lohansen's: The New Scorecard System jill Landon's palms were starting to sweat. It was the morning of johansen's annual performance Summit, and she was still unsure about what overall performance rating to giveJared Clark. It was clear from the data that he deserved the highest rating on the nancial, strategy, and leadership initiatives on the new scorecard. But his performance this year in customer service fell far short of the level required by the guidelines in the new scorecard system. Based on the data, she did not think she could justify more than a \"meets expectations" rating of 3 for Clark's customer service rating. As a result, she knew that Clark would be ineligible for the best overall performance rating of 5 and, subsequently, would not receive the maximum bonus possible. In fact, based on the new system, he would receive a lower bonus than he did last year if given a 4 overall this year (Exhibit 13. Landon knew the importance of the company's new scorecard system. Although Clark's scorecard Suggested that he should receive an Overall rating of 4, the thought of giving Clark anything less than a 5 overall was difficult to stomach. Landon was johansen's Southwest regional manager; and Clark had been her best store manager for a number of years. She had never seen another store manager who could deliver the nancial performance that he could year after year. Landon's own annual performance evaluation was based primarily on the sales and nancial performance of the Southwest region, performance that was affected greatly by what happened in Store 51; she was grateftd for a manager like Clark, since her own future promotion and compensation prospects depended on continuing to turn in top results. Landon recalled a conversation she had with Clark the previous November. When Clark informed her that one of Johansen's largest national competitors was planning on opening a store in the same mail as Store 51, her immediate thought was, \"This is our highest-performing store in the region. How will this affect sales?" Clark then proceeded to tell her that he had been approached by the competitor to be the store manager for this new store. Clark also detailed the generous increase in salary he had been offered, as well as the opportunity for larger annual bonuses. Despite the appealing offer, he shared that he loved Store 51 andjohansen's because of the corporate culture and the positive encouragement and interest in his success as a store manager that he had received over the years. The potential for higher pay was understandably attractive, however. He also remarked that he hoped Landon would bear this in mind when evaluating his performance and when the company considered which store managers to promote within the company. Landon was concerned about the competitive threat, but relieved that Clark was forthcoming about it and seemed open to working things out so that he could remain atjohansen's. Exhibit 1 Johansen's: The New Scorecard System Southwest Regional Manager Jared Clark's Historical and Projected Annual Compensation 2012 2013 Jared Clark's salary: $85,000 $91,000 +bonus Overall rating = 3 10% $8,500 10% $9,180 Overall rating = 4 25% $21,250 25% $22,950 Overall rating = 5 40% $34,000 40% $36,720Exhibit 2 Johansen's: The New Scorecard System Johansen's Regional Breakdown Northwest Northeast Midwest Southwest Southeast Source: Author adaptation of "Blank USA, w territories," posted to public domain under Creative Commons (CC BY-SA 3.0) by "Lokal_Profil," February 12, 2007, http:://commons.wikimedia.org/wiki/File:Blank USA, w territories.sug (accessed May 13, 2014).Exhibit 3 Johansen's: The New Scorecard System Johansen's Financial Overview 2013 2012 2011 2010 2009 2008 2007 2006 2005 Net sales $8,300 $7,790 $7,800 $7,600 $6,610 $6,600 $7,000 $6,725 $6,612 Cost of goods sold (COGS) $5,400 $5,140 $5,130 $4,950 $4,350 $4,390 $4,500 $4,350 $4,166 COGS as % of net sales 65.1% 66.0% 65.8% 65.1% 65.8% 66.5% 64.3% 64.7% 63.0% Gross profit $2,900 $2,650 $2,670 $2,650 $2,260 $2,210 $2,500 $2,375 $2,446 Gross profit as % of net sales 34.9% 34.0% 34.2% 34.9% 34.2% 33.5% 35.7% 35.3% 37.0% SG&A expenses $1,950 $1,830 $1,830 $1,750 $1,650 $1,650 $1,675 $1,650 $1,621 GerA expenses as % of net sales 23.5% 23.5% 23.5% 23.0% 25.0% 25.0% 23.9% 24.5% 24.5% EBT $950 $820 $840 $900 $610 $560 $825 $725 $825 Taxes (40%) $380 $328 $336 $360 $244 $224 $330 $290 $330 Net income $570 $492 $504 $540 $366 $336 $495 $435 $495 Net income as % of net sales 6.9% 6.3% 6.5% 7.1% 5.5% 5.1% 7.1% 6.5% 7.5% Source: Created by author.15% 10% 5% - Total Retail (excluding food and e-commerce) Exhibit 4 Johansen's: The New Scorecard System 0% Historical Retail Industry Trends Quarter/Quarter Sales Growth by Retail Sector -5% -- - E-commerce -109% Apro0 ...* Department Stores Apr-01 Oct-01 Source: Federal Reserve (FRED) Apr-02 Oct-02 Apr-03 - - Total Apparel Oct.03 Apr-04 Oct-04 Apr-OS Oct.Os Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct.09 Apr-10 Oct- 10 Apr-11 Oct-11 Apr-12 Oct- 12 Apr-13Exhibit 8 (continued) Category 2: Customer Service (quantitative and qualitative) Store manager must achieve a survey response rate of 12% to receive a rating of 4 or 5. Q1'13 Q2'13 Q3'13 Q4'13 Response rate 3.5% 3.7% 5.5% 7.0% Store manager must achieve a store customer satisfaction score of 4.4 to receive a rating of 5. Q1'13 Q2'13 Q3'13 Q4'13 Customer satisfaction score 3.2 3.4 3.7 4.1 Qualitative assessment: Although Clark did not achieve the 12% minimum customer service survey response rate, his customer service performance improved throughout the year. In the first quarter, the feedback was generally negative; customers were able to find the merchandise they demanded, but were very unsatisfied with the customer service. In Q2, I spoke to Clark about the importance of customer service. He was receptive to the feedback, and saw an increase in survey response rate (from 3.7% in Q2 to 5.5% in Q3). Additionally, the feedback from customers was not overwhelmingly positive, but certainly was not as negative as it had been in the first half of the year. In Q4, Clark's performance increased again. The survey response increased to 7%, and customers had positive things to say about Store 51. Customer Service Rating: 3 Category 3: Leadership (qualitative) Questions to consider when rating store manager: Were there many employee complaints? What was the nature of the complaints? Isolated incidents or ongoing issues? Was there an increase in turnover throughout the time period being assessed? What was the nature of the 360-degree feedback? Was store manager interested in developing leadership skills? Qualitative assessment: Clark's turnover was notably high at 45% during the first half of the year. In Q3 and Q4, however, turnover was reduced to 33%, a turnover figure better than the corporate average of 35%. There were 23 employee complaints throughout the year. 17 of them were from the same two employees, however. This does not necessarily imply that Clark's leadership was poor; the high volume of complaints from two individuals could simply indicate a mismatch in personalities. Those two employees voluntarily left Johansen's in November. Clark's 360-degree review was highly positive for the most part. Leadership Rating: 5\fExhibit 9 Johansen's: The New Scorecard System Managers Attending the Perfomtnnce Summit Corporate Human Resources Manager Don Harold Last year. Harold was ready to leave joharlsen's. After sis: years, his job had become ntonotonous. the company was snugglingandmoralewaslow. Hewas iuststartingtolook atopporrunities elsewhere when senior management announced an overhaul of the existing perFocrrmr-ce measurement system. The company had been too focused on nancial performance. and had lost sight ofits strong customer service value proposition. The new scorecard system wasanefacrttobring the coununybaelt to its core values. Haroldwas offered a promotion within human resources to develop and implement the scorecard system. This was aactly the type of opporttmity that he was looking for. so he eagerly accepted the promotion and stopped looking For other positions; As much as the change' in responsibilities was refreshing, it was challenging to develop the new system While crafting it. Harold had his own performance assessment in mind He would be evaluated and compensated based or: the successful implementation of the new system. buy-in from employees. and changes made after system implementation He wasn't sure exactly how those factors would be measured. but he did know that his boss would do the evaluation aFter seeking input From other constituents to get their assessment abmt the implementation process and genera} support ofthe system design.as well as reecting on the extent of changes needed after the rst year under the system. Harold was eligible for a one-time bonus oftrp to 30% of his salary based on the outcome of that review. He worked hard to come up with the best system possible. and he thought it was truly a stellar system. Corporate Customer Experience Massage: Mitch Bengals After several years at Johansens Dwgan was given the opportunity to become the company's rst customer experience manager. [his position was created alongside the development of the new scorecard system. and was considered instrumental to Johansen' s return to its core value of [newer customer service. In this role. Dougan's main obiective was to improve customer service across the company. He would be evaluated and would be eligible for a bonus based on the increase in customer service survey response rates. and also the customer satisfaction scores and qualitative feedback received through the surveys. He hoped that the new scorecard system would help boost the scores. He was very enthusiastic about the company's renewed focus on customer service, as well as his new opporntnity to shine in this role. Corporate Finance Manager Met-lactic Thompson This year. 'l'nmnpson was celebrating her 15th anniversary uithjohansen's. She started as a nance intern when she was in college and had moved up the nance ranks over the years. During her tenure with the company. she saw several years ofstcliar Financial perfonnance. In 2(115. however. she watched the company's financials. as well as her bonus. start to stagnate. Johansen's began to recover after implementing a financially based incentive system. but that recovery was short-lived. Then the crtrnpany implemented the new scorecard system. and 'l'hnrnpson was notied about what would happen as a result. She iust taunted to set: the company return to an escrptirmal financial standing. \fBackground johansen's, a large highend department store, rst opened its doors in New York City in 1950. Founded on the principle of superior customer service,_lohansen's quickly found success and expanded its stores across the country. johansen's built its reputation and brand on putting the customer rst and offering an unparalleled level ofcustomer service. This core value was integral to maintainingits position as the premier highsend retailer for decades. As of 2014,]ohansen's had 121 stores across 32 states. Due to its growth over the years, Johansen's was divided into ve regions: Northeast, Southeast, Midwest, Southwest, and Northwest {Exhibit 2). Each region had a regional manager who oversaw all the store managers in that region. Generally, johansen's promoted from within, and it was not uncommon for an associate at one store to be promoted to manager of another. At the store manager leveL it was more typical for a promotion to regional manager to occur within the same region, but there were instances in which a store manager from one region was promoted to regional manager of another region. In 2006,]ohansen's was facing nancial difculties. As a result. most ofthe senior executives were replaced. The new leadership team was eager to drive across-the-board improvements in nancial performance. To this end. a nancially based incentive system was implementedjohansen's store managers were the \"boots-on-the- ground" employees, and were critical to driving sales; johansen's believed in empowering its employees, and store managers had a great deal of autonomy and control over their stores. They had little to no inuence over store locationand consequently customer demographicsand other major store investments. But they had the ability to influence sales levels, and they affected the in-store customer experience, determined individual store marketing and sales promotions, handled individual store merchandising, and were responsible for training and developing empIOyees. As a remit, the leadership team considered the stores to be profit centers and decided that store managers would be rated and compensated based on three key nancial metrics for their stores: same-store sales growth, gross margin, and net income. Although Johansen's saw a modest improvement in its nancial performance early on, by 2012, the company's nancial performance had stagnated again (Exhibit 3}. Management commissioned a study to gure out why Johansen's was facing nancial difculties once more. The study provided three key insights. First, it became clear thatjohansen's industry~leading position was far from assured. It used to be thatjohansen's main competition was from other retail stores. Now, however,_]ohansen's faced additional competition as more and more Internet retailers emerged. Ecommerce had been growing faster than any other retail sector since 2003 and, as a result, was consuming an ever-greater share of retail spending. Exhibit 4 shows the growth trends for e-commerce and total retail sales, as well as for department stores and apparel. Like most retailers,johansen's did have an online presence, but only a marginal percentage of its revenue came from online sales. Nearly all johansen's sales came from in-store purchases due to the robust customer experience that appealed to shoppers. Moreover, given the e-commerce retailers' cost structures. johansen's knew it was unlikely to be able to successfully engage in a price war, placing an even greater emphasis on its in-store experience going forward. Secondand to make matters worserecently published market research that was reviewed as part of the study indicated that a rival company's customer service was superior to that ofjohansen's. This news seriously ioltecl upper management. Certainly, improving nancial performance had been essential to this new leadership team, and to varying degrees the team had succeeded in this regard. Delighng customers had always been Johansen's key value proposition, however, and the prospect of losing this important differentiator caused great angst among senior managers. Finally, an analysis of detailed nancial and empIOyee data sugested that cost- cutting efforts that led to greater protability may also have fueled customer servicerelated compromises. When the leadership team implemented the incentive program focused on nancial metrics in 2006, it had assumed managers knew that customer service was at the heart of the company's identity. Now, the leadership team was convinced that an overemphasis and focus on nancial performance had eroded performance around its key success factor, customer service. The leadership team was determined to make any necessary changes to restore johansen's position as the premier customer service provider in the industry, while also continuing its trend of improved nancial performance. Superior customer service had always been associated with the company's name, and it was an even more important success factor considering the growth in escommerce. To ensure a customer experience that pulled patrons away from the Internet and into johansen's retail locations, it was imperative that the company refocus its efforts along this dimension. The leadership team agreed that incentives drive behavior, and it became clear that the nancially driven incentive system needed to be overhauled. The New Performance Measurement and Incentive Compensation System After much discussion and analysis, the leadership team agreed that a new performance measurement and incentive system was needed. The leadership team reflected on the role of the company's store managers and decided to implement a new assessment tool that it called the \"scorecard system." Under the new system, store managers would be assessed across four categories: nancial, customer service, leadership. and strategy. The store managers would receive a rating for each of these individual categories on a 1-to-5 numerical scale: 1 conferred a \"below expectations\" rating, 3 a \"meets expectations\" rating, and 5 an \"exceeds expectations" rating. 1. Fir-resold: The regional manager worked with the corporate finance department to establish year-ever- year ('5'on sales-growth and protability targets for the individual stores.1 These targets included a baseline target that stores had to hit in order to achieve the \"meets expectations\" rating. These baseline targets appropriame accounted for each store's unique demographics; as such. stores that had more favorable demographics could be expected to have more aggressive baseline goals. In addition, a stretch target was issued by the corporate nance department that, although achievable, would require an impressive performance to meet. If met, however, it would qualify stores and managers for the maximum rating of \"excecds expectations" in this category. 2. Creamer Senate: The company had always measured customer service through customer surveys. The surveys were developed, administered, and analyzed by a third party to preserve the integrity of the questions and the results. Every customer had the opportunity to take the surveyinstructions were featured on the bottom of the receipts printed at checkout Sales associates often circled the instructions with a highlighter to draw the customer's attention to them. Customers who took the survey would be eligible for a monthly drawing to win a $500 gift card redeemable at any johansen's store. Until 2005, customers who wished to take the survey called a tollfree number and previded numerical answers to a sequence of questions using the telephone keypad. In zoos, this changed, and the receipts instead directed customers to a website so that they could take the survey online. The Survey had 1|] questions about the customer's in-store experience. Each of the questions allowed the customer to answer on a scale from 1 to 5, with 5 being the best score. The scores for the 10 questions were averaged to get an overall survey score. All the overall survey scores for an individual store were then averaged to get a customer satisfaction score at the store level. In addition, customers had an opportunity to provide qualitative feedback at the end of each survey. Company-wide, the response rate of the survey in 2012 was 18.5%, and the average customer satisfaction score was 3.6. In this category of the scorecard, store managers were evaluated quantitatively and qualitatively. First, the regional manager considered the store's survey response rate. Managers whose stores achieved less than a 12% response rate could earn a maximum of a \"meets expectations\" rating in the customer service category, even if the feedback was positive. This constraint was part of the system because in cases of particularly low response rates, the sample size was considered too small for the data to be meaningful. Second, the regional manager considered the average customer satisfaction score for the store. To get a 5 rating in customer service, store managers needed to get an average customer satisfaction score of 4.4 or higher. Third, the regional manager made a subiective assessment of the qualitative customer feedback that the store received. 3. Lwnkrsltmjohansen's believed in 3604:1egree feedback, which the human resources {HR} department administered annually. HR forwarded the results of the exercise to regional managers so they could factor those results into a store manager's leadership rating. HR also communicated turnover and employee complaint information to the regional managers so that this too could be factored into the leadership rating. The regional manager weighed all the information received from HR to detemtine what rating to give the store manager in. this category. 4. 31mm: The purpose of this element of the scorecard was to achieve cohesiveness and alignment throughout the company. Store managers were subjectively evaluated by the regional manager on promotion of the johansen's brand and branded merchandise, and also the implementation of corporate initiatives such as inventory management, training, merchandising mix, and initiatives from corporate (e.g., inventory management and employee training) After assigning a rating for each of the four dimensions, the regional manager gave the store manager an overall rating, also on a l-to-S scale. Ultimately, the overall rating determined a store manager's bonus (Exhibit 5). Additionally, when regional manager positions became available, store managers who had the highest performance ratings were the first ones considered for promotion. But the overall rating was not a simple average of the ratings in the four categories of the scorecard. Rather, it was a subiective rating by the regional manager that was supported by the underlying individual ratings in each category and the following corporate guidelines. In order for a store manager to receive an Overall rating of a 5, he or she needed to be rated at least a 3 in all Enur categories, achieve a 5 in three of the f0ur categones, and achieve a 4 or higher in the customer service category. Requiring a store manager to get at least a 4 in the area of customer service emphasizedjohansen's renewed focus on this key success factors The new system was rolled out companywide and implemented beginning january 1 2013. It initially received mixed responses from the regional managers. Those who had been with the company for several years were relieved to see that corporate management was working to restore johansen's original Culture and character. But some regional managers resisted the new system and were quite reluctant to buy m. The skeptics, having always exceeded their nancial goals, were concerned that their performance evaluation under this new system would be adversely affected by nonnancial, \"soft\" metrics. Moreover, many of these managers had been promoted or hired during the period when improving nancial performance was the company's numben one goal, and they now felt vulnerable to a system that didn't fully appreciate their unique skill sets, which were more geared onward running highly efcient, nancially savvy stores. The New Scorecard System: Early Success The time had come for johansen's rst annual performance review under the new scorecard system. Despite the lack of buy-in from some of the regional managers, the leadership team believed that the new system had proved successful so fart During the first three quarters, most regions 3110de both increased protabilityas a result of growth in revenueand increased customer satisfaction scores. It appeared that johansert's was on its way back to the topl The Store 51 Dilemma Store 5t, located in the Southwest region, generated annual revenue of SISU million in 2U13, the highest in the region and the sixth highest in the United States (see Exhibit 6 for a nancial summary of Store 51 compared with the average johansen's store). Store 51 typicay led the region in sales due to its advantageous location in Orange lCounty, California. The store was located in a shopping center that had numerous upscale shops and restaurants but no direct competitors tojohansen's. Store 51 was also a agship store, resultingin a number of advantages for it. First, given its status and history in the area, it had a veryloyal customer base. This helped drive the second advantage: extensive, detailed historical customer data. This data provided Store 51 with a heightened understanding of and insight into its customers and, consequently, provided great merchandising advantages. Additionally, the surrounding neighborhoods were very affluent; this resulted in people who entered Store 51 generating higher-than-average revenue per transaction than those in most other Johansen's stores. Despite its continued success, Store 51 was in an interesting predicament. The store manager,]ared Clark, was known as one of the best store managers in the country. Under the old performance system1 he exceeded every nancial metric and received the highest store manager bonus possible every year; his record was pristine. Under the new scorecard system1 Clark still exceeded the nancial targets. The new system, however1 revealed several issues regarding Clark's performance as a manager that had previously gone undetected by Landon as the Southwmt regional manager. In the rst and second quarters under the scorecard system, Landon noted particularly high employee turnover (45%) and relatively low customer satisfaction scores of 3.2 and 3.4, respectively, at Store 51. She approached Clark to discuss these shortcomings, and was relieved to Find that he was receptive to the feedback. Clark was able to modestly improve his customer satisfaction score in the third quarter, and the latest results for the fourth quarter indicated further improvement. Per usual, Store 51's financial performance was well above that of the other stores in the region. But Clark's performance in customer service remained below the company average, even with his improvement throughout the year. Another eompiicating element that needed to be considered was the relatively low customer survey response rate (the highest it had been in le'13 for Store 51 was 7%: in the fourth quarter). It was not particularly surprising that Store 51's response rate was less titan the average, since the older, wealthier demographic of Orange County was less likely to go online and ll out a survey (Exhibit 7). Landon could not help but wonder, however, whether the low survey participation rate for Store St was the root of Clark's low customer service scores. Perhaps if the sample size was larger, Clark would be able to achieve a higher rating in the customer service category, making him eligible for the overall rating of 5. Or was the fundamental customer base inherently disadvantageous to Store 51's customer service score? Based on the feedback through the survey, the majority of survey participants only tool: the survey when upset. \fAnswer the following questions: 1) Identify the industry, key success factors, etc. that are unique to Johansen. 2) Identify the responsibility centers used for the stores managers. Does this make sense in terms of what they can influence and/or control? 3) What were the key issues identified in the 2012 financial performance? 4) Summarize the management control issues in Store 51 that need to be addressed