Secure Servers Inc. (SSI) is one of the largest software and service providers directed at providing high levels of backup and security for computer servers to the financial community, military, and other clients requiring off- site backup and security systems. SSI’s software packages include encryption, downloading, and data warehousing of large amounts of data to various SSI sites in dedicated locations. SSI backup locations are designed to survive virtually all natural disasters and terrorist attacks.

SSI employs 6,000 people in Dayton, Ohio. Being one of Dayton’s largest employers, it has a deep commitment to the community and supports local educational, cultural, and philanthropic activities. SSI also believes strongly in both customer and employee satisfaction. To achieve these objectives, SSI employs a balanced scorecard to evaluate and reward senior managers. One- fourth of each senior executive’s bonus is tied to the following objectively determined performance measures:

Community engagement (independent survey of local leaders).

Customer satisfaction (independent survey of customers).

Employee satisfaction (independent survey of employees).

Corporate profit (audited net income before taxes).

The annual surveys of local leaders, customers, and employees are conducted by an independent opinion survey firm that reports directly to the board of directors. Corporate profit is the firm’s reported net income before taxes as audited by an international public accounting firm. SSI’s senior management team believes strongly in the concept of the balanced scorecard and accepts it as a valid and productive performance measurement and incentive tool.

Senior management is tasked with determining how much to spend on further improvements in community engagement, customer satisfaction, and employee satisfaction. The following table captures the relations among additional spending in each area and the expected improvements from such expenditures (in millions).

For example, by spending an additional $ 3 million on customer service (improved call centers, training, etc.), a 95 percent customer satisfaction can be achieved. Or, by spending an additional $ 2 million on employee- related activities (improved child care, athletic facilities, fringe benefits), a 90 percent employee satisfaction can be achieved. Or spending $ 1 million on additional community projects can raise SSI’s community rating survey to 50 percent. Besides raising the satisfaction scores as detailed above, making additional expenditures on these three areas also generates additional net cash flows to the firm. The following table estimates the additional cash flows SSI receives from making the additional expenditures.

For example, spending $ 3 million for community projects yields a community rating index of 90 percent and additional cash flows of $ 4.0 million, which increases net income before taxes by $ 1.0 million ($ 4.0 $ 3.0). To convert audited net income into a percentage index that can be averaged with the other three survey metrics, SSI uses the following formula: Profit index 3 0.05 Net income So, if net income is $ 74 million, the profit index for use in the balanced scorecard is 70 percent [ 3 (0.05 74)]. The four indexes are averaged to get an overall index for determining the bonus for each senior executive of SSI. For example, the following four indexes yield a balanced scorecard of 79.75 percent:
Customer satisfaction........... 76.00%
Employee satisfaction........... 88.00
Community rating............. 85.00
Profit index ...............70.00
Average .................79.75%
SSI expects audited net income before taxes for the year before making any additional expenditures on customer satisfaction, employee satisfaction, and community engagement to be $ 72 million.
Required:
a. What levels of additional spending do you expect the senior management team of SSI will select for: (1) Customer satisfaction. (2) Community engagement. (3) Employee satisfaction. Be sure to justify your answers with appropriate analysis.
b. Given the levels of additional spending on the three items you recommended in (a), what is the expected balanced scorecard index? That is, calculate the average balanced scorecard management expects to generate if they make the expenditure decisions you predict in (a). Show calculations.
c. What level of spending would you expect a profit- maximizing owner of SSI to select for: (1) Customer satisfaction. (2) Community engagement. (3) Employee satisfaction. What is the expected balanced scorecard resulting from these spendinglevels?

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Additional Expenditune 0.50 1.00 Customer Satisfaction Employee Community Rating 40% Satisfaction 75 80 85 75% 80 85 90 95 70 80 95 100 Customer Satisfaction Employee Satisfactien Community Rating Additional Cash Additional Cash Flow Additiona Additiona Cash Flow Index Expenditune 0.5 1.0 1.5 2.0 Index index $0.9 1.5 2.1 2.7 3.1 3.5 $0.7 1.3 1.5 1.8 2.0 2.1 $0.75 150 2.25 3.00 4.00 4.00 75 80 85 75% 80 85 40% 50 95 100 70 80 90 3.0 95