation

Figure 4-24: Schematic presentation of a cause-effect relation Source: http://fitnesstribune.com/arc/img/ ft101_4b.gif.

1

Comp. Ackermann [Balanced Scorecard, 2000], p. 33–34.

2

Comp. Horváth & Partners [Balanced Scorecard, 2004], p. 205.

3

Comp. Ehrmann [Balanced Scorecard, 2007], p. 113.

Higher qualification level

Case study: Balanced Scorecard illustrated with a soccer club

207

Example: In future, the mending of a device has to be carried out at the client’s. If the customer sees the service on the premises, the customer satisfaction increases, which can lead to longer customer loyalty. Additionally, fewer transportation costs of the company arise, which influences the price. A lower price can have the effect, that the company might be engaged for certain services also in future. “The measurement of the degree of target achievement is possible, because the strategic aims and the measures for the achievement are combined with the indicators. The indicators used are subdivided into succeeding profit indicators (lacking indicators) and preceding driving values (performance drivers).”1 To which extent the company strategy is free of controversy, can be seen from the individual cause-effect-relations (chains). The targets of the financial perspective play a special role in this regard, as all measures of the perspectives are geared towards them.2

7

Case study: Balanced Scorecard illustrated with a soccer club

7.1

Frame conditions

For the case study a fictive club is chosen which though the introduction of the Balanced Scorecard is hoping for an improved monitoring and control of the sportive and financial developments. The Balanced Scorecard is, for the time being, constituted for a period of five years. In order to make things easier the club is referred to with “FC Hagen 09” and trades as corporation under the name “Hagen 09 AG”. This club is based in the region North-RhineWestphalia and has played in the highest German game class since the beginning of 2000. The last two years the club played in the UEFA-cup and it now achieved its qualification for the Champions League because of its third place.

7.1.1

Venues, administrative panel and specialties

The stadium belongs to the city of Hagen, with which the club has concluded a contract for the use of the stadium. The stadium disposes over a capacity of 40.000 persons. Rent including heating and charges amounts to 30% of the ticket revenues.3

1

Quotation: Pietsch/Memmler [Balanced Scorecard erstellen, 2003], p. 43, own translation.

2

Comp. Kaplan/Norton [Balanced Scorecard, 1997], p. 142ff.

3

Note: In the style of the stadium rent of the Karlsruher Sport Club.

208

Chapter IV

In the branch office of the club there are four employees and the management. The salary due amounts therefore to 144.000 Euro for these employees. While the CEO works as an honorary member, the only manager of the club receives two million Euros per year. For an activity as CEO an expense allowance amounting to 10,000 Euros annually is due. The branch office can be found next to the stadium complex and is owned by the club, so that no additional rent is due. There is a fan shop on the premises of the branch office. The building has an accounting value of 40 Million Euros. In the operative area of a day of play expenses for the security agency, the public cleansing service and for the emergency medical services arise in an amount of 30.000 Euros. The youth department receives an annual extra payment amounting to 2.5 million in addition to the membership fees. Because of the insolvency of the Kirch Media GmbH&Co.KGaa and KirchPayTV GmbH the club had to take up a loan from its house bank in 2005. A small share of the amount has already been paid back, so that the amount was balanced with 30 million Euros as liabilities. The amortization of the loan is contracted for ten years. Balance sheet of the Hagen 09 AG at 30/06/2007 Assets Liabilities + equity Fixed assets Equity Building 40.000.000 Capital fund Player value 20.000.000 Annual net profit Floating assets Liabilities Bank 6.003.000 Credits Balance sum: 66.003.000 Balance sum:

30.000.000 6.003.000 30.000.000 66.003.000

Figure 4-25: Balance of the corporation, “Hagen 09 AG” at the 30/06/2007 for the business year 2007/08 without tax considerations

7.1.2

Club team

The team “FC Hagen 09” disposes of 18 players1. 13 players, on the average, take part in a game. The players’ salaries amount to 27 million Euros p.a. Besides these fix amounts, individual primes are negotiated for the Champions League and the UEFA-cup as well as the DFB-cup. The trainer, including the trainer panel and the advisers receive a fix salary amounting to one million Euros p.a.

1

Note: In the Bundesliga the team of an association consists of 20 players, for reasons of simplification the team was reduced in numbers.

Case study: Balanced Scorecard illustrated with a soccer club

7.1.3

209

Structure of revenues and expenses

List of revenues and expenses of FC Hagen 09 in Euros Sponsoring (fix revenues, p.a.) Main sponsor und equipment provider (“SADIDS”) Pool of sponsors Spectator revenues (variable revenues, per game) Ticket (Bundesliga) Ticket (international) status: season 2006/07 TV-revenues (variable revenues, per game/season) Bundesliga International (in form of primes) Leasing (fix revenues, per game) Restaurants, Snack bars, drinking stands etc. Sales/Fan shop (sales price per item) Jersey (at home/elsewhere) Trousers Support

7,500,000 7,500,000 18 per ticket 25 per ticket n.s. n.s. 25,000 70 20 10

Figure 4-26: Overview over revenues of the “FC Hagen 09” in the season 2006/07

in Euros Administration (fix costs, p.a.) CEO 10,000 Management 2,000,000 4 employees 144,000 Other 16,000 Player team (fix costs, p.a.) Trainer 1,000,000 Team 27,000,000 Event costs (fix costs, per game) Security Service, public cleansing, emergency medial 30,000 services Event costs (variable costs, per game) Stadium rent 30% of ticket revenues Sales/Fan shop (variable costs, per item) Costs for merchandising articles 10% of the net sales revenues Liabilities (fix costs, p.a.) Amortization of the loan (amortization amount p.a. 3 3,000,000 million Euros, duration 12 years) Figure 4-27: summary of the expenses of the clubs “FC Hagen 09”

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In addition, five million Euros as depreciation of player values have to be added to the expenses of the balance sheet. Furthermore, additional expenses in relation to national and international cup games and primes have to be considered.

7.2

Balanced Scorecard of the “FC Hagen 09 e.V.”

Some modifications were made to the Balanced Scorecard of the “FC Hagen 09” in comparison with the standard model. Besides the finance and the customer perspective there is a third decisive perspective, which considers sportive targets. Furthermore, the internal process perspective and the potential perspective have been merged to one perspective, so that – as originally – four perspectives are considered.

7.2.1

Company strategy

After their advancement in the Bundesliga the “FC Hagen 09” had the vision to become German Champion at some point. This would be an enormous success for the region. For this purpose, only players who identify with the club and its vision were purchased. At the moment the attention for the club in the region is very low. This, however, is supposed to change in future. By rising sportive success the clubs wants to gain more importance for the city and the surroundings. For this purpose a slogan with the following wording was developed: “In Hagen we play not only with our hands but also with our feet!” By attractive soccer more spectators shall come into the stadium. In order to achieve sportive successes, short and long term investments are necessary. In order to achieve short term successes star players have been contracted. In order to secure long term successes, a sport academy has been created. As the financial success depends on the sportive success and vice versa, the club has also profit oriented aims. In order to generate a high economic profit, the entrance in the European Champions Clubs’ Cup competition is crucial This shall be made possible by a strong team.

7.2.2

Financial perspective

The core components of the financial perspective of a soccer company are not different from those of companies in other sectors. Conflicts of aims with the sportive perspective, however, cannot be excluded because of the huge sportive development. Overview over revenues and expenses in the season 2006/2007 The sales revenues of the last season amounted to 55.39 million Euros with expenses amounting to 49.39 million Euros.

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Revenues Sponsoring Spectator revenues (Bundesliga) Spectator revenues (DFB cup) Spectator revenues (International) TV revenues (Bundesliga) TV revenues (International, own marketing) TV revenues (International, central) Primes (DFB cup) Primes (UEFA cup) Merchandising sales Leases (Restaurants, snack bars etc. during 20 home games)

in Euros 15,000,000 9,180,000 0 1,800,000 24,630,000 3,000,000 0 52,000 230,000 1,000,000 500,000

Total revenues

55,392,000

Figure 4-28: Overview over revenues of the “FC Hagen 09” in 2006/07

Expenses Player salaries (Fix costs) Player salaries (primes, international, for 13 playing members on the average) Trainer team Stadium rent (30% of spectator revenues) Other companies (security service, public cleaning company, emergency medical services etc.) Management (Fringe benefits) Management Administration (salaries) Administration (other) Merchandising expenses Young people department Amortization of loans (status of loans 1.7.2007: 3 million Euros) Total expenses + Depreciations of player values – Amortization of loans Total disbursements Figure 4-29: Overview over revenues and disbursements of the “FC Hagen 09” in 2006/2007

in Euro 27,000,000 39,000 1,000,000 10,980,000 600,000 10,000 2,000,000 144,000 16,000 100,000 2,500,000 3,000,000 47,389,000 5,000,000 –3,000,000 49,389,000

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Aims of the financial perspective The aims of the financial perspective are:      

Increase of the operating margin [15% to 30 %] Increase of sales [18% to 30%] Increase of profits [300% to 600%] Decrease of the debt of equity ration to 0,8 Reduction of the stadium rent by 10% Decrease and sales specific adaptation of the player salaries

The following key figures were identified in the last season. Key figures of the “FC Hagen 09” in the season 2006/2007 Indicators: (category 1) Sales Costs Profit Indicators: (category 2) Operating margin Indicators: (category 3) Equity Debts (Loans) Debt to equity ratio (Debts/Equity) Indicators: (category 4) Expenses for players and trainers Player specific revenues (TV, spectators, primes from DFB and UEFA) Operative revenues/expenses-ratio

55,392,000 49,389,000 6,003,000 10.84% 33,003,000 30,000,000 0.91 28,039,000 38,892,000 1.39

Figure 4-30: Indicators of the “FC Hagen 09” in the season 2006/2007

Calculation of net profit ratio of the “FC Hagen 09” assuming an operating margin of 15%. Sales (S)

58.104.706 €

Net profit ratio (NPR)

15%

Costs (C)

49.389.000 €

= Profit (P) Figure 4-31: Calculation of the net profit ratio of the “FC Hagen 09”

8.715.706 €

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The utmost target of the “FC Hagen 09” is the increase of the operating margin to at least 15%. As the consequences of the adaptation of the player salaries only take a minimal share, the increase of the margin has to be reached by increasing the sales. The indicator “salaries per game” serves to control the results in the operative business, with the result that by increasing the number of players a fix cost reduction takes place. Another measure is the reduction of the percentage of professional soccer players in the team. The increase of sales has to be reached in the areas: ticketing, sponsoring, European TVmerchandising, primes of the DFB cup as well as Champions League and in merchandising sales. Additionally, negotiations regarding stadium rent take place with the city of Hagen. The negotiations resulted in the agreement, that the stadium rent wound be decreased by 10% to 27% in the case of reaching the Champions League. The argumentation of higher Champions League ticket prices was also put through in negotiations. If the club does not reach the Champions League, the former agreements would remain unaffected. The decrease concerns any kind of events in the stadium, and, thus also Bundesliga and DFB-cup games. In order to reach the Champions League qualitative improvements of the team are necessary. Scorecard “Finances” Aim Increase of sales by 18% to 30% Increase of the operating margin from 15% to 30% Increase of profit by 300% to 600% Decrease of the debt to equity ratio Decrease of the stadium rent by10% Decrease of player salaries per game (Previous year: 28 m Euros for 41 games)

Indicator

Plan (€) Preceding Actual Measures year (€) Sales = 58.10 m. 55.39 m. Additional revenues Profit + Costs by sponsoring, TV marketing, merchanProfit/Sales * 15% 5,42% dising, increase of 100% spectator numbers, reduction of transfer Sales – Costs 8.7 m. 3 m. expenses, adaptation of player salaries to Debts/Equity 0.80 0.91 sales increase Reduce participa27 % 30 % Strengthen the team in tion in sales for order to play longer in ticketing the Champions League. Salaries/per Spiel 650,000 683,878 From fix to variable salary structure. Reduction of the team by one professional soccer player.

Figure 4-32: Scorecard “Finances”

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7.2.3

Chapter IV

Customer perspective

The corporate management factors of the customer perspective of a soccer company differ from those of companies of other sectors. The strategic aims with regard to the customer perspective are:      

increase revenues from ticketing increase revenues from TV-marketing Increase revenues from merchandising Increase revenues from sponsoring Increase market share with soccer fans Raise assistance of fans

Strategic aim: increase of ticketing The number of spectator rose by 6,587% on the average between the season 2001/02 and the season 2006/2007. In comparison with the season before, this means a decline by 1.43%.1 The stadium capacity utilization was at 78.27% on the average (year before: 74.81%).2 Average development of stadium visits in the 1st Bundesliga since the season 2001/2002

50,000 45,000

38,191

40,000 35,000

37,644

31,911

31,057

35,183

35,048

30,000 25,000

00 7 /2 06 20

05 20

/2 04 20

/2

00 5

00 4 20

03

/2

00 3 20

02

/2

00 2 /2 01 20

00 6

20,000

Figure 4-33: Average development of stadium visits Source: Kicker sports magazine [Kicker, 2007/08], p. 149.

1

Own calculation. Comp. Kicker-Sportmagazin [Special issue, Bundesliga, 2007/08], p. 149.

2

Own calculation, Comp. Kicker-Sportmagazin [Special issue, Finale, 2006/07], p. 28–96 and KickerSportmagazin [Special issue, Finale, 2005/06], p. 26–98.

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From the figure can be seen that in the last season 2006/2007 37,644 spectators came into the stadiums of the first Bundesliga. The spectator pays 18.63 Euros per stadium visit on the average.1 Increase of ticketing in Bundesliga games Last season, the „FC Hagen 09“registered a spectator average in Bundesliga games of 30.000 paying spectators. For an average entrance price of 18 Euros this corresponds to sales revenues of 9.18 million Euros.2 The strategic aim is an increase of the sales revenues by 15% in connection with equal cost developments. This implies an increase of the number of spectators per game by 4,500 stadium visitors. The revenues from ticket sales would thereafter increase from 9.18 million Euros to 10.56 million Euros. This corresponds to an increase of the sales revenues by 1.38 million Euros. Increase of ticketing in international competition While in the last season the “FC Hagen 09”completed three home games in the Champions League, in the case of victory in the qualifying game, one has to count on four games.3 In the three home games ticket revenues amounting to 1.8 million Euros have been achieved. 30,000 spectators on the average appeared to the games of the UEFA cup. The average entrance price was 18 Euros. Also because of the mediocre opponents no higher entrance prices could be achieved. The goals of this season are the qualification for the Champions League as well as a later qualification for the semi-quarter final. Because in the Champions League one can count on top class clubs, the entrance prices were raised from 18 to 45 Euros.4 Under this presumption one can count on revenues of 5.4 million Euros.5 This corresponds to an increase of sales revenues in this area by 200%.6 In order to achieve this aim, the season ticket for the group phase was created. In addition, the holder of a season ticket receives a coupon of 15 Euros, if the team qualifies for the semi-

1

Comp. w/o author, DFL-Report [Bundesliga Report, 2007], p. 34–35; Note: In comparison to other European Leagues like England (48.00€) or Spain (32€) the entrance prices are by far cheaper. Comp. w/o author, DFLReport [Bundesliga Report, 2007], p. 34.

2

Note: Calculation from 17 home games à 30.000 spectators with an entrance fee of 18.00€.

3

Note: The third placed team has still to qualify for the group phase in the UEFA-Champions League. If the club loses the game, it plays in the UEFA-Cup. There are three home and three away games in the group phase of the Champions League. Both first teams of the groups are qualified for the semi-quarter finals, while the third joins the round of sixteen in the UEFA-Cup.

4

Note: In the case of the FC Schalke 04 the average price for a ticket to a Champions League Game of the club is 48.87 euros (however, only the categories 1–7 are considered in this case. The hospitality seats in the areas LaOla, Schalker Markt, boxes etc. are not considered). Comp. see annex table sheet “Schalke 04”.

5

Note: Four home games with an average of 30.000 spectators and an entrance price of 45 euros.

6

Note: Year before: 1.8 million euros, this year 5.4 million euros, rise by 3.6 million euros corresponding to a growth by 200%.

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quarter final.1 The coupon is offset against the purchase of a merchandising product. For this, expenses amounting to 504,201.68 Euros maximum have to be included in the calculation.2 Raise of ticketing in the DFB cup As last season the “FC Hagen 09”dropped out in the first round against an amateur club, no revenues resulted. As the ticket revenues in the DFB cup belong exclusively to the hosting club, the guest club cannot obtain any revenues. Therefore, the target is to have at least one home game. As the DFB-cup is not as well visited as a Bundesliga game, the club counts on 50% of the regular spectator number of the past year in the case of a home game. This corresponds to 15.000 stadium visitors and to sales revenues of 270,000 Euros for an entrance price of 18 Euros. Measures for a higher number of visitors are a “2 for 1” promotion as well as seat cushions with the words “we are going to Berlin” for every spectator. This leads to expenses per spectator of two Euros (net). Strategic aim: raise revenues from TV-commercialization TV-marketing revenues for the Bundesliga games The TV-marketing revenues of the Bundesliga depend on the average place in the last three seasons as well as on the current average place in the present season. In the season 2003/2004 the FC Hagen 09 was on the average on the fifth, in the season 2004/2005 on the average on the fourth, in the season 2005/2006 on the average on the fourth, in the last season on the average on the third place. Under the weighting (4-3-2-1) the club received for the last season 22.63 million Euros for German TV-marketing.3 Because of the place in the last season the club received two million Euros from marketing abroad. An increase of these revenues is exclusively possible if the club is placed between first and third, because the bad place in the season 2003/2004 is not taken into consideration any more. For the complete TV-marketing the club receives 24.63 million Euros. As seasonal target the club focuses the league rank. The TV-commercialization revenues would then rise to 24.92 million Euros (including 2 million Euros for the marketing abroad. This corresponds to 1.18%4. At the moment it is not possible by direct marketing to take measures for achieving higher revenues. It would be possible to negotiate a new contract. The present contract concerning

1

Note: A registration of the fans is necessary for these purposes. Later one can revert to the data.

2

Note: The capacity of the stadium is 40.000 spectators, any of whom receives a coupon if the semi-quarter final is reached. I.e. the maximum gross list price to be booked as expenses is 600,000 euros, corresponding to a net amount of 504,201.68 Euro.

3

Note: Own calculation; under the presumption of a TV merchandising in the Germany of 420 million per season, see annex table sheet “TV-Vermarktungseinnahmen”.

4

Note: (24.92-24.63)/24.63*100%=1,18%.

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broadcasting rights terminates in summer 2009, so that there is the possibility of a higher quoted contract for the future.1 TV commercialization revenues in international competition The club had three UEFA cup home games in the last season, for which an advertising agency was contracted. This agency attends several big German clubs, when they hold international games. Three million Euros were obtained for TV-broadcasting. As the club, because of two defeats, one victory and one tie could not qualify for the final round, no further games were hold. Therefore, the UEFA paid 230.000 Euros as prime to the club.2 For the qualifying game for the group phase of the UEFA Champions League, contracts with an external advertising agency were concluded. For broadcasting one million Euros are computed. In the group phase one counts on three home games, which means a prime of three million Euros. Furthermore each participant in the group phase receives apart from the participation prize of three million Euros also a “kick-off prime” of 2.4 million Euros. Thus, one can count on revenues of 10.2 million Euros for reaching the group phase. Additionally revenues adding up to the distribution of the market pool have to be considered.3 The third placed club of the Bundesliga can count on revenues of 8.3 million Euros. In order to have success in the group phase in the Champions League, the club has to raise the player quality. TV-marketing revenues for DFB-cup games Last season the club “FC Hagen 09” has dropped out in the first round. Thus, only the prime of 52,000 Euros from the TV-pot could be registered as revenues.4 This season the club hopes for a long-lasting coming forth and has the goal of reaching the quarter finals. The TVbroadcasting depends on the teams playing, so that one cannot principally count on the broadcasting revenues.5 The revenues from live-broadcasting have to be divided in a relation 6:4 between the host and the guest. The prime which the DFL distributes amounts to 416,000

1

Note: From the season 2009/2010 on the agency Sirius (a Leo Kirch company) takes the marketing rights in the Bundesliga over. The contract is fixed for six years and guarantees the Bundesliga clubs in the first and second League revenues of at least 500 billion euros. Comp. http://www.ftd.de [Leo Kirch, 10/9/2007], (status: 11/17/2007; 0:24 CET) and w/o author, Borussia Dortmund [Geschäftsbericht 2006] p. 46.

2

Note: Sum of entrance fee (70,000 euros), victory prime (40,000 euros), tie prime (20,000 euros) as well as 100,000 euros from the market pool. Comp. http://www.tagesspiegel.de [Krösus Bayern, 2.7.2007], (status: 11/17/2007; 12:26).

3

Note: The distribution of the market pool depends on the TV-marketing position of the respective country, which is put in relation with other countries. The place in national competition (Bundesliga) plays an important role in this case. For example, the SV Werder Bremen received 10.9 million euros and the Hamurger Sportclub 8.3 million euros after being eliminated from the Champions League. Comp. Kicker-Sportmagazin [Issue 55, 5.7.2007], p. 26.

4

Comp. Kicker-Sportmagazin [Issue 5, 16.1.2006].

5

Note: In the DFB cup the amateur clubs (including regional league and above) have the home right, with the result, that the TV revenues can only be booked as income by the home club.

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Euros for reaching the quarter finals.1 For a live broadcasting and after the division with the guest team the amount rises to 600,000 Euros. Thus, reaching the goal (quarter final) implies sales revenues of 1.16 million Euros. In order to reach this goal it is necessary, to adapt not only quality but also quantity of the team in order to compensate the higher physical pressure. Strategic aim: increase merchandising revenues The club disposes of a very small range of articles. Besides home and away jerseys only trousers and socks can be bought in the fan shop. Last business year only one million Euros in sales revenues were obtained. That means one has to catch up considerably in comparison with the big clubs like Borussia Dortmund, which achieves 11.7 million Euros in sales revenues from merchandising products.2 The target is an increase by 150% to 2.5 million Euros. In the next five years the 5 million limit shall then be crossed. In order to achieve this aim, a contract with a big textile manufacturer in the area Northern Westphalia has been concluded. Besides jerseys, trousers and socks also shirts, polo shirts, ties, jackets, training cloths and caps shall be added to the selection. Furthermore a jersey especially for the Champions League games shall be created. Also flocking with the name of players or one’s own name are available from now on. Additionally flags, banners, umbrellas, cushions, blankets, gloves, cords, scarves etc. have been integrated into the sales program.3 A neighboring sewer was contracted for that purpose. For glasses, jugs, chalices and ashtrays a contract with a glassblower was concluded. In order to achieve an increase in sales revenues, besides the fan shop in the stadium also an internet shop platform has been developed. Under www.fc-hagen-09.de/fanshop articles are also available after opening hours of the fan shops. Strategic aim: increase revenues from sponsoring The main sponsor “SADIDS” is additionally the equipper. The contract is fixed until the end of the season 2009/2010. The French sport article group transfers 7.5 million Euros annually. Additional 7.5 million Euros come in from a sponsoring pool. This sponsoring pool comprehends all business partners of the club. They can be seen on the advertising banners and yard signs during interviews.4 The target of the club is to increase the revenues amounting to 15 million Euros annually to 17.5 million Euros. In the context of this implementation new negotiations with business partners are necessary. Because of the fact that the club plays in the Champions Leagues in the case of qualification,

1

Note: 1st round (52,000€), 2nd round (104,000€), semi-quarter final (208,000 €), quarter final (416,000€).

2

Comp. w/o author, Borussia Dortmund [Geschäftsbericht, 2006] p. 48.

3

Comp. http://shop.fcbayern.de [Fanshop, FC Bayern München], (status: 17.11.2007; 15:54 CET).

4

Comp. http://ww.bayer04.de [Business-Partner, 2007], (status: 17.11.2007; 16:21 CET).

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the club asks for in increase by 33.33% to 10 million Euros (from 7.5 million Euros) from the sponsoring pool. This is connected with the qualification for the group phase. Strategic aim: increase market share with soccer fans 34.59 million soccer interested people live in Germany.1 The market share of the FC Bayern München is 19.32%, the one of Borrusia Dortmund 16.14%, the one of the SV Werder Bremen is 9.29%, the one of FC Schalke 04 is 6.11%,2 whereas the market share of the “FC Hagen 09” is only 1.96%. This corresponds to a number of 677,954 fans. As the club is within the catchment area of the Borussia Dortmund, it is difficult to attract spectators from the direct surroundings. The target is, to increase the market share from 15% to 2.25%. In order to achieve this goal, besides the existing customers other fan cultures have to be addressed. In first place, this is the target group of the elementary school students in this and in the neighboring region. By signature sessions in the schools and cooperation with public institutions the favor of the future spectators shall be won. Additionally family tickets are introduced and stadium sections exclusively for “parents and children” are introduced. Moreover soccer fans have to be addressed whose club is not from the direct surroundings.3 In order to address this group of people, the sportive performance and the service in the stadium have to be improved.4 Strategic aim: improve fan attendance At the moment fans are little attended. Only once a week fan letters are in received and autograph cards sent. This belongs to the side activities of an accountant. At the moment a real attendance does not take place. The target is to improve the quality of the attendance, in order to get more spectators in the stadium. In order to avoid the time intensive postal way, a internet site has to be created, where the fans can directly address a fan attendant. Here the intersection between fans and club is closed. The fan attendant also cares about the attendance of away games and helps in organizational matters. Scorecard “Customers” In conclusion the targets, indicators and measures of the customer perspective are presented as follows:

1

Comp. w/o author, DFL-Report [Bundesliga Report, 2007], p. 29.

2

Comp. Mrazek [CA$H-L€AGUE, 2005], p. 174.

3

Note: ContactingFC Bayern München Fans who live and work in the Ruhr area.

4

Note: Themed “without us you will miss a soccer event”.

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Target

Indicator Plan (€) Previous Curyear rent (€) Increase the number of spectators/spectator revenues In the Bundesliga Revenues 10.56 m. 9.18 m. Survive Champions Revenues 5.4 m 1.8 m League/UEFA Cup group phase In DFB Cup (1 home Revenues 135,000 0 game) Increase of TV commercialization revenues In the Bundesliga Revenues 22.92 m 22.63 m Survive Champions Revenues 18.5 m 3.23 m League/UEFA Cup group phase In DFB Cup quarter Revenues 1.16 m 0 finals (prime and one live broadcast) Increase of merchandising revenues Increase fan article Percen250% 100 % revenues by 150% tage

Increase of sponsoring revenues Increase of sponsoring Revenues revenues by 16.67%

17.5 m

15 m

Increase of market shares Increase market shares Percentage

2.25%

1.96%

50

4

Increase of attendance to fans Daily fan contact Number

Figure 4-34: Scorecard “customer perspective”

Measures

Family tickets, 5-ticket, Trade cards for group phase, tickets including merchandising articles “2 for 1”-promotions, seat cushions for every visitor Seasonal target: third place Make well planned player investments in order to improve the quality Increase of team in order to decrease physical pressure

Enlargement of sales program and adaptation to individual needs, internet presence Qualification for the group phase in the ChampionsLeague Signature sessions in schools, family sections, family tickets, attractive soccer Employment of a fan attendant, create web site, immediate response to fan desires

Case study: Balanced Scorecard illustrated with a soccer club

7.2.4

221

Internal process perspective and employee perspective

While the internal process perspective concentrates especially on the customer and finance specific processes, the learning and development perspective focuses the securing of employee potentials. Process perspective In order to achieve the company aim of the increase of an operating margin as well as an improvement of sportive success, the processes have to be targeted towards these goals. Goals of the process perspective are:  Increase of efficiency in marketing  Improve talent finding From the value chain of a soccer game the use of finances and tangible means as well as of employees including their backflows can be detected. Performance in soccer games in the value chain:

Procurement

Assets: Stadium, training area, club building etc., rights, information etc. Personnel Resources: Administrative employees, players, trainers, attendants etc.

Sales

Production Input: 2 teams, arbitrator, venues etc. Process: Performance Output: Outcome of the game

Sportive competitions, implying: - Broadcasting rights - Entrance rights - Marketing rights - Merchandising articles - Etc.

Figure 4-35: Soccer game in the value chain Source: von Freyberg [Transfergeschäfte in the Fußballbundesliga, 2005], p. 10.

For increasing the merchandising sales the installation of a customer data bank is necessary. By saving the data the club receives an overview over which articles are sold. Thus, the club receives information about which player is the favorite player of certain customers. Thereby, a direct offer can be created for the customers. For example, there is the possibility to offer a jersey of the customer’s favorite player for the purchase of a seasonal ticket. Moreover, certain conclusions can be drawn when a certain player leaves the club. Thus, only players will leave the club, if in addition to the bad sportive performance the jersey sales were below average. By introducing such a system a closer connection with the customers is created.

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In order to improve the talent scouting cooperation with schools has to be started. Youth trainers of the clubs appear on the yards and in the foyers of the elementary schools of the city on a monthly basis. By games on the youth area of the club scouting of young people not belonging to the club are conducted once a year. Employee perspective The targets of the employee perspective refer to:    

Strengthening the team Improve team performance Increase number of young people within own soccer academy Enforcement of management

The club has become active on the transfer market. Thus, three average players (book value six million Euros) have left the club for eight million Euros in total. One center forward was purchased by the “FC Hagen 09” for eight million Euros, a mid center for ten million Euros and a mid center for three million Euros. The contract time is four years. Besides these professional players two young players have joined the team, with the result that the team was enlarged to 20 players. No additional costs arose for the young players from the own soccer academy. Because of this new team situation the player revenues have risen by three million Euros to 30 million Euros. In order to improve the performance of the professional soccer players additionally a fitness trainer has been employed. The costs amount to 50,000 Euros per year. Last season, 40 days were lost through sickness on the average, which has to be reduced by 50%. Additionally, a payment of primes has been agreed if success in the European Champions Clubs’ Cup and the national Cup are achieved. in Euros Champions League Prime for Victory Tie Defeat UEFA Cup Victory Tie Defeat DFB Cup Victory Defeat

10,000 3,000 0 2,000 1,000 0 1,000 0

Figure 4-36: Prime catalogue of the “FC Hagen 09”

Furthermore, five million Euros are distributed to players if the group phase in the Champions League is reached.

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The fitness coach is not only responsible for the attendance of the professional players, but also for the talents in the young people area. A further measure is the increase of contributions from two and a half to three million Euros, which are invested in a weights room. In the merchandising area and the fan attendance a former professional player was contracted. Besides the attendance of the fan club, the merchandising sales via the internet are part of his responsibility. By the introduction of a software, which saves all information on customer desires, the company has the possibility to satisfy individual customer desires. The management has to be reinforced. At the moment exclusively the management has the responsibility for player transfers. In order to support the management in this an area, a scout has been contracted. While the management concludes contracts predominantly with trained professional players, the scout has the task to win talented young players from other clubs for the FC Hagen 09. The costs of the Scout amount to 300,000 Euros per year. By the experience of the scout, who was a former Bundesliga professional himself, an improvement of quality is achieved.

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Scorecard “Processes and potentials” Plan

Previous year

Sold articles (in pieces)

20.000

15.748

Sold tickets (in pieces)

35.000

30.000

2

0

Target Indicator Increase of efficiency in marketing

Current

Measures Strong loyalty the club, cooperation with schools, introduce data base on customers, direct marketing

Improve talent scouting More talented Talent/youth players in the squad youth department

Reinforcement of the team (increase quality) In the Bundesliga Result 3. Platz in the European Champions Clubs' Cup

Result

3. Platz

Champions UEFA Cup League group group phase phase

in the DFB Cup Result 202.500 0 Increase of performance of the team (physical willingness to perform) absense due to illness/year (during the season)

20 days

40 days

in the European Semi-quarter Group Champions Result finals phase Clubs' Cup in the DFB Cup Result 1st round 1st round Increase number of young players Young players/total 10% 0% number in squad Reinforcement of the Management Talent/year

1

0

enter into cooperation with schools, scouting in schools, carry out own games Sale of three average players for 8 million euros, purchase of one center forward for 8, of one midfielder for 10 and of one midfielder for 3 million euros, addition of two young players. For quickly reaching the performace level a fitness coach is contracted. Introduction of primes for reaching certain sportive goals. By contracting a fitness coach, creation of a weights room in the youth area and increase of contributions Employement of a scout who examines the youth departments of other clubs.

Figure 4-37: Scorecard “Process and potential perspective”

7.2.5

Sportive perspective

For a soccer company the consideration of sportive aims is necessary. Therefore a sportive perspective has to be included into the Balanced Scorecard of the “FC Hagen 09”. The sportive aims of the “FC Hagen 09” correspond to the national, international and club internal area. Thus, the targets for the season are determined as follows:

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225

Maintain or improve final place from last season in the Bundesliga Have success in national and international competition Increase of team value Consistency of the trainer team

Maintain and improve the placement in the Bundesliga In the season 1991/92 the “FC Hagen 09” has come into Bundesliga as second promoted team. Since the season 2004/2005 the club is present in international competition. Last season the club reached the third place in the national League, so that the club could qualify for the Champions League for the first time.

The course of the placement of the “FC Hagen 09” e.V. in the season 2001/02 Champions League Champions League Qualification for the Champions League

3rd place 4th

UEFA Cup 5th

UEFA Cup

place

place

Qualification for the UEFA Cup 7th place 8th place

8th place

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

Figure 4-38: Course of placement of the “FC Hagen 09” since the season 2001/2002

The target of this season is at least the third place in the Bundesliga ranking. In order to achieve this goal the quality of the player team has to be improved. Corresponding measures are:  departure of three average players  acquisition of three leading players  entrance of two young players Have national and international success The sportive aims in the national and international cup competitions (DFB cup and Champions League) are different with regard to the number of rounds set as target. The measures, however, are identical. Thus, a higher player quality is necessary, to achieve the set targets.

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National competition (DFB-Cup) In the DFB cup the club dropped out in the first round last year. For the season 2007/2008 the target is to reach the quarter finals. International competition (Champions League) In the last season the “FC Hagen 09” dropped out in the group phase of the UEFA cup. The target for the season 2007/2008 is to reach the semi-quarter final in the Champions League. Raise the team value “You have to be eleven friends!”, said the former national trainer Sepp Herberger.1 A good team spirit improves the player quality. Also for the selection of new players, one has to consider the type of player, so that he goes well together with the team. In future, only players will be contracted who are able to integrate quickly. In order to make this easier for new players, special measures are planned. Thus, young players are already introduced in the professional team with the conclusion of the contract and absolve a common training. For foreign professional players trainer and fitness coach will have more responsibility. The integration of new players has to be shortened from one year to 6 month. By strengthening the team spirit additional potential can be achieved. Persistence of the trainer team The trainer has been employed by the club for four years now. His task focuses exclusively the training, the player formation and the game tactics. In order to achieve long-term sportive successes, the trainer position has to be persistent.2 In order to create a stronger connection between the trainer and the club, the trainer has to identify with the club.3 For the integration of the trainer, the following measures have to be carried out:  More influence in transfer questions  Own selection of a Co-trainer  Right of co-determination in the case of club investments in the sportive area (e.g. soccer academy)  Time for experimentation The persistence of the trainer team has also to be guaranteed for the play. Often changes of the game tactics have negative implications for the motivation of the players. Each player has

1

Comp. http://www.seppl-herberger.de [Elf Freunde], (status: 11/25/2007; 16:26 CET), own translation. Note: One example is Greece`s victory in the European Cup 2004, which had won through team spirit against Portugal (a team with many individual players) in the final.

2

Note: The change of a trainer leads to reorganizations in the team. The contact to the players has to be build up again and confidence needs a certain time. On the long run continuity has to be a target, because the trainer has certain game ideas and correspondingly hands his desires further to the management.

3

Note: Only a trainer who identifies with the club follows the interests of the club and leads to sportive success on the long run.

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to know for which area he was contracted and for which position the trainer wants the player to fill in on the long run.1 The conclusion of short term trainer contracts (less than one year) does not permit any persistent collaboration. In the case of contract prolongations the contract duration has to be at least three years in order to be able to talk about a continuous collaboration. Scorecard “sport” Target

Indicator Plan

Previous Current Measure year Maintain or improve the place in the Bundesliga ranking At least third Placement xinsert left

3) 4) 5)

P=S-C 0,15S=S-C | solve for S C/0,85=S

With the help of the break-even analysis it can be seen, that the revenues from the Champions League are of great importance for the club. Only by incomes from the Bundesliga the team cannot be financed. The incomes from commercialization in the Champions League have a contribution margin, which in the case of reaching the semi finals amounts to 38.3 million Euros.2 The DFB cup contributes positively to the result with a contribution margin of 368,000 Euros. TV-broadcasting is not considered, which can contribute to an increase of sales revenues by 600,000 or 400,000 Euros.3 Also revenues from merchandising sales have not been taken into consideration. For reaching the group phase of the Champions League one can count on revenues of 25.2 million Euros.4

1

Comp. http://www.abendblatt.de [Millionenspiel, 8/29/2003], (status: 11/22/2007; 13:54 CET).

2

Note: (42,900,000€- 4,600,000€)=38,300,000€.

3

Note: The revenues from TV marketing are distributed in a relation 6:4 between hosts and guests.

4

Note: Sponsors (7.5 m. €) + starting fee (3 m. €) + playing prime (2.4 m. €) + market pool (8.3 m. €) + spectator revenues (4 m. €) = 25.2 m. €.

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Break-even-analysis of the FC Hagen 09: € in m. C (League)

60 53.5 50.6 50

E (League) E (Champions League)

42.9 40 31.2 30 27,6 20 4.6 2.6 0,42 2.3 0,052

Group phase

E (Champions League) max. prime E (Champions League) without prime

C (Champions League) C (Champions League) max. prime E (DFB Cup) without home game Number of games C (DFB Cup) without home game 2VF

12 HF

7 5

10

17 15

22 20

27 25

32 30

34

Figure 4-43: Break even analysis of the FC Hagen 09

The salaries of the players are exclusively calculated in the costs of the Bundesliga. Also costs for the trainer, employees, buildings and other costs are part of it.1

7.3

Scenario

The Balanced Scorecard of the “FC Hagen 09”has been developed for a period of five years. For the first year the measures undertaken in the individual reflected levels have the following effects from a sportive and financial point of view:

7.3.1

Sportive targets

For the pursuit of sportive aims high investments in the player team were necessary. During the selection of players, attention was paid that the players’ characters matched the team. By reinforcing the team a reduction of the sportive stress for each individual player took place.

1

Note: Additionally expenses for the depreciation of player values have to be considered. Thus, this reflects profit before depreciations, but not the balance sheet profit.

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The following table shows the sportive aim before the season as well as at the end of the season. Plan-actual-analysis of sportive goals of the “FC Hagen 09” Prospected target Additional target Spectators (average) Achieved goal Group phase Number of victories Number of draws Semi-quarter final Quarter final Spectator (average)

Bundesliga 3rd place

DFB Cup Quarter final 1 home game 15,000

30,000

2nd place

Semi final 2 home games

Quarter final 5+1 home games

/ /

4 0

35,000

35,000

3 1 2 victories 1 victory / 1 defeat 35,000

34,500

Champions League Semi-quarter final

Figure 4-44: Plan-actual analysis of sportive goals

Therefore, the sportive aims are regarded as fulfilled. The new players were quickly integrated into the team. The reason for this is the direct attendance by the fitness coach as well as by selected players of the team. The player evening and the sportive successes improve the team spirit. By concluding long-term contracts the trainer can now continuously build up young players. Additionally, the ideas of the coach to apply the game culture of the professional players also in the young section were put into practice. Thus, there is no long integration phase for young players who join the professional team.

7.3.2

Internal process and potential perspective

While last year the merchandising sales revenues for 15,748 pieces amounted to one million Euros,1 the sales revenues of this season rose to five million Euros. The planned number of 20,000 has been clearly improved. By the creation of a fan data base, selected fans can be addressed by the marketing. Thus the number of sold merchandising articles could be increased to 231,496.2 The high popularity of the new players as well as the sales via the internet shop are seen as further reason for the rise of the merchandising sales revenues. Besides

1

Note: The number of items is calculated with 90% jerseys, 5% trousers and 5% socks with a net revenue of one million euros.

2

Note: 50% of the revenues are due to articles with an average price of 25 euros. 40% of the revenues are due to articles with an average price of 63.5 euros (e.g. jerseys, trousers and socks). The remaining 10% are due to articles with an average price of five euros (autographed pictures, glasses etc.).

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the new stars in the teams, many young players identify themselves with the young talents, which joined the team from the youth department. In the last months the clubs registered a bigger inflow of young players in the young talent department. By employing a scout some talented young talents were discovered, who were for some time integrated in the young talents area of the club. Thus, for the future, there is a stronger commitment to own young talents for the professional team. For the next season two further young talents will join the professional team. The measures undertaken for backing the team up were fulfilled by reaching the sportive aims in this season. By employing a fitness trainer one has reached the target of shortening the time of getting injured or physically exhausted players fit for playing again. For measurement the lactate test was employed, which showed that injured or ill player can be used in games after the first week of training. 85% of the fatigued players could play the week after. Customer perspective Plan-Actual-analysis of the customer goals of the “FC Hagen 09”1 Increase of number of spectators Entrance Bundesliga DFB Cup Champions League Increase of Ticketing Bundesliga 18 € DFB Cup 9€ Champions League 45 € Total (€) Increase Bundesliga DFB Cup DFB-Cup (Primes) Champions League (Prime) Champions League (Qualification) Total (€) Increase of merchandising Total Increase of sponsoring revenues Total Total sum

Plan 586,500 15,000 150,000

Actual 595,000 70,000 210,000

Deviation 8,500 55,000 60,000

10,557,000 135,000 6,750,000 17,442,000 Plan 22,920,000 600,000 416,000

10,710,000 630,000 9,450,000 20,790,000 Actual 26,204,314 1,200,000 832,000 28,132,000 1,000,000 57,368,314 Actual 5,000,000 Actual 17,500,000 100,658,314

153,000 495,000 2,700,000

18,500,000 42,436,000 Plan 2,500,000 Plan 17,500,000 79,878,000

Deviation 3,284,314 600,000 416,000 9,632,000 1,000,000 Deviation 2,500,000 Deviation 0 20,780,314

Figure 4-45: Plan-actual analysis of the customer targets of the “FC Hagen 09” 1

Note: Calculation of the revenues in the Champions League = 15,932,000 (market pool) + 3,000,000 (starting money) + 2,200,000 (semi-quarter finals) + 2,500,000 (quarter finals) + 2,400,000 (starting money in the group phase) + 2,100,000 (primes for 3 victories and 1 tie in the group phase).

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The season tickets for the group phase of the champions league were sold 25,000 times, with the result that expenses amounting to 315,126.05 Euros in the form of vouchers arose.1 In the DFB cup an average entrance price of nine Euros was calculated in the retrospective calculation because of the “2 for 1” promotion. Furthermore, the costs for the cushions amounted to 140,000 Euros.2 The fan attendance was improved by employing a fan appointee. The creation of a fan email address as well as of a website enjoys great popularity. Thus, more than sixty emails a day are answered. Additionally the website offers a category with “questions and answers”. One hundred people a day visit the website on the average. Financial perspective The utmost aim of the financial perspective is to increase the operating margin by 15 to 30 %. The sales rose to 102,658,314 Euros during the season (previous year 55,392,000 Euros). This implies an increase by 85.33% (47.27 million Euros). Besides the revenues from ticketing, TV commercialization, sponsoring as well as merchandising, accounting profits for the departure of players could be registered. These amounted to two million Euros. Sales revenues of the “FC Hagen 09”in the season 2007/2008 Increase of ticketing Increase of TV revenues Increase of merchandising Increase of sponsoring revenues Increase of sale of players Total sales revenues

in Euros 20,790,000 57,368,314 5,000,000 17,500,000 2,000,000 102,658,314

Figure 4-46: Sales revenues of the “FC Hagen 09“ in the season 2007/08

The costs amounting to 60,209,426 Euros of the season 2007/08 consist of the following positions. Because of moving further in the Champions League as well as in the DFB cup primes have been paid to the players. For the Champions League the primes amount to 5,819,000 Euros.3 For reaching the semi-finals additional 52,000 Euros have been paid to the players.4 The prime was only paid to the players who played the game. The indicator “salary per game” has risen from 683,878 Euros to 702.333 per game because of the rise of prime payments.

1

Note: about the calculation: (25,000 season tickets * 15.00 Euro)/1.19 = 315,126.05 euros.

2

Note: about the calculations: (70,000 visitors * 2 euros (net) per cushion) = 140,000 euros.

3

Note: Five million euros as prime for reaching the group phase as well as point prime which results from six victories and a draw with 13 players used per game on the average.

4

Note: 13 players with 4 victories on the average.

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Through the qualification for the group phase of the Champions League the stadium rent was decreased by 10%. Besides fixed costs as player salaries, administrative talks, amortization of loans as well as stadium ancillary expenses, expenses for marketing measures in relation to voucher promotion and the “five away” distribution have arisen. In the Champions League 25,000 season tickets were sold for the group phase. This corresponds to a value of vouchers of 63,025 Euros. The total costs have risen by 10.82 million Euros in comparison with the previous year (49.39 million Euros), which corresponds to a rise by 21.9%. Costs and expenses of the “FC Hagen 09” in the season 2007/2008 in Euro 30,000,000 5,871,000 10,500,000 3,520,000 3,000,000 5,613,300 500,000 750,000 315,126 140,000 60,209,426

Player salaries Player primes Depreciation of the player value Administrative expenses (Manager, coach, staff etc,) Young player department Stadium rent (27% of ticketing) Merchandising expenses (10% of net revenues) Stadium ancillary expenses (security agency etc.) 25 games Voucher promotion (15 Euros gross, 25,000 season tickets) Cushion promotion (2 Euros net, 70.000 spectators) Total costs/Total expenses Figure 4-47: Overview of costs or expenses of the “FC Hagen 09” in the season 2007/2008

The increase of sales revenues and costs has the effect of an increase of the operating margin to 38.43% (previous year 10.84%, plan: 15%). Return on Sales of the FC Hagen 09 in the season 2007/2008: 102,658,314 €

Sales (S)

Return on sales (ROS)

38,43%

Costs (C)

60,209,426 €

= Profit (G)

42,448,888 €

Figure 4-48: Return on sales of the “FC Hagen 09” in the season 2007/08

In the season 2007/2008 the EBITA rose to 55.95 million Euros. In comparison to the year before (14 million Euros) this corresponds to an increase by 41.95 million Euros. The earn-

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ing before the deduction of interest, tax and amortization expenses for intangible assets rose by 299.55%. A further financial goal is the reduction of the dept to equity ratio to under 0.8. The dept to equity ratio accounted for 0.91 the year before. Due to the profit of about 42.45 million Euros earned in 2007/2008 the following numbers were identified for the annual balance sheet, in which it was possible to reduce the debt to equity ratio to 0.34. Profit and loss statement of the FC Hagen 09 AG at the 30th June 2008 Credit Depreciation Of player value Of player value (New players) Total costs Profit

3.500.000 7.000.000 49.709.426 42.448.888 102.658.314

Sales revenues Sale of players

Debit 100.658.314 2.000.000

102.658.314

Figure 4-49: Profit and loss statement of the corporation “Hagen 09” in the business year 2007/2008 without considering taxes

Balance sheet of the Hagen 09 AG at 30th June 2008 Assets Fixed Assets Buildings Player values Working capita Outstanding money Cash Bank Balance sheet total:

Liabilities 40,000,000 24,500,000

8,000,000 6,003,000 26,948,888 105,451,888

Equity Stock Retained earning Annual net profit Debt capital Loans

Balance sheet total

30,000,000 6,003,000 42,448,888 27,000,000

105,451,888

Figure 4-50: Balance sheet of the corporation “Hagen 09 AG” at the 30th June 2008 for the business year2007/08, without tax considerations

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8

Case study: Application of the Berlin Balanced Scorecard

8.1

Application of the Berlin Balanced Scorecard

Schmeisser’s Berlin Approach of the Balanced Scorecard serves the calculability and the connection of the BSC perspectives.1 The connection is realized via instruments of internal and external accountancy. The break-even-analysis, for example, makes a connection between the customer and the financial perspective possible.2 In order to determine the value of the playing performance of a Bundesliga soccer player the share of every individual player in the sportive success has to be determined via a cost-utility analysis. Via the “Return on Investment” a connection between the player value and the financial perspective of the Balanced Scorecard is created.

8.2

Assessment of the player performance

The club disposes over eighteen outfield players and two goal keepers. In a 3-5-2 system, in which two defensive players are arranged in the centre, the playmaker does not take over any defensive work. There is one player on every outer line who is responsible for cross and pass playing. The playmaker is the link between midfielders and center forwards. The defense consists of a formation of three players. With the help of a cost-utility analysis the player performance can be determined. The performance of a player can be divided into scoring rate, team play, defensive work and goal keeper work. The ponderation of the criteria depends on the player type (outfield player or goal keeper).

1

Comp. Schmeisser et al. [Berliner Balanced Scorecard, 2006], p. 57.

2

Comp. Schmeisser et al. [Berliner Balanced Scorecard, 2006], p. 49, p. 111.

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Overview over the game system and of the position of all players: Goal 1

Defence 3

Defensive midfield 2

Outer line Play maker midfield midfield 2 1

D1

M1

O1

D2

M2

O2

D3

M3

O3

Center forward 2

F1

G1 P1 F2

G2 F3 P2 M4

D4

O4

F4

Figure 4-51: Overview over the game system and the position of all players

Criteria for the identification for the determination of the directly attributable player utility:

Goal keeper work

Defensive work

Team play

Scoring results

100%

100%

100%

Goal keeper

Outfield player

Figure 4-52: Attribution of criteria depending on player type

For the individual criteria three categories of characteristics are determined, to which any player in dependence of the player type is attributed. For each category points are allocated which reach from one to three. The assessment in the context of the utility analysis depends on the average utility of a player.

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Utility procedure with the individual ponderation and the corresponding categories of characteristics:

100%

Ponderation of c criteria

100%

scoring results

C criteria

40% 15% 30% 10% 5% 40% 20%

100%

20%

200%

goal keeper work

defensive work team play

10%

10% 20% 10% 20% 30% 20% 60% 80% 20% 20% 29%

number of goals number of shot on goal number of goal preparations number of crosses in penalty area playing in front third number of arrived passes number of give-and-goes number of free kicks and corner kicks number of crosses from penalty area playing in front third number of won duels number of fouls play making from own third number of clearances playing in back third number of saved shots number of goals ball handling with back passes saving corner kicks saving free kicks

Categories C1 C2 C3 0 to 0.2 0.2 to 0.4 > 0.4 0 to 2 2 to 4 >4 0 to 0.2 0.2 to 0.4 > 0.4 0 to 2 2 to 4 >4 0% to 30% 30% to 60% > 60% 0 to 10 10 to 20 > 20 0 to 2 2 to 4 >4 0 to 1

1 to 3

>3

0 to 5

5 to 10

> 10

0% to 30% 0 to 3 > 10 0 to 5 0 to 1 0% to 30% 0 to 3 >2 0% to 30% 0% to 30% 0% to 30%

30% to 60% 3 to 7 7 to 10 5 to 10 1 to 2 30% to 60% 3 to 7 1 to 2 30% to 60% 30% to 60% 30% to 60%

> 60% >7 0 to 7 > 10 >2 > 60% >7 0 to 1 > 60% > 60% > 60%

Figure 4-53: Categories of criteria in the utility analysis Source: adopted from Freyberg [Transfergeschäfte in der Fußballbundesliga, 2005], p. 225.

Five subcriteria are contained in the four main criteria, which comprise individual player characteristics. These subcriteria are weighted differently and reflect the importance of the individual characteristic. Thus, the “number of goals” has a higher importance as the “catching ability after a corner kick”. As the center forward generally does less defensive work than the defense, this is made up by a higher “number of goals per game”. Mid centers have an equal share of defensive and forward work, in dependence of tactics and player strength.

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Assessment of utility of player “P1“:

100%

100%

200%

100%

scoring results

defensive work team play

goal keeper work

C Ponderation of c criteria criteria 40% number of goals 15% number of shots on goal 30% number of goal preparations 10% number of crosses in penalty area 5% playing in front third 40% number of arrived passes 20% number of give-and-goes 10% number of free kicks and corner kicks 20% number of crosses from penalty area 10% playing in front third 20% number of won duels 10% number of fouls 20% play making from own third 30% number of clearances 20% playing in back third 60% number of saved shots 80% number of goals 20% ball handling with back passes 20% saving corner kicks 29% saving free kicks Points

Player P1 0.64 8 0.36 5 85% 22 6 0.1 8 15% 8 3 0 0.1 0%

2,4 0.9 0.9 0.6 0.3 2.4 1.2 0.1 0.6 0.1 1.2 0.6 0.2 0.3 0.2

28 16

12.00

Figure 4-54: Utility calculation for player “P1” Source: Own presentation, note: calculation in annex, table “performance measurement“.

The value 12.00 for the player “P1” was assessed in the utility analysis. This value reflects the individual player value. Besides this value, a factor which unifies the sportive success of a player position is also integrated into the assessment. Ponderation of points with regard to the player position Goal

Defence

Midfield

Forward

0.80

1.00

1.10

1.30

Figure 4-55: Ponderation of points with regard to player position and importance

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With the help of these information the share of each player in the sportive success can be determined. Determination of individual player values of the players of the FC Hagen Player G1 G2 D1 D2 D3 D4 M1 M2 M3 M4 O1 O2 O3 O4 P1 P2 F1 F2 F3 F4 Total

Utility Minutes of play type of player total utility Share X Y factor (X*Y*factor) in success 16.80 4,005 0,8 53.827 9.37% 12.00 585 0,8 5.616 0.98% 11.20 4,140 1,0 46.368 8.07% 8.20 3,780 1,0 30.996 5.4% 7.90 3,915 1.0 30.929 5.39% 14.40 1,935 1.0 27.864 4.85% 8.60 3,960 1,1 37.462 6.52% 9.20 3,735 1,1 37.798 6.58% 5.20 1,035 1,1 5.920 1.03% 4.90 450 1,1 2.426 0.42% 11.50 3,645 1,1 46.109 8.03% 9.35 3,555 1,1 36.563 6.37% 7.80 1,080 1.1 9.266 1.61% 6.55 900 1.1 6.485 1.13% 14.40 4,050 1.1 64.152 11.17% 5.65 540 1.1 3.356 0.58% 12.00 3,870 1.3 60.372 10.51% 11.90 3,330 1.3 51.515 8.97% 7.65 1,260 1.3 12.531 2.18% 5.05 7,20 1.3 4.727 0.82% 190.25 50,490 574.281 100%

Figure 4-56: Utility identification of the individual players of the FC Hagen 09

Composition of the player value: Personal player value 0

Team specific player value

60%

Additional value

Figure 4-57: Composition of the player value

~40%

Player value

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The performance of a player is measured with the help of the sales revenues of the club. All revenues resulting from running the game and the sale of merchandising articles serve as basis. The personal player performance contributes with a ponderation of 60% of the sales revenues to the player value. The remaining 40% have to reduced by the additional value and are divided by the number of the players (contribution “per capita”). The additional value is determined from directly attributable revenues, which were achieved in the form of merchandising articles.

8.3

Assessment of the additional value

The sales revenues from the merchandising sales can be directly attributed to the individual players. The individually attributable sales revenues correspond to the “additional value”of a player. Person related sales from merchandising Players G1 D1 D4 M1 M2 O1 O2 P1 F1 F2 Total

Personal related sales from merchandising in €

Person related sales from merchandising (in %)

100,000.00 45,000.00 210,000.00 50,000.00 15,000.00 300,000.00 30,000.00 500,000.00 500,000.00 250,000.00 2,000,000.00

5.00% 2.25% 10.50% 2.50% 0.75% 15.00% 1.50% 25.00% 25.00% 12.50% 100.00%

Figure 4-58: Share in revenues of the individual players, which can be directly attributed to the player

Well performing players or role models will achieve relatively higher individual sales revenues than less successful or unimpressive players. Special attention is needed for the play maker, forward as well as possible captain on another position. The remaining sales revenues from merchandising accounting for three million Euros are distributed in accordance with the number of players and goes to the team specific player value.

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Chapter IV

Determination of the player value

In the season revenues accounting for 100,658,314 Euros were achieved, which are distributed correspondingly to the individual players. Player values of the individual players Player Personal Player Value G1 G2 D1 D2 D3 D4 M1 M2 M3 M4 O1 O2 O3 O4 P1 P2 F1 F2 F3 F4 Total

9.37% 5,660,803.41 0.98% 590,613.52 8.07% 4,876,347.51 5.40% 3,259,732.30 5.39% 3,252,633.58 4.85% 2,930,351.69 6.52% 3,939,695.05 6.58% 3,975,094.00 1.03% 622,605.08 0.42% 255,080.68 8.03% 4,849,135.75 6.37% 3,845,211.08 1.61% 974,512.31 1.13% 681,950.38 11.17% 6,746,623.65 0.58% 352,948.37 10.51% 6,349,095.32 8.97% 5,417,648.59 2.18% 1,317,806.41 0.82% 497,099.71 100.00% 60,394,988.39

MerchanShare in Team value dising Player value sales in per capita Sales % 100.000,00 1,913,166.28 7,673,969.69 7.62 0,00 1,913,166.28 2,503,779.80 2.49 45.000,00 1,913,166.28 6,834,513.79 6.79 0,00 1,913,166.28 5,172,898.58 5.14 0,00 1,913,166.28 5,165,799.86 5.13 0,00 1,913,166.28 4,843,517.97 4.81 210.000,00 1,913,166.28 6,062,861.33 6.02 50.000,00 1,913,166.28 5,938,260.28 5.90 15.000,00 1,913,166.28 2,550,771.36 2.53 0,00 1,913,166.28 2,168,246.96 2.15 0,00 1,913,166.28 6,762,302.03 6.72 300.000,00 1,913,166.28 6,058,377.36 6.02 30.000,00 1,913,166.28 2,917,678.59 2.90 0,00 1,913,166.28 2,595,116.66 2.58 0,00 1,913,166.28 8,659,789.93 8.60 500.000,00 1,913,166.28 2,766,114.65 2.75 0,00 1,913,166.28 8,262,261.60 8.21 250.000,00 1,913,166.28 7,580,814.87 7.53 0,00 1,913,166.28 3,230,972.69 3.21 0,00 1,913,166.28 2,410,265.99 2.39 2.000.000 38,263,325.60 100,658,314 100

Figure 4-59: Player values of individual players

This figure makes clear how differently the sportive performance as well as image related parameters of the individual players generate sales revenues.

Case study: Application of the Berlin Balanced Scorecard

8.5

245

Connection of the player with the financial perspective

The assessment of the player is connected via the Return on Investment (ROI) with the financial perspective of the Balanced Scorecard. Finances

ROI

Break-Even Sales Revenues

Player value

Customers

Potentials/Player

Sport Figure 4-60: Berlin approach for the calculability of the Balanced Scorecard Source: adopted from Schmeisser [Balanced Scorecard, 2002], p. 30.

By the dynamisation a quantification of the potential/player perspective can be achieved. The RoI of the license player team has a value of 264.44%. Return on Investment of the license player team of the FC Hagen 09:

Return on Sales 64.36 % RoI

= 264.44%

=

Profit Sales revenues

64,787,314 € 100,658,314 €

X

4.109 Sales revenues 100,658,314 € Capital turnover = Total capital 24,500,000 € Figure 4-61: Calculation of the Return on Investment of the license player team

246

9

Chapter IV

Conclusion

The target of this part is the assessment of human capital on Bundesliga soccer players via the approach of the Berlin Balanced Scorecard/via the Berlin Human Capital Assessment Model. There are differences with regard to the balance related assessment and utility of a soccer player which are presented in the Berlin Balanced Scorecard Approach. The accounting valuation in accordance with IAS/ IFRS is realized with the help of the paid transfer fee as well as the connected additional expenses. Among the additional expenses are the hand money and the player agency commission. In the case of transfer fee-free players only the hand money and the agency commission are put on the asset side. It is not possible to register self-made players on the balance sheet, as an exact determination of the development costs cannot be carried out. Problems arise if a player exchange between two clubs takes place and the difference is paid. The reason is that the amount of compensation payments can vary arbitrarily. Higher player values imply therefore higher depreciations and thus a lower tax base. The depreciation is undertaken on a linear basis over the contractual duration with the player in question. However, one can refrain from the depreciation, if on a contractual basis a residual value is created, which surpasses the actual book value. The contractual basis can be a contract between two clubs, to oblige the player after the end of the contract for a certain amount of money. An appreciation to the book value lying over the ordinarily adjusted purchase costs is not possible. Moreover, there can be big differences between the position “player value” on the balance sheet and the factual market values of the players in the team. If a soccer corporation follows the strategy to oblige more transfer fee-free players than the competitors or to train self-made players, the corporation has a low amount of human capital in the balance sheet, while the total performance of the players can be considered as equal to the one of the other clubs. This is where the determination of the player assessment and the integration into the Berlin Balanced Scorecard comes into play. The Berlin Approach of the Balanced Scorecard connects the perspectives of the Balanced Scorecard with monetary indicators. The Balanced Scorecard of a soccer clubs consists of a financial, customer, process, employee as well as a sport perspective. With the help of the utility analysis a connection between the employee perspective and the financial perspective is created. The perspectives are connected via the Return on Investment. The utility analysis is an independent instrument. This procedure contains performance related criteria, which in their ponderation and values are of subjective nature. Every player, however, is considered individually on the basis of objective criteria. As the player value consists of a ponderation of individual value and team value, also a subjective influence exists. It is hard to determine the ponderation of individual and team value. For this paper, more weight was given to the individual value; this, however, can be seen differently from person to person. This way a utility value of every player can be determined. The players, whose purchase costs cannot be determined out of reasons in relation with regu-

Literature and sources

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lations concerning the balance sheet, or whose values are subject to manipulation due to barter trades can also be assessed. The determined player values of the human capital assessment are crucial for investment decisions. Because of the strict regulations of the IAS/IFRS it is not possible to book the player values as „Fair Value“on the balance sheet, as there is no active market. How in future the utility value of a soccer player is dealt with, is still uncertain. Only the discussion can be enriched. If in future player utility values are made public in international accountancy, one can count on renewed salary negotiations. Additionally, the transparency can lead to conflicts within the team, because some players could feel disadvantaged from the player utility evaluation. The Berlin Balanced Scorecard Approach is an appropriate instrument for measuring the player values in the team and to support the controlling in its budgeting task.

10

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Schwendowius, Daniel [Finanzierung- und Organisationskonzept, 2002]: Finanzierungs- und Organisationskonzept für den deutschen Profifußball – Eine Analyse der finanzierungsrelevanten Vertragsbeziehungen von Fußballklubs unter besonderer Berücksichtigung der Spielerfinanzierung, Diss. 2002, on the internet: URL http://www.diss.fuberlin.de/2003/21/index.html (status 08/31/2007, 11:26 CET). Süßmilch, Ingo/Elter, Vera-Carina [FC €uro AG, 2004]: FC €uro AG – Fußball und Finanzen, ed. by WGZ-Bank/ KPMG Deutsche Treuhand-Gesellschaft, 4th edition 2004, on the internet: URL http://www.kmpg.de/library/pdf/041102_fc_euro_ag_de.pdf (status: 31.10.2007; 18:33 CET). Staudt, Erwin [Balanced Scorecard, 20.12.2004]: Das Management eines Fußballvereins über die Balanced Scorecard, hrsg. Vom Institut Arbeitswirtschaft und Organisation/ VFB Stuttgart, on the internet: URL http://www.fit4service.de/files/veranstaltung_200412/Vortrag_Staudt_VFB.pdf, (status: 11/11/2007; 13:49 CET). Von Billerbeck, Christoph [Einflußnahme an Kapitalgesellschaften in der Bundesliga, 2001]: Einflußnahme Dritter durch Beteiligung an verschiedenen Kapitalgesellschaften der Lizenzligen, in: Seminar zum Sportrecht an der Universität Bayreuth 2001, on the internet: URL http://www.sportrecht.org/studarbeiten/billerbeck.pdf (status: 12/06/2007; 22:48 CET). Von Freyberg, Burkhard [Transfergeschäfte der Fußballbundesliga, 2005]: Transfergeschäft der Fußballbundesliga – Preisfindung und Spielerwertbestimmung, Erich Schmidt Verlag, Berlin 2005. Von Keitz, Isabel [Immaterielle Güter, 1997]: Immaterielle Güter in der internationalen Rechnungslegung, IDW-Verlag, Düsseldorf 1997. Wehrheim, Michael/Zulauf, Carsten [PiR, Vol. 8, 2007]: Die Bilanzierung von Aufhebungszahlungen im Lizenzfußball nach IFRS, in: Praxis der internationalen Rechnungslegung, Zeitschrift zur IFRS-Bilanzierung, Vol. 8/2007, nwb-Verlag, Herne 2007. Weis, Hans Christian [Marketing, 2001]: Marketing, ed. by Olfert, Klause, 12th revised and extended edition, Kiehl Verlag, Ludwigshafen (Rhine) 2001. Zingel, Harry [IFRS und IAS, 2007]: International Financial Reporting Standard – IFRS und IAS 2007: Grundbegriffe der internationalen Rechnungslegung, on the internet: http://www.zingel.de/pdf/03ias.pdf (status: 10/07/2007; 15:47 CET). Other sources: Die Zeit [n° 33, 8/9/2007]: Makler ohne Lizenz von Hoppe, Till, (8/9/2007, p. 23, Zeitverlag Gerd Bucerius, Hamburg 2007. http://de.eurosport.yahoo.com [VFB, 5/22/2007]: Bundesliga – VfB macht richtig Kasse, newspaper article from 5/22/2007 – on http://de.eurosport.yahoo.com, on the internet: URL http://de.eurosport.yahoo.com/22052007/73/bundesliga-vfb-richtig-kasse.html, (status: 11/17/2007; 0:35 CET).

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256

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http://www.controllingportal.de [Balanced Scorecard]: Balanced Scorecard von Friedag, Schmidt – on http://www.controllingportal.de, on the internet: URL http://www.controllingportal.de/Fachinfo/BSC/Friedag-Schmidt-BalancedScorecard.html, (status: 11/05/2007; 14:54 CET). http://www.controllingportal.de [Balanced Scorecard, Skript]: Die Balanced Scorecard als ein universelles Managementinstrument – extract chapter 3 – on http://www.controllingportal.de, Friedag, Herwig R., on the internet: URL http://www.controllingportal.de/upload/pdf/fachartikel/Instrumente/pdf_management_3. pdf, (status: 11/14/2007; 23:54 CET). http://www.creative-talent [Spielervermittler]: CT Creative Talent GmbH, on the internet: URL http://www.creative-talent.net/index.php?id=37 (status: 10/18/2007; 23:21 CET). http://www.deloitte.com [Annual Review of Football Finance, 08/ß8/2003]: Annual Review of Football Finance – Bundesliga festigt ihre Position im europäischen 10 Milliarden Euro Fußballmarkt, article from 08/08/2003 – on http://www.deloitte.com, on the internet: URL http://www.deloitte.com/dtt/press_release/0,1014,sid%253D6272%2526cid% 253D22587,00.html, (status: 12/19/2007; 20:58 CET). http://www.diepresse.com [Beckham, 7/6/2007]: „Goldjunge“ Beckham brachte Real Madrid 440 Mio. Euro Zusatzeinnahmen, newspaper article from 7/6/2007 – on http://www.diepresse.com, on the internet: URL http://www.diepresse.com/home/wirtschaft/economist/315492/index.do?_vl_backlink=/ home/wirtschaft/index.do, (status: 11/19/2007; 0:29 CET). http://www.dfb.de [Talente fordern und fördern]: Konzept zur Nachwuchsförderung – Deutsche Fußball-Bund, on the internet: URL http://www.dfb.de/index.php?id=11175 (status: 10/13/2007; 15:22 CET). http://www.eskript.unibas.ch [Framework, Verlässlichkeit]: IAS/IFRS – Framework, Paragraph 31 f. – on http://www.eskript.unibas.ch der Universität Basel, Handschin, Lukas, , on the internet: URL http://www.eskript.unibas.ch/rechnungslegungsrecht/jahresabschluss/grundsaetze_ordn ungsmaessiger_rechnungslegung/ die_grundsaetze_im_einzelnen/verlaesslichkeit/ifrs, (status: 10/11/2007; 22:31 CET). http://www.fd21.de [Starspieler]: Starspieler, on the internet: URL http://www.fd21.de/13811.asp (status: 10/18/2007; 14:48 CET). http://www.finanznachrichten.de [Citibank, 5/18/2007]: SPONSORS / Nachfolger von bwin gefunden: Citibank neuer Hauptsponsor von Werder Bremen, newspaper article from 5/18/2007 – on http://www.finanznachrichten.de, on the internet: URL http://www.finanznachrichten.de/nachrichten-2007-05/artikel-8267378.asp, (status: 11/02/2007; 13:13 CET).

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http://www.faz.net [Kaiserslautern, 09/26/2007]: Lautern droht die dritte Liga, newpaper article from vom 09/26/2007 – on http://www.faz.net, on the internet: URL http://www.faz.net/s/RubBC20E7BC6C204B29BADA5A79368B1E93/Doc~E1626D60 DE36B4EBF90116E68AF97289F~ATpl~Ecommon~Scontent.html, (status: 11/1/2007; 18:43 CET). http://www.faz.net [Milliardengeschäft, 6/5/2007]: Milliardengeschäft Fußball, newpaper article from 6/5/2007 – on http://www.faz.net, on the internet: URL http://www.faz.net/s/RubE2C6E0BCC2F04DD787CDC274993E94C1/Doc~EFCBB22 F390ED4140B9DE844AD2CE5E6F~ATpl~Ecommon~Scontent.html, (status: 12/27/2007; 18:57 CET). http://www.fibumarkt.de [Anschaffungskosten]: Anschaffungskosten, FIBUmarkt.de – Das Rechnungswesen-Portal, on the internet: URL http://www.fibumarkt.de/Fachinfo/Anlagevermögen/Anschaffungskosten.html (status: 10/18/2007; 13:15 CET). http://www.football-research.org [Alex Ferguson, 1999]: A Game of Two Halves? The Business of Football, Artikel vom Mai 1999, on http://www.football-research.org, on the internet: URL http://www.football-research.org/gof2h/Gof2H-contents.htm, (status: 12/26/2007; 12:51 CET). http://www.ftd.de [Leo Kirch, 10/09/2007]: Leo Kirch vermarktet Bundesliga im TV, newspaper article from 10/09/2007 – on http://www.ftd.de, on the internet: URL http://www.ftd.de/technik/medien_internet/263560.html?nv=cd-rss1220, (status: 17.11.2007; 0:24 CET). http://www.fussball24.de [BVB, 03/16/2005]: BVB spart ab 2007 rund 5 Millionen Stadionmiete, newspaper article from 03/16/2005, on the internet: URL http://www.fussball24.de/fussball/1/7/38/12149-bvb-spart-ab-2007-rund-5-millionenstadionmiete, (status: 1.11.2007; 18:33 CET). http://www.fussball24.de [FC Bayern, 11/23/2005]: FC Bayern: Mindestens 25 Millionen Euro Einnahmen, newspaper article from 11/23/2005, on the internet: URL http://www.fussball24.de/fussball/112/116/137/21002-fc-bayern-mindestens-25millionen-euro-einnahmen, (status: 11/29/2007; 19:20 CET). http://www.fussball24.de [Hertha BSC, 7/11/2007]: Hertha BSC: Neue Satzung mehr Personalkosten, newspaper article from 7/11/2007 on http://fussball24.de, on the internet: URL http://www.fussball24.de/1/7/38/48494-hertha-bsc-neue-satzung-mehrpersonalkosten, (status: 11/16/2007; 16:42 CET). http://www.fr-online.de [Eintracht Frankfurt, 02/14/2007]: „Die nächste Kategorie kostet das Doppelte“ – Interview mit Eintracht-Finanzvorstand Pröckl, Thomas, newspaper article from 02/14/2007 – on http://fr-online.de, on the internet: URL http://www.fronline.de/in_und_ausland/sport/eintracht_frankfurt/?em_cnt=1074236&sid= c0f31d65cd4312356787d9bdladfe78b, (status: 11/01/2007; 19:37 CET).

258

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http://www.handelsblatt.com [Martin Kind, Interview, 13.12.2007]: Pro:”Wir brauchen mehr Kapital” – Interview mit Martin Kind, Präsident von Hannover 96 Zeitungsartikel vom 13.12.2007 – on http://www.handelsblatt.com, on the internet: URL http://www.handelsblatt.com/News/Sport/Fussball/_pv/grid_id/903493/_p/300481/_t/ft/ _b/1365951/default.aspx/pro-wir-brauchen-mehr-kapital.html, (status: 12/26/2007; 15:42 CET). http://www.idw-online.de [Borussia Mönchengladbach, 06/19/2006]: Die „Borussia“ – auch Wirtschaftsfaktor und Werbeträger für den Niederrhein, Zeitungsartikel vom 06/19/2006 – on http://www.idw-online.de, on the internet: URL http://www.idwonline.de/pages/de/news164464. (status: 12/27/2007; 13:57 CET). http://www.ksc.de [KSC, Stadionmiete, 9/6/2007]: Stadionmiete soll sich an den Einnahmen orientieren, newspaper article from 9/6/2007 – on http://www.ksc.de, on the internet: URL http://www.ksc.de/aktuelles/anzeigen/news/stadionmiete-soll-sich-an-deneinnahmen-orientieren/81/neste/13.html (status: 11/1/2007; 18:41 CET). http://www.medienmaerkte.de [Fußball-Rechte, 8/11/2006]: Fußball-Rechte so teuer wie nie zuvor – In Frankreich und England aber muss noch mehr gezahlt werden, newspaper article from 8/11/2006, on the internet: URL http://www.medienmaerkte.de/artikel/free/ 061108_fussball.html, (status: 11/2/2007; 16:31 CET). http://www.ndr.de [Gerald Asamoah]: Gerald Asamoah – Porträt, Artikel on http://www.ndr.de, on the internet: URL http://www.ndr.de/cgi/mf/mannschaften/ wm2002/mannschaften/spieler/detail.phtml?pid=4457, (status: 10/27/2007; 19:49 CET). http://www.netzeitung.de [Braunschweig, 7/25/2005]: Rekordeinnahmen durch Trikotwerbung, newspaper article from 7/25/2005 – on http://www.netzeitung.de, on the internet: URL http://www.netzeitung.de/sport/bundesliga/349977.html, (status: 10/31/2007; 22.25 CET). http://www.pressetext.de [Merchandising, 12/4/2007]: Merchandising: Rekord für Bundesliga-Vereine, Zeitungsartikel vom 12/4/2007 – on http://www.pressetext.de, on the internet: URL http://www.pressetext.de/pte.mc?pte=071204034, (status: 12/26/2007; 13:31 CET). http://www.rogon.tv [Spielervermittler]: Rogon GmbH & Co. KG, on the internet: URL http://www.rogon.tv/impressum.php (status: 10/20/2007; 13:08 CET). http://www.satundkabel.de [Leo Kirchs Gebot, 10/08/2007]: Kirch bietet 1,5 Milliarden Euro – Verhandelt DFL mit dem Ex-Pleitier?, newspaper article from 10/08/2007 – on http://www.satundkabel.de, on the internet: URL http://www.satundkabel.de/modules.php?op=modload&name=News&file=article&sid= 25592&mode=thread&order=0&thold=0, (status: 11/03/2007; 16:50 CET). http://www.seefelder.de [GmbH & Co KG auf Aktien]: Die GmbH & Co KG auf Aktien, on the internet: URL http://www.seefelder.de/shop/kgaa.php, (status: 12/09/2007; 18:23).

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http://www.seppl-herberger.de [Elf Freunde]: Die Helden von Bern, on the internet: URL http://www.seppl-herberger.de/helden.htm, (status: 1/25/2007; 16:26 CET). http://www.spiegel.de [Rechteverwerter mit Dreijahresvertrag, 5/29/2007]: newspaper article from 5/29/2007 – on http://www.spiegel.de, on the internet: URL http://www.spiegel.de/sport/fussball/01518,485534,00.html, (status: 11/2/2007; 16:14 CET). http://www.sport.ard.de [Ballack, 2/28/2006]: Chelsea lockt angeblich mit Traumgage, newspaper article from 2/28/2006 – on http://www.sport.ard.de, on the internet: URL http://www.sport.ard.de/sp/fussball/news200602/28/chelsea_lock_angeblich_mit_traum gage.jhtml (status: 10/20/2007; 12:45 CET). http://www.sportbild.de [Trikotsponsoren, 7/10/2007]: Rekord: Trikotsponsoren zahlen 123 Millionen, newspaper article from 7/10/2007 – on http://www.sportbild.de, on the internet: URL http://sportbild.de/sportbild/generated/article/fussball/2007/07/10/ 6604800000.html, (status: 10/31/2007; 21:56 CET). http://www.sportgate.de [Roth, 8/10/2007]: FCN-Mitglieder bestätigen Präsident Roth, newspaper article from 8/10/2007 – on http://www.sportgate.de, on the internet: URL http://www.sportgate.de/fussball/bundesliga/artikel/fcn-mitglieder-bestaetigenpraesident-roth-1766, (status: 11/29/2007; 19:27 CET). http://www.sport-rekord.de [Trikotsponsoren, 2007/2008]: Die etwas andere Bundesliga – Tabelle Saison 07/08 – on http://www.sport-rekord.de, on the internet: URL http://www.sport-rekord.de/tabelle_trikotsponsor.php, (status: 10/31/2007; 21:58 CET). http://www.starsandfriends.net [Spielervermittler]: Stars & Friends International Holding GmbH, on the internet: URL http://www.starsandfriends.net/stars/index.php (status: 10/20/2007; 13:10 CET). http://www.stern.de [Fußballflüsterer, 9/11/2005]: „Die Fußballflüsterer“, newspaper article from 9/11/2005- von Erichsen, Björn – on http://www.stern.de, on the internet: URL http://www.stern.de/sport-motor/fussball/:Bundesliga-Datenbank-Die_Fu%DFballfl% FCsterer/545533.html?nv=ct_cb und http://www.stern.de/sport-motor/fussball/: Bundesliga-Datenbank-Die_Fu%DFballfl%FCsterer/545533.html?p=2&nv=ct_cb, (status: 11/10/2007; 17:18 CET). http://www.stern.de [Finanzspritze DFB-Pokal, 12/22/2005]: „Finanzspritze DFB-Pokal“, newspaper article from 12/22/2005 – on http://www.stern.de, on the internet: URL http://www.stern.de/sport-motor/fussball/:FC-St.-Pauli-Finanzspritze-DFBPokal/551946.html, (status: 11/07/2007; 22.18 CET). http://www.stern.de [Ausverkauf, 6/2/2005]: „Dortmund vor dem Ausverkauf“, newspaper article from 6/2/2005 – on http://www.stern.de, on the internet: URL http://www.stern.de/sport-motor/fussball/536732.html?eid=527572; (status: 11/07/2007; 21:25 CET).

260

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http://www.tagesspiegel.de [Krösus Bayern, 7/2/2007]: Krösus Bayern kassiert fast 30 Millionen, newspaper article from 7/2/2007 – on http://www.tagesspiegel.de, on the internet: URL http://www.tagesspiegel.de/sport/Fussball-Champions-LeagueBundesliga;art133,2331901, (status: 11/17/2007; 12:26). http://www.welt.de [Bosman-Urteil und die Folgen]: Das Bosman-Urteil und die Folgen, newspaper article from 12/15/2005 – on http://www.welt.de, on the internet: URL http://www.welt.de/print-welt/article184432/Das_Bosman-Urteil_und_die_Folgen.html, (status:12/28/2007; 16:15 CET). http://www.zeit.de [Fußball als Markt, 26.1.2007]: Fußball als Markt, newspaper article from 26.1.2007 – on http://www.zeit.de, on the internet: URL http://www.zeit.de/online/ 2007/05/fussball-oekonomie-einleitung und http://www.zeit.de/online/2007/05/fussballoekonomie-einleitung?page=2, (status: 12/26/2007; 14:53 CET). http://www2.jura.uni-hamburg.de [Immaterielle Vermögenswerte, 2005]: Immaterielle Vermögenswerte und Goodwill nach IAS/IFRS in Abgrenzung zum HGB, Handout vom März 2005, on the internet: URL http://www2.jura.uni-hamburg.de/hirte/ seminar/0405/Immaterielle_Vermoegenswerte.pdf (status: 10/17/2006; 20:57 CET). Interviews: Sportfive [Interview, 10/10/2007]: Telefongespräch mit einem Mitarbeiter von der Sportfive GmbH, (Interview on 10/10/2007; 15:41 CET). Fleischmann, Carlos [CT Creative Talent GmbH, Interview, 2007]: Gespräch vor Ort mit dem Geschäftsführer von CT Creative Talent GmbH, (Interview from 09/12/2007, 11:20 – 11:47 CET). Tuncay, Firat [Türkiyemspor Berlin, Interview, 2007]: Telefongespräch mit dem Geschäftsführer des Berliner Vereins „Türkiyemspor Berlin“, (Interview from 11/16/2007, 15:14 CET). Picture materials: http://www.sgvw.ch/images/060503_bsc.jpg, (status. 11/05/2007; 15:38 CET). http://www.fitnesstribune.com/arc/img/ft101_4b.gif (status: 11/23/2007; 10:51 CET).

Chapter V Value increasing performance control with the help of the Berlin Balanced Scorecard Approach: Further Development of the financial perspective via the capital flow calculation and the Working Capital management Via the Berlin Balanced Scorecard Approach1 individual indicators on the company business level, department level etc. – going as far as the annual statement analysis can be examined. It is going even further: The individual perspectives of the Balanced Scorecard can be presented, calculated and examined with accountancy techniques and instruments. They uncover possibilities for rationalization in the business performance related area. Moreover, they recognize and analyze weaknesses of the financial instruments of the company as well as of the balance sheet.

1

Introduction

Today, more than ever, a continuous improvement of performance has to be top priority of internationally active companies. Companies are not only confronted with rising demands of the customers and changing frame conditions on the market, but at the same time with the demand of the shareholders for rising value, growing difficulties to obtain capital as well as stronger international competition. Only a high force of innovation, potentials to save costs,

1

Comp. Schmeisser/Schindler/Clausen/Lukowsky/Görlitz Krimphove (2007).

(2006)

and

Schmeisser/Clermiont/Hummel/

262

Chapter V

flexible structures, high motivation for changes and an integrally cohesive finance management can be an answer to the growing demands. In the following chapter a holistic finance management and controlling model as framework of the Berlin Balanced Scorecard Approach is introduced, which is appropriate for the diverse demands of single business areas as well as for the financial management of the whole company. With the help of the Berlin Balanced Scorecard Approach as strategic-operative framework all Cash Flow generating business areas can be planned, managed and controlled in a detailed way. By the connection of capital flow calculation, Cash Flow calculation and Shareholder Value approach in the financial perspective of the Berlin Balanced Scorecard Approach a concept is created which immediately shoes the value increase of a company. By the strong connection of the concept and the external accountancy, a perfect integration in the planning and finance publicity process of the annual statement of the company is possible. Besides, the relevant indicators underlie the external annual audit, with the result that credibility and acceptance of the concept is also offered to the company extern analyst.

2

Cash Flow Statement

In a consolidated financial statement in accordance with IFRS the Cash Flow Statement (CFS) is an obligatory part in addition to the balance sheet, profit and loss statement, calculation of equity variations as well as the annex. The relevant norm for the creation of the capital flow calculation in the individual and consolidated financial statement is the IAS 7, which was last amended in 2005. In connection with the further parts of the annual financial statement, the addressees will receive information via the Cash Flow Statement, which permits them to get an insight in the financial and investment situation of the company. By the comparison with liquidity target figures conclusions with regard to the solvency of the company can be drawn.1 Furthermore, it is possible to evaluate the point in time and amount of future Cash Flows with the help of an extrapolation of the Cash Flows of past periods, which makes it possible to estimate the needs for liquidity.2 The amounts disclosed in the profit and loss statement are evaluated in accordance with their purchase and production costs, but more and more also with their Fair Values in the application of the IFRS. Thus, the disclosed values are also the result of interpretations and assumptions, by which the credibility of the information is rather weakened. Under the period distinction (accrual principal), demanded in the IFRS, expenses and disbursements as well as 1

Comp. Pellens/Fülbier/Gassen (2004), p. 162.

2

Comp. Pellens/Fülbier/Gassen (2004), p. 163.

Cash Flow Statement

263

revenues and incoming payments do not necessarily occur in the same period. In order to depict the Cash Flows in a statement period a separate representation via the Cash Flow statement is needed. Because of the demanded accrual principle the Cash Flow statement is one of the few even cross-norm comparable parts of the annex. Moreover, today generally further (free-)Cash Flows deliver a basis for the assessment of companies and company areas of tomorrow. Via Discounted Cash Flow Methods first indications to the company value can be deducted from the Cash Flow Statement in addition to the evaluation of the financial situation.1

2.1

Basic principles for establishing a Cash Flow statement

The superordinated frame principles are also valid for the Cash Flow statement, because it is an obligatory part of the IFRS statements. Essentially they consist of the following principles:2 Principle of Comprehensibility The information has to be presented in such a way that they are understandable for the addressees. The individual positions have to be formulated in a clear and unambiguous way. Principle of Comparability In accordance with IAS 1.36 the figures from the previous year have to be included into the Cash Flow Statement. If the structure or the presentation of the Cash Flow Statement is changed, also the comparative values of the past future have to be restructured. Principle of Reliability The reliability of the information requires the following conditions:    

They must be free of essential mistakes. Neutrality – i.e. free of known falsification or manipulation. Credibility. The determination has to be carried out on the basis of an economic kind of consideration.  In the case of insecurities they have to be determined in a careful and unbiased way  Totality. It is important that all incoming and outgoing Cash Flows of the company are taken into consideration.

1

Ibid.

2

Comp. Pellens/Fülbier/Gassen (2004), p. 164f.

264

Chapter V

Furthermore, the gross principle has to be applied in the Cash Flow Statement. In accordance with IAS 7.21 the incoming and outgoing Cash Flows have to be presented in a non accumulated way. Only the following cases are an exemption from this rule (IAS 7.22-23):  Cash receipts and payments on behalf of customers and payments, which can rather be ascribed to customer activities than to those of the company.  Cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short.1 The Cash Flow calculation gives detailed information on the changes of liquid assets during the past business year. The liquid assets comprise cash and cash equivalents. They include cash on hand and demand deposits together with short term, highly liquid finance investments that are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.2 The following figure gives a schematic overview: Liquid assets = financing funds

Liquid assets

Cash equivalents

Cash on hand and demand deposits

Short term, highly liquid finance investments that are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value

Receipt and payment cash and cash equivalents = Cashflow

Figure 5-1: Composition of financing funds Source: Pellens/Fülbier/Gassen (2004), p. 165.

In accordance with IAS 7.6 financing funds essentially comprise:  Cash on hand in Euros and foreign currencies,  Demand funds with domestic and foreign credit institutes (including Central Reserve Bank and Post Office Banks),

1

Pellens/Fülbier/Gassen (2004), p. 165. The examples of the IASB named especially for point 2 refer above all to banks. Thus, loans for credit card customer, the purchase or sale of finance investments of credits with a term of three months are stated. Comp. IAS 7.23.

2

Comp. Pellens/Fülbier/Gassen (2004), p. 165f.

Cash Flow Statement

265

 Domestic and foreign postal stamps and available franking possibilities of corresponding equipment,  Received, not yet cashed cash and collection-only checks, as checks are always payable on demand independently from their contract period (Art. 28 ScheckG1). Drawn checks on the other hand have to be deduced from the demand funds, even if no debiting has taken place.2 Short term investment that are readily convertible into cash and are subject to insignificant risk of changes in value belong to the cash equivalents (IAS 7.6). An investment normally meets the definition of a cash equivalent if it has a maturity of three months or less from the date of acquisition (IAS 7.7). Shares are normally excluded from the fund, unless they are in substance a cash equivalent (IAS 7.7). Bank borrowings belong to the financing activities of the entity and are not part of the financial fund in accordance with IAS. In the case of bank overdrafts, the attribution to the fund is the rule, if they represent an individual part of the cash management of the company (IAS 7.8).3 Cash flows in foreign currencies should be calculated in the rate in effect at the date of the Cash Flows (IAS 7.25). Out of reasons of simplicity the currency conversion can be carried out with the help of weekly or monthly average exchange rates, if no strong currency fluctuations would be opposed to it (IAS 7.27 in connection with 21.9f.). Incoming and outgoing cash from extraordinary business transactions have to be disclosed separately (IAS 7.29).

2.2

Special questions of attributions

Interests and dividends Receipts and payments of interests and dividends have to be disclosed separately. Paid interests and received interests and dividends can be either classified as operating Cash Flows or investing Cash Flows respectively (IAS 7.33). Paid dividends can be disclosed as financial Cash Flow (rule) or operative Cash Flow (IAS 7.34). However, the principle of consistency has to be observed (IAS 7.31).4 Cash flows arising from taxes Cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities ((IAS 7.35-36).5 Acquisition and disposals of subsidiaries and other business units 1

German Check Act.

2

Comp. Pellens/Fülbier/Gassen (2004), p. 165f.

3

Comp. Pellens/Fülbier/Gassen (2004), p. 166.

4

Comp. Pellens/Fülbier/Gassen, (2004), p. 169f.

5

Comp. Pellens/Fülbier/Gassen (2004), p. 170.

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Chapter V

Aggregate Cash Flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. (IAS 7.39). Transactions which do not require the use of cash Investing and financing transactions which do not require the use of cash should be excluded from the statement of Cash Flows, but they should be separately disclosed elsewhere in the financial statements (IAS 7.43).

2.3

Structure of the Cash Flow statement

IAS 7 does not determine any formal requirements for the presentation of the Cash Flow Statement. Comparative information in respect of the previous period shall be disclosed (IAS 1.38). The presentation of Cash Flows is divided into three big sections (IAS 7.10), to which the receipts and payments of cash and cash equivalents have to be attributed to. The following representation shows the rough structure in the form of a hierarchy.1 – = – = – =

Operating receipts Operating payments Cash flow from operating activities (1) Divestment Investment payments Cash flow from investing activities (2) Financing receipts Financing payments Cash flow from financing activities (3) Change of financial fund ((1) + (2) + (3))

Figure 5-2: Rough structure of the Cash Flow Statement Source: Pellens/Fülbier/Gassen (2004), p. 171.

In order to do justice to the informational function of the Cash Flow Statement the individual Cash Flows of operative activities, investing activities and financing activities have to be further structured. Cash receipts and payments of operative activities can be presented in accordance with the direct or the indirect method (IAS 7.18 ff). For Cash Flows of investing and the financing activities only the direct method is allowed (IAS 7.21).

1

Comp. Pellens/Fülbier/Gassen (2004), p. 171.

Cash Flow Statement

267

The gross principle as well as the principle of consistency is generally valid for the recording of cash receipts and payments. For individually named Cash Flows, however, reporting on a net basis is allowed (IAS 7.22 ff.).

2.3.1

Cash flows from operative activities

If for the determination of the Cash Flows from operative activities the direct method is used, the determination has to be carried out directly on the basis of receipts and payments of cash and cash equivalents. Following DRS 2 the presentation could look as follows: – + – – +/– =

Cash receipts from customer Cash paid to suppliers and employees Other cash received, which cannot be attributed to investing or financing activities Other cash paid, which cannot be attributed to investing or financing activities Interest paid Cash receipts and payments for extraordinary items Cash flow from operating activities

Figure 5-3: Direct presentation of the Cash Flow from operating activities Source: Pellens/Fülbier/Gassen (2004), p. 173.

The indirect method resorts to the Profit and Loss Statement for the determination of the Cash Flow from operating activities. It adjusts accrual basis net profit or loss for the effects of non-cash transactions. The necessary corrections in accordance with IAS 7 following DRS 2 can be seen in the following table: +/– +/– +/– –/+ –/+ +/– – +/– =

Accrual basis profit before extraordinary items and taxes Appreciations/depreciations of assets Increase/decrease of accruals Other cash irrelevant expenses/revenues Profit/loss from disposal of assets Decrease/increase of inventories, of receivables as well as other assets which are not attributed to investing and financing activities. Decrease/increase in trade payables and other liabilities which are not attribute to investing and financing activities. Tax payments Cash receipts and payments from extraordinary items Cash flow from operating activities

Figure 5-4: Indirect presentation of Cash Flows from operating activities Source: Pellens/Fülbier/Gassen (2004), p. 174.

268

Chapter V

2.3.2

Cash flows from investing activities

The IASB does not require any minimum structure for reporting the Cash Flows from investment activities. The applicable direct method shows separately every main category of gross receipts and gross payments. Applying the categorization scheme of DRS2, the following picture is obtained: – + – + – +/– =

Receipts from disposals of fixed assets Payments for investments in fixed assets Receipts from disposals of intangible assets Payments for investments in intangible assets Receipts from disposals of financial assets Payments for investments in financial assets Payments and receipts of cash for the purchase and disposal of subsidiaries and other business units Cash flow from investing activities

Figure 5-5: Direct presentation of Cash flows from investing activities Source: Pellens/Fülbier/Gassen (2004), p. 174.

As can be seen from the figure above, also the purchase and disposal of subsidiaries and other business units belongs to the investment activities. In accordance with IAS 7.39 Cash Flows from the purchase or disposal of consolidated companies have to be classified as investing activities and have to be reported separately. The amount is determined with the help of the purchase/disposal price reduced by received/paid cash/cash equivalents.1 Changes of consolidation are no cash relevant activities and do not have to be recorded in the Cash Flow Statement.

2.3.3

Cash flow from financing activities

Also the Cash Flow from financing activities is exclusively presented in accordance with the direct method. All finance flows which result from transactions with the shareholders and minority shareholders of consolidated subsidiaries as well as the taking out or paying back of credits are attributed to the Cash Flow from financing activities.2 DRS2 gives the following recommendation for structuring it:

1

Comp. Pellens/Fülbier/Gassen (2004), p. 174f.

2

Comp. Pellens/Fülbier/Gassen (2004), p. 175.

About Working Capital

– + – =

269

Receipts from increase of equity Payments to the shareholders Receipts from issuing loans and taking out credits Payments for paying loans and credits back Cash flow from financing activities

Figure 5-6: Direct presentation of the Cash Flow of financing activities Source: Pellens/Fülbier/Gassen (2004), p. 175.

3

About Working Capital

The Working Capital is an indicator for the assessment of the liquidity of a company. However, it does not represent a freely disposable part of the working liquid assets, but a potential for covering future liabilities.1 The Working Capital expresses how much of the short term disposable liquid assets2 can be financed on the long run and, thus, more cost effectively.3 The Working Capital presents from a liquidity based point of view, which share in the liquid assets is not necessary for the payment of short term liabilities.4 The net liquid assets are not altered in case of business transactions, which only affect short term balance sheet positions (e.g. payment of short term liabilities in cash or by check) or only the long term balance sheet positions (allocation to reserves). They are only affected by decisions, which concern long term and short term balance sheet positions (e.g. disposal of a building for cash, paying back long term debts with cash). The Working Capital should always be positive as a negative Working Capital indicates a violation of the golden rule of the balance sheet5 (lack of coverage of the fixed assets and long term liquid assets by equity and long term credits). The Working Capital shows especially, to which extent parts of the liquid assets which are disposable on short notice can be financed on the long run or in the medium turn, in order to reduce expenses for interests.

1

Comp. Corsten (1993), p. 946.

2

All those parts of assets of a company count amount current assets which firstly are meant to be sold or consumed, which are secondly connected with the execution of payment or which serve as a momentary investment. Comp. Corsten (1993), p. 850.

3

Comp. Kralicek (2003), p. 62.

4

Comp. Blazek/Deyhle/Eiselmayer (2002), p. 127.

5

Comp. Baetge (1998), p. 241ff.

270

3.1

Chapter V

Determination of the Working Capital

There are different methods of determining the Working Capital. The basis for all calculations is different figures on the balance sheet of a company. Assets Inventories Receivables Liquid assets Instruments from liquid assets Paid deposits

Liabilities Payables Other liabilities not subject to interests

Received deposits

Figure 5-7: Balance sheet-based parts of the Working Capital

The Working Capital can be determined as follows: (1) Working Capital = Liquid assets – short-term liabilities1 or (2) Working Capital = Liquid assets – liabilities not subject to interests2 or (3) Inventories (raw materials and supplies, finished products) + Receivables – Payables + Paid deposits – Received deposits = Working Capital3 If both figures are presented as ratio, the following indicator is received: Working Capital 

3.2

Liquid assets Short term liabilities

About management of Working Capital

Working Capital Management implies to plan, carry out and control with the help of appropriate measures. This means, value drivers have to be identified and transparency for the company management has to be created with appropriate indicators. The company management should determine measures with the aim to improve the financial independence and creditworthiness as well as the capital needs of the company. In this context the company faces the task to minimize Cash Flow cycles. 1

Comp. Kralicek (2003), p. 62 and Coenenberg (2000), p. 929.

2

Comp. Schneider (2002), p. 540.

3

Comp. Wieselhuber (2005), p. 2.

About Working Capital

271

Booking of supplier invoice and receipt of goods

Sale of products Booking outgoing invoice Days receivabel outstanding

Cycle time

Turnover time of liabilities

Cash-to-Cash Payment to supplier

Receipt of customer payment

Figure 5-8: Cash-to-Cash-Cycle Source: Kaplan/Norton (1997), p. 56f.

The cash-to-cash cycle represents the time needed in order to transfer the payments to the supplier in receipts from the customer. If a company achieves to reduce the turnover time of payables, it disposes over more liquid assets. In extreme cases even negative cash-to-cash cycles are necessary. This is the case when the Working Capital is completely paid by suppliers and customers.1 Finally, all this is about holding financial assets as long as possible in the own company. Therefore, it is necessary, to deduct the essential approaches for reducing Working Capital for a company specific level. It is the aim of the Working Capital Management, to reduce the Working Capital, in order to achieve a reduction of the financed part of the liquid assets which is subject to interests. This way capital can be liberated, which can either be invested or the use of which can be renounced in order to save financing costs. Thus, the liquidity situation as well as the return rate can be improved.

1

Comp. Kaplan/Norton (1997), p. 56f.

272

3.3

Chapter V

Tasks of Working Capital Management

Essentially, the Working Capital management consists of three areas: Management of receivables: Quick reduction of receivables, increase of turnover rate of receivables. Management of inventories: Reduction of stocks of finished and unfinished products as well as raw material and supplies; increase of delivery turnover. Management of liabilities: Negotiation long credit periods, agreement on appropriate discounts in case of quick pay-back of liabilities.

3.3.1

Management of receivables

In the context of management of receivables it shall be achieved that receivables are transformed into cash as quickly as possible. This can especially be supported by a timely issuing of invoices. Moreover, one has to pay attention that no factual or calculation mistakes are made on the outgoing invoice, as otherwise payment delays might result from complaints. Overdue receivables shall be collective via an efficient debt collection as quickly as possible. Furthermore, in case of businesses where high amounts are involved, appropriate securities, e.g. bonds or guarantees and deposits shall be agreed to avoid deficits in payment. Finally the possible payment types influence the turnover of receivables.1 Thus, the liquidation of receivables, e.g. in the case of a collection authorization given by the customer can be realized in a considerably faster way than in the case of payment by check, because the examination and presentation of a check as well as the entry on the bank account can demand a longer processing time. Also the sale of demands, e.g. in form of Factoring or ABS-transactions2 lead to a quicker liberation of bound capital. However, the costs and the utility won by the liberation of capital must always be compared. The following picture offers a graphical overview over the management of receivables.

1

Comp. Schneider (2002), p. 542.

2

Comp. Schmeisser/Leonhardt (2006).

About Working Capital

273 Management of receivables

Drawing up contract

Payment method

Creditworthiness assessment

Preparation of offer and invoice

Directives of financing/ credit

Quickly

Determination of courses of procedures

Factually and mathematically correct

Creditworthiness assessment

Determination of control mechanisms

Handling of receivables

Reminder mechanism and cashing

Factoring

ABS

Figure 5-9: Possibilities of management of receivables Source: Schneider (2002), p. 542 and Pütz (2002), p. 50.

3.3.2

Management of inventories

Measures of the management of inventories are mostly connected with tightening the production process and lead to a shortened turnover period. As they concern generally the whole production process they shall already be taken into consideration when planning new products and designing the production program. Inventories, for example, can be reduced via the modularization of finished products and assembly groups, by the reduction of interfaces or by just-in-time production. Also by outsourcing certain components the inventories can be reduced. For all measures of inventory management there is a conflict between the reduction of the inventories on the one hand and the conservation of the productive efficiency on the other hand.

3.3.3

Management of liabilities

The aim of the management of liabilities is to maximize the payment terms with suppliers and to agree on corresponding discounts for quick payment. Whether this can be achieved depends on the market power of the company. Furthermore, it has to be made sure, that pushing through longer payment terms does not lead to a deterioration of the relation to the supplier and thus to limitations of the service.1 It

1

Comp. Schneider (2002), p. 543.

274

Chapter V

is necessary for an efficient liability management to have an up-to-date and complete overview over the amount and due dates of liabilities, which can only be achieved by a prompt book entry of the invoices received. If possible, the payment of liabilities should not be effected via the direct debiting scheme, as in case of this payment method one can not determine the moment of payment oneself. The following figure 5-10 gives a summarizing overview: Management of liabilities

Drawing up contracts Payment targets Payment methods Form of payment

Accounting control Prompt Correct with regard to content and calculation Supervision of claims

Financial directives Determination of procedures Determination of control mechanisms

Handling of invoices Allocation Booking

Figure 5-10: Possibilities of liability management Source: Schneider (2002), p. 543.

3.4

Control of Working Capital

Usually the Working Capital is controlled with the help of indicators. Important figures in this context are the days sales outstanding and the days payables outstanding, as well as the stock turnover rate and duration, the Working Capital intensity as well as Days of Working Capital. Days Sales Qutstanding 

Receivables Sales - Revenues

Days Payables Qutstanding 

Payables Sales - Revenues

The Days Sales Outstanding represents the payment term which the customers are using on the average, while the Days Payables Outstanding show how long the company generally needs to pay its supplier payables.

About Working Capital

275

Sales Revenues * 360 days Average inventory without received payment Average inventory without deposits received Turnover duration of inventories  * 360 days Sales Revenues Turnover frequency of inventories 

The stock turnover rate1 shows how often material was turned over in one period. It is determined by dividing the disposal of the position in one period by the average inventories. The turnover duration2 shows in which period the inventory is turned over once. It can be calculated by dividing the number of days in the period considered by the frequency of turnovers. The Working-Capital-Intensity can be obtained by dividing the Working Capital by the sales revenues. Working Capital Intensity 

Working Capital Sales Revenues

It shows how much Working Capital per unit of sales revenues is bound on average. Days of Working Capital 

Working Capital * 365 Sales Revenues

The indicator calculates the average number in days, during which the sales revenues have to be pre-financed. In this case the target is a low value.3

3.5

Effects of the Working Capital management

An improvement of the Working Capital frees liquid assets. This can lead to:  An improvement of the equity ratio.  Reduction of the balance sheet total (Foreign Capital).  Reduction of the expenses for interests.4 Furthermore, the financial result, the operative result, the annual net profit and finally the rate of return, are improved for example by the increase of the capital return.5 The effect of an active Working Capital Management may not be underestimated. As the indicators for the control of Working Capital are generally also used in the context of company ratings, an efficient Working Capital Management has also a positive effect on the liquidity of the com1

Comp. Baetge (1998), p. 675.

2

Comp. Baetge (1998), p. 675.

3

Comp. Schneider (2002), p. 545.

4

Comp. Wieselhuber (2005), p. 8f.

5

Comp. Schneider (2002), p. 540.

276

Chapter V

pany.1 If companies manage to improve their equity basis, this results also – taking Basel II into consideration, in advantages for the costs (interests) of future credits. In accordance with Basel II banks have to deposit a corresponding amount of equity for the credits to be emitted. The amount of the equity to be deposited depends on the default risk of the credits. The consequence is that risky credits are given out with higher interest rates by the banks. Companies can encounter this with a higher equity rate. Finally, an active Working Capital Management has generally the effect of raising the free Cash Flows, which has positive effects in the context of the use of a value oriented management concepts. However, one has always to consider the tension between the Working Capital on the one hand and the customers and suppliers on the other hand. In this context only those measures should be carried out, which imply more benefits on the long run.

3.6

Interactions between Working Capital and Cash Flows

The Cash Flow from operative activities in accordance with IAS 7 following DRS 2 is determined as follows. +/– +/– +/– –/+ –/+ +/– – +/– =

Accrual basis profit before extraordinary items and taxes Appreciations/depreciations of assets Increase/decrease of accruals Other cash irrelevant expenses/revenues Profit/loss from disposal of assets Decrease/increase of inventories, of receivables as well as other assets which are not attributed to investing and financing activities. Decrease/increase in trade payables and other liabilities which are not attribute to investing and financing activities. Tax payments Cash receipts and payments from extraordinary items Cash flow from operating activities

Figure 5-11: Indirect presentation of the Cash flows from operative activities Source: Pellens/Fülbier/Gassen (2004), p. 174.

The connection between the Cash Flows from operative activities and the Working Capital can be seen from the parts of the calculation printed in bold. The Working Capital rises if the inventories and payables rise, if the payables decrease, or if other assets and liabilities which cannot be attributed to the investing or financing activities are affected. It becomes clear that an increase of Working Capital leads to a deduction of Cash Flows from operative activities.

1

Comp. Schmeisser/Mauksch/ Schindler (2005).

About Working Capital

277

By binding capital the company loses financial assets which could be used for investments, paying debts or payment of dividends. The Working Capital is reduced in case of a reduction of inventories, of payables, an increase of payables as well as of other assets and liabilities which cannot be attributed to the investment and financing activities. In case of reduction of the Working Capital the Cash Flow rises and thus finally the Shareholder Value, because less capital is bound in the liquid assets. The influence of the Working Capital on the Cash Flow from operative activities and finally on the Shareholder Value of a company is shown in the following Figure 5-12: Shareholder Value Cash Flow from operative activities Cashflow from operative activities without WC alterations

+

+

Cash Flow from investing activities

+

Reduction of the Working Capital

-

Cash Flow from financing activities

Increase of the Working Capital

Figure 5-12: Interdependencies between Cash Flow from operative activities and Working Capital

Companies therefore have the task to configure the Working Capital in the best possible way in order to secure profitability, liquidity and the Shareholder Value on a sustainable way. In the US company practice the 2:1 rule, also referred to as bankers rule (liquid assets to short term borrowings), has established as being desirable.1

3.7

Interactions between Working Capital and ROI

The Return on Investment (ROI) is an indicator which shows the relation between profit and invested capital. It is often used as measure for performance and return of a company or of business areas. Because the ROI is independent from the size of the analyzed business area, it makes a comparison between entities of different sizes possible.2 The return rate expresses the relation of one profit indicator to another business indicator, which has contributed to gain this return. Thus, the return on sales measures the share of the profit in the sales revenues before taxes and interests (EBIT) and shows which part in every monetary unit received from sales was “earned”. In dependence of the type of used capital (equity, borrowings)

1

Comp. Blazek/Deyhle/Eiselmayer (2002), p. 128.

2

Comp. Baetge (1998), p. 424 and Perridon/Steiner (2003), p. 569ff.

278

Chapter V

different return indicators can be distinguished. In the return on equity the profit at the shareholders’ disposal is put into relation with the equity. In order to determine the return on assets the interests for borrowings in the sense of economic profits for the creditors have to be added to the profit, before putting this sum into relation with the total assets. In order to determine the return on sales the profit is related with the sales revenues. The indicator Return on Investment (ROI) can also serve as indicator for returns and is generally defined as follows: Return on Invesment 

Profit Total assets

If one expands enumerators and denominators with the sales revenues, the ROI is determined by the product of return on sales and capital turnover. Return on Invesment 

Profit Sales Revenues * Sales Revenues Total assets

Return on Invesment  Re turn on Sales * Asset Turnover Thus, the ROI represents the link between the profit, sales revenues and use of capital.1 By splitting the ROI into return on sales and asset turnover a detailed cause research is possible. E.g. a low return on sales can indicate higher costs or a reduction of sales revenues, which could be the result of lost market shares. A further possible cause could be a failed implementation of the strategy.2 In order to recognize and work on the causes systematically, the performance drivers identified by and integrated in the Balance Scorecard should be taken into consideration for the analysis, as well as alterations of individual positions of returns, expenses and assets. From these results of analysis interim and company goals can be deducted up to the operative level and finally the strategic target hierarchy in the sense of the Berlin Scorecard can be created.3

1

Comp. Baetge (1998), p. 521f. and Schmeisser/Tiedt/Schindler (2004), p. 99, p. 102.

2

Comp. Baetge (1998), p. 526f.

3

Comp. Schmeisser (2002), p. 31 and p. 48.

About Working Capital

279

Variable costs Earnings before taxes Return on sales

Contribution margin Sales revenues Fixed costs

Sales revenenues

ROI Capital turnover

Fixed assets Inventories

Invested capital Liquid assets

Receivables Cash

Figure 5-13: Effect of Working Capital on the ROI

As presented above the Working Capital parts (liquid assets) have direct influence on the invested capital as well as the capital turnover and thus on the ROI. The following example shall mathematically depict the connection.

+ + =

Inventories Receivables Cash Liquid assets

2005 24.000 90.000 25.000 139.000

2004 30.000 150.000 45.000 225.000

+

Fixed assets

160.000

160.000

=

Invested capital Sales revenues

299.000 400.000

385.000 400.000

/

Invested capital

299.000

385.000

=

Capital turnover

1,34

1,04

*

Return on sales

5%

5%

6,7%

5,2%

ROI Figure 5-14: Effect of the Working Capital Management on the ROI

Only by a reduction of the liquid assets in 2005 by 38.22% (all other values remained unchanged), a raise of the capital turnover by 0.3 as well as an increase of the ROI by 1.5% were achieved.

280

4

Chapter V

The connection of Shareholder Value, Cash Flow Statement and Working Capital with the Berlin Balanced Scorecard

The driver tree of the financial perspective connects the Berlin Balanced Scorecard financial perspective with the created Shareholder Value. If one considers the single perspectives of the Balanced Scorecard as the business segments of a company it becomes clear that the sum of the forecasted cash flows represent the basis for calculating the Shareholder Value, which is composed as follows in accordance with Rappaport: Actual cash value of forecasted corporate cash flows Actual value of the residual value Market value of shares traded on the stock market Company value Market value of foreign capital Shareholder Value

+ + = – =

Figure 5-15: Calculation of the Shareholder Value in accordance with Rappaport Source: Rappaport (1999), p. 40.

The pure calculation of the Shareholder Value does not mean an increase in value for the company. The task lies in actively and systematically designing the process of strategy finding, formulation and implementation with the help of the Balanced Scorecard in order to successfully implement strategies and to increase the company value by doing so. The precondition is that effects of strategic decision on the company value are quantitatively represented. By the determination of quantitative values for each perspective, here presented through the financial perspective, value increasing and value destroying factors of the Shareholder Value can be explicitly identified. As soon as the problematic area is identified, it can be remedied through a detailed cause research within the corresponding key indicator hierarchy via the value influencing factors.

4.1

Determination of the adequate target rate

In order to calculate the capital value the forecasted cash flows have to be discounted by an adequate target rate. In order to fulfill the requirements of the investors, the WACC (Weighted Average Cost of Capital) can be used as minimum interest. The weighted capital costs can be calculated as follows:1

1

Comp. Schmeisser/Tiedt/Schindler (2004), p. 78.

The connection of Shareholder Value, Cash Flow Statement and Working Capital

WACC  rE *

281

E D  rC * (1 - t) * ED ED

The equity cost rate can be calculated with the help of the capital asset pricing model (CAPM)1 whose aim is to determine an adequate risk adjusted return for each investment.2 The costs of equity are composed as follows: Cost of equity = risk free interest rate + risk premium of equity Risk free rate = real interest rate + expected inflation rate Risk premium = Beta * (expected market return – risk free interest rate) The risk premium of the market represents the additional remuneration required by investors when they invest in the company instead of providing their money for a secure investment.3 In order to determine the cost rate of borrowings, the average of all borrowing costs, which were caused during the planning period, should be taken as basis.

4.2

Mathematical connection of SHV, Cash Flow Statement, WC and BSC

An important instrument for controlling the business process is the Berlin Balanced Scorecard (BBSC). The BBSC is the connection between the value oriented aim of increasing the company value, the company strategy and the operative implementation. The driver tree of the financial perspective of the Berlin Balanced Scorecard shows the connection between Shareholder Value, Berlin Balanced Scorecard, Cash Flow Statement and Working Capital. The advantage of the presentation lies in the finance related, complete representation of the interdependencies between Shareholder Value, Berlin Balanced Scorecard, Cash Flow Statement and Working Capital. The advantage of this presentation lies in the finance related, holistic presentation of the interdependencies of cash freeing components and, thus, prevents the isolated consideration and optimization of individual parts.

1

Comp. Perridon/Steiner (2003), p. 119ff.

2

Comp. Perridon/Steiner (2003), p. 119ff. and Fischer/ von der Decken (o. A.), p. 26.

3

Comp. Rappaport, A. (1999), p. 46 f.

282

Chapter V SHV BSC

Finances KFR

Employees

 forecasted Cash Flow

X

Customers

Business processes

WACC

Cashflow from operative activities without WC changes Working Capital Management Inventories

+

Reduction of Working Capital

Receivables

-

Growth of Working Capital

Down payments received Payables

Cashflow from investing activities Management of fixed assets

Management of financial assets

Management of intangible assets

Cash flows from financing activities Management of equity

Management of loans and credits

Figure 5-16: Connection of SHV, BBSC, Cash Flow Statement and Working Capital

4.2.1

Management of the operative Cash Flows

In the operative area the Working Capital Management occupies an outstanding place. The object of the Working Capital Management is the optimization of inventories, receivables, down payments received and payables. The Working Capital does not only consider the monetary perspective – of the chronological structure of payments and receipts, but also the operative component, i.e. the efficient use of resources.

Conclusion

4.2.2

283

Management of Cash Flows from investing activities

The planning, control and monitoring of cash flows from investing activities essentially comprehends the areas management of fixed assets, management of financing assets as well as management of intangible assets. The management of fixed assets refers to the planning, control and monitoring of investments/ divestments in estates, buildings, machines as well as operative equipment in order to determine the necessary fixed assets. The management of financing assets comprehends the areas share acquisition and sale of stock, purchase and disposal of shares and taking up and paying back loans, as well as the acquisition and sale of subsidiaries and other business units. The management of intangible assets should basically plan, control and monitor the investments/divestments in licenses, patents, rights of utilization, information, know-how of employees as well as research and development.

4.2.3

Management of Cash flows from financing activities

This area is separated into the management of loans and credits as well as equity management. The management of loans and credits shall pay special attention to the contract drawing for the emission of loans and the taking up of credits as well as equity management in order to optimize the cash flows, e.g. the interest costs. The equity management essentially deals with the addition of equity, amongst other things with the profit accumulation as well as the disbursements to shareholders, e.g. dividends.

5

Conclusion

Especially in economically tumultuous times, securing liquidity and the company value in a sustainable way is of great importance. The management of operative assets receives more and more attention in this context. The target is to create a balance for payables, receivables and inventories and, thus, to use the cheapest cash-source in the company. Company value and liquidity are topics, which many companies are just dealing with. There are two possibilities for the improvement of the liquidity. The first one is the increase of the amount of cash from the outside, i.e. the addition of equity or borrowings. The second possibility is using internal cash sources. For shareholders the increase of company value has top priority. The management of operative assets offers the possibility of increasing the goodwill and the company earnings. In the field of business management a multitude of instruments have been developed to influence

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payables, instruments and inventories. However, there is still a lack of attention to the interdependences within the parts of the current assets as well as to a combined consideration of financial flows and operative performance. An effective liquidity management is important in order to avoid high capital commitment. An efficient liquidity management which aims at providing a sustainable contribution to securing and increasing the company success and the goodwill, has to get over those deficits and provide differentiated instruments, adapted to the individual operative demands. An increase of the company value can be achieved by an increase of profit, an improvement of the financial mix, by an improvement of the interest rate or a reduction of needs of capital per profit share. The connection between Working Capital with its possibilities of inner financing, the cash flows (Cash Flow Statement) as well as their relation with the financial perspective of the Berlin Balanced Scorecard and finally the Shareholder Value offers a comprehensive model of control and monitoring and, thus, possibilities to recognize cash sources in the company in a well concerted way and to use them in the best possible way.

6

Literature

Baetge, Jörg: Bilanzanalyse, Düsseldorf: IDW-Verlag, 1998 Blazek, Alfred/Deyhle, Albrecht/Eiselmayer, Klaus (2002): Finanz-Controlling: Planung und Steuerung von Bilanzen und Finanzen, Offenburg (Verlag für ControllingWissen), 2002 Coenenberg, Adolf [2005]: Jahresabschluss- und Jahresabschlussanalyse, 20th ed., Stuttgart: Schäffer-Poeschel, 2005 Corsten, Hans (ed.): Lexikon der Betriebswirtschaftslehre, 2nd slightly changed edition, Munich, Vienna: R. Oldenbourg Verlag, 1993 Fischer, Thomas M./Decken von der, Tim: Kundenprofitabilitätsrechnung in Dienstleistungsgeschäften – Konzeption und Umsetzung am Beispiel des Car Rental Business, Ingolstadt et al. Hahn, Dietger/Hungenberg, Harald: PuK – Wertorientierte Controllingkonzepte, 6th completely revised and extended edition, Wiesbaden: Gabler Verlag, 2001 Kaplan, Robert/Norton, David P.: Balanced Scorecard – Strategien erfolgreich umsetzen, [translated byPéter Horváth, Beatrix Kuhn-Würfel, Claudia Vogelhuber], Stuttgart: Schäffer-Poeschel Verlag, 1997 Kralicek, Peter (2003): Bilanzen lesen – eine Einführung: keine Angst vor Kennzahlen, Frankfurt/Wien (Redline Wirtschaft bei Ueberreuter), 2003

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Pellens, Bernhard/Fülbier, Rolf Uwe/Gassen, Joachim: Internationale Rechnungslegung, 5th revised and extended edition, Stuttgart: Schäffer- Poeschel Verlag, 2004 Perridon, Louis/Steiner, Manfred: Finanzwirtschaft der Unternehmung, 12th revised edition, Munich: Verlag Vahlen, 2003 Pütz, Heinz C. (2002): Lexikon Forderungsmanagement, Heidelberg (Economica – Verlag) 2002 Schmeisser, Wilhelm: Balanced Scorecard – Quantifizierung der Personalarbeit, in: HR-Services, Vol. 2 and 4–5/2002, p. 28–31 and p. 48–51 Schmeisser, W./Clermiont, A./Hummel, Th. R./Krimphove, D. (ed.): Einführung in die finanz- und kapitalmarktorientierte Personalwirtschaft. 2007 Schmeisser, W./Leonhardt: Asset-Backed-Securities-Transaktionen als Finanzierungsalternative für den deutschen Mittelstand. 2006 Schmeisser, W./Mauksch, C./Schindler, F.: Ausgewählte Verfahren zur Analyse und Steuerung von Risiken im Kreditgeschäft. Unter Berücksichtigung der neuen Anforderungen Basel II und Mak am praktischen Beispiel aus der Kreditwirtschaft. 2005 Schmeisser, W./Schindler, F./Clausen, L./Lukowsky, M./Görlitz, B.: Einführung in den Berliner Balanced Scorecard Ansatz 2006 Schmeisser, Wilhelm/Tiedt, Anja/Schindler, Falko: Neuerer Ansatz zur Quantifizierung der Balanced Scorecard – unter besonderer Berücksichtigung der Dynamisierung des Ansatzes von Schmeisser, Munich, Mering: Rainer Hamp Verlag, 2004 Schneider, Christian (2002), Controlling von Working Capital bei Logistikdienstleistern, in: Controller Magazin, 27th annual edition, 2002, p.540–545 Wieselhuber (2005), Kennziffer “Working Capital”: Optimierungsmöglichkeiten in der Rechnungswesenpraxis: Branchenvergleiche und Steuerungsinstrumente, Redaktion „Bilanzbuchhalter und Controller“, http://www.bc-online.de [status 02/15/2005]

7

Closing words and outlook

It is likely that, after reading this book, you might ask how to receive further information on the other perspectives as well as their connection and how this research approach continues. That is why we want to point to our literature, which will certainly help you to get an even closer insight into the Berlin Balanced Scorecard Approach.

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Schmeisser, W./Schindler, F./Clausen, L./Lukowsky, M./Görlitz, B.: Einführung in den Berliner Balanced Scorecard Ansatz. Ein Weg zur wertorientierten Performancemessung für Unternehmen. Munich and Mering 2006 Schmeisser, W.: Finanzorientierte Personalwirtschaft. Oldenbourg-Verlag. Munich 2008 Schmeisser, W./Eckstein, Peter P./Boche, M.: Die Finanzorientierte Personalwirtschaft auf dem empirischen Prüfstand: Eine webbasierte Befragung. Rainer Hampp Verlag. Munich and Mering 2009 Schmeisser, W./Mohnkopf, H./Hartmann, M./Metze, G. (ed.): Innovationserfolgsrechnung. Springer Verlag. Berlin Heidelberg 2008 Schmeisser, W./Mohnkopf, H./Hartmann, M./Metze, G. (Ed.): Principles of Innovation Performance Accounting: Financing Decisions and Risk Assessment of Innovation Processes. Springer-Verlag, Berlin, New York 2009 Schmeisser, W./Krimphove, D.: Internationale Personalwirtschaft und Internationales Arbeitsrecht. Oldenbourg-Verlag. Munich 2010 During the reading it will not remain a secret that the competence center “Internationale Innovations- und Mittelstandsforschung”1 (www.mittelstandsforschung.de) is collaborating with companies in Berlin, in order to promote the approach empirically, theoretically and especially practically. This means for you that we have gone further than reported in this book. Of course we are glad to cooperate with you, should you contact us.

1

“International innovation and medium sized business research.”