Monday, July 06, 2020

However Beautiful the Strategy, You Should Occasionally Look at the Results

However Beautiful the Strategy, You Should Occasionally Look at the Results
The title of this article is frequently credited to Winston Churchill (1874-1965), but he never said it. The saying first appears from about 1981, many years after Churchill’s lifetime.

The saying is used to stress that one needs to look at results and shouldn’t fall in love with one’s designed strategy if it doesn’t work.

The 2007 Financial Times obituary for UK Conservative politician Ian Gilmour (1926-2007) stated that he had used the line in a cabinet meeting in 1981.

In the end it doesn't matter who came up with the line, he or she was absolutely right! 

But how do we actually measure the results of our strategy? 

One very good answer to this question is the Balanced Scorecard. This article will show you what this is and how you can use it to drive strategy execution.

What is a Balanced Scorecard?

The Balanced Scorecard (BSC) is a business framework used for tracking and managing an organization’s strategy.

The BSC framework is based on the balance between leading and lagging indicators, which can respectively be thought of as the drivers and outcomes of your organization’s goals. When used in the BSC framework, these key results tell you whether or not you’re accomplishing your goals and whether you’re on the right track to accomplish future goals.

With a Balanced Scorecard, you have the capability to:

> Describe your strategy
> Measure your strategy
> Track the initiatives you're taking to improve upon your results

It was originally published by Dr Robert Kaplan and Dr David Norton as a paper in 1992. And then formally as a book in 1996. Both the paper and the book led to its widespread success. It is interesting to note that although Kaplan and Norton published the first paper, they were anomalously referenced in a work by Art Schneiderman who is believed to be the BSC creator.

BSC is more than just financial measures. The major difference that Kaplan and Norton introduced into this methodology is the ‘balance’ across all organisational functions. The problem back then, and still today, is that most companies focus on financial measures only. For example, revenue growth and profitability. 

By looking at an organisation across four ‘Perspectives’ a causal relationship between investment and financial outcome can be defined, measured and managed.

The BSC is not just a scorecard, it is a methodology. It starts by identifying a small number of financial and non-financial objectives related to strategic priorities. It then looks at measures, setting targets for the measures and finally strategic projects (often called initiatives). It is in this latter stage where the approach differs from other strategic methodologies. 

It forces your organisation to think about how objectives can be measured and only then identifies projects to drive the objectives. This avoids creating costly projects that have no impact on the strategy.

Objectives are high-level organizational goals. When you create an objective, you should focus on what your organization is trying to accomplish strategically. A very general example would be: “Become an internationally-recognized brand.” The typical BSC has 10-15 strategic objectives.

Key Results
Key results help you understand if you’re accomplishing your objectives strategically. They force you to question things like, “How do I know that I’m becoming an internationally-recognized brand?”. Over time your key results might change, but your objectives will remain the same. You might have 1-2 key results per objective, so you are aiming to come up with 15-25 measures at the enterprise level of your strategy.

Initiatives are key action programs developed to achieve your objectives. You’ll see initiatives referred to as “projects,” “actions,” or “activities outside of the Balanced Scorecard.” Most organizations will have 0-2 initiatives underway for every objective (with a total of 5-15 strategic initiatives).

The ‘balance’ is brought about by a focus on financial and non-financial objectives that are attributed to four areas of an organisation. These are the Perspectives. They are: Financial, Customer, Internal Processes and Organisational Capacity

The four perspectives of a Balanced Scorecard

Questions often arise about the four perspectives described in the methodology. Why should we only look at Financial, Customer, Internal Processes and Organisational Capacity? Why not include Health and Safety? 

The answer is, of course, there is nothing stopping us. The four perspectives are simply a framework. However, over decades of use it has become clear that they work.

More importantly, there is a causal relationship between the perspectives. Working from the bottom to the top: Changes in Organisational Capacity will drive changes in Business Processes that will impact Customers and improve Financial results. The causal relationship may not be guaranteed if a new perspective is added. The result might be a useful scorecard, but it would not, by definition, be a balanced scorecard.

In brief, the four scorecard perspectives are:

The high-level financial objectives and financial measures of the organisation that help answer the question – How do we look to our shareholders? Financial objectives are usually the easiest to define and measure. However, creating a financial objective, for example, Improve Profit, rarely provides a clue as to how to achieve the objective. by linking objectives from the lower levels in the model, we begin to see exactly where to define projects and make investments.

Objectives and measures that are directly related to the organisation’s customers, focusing on customer satisfaction. To answer the question: How do our customers see us? It is always important to take a step outside and view your company or organisation from your customers view point. You need to understand what they want from you, not necessarily, what you can do for them.

Internal Processes
Objectives and measures that determine how well the business is running and whether the products or services conform to what is required by the customers, in other words, what should we be best at? Some of the biggest cost items can be reduced by streamlining internal processes. This is also the best area to focus on new and creative ideas.

Organisational Capacity
Objectives and measures concerning how well our people perform, their skills, training, company culture, leadership and knowledge base. This area also includes infrastructure and technology. Organisational Capacity tends to be the area where most investment takes place. It answers the question: How can we improve and create value?

The real value of the perspective approach is that it provides a framework to describe a business strategy. It focuses on objectives and key results that both inform us about progress and allow us to influence activities to achieve the strategy.

Over time, the concept of a strategy map was created. A BSC Strategy Map is a one-page visual depiction of an organization’s scorecard. It has the ability to show the connections between all four perspectives in a one-page picture.
The four perspectives are in a specific order and contain strategic objectives that contribute to a Vision and Mission. The objectives are linked in a causal way from the bottom to the top. The Strategy Map provides a very powerful tool allowing the user to talk about the causal impact of investment at the bottom to improved financial results at the top.

The benefits of a Balanced Scorecard 

A Balanced Scorecard is most often used in three ways:

> To bring an organization’s strategy to life. Those in the company can then use this strategy to make decisions company-wide.

> To communicate the strategy across the organization. This is where the strategy map is critical. Organizations print it and include it in interoffice communications, put it on their intranet, communicate it with business partners, publish it on their website, and more.

> To track strategic performance. That’s typically done through monthly, quarterly, and annual reports.

Closing thoughts

There must be a direct relationship between what an organisation is trying to achieve (the strategic objectives) and what is being measured to determine progress towards the objective. 

Clearly, there will be a lot of operational measures and some of these may contribute data to the key results, but operational measures (KPIs) should be considered as ‘housekeeping’ and ‘good practice’ and should not be confused with key results.

The approach gives us the framework to take a ‘balanced’ view across an organisation and define strategic objectives in the four perspective areas together with the associated KPIs.  We must be careful not to define too many strategic objectives.
Posted on Monday, July 06, 2020 by Henrico Dolfing