1 Management Best Practices 2003 Building a Strategy Focus – Paul R. Niven September 30, 2003.

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Management Best Practices 2003

Building a Strategy Focus – Paul R. Niven

September 30, 2003

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© 2003 Primerus Consulting, Inc. All Rights Reserved

Agenda

• Introduction to Primerus Consulting

• Performance Measurement and Balanced Scorecard Background

• Balanced Scorecard Fundamentals

• Public Sector Balanced Scorecard Model

• The Four Perspectives

• Strategy Maps & Terminology

• Who is Working with Performance Management?

• Performance Management Essentials

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Introduction to Primerus Consulting

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Paul Niven and the Balanced Scorecard

• BSC Practitioner first, then consultant, and writer

• Led a BSC project with large Canadian firm in mid-90s

• Have consulted with KPMG (Chicago) and CSC (San Diego)

• Formed Primerus Consulting in 2001

• Have written 2 books (contributed to a third), and many articles on the subject of Balanced Scorecard

• Speak at conferences and seminars around the world

• Have worked with clients in many different sectors:

• Fortune 1000

• Government (city and county)

• Nonprofit

Translated into 12 languages

Released June, 2003

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Performance Measurement and Balanced Scorecard Background

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The Changing Landscape of Performance Management

• 80% of respondents reported making changes in their PM system during the last 3 years. For 33% the change was described as a “major overhaul” More than 50% of respondents indicated their company is currently changing its PM system. (From Strategic Finance Magazine)

• More than 50% of the Fortune 1000 have turned to the Balanced Scorecard. (Bain & Company study)

• In the public sector, close to 60% of respondents agree or strongly agree that using performance measures has increased efficiency. (GASB study)

The question is why???

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Factors Driving the Prominence of the BSC

Prominence of the Balanced

Scorecard

Business RisksBusiness Risks

Difficulty Executing Strategy

Difficulty Executing Strategy

Rise of Intangible

Assets

Rise of Intangible

Assets

Over-reliance on Financial Measures




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© 2003 Primerus Consulting, Inc. All Rights Reserved© 2002 Primerus Consulting, Inc. All Rights Reserved

“They (knowledge workers) now account for a full third of the American workforce, outnumbering factory workers two to one. In another twenty years they are likely to make up two-fifths of the workforces of all rich countries.”

-Peter F. Drucker, The Economist, November 2001

38%

62%

75%

1982 1992 Today

The increasing value of intangible assets in organizations

Our Economy is Changing

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• Intangible assets may not have a direct impact on financial results

• The value of intangibles is largely potential – it must be transformed

• Intangible assets require interdependence for success

Assessment based on assumptions

Tangible versus Intangible Assets

Tangible Assets Intangible Assets

Rigorously quantified Difficult to quantify

Part of the Balance Sheet Not tracked through Accounting

Investment produces known returns

Can be easily duplicated Cannot be bought or imitated

Depreciates with use Appreciates with purposeful use

Best managed with “scarcity” mentality Best managed with “abundance” mentality

Best leveraged through control Best leveraged through alignment

Sources: For top 3 bullets: based on research presented by David P. Norton at the BSC N.A. Summit, New Orleans, LA., Sept. 2000. Source for bottom chart: Brian Becker, Mark Huselid, and Dave Ulrich, “The HR Scorecard”

Intangible Assets are Different

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• Not consistent with today’s business realities

• Driving by rearview mirror

• Tend to reinforce functional silos

• May sacrifice long-term thinking

• Not relevant to many levels of the organization

The Alto

Financial Measures Don’t Tell the Whole Story

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The Risks are Greater than Ever

• Business

• Financial

• Reputation

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Only 10% of organizations execute their

strategy

Barriers to Strategy Execution

Only 5% of the workforce

understands the strategy

Vision Barrier

Only 25% of managers have

incentives linked to strategy

People Barrier

85% of executive teams spend less than one hour per month discussing

strategy

Management Barrier

60% of organizations don’t

link budgets to strategy

Resource Barrier

Chart adapted from material developed by Robert S. Kaplan and David P. Norton

The Strategy Story

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• Disclosure and reporting issues have never been hotter!

• In the public sector GASB is pushing for greater reporting of results

• Citizens are demanding accountability


Performance Management is Critical in the Public Sector

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Clearly, A Change is Needed

Intangible Assets

Risks Strategy Financial Measures

Accountability

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Balanced Scorecard Fundamentals

Customer

Objectives"To achieve our vision, how should we appear to our customers?"

Measures Targets Initiatives

Internal Business ProcessObjectives"To satisfy our

shareholders and customers, what business processes must we excel at?"


Financial

Objectives"To succeed financially, how should we appear to our shareholders?"


Learning and GrowthObjectives"To achieve our

vision, how will we sustain our ability to change and improve?"


Visionand

Strategy

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Public Balanced Scorecard Model

Who do we define as our customer? How do we create

value for our customer?

How do we enable ourselves to grow and change, meeting

ongoing demands?

Strategy

Customer

Employee Learning & Growth

Mission

To satisfy customers while meeting budgetary constraints, at what

business processes must we excel?

Internal Process

How do we add value for customers while controlling

costs?

Financial

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Customer Perspective

Customer






Financial






Visionand

Strategy

• Should answer two questions:

• Who are our customers?

• What is our value proposition in serving them?

• Operational Excellence

• Product Leadership

• Customer Intimacy

• What do Customers demand?

A City’s measures:• Reduce Crime: Reduce the homicide rate by 10% per 100,000 population during FY 2002-2003• Enhance Service Delivery: Achieve rating of “excellent” or “good” in service delivery by at least 75% of citizens in biennial survey

Customer

Financial

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Customer Value Propositions

Operational ExcellenceOperational ExcellenceInnovation/Product LeadershipInnovation/Product Leadership Customer IntimacyCustomer Intimacy

“Operationally excellent companies deliver a combination of quality, price, and ease of purchase that no one else can match”

CostcoMcDonaldsDell ComputerSouthwest Airlines

“A Product leadership company pushes its products into the realm of the unknown, the untried, or the highly desirable”

SonyJ&JIntel

“A Customer Intimate company builds bonds with customers; it knows the people it sells to and the products and services they need”

NordstromIBM (1960-70)Mobil

Best SolutionMost Innovative Product Best Total Cost

According to Treacy & Wiersema (1), organizations can select one of three customer-focused strategies,

(1) Treacy & Wiersema, The Discipline of Market Leaders, Addison Wesley, 1995

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Chrysler’s Customer Value Proposition

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Internal Process Perspective

Customer






Financial






Visionand

Strategy

• Key processes we must excel at to drive value for customers

• Also focus on customer value proposition

• Normally contains the largest number of measures

A City’s measures:• Promote community-based problem solving: Implement a cross-collaboration plan among key businesses that allows for more effective sharing of resources and shared authority in areas such as code enforcement• Increase infrastructure capacity: Dollar amount of capital plan improvements constructed

Customer

Financial

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Internal Process Perspective

InnovationProcess

• Marketing• R&D• JV/Partnerships

Customer Management

Process

• Sales• Service• Relationships

OperationsProcess

• Inbound Logistics• Manufacturing• Outbound Logistics• Supplier Relations

Social & Environmental

• Health• Safety• Environment• Social

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Financial Perspective

Customer






Financial






Visionand

Strategy

• No BSC is complete without financial measures

• Represent enablers or constraints

• Must balance effectiveness with efficiency

• Normally lag measures of performance

A City’s measures:• Maintain AAA Credit rating: Maintain AAA credit rating• Grow the tax base: Value of issued building permits

Customer

Financial

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Employee Learning & Growth Perspective

Customer






Financial






Visionand

Strategy

• Often overlooked

• Represent the “enablers” of the other three perspectives

• “Soft” measures can drive “hard” results

A City’s measures:• Enhance information management: Implement Information Technology strategic plan to facilitate improvements in service delivery, quality, timeliness, employee productivity and overall organizational effectiveness

Customer

Financial

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Employee Learning & Growth Perspective

Human Capital – Understand what competencies we need,

what we have, and how to close the gap

Information Capital – Understand the information

applications and infrastructure we need to support the

strategy

Climate for Action:

Culture – Build an organization that internalizes the shared vision, strategy, and values required to execute

Goal Alignment – Encourage personal contribution through goal and incentive alignment

Knowledge Sharing/Teamwork – Share knowledge and experience through teamwork

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Strategy Maps & Terminology

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Cause & Effect is Key to the BSC


Knowledge, Skills, Systems, and ToolsKnowledge, Skills, Systems, and Tools

Financial Financial ResultsResults

To Build the Strategic Capabilities..

Needed to Deliver UniqueSets of Benefits to Customers...

To Drive Financial Success...

And Realize the Vision

Equip our People...

Internal Internal CapabilitiesCapabilities

Customer Benefits

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Halifax

Truro

Sydney

Antigonish

Maps Get Us From “A” to “B”

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Formation of a Strategy

Landmark 1

Successfully Executed Strategy

Landmark 2

Strategy is Also a New Destination

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A Good Balanced Scorecard Tells the Story of Your Strategy on a Strategy Map

The Revenue Growth Strategy“Improve stability by broadening the sources of revenue from current customers”

The Productivity Strategy“Improve operating efficiency by shifting customers to more cost-effective channels of distribution”

Improve Returns

Improve Operating Efficiency

Broaden Revenue

Mix

Increase Customer

Confidence in Our Financial

Advice

IncreaseCustomer

Satisfaction Through Superior

Execution

IncreaseEmployee

Productivity

Access to Strategic

Information

Develop Strategic

Skills

Align Personal

Goals

FinancialPerspective

CustomerPerspective

InternalPerspective

Learning Perspective

Cross-Sell the Product

Line

Shift to Appropriate

Channel

Provide Rapid

Response

Develop New

Products

Minimize Problems

Understand Customer Segments

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County of San Diego, CA., Animal Control Strategy Map

Financial

Customers

InternalProcesses

Learning andGrowth

Sustain citycontract

resources

Sustain citycontract

resources

EnhancerevenuesEnhancerevenues

Promote employee

development

Promote employee

development

Ac

hie

ve

Mis

sio

n

Increase employee

satisfaction

Increase employee

satisfaction

Increase placement of sheltered animalsIncrease placement of sheltered animals

Reduceeuthanasia

Reduceeuthanasia

Enhance customer satisfaction

Enhance customer satisfaction

Reducewait timesReduce

wait times

EnhanceAnimal handling

& behavior evaluation

EnhanceAnimal handling

& behavior evaluation

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Government I.S. Strategy Map

Customer Focus Know Our Business Keep Pace With Technology Work Smarter Always On

Customer

Internal Processes

Employee Learning and Growth

Financial

Increase customer satisfaction

Proactively provide effective and innovative

solutions

Keep systems up and

running

Deliver efficiently through

consensus

Improve and simplify the

customer experience

Participate knowledgably and contribute

to meeting needs

Explore alternatives and anticipate use of new technology

Build it right, keep it healthy

Understand and anticipate

customer business needs

Get more bang for our buck!

Share information, listen more, and

respond

Proof of concept

Get off the 3rd floor

Foster an environment that encourages,

recognizes, and rewards contribution

Create accountability and

ownershipBe consistent

Hire, develop and retain superior performers

Ensure teamwork that fosters mutual

respect, support, and learning

Encourage customers to keep

pace with technology

Continuously review and

simplify internal practices and procedures

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Source: Balanced Scorecard Report

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A Final Thought on Strategy Maps

The single most important indicator of BSC success is the development of a Strategy Map

– Finding from BSC User Group Survey 2002

The Revenue Growth Strategy

“Improve stability by broadening the sources of revenue from current customers”

The Productivity Strategy

“Improve operating efficiency by shifting customers to more cost-effective channels of distribution”

Improve Returns

Improve Operating Efficiency

Broaden Revenue

Mix

Increase Customer

Confidence in Our Financial

Advice

IncreaseCustomer

Satisfaction Through Superior

Execution

IncreaseEmployee

Productivity

Access to Strategic

Information

Develop Strategic

Skills

Align Personal

Goals

FinancialPerspective

CustomerPerspective

InternalPerspective

Learning Perspective

Cross-Sell the Product

Line

Shift to Appropriate

Channel

Provide Rapid

Response

Develop New

Products

Minimize Problems

Understand Customer Segments

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The Importance of Terminology

“The first task of any theory is to clarify terms and concepts that are confused…Only after agreement has

been reached regarding terms and concepts can we hope to consider the issues easily and clearly, and expect

others to share the same viewpoint…”

-Carl von Clausewitz, “On War,” 1832

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BSC Terminology & Theme Example

Objectives

• Maintain fast ground turnaround

Statement of what strategy must achieve

and what’s critical to its

success

Target

• 30 Minutes• 90%

The level of performance

or rate of improvement

needed

• Cycle time optimization

Key action programs

required to achieve

objectives

InitiativeMeasurement

• On Ground Time• On-Time

Departure

How success in achieving the strategy

will be measured and

tracked

Strategy Map

ProfitabilityFinancial

Learning

Increase Revenue

Align ground crew

Provide Lowest prices

Lower Costs

Customer

Internal

Maintain fast ground turnaround

Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives

Offer on time flight

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Some Terms You Should Consider

• Performance Measurement

• Performance Management

• Mission

• Vision

• Values

• Strategy

• Strategic Initiatives

• Outcomes

• Objectives

• Measures

• Balanced Scorecard

• Budgets

• Public Input

• Business Plan

• Lag and Lead

• Input and Output

How do these terms work together to comprise your Performance Management Framework?

Do you have a Glossary?

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Who is Doing Performance Measurement?

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Everybody’s Doing It!

Can you guess the country represented by this flag???

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Who is Doing it Well?

• Tying resource allocation to strategic plan and using performance measures resulted in better resource allocation, shift of resources towards strategic objectives and more efficient services

• Accountability in government improved, and the government does a good job of communicating with the public

• Quote: “Managing for results” is”

• Focused on accountability and results

• Major culture change

• Major change and alignment of management systems

• Long term commitment to learning

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The City of Charlotte

• 25th largest city in the U.S.

• 2nd largest financial center in the nation

• Population of 539,000

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The City of Charlotte

• Measuring performance since the 1970s

• Set goals at an annual retreat of the city council

• In 1990 Council agreed to identify strategic themes (focus areas)

• Those themes are still in use today

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Strategic Themes (Focus Areas)

Community SafetyProvide public safety services to ensure that citizens feel safe; support programs which work to solve the root cause of crime and drug problems, such as housing, jobs, etc.; and elicit the support of other organizations to reduce crime and the influence of drugs

City Within a CityProvide leadership and resources to make individuals and families self -reliant; and strengthen and revitalize deteriorated neighborhoods

TransportationAddress the City’s road and intersection improvement needs, develop a local and regionalmass transit system, and promote alternative methods of transportation such as walking and biking

Restructuring Government Manage for results by providing the best service at the lowest cost and meeting customerExpectations

Economic DevelopmentSupport formation, retention, and expansion of business and initiatives that provide qualityJobs

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Charlotte’s Balanced Scorecard

Smart Growth

City Council Focus Areas

Community Safety

City Within a CityRestructuring Government

TransportationEconomic

Development

Corporate Scorecard

Customer Customer

FinancialFinancial

Internal Internal

L & GL & G

Reduce Crime

Strengthen Neighborhoods

Increase perception of safety

Enhance Service Delivery

Maintain competitive

tax rate

Provide safe, convenient

transportation

Promote economic

opportunity

Maximize benefit/cost

Secure funding/service

partners

Grow the tax base

Maintain AAA rating

Promote community

based problem solving

Enhance customer service

Improve productivity

Increase infrastructure

capacity

Achieve positive

employee climate

Enhance information

management

Close skills gap

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Benefits of Using the BSC in Charlotte

• Focuses City Council’s agenda on important or strategic issues

• Measurement gives clarity to vague concepts such as strategic goals

• Develops consensus and teamwork

• Enhances employees’ understanding of organizational goals

• Communicates strategic results to citizens

“The Balanced Scorecard has helped me to communicate a strategic vision for the city to my constituents, the citizens, and to prospective businesses who are considering locating here. It helps the City Manager focus on things that will have the biggest impact on the city.”

-Charlotte Mayor Pat McCrory

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Performance Management Gets Results!

Measure of Success

Measurement-Managed Organizations

Non Measurement-Managed Organizations

Industry leader over the past 3 years

Three year return on investment (ROI)

Success in last major change effort

74% 44%

80% 45%

97% 55%

Measure of Success

Measurement-Managed Organizations

Non Measurement-Managed Organizations

Agreement on strategy

Communication of strategy

Cooperation and teamwork

90% 47%

60% 8%

85% 38%

Pe

rfo

rma

nc

eC

ult

ure

Sources: John H. Ingle & Wm. Schiemann, “Is Measurement Worth It” Management Review, March 1996

Morgan & Schiemann, “Measuring People & Performance: Closing the Gap” Quality Progress, January 1999

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Performance Management “Essentials”

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Essential One – Rationale for your System

Put the big rocks in first!

The beginning is the most important part of the work

-Plato, The Republic

• Why are you developing a PM system?

• PM alone will not transform the organization

• Clear objectives are critical for communication, education, and guiding PM evolution

48


Rationale for Your PM System

Business crisis

Setting new targets

New leadership

Aligning improvement initiatives

Clarifying current strategy

Communication and education

New organizational strategy

Aligning employee

goals

FINANCIAL CUSTOMER INTERNALPROCESSES

EMPLOYEELEARNING

ANDGROWTH

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“To make initiatives work it took passionate, all-consuming commitment from the top…Every leadership action must demonstrate total commitment to the initiative.”

-Jack Welch, Jack: Straight From the Gut

• No initiative will survive without active executive sponsorship

• Executives hold key knowledge for PM success

• Everyone watches what the boss watches

• You can influence executive sponsorship

Essential Two – Executive Sponsorship

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Essential Three - A Solid Implementation Team

“A team is a small number of people with complementary skills who are committed to a common purpose, performance goals, and approach for which they hold themselves mutually accountable.”

-Katzenbach & Smith, The Wisdom of Teams

• No single person or group holds all the information necessary to build the PM system

• Team members are crucial PM ambassadors

• Team members influence their own senior leaders

• Team participation is a wonderful learning opportunity

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“A recent review of our Balanced Scorecard Hall of Fame organizations demonstrates that virtually every successful CEO had a partner – a change agent who played the lead role in introducing the Balanced Scorecard program.”

- David P. Norton, The Balanced Scorecard Report (May-June, 2002)

Balanced

Scorecard

• Guides the PM process

• Provides thought leadership on PM

• Must be a skilled communicator

• Should be full-time role in the organization

Essential Four - A Strong PM Champion

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Essential Five - Training, Education, and Communication

Companies that don’t encourage

employee education of all kinds are dumb!

• The perceived simplicity of the BSC means

training is often overlooked – that is a mistake!

• BSC is simple, but not simplistic

• Training “levels the playing field” and encourages involvement

• Training leads to important questions

• Provide background information, your objectives, success stories, your plan, etc.

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Essential Six - Cause & Effect; “Strategy Maps”

• A good Balanced Scorecard should “tell the story of your strategy”

• Strategy Map specifies relationships and makes them testable

• Also acts as a powerful diagnostic tool for your BSC

• Great way to communicate your Scorecard

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Essential Seven - Reporting – The New Management Meeting

Review Strategic Issues

(20%)

Discuss Implications

(40%)

Review Performance

(40%))

• Provide input to strategic issuescurrently being worked

• Dialog about performance– explain anomalies– suggest solutions– identify issues

• Identify strategic issues fordiscussion at next group meeting

• Review performance data (available on-line)

Review Strategic

Issues(60%))

Discuss Implications

(30%)

Review Performance(10%)

The TRADITIONAL Executive

Management Meeting

Between the Executive Meeting

The NEW Executive Management Meeting

Source: Kaplan & Norton

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Areas of Discussion During the Meeting

Zero-in on Specific Areas of the Business: • The yellow and red traffic lights

Is the measure off track? If so, why?

What is causing this trend?

Analyze Performance Gaps

Discuss and Agree on How to Remedy Issues

• Cancel or refocus current initiatives?• Develop new initiatives?• Re-set the target?• Adopt a new strategy?

Is the target too high?

Is the strategy flawed?

98%

94% 91%

75%

90% 90% 90%

2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03

Actual Target

1Q02 value

1Q02target

Measure: Retention of high performance people 75% 90%

1

23

4

Objective: Passionate about the kind of business we are building

90%

Source: Kaplan & Norton

56


Essential Eight - Cascading

Mission, Values, Vision

FinancialObjectives Measures Targets Initiatives

CustomerObjectives Measures Targets Initiatives

Internal ProcessesObjectives Measures Targets Initiatives Objectives Measures Targets Initiatives







Hig

hes

t L

evel

S

core

card

B.U

. Lev

el, e

tc.

Emp. L. & G.

Emp. L. & G.

Emp. L. & G.

Strategy

Dep

artm

ent,

Gro

up

le

vel

Team and Personal Balanced Scorecards

• Allow everyone to demonstrate how they contribute to overall goals

• Create a consistent language through measurement

• Achieve a laser- like focus on strategy

57


The Sacred Obligations of Leadership

Soichiro Honda described the sacred obligations of leadership as 3 things:

•Vision: What will we be?

•Goals: What four or five key things must we do to get there?

•Alignment: Translate the work of each person into an alignment with

the goals.

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The Cascading Process

Mission, Values, Vision










Hig

hes

t L

evel

S

core

card

B.U

. Lev

el, e

tc.

Emp. L. & G.

Emp. L. & G.

Emp. L. & G.

Strategy

Dep

artm

ent,

Gro

up

le

vel

Team and Personal Balanced Scorecards

59


Cascading Example

City ScorecardPerspective Objective Measure Target

Customer Provide safe, convenient transportation

Increase in average ridership of public transportation

10%

Department of Transportation ScorecardPerspective Objective Measure


Percentage of fleet available

90%

Target

Perspective Objective Measure


Percentage of vehicle repairs completed within 24 hours

Operations Group ScorecardTarget

75%

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Essential Nine - Linking to Management Processes

Budgets

• BSC has evolved from a measurement to a “strategic management” system

• Initiatives on the BSC provide a natural link to the budgeting process

• Using the BSC, budgets are based on strategy (less than 40% of organizations currently make this link)

61


Essential Ten - Making the PM System Part of the Organization

• Don’t think of the PM system as a |

project to be “checked off”

• Give PM a home in the organization

• Assign accountability for PM (the BSC Champion??)

• Develop PM policies and procedures – but keep them simple!

• Update the system’s core elements regularly

Will your PM system stand the test of time?

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Thank you for your time. If you have any other questions, please feel free to contact me at: (760) 918-5990 or [email protected]

www.primerusconsulting.com

1 Management Best Practices 2003 Building a Strategy Focus – Paul R. Niven September 30, 2003.

Documents

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