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December, 2003

Making Scorecards Actionable Newsletter # 6/2003

Content of Making Scorecards Actionable Newsletter # 6/2003

» Our Opinion
» Balanced Scorecard In The Media
» Lessons Learned From Completed Scorecard Projects
» Elaboration On Key Design Issue #6: Using IT to leverage the scorecard



OUR OPINION
By Jan Roy

During this time of the year we as usual make new “resolutions” for the coming year. Resolutions that are intended to bring us another step towards our dreams and visions. We do this privately as well as professionally. Unfortunately these resolutions often are the weakest link towards our new goals. Too seldom we manage to put together an action plan that deliver what’s expected. We are often too ambitious with our goals and visions and we rarely take time to identify a correct action plan based on proven cause and effect links. This results in a gap between our ambitious goals and our actual plans. Another effect is that it is hard to communicate blur messages. As the key to success is to get our colleagues onboard and make them buy our ideas it’s of greatest importance that our communication is clear and that it shapes the important dialogue around a well defined roadmap. This so that we support the commitment for the change needed. A well done Balanced Scorecard process is excellent for this purpose.

Our experience is that with the Balanced Scorecard structure you have an excellent tool to break down visions and strategies in understandable bits and pieces. This will give you the needed vehicle for important internal communication and dialogue within your organisation. By using the Balanced Scorecard you will build a common language and shape new metaphors that will help you on the road to success. The process will help you clarify the cause and effect links and build the needed bridge between the strategy and a relevant action plan.

Frequently we get the comment that it is too time consuming to have those calls and dialogues. And for sure it takes time. It is not easy to convince individuals and organisations to change the way they operate. But if we can not explain why and how things are supposed to be done, it is hard to see how to achieve our goals. Change is a long term thing that takes time and it takes even more time if you cut corners by not explaining and just telling. So in our opinion you should make sure that your dreams come true by keeping the communication and dialogue going with the help of the Balanced Scorecard. By doing that, you will have new goals to go for during the next year and not the old ones.



BALANCED SCORECARD IN THE MEDIA
By Nils-Göran Olve

Should strategy maps be statistically validated?

In an interesting article in the November 2003 issue of Harvard Business Review (“Coming Up Short on Nonfinancial Performance Measurement”), Christopher D. Ittner and David F. Larcker argue that companies need to improve their use of nonfinancial measures. Although metrics such as customer loyalty and employee satisfaction are used increasingly, companies have “failed to relate these measures to their strategic goals or establish a connection between activities undertaken and financial outcomes achieved. Failure to make such connections has led many companies to misdirect their investments and reward ineffective managers.”

The authors produce evidence that “companies focus too much on short-term financial results, and they use metrics that lack strong statistical validity and reliability. As a result, the companies can't demonstrate that improvements in nonfinancial measures actually affect their financial results.” Consequently, Ittner and Larcker advise managers to develop models of the causal relationships involved, validate such relationships by statistical means, and base their actions on the findings.

Up to a point, this is very much in line with Kaplan & Norton’s 2000 book and our views in Making scorecards actionable. Scorecards need to be based on causal models, and their use should include an element of (at least informal) hypotheses testing. To introduce nonfinancial metrics without relating them to long-term goals is of limited use. Strategy maps are important in discussing what actions to pursue, and learn from experience.

However, Ittner and Larcker introduce one more requirement: that metrics should be statistically proven. This is of course an attractive idea. But is it possible?

Even partial modelling of conditions for business success has proved difficult. In the early days of scorecards, US and British firms selling systems dynamics software and consulting developed their modelling tools to support clients in performing formal analysis of causal relationships in scorecards. Few succeeded.

First of all, with the time lags and multiple variables involved, proving relationships by statistical means has often proved impossible. Franchise-type operations with a large number of similar units may be able to do it for some variables, but even then conditions and success factors will differ between units and over time.

Second, even if statistical correlations can be proved, many managers don’t believe they apply to their own units. So in these cases corporate management will have a choice between imposing a general ‘truth’ or encouraging local views. Do they want managers to conform to headquarter’s view of their business, or develop their own?

The answer to this is not simple. Again, retailers with multiple stores and franchise-type operations often build on centrally developed concepts to which store managers have to adhere strictly. Then, scorecards for individual shops might benefit from being based on statistical analysis. But what about other types of corporations?

We know some companies who did indeed try to build systems dynamics models as part of their balanced scorecard efforts. We have not seen anyone persevere. We also know a much larger number of companies who unthinkingly introduced a set of metrics straight out of books they read. Most of them abandoned their scorecard efforts after some time.

So what we advise is a ‘middle way’. Cause-and-effect thinking and active use of strategy maps should be the basis for scorecards. The exact shape of most causal relationships will remain largely a matter of faith and experimentation, where local management has an important role in developing their own views on how they will become successful.

Scorecards then become a common business language for strategic management dialogues. The contents of scorecards should be customized for different parts of the organization, and the emphasis shifts from central analysts to local users. This is the pattern we now see developing in North European firms and public administration. Does it really differ from the US scorecard experience, or is it just that the prescriptions we read are still dominated by a centralized “scientific management” approach?



LESSONS LEARNED FROM COMPLETED SCORECARD PROJECTS
By Carl-Johan Petri

Some year ago we were asked by a big organization to help them develop a scorecard for one of their internal support units. The purpose of the project was twofold; to develop and illustrate the unit’s long-term ambitions, but also to allow continuous evaluation of the unit’s achievements. The latter was the most important reason for introducing scorecards, since the internal support unit’s contribution could not – solely – be measured in financial terms.

The first step in our project was to investigate different internal stakeholders’ expectations on the unit. Being an internal support unit, it became obvious that its responsibility was not only to satisfy today’s “customers” – an idea that typically underpins most outsourcing deals and efforts to turn support units into profit centers. Contrary to this, we saw that most internal units also have a more long-term responsibility with regard to standard setting, governing that standards are obeyed and serving the corporate management with corporate wide activities. These latter activities are examples of “products” that no individual unit or company, within the corporation, is willing to pay for – but still are important to make the whole system effective.

For these reasons, we thought that it would not be possible to just turn the internal support unit into an “enterprise-like” profit center, whose only responsibility was to serve existing clients and prove its efficiency by showing black figures in the P/L statement.

Instead, we worked with the unit, and the unit’s principals (i.e. corporate management) to find out what the unit’s role should be in the organization. In this effort we tried to balance what the unit offered and delivered to today’s users, and what it did to support the corporate interests.

Of course such discussions can be sensitive, since different stakeholders in the corporation have different expectations; some claimed that they were not willing to finance any other services from the unit than they actually utilized. A typical opinion among these persons was that they rather wanted to buy these support services in the open market – from an external and independent vendor. Other users argued the other way around; that they were happy to have access to a portfolio of services internally, that where not funded in its bits and pieces, but rather on a more strategic level, so that the internal service provider could take a more strategic responsibility for the decisions they make within their domain of expertise. They also argued that the internal support unit was a better supplier since it was more knowledgeable about the corporation’s business than any other external vendor would be.

Regardless whether the organization chooses to turn their internal support units into profit centers, or if they are evaluated on a broader spectrum (e.g. with a Balanced Scorecard), it is important to be explicit about the units’ responsibility. Does the unit also have a responsibility for services that are “impossible to sell” to existing internal units, or is the unit only responsible for delivering what the units express that they want today?

In the company we worked with, it was obvious that the internal unit had a bigger responsibility than just delivering “today”. To demonstrate this, for the employees in the internal unit, as well as for the unit’s stakeholder, we draw a strategy map, to indicate the unit’s ambitions and “beliefs” but also to explicitly demonstrate the conscious trade offs they had made. These were, for example, the right to deny a business unit a service or product that goes beyond existing standards – even if the using department is willing to fund the specific investment themselves. Such a decision may lead to lower revenues for the internal units in the short run, but higher efficiency in the long run.

The internal support unit is now using a scorecard that has been derived from the strategy map, to inform the employees within the unit how they are doing, as well as external stakeholders about its performance. By keeping the using departments updated on the unit’s performance they are also invited to discuss the unit’s strategic intentions as well as understanding the priorities they have made.

According to our client, a traditional P/L statement would not do this. But with a scorecard they managed to engage both employees and stakeholders in this strategic dialogue.



ELABORATION ON KEY DESIGN ISSUE #6: USING IT TO LEVERAGE THE SCORECARD
By Carl-Johan Petri

Most BSC/IT-projects focus on the wrong issues. Instead of using IT to enable strategic dialogues within and between organizations, IT is typically used to compile, calculate and present vast amounts of data. Data that is never turned into knowledge, but just add to rather than reduces information overload in the organizations. The reason for this is that most BSC-applications come from the data warehouse domain, where the effort typically is to drill down in existing transaction systems to find and aggregate information.

For many reasons we do not think this is the right focus. First and foremost, most new performance indicators that we define in a scorecard project have not been of interest before and are therefore not measured in any systematic way. This means that it is difficult to find basic data for the metric in existing systems. Instead the organization should design and implement new procedures to capture this kind of new performance information. Second, if the company invests heavily in a BSC/IT-solution, the scorecard project (which is supposed to focus on strategy realization) may turn into an IT-project and hence loose credibility and interest in the organization.

All too often, a balanced scorecard software is thought of as an application that retrieves numerical information from the organization’s wide range of transaction systems, and presents this as speedometers and performance reports in four perspectives. These features are of course important in any balanced scorecard software, but we believe that IT should also play a more important role in the other stages of a scorecard project: from the initial development of the organization’s vision and the creation of the strategy map, to the day-to-day administration of action plans and to-do lists. This would include, in addition to the number-crunching functionality, tools to draw and validate strategy maps, features that connect vision, strategic goals, critical success factors, measures and action plans, as well as forums that allow members in the organization to share knowledge and insights in order to improve the business. IT can thus be used at different stages through out the scorecard implementation:

- IT support in the initial stages of the scorecard project
- IT support when breaking-down and linking the scorecard
- IT support when setting targets and monitoring performance
- IT support when managing strategic activities

The purpose of a scorecard is to trigger a new behaviour in the organization, such that the intended strategy is realized. Therefore we find the fourth bullet in our list above most important.

Not many balanced scorecard software packages include a robust activity management module. Managing strategic initiatives and activities does not require an IT support system per se, but such a system will contribute to the organization’s ability to assure that important initiatives are executed as intended. An activity management system is a type of workflow management package that helps the employees in the organization to make sure that activities are carried out as expected.

The simplest kind of activity management feature in a balanced scorecard solution is to link “to do” items to individual metrics. If the organization decides to take action to correct for a negative trend regarding a certain metric, information about this initiative can be entered in the system – and be linked to the individual metric. The activity is then allocated to some one who is responsible to execute it. When this person has finished the activity, it is marked as completed.

The workflow functionality can also be extended to allow different paths of escalation, and allocation of different responsibilities to different employees. The system may also keep track of the action list and alert the person responsible for a certain activity when the deadline approaches. The system may also keep track of the initiatives that have been taken regarding a specific issue, so it is possible to see who has done what in relation to it.

Finally, the system can also create a feedback loop, by allowing the user to see whether an action has created the anticipated effects or not. Some time after an activity has been completed, the system can summarize whether the metric has changed in the desired direction or not. If, for example, the company has faced decreasing customer satisfaction and has decided to take a short-term initiative to increase customer communication, an alert could be set in the system, e.g. three months after the activity was executed, to inform the user about the effects of the initiative, on the customer satisfaction index.

IT is not required to succeed with scorecards. But it is likely that the organization must have some computerized support system to make the scorecards truly actionable. In doing this, it is important to look beyond the number crunching functionality and also consider how the IT-solution can be designed to enable strategy-oriented dialogues within the organization.






MAKING SCORECARDS ACTIONABLE NEWSLETTER is a bi-monthly update on our experiences and opinions on how scorecards and strategy maps can be made actionable – to help organizations realize their intended business strategies. The newsletter is compiled and distributed for free by the authors of the book “Making Scorecards Actionable – Balancing Strategy and Control”. Also make sure to check out www.makingscorecardsactionable.com to get up to date information about our seminars, to evaluate your organization’s BSC skills according to our computerized BSC Analyser and to download presentations from the document archive.
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