Balanced Scorecard Report the strategy execution source
m a y – j u n e 2 0 1 0 : vol 12 no 3
The World Has Changed—Isn’t It Time to Change the Way We Lead and Manage? By Bjarte Bogsnes, Vice President, Performance Management Development, Statoil; and Member, Advisory Board, Palladium Execution Premium Community (XPC)
also in this issue:
Bjarte Bogsnes, a leader and popular speaker in the Beyond Budgeting movement and author of Implementing Beyond Budgeting: Unlocking the Performance Potential (John Wiley & Sons, 2009), described his company’s latest step in its dynamic management journey in the September–October 2009 BSR. Here, he draws on Statoil’s remarkable successes to offer a holistic view of dynamic management and its power as a management approach when used within the BSC framework.
How Bahrain’s Hall of Fame Organizations Stay Strategy-Agile and On Course . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The year 2010 marks the fiftieth anniversary of The Human Side of Enterprise (McGraw-Hill, 1960), the landmark book on organizational behavior by social psychologist Douglas McGregor. In it, McGregor introduced Theory X and Theory Y, two opposing views of the organizational human. Theory X sees most people as potential thieves who must be managed on a tight leash; otherwise, everyone will misbehave and chaos will ensue. (I’m paraphrasing here, of course.) Theory Y posits that most people are responsible and mature. They want to be involved and heard. They are driven more by the intrinsic motivation of the job than by the extrinsic motivation of sticks or carrots. In short, they can—and want to—make a difference.
just released!
What do McGregor and his 50-year-old labels have to do with management models for the 21st century? First, when choosing a performance management model, every organization should begin by defining its view of human nature. A management model based on Theory X would (and should) look very different from one founded on Theory Y. In which camp do the majority of your employees belong? Whether informed by observation or by personal philosophy, this view must serve as the basis of your performance management model. The minority should be handled through other mechanisms. Second, Theory X—the negative view—is very much alive, as if little had happened in the past 50 years. Many executives vaunt the “flattened” organization and employee empowerment, but they don’t walk the talk. Why must my airline pilot friend, a captain who is a trusted and valued employee, get written approval if he wants a new uniform shirt more often than the manual stipulates? What good is a Theory Y leadership vision if your management practices are rooted in Theory X? continued on the following page
BSC Adoption Boosts Shareholder Returns: Findings from a Recent Study by DeBusk and Crabtree . . . . . . . . . . . 11 Building the Theme Team: A Step-by-Step Guide . . . . . . . . . . . . . . . . . . . . . 14
Strategy Execution Champions: The Palladium Balanced Scorecard Hall of Fame Report 2010. The latest edition of the Hall of Fame Report profiles the 13 members of the Hall of Fame class of 2009. For details and to order, visit www.bsrhof.org or call 800.668.6705 (+1.617.783.7474 outside the U.S.).
also available BSR Index 1999–2009, a compendium of the more than 325 articles published in Balanced Scorecard Report since its inception. Download it—free—at www.index09.hbr.org.
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It actually makes things worse because a gap between words and actions makes people cynical about their organization. In their hearts, most company leaders would probably subscribe to Theory Y, and yet in their minds, they still might see it as a risky and painful basis for their management practices and processes. But do they really have a choice? Actually, no. Employees have become more educated and competent, with increasingly higher expectations of their employers. At the same time, the business environment has changed radically, becoming much more dynamic and unpredictable. Today it is much harder to see what lies around the next corner than it was almost 30 years ago, when I began my finance career. Although the navigational charts and forecasts are more abundant than ever, we cannot rely on them for guidance; shotgun forecasts simultaneously predict everything from calm seas to gale-force winds. Our assumptions about the future are repeatedly off base. All that’s certain is that we will be wrong again. We just don’t know in which way or by how much. In such treacherous seas, it is becoming increasingly difficult for large companies to maintain a centralized commandand-control (or micromanagement) approach. Unexpected opportunities and threats keep cropping up, and they demand rapid, intelligent responses. Management cannot be reduced to an annual exercise of cascading targets, budgets, and instructions, in which any deviation from plan is more likely to be seen as mismanagement than as a sensible and value-adding response to reality. In this new environment, senior managers must allow more authority to flow to the front lines. We also need better, more intelligent ways of establishing goals, motivating people, and evaluating performance. We need more flexible
Change in leadership
Change in processes
Values: Govern through a few clear values, goals, and boundaries and not detailed rules and budgets.
Goals: Set relative goals for continuous improvement; don’t negotiate fixed performance contracts.
Performance: Create a high-performance climate based on relative success and not on meeting fixed targets.
Rewards: Reward shared success based on relative performance and not on meeting fixed targets.
Transparency: Promote open information for self-management; don’t restrict it hierarchically.
Planning: Make planning a continuous and inclusive process and not a top-down, annual event.
Organization: Organize as a network of lean, accountable teams and not around centralized functions.
Coordination: Coordinate interactions dynamically and not through annual planning cycles.
Autonomy: Give teams the freedom and capability to act; don’t micromanage them.
Resources: Make resources available as needed and not through annual budget allocations.
Customers: Focus everyone on improving customer outcomes and not on hierarchical relationships.
Controls: Base controls on relative indicators and trends and not on variances from the plan.
FIGURE 1: THE PRINCIPLES OF BEYOND BUDGETING Beyond Budgeting is often misunderstood. It doesn’t compete with, but rather complements, the BSC system. The two together constitute a powerful combination, as the author’s experiences at Statoil testify.
and dynamic processes for making forecasts, allocating resources, and setting targets. In short, we need a new set of management processes—one that ensures greater consistency between our processes, our people philosophy, and the realities of the world around us. The Beyond Budgeting movement provides a new alternative for the new business realities. Beyond Budgeting is about much more than cost management; it’s about creating agile ways of managing, ways more aligned with human nature than against it, ways more suited to managing knowledge organizations that are competing in turbulent and dynamic business environments. The 12 Beyond Budgeting principles (see Figure 1) offer a coherent view of management, addressing leadership as well as processes. They seek consistency between words and actions. Specifically, the Beyond Budgeting principles on planning, coordination, and resource allocation all address the need for more dynamic, less calendar-driven management processes.
Toward a Dynamic Management Approach In a September–October 2009 BSR article,1 I described a new process Statoil was piloting—dynamic forecasting—to replace traditional calendardriven forecasting. Most Beyond Budgeting companies adopt rolling forecasts, which typically have a five-quarter horizon and are updated every quarter. Dynamic forecasting, an approach we developed in-house, is event driven; it is not done at fixed frequencies, nor does it follow fixed time horizons. Rather, it accepts the unpredictable rhythms and uncertainties of the real world. The purpose of forecasting is to get issues on the radar screen early enough to act on them if necessary. No company is like a single vessel; with its various units and activities, it’s more like a fleet of vessels ranging from speedboats to supertankers. Why equip these different vessels with identical radar screens that have identical reach and resolution? The speedboats may not even need radar, because they can react and adjust on the spot. Forecasting is actually a way of
1 B. Bogsnes, “Dynamic Forecasting: A Planning Innovation for Fast-Changing Times,” BSR September–October 2009 (Reprint #B0909C).
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compensating when we lack this kind of agility—as with the less maneuverable supertanker. Our three pilots—in our exploration and production businesses in Norway and Azerbaijan and our Danish refining business—tested three main issues. 1. D o we need a common definition of “event”? The only definition we deemed necessary was “big enough for your unit.” An event is anything from an unplanned shutdown of an oil platform to the approval of a new project (where the forecast is updated with the project’s business case). 2. H ow does dynamic forecasting change management discussions? So far, it seems to be shifting their focus to the longer term rather than the year-end. 3. W ill it simplify or eliminate the need for a fall planning process? In principle (and in combination with dynamic action planning), yes.2 But we have done fall planning for so long that it is ingrained in our notion of performance management. We have already changed what we do in the fall (from budgeting to action planning and forecasting). Changing when we do it challenges another accepted truth. However, we believe that changing from a process driven by the calendar and fixed time horizons to one driven by events and relevant horizons will actually make it easier for people to appreciate the difference between traditional budgeting and the new ways of target setting, forecasting, and allocating resources. The fact that external stakeholders still follow an annual rhythm may also make it a bit harder to adopt the new habit, although our ability to tap in to the latest
Dynamic Resource Allocation
allocation, on the other hand, the “bank” is open 12 months a year. Your funding request might still be refused; we should be just as good at saying no as yes. But why should we make all those decisions in the fall, before we have to? Isn’t it better to make them as late as possible, when we have better information—not only about the project or activity itself, but also about our capacity to fund or staff it? A project that arose yesterday should have the same funding chances as one that arose nine months ago and would have, in the old system, already been budgeted.
Dynamic forecasting represents another step on a journey that we hope will further liberate our management process (which we call “Ambition to Action”) from the calendar year.3 Our first important step was introducing dynamic resource allocation a few years ago.
To illustrate how the combination of dynamic forecasting and dynamic resource allocation provides a dynamic framework for decision making, let’s look at capital investments. At Statoil we abolished the annual capital investment budget in 2006, when we segregated forecasting from resource
forecast data whenever any stakeholders need information should not require additional work. The job is already being done on a continuous basis. Our 2009 pilot was a success, and business areas throughout Statoil have begun implementing dynamic forecasting. Because it is not mandated, adoption may not happen quickly, but the increase in ownership, commitment, and sustainability we’ll experience will more than compensate for the slower pace.
Management cannot be reduced to an annual exercise of cascading targets, budgets, and instructions, in which any deviation from plan is more likely to be seen as mismanagement than as a sensible and value-adding response. For executives considering Beyond Budgeting, perhaps the most difficult question is how to manage costs without preallocating resources every year through detailed budgets. Is there really a better way to manage costs than handing out all those little bags of money every fall? Imagine a bank informing its customers, “We have now changed our hours, so if you want to borrow money for next year, we are now open only in October.”4 It sounds ridiculous—but isn’t this exactly what people in companies experience every year with the budget process? With dynamic resource
allocation and abolished the annual preallocation of resources. Dynamic forecasting provides a continuous update of our expected short- and longer-term financial capacity (within the range of uncertainty created by future oil and gas prices). The investment forecast includes approved and ongoing projects and proposed projects, along with extended “generic forecasts” to reflect unforeseen projects we know will come. This forecast keeps changing, because of delays or accelerations in individual projects or any of the many other factors beyond oil and gas prices that influence our expected cash flows.
2D ynamic action planning is the actual planning of activities required to advance toward strategic objectives and deliver on key performance indicator (KPI) targets. These activities are funded through dynamic resource allocation, either directly (in the case of a new project) or indirectly (e.g., managing exploration costs by unit-cost and volume targets). 3A mbition to Action, initiated in 1997, is Statoil’s version of the BSC management system and the cornerstone of its performance management process. It translates strategies into strategic objectives (“Where are we going?”), KPIs (“How do we measure progress?”), and actions (“How do we get there?”). 4 T hanks to Steve Morlidge, coauthor of Future Ready: How to Master Business Forecasting (John Wiley & Sons, 2010) and a Beyond Budgeting veteran, for this wonderful analogy.
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We allocate resources for projects when they get the final go-ahead at Decision Gate 3 (of the stage-gate model). The latest forecasts will indicate our financial capacity; if they show negative development capacity, there need to be more noes than yesses to new projects—and vice versa. An annual investment budget would have been of little help here. It would have forced us to say yes or no to projects before we had to—and provided a view of our financial capacity that would have quickly been outdated. The prioritization once performed by the budget is now performed through a continuous investment-portfolio prioritization process that ranks investments in the portfolio based on a set of strategic, financial, and operational criteria. The prioritization guides the organization in approved as well as proposed projects, while helping local teams allocate resources and coordinate work. The priority list is updated when needed— at a minimum, biannually.
Handling Operational and Administrative Costs Operating without an annual budget is easier when the resource spend involves large, discrete projects. They typically have clear business cases and go through rigorous, transparent decision processes. Operational and administrative costs are different and must be managed in more diverse ways. The old budget mechanism—handing out bags of money each year—might seem an effective way of capping such costs, especially if managers are reminded of the consequences of overspending. The problem is that setting a ceiling also sets a floor; managers know that not spending their budget is not smart if they want to ensure the same level of resources next year. The result is much less budget variance up or down than what we actually should see. But we feel very much in control! Instead of asking the budget question (“Are budget funds still available?”), we
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Absolute KPIs Traditional cost budget
x xx x x $1,000
Absolute cost KPI
Relative KPIs
No KPIs
Unit cost input/output
Unit cost vs. peers
Bottomline focus only
Strategic objectives or actions only
Increasing freedom and flexibility
USD/bbl USD/customer USD/employee
First quartile Above average
EBIT ROCE (absolute/ relative)
Cost-effective and competitive operations
Increasing need for strong values and clear direction
$1,000
More videoconferencing, less travel
Monitoring of actual development, intervention only if needed
FIGURE 2: MANAGING OPERATIONAL COSTS WITHIN A DYNAMIC RESOURCE ALLOCATION FRAMEWORK Statoil has instituted three mechanisms that units can use to manage their own operational costs: absolute KPIs, relative KPIs, or no KPIs. The progression from absolute to no KPIs provides increasing freedom and flexibility but also requires strong values and clear direction.
want people to ask themselves, “Can I justify this expenditure?” If they’re in doubt, we recommend they imagine their yes decision being questioned; “Was this really the right thing to do?” If someone believes he will struggle with this question, then maybe his decision should be no, or at least he should discuss it with someone first. This question should be asked from the first penny spent and not only when budgets are about to be exceeded. Our unit, for example, does not have a travel budget. Some of my trips abroad are expensive in money and time. But it’s much easier to decide whether any single trip is justifiable at the time, instead of having to decide months in advance what our travel costs should be. (See sidebar, opposite.) We are not, however, naive. We don’t believe that Scandinavia’s largest company can manage costs through such questions alone. These questions are necessary but not sufficient. At Statoil, we therefore instituted three mechanisms that units can use to manage their own operational costs. (See Figure 2.) They can still use absolute KPIs (key performance indicators) to set an overall cost target (in some cases, it might be set from above), but we don’t
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recommend or require any details, as a traditional budget would. This policy provides a great deal of flexibility. But if what lies ahead is uncertain, how do we know exactly what that target should be? We then might use relative KPIs. For instance, variable production costs can be managed through unit costs instead of absolute costs because it’s OK to spend more if you’re producing more—and vice versa. Unit costs can also be benchmarked against peers, with targets, for example, set as “above average” or “first quartile.” Cost can be managed even more indirectly through ambitious bottom-line targets. If you have a tough bottom-line target, absolute or relative versus the competition, you cannot just spend money like a drunken sailor. A bottom-line target discourages “bad” costs. Importantly, it also acknowledges that the frontline unit responsible for that particular bottom line is almost always better equipped to distinguish between good and bad costs than any management layer above. In some circumstances, we eliminate cost targets altogether (no KPIs). For example, our corporate staff unit has no absolute cost targets, and can’t use unitcost or bottom-line targets. We address costs by setting a clear objective for the
Reducing Travel Costs Without a Budget When you’re trying to reduce costs, instead of targeting specific cost types (e.g., travel, consultants), think in terms of activities. Some travel costs add value, but others less so. It’s hard to determine which is which if you don’t understand the reason for the travel. It’s the less-value-adding activities that we should aim to reduce. The problem is that few companies can describe their costs in terms of activities; they typically rely on cost types as defined in the chart of accounts. Consider travel costs—a favorite target of cost-reduction programs, and, in some cases, a sensible one. Travel is a visible cost type that affects many employees, so it’s a useful and easy area in which to promote a change in behavior and practices. Here’s how Statoil reduced its travel costs during the financial crisis without reverting to traditional budget approaches. • We set a goal of reducing travel activity within a 25% range. This target was a corporate target and not one to be cascaded throughout the organization. • We made it a priority to improve— and communicate—the alternatives. Our videoconferencing room, for example, was significantly upgraded and expanded. • We adjusted the company travel standard from “business class” to “flexible economy” for travel within Europe. Note the distinction between a centrally determined standard and a centrally determined budget circumscribing individual teams’ travel.
• We improved cost transparency significantly, in two ways. First, we launched a “meeting calculator” on the company website to help people determine whether traveling to a physical meeting was necessary. If travel was recommended, the calculator estimated the full cost of the meeting. Often, when that became visible, the decision to go was reversed. Second, we improved the reporting of actual travel costs in our accounting system, helping local teams better monitor the trends and developments in their travel costs. • Finally, we intensified communication about travel cost goals, alternatives, and cost-reduction trends. Within six months, we reduced travel costs by more than the 25% goal—without having to reintroduce travel budgets—that is, without any “cutting.” Corporate simply created conditions conducive for employees to reduce their travel expenditures. This occurred largely without the suboptimization, frustration, and cynicism that typically follow a traditional top-down cost-cutting program. We did learn a few lessons. Despite our messages, some units perceived the 25% corporate ambition level as a fixed target to be further cascaded within their own units. The word “cutting” was also still being used, even though we worked hard to communicate that this was not our intent. Clearly you can never overcommunicate intentions and principles when you want to change behavior.
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cost mentality we want to cultivate and by defining actions like “travel less and use videoconferencing more.” Finally, all units monitor their actual cost development, as does the level above them. In our unit, that would be the CFO. He hasn’t abdicated his right to intervene if we abuse his trust; he can move us back to a traditional budget overnight. He hasn’t had to: in fact, our team discusses costs more often now than when we had a budget. It was actually easier to spend money in the old days when someone told us up front exactly how much and on what. Now, we must decide every day what constitutes wise or unwise spending. Eliminating cost budgets is easy compared with changing the mind-set they reflect. This change takes time—as it should. We cannot instruct people to change. We cannot abolish commandand-control by command-and-control. Everybody needs to recognize the limitations of the old way and come to terms with the new way on her own timetable. We expect it will take several more years before this aspect of Beyond Budgeting is embraced throughout our organization.
From Cascading to Translating: Balancing Alignment and Ownership Among the growing numbers of companies that are abandoning traditional budgeting, many have made the Balanced Scorecard a cornerstone of their new management model. Some have introduced the BSC as a wholesale replacement of the role formerly played by the budget. Others have used BSCs in parallel with traditional budgeting for years with reasonable success (Statoil, since 1997), only to discover that abolishing budgets turbocharged their scorecard process, significantly amplifying its benefits. These companies realized that when run in parallel, the two systems often sent mixed signals to bewildered managers—with the budget invariably prevailing. (Don’t
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blame managers; few get fired for hitting their numbers.) When Statoil dropped the budget altogether in 2005, that action triggered a revitalization of our scorecard process at a magnitude we had not expected. Everyone realized we were serious about the scorecard. Ambition to Action, our BSC program, has become a household word, with 1,100 unit scorecards built thus far. Our decision to address the conflict between scorecards and budgets was part of a major reorientation of our management principles. We wanted to respond to an increasingly dynamic and unpredictable business environment. We also wanted to achieve greater consistency between our words and our actions by making our values and our management processes consonant. And,
crucial to strategy execution, because strategy is about making choices. If you never say no, you don’t have a strategy. And scorecards ensure that we actually do what we have said yes to—and don’t do what we have said no to. But alignment is only part of the equation. We also need the commitment and ownership of local teams. If a local scorecard is nothing more than a landing ground for instructions cascaded from above, ownership takes a serious hit. Ownership requires participation by teams at every level. You can’t just copy and paste directives from above. Flowery strategy statements that resonate with board members often sound hollow to frontline employees. Local KPIs must be perceived as relevant and sensible, and KPI targets as
Flowery strategy statements that resonate with board members often sound hollow to frontline employees. Local KPIs must be perceived as relevant and sensible, and KPI targets as ambitious without being overly aggressive. as we say in our values, we wanted to “challenge accepted truths.” But eliminating the budget process and moving exclusively to the scorecard were in themselves no guarantee of achieving these goals. The scorecard can, in fact, enable much more centralized, microlevel management than a budget, given the broader menu of buttons to push and strings to pull at corporate’s disposal. The way the BSC is used is therefore just as important as whether it is used at all. Scorecards can quite effectively reinforce Theory X (“people can’t be trusted”) command-and-control tendencies. But BSCs can also be used for the opposite purpose—to make Theory Y visible, tangible, and credible in the organization. The X or Y choice that organizations make, consciously or unconsciously, is often manifest in the way they ensure alignment between corporate strategy and frontline goals and priorities. Alignment is, of course,
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ambitious without being overly aggressive. The need for “stretch” must also be both understood and accepted. Management must allow sufficient local freedom and flexibility to allow for opportunities to be grabbed and threats to be fended off when (not if) the unexpected occurs. This is difficult if scorecards are carved in stone (like an annual budget) and if unplanned—but appropriate—actions need a nine-floor journey for approval. Securing alignment is therefore a delicate balancing act. To make things hang together sufficiently, we need to apply enough glue to ensure a common understanding of direction, goals, and priorities throughout the organization. But if we squeeze the tube too hard, we risk gluing away all the agility and flexibility that companies need just as much as perfect alignment. “Cascading,” a popular word in the Balanced Scorecard lexicon, is the way many organizations create alignment. In
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my view, that’s unfortunate because it can have serious side effects. Cascading is typically a top-down, one-way instruction about local scorecard content (and not necessarily from corporate down; it can issue from any level). Although it’s effective in achieving alignment, it does so at a cost: reduced local flexibility, commitment, motivation, and ownership. In some organizations, corporate uses cascading as an opportunity to micromanage through scorecards on a scale greater than the budget process ever allowed. There is, however, a better alternative, and one that’s based more on “pull” than on “push.” You can create sufficient alignment without sacrificing local ownership. It starts with using a different word: “translating.” Translating is not a one-way, top-down exercise. It involves two parties, with roles reversed: the lower-level party is responsible for translating strategy from the level above. Consider, for example, translating a divisional scorecard into business unit scorecards. The business units would take the lead, each looking at the divisional scorecard (and, if necessary, at other divisions’ or corporate’s BSC) and asking the following: • What should our scorecard look like to reflect the direction and priorities of the scorecards above it? • How should we formulate our strategic objectives? Should we simply copy the objectives from the level above, or should we translate them into more concrete terms? • Which KPIs will best show whether we are moving toward our strategic objectives? Should we copy or replace existing ones—or add new ones? • Which KPI targets do we need to set? • Which actions do we need to take to advance toward and ultimately achieve our strategic objectives? Instead of cascading these elements downward, the division now oversees and supports each business unit’s score-
card work, ensuring it is directionally correct. The division can, of course, challenge proposed objectives, KPIs, targets, and initiatives, and it has ultimate say when a disagreement arises (although this authority should be used sparingly). Equally important, the division should stimulate scorecard best practice sharing among business units, as well as promote horizontal alignment, when necessary, across units. This process is replicated level by level throughout the organization, always between two levels, with the higher level ultimately responsible for sufficient alignment between the two. Everybody can, however, check alignment with everyone else because all scorecards should be visible to all (except those portions containing sensitive information). Remember, transparency is a key Beyond Budgeting principle, promoting learning as well as effective, self-regulating control. Translation does not inherently exclude the possibility of applying traditional top-down cascading. From time to time, traditional cascading will be the right (and needed) way. But it should be the exception and not the rule. The word “translation” is already part of the Balanced Scorecard vocabulary, but I hope it becomes a household term in practice. I also hope that the term “Balanced Scorecard” comes to mean a balance between alignment and ownership, because, as we’ve learned from hard experience, local ownership, commitment, and motivation are just as important as perfect mechanical alignment.
Are We Losing—or Gaining— Control with the New Dynamic Management Approach? Beyond Budgeting, and the whole notion of dynamic management, prompts interested but still skeptical professionals to wonder, “Won’t we lose control?”
Yes and no. We actually want to lose some forms of control—the “bad” ones, such as the micromanagement of people who neither need it nor want it. As the late Peter Drucker put it, “Most of what we call management consists of making it difficult for people to get their work done.” We also want to lose the illusion of control we get through board-approved budgets and plans that describe in detail what next year will look like. Such reference points may be reassuring when the real world takes a different route, as it inevitably will, but do they constitute control? As for “good” controls, we actually gain more of them. Transparency is a great control; there’s a reason thieves operate at night rather than in broad daylight.
suboptimal decisions you otherwise get when people are trying only to “hit the numbers.” Remember: the “I” in KPI stands for “indicator.” Hindsight insights and management judgment must be used to pressure-test mechanically measured performance before we can draw conclusions. It’s worth recalling Einstein’s words: “Not everything that can be counted counts, and not everything that counts can be counted.” Let us not forget that control is not a goal in itself. The goal is the best possible sustainable performance in our organizations, within the boundaries set by society and by ourselves. It is that simple—and that difficult. Bjarte Bogsnes heads the Beyond Budgeting project at Statoil, Scandinavia’s largest company. The author of Implementing Beyond Budgeting: Unlocking the Performance Potential (John Wiley & Sons, 2009, with a foreword by Robert S. Kaplan), he is also chairman of the Beyond Budgeting Roundtable in Europe. Visit www.bbrt.org.
Emphasizing values rather than rules provides a robust and self-regulating way of guiding behavior in a world where no manual is thick enough to address every possible situation or dilemma that employees might face. We also get better control through better quality of information by segregating the three processes within (and three purposes of) the budget: target setting, forecasting, and resource allocation. Separating them enables us to improve each of them in a way not possible when they are bundled. We can set more ambitious goals and make them both relative and directional. We can get more unbiased forecasts than we got when those budget projections also served as targets against which people are incentivized—or penalized. And we improve resource allocation by making it dynamic and continuous and by viewing costs as inputs that create outputs and not something that can be managed in isolation. The holistic performance evaluation is yet another type of good control that we gain. It’s an effective way of avoiding the kind of unwanted behavior and
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To learn more Statoil, a 2007 inductee into the Palladium Balanced Scorecard Hall of Fame for Executing Strategy®, was profiled in the 2008 BSC Hall of Fame Report (Product #2797) and in BSR January–February 2008: “Statoil: Scorecard Success–the Second Time Around” (Reprint #B0801B). Both are available at www.hbr.org. Also at hbr.org, check out the BSR Reader Planning for Results: Linking Planning and Budgeting (a compilation of important articles on these subjects; Product #1893). And consult the BSR Index 1999–2009 (available free of charge at www.index09.hbr.org) for more articles on planning and budgeting.
Continue the dialogue Wondering how coordination can take place without an annual budget? What’s your view of cascading versus translating? Palladium Execution Premium Community (XPC) members can continue the discussion with the author (an XPC advisory board member) and other members at www.thepalladiumgroup.com/BogsnesBSR. Not a member? Join at www.thepalladiumgroup.com. Reprint #B1005A
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How Bahrain’s Hall of Fame Organizations Stay Strategy-Agile and On Course By Lauren Keller Johnson, Contributing Writer Bahrain’s ministry of public works and its major utility step up to support a bold kingdomwide vision—adopting a new management system that infuses professionalism, discipline, and agility into these complex organizations. Though only 290 square miles in area, the Kingdom of Bahrain, an Arabian Gulf archipelago, is immersed in a major transformation. Its “Economic Vision 2030,” unveiled by the country’s Economic Development Board in November 2007, calls for Bahrain to advance from “regional pioneer to global contender”—from “an economy built on oil wealth to a productive, globally competitive economy, shaped by the government and driven by a pioneering private sector.” Within the national vision is an ambitious goal for 2030: that every Bahraini household enjoy better job opportunities and a better quality of life and have at least twice as much disposable income in real terms as it did in 2009. Achieving that aim—along with goals for overall economic, commercial, and industrial growth—hinges on infrastructure development, which in turn depends on adequate supplies of potable water and electricity. That has presented major challenges for Bahrain’s Ministry of Works (MOW), the national infrastructure agency, as well as for the kingdom’s Electricity & Water Authority (EWA). Like all of Bahrain’s government entities, MOW and EWA are expected to align their own strategies to Vision 2030’s goals. The two organizations have had to determine how best to help realize the vision in the face of tall hurdles.
A Closer Look at MOW and EWA With a workforce of 1,600, Bahrain’s MOW is responsible for the design,
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tendering, construction, and maintenance of public buildings; the planning, design, tendering, construction, and maintenance of the kingdom’s roads and sanitary network; and management of sanitary engineering projects such as waste collection and treatment and surface-water drainage. In recent years, Bahrain’s rapid population growth has dramatically increased demand for public infrastructure. (During 2007–2008 alone, the number of constituents MOW serves jumped from 600,000 to 1.2 million.) At the same time, MOW has seen construction and maintenance costs soar and land become scarce, and it has confronted competition from the private sector over materials, skills, and contractor capacity. To make matters even more complex, it has also had difficulty attracting and retaining highquality staff. Bahrain’s EWA is one of the kingdom’s largest employers, boasting a 3,400strong workforce and 17 facilities spread across the country. EWA is a bundled utility, producing, transmitting/ distributing, and selling its output. In addition to producing electricity and processing water at its own plants,
EWA sources water and electricity from major independent water and power producers. The authority, whose 2009 budget was Bahraini dinars 368 million ($974 million), operates on a no-profit, no-loss basis, with any deficits funded through subsidies from the government, which also sets tariff principles. Like MOW, EWA has had a tough row to hoe. Again thanks to population growth, demand for utilities has exploded. For example, from 2000 to 2009, electricity consumption in Bahrain nearly doubled. Facing unique as well as similar challenges and charged with supporting Vision 2030, MOW and EWA decided to adopt the Balanced Scorecard (the ministry in 2004, with an overhaul of the program in 2006; the authority, in 2007). Although each of the BSC programs has distinct characteristics, both programs share explicit goals: to improve governance, adapt to rapidly changing circumstances, and analyze resources and capacity with an eye toward growing to meet the kingdom’s needs. The organizations’ strategic themes reflect these intentions. (See Figure 1.) So impressive are the two organizations’ strategy management systems— and the results these systems have begun generating, including navigating unscathed through the recent global financial crisis—that in 2009, both were inducted into the Palladium Balanced Scorecard Hall of Fame for Executing Strategy.
Building an “Agile Strategy Capability” at MOW To foster agility in the face of accelerating change, Bahrain’s Ministry of Works
FIGURE 1: A SNAPSHOT OF THE TWO ORGANIZATIONS’ STRATEGIC THEMES
Strategic Themes Ministry of Works
Electricity & Water Authority
Public-Private Partnership(s)
Serve Customer Needs
Key Planning Player
Grow with Bahrain
Sustainable Quality Services
Deliver Operational Excellence
Leading Professional Organization
Foster a Caring and Enabling Environment
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has tightly integrated its strategy management system with its project management and budgeting processes and adapted its strategic objectives and initiatives accordingly. More recently, the ministry has incorporated enterprise risk management into its strategy management process.
Integrating Key Management Processes In 2008, MOW established a Project Management Office (PMO) and Project Management System reflecting best practices laid out by the Project Management Institute.1 MOW’s Office of Strategy Management (OSM) and PMO work together to ensure that the projects are aligned with strategic objectives. The OSM also works closely with MOW’s Financial Resources Directorate to ensure the funding of strategic initiatives—and enable the organization to put its strategy into action quickly. Initiatives are slotted into MOW’s strategic initiative portfolio, prioritized by specific criteria. For example, managers from MOW’s Financial Resources Directorate and PMO participate in annual strategy reviews conducted by the OSM for top management and MOW’s 15 SBUs (such as the roads unit, sanitary unit, and HR unit). From those meetings, budgets are developed and then consolidated. When MOW submits the consolidated budget to the Bahrain Ministry of Finance, it includes its portfolio of strategic initiatives and an explanation of how each initiative supports national strategic objectives.
Modifying Objectives MOW’s willingness and ability to modify its strategic objectives have further enhanced its agility. Every year (in Q4), the ministry’s OSM conducts a SWOT (strengths, weaknesses, opportunities, and threats) analysis for each strategic theme. The analysis includes assessing progress on all related strategic objec-
tives as well as threats and opportunities posed for each theme by developments in the external environment.
reflect the more difficult circumstances under which the organization was operating.
For instance, in late 2008, anticipating the impact of the global financial crisis on Bahrain, the OSM organized a presentation by the economist on its team about the recession’s implications for MOW’s work. One such implication: an expected reduction in the government’s budget for the ministry. (By the way, the budget cuts never came to pass: Bahrain’s government ultimately injected more funds into MOW to help it carry out its mandate to boost the kingdom’s economy.) The presentation was delivered to MOW’s executive team, whose members include owners of the ministry’s corporate-level strategic objectives. MOW also called in an international expert to brief the executive team on ways organizations around the world had mitigated the risks of the financial crisis. Both presentations prompted the ministry to seek alternative means of financing its ambitious growth plans.
One example of the new initiatives that resulted from this effort is a proposed overhaul of the business model for the Materials Engineering SBU. The unit hopes to generate new sources of revenue by charging customers (public entities, materials manufacturers, and private sector entities) for its services, which include testing construction materials’ compliance with specifications and recommending solutions to construction problems. Previously, the unit had provided such services for free. The new business model is currently being reviewed by the Bahrain Legal Affairs Bureau and is expected to become official by the end of 2010.
To that end, MOW modified several strategic objectives. For instance, it changed its “Full utilization of financial resources” objective to “Optimized management of financial resources”— a change designed to promote revenue generation—and added the new objectives “Optimized cost-effective processes” and “Effective regulations, policies, and plans.” It also split an older objective into three—“Worldclass roads,” “World-class sanitary infrastructure,” and “Excellent business services”—to better represent key areas of focus.
Refining Initiatives MOW then defined a new set of strategic initiatives to reflect the changed objectives. It also expanded the spectrum of some targets to account for anticipated budget cuts. And it tightened the prioritization criteria for initiatives to
Integrating Risk Management and Strategy Management MOW revised its BSC in Q4 2009 to integrate risk management into its strategy management process. As a first step (which will become an ongoing effort), each strategic theme team conducted workshops to identify major risks to the theme, diagnosing each risk’s likelihood and its potential impact. The risks were then plotted on a heat-map matrix. Next, the organization defined initiatives for mitigating the most likely risks having the worst impacts. Newly identified risk mitigation initiatives include “Supply and install emergency power generators” at critical sanitary facilities to minimize the effects of power failures; and “Improve stakeholder management,” which establishes a stakeholder management committee to build trust with and support from stakeholders. The committee, consisting of representatives from all sectors and all MOW directorates, will mitigate stakeholder support risks (e.g., not getting sufficient support from Parliament, the cabinet, the public, media, partners, and the private sector for its public-private partnership efforts). This
1 T he Project Management Institute is a not-for-profit professional association whose mission is to advance the practice, science, and profession of project management throughout the world. m a y – j u n e
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initiative addresses more than 10 independently identified risks from across the ministry.
Anticipating the Future at EWA Like MOW, EWA has also strived to anticipate Bahrain’s future needs as well as beef up its capacity and resources to meet those needs. These strategic efforts include defining essential new initiatives, enlisting Bahrainis’ help, and partnering with other member countries of the Gulf Cooperation Council (GCC).2
Defining New Initiatives To meet Bahrain’s future energy and water requirements, EWA has defined a number of major strategic initiatives related to enhancing its capacity. Among them is the Al Dur Independent Water and Power Project on the southeast coast, which will be Bahrain’s largest such plant. These programs also include developing a grid code, constructing a 400kV electricity transmission network, expanding Bahrain’s 220kV and 66kV electricity transmission network and its water transmission capabilities, and commissioning new distribution networks. In addition, the authority is shoring up aging networks to reduce loss of water through leaks and to bring in more revenue by improving meter-reading accuracy. (For instance, it’s installing low-flow control valves and replacing defective water meters.) Finally, EWA is exploring renewable-energy solutions for Bahrain. In executing its strategic initiatives, the authority has been helped more than hurt by the global recession in some respects. Costs for materials (particularly metals) and labor have decreased, enabling EWA to negotiate more favorable prices for inputs vital to its initiatives. The overall effect is that EWA has been better able to manage costs related to its infrastructure. To support its capacity-boosting and other strategic initiatives, EWA has significantly expanded its use of IT
systems. For instance, before adopting the BSC, it had one billing application. Today, it runs six major enterprise applications, including a website that offers electronic payment services for customers; finance and purchasing modules from an enterprise resource planning system; and a geographic information system (GIS) for the planning, design, operation, and maintenance of utility transmission and the distribution network. The authority has also adopted technology to support knowledge management and has a strategy execution application to manage execution of strategic initiatives and reporting on strategic performance. Perhaps one of the most transformative initiatives at EWA is My HR, which affects the foundation of the people side of EWA’s business. Designed to make EWA an attractive, exciting place for people to work, grow, and develop—and in doing so, to boost talent retention—My HR involves overhauling job descriptions, the employee grade system, and numerous other HR processes to streamline and improve them. A new performance management system will foster career development and reward performance, and EWA is reviewing its compensation policy to ensure it is fair and properly rewards higher performing individuals.
Partnering with Fellow GCC Members Just as EWA is looking to Bahrainis to help solve the kingdom’s utilities challenges, it is also seeking to partner with other GCC countries to meet those same challenges. In 2009, the authority launched its “GCC interconnectivity” initiative, which it hopes will provide a platform for the exchange of electricity between GCC member countries. The primary purpose of the initiative is to guarantee strategic support from other GCC countries in the grid in case of emergencies or blackouts in any member state. The project is also intended to facilitate the sharing
of power-generation reserves among countries linked to the grid and to help minimize Bahrain’s energy investments. Through such sharing, “spinning reserve” (spare power capacity available for immediate delivery) for a country connected to the GCC grid can be reduced to nearly half of the present requirement. But that isn’t the only benefit promised by the GCC interconnectivity project. EWA also hopes that the initiative will further strengthen diplomatic and commercial ties between GCC members, thus opening the door to innovation in electrical power systems equipment.
Building Tomorrow’s Bahrain Both MOW and EWA have made important gains through their new approach to strategy management. At MOW, for example, constituent satisfaction has improved, along with the ministry’s ability to complete projects within budget and on schedule and employees’ awareness of the organization’s strategy. At EWA, positive results have included reductions in the unit cost of electricity and water production, increases in spare capacity, improvements in workforce productivity, and swifter resolution of customer complaints. Clearly, these two organizations have become essential partners not only in building tomorrow’s Bahrain but also in supplying the kingdom with the utilities and infrastructure it needs to realize Vision 2030.
To learn more Read more about the strategic transformation and accomplishments of these two organizations in Strategy Execution Champions: The Palladium Balanced Scorecard Hall of Fame Report 2010, available at www.bsrhof.org. Reprint #B1005B
2 The GCC, created in 1981, is a political and economic union of six Arabian Gulf states: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. 10
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BSC Adoption Boosts Shareholder Returns: Findings from a Recent Study by DeBusk and Crabtree
research confirms that in most cases, regardless of industry, it takes at least 18 months for implementation, and generally between two and three years for the impact of BSC implementation to be felt, in both “hard” and “soft” results.
By Janice Koch, Editor It took three years of intensive research and massive data crunching, but they did it: academics Gerald DeBusk and Aaron Crabtree showed, in their 2008 study, the strongest objective evidence yet of the execution premium that BSC users achieve against their peers. For the countless Balanced Scorecard users throughout the world, the execution premium they’ve gained—across all scorecard dimensions—is proof positive of the BSC’s benefits. Admittedly, though, verified scientific proof of the scorecard’s impact on performance is harder to come by. Part of the problem rests in the complexity of such a study; with numerous variables and many external factors (from changes in leadership to variations in implementation and use), gathering compelling evidence of a relationship represents a challenging research design effort. (No study, of course, can demonstrate causality.) So it’s no surprise that, although Robert Kaplan and David Norton publicly introduced the Balanced Scorecard in 1992 with their landmark Harvard Business Review article, until as recently as 2008, only one study (by Ittner, Larcker, and Randall, 2003)1 had been conducted investigating the link between BSC use and shareholder returns. Several surveys examined the connection between BSC
adoption and perceived performance— the subjective assessments of adopters. The Ittner et al. study, which looked at users within one industry (financial services) in the period 1997–1999, showed that the combined use of financial and nonfinancial measures has a positive effect on a company’s stock market performance. But it found no conclusive association between the BSC and shareholder returns.
Long Horizon, Broad Industry Pool In 2003, accounting professors Gerald DeBusk (of the University of Tennessee) and Aaron Crabtree (of the University of Nebraska) set out to ask this question again: Did firms that adopted the BSC outperform those that did not? Unlike the Ittner study, however, theirs looked at the three-year period following BSC adoption. Such a “long horizon” event study methodology allowed time for fully implementing the BSC—typically a major undertaking—and for results to begin accumulating. Indeed, Kaplan and Norton’s (and Palladium’s) extensive
Three-year post-adoption performance of matched BSC firms vs. control firms Description
BSC firms (mean)
Control firms (mean)
Difference
Market value of equity
50.72%
23.60%
27.12%
Book-to-market ratio
39.14%
8.97%
30.17%
Net total assets
41.05%
13.47%
27.58%
DeBusk and Crabtree’s study differed from the earlier study in two other crucial respects: it did not confine itself to one industry but rather studied a range of industries. (Manufacturing firms constituted the largest segment.) And more than half of the participant firms adopted the BSC after 1999. As the researchers note, the previous study contains many early adopters (1997 or before). Given that organizations learn from the mistakes of early adopters (and that such lessons are generally disseminated in various ways throughout the community of users), it’s reasonable to assume that early adopters’ results would have been more lukewarm.2
Survey Participants and Methodology To ensure confidentiality (and boost the response rate), DeBusk and Crabtree conducted a blind emailing of members of the Institute of Management Accountants, targeting professionals at the director/manager level and above as well as those in management positions with relevant job descriptions. (“Educator,” “public accountant,” and “retired,” for example, were excluded.) The pair included a definition of the BSC to screen out potential respondents who were not, in fact, using the BSC system. FIGURE 1 At the end of the three-year period, the stock market performance of BSC users beat that of nonusers by an average of 28 percentage points. © 2010 Elsevier Ltd. Adapted with and used by permission of the publisher via Rightslink copyright clearance.
1C . D. Ittner, D. F. Larcker, and T. Randall, “Performance Implications of Strategic Performance Measurement in Financial Services Firms,” Accounting, Organizations and Society 28 (2003): 715–741. 2 T oday, the same argument might apply to DeBusk and Crabtree’s study. At the time the pair conducted their survey, the Strategy-Focused Organization principles—a key framework for BSC implementation—were not yet put forth, nor was the Office of Strategy Management function yet identified by Kaplan and Norton. Since 2004, more organizations have incorporated these elements as an intrinsic part of their BSC programs. Both elements have contributed significantly to more consistent results and to the evolving and widespread use of the BSC system. m a y – j u n e
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FIGURE 2: CHANGE IN VALUE OF BSC ADOPTERS VERSUS NONADOPTERS The returns represent the increase (or decrease) in firm share price plus dividends, scaled by firm share price as of January 1 of the adoption year. (Amounts were scaled, or prorated, to account for the variations in share prices across firms; a $5 return for a firm with a $20 share price is different from a $5 return for a firm whose share price is $15.) BSC Non-BSC BHR = Buy-and-Hold Returns
Cumulative BHRs of BSC firms vs. non-BSC firms Market-value-of-equity sample
Because of the difficulty of establishing an exact “start” date, they allowed respondents to identify the year and counted that year as part of the threeyear period. Of the more than 1,000 public and privately held organizations surveyed, 23% were identified as “regular users” of the BSC in some or most of their operating divisions. Among the regular users, 88% reported improvements in operating performance, and two-thirds of that 88% also indicated that their profits rose, after adopting the BSC.3
0.6
% return
0.4 0.2 0 –0.2
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Post-adoption month
Cumulative BHRs of BSC firms vs. non-BSC firms Book-to-market sample 0.5
% return
0.4 0.3 0.2 0.1 0 –0.1
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Post-adoption month
Cumulative BHRs of BSC firms vs. non-BSC firms Net assets sample 0.5
% return
0.4 0.3 0.2 0.1 0 –0.1
Next, DeBusk and Crabtree sought to establish quantitative evidence of a performance difference.4 Here, they narrowed the respondent pool from the initial 1,000-plus to a final study pool of publicly traded companies, of which 107 were non-BSC users and 57 were BSC users. The industry breakdown was roughly as follows: 69% manufacturing companies, 15% financial companies, 9% utilities, 4% services companies, and 4% retailers. A significant percentage of the publicly traded BSC adopters (43%) introduced the BSC in 2000 and 2001.
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Post-adoption month
© 2010 Elsevier Ltd. Used by permission of the publisher via Rightslink copyright clearance.
To control for differences among respondents in industry, organization size, risk, and growth potential, the researchers used a matched-pair design. The matched-pair approach involves pairing organizations similar in the above characteristics, where one adopted the BSC and the other did not—effectively yielding a test case and a control. This approach was applied in previous studies of economic value added (EVA), activity-based costing, Total Quality Management, and other management methodologies to determine whether users outperformed nonusers. To match by industry, the authors used standard industrial classification (SIC) codes. The researchers used three matching criteria to assess the performance differential: market value of equity (to match size, market percep-
tions, productive capacity, and financing ability); book-to-market ratio (an indicator of risk and growth potential); and net total assets (which establishes productive capacity and size, while excluding market perceptions).
Key Findings By the end of the three-year period following adoption, BSC users outperformed nonusers in stock market performance in all three match criteria, on average, by 28 percentage points. Performance was measured in terms of buy-and-hold returns: the increase in value from the accumulation of dividends and share price increases. Returns were accumulated by summing both of these figures for each month over the three-year period. In the market-valueof-equity grouping, users beat nonusers by 27.12 percentage points; in the bookto-market sample, by 30.17 percentage points; and in the net-total-assets grouping, by 27.58 percentage points. (See Figure 1, previous page.) DeBusk and Crabtree’s findings also demonstrate that firms earn greater excess returns after adopting the BSC than before. Excess returns are defined as the difference, either positive or negative, between the stock market performance of a BSC-adopting firm and a reference portfolio’s performance. Looking at the changes another way actually underscores the significant execution premium that BSC adopters earned. In the market-value-of-equity grouping, the control firms had a return of 23.6%, versus the BSC adopters’ return of 50.72% over the three-year study period. That is, BSC adopters outperformed the control firms by 27.12 percentage points with rates of return twice as high as the nonusers. In the book-to-market grouping, the control firms had a return of 8.97%, whereas the BSC adopters returned 39.14% over the study period. So, BSC adopters surpassed by 30.17 percentage points
3 T hese survey results, of public as well as privately held companies, were published in the first of two articles by DeBusk and Crabtree on their study, “Does the Balanced Scorecard Improve Performance?” Management Accounting Quarterly, 8, no. 1 (Fall 2006). 4 T his more in-depth study of the results of BSC adoption among publicly held companies was written up in DeBusk and Crabtree’s second article, “The Effects of Adopting the Balanced Scorecard on Shareholder Returns,” Advances in Accounting, incorporating Advances in International Accounting, 24 (2008) 8–15. 12
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the performance of the control firms— earning returns of roughly 300% more. And in the net-assets grouping, the control firms generated a 13.47% versus 41.05% return for the BSC adopters. The latter outperformed by roughly 200%. Figure 2 shows cumulative buy-andhold returns of the BSC adopters versus non-BSC adopters, again by grouping. In each grouping, the early returns are similar but widen significantly at about the two-year post-adoption mark. That’s entirely as you’d expect. BSC firms and their matched nonusing counterparts begin the 36-month period at the zero return point on January 1 in the year that the BSC-using firm adopted the tool. For each firm, the buy-and-hold return is accumulated over three years. At some point in the first 12 months, BSC firms adopt the scorecard. After adoption, you would expect it to take a certain amount of time before the changes brought about by implementation would work their way through the cause-and-effect linkages to bottom-line financial results. Success in financial results will be reflected in stock market performance. Figure 2 dramatically illustrates that, after a while, BSC firms begin to significantly outperform their non-BSC counterparts. To further validate the results of their primary analysis, DeBusk and Crabtree performed additional robustness data checks. One such check involved studying the returns of matched pairs in the two years before the BSC was adopted to see whether BSC users had enjoyed higher market returns before the year of adoption. The result? None of the sampled pairs showed significantly different returns between BSC users and nonusers prior to users’ adoption— providing additional evidence that the execution premium earned by the adopters was associated with the BSC. DeBusk and Crabtree’s study is the first to demonstrate that BSC users, regardless of industry, earn better stock market returns than comparable non-users—between 27 and 30 percent-
age points better over the three-year post-adoption period. As powerful as their evidence is, it’s tempting to wonder what this difference might be today. How much, if any, impact would the financial crisis have had on users’ versus nonusers’ relative performance? And given the much more evolved and rigorous BSC framework that adopters in recent years have embraced, how different might their shareholder returns be relative to DeBusk and Crabtree’s survey pool?
About the Study Authors Gerald K. DeBusk, PhD, CPA, CMA, is an assistant professor of accounting at the University of Tennessee– Chattanooga. Before becoming an academic 10 years ago, he spent 17 years in public accounting and industry, where he held such positions as cost-accounting manager, plant controller, and corporate controller. He has published numerous articles on performance measurement and Lean Six Sigma. He can be reached at
[email protected]. Aaron D. Crabtree is an assistant professor of accountancy at the University of Nebraska–Lincoln, College of Business Administration, where he teaches financial accounting and taxation. His research interests include the impact of taxes and auditor information on the capital markets. He can be reached at aaron_
[email protected].
To learn more To obtain a copy of DeBusk and Crabtree’s article, “The Effects of Adopting the Balanced Scorecard on Shareholder Returns,” published in Advances in Accounting, incorporating Advances in International Accounting, Vol. 24 (2008), 8–15, go to Elsevier’s website: www.sciencedirect.com.
Continue the dialogue Palladium Execution Premium Community (XPC) members can continue the discussion at www.thepalladiumgroup.com/DeBuskCrabtreeBSR.
Not a member? Join at www.thepalladiumgroup.com Reprint #B1005C
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Q&A with the Study’s Authors BSR: Why did you settle on a threeyear horizon for the study? Crabtree: Three years is a reasonable amount of time for any benefits to accrue in a company’s financial statements—and for the market to start rewarding the firm for this value. As one of our robustness checks, we did a sampling of four-year returns among the matched pairs. It turns out that the four-year results were basically the same. DeBusk: We took into account what Kaplan and Norton had said: that it takes a while for the effects of the BSC to show up in a company’s financial results. Also, it’s hard to pin down the date of adoption: when a company says “2003,” do they mean the first month of the year? The last month? We had to assume January first—another reason to choose a three-year period. Crabtree: With a long-horizon study, and one in which there are so many variables affecting performance, the longer you extend the horizon, the more you risk adding noise. BSR: What was the most critical factor to match in the matchedpair study? Crabtree: Typically, matching on size is the biggest issue. Size explains so much in this type of research. For example, it helps control for risk. Growth prospects are another factor affecting returns; hence, our book-tomarket match. BSR: What is the biggest data challenge in such a study? DeBusk: We used a dichotomous variable in our study, as is common in this type of research. “Dichotomous” means that either the organization was said to have adopted the BSC or not. It is a simple yes or no. But it was common in our study for a BSC adopter not to be using the BSC in many of its operating divisions. Therefore, there’s a large bias against finding a correlation between BSC use and performance in this type of study.
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Building the Theme Team: A Step-by-Step Guide by Mario Bognanno, Vice President, Palladium Group, Inc. As BSR readers know, strategic theme teams are a vital element of strategy execution and a central mechanism for linking strategy and operations. So, what makes for a successful theme team? Drawing on the research of Kaplan and Norton and their team, as well as the experiences of members of Palladium’s 2009 Action Working Group on Linking Strategy to Operations, Mario Bognanno assembled these guidelines to help organizations build effective theme teams.
Financial
Customer Value Proposition
Innovation and Growth
Customer Management
Operational Efficiency
Social/ Regulatory
Learning & Growth Competencies
Climate
Technology
Strategic Theme Create Customer Partnerships
As subsets of the strategy, strategic themes permeate all or most of an organization’s Balanced Scorecard perspectives—that is, all the performance dimensions of strategy execution. They “support the boundaryless approach necessary for successful strategy execution.” 1 (See Figure 1.) Similarly, a strategic theme team must be boundaryless in its composition. A theme team is a cross-functional, cross-organizational team charged with overseeing the execution of a strategic theme of the organization’s BSC. Theme teams monitor, analyze, and report on performance against strategic objectives and on the progress of initiatives, providing information and insights that the executive team uses to manage— and advance—organizational strategy. The role of the theme team evolves as the strategy execution process unfolds through the design, installation, and operations phases. This article addresses the role of the theme team in operations—the new “steady state.”2
Step 1: Define the Theme Team As a first step in building effective theme teams, your organization should craft its own definition of a theme team. No matter who drafts it—whether the head of your Office of Strategy Management (OSM) or the executive team—the
executive team should ultimately approve a workable definition. Every theme team, however, must have cross-functional membership and executive leadership. Cross-functional representation (i.e., across all BSC perspectives) is essential for managing the cause-and-effect linkages of the theme. Executive leadership demonstrates the importance the executive team places on the theme team as a steward of strategy management. Furthermore, because theme teams lack explicit authority, executive leadership endows them with the clout they need to carry out their work.
Step 2: Define Membership Criteria and Roles The theme team leader. Every theme team is led by a member of the executive team, who is appointed by the CEO. The theme team leader acts as the eyes and ears of the executive team and is responsible for the team’s efforts in monitoring performance of all objectives, measures, and initiatives within the strategic theme. Generally, team leaders are functionally connected to their theme; for example, the VP of operations would be the logical choice to head an Operational Excellence theme team, and the SVP of marketing would likely chair a Customer Intimacy theme team. Some organizations
Broaden revenue mix
Increase customer confidence in our financial advice
Financial [perspective]
Customer
Cross-sell the product line Internal Process Understand customer needs
Strategic job financial planner Strategic systems portfolio planning
Learning & Growth
Create organization readiness
FIGURE 1: STRATEGIC THEMES SLICE VERTICALLY THROUGH THE BSC PERSPECTIVES This sample strategic theme, Create Customer Partnerships, issues from the need to get closer to the customer—the company’s customer value proposition. But it has ramifications for every strategy map perspective. The ultimate desired outcome, “Broaden revenue mix” (a financial objective) is carried out by objectives throughout the other scorecard perspectives. The cross-functional theme team is thus designed to address the crossorganizational nature of the strategic theme and its execution.
1 R. S. Kaplan and C. Jackson, “Managing by Strategic Themes,” BSR September–October 2007 (Reprint #B0709A). 2 D. Norton and R. Russell, “Linking Strategy to Operations: Part II—Theme Teams and IT Infrastructure,” BSR September–October 2009 (Reprint #B0909A).
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Balanced Scorecard Report A joint publication of Palladium Group, Inc., and Harvard Business Publishing Editorial Advisers Robert S. Kaplan Professor, Harvard Business School David P. Norton Director and Founder, Palladium Group, Inc. Publishers Robert L. Howie Jr. Managing Director, Palladium Group, Inc. Joshua Macht Group Publisher Harvard Business Review Group Executive Editor Randall H. Russell VP/Director of Research, Palladium Group, Inc. Editor Janice Koch Palladium Group, Inc. Copyright © 2010 by Harvard Business School Publishing Corporation. Quotation is not permitted. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. Harvard Business Publishing is a not-forprofit, wholly owned subsidiary of Harvard University. The mission of Harvard Business Publishing is to improve the practice of management and its impact on a changing world. We collaborate to create products and services in the media that best serve our customers—individuals and organizations that believe in the power of ideas. Palladium Group, Inc., is the global leader in helping organizations execute their strategies. Our expertise in strategy management, performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, technology, conferences, communities, and certification. The Palladium Balanced Scorecard Hall of Fame for Executing Strategy® recognizes organizations that have achieved an outstanding execution premium. For more information, visit www.thepalladiumgroup.com or call 781.259.3737.
appoint coleaders, a practice that promotes unity among business- and support-unit executives. Some companies appoint less-than-obvious leaders as a way of making executive team members experience the challenges their peers face and of dampening the potentially counterproductive competitiveness among executives from different functional areas. For example, the CEO of a manufacturing company assigned the VP of operations to lead the Customer Intimacy theme. Because theme team leaders are stewards and not owners—and lack the explicit authority to make unilateral decisions—they must be skilled influencers. Their stewardship role must be clearly articulated and agreed on. Getting it right may require personal coaching. One division president was coached to change the way he led discussions—from making declarations to asking questions. The result: more candid discussion among his theme team members. Theme team members. If theme team leaders are the executive team’s eyes and ears, theme team members are its arms and legs. Each month (or quarter), team members monitor and analyze performance data related to their assigned objectives, measures, targets, and initiatives, reporting findings to the team leader. The average theme team has four regular members. They are usually selected by the theme team leader and often are subject matter experts (SMEs) from various functional areas. Members are assigned two to four strategic objectives (and their underlying measures) according to their functional expertise; for example, a financial analyst is typically assigned financial measures. In addition to being skilled at information gathering, analysis, and communication, members should be team oriented and persuasive because they must rely on interpersonal skills, rather than authority, to get the information they need.
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The time commitment—the equivalent of one to two days’ work per reporting period—can be a concern to prospective members and their supervisors. All parties—the executive team, the theme team leader, team members, and supervisors—must be aware of and agree to this extracurricular time commitment from the get-go.
Step 3: Define the Core Activities In addition to monitoring objectives and measures, the team’s core activities include identifying needed strategic initiatives, recommending their funding, and monitoring the key processes that support theme objectives. This work calls for gathering data (internal and external) for review and discussion; soliciting the input of the OSM and functional managers; recommending actions and decisions; and ensuring that action is taken within the team and throughout the organization. Proposing and monitoring strategic initiatives. Although initiative recommendations can come from many sources, the theme team may also propose initiatives to the theme team leader (and their funding, or StratEx) to achieve an objective. The theme team generally doesn’t project-manage initiatives; instead, they are managed by functions, such as IT, HR, or R&D. The team does, however, prepare the performance reports that the team leader presents at the organization’s strategy review meetings. Once an initiative is completed, the team may also provide post-project evaluations confirming the return on investment that was projected in the authorizing business case. Monitoring key processes. The theme team may also monitor the performance of key processes that support theme objectives: for example, the manufacturing process, which would be instrumental to a product quality objective, or the sales process, critical for a customer relationship objective. The theme team must be familiar with all processes that support
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The OSM and Theme Teams As a coordinator, the OSM secures the resources needed by theme teams to perform their duties. When necessary, the OSM can engage experts (elsewhere in the company or externally) to help a theme team with complex analysis, such as assessing enterprise risk triggered by a change in macroeconomic conditions affecting an objective. In large organizations, the OSM may have a representative on each theme team. In other organizations, the OSM might simply support the theme teams. Because of the potential for overlap between the two entities (for example, in monitoring initiatives or key processes), it’s important to coordinate their work. Firms should outline each group’s activities and create a RACI (responsible, accountable, consulted, informed) matrix to define
Supporting the strategy review meeting. The strategy review meeting is a critical element of the strategy management process—in effect, the place where strategy is managed. Monthly (or quarterly) and annually, the executive leadership team convenes with representatives of the OSM to review and discuss strategy and strategy performance and develop action plans. Theme team leaders present their team’s findings and recommendations. Organizations use various approaches to review the strategy and strategic themes. Some organizations choose one theme to address in depth at each meeting (doing a summary analysis of the others) and rotate themes over the course of review meetings. Others focus on exception reporting, scrutinizing areas of underperformance across themes. Either way, by offering insights on what happened and why and by suggesting alternative actions and their potential implications, the theme team provides a critical foundation for executive problem solving and decision making regarding strategy.
tasks and decision-making authority. Working together, the OSM and
Step 4: Provide the Necessary Tools
the theme teams are essential for
To perform its monitoring, analytic, and reporting duties, the theme team needs access to—and the ability to recommend adoption of—certain basic tools.
strategy implementation. the activities connected to achieving theme objectives. If improvement is needed in a key process, the theme team should recommend such action and perhaps even specify process improvement tools used within the organization to help resolve the problem. Although process improvement efforts are generally led by the appropriate functional area or by an internal process improvement team or expert (e.g., the Total Quality Management team, a Six Sigma Black Belt), the theme team must monitor and report on the efforts’ progress.
Dashboards and other reporting tools. According to a recent Palladium Group study, “The most successful organizations link their IT system to their system for managing strategic performance.” 3 Automated reporting tools, including dashboards, are particularly helpful in providing the theme team relevant and timely information. Although the theme team is not responsible for developing IT systems or reporting applications—that responsibility falls to functional and operational areas, with OSM support—it is a major user of such tools.
Process improvement tools. The theme team can identify the tools available for any process improvement it recommends. Such tools may include process reengineering, lean manufacturing, customer value management, customer life cycle management, activity-based costing, experience cocreation, and open innovation. The theme team may not have the expertise to perform the activity but is asked to monitor process improvements related to the team’s assigned objectives. Decision analytic tools. Such tools allow users to plug in data to test assumptions about cause-and-effect relationships and performance drivers that enable root cause analysis. Specific methodologies include regression analysis, value driver analysis, and other types of what-if performance modeling. Analytic tools can be used regularly (for instance, to prepare analysis for the annual strategy review) or on an ad hoc basis (to assess an emergent threat to strategic progress). Theme team members may use these tools or engage internal or external SMEs to do the analysis. As David Norton says, “Strategy is a team sport.” By following these steps, your organization can build effective theme teams to sharpen its strategy execution. Mario Bognanno, a consultant and professional corporate trainer, has 20 years’ experience advising corporations and government agencies on strategy, measurement, implementation, and strategic change initiatives.
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3 R. Russell, “Linking Strategy and Operations to Achieve Strategy Execution Excellence,” Palladium Group, Inc., 2009. This white paper was sponsored by IBM.
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