Addressing Strategy Management and the Balanced Scorecard

Strategy Management and the Balanced Scorecard is also known as: Management Planning, Balanced Scorecard method, Balanced Scorecard Toolkit, Customer Lead Time (CLT), Strategic long term objectives, Strategic management concepts, Objectives strategic management, Management Strategies, Performance Management, Balanced scorecard strategy, Strategic Management

Organizations often recognize that there is a significant gap between their strategic plans and their ability to execute them. Many try to implement tools known as scorecards to solve this problem. Unfortunately, in doing so they often put measures into place without establishing the cause-and-effect linkages between those measures and the daily activities that drive them. This paper explores ways to address this problem, ensuring a successful scorecard implementation.

Introduction: The Strategy Gap

Most organizations recognize that there is a significant gap between their strategic plans and their ability to execute. Part of the reason for this was shown in a recent survey conducted by CFO Research Services where 60 percent of organizations said they were dissatisfied in the alignment between strategy and budgets.1 This alignment is vital because the budget is often the only enterprise-wide process where users are directed and controlled in their use of company assets to achieve organizational objectives.

But why is this alignment so hard? In the book Competing for the Future, this disconnect was summed up in the statement:

"In too many companies there is a grand, and overly vague, long-term goal on one hand…and detailed short-term budgets and annual plans on the other hand…with nothing in between to link the two together…. The long term doesn't start at year five of the current strategic plan. It starts right now!"

Today, most organizations rely on the budget process to bridge the gap. Managers are told the results that are required for next year and in turn they develop a revenue/cost budget to achieve them. But this process is usually devoid of anything to do with strategy, providing little direction as to how strategies are to be achieved, little analysis as to whether budgeting activities make sense given the current overall strategic plan, and little thought for conflicts between activities and resource allocation. Instead, the "how" of strategy management is either assumed or, worse still, worked out as the year progresses and failure looms. Which brings us to the other issue: How do we monitor the plan? Most management reports offer little or no real value in monitoring plans. Consider Figure 1, for example. While this report is great for telling an organization what happened, in terms of managing performance this report has significant challenges. This report:

• Shows no relationship to the actions that produced the results. For example, we can see that revenue for the month was over budget but we have no idea why. Even if we were able to break this figure down into products and customers, it still doesn't tell us what actions took place that resulted in the reported performance.
• Provides little or no information of what needs to happen in the future. The report shows that, year-to-date, we are behind the goal for revenue. What it doesn't tell us is what needs to change in order for us to meet the year end goal
• Is an accounting-based view and not directly related to operational managers' daily activities/responsibilities. Managers direct and control activities and it's these activities that ultimately determine whether organizational goals are met. Most financial statements are the results of activities that took place in the past" they are not the activities themselves.
• Provides no context on what's happening in the "real world." Budgets are usually the results of negotiations that took place many, many months in the past. Assuming (and this is a big assumption) that budget managers set these budgets based on the prevailing economic environment, if that environment changes, for example a competitor releases a much improved product/service, then the budget assumptions are no longer valid. Beating a budget that was unrealistic to begin with, does not help in the slightest an organization who wants to beat the market.
• Does not tell us if strategy was successful. There is no way of knowing from this report what the strategy of the company was, whether it was actually implemented and if the results reflected that implementation. Without this feedback, managers can delude themselves over the causes of success or failure. The question facing managers is this: How do we bridge the gap between strategy and execution?

Scorecards

Scorecards are being hailed as the solution to the gap between strategy and execution. They are not new. In the late 1980s, it became apparent that the traditional approach to monitoring performance based on financial measures such as ROI was no longer appropriate in the increasingly complex business environment. Initiatives such as Total Quality Management (TQM) in the U.K. and the Malcolm Baldrige Quality Award in the U.S. provided a more practical approach to managing performance"one based on a wider range of measures such as quality, strategy, people, and partnerships.

In the early 1990s, many methodologies were developed that sought to link the different activities, both internal and external, as well as cost and non-cost categories of an organization to overall performance. The breakthrough methodology came with Norton and Kaplan's Balanced Scorecard.

Today, organizations realize that to manage performance they need to take into account a number of business facets, including how they deal with customers, manage their internal processes, and continue to develop innovative solutions. This requires a balanced, broad array of measures that need to be planned and monitored. Users interact with these measures in the same way that a driver uses a car dashboard.

A car dashboard consists of important "management information" such as speed, engine temperature, and fuel consumption. Warning lights, or alerts, inform the driver of issues that need attention"for example, low fuel.

To steer, the driver needs to continually gather information about the road ahead by looking out of the windshield and then making continuous adjustments to direction. He or she may plan the route before starting out, but the driver needs to keep updating this view and acting accordingly. For example, there may be road works or traffic jams ahead which need to be avoided if the driver is to arrive at the destination on time. Looking in the rear view mirror doesn't help that much"in the same way that reading financial reports doesn't help an organization determine what it needs to do next to achieve its planned goals.

As can be seen from this analogy, the focus needs to be measures related to activities that show "How do we get there?" and "Are we on course?" as well as on the warning lights telling us what is currently happening. And yet today, most organizations look solely at the warning lights"how close are expenses and revenue to budget"rather than focusing on where they want to go and how they are going to get there.

In a report prepared by Gartner and Cranfield Business School3, the authors found that although a balanced set of measures helps make strategy comprehensible to employees, the implementation of a balanced measurement system is a difficult task. It is estimated that:

• Only 5 percent of the workforce understand strategy.
• Only 25 percent of managers have incentives linked to strategy.
• 85 percent of executives spend less than 1 hour a month in discussing strategy.
• 60 percent do not link budgets to strategic plans.

The report goes on to say that a tool is needed which contains both short- and long-term measures, as well as financial and nonfinancial ones. The tool must be acceptable to all sectors of the workforce; must be easily understood and communicate overall business strategy; must show the drivers necessary for long-term results and indicate every employee's contribution to overall success; must be easy to use; must integrate with existing business systems; and must fit in with the overall culture of the organization. Scorecard solutions were designed to fulfill this role but, unfortunately, the way many of them are implemented means they fall short of this purpose.

The Balanced Scorecard

The Balanced Scorecard was developed by Robert Kaplan and David Norton in an attempt to show organizations how to make strategy become "everyone's everyday job." It is a framework that:

• Communicates strategy so that everyone understands the objectives and their role in achieving them.
• Aligns resources to focus on the key drivers of strategy.
• Monitors the execution of strategy by tracking measurable results.

The Balanced Scorecard methodology typically communicates strategy across the four perspectives:

1. Financial. What financial returns are required by investors?
2. Customer. What do our customers want?
3. Internal Process. What do we need to do to deliver?
4. Learning and Growth. How do we sustain the business?

Strategic objectives are communicated as a set of cause-and effect-linkages known as "strategy maps." These linkages define initiatives (or action plans), assign responsibilities, and define the targets that must be achieved to attain corporate goals. In this way, everyone understands their priorities and how they impact overall performance.

According to Gartner, the concept of strategy maps"accounting for cause-and-effect linkages" is even more critical than the methodology's four perspectives, which are what people tend to concentrate on. The linkages are critical because they in turn help the organization determine which metrics are most important.

The trouble is that most organizations implement a scorecard of measures and fail to make or communicate the cause-and-effect linkages together with the actions that are required of individuals. The result often is a scorecard that is nothing more than another traditional report, as shown earlier. Although many people dismiss strategy maps as too conceptual, it is this cause-and-effect linkage that makes it practical to determine the right metrics in the first place.

In their follow-up book to The Balanced Scorecard, Kaplan and Norton made the point that:

"Organizations need a new kind of management system one explicitly designed to manage strategy, not tactics…. Organizations today need a language for communicating strategy as well as processes and systems that help them implement strategy and gain feedback about their strategy. Success comes from having strategy become everyone's everyday job."

Systems implemented to support this vision of the Balanced Scorecard must do just that: they must explicitly manage, communicate, help implement, and gain feedback on strategy at both the corporate and employee level.

Overcoming the Strategy Gap with Extensity MPC

To overcome the gap between strategy and execution, a scorecard solution must support a number of management processes. The critical processes outlined by the Cranfield School of Business are:

• Clarifying and translating the vision and strategy
• Communicating and linking the strategic objectives and measures
• Planning and setting targets and aligning strategic initiatives
• Enhancing strategic feedback and learning

Performing these processes requires a system that supports the enterprise-wide development of operational plans that are clearly linked to high-level organizational goals. Let's take a look at these critical processes in more detail and see how one solution, Extensity® MPC, supports those activities.

Clarifying and Translating Vision and Strategy

The development of a strategic plan typically begins with reviewing current performance. This review requires systems that support the detailed analysis of activities and results. From this analysis, senior management develops a high-level financial plan, which in a profit driven company would show the returns expected by investors in the medium to long term. Armed with this information, senior management can now communicate to operational management the high-level goals to be achieved and the strategic themes to be adopted" for example, "focus on developing existing customer relationships."

Extensity MPC is a unique and innovative solution for implementing management systems that develop, communicate, monitor, and assess the implementation of strategy. It was designed to support a range of methodologies, including the Balanced Scorecard. The solution also allows organizations to customize a methodology to suit their needs.

Theme

This object represents strategic themes of the plan"for example, "profitable growth."
Obj/KP
This object represents specific objectives and key performance indicators associated with that objective.
Initiative
This object represents particular initiatives that will be implemented to achieve the objectives.
Assumption
This object represents assumptions made when setting performance targets. If these assumptions differ from plan, then the targets will need to be reviewed.

Once installed, users can select the Balanced Scorecard option. MPC will then display the relevant building blocks of a plan. These are known as "plan objects" and reflect the different components of the Balanced Scorecard (Figure 3). When creating a Balanced Scorecard, the perspective (financial, customer, internal, and learning and growth) will be assigned to each object.

To communicate the high-level goals and strategic themes to operational managers, plan objects are organized into cause-and-effect relationships. This is easily done by dragging and dropping the appropriate object and giving it a name. In Figure 4, for example, the management team has identified three themes: revenue growth, operating efficiency, and corporate governance. Each theme has been assigned a number of objectives. One initiative for revenue growth, for example, is to maintain the existing customer base. That initiative is support by plans for introducing new products and creating repeat business opportunities.

Each object has associated properties (Figure 5). Properties define the start and end period of an activity, assign responsibility for initiatives or activities, link objects to the appropriate Balanced Scorecard perspective, and define other pertinent information. In addition, documents, websites, and links to supporting systems and applications can be attached to each object to further clarify its purpose.

Once plan objects and their properties have been established, responsibilities are defined (Figure 6). To do this, each object is associated with the relevant organizational unit as shown in the example. Here, the objective of "maintaining the base" has been assigned to marketing and all four sales units. Each unit will be assigned performance targets in line with their ability to contribute to the overall goal.

Measures are linked to each unit, theme, objective, and key performance indicator, allowing the organization to monitor the implementation and success of its strategic plan (Figure 7). Measures can hold multiple targets" for example, expected and best case results"as well as actual data. Data can be supplied automatically from external systems to automate the reporting and budgeting process. The system is now ready for the next critical management process.

Communicating and Linking Strategic Objectives and Measures

With Extensity MPC, operational managers see and focus on only the themes and objectives that have been assigned to them. In Figure 8, for example, the marketing manager can view only his part of the strategic plan. Operational managers can then add their own initiatives to the plan, in as much detail as necessary, to achieve the strategic goals set. In Figure 9, three initiatives"communication program, loyalty program, and conference"have been established to support "repeat business."

Setting Targets and Aligning Strategic Initiatives

Once the plan is complete, senior management reviews the entire plan, including the operational initiatives (Figure 10). They can assess whether the plan is likely to work. Targets can be entered into the plan manually or electronically linked to the supporting budgeting and reporting systems such as Extensity MPC (Figure 11). In this way, the organization can assign budgets to initiatives, verify that costs and revenues are within plan, and confirm that outcomes are aligned with organizational goals.

Enhancing Strategic Feedback and Learning

Extensity MPC can take results directly from supporting systems such as existing transactional/data warehouses. A range of reports are then automatically available, helping the organization determine whether its strategic plan is working. These reports are flexible in that they can be tailored by end users and allow measures to be reported across the Balanced Scorecard perspectives as well as by responsibility. In addition, MPC automatically supplies two performance measures:

1. Outcome

   "shows how close actual performance is to the set target levels

2. Activity

   "shows at a theme/objective level how well the supporting initiatives have been implemented In this way, MPC gives users a measurement of how goals are being met through user activity. Let's view some report examples.

Figure 12, the plan overview report, illustrates the cause-and-effect relationships between themes, objectives, key performance indicators, and initiatives at the corporate level for a company called Best Electronics. Each Balanced Scorecard component is color-coded to show the year-to-date outcome value of the "actual versus expected" target for quarter three. In other words, it answers "How close to target did we come?" The bar underneath each object gives a visual "thermometer" of completeness.

The user can change the content of a report by selection options using the buttons at the top of the screen. For example, if the "Qtr 3 2004" button is selected, a list of other possible dates will be presented from which the user can choose. If the user clicks on the "Outcome" button, he or she will see two options: outcome and activity.

The performance results report (Figure 13) is a key report within Extensity MPC. It enables managers to see the relationship between activities and outcomes. In other words, it helps them determine whether planned activities were implemented and whether those activities contributed to achieving the high-level goals. The performance results report shows actual and target values as well as the performance measures, or "outcome." Outcome answers the question, "How close to target did we get?" "Activity" looks at the weighted implementation of initiatives. This particular example shows that:

• The objective/key performance indicator for repeat business is on target at 101 percent, yet only 81 percent of the initiatives that supported it were implemented. This could indicate that the objective/key performance indicator target was set too low, or that the activities do not have to be completed to the depth planned. In the latter case, the organization could move resources from these initiatives onto others that are falling behind.

• The activity level of initiatives supporting the objective/key performance indicator for new products is over 100 percent, yet only 70 percent of the result has been achieved. This tells us that something else is impacting this key performance indication"something that has not been thought about or planned.

The performance results report allows management to assess whether the initiatives agreed upon really are the right initiatives. At any time, MPC will allow, security permitting, for these initiatives to be changed so that the plan remains a relevant, living plan.

When investigating performance, organizations can use the trends report (Figure 14) to see whether a particular outcome is getting better or worse compared with last period.

This trends report shows actual and target values along with an icon that indicates performance compared, to last quarter In this case). It also shows who is responsible for that activity. In this case, the sales training initiative seems to be way off target. Harry Manning is responsible for this initiative. To investigate what else Harry Manning is working on, the system user simply selects the name in the "responsibility" column, followed by the responsibilities report icon.

Figure 15, the responsibilities report, reveals a number of issues associated with Harry Manning. In particular, it shows that his local recruitment initiative has not been fully implemented.

To find out what impact this could have on the overall plan, the user selects the initiative in question (Figure 16). This tells us that the recruitment initiative, if not implemented, will impact the social awareness objective/ key performance indicator, which in turn impacts the operating excellence theme. In this way, Extensity MPC warns the organization of the impact of failing initiatives.

Other out-of-the-box reports supplied by MPC include the unit contribution report shown in Figure 17. This report shows how each unit is contributing to overall scorecard performance, by perspective. From the unit contribution report, users can drill down into the supporting detail to carry out further analyses.

Extensity MPC also supports the ad hoc creation of reports. In Figure 18, the system user has selected to view the initiatives grouped into those activities that are designed to improve performance, grow new business, and sustain current business. From this, management can view activities in terms of how they were planned to impact overall performance.

Finally, data and results held within MPC can be directly accessed via a web browser or Microsoft Excel as part of an overall information portal. These reports still respect the built-in security system but allow users to report and analyze data in virtually any format or layout. In Figure 19, the report shows a "dashboard" containing key performance measures from the plan's strategic themes and objectives. This report is not static; users can select and drill down through periods and plan components.

The last example, Figure 20, has been created to show a high-level strategy map. The cause-and-effect linkage is displayed on top of the different organizational perspectives. The report shows performance values (outcome and activity) and is color-coded appropriately. As with the previous example, users can drill through the different periods and units within the organizational structure.

Alternative Approach to the Balanced Scorecard

Extensity MPC is flexible in that it allows you to approach the Balanced Scorecard from a number of directions. Consider, for example, an organization that wants to use the Balanced Scorecard as the mechanism for displaying performance to the different stakeholders within the organization. They may want to use the financial perspective to display to shareholders how well the company is doing; the customer perspective to show key customers what is being done for them; the internal perspective for presentations to operational managers; and the learning and growth perspective for presentations to employees. The overall cause-and effect map takes on the following appearance (Figure 21), where the perspectives become the focal point. For the individual presentations, MPC allows the management team to drill down into each perspective to show performance, just from that perspective. For example, Figure 22 presents a view of only the financial activities. For a presentation to operational management, the system user might choose a view of only internal perspective initiatives (Figure 23). Data can also be accessed directly, security permitting, from users' spreadsheets, enabling them to develop their own style of reports.

Extensity MPC: The Better Solution

As a comprehensive financial performance management application, MPC's approach to scorecards is a much better solution than a "scorecard only" product. Consider the following.

Business

MPC supports the enterprise-wide development of the plan. It supports senior managers in the communication of high-level themes and objectives/key performance indicators, and it supports operational management in the development of their own initiatives to support those goals. This approach:

• Promotes buy-in from around the organization as end users build their own plans that are linked to organizational objectives.

• Promotes communication to end users and allows them to identify responsibilities.

• Promotes the use of organizational knowledge which may be embedded around the different operations in meeting strategic goals, resulting in better plans.

• Provides intuitive reporting on whether the plan is working, with no setup required. In particular, MPC automatically provides two key performance measures outcome and activity"that show the relationship between detailed, low-level initiatives and their ability to impact high-level goals.

• Allows ongoing review and adjustment to deliver strategic goals. Scorecard solutions must be dynamic to reflect the changing business climate. MPC supports continuous, enterprise-wide planning and monitoring.

Technology

• Leverages the Microsoft business intelligence platform. Extensity is a Microsoft Gold Certified Partner for business intelligence and software products. Extensity's solution exploits Microsoft .NET, XMLA, and SQL Server technologies, and provides open access to supporting systems.
• Web-based for easy deployment across the enterprise. Users simply connect via a web browser, identify themselves to the security system, and away they go.
• Linked to one of the world's leading performance management applications. Extensity is a leading provider of truly integrated planning, budgeting, forecasting, reporting, and analysis systems: MPC. The application suite provides all you want"from a single vendor.

Extensity MPCs Balanced Scorecard Capabilities

Planning Features

• Support for different management frameworks/ methodologies (e.g., Balanced Scorecard, Six Sigma, Hoshin, EVA)
• View strategy from at least four different perspectives with the ability to create and name others at the user's option*
• Allow strategic objectives to be assigned to at least one perspective*
• Allow measure(s) to be explicitly linked to at least one strategic objective*
• Allow quantifiable targets with a specified time frame to be assigned to measures*
• Allow strategic objectives to be linked and graphically represented as a series of cause-and-effect relationships which can be easily changed and edited as appropriate*
• Facilitate the documentation of qualitative descriptions of each element of the scorecard*
• Make explicit the relationship between initiatives required to achieve the strategy and the associated strategic objective*

Data Visualization Capabilities

• Able to display current performance data for each measure*
• Allow subjective assessments of performance (e.g., red, yellow, green) as well as memo-style qualitative descriptions of performance*
• Graphically display performance against targets in an easy-to-comprehend format that allows for modification to suit individual end-user needs*

Integration Capabilities

• Link to different applications without having to close the application down
• Provide data integration links to transaction/data warehouse systems
• Integration with other MPC capabilities to analyze performance data

Analysis Capabilities

• User-defined tolerances with multiple levels of tolerance
• Basic trend (e.g., icons) and trend analysis over time
• Integrate OLAP capability with data stored in a multidimensional format
• Actual comparison with multiple targets/benchmarks
• Drill down from summary data into detailed analysis
• Detail description of measures including name, description, format, desired value direction, target value(s) for period and unit, start date, duration, frequency, person responsible, data source, current value, user definable attributes, general notes, and attachments
• Visual link between measures
• Security on data viewing and functionality
• Reporting by person responsible

Technology

• Web enabled
• Scalable across the enterprise

About Infor

Infor delivers fully integrated enterprise solutions as well as best-in-class standalone products that address the essential challenges its customers face in areas such enterprise resource planning, supply chain planning and execution, customer and supplier relationship management, asset management, product lifecycle management, financial management, performance management and business intelligence. With more than 8,100 employees and offices in 100 countries, Infor provides enterprise solutions to more than 70,000 customers. For additional information, visit www.infor.com

Table Of Contents

Introduction: The Strategy Gap
Scorecards.
The Balanced Scorecard
Overcoming the Strategy Gap
Clarifying and Translating Vision and Strategy.
Communicating and Linking Strategic Objectives
Setting Targets and Aligning Strategic Initiatives .
Enhancing Strategic Feedback and Learning
Alternative Approach to the Balanced Scorecard
The Better Solution
Business
Technology
Balanced Scorecard Capabilities
Planning Features
Data Visualization Capabilities
Integration Capabilities
Analysis Capabilities
Technology