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February, 2007

Making Scorecards Actionable Newsletter # 25 (2007)

Content of Making Scorecards Actionable Newsletter # 25 (2007)

» Experiences from a utility company: How to staff a scorecard project
» What can we learn from your experiences?
» European seminars


EXPERIENCES FROM A UTILITY COMPANY: HOW TO STAFF A SCORECARD PROJECT

How to staff a balanced scorecard project is a typical question we receive. Shall the scorecard project be lead by the finance department (governed by the CFO of the firm) or is it more beneficial to engage some other part of the organization to develop and implement the scorecard? Of course, this is a relevant question – but more important than the responsibilities in the development- and implementation project, are the responsibilities regarding the utilization of the scorecard. Who is actually going to look at the scorecards? And how will this information be used? What kind of new decisions will be made in the organization thanks to the new knowledge delivered through the scorecard? And finally – who will take care of the daily administration needed to produce the scorecard reports? Will a controller in the finance department do this or is it the IT department’s responsibility to deliver some kind of computer system that will – automatically – produce and distribute the balanced performance reports?

To begin with, we believe that the purpose of a scorecard is to assure that the company is realizing its intended strategies. The scorecard is thus the most important instrument in the management control system, and it should be designed to focus all employees’ attention on those activities and behaviors that are believed to generate the expected results (for example financial returns or growth). Therefore, the development of the scorecard must not only be supported, but even actively driven, by top management. Unless top-management believes in the new management control system (the balanced scorecard) and are willing to adjust the legacy components in existing control systems (e.g. reward mechanisms) the scorecard will not be regarded as something that is considered relevant and mandatory. Instead, the scorecards will be regarded as additional information on performance, of superficial interest to those who care to bother. The real control mechanisms (what will help you make a career and will influence your salary and bonus) are still how your department is performing financially – according to the profit and loss statement.

During the last years we have been working with a Scandinavian utility on how to redesign their management control system in order to focus the organization’s attention on its business strategy, rather than short term behaviours that will affect the official profit and loss and balance sheet statements.

The chief executive is of the opinion that the sole focus on income and profit has generated a lot of unwanted behaviours in the organization: short-term projects are prioritized before investments that will pay of in a longer period of time, cooperation between business units are eroding since all units are focusing on their own financial returns, and most important; there is no clear understanding through out the organization on the business strategy. Most of the employees are familiar with the organization’s end-goals, but there is no shared idea among senior managers, and even less so among ordinary employees, on how to reach these goals. These are the main reasons why the CE decided to analyze and redesign the planning and monitoring procedures in the organization.

Even though the control system will be redesigned, the positive experience from using the profit and loss statement on a fairly low level in the organization, is that all employees become aware of the financial aspects of the operation. Being a utility, the organization didn’t historically need to think about the financial consequences of its decisions. Earlier – before the profit and loss statement was introduced through out the whole organization – production quality and volume where the only indicators of successful performance, which had lead to less efficient processes than possible. By adding a P/L statement as the most important performance report in the management control system, the CE had succeeded in communicating the financial aspects of the operation; for example how decisions on maintenance influenced income and how better planning could lead to higher income and thus also higher profit.

The project to re-design of the management control system – away from the typical one-dimensional (financially focused) planning, monitoring and rewarding system, towards a more balanced approach where also other performance than income was regarded valuable (e.g. initiatives to create more motivated staff, better processes and happier customers) – would help the organization overcome a too short-sighted focus.

The new planning and monitoring procedures (the management control system) was easy to design based on the utility’s business strategy. It was also fairly easy to find potential team members for the project. The project was lead by one of the CE’s most trusted vice presidents (who was working in production, and thus had true business legitimacy), and was staffed with persons from several functional domains: there were some IT specialists that contributed with knowledge on how to design a computer system to compile and present perfromance information, there were some representatives from the business controller’s department that could relate the scorecard to other instruments in the whole management control system, there were a few information and communication specialists and finally – and most important – there were representatives from the various production lines.

The scorecard was pretty well aligned with the organization’s business strategies and end goals. And the project team was well balanced. But, unfortunately most of the efforts in the design of the scorecards went into the issues of designing the scorecard and managing the scorecard project. Less attention and efforts were allocated to the issues of maintaining and using the scorecards. The only piece of operational considerations that were handled in the project team, was the design of a computerized information system that would be used to compile and distribute information on performance. No actual considerations had been made on who would actually feed the system with relevant information and who would spend time on analyzing the results in the scorecard.

The responsibility for analyzing profit and loss statements is explicitly allocated to the business controllers’ department. The business controllers in the organization have all a solid financial background and are used to view the operation through a pair of P/L glasses. Based on their education and experience they are comfortable with the financial description of performance. They know the inner logic of the P/L and balance sheet and they can discuss with production managers on the right way to codify expenses: whether it should be regarded a cost of this... or that…, and whether it should be regarded an investment or full cost the present year – based on established accounting and auditing rules. However, the business controllers where not as familiar and self-confident when it came to discussing the business itself. Their area of expertise was how to describe business events in a financial language – not how to create a business language that would contribute to the organization realizing its business strategies.

This was considered a barrier when implementing the new, more balanced planning and monitoring system. One of the bigger challenges was how to assure that the business controllers – who were considered the creators and owners of the management control system – could be inspired to step out of their financial reporting role and move more towards a position where they would contribute to the development of the operation, based on their experience on how to design and maintain planning and monitoring procedures (i.e. management control systems).

The first step we took, was to survey the attitudes and experiences of the business controllers according to a simple framework developed by Olve in the middle of the eighties. According to the framework any business controller needs to take a stance on two important dimensions of her work: 1) How many data sources is she supposed to understand and draw conclusions from, and 2) How far is she supposed to reach in the organization. For the individual business controller, any of the four roles in the framework can be suitable (based on her qualifications and ambitions). But for the business controllers’ department as a whole, it is essential to cover all four corners in the model. This was the challenge which resulted in a sub-project to staff the maintenance organization of the new management control system.

The traditional – and maybe easiest – role of a business controller is to understand a narrow set of data sources (dominantly the information stored in the accounting system) and to report to a limited number of persons (the CFO, the Chief Executive and maybe to some other persons in the management team). We refer to this role as the Book keeper. There is nothing wrong being a bookkeeper. It is an absolutely necessary function in all organizations – but one should not expect a book keeper doing more than keeping the books.

If the organization wants to measure, analyze and understand other types of performance (e.g. how the customers are experiencing us, how the industry is developing or how enthusiastic our employees are), and it wants the business controllers to do this, the controllers must develop new skills and competences to handle more data sources than the typical book keeper can and will do. We refer to this broader position, if it still reports to a narrow audience of executives as the Analyst.

Instead of growing in number of data sources to rely on, a business controller can aspire to integrate with the business, i.e. to leave the controllers’ department and join the operative units, helping them to understand the financial language. This role – the Teacher – will still work exclusively with financial information, but she will not only report to the CFO, the CE and other senior managers. Instead she will report to employees all over the organization; clerks as well as blue color workers, explaining how different business decisions will end up as one or the other figure in the financial performance report.

The forth, and probably the most challenging role is called the Coach or Change Agent. This type of controller is typically assisting line managers (or even the CE) in changing the business as such. She is both analytical in the sense that she contributes with knowledge and facts about the organization’s internal capacity as well as its external environment; and she is also continuously informing a broader range of employees about these facts. In doing so, this type of business controller is not only designing a management control system that will help the organization realizing its business strategies, but is also producing information that contributes to carve out new strategies and new goals. This is a business controller that participates in creating the business.

Based on these four roles, that are derived from the two dimensions 1) Number of data sources and 2) Number of persons to interact with, we created a questionnaire the makes it possible for each person in the business controlling department to assess her own skills and workload. The sum of the profiles constitute a description of the controller department as a whole; whether it is heavy on bookkeeping or if it perceives itself as a change agent and business catalyst.

After surveying the controller department, similar questions were asked senior management. Both what they expected of their business controllers and how they would rate them today. When comparing the business controllers’ view with the expectations on them, it was apparent that there did not exist any persons in the organization that could take charge of the operation of the scorecard. No one in the organization felt comfortable with all indicators in the scorecard, and hence no one took responsibility for compilation, analysis and presentation of the information in all of the scorecard’s different perspectives. Instead of a holistic performance planning and monitoring system, it became a fragmented summary of various performance indicators that didn’t relate.

Comparing the controllers’ and the senior managers’ view on who was responsible for what, the fragmentation of the scorecard could be tackled. The controller department initiated a sub-project to develop the necessary skills and competences to compile, monitor and analyze performance according to all dimensions in the scorecard. They also assumed responsibility for producing and informing top management as well as employees through out the organization on the utility’s performance. Not only of financial performance, but also on customer satisfaction, process efficiency and the organization’s efforts to re-invent itself for the future. By doing this the business controllers did not only control the business, they also contributed to create the business.



WHAT CAN WE LEARN FROM YOUR EXPERIENCES?

Do you recognize the challenges we report from the Scandinavian utility? If so, how did you manage them? If not, what have been the biggest challenges in your utilization of scorecards – and what have you done to overcome these challenges?

Four years ago, “Making Scorecards Actionable – Balancing Strategy and Control” was published. Since then it has been translated to six different languages. And in addition to the book and our bi-monthly newsletters we are also publishing new experiences in more academic journals and conferences.

The foundation for this continuous knowledge creation is the feedback we receive from readers all over the world; from the far east (China, Japan and Korea), from Russia, from Spain and various countries in South America; as well as from English speaking countries. In addition to this we also add the European experiences that we gain in various client assignments: which we most often are engaged in, in the Scandinavian countries, but occasionally also in companies in continental Europe and Russia.

So please join us in understanding how balanced scorecards can be utilized in a European setting. We always find it interesting to see how companies in different countries apply the suggestions brought forth in the literature. If you have anything to share, just let us know. Please send Carl-Johan an e-mail at carl-johan.petri@makingscorecardsactionable.com.



EUROPEAN SEMINARS

During the spring we will arrange seminars through out Europe on the book and discuss how to implement scorecards in a European context. Please join us for a half day and discuss theory and practical experiences. The full seminar schedule can be found on the website (under Seminars), but here are some important dates:

Helsinki, March 16
Copenhagen, March 21
London, April 4
Paris, April 9
Barcelona, April 17
Rome, April 19
Stockholm, April 25






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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