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February, 2009

Making Scorecards Actionable Newsletter # 37 (2009)

Content of Making Scorecards Actionable Newsletter # 37 (2009)

» Six years later…
» Balanced Scorecard in the Media
» Scorecards in vertical and horizontal control
» Meet us on Youtube.com
» What did you think about this newsletter?



SIX YEARS LATER…

February 26, 2003, we published our first Making Scorecards Actionable Newsletter. It has passed six years since we started to write and reflect on what makes strategy maps and scorecards actionable in this Newsletter series. During these years we have commented on much of the content in the book as well as discovered new approaches on how to use scorecards to create strategy-grounded dialogues in organizations. Hopefully you find these reflections valuable and helpful in your own thought-process on how to create a control system that focuses your organization’s attention on how to realize your intended business strategy. And, as always, we hope you will respond to this Newsletter with comments and thoughts, either via e-mail or via our web based questionnaire (see the link in the end of the Newsletter).



BALANCED SCORECARD IN THE MEDIA

A couple of years ago we worked with the British Department of Health to design and implement a process for Strategic Health Authorities, Trusts and PCTs to create and use balanced scorecards. It is rewarding to see how some PCTs talk about how they use scorecards to articulate the strategy and assure that it is realized. In the following article, in Health Service Journal, Yi Mien Koh, chief executive of Hillingdon PCT, says: “It has proven to be helpful to have a strategy statement everyone knows and understands. The strategy sets personal objectives from the executives down, clarifying roles, responsibilities and accountabilities. It informs commissioning plans and validates strategic decisions. The organisational development plan focuses on plugging capability gaps and a balanced scorecard tracks how the strategy is implemented. The strategy has enabled us to prioritise and stopped the PCT from being distracted and behaving like a candle in the wind. Executives know what we need to do, and a unified board provides support”. For the full article follow this link: http://www.hsj.co.uk/goodmanagement/2008/12/yi_mien_koh.html

Gartner Group, the technology research firm, downplays technology’s role in creating an actionable control system. Instead of using technology (to automate and produce a myriad of performance indicators), they argue that it is better to focus on a narrower scope of indicators that say something about the company’s long term aspirations: “Having a standard set of enterprise metrics sounds easy but can be quite complex, we've come across organisations with a 1000 metrics, but follow the old Kaplan and Norton balanced scorecard and focus on 'visionary' metrics at the top". For the full article follow this link: http://www.thestandard.com/news/2009/02/23/gartner-says-key-bi-talk-not-tech

But is it as simple as that – just picking “the right” strategic indicators? Neil Raden challenges the assumption “What gets measured gets done” and reflects on the two different attitudes to measurement: the one building on the quote above and the other challenging such statement arguing that managing people and influencing their behaviours takes more than a handful of metrics. In an article on BeyeNETWORK, Raden concludes: “The solution is not to discard measurement but rather to be conscious of this tendency and to be vigilant and thorough in the design of measurement systems. We all have a tendency toward simplifying things; but in some cases, it appears better to not measure at all than to produce something inadequate. Performance management, to achieve its goals, has to be applied effectively, which is to say, with superior execution of technology, implementation and management. It has to be designed to be responsive to both incremental and unpredicted changes in the organization and the environment”. For the full article follow this link: http://www.b-eye-network.com/view/9618



SCORECARDS IN VERTICAL AND HORIZONTAL CONTROL

In a recent Swedish book (Den finansiella styrningens realiteter och fiktioner, http://www2.hhs.se/efi/summary/767.htm), the author discusses how financial controls in Swedish business and government evolved and changed during more than a century. He is Lars Östman, professor of accounting who has been active not only as a researcher but in various professional capacities since the 1960s. One of his main themes is distinguishing the role of vertical and horizontal controls in influencing activities. Although Östman discusses financial controls, we believe it is fruitful to consider this distinction also in using scorecards.

What determines actions in organisations? Many writers and casual observers can present long lists of stakeholders who are influential, sometimes just through representing interests that could disturb operations if they found reasons to object. Ultimately, a number of people – sometimes those actually operating machines or meeting customers – will determine what happens, based on their own prior views and aspirations, and the information and incentives that reach them. According to most definitions, management control (financial or otherwise) is the structured and deliberate processes used to influence their actions.

Vertical controls are commonly understood as such processes originating in a “chain of command”, i.e. in the hierarchy that exists in all legally recognized organisations in our type of society. There always is some sort of ownership, political representatives, a board, an executive etc. Horizontal controls, on the other hand, grow out of operations themselves: there always are factor markets, recipients of the goods and services that are produced, societal causes that are addressed. Organizations aspire to make a difference, and often choices and consequences are considered horizontally that are not subject to vertical controls, except very indirectly.

Thinking about vertical and horizontal dimensions of control makes us recognize how people performing activities in an organisation often do so out of strong personal convictions. Operations may continue in a recognizably similar way and gradually evolve and adapt to ‘horizontal’ conditions through several changes of ‘vertical’ ownership. Management teaching may have focussed too much on the formal prerogatives of the latter. Many owners and political bodies may be rather uninterested in their organisations, as long as they deliver reasonable returns and results. Management literature’s plea for clear strategies seem to be met quite rarely, and strategy is then decided – or emerges – in the horizontal dimension.

In our books, we advocate that explicit strategies should form the basis for control activities. Our definition of control includes the processes leading up to a (revised) strategy: not first strategy then control, but a determination and execution of strategy through control. How does this mesh with the vertical/horizontal split argued by Östman?

First of all, we believe the prerogatives of commercial and political owners of organisations are central to our type of society. They provide a societal test which organisations should be allowed to continue. Exceptions can of course be made for organisations with no or neglible exchanges with society, like a social club. But most organisations need to be recognized and assume some more official status. Then there will be a vertical dimension, and a role to be played by owners and board members. This should always involve some elements of a ‘business model’: an understanding of operations (resources), aspirations for achievements (goals), and assumptions about the links between operations and achievements. This will most often be in rather general terms, particularly if operations seem to go well. It will be based on information from the organisation itself about strategic possibilities, but also on the vertical leaders’ perceptions of market realities and their own, and their principals’, goals and appetite for risk. In our books we talk about ‘strategic bets’, and we understand these as largely a responsibility for the vertical dimension of an organisation.

Horizontal controls concern the means to fulfil the vertical goals, but also adapting to business partners, maintaining and developing critical resources etc. Distant vertical principals will never be able to monitor or understand these processes in any detail, but they have a formal obligation – strengthened through recent debates about governance – to investigate their trustworthiness in enough detail to convince themselves that they are acceptable. A conglomerate strategy will leave greater leeway for each included business than a strategy where synergies are emphasized.

In his book – to be issued later in an English version – Östman charts changes in financial controls. For instance, he sees activity-based costing as part of horizontal controls and regards the attention paid to it around 1990 as a power-shift to the horizontal dimension, followed ten years later by increased emphasis on the vertical dimension when shareholder value became the guiding light for managers. We would rather describe this as a constant superpositioning of many types of control. A good start for any control project usually is to survey the entire control environment. Often we find too many, contradictory and sometimes superfluous controls – not of course only financial or even “management” controls, but all kinds of instructions, planning routines, professional views to be considered etc.

So what is the role of scorecards in all this? Strategy maps and scorecards exist to facilitate communication about strategy and its consequences: possible routes of action, and the ones selected. They are used to visualize and remember what we should strive for. In conglomerates, distant vertical leaders will probably avoid involving themselves in detailed discussions about subsidiaries, whose activities they barely understand. In a recent assignment, only two financial objectives can be traced to the corporation owning the firm we are working with. Yet, requirements (strategic bets) from hierarchical leaders inside this firm mean that parts of the scorecard are set vertically, eg sales volumes and developing new customers.

Other objectives and metrics could be seen as horizontal controls. The firm has an established process for R&D, where Marketing, Product development and Supply work together. Meaningful targets for R&D need to emerge from this process, rather than being dictated from the CEO.

So in the final scorecard for a unit within an organisation, all goals should reflect vertical strategic bets while others will be set in the processes Östman calls horizontal. There may even be horizontal strategic bets – eg testing a new raw material or sales approach – that are never discussed with vertical superiors, except perhaps on the next hierarchical level.

It seems difficult to give a hard-and-fast rule for what constitutes vertical and horizontal, nor is it necessary. We do believe the entire organisation needs some basic rationale for its existence – its business cannot just be to make money, and top leaders must engage in discussions about business models. However, these may be highly specific or very general. What needs to be vertically coordinated can include adherence to lots of detailed instructions, or just concern commercial exploitation of some basic resource (like a brand name). Vertical power may be strong and imminent if there are few hierarchical layers and a small scope of operations, weak and distant in a global conglomerate.

In our book Making scorecards actionable, we encourage scorecard development to start from Strategy and Dialogues – ie what is known about strategy at the outset of the process, and who should use scorecards to inform their discussions. Distinguishing vertical and horizontal controls may be one way of clarifying both these factors.



MEET US ON YOUTUBE.COM

We are flattered that so many of you contact us and comment on our Newsletters. We have understood that you value our reflective approach to what makes strategy maps and scorecards actionable. Instead of giving you clear-cut answers we strive to keep an open mind in thinking about what makes scorecards successful and what seem to erode their potential power.

In addition to our written pieces we are also interested in expanding the way we communicate. Hence, we have associated a short video cast with this Newsletter. Please follow the link below to find a short interview with professor Nils-Göran Olve where he elaborates on the differences between vertical and horizontal control.

You find the clip on the following address: http://www.youtube.com/watch?v=hTM1_4ggCM8



WHAT DID YOU THINK ABOUT THIS NEWSLETTER?

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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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