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August, 2006

Making Scorecards Actionable Newsletter # 22 (2006)

Content of Making Scorecards Actionable Newsletter # 22 (2006)

» The Business Plan: an excellent opportunity to communicate the scorecard
» Connecting the 1st and 2nd order design issues
» Balanced Scorecard experiences from Russia



THE BUSINESS PLAN: AN EXCELLENT OPPORTUNITY TO COMMUNICATE THE SCORECARD

In many companies, the business planning process is soon about to start. In case you intend to launch or re-start a balanced scorecard project, it is a good idea to use the business planning process as a platform to communicate the BSC framework. It is also an effective way to structure the discussion on where to go and how to get there. Typically, the business planning process is the time when strategies are considered (and re-considered) as well as when goals and targets are set.

To legitimize the scorecard, it is important that the performance indicators in the scorecard – new ones as well as old ones – relate to the strategy. It is essential that the organization’s goals and mission can be explicitly translated to the specific performance indicators chosen. Whether the scorecard is valid or not, does not depend on the indicators as such, but rather on how explicitly they link to the strategy.

In a good business plan four essential questions should be answered (Sahlman, 1997): who are the People running the operation, what is the market Opportunity (who are the customers and what are they prepared to pay for), what characterizes the Context (the environment the company operates in) and finally what are the enterprise’s inherent risks and rewards.

In the business plan document the balanced scorecard structure should be used to indicate the temporal assumptions in the strategy 1) what kind of offerings and processes should the company develop (learning and development perspective), how will these be delivered to the market (internal processes), and which customer groups will be targeted (customer perspective) in order to reach the overarching goals (financial perspective).

Of course, these assumptions can be described in written text, but they are often easier to communicate in visual form, in a strategy map. Such maps can be used to communicate and discuss the most important assumptions, underlying the business plan. The characteristic of these assumptions is that no one knows whether they are correct or not – no one knows what kind of products the market will value in the future. But discussing different potential routes to success (the strategy) will lead to a better platform for action. These assumptions should be regarded as betting on the future. Bets that hopefully will pay-off. But there is of course no guarantee for this. Therefore we refer to the relationships described in the strategy map as strategic bets!

The content in the strategy map should then be used to define relevant performance indicators that will tell whether the activities in the strategy are executed or not. When the performance indicators have been defined, it is essential that employees through out the business are engaged in the target setting, in order to make the targets their own goals, rather than someone else’s expectation on them.

After finishing the business plan, the content will be negotiated with management on the level above. In this negotiation process the targets for the metrics in the scorecards (which have been grounded in the strategy) will be confirmed as the unit’s ambitions – and their promise to the rest of the organization.

Whether the scorecard will contribute to the organization delivering its strategy or not, depends on whether the scorecard is systematically used on monthly or quarterly basis. Data for the metrics must be compiled and presented to management as well as to the employees in the unit, and actions need to be taken to correct for sliding performance or for grasping opportunities that are arising! Including the scorecard as a fundamental part of the business planning process will both help communicate the organization’s strategic bets as well as communicate – in a systematic fashion – whether they play out in reality or not. Thus, the scorecards become actionable and contribute to the realization of the strategies!



CONNECTING THE 1ST AND 2ND ORDER DESIGN ISSUES

In our book Making Scorecards Actionable we propose that any organisation implementing scorecards should address six critical design issues. We also propose that these should be managed in a certain sequence. To start with, the balanced scorecard needs an explicit and unambiguous strategy to correspond with. Unless there is a strategy, there is nothing to realise. And if the indicators in the scorecard can not be explicitly traced back to certain goals and strategic bets, the scorecard will only be perceived as yet another performance measurement report. Second, the utilisation of the scorecards needs to be addressed: who will take part in the creation of the scorecard, how will targets be set, how will the results be communicated and how will action be taken? Utilisation refers to the dialogues where scorecards serve an important purpose. Third, someone needs to make it happen: who will be responsible for designing and operating the scorecard, who will look at the scorecard and how will the scorecard influence decision making?

The forth issue refers to the interfaces between different strategy maps and scorecards in the same organisation. Is it necessary to break down the corporate scorecard, or is it enough with just one scorecard for the whole organisation? If numerous units, on the same hierarchical level, use scorecards, should these be identical to allow benchmarking or should they be specific to reflect each unit’s local situation. The fifth issue relate to incentive schemes: should bonuses be rewarded based on all perspectives or is it only the financial outcomes that should be rewarded. Finally, the sixth issue deals with the need for IT-support in designing and operating scorecards.

When we encounter references to our book, the issues are sometimes described as one sequence of issues to be handled in a row. In the book, however, we portray the six design issues as a spiral – not as a row of activities. What we want to communicate is that the design issues are intertwined. Therefore we position the three first issues in the centre of the spiral, and the following three issues around them. The principal relationship is still the one described above (from making the strategy explicit to introduction of IT support), but we use the spiral to indicate the parallel relationships between issues 1 and 4, 2 and 5, and finally 3 and 6. Visualisation of the strategy (1) and interfaces between scorecards (4) deal with the break-down of the strategy; either in one unit or in the corporation as such. Dialogues (2) and incentives (5) both address motivational issues. Dialogues are used to create awareness and enthusiasm. Incentives are an add-on to this: by rewarding employees for certain behaviours, they are believed to pay more attention to those. And finally, roles and responsibilities (3) allocate administrative activities to certain individuals in the organisation. When the utilisation of the scorecard stabilises and the same indicators are measured every month, it is likely that an IT-solution (6) can ease some of the administrative measuring efforts. Thus, the relationships between the six issues are not only sequential (i.e. 1 to 6) but also intertwined (issues 1 <-> 4, 2 <-> 5 and 3 <-> 6).



BALANCED SCORECARD EXPERIENCES FROM RUSSIA

We recently taught at an MBA program for senior managers in the oil and gas industry in Russia. After having presented the content of our book, an intense discussion among the participants arouse. Some argued that much of the ideas we presented on employee empowerment and communication might be relevant in western companies, but that Russia’s long tradition of more hierarchical management require less need for communicating “why” and rather focus on instructions on “what” shall be done. This opinion was immediately questioned by other participants who thought that the need for communicating strategies, and explaining how to operate in a totally new market situation than before, would even increase the need for new and better tools to design, communicate and evaluate strategy realisation, such as the BSC. After listening to different participants’ views on this, it was quite clear to us that there is no big difference between companies in the east and the west. Rather than external factors, successful implementation of scorecards depend on whether the people want to communicate and discuss strategy or not. The need for, and the possibility to do so, does not depend on history – but on the will to do so. It was also interesting to notice that the support for new and better management control processes grew greater as the discussion continued. As BSC advocates we were happy to see this and we are looking forward to see how application of various management control instruments will develop in these emerging markets. If our interpretation of balanced scorecard can help them realise their strategies, we believe we have made a difference.

If you operate in an emerging market and use balanced scorecard, please send us a note on your experiences from working with it. We are always interested to know more on how balanced scorecards are used in different contexts.






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 organisations realise 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 organisation’s BSC skills according to our computerised BSC Analyser and to download presentations from the document archive.
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