Evolution of the Balanced Scorecard For Delivering Stakeholder Value At Hilton Hotels Corporation

 

In 1995 Hilton set out to systematically create additional value for its constituents—customers, owners and shareholders, team members, strategic partners, and the communities in which each hotel is located. The following describes the results of this award-winning effort to increase value and explains the subsequent steps Hilton has taken to enhance performance, resulting in the development of the Hilton Value Creation Process^SM (VCP).

The foundation of the VCP is the translation of strategy into fully integrated operational activities across the enterprise using the axiom - what gets Measured, Understood, Managed and Rewarded … gets Improved.

BACKGROUND

After the recession of the early 1990s, all major hotel chains were compelled to improve the value proposition they offered their customers.  At that time, excess hotel room capacity only exacerbated the challenge every hotel company faced - to increase share and per room profitability in an overbuilt recession market.  Hilton Hotels Corporation faced a special challenge – a large portion of its revenues came from a property portfolio of mostly owned or managed assets, making the need for continued profitability even more acute.  Moreover, the addition of new brands created ever-narrowing market segments, increasing consumer choice and making it more difficult for hotel chains to differentiate products and services. Hilton responded to this environment (not unlike post “September 11”) by focusing on understanding the essential drivers of value and how to deliver against them consistently.  This article describes the Hilton Balanced Scorecard, the role it plays in Value Creation, the results which have been achieved and concludes with a review of next steps.

SCORECARD CONCEPT

The idea for the balanced scorecard was developed by Robert Kaplan, a professor at the Harvard Business School and David Norton, President of Renaissance Strategy Group.   Dieter Huckestein, then senior vice president and managing director of the Hilton Hawaiian Village from 1991 to 1994, began experimenting with the concept and introduced the Balanced Scorecard (BSC) and a TQM approach to the hotel.

Upon becoming President of the Hotel Division in1994, Dieter led the Division to substantially higher levels of revenue and profit through a Five-year Plan utilizing a system of measurement and incentives in four areas: Operations Management, Brand Management, Real Estate, and Strategic Partners.  However, by the end of 1996, there was a “gap” between some measures of performance for the total hotel system and disparity between individual hotels.  At the same time, the earlier implementation of the BSC at the Hilton Hawaiian Village was already showing results.  In 1996 the hotel won the prestigious 1^st level of the Hawaii State Award of Excellence (ASAE) Quality Prize, recognizing the value of implementing quality processes to improve the guest experience.  Clearly, the next logical step was to implement the BSC coupled with a TQM process to improve performance across the entire Hilton organization.

DEVELOPING THE SCORECARD

Value Drivers are the conceptual elements that reflect corporate strategy by “touching” each of Hilton’s key constituents.  In 1997, Dieter Huckestein, working with Hilton executives Dennis Koci, Bill Brooks and Daniel Dinell, based the first version of the Hilton Hotels BSC on three Value Drivers: Operational Effectiveness, Revenue Maximization, and Value Proposition.  In 1998, a fourth Value Driver, Brand Management, was added.  Each of the original Value Drivers is defined below.

1. Operational Effectiveness – reflects how efficiently revenue is converted into profit through hotel operations processes and procedures.

2. Revenue Maximization – indicates how well flexible market pricing is matched to market demand in each hotel to produce highest revenue.

3. Value Proposition - signifies ability of hotel operations to create a service environment which increases both repeat visits (loyalty) among guests and retention of key staff members.

4. Brand Management - assesses consistency in the delivery of services and products offered by Hilton Hotels Corporation and expected by customers.

The grid below describes the relationship between each Value Driver (Corporate Strategic Direction) and the Key Performance Indicator (hotel level tactical goals) used to measure execution.  In addition to the linking of corporate Strategy and local Tactics, the BSC also provides an “early warning system” for key measures of performance.  For example, Guest Loyalty is a leading indicator of future RevPAR (revenue per available room).  This allows Hilton Hotels Corporation to modify its current strategy in order to ensure the future delivery of expected levels of performance.

 

MEASURING PERFORMANCE WITH THE SCORECARD

Application of the scorecard system began with the setting of annual performance goals on each KPI for each hotel.  Goals were set on the basis of prior year results, or progress toward a state of “perfection.”  Prior year results were the “jumping off” point for many KPIs to ensure that the hotels felt the goals were both relevant and achievable.  Other goals, for example Brand Management Standards, were set on the basis of the difference between current performance and a “perfect” score of 100%.  Improvement goals were then determined based on closing this “Gap-To-Perfection” by some common “amount,” e.g. 20%.  In this way, the level of expected performance was always higher than the year before and each hotel was asked to improve the same extent relative to “perfection.”   For each calendar quarter, actual performance data for every hotel on each KPI were then integrated into a common database and a report developed.   KPIs below goal were coded red or yellow depending upon the level of underperformance.  Performance at or above goal was coded green.  The final Hilton Balanced Scorecard was produced by the Operations Support Department and distributed to each hotel each quarter showing both current and year-to-date performance.   As a result, hotels not only knew what was expected of them through their own goals, but also understood how each performed relative to others.

CONTINUOUS IMPROVEMENT PROCESS (CIP)

Since the hotels were now focused on areas which were in harmony with corporate strategy, the next logical step was to develop a structured process to help hotels improve performance.  Using the resources of J.D. Power and Associates, Hilton Hotels Corporation developed a complete customized quality Continuous Improvement Process (CIP) much like that implemented earlier at the Hilton Hawaiian Village.  The process included “Root Cause Analysis” in a Situation-Target-Plan (STP) context followed by a Plan-Do-Check-Act framework.

Instruction in the use of the CIP was delivered to all owned, managed and franchised hotels in 1997.  This instruction included the material necessary to “Train-The-Trainer” for each hotel, as well as the BSC introduction and its use as the “trigger” for the application of CIP when performance on any measurement was under goal, or in the “red” zone.  On-site follow-up ensured that the BSC and CIP were understood and used at every hotel.  The scorecard also highlighted poor performers, allowing additional corporate support to be applied where needed.

INCENTIVE PROGRAM DEVELOPMENT

After goal setting, measurement, and improvement efforts, a reward and recognition process was activated.  Hotels were incentivized for performance for the year in three ways:

1.          Executive management incentive bonuses were directly related to the number of KPIs in the “Green Zone.”

2.          Individual performance reviews and merit-based salary increases used BSC results.

3.          Hourly staff in hotels having all KPIs in the “green zone” received certificates of Hilton Common Stock.

SCORECARD DEPLOYMENT RESULTS

The real proof of any process is whether or not it generated the expected results.  Following the introduction of the Balanced Scorecard, Hilton Hotels Corporation delivered three (3) additional points of profit margin more than other full service hotels.   In addition, post-stay guest loyalty and satisfaction improved for each Fall (F) and Spring (S) measurement period, as shown below.

                   

 

Overall value generated as the result of the BSC and CIP combination continued to improve through the year 2000 due to the –

      1.   Sense of Team Spirit and Common Purpose resulting from the ease with which measurements, goals and performance could be understood, interpreted, communicated and improved at every level of the organization.

2.      Consistent Overall Performance across many different hotels in both the short and long term, attributed to a common measurement system.

3.      Clear Direction and Focus achieved as the result of having a direct linkage between incentives and individual hotel goals, thereby taking the “guesswork” out of what was expected of every individual throughout the organization.

Hilton Hotels Corporation received two awards in 2000 in recognition of the company’s effective use of the scorecard as a management tool for improving business results: Boston University School of Business Award and the Balanced Scorecard Collaborative Hall of Fame.  

SCORECARD ENHANCEMENT

In 2000, in the spirit of Continuous Improvement, Customer Relationship Resources, Inc. (a respected performance improvement consultancy) was asked to focus on four areas of the Balanced Scorecard:

 

 1.    CONTENT – Adding explanatory “diagnostic” information about a KPI would clarify the reasons underlying poor performance and provide direction for improvement.  Measurements on the level of the workforce skill would add a key dimension of understanding to the Balanced Scorecard.

 2.    SPEED – Generating results from the Balanced Scorecard took approximately four weeks, since data from multiple sources were manually brought into a single database.   Automating this process would eliminate this delay.

 3.    EASE – Producing the Balanced Scorecard required significant effort of over ten person-days to manage the data, maintain the database, and report and distribute the results.  Automation would minimize this effort.

 4.    INTEGRATION – Incorporating the Balanced Scorecard and the Continuous Improvement Process into an overall Value Creation Process^SM  (see illustration #) would leverage their effectiveness.

Work in these areas continued through 2000, with the following Content improvements to the Hilton Balanced Scorecard:  EBITDA Margin and EBITDA Leverage were added to the Operational Effectiveness Value Driver to make it a more complete gauge of how well hotels converted revenue to EBITDA.  KPIs for the Loyalty Value Driver (the renamed Value Proposition Value Driver) were modified to make it easier to interpret and use.  Finally, Learning & Growth (a new Value Driver) was introduced to include two very important aspects of future performance – training and full utilization of social diversity in the Team Member, Local Community and Strategic Partner constituencies.   The complete set of Value Drivers and KPIs are shown below. 

 

 

Value Driver	Key Performance Indicator (KPI) 2001
Operational Effectiveness	Earnings before interest, taxes, depreciation, and amortization (EBITDA) EBITDA Margin EBITDA Margin Growth (Leverage)
Revenue Maximization	Revenue Per Available Room (RevPAR) RevPAR Index defined as RevPAR versus local market conditions
Loyalty	Overall Guest Loyalty Score from Guest Mail Survey Overall Satisfaction Score from comprehensive Team Member Survey
Brand Management	Score on compliance with brand requirements from on-site inspections
Learning & Growth	Measures of training skill level from training records Diversity plan performance from the end of year review

Speed and Ease of generating the Balanced Scorecard were dramatically improved with the automation of the data storage, retrieval and communication of the results through the CorVu software system.  Currently all required financial data from internal sources and non-financial data from external sources are first delivered to two data warehouses managed by Hilton Information Technology Group.  Archived data from these two systems are then “pulled into” the CorVu software system for the weekly updating of hotel, area, region, brand, and enterprise level scorecards for all owned and managed hotels.  Today these scorecards include to-date performance versus goals, web links to internal Best Practice sites and other Hilton web-based resources, and diagnostic information to help “explain” the causes of performance.   In fact, without automation the timely reporting of any additional information would have been impossible, much less the addition of those hotels acquired by Hilton in the 1999 Promus merger.  

The addition of multiple diagnostic measures, designed to add insight into the reasons for performance, greatly improve the Content of the BSC.  For example, the underlying components of RevPAR, occupancy and average daily room rate, are available as trended measures to explain changes in RevPAR, the Key Performance Indicator.  This allows the BSC user at the hotel to visualize and understand the reason(s) for performance, eliminating what was formerly a time-consuming and complex ordeal to just organize the data.  Efforts previously devoted to analysis are now channeled into the development of corrective action plans, thereby accelerating the Value Creation Process. 

VALUE CREATION PROCESS^SM

Building on an early version of the Hilton Value Chain first created in 1999, Romy Bhojwani, Director of Operations and Strategic Planning for the Owned and Managed Hotel Group, led the development in 2001 of a complete Value Creation Process, shown below:

   

  

This process shows the steps linking the corporate Vision and Strategy to hotel and individual performance in order to create value for all of Hilton’s constituents.  First, the corporate Strategy is “tested” to ensure its ability to support the Vision.  Then, individual Business Unit Strategy and Tactics are developed, resulting in specific Key Performance Indicators (KPIs) and Goals which are then incorporated into the Balanced Scorecard, Continuous Improvement, and Recognition and Reward processes.  In this way, individual Business Unit and hotel plans are in harmony with overall corporate Strategy. 

This Value Creation Process also recognizes the role of the specialized Performance Support Staffs (Engineering, Safety & Security, Housekeeping, Food & Beverage, Leasing, and Retail).  These groups are focused on providing professional guidance and direction for improvement in performance directly related to corporate and Business Unit Strategy.

NEXT STEPS

 Plans are underway to continuously improve the Value Creation Process by focusing on:

            - more precise measurement of KPIs,

            - further understanding of the causes of above and below average performance,

            - streamlining coordination of corporate and hotel plans and actions,

- enhancing reward and recognition for those teams and individuals creating value for Hilton.

Hilton Hotels Corporation is the first hotel company to design and implement an effective tool in support of management at every level in the creation of stakeholder value.  The Hilton Balanced Scorecard and the Value Creation Process are the proprietary mechanisms Hilton developed solely for this purpose confirming the axiom that what gets Measured, Understood, Managed, and Rewarded gets Improved. 

This commitment to its constituents is the principal reason Hilton enjoys and will maintain an industry leading position among the guests, team members, strategic partners, owners, shareholders and the communities it serves.  

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For additional information on Hilton’s Balanced Scorecard, see Hilton Hotels – A Comprehensive Approach to Delivering Value for All Stakeholders by Dieter Huckestein and Robert Duboff, Cornell Hotel and Restaurant Administration Quarterly, Vol. 40, No.4, August 1999