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Linking the Balanced Scorecard to Corporate StrategyPhil Aisthorpe, Senior Project Manager, Halifax plc |
Good Morning Ladies & Gentlemen, this dropped through my letter box just today. It's a programme for a conference from Business Intelligence called 'Linking the Balanced Scorecard to Strategy'. So if there's any doubt that what I'm going to talk about wasn't topical, well this confirms it is and, not one to duck a challenge, I propose to do in the next 45 minutes what these guys want to do in 2 days.
The title I put on this first slide was 'Putting the Genie in the Bottle'. You notice it doesn't say 'Putting the Genie Back in the Bottle' because I don't believe the Genie has ever been in the bottle, but getting business strategy into a Balanced Scorecard remains something still of a black art. Now, in my spell in Corporate Planning, following the merger with Leeds Permanent, I was set the task of trying to link the concept of strategic architecture, as in Hamel and Prahalad from the best-seller "Competing for The Future", with the Balanced Scorecard in Kaplan and Norton and fuse them together. Now, how many of you have read "Competing for the Future"? Anyone? Not many, so I guess even fewer have actually attempted to ever do this, or have produced any strategic architecture. Well we've had this guy, Gary Hamel banging on now since 1990 about the need to express strategic intent, or strategic architecture, but he never really told us what that meant or indeed how to do it and there are very few firms who have attempted to do it although we have the famous case study of EDS, but there are very few other case studies.
So here we have Gary Hamel telling us that he has invented a way of formulating strategy and then we have Kaplan and Norton saying they have found a way of managing strategy, but not a way of formulating it. So it seems it should be possible to put these two things together and have Hamel and Prahalad to help to formulate strategy and then Kaplan and Norton to help us manage it. That is really a problem we intend to solve.
This next line takes me ages to get through, but I will do it anyway. The key question here is what do managers need to know in order to take the actions that leads to the right business result. So we are talking about knowledge, action, results, and if we look at these three domains, starting at the knowledge domain, how do we get this strategic knowledge together? Well, clearly we do things like industry analysis and scenario planning. We have results from the business which inform us. We have good old experience, "we've been doing it for years" and, as I say, Gary Hamel told us "we need to build strategic architecture" .This idea therefore is that we take all that knowledge to do with strategy into this strategic architecture, which we would then allow us to begin to take action based on that strategic architecture: at a strategic level we can have a change management programme, that sort of thing; at an operational level we can run our processes, and then we can measure results in a balanced scorecard.
One of the key things you have to do though is ask the question: when is it appropriate to build that Balanced Scorecard? Do you wait until after you've taken the action over there, (points to slide) with the risk that it will not work. High school physics says, in a simple experiment you have to put all your thermometers and probes in place first before you light the blue touch paper. So the key thing in this is to design the Balanced Scorecard directly from strategic architecture, and what I'm going to demonstrate later in the presentation is a software tool that I developed which enables you to do just that.
So, before I do that, I just want to quickly look at the Balanced Scorecard and strategic architecture. This is the way that Kaplan & Norton present a Balanced Scorecard. They have their four quadrants, innovation learning, internal, customer and financial quadrants and they talk about the external perspective (measures that relate to the outside commercial world) and they talk about the internal perspective (what goes on under the covers inside the firm). The whole purpose of the Balanced Scorecard - and I've heard David Norton say this so I know it's true - the whole purpose is to create this matrix which is what we are going to talk about. And, I wonder why they drew it as a two by two matrix because there was basically no relationship between that quadrant and that quadrant, and no relationship between that one and that one. And, in fact, although it looks like a two by two, when it's implemented, in effect, it's a one by four. So it's innovation and learning, internal, customer and financial, and when these guys talk about one measure driving another measure, then we start to talk about measures here driving measures here driving measures here to give this shareholder driver, so all the time things are percolating up from the bottom of the stack and we get this wonderful thing, this shareholder value created at the top. I think that's a fairly jaundiced view. To my mind, it's fiercely North American capitalist, this. The only reason we keep people happy at the bottom here is because they deliver more of this stuff. And if we can get them to deliver more of this stuff by being miserable, then we would make them miserable, and I don't like that - I want to be happy.
So I would like to make a slight modification to the scorecard, a very simple modification. What I want to do is simply switch round those tops and bottoms in the scorecard. If you do that you see something interesting. What pops out of it now is a cycle. And we get this economic cycle of information flowing round the scorecard. So, if we start on the right hand side there, the first linkage is strategic investment and in this brave new world of strategic architecture from Guy Hamel, we will recall that we're exhorted to develop core competencies and things like that and build strategic assets, then what we ought to be doing is taking something like financial capital and converting it in the words of Skandia Insurance into intellectual capital down here, and making strategic investments in our core competencies in here.
Then we should be developing our processes, leveraging them, creating broad capabilities in the internal quadrant, delivering services and products into the market-place for the benefit of customers and then achieving some sort of commercial performance. And if we make a surplus then clearly there'll be something for the shareholder, who'll still claim shareholder value, but who have another surplus which can reinvest into this innovation learning quadrant. So, this is my nice rosy view of life, if you like my new Labour value, my stakeholder economy and all that sort of thing flowing around this scorecard like that.
This bit is about strategic investment, it sounds attractive, but this is a slide taken from Gary Hamel. This two by two matrix compares new and existing core competencies against new and existing markets. They asked them some searching questions about the nature of this strategic investment, so in this quadrant he asks "what is the opportunity to improve our position in existing markets by better leveraging our existing core competencies", and he calls that 'filling in the blanks'. Again, on the existing core competencies - "what new products or services could we create by re-deploying or recombining our core competencies". Top line, what new core competencies will we need to extend our franchise in current markets - in other words maintain leadership and, finally, what new core competencies will we need to develop to participate in the most exciting market of the future? He goes on to talk about reinventing your industry. The problem with this stuff, of course, who talks like that? Who asks those sorts of questions? When it comes to formalising business strategy, who asks those sort of questions?
The third point about scorecards is this: In switching these two quadrants around, we can create two further perspectives on the scorecard. The first one I call the strategic perspective because now we've got the alignment of the financial quadrant with the innovation and learning quadrant. And on this side we have what I call an operational perspective, the alignment of internal capabilities with external markets. I'm not going to develop this idea too much further, but I think it's quite interesting because what we're talking about there is ... this is the business of strategy and we have financial assets - invest them in these non-financial learning assets down here. This is the stuff that strategy is really all about, the making of decisions about where to apply the assets of the business. And this is very operationally focused because it's about the business units. I have this core capability, how can I better apply it in my market? I think there's a sort of balance there between the centre of the organisation and the business unit that is brought out by the scorecard.
Here's some typical scorecard measures. Now, I got these, apart from the ones in internal which I put in myself, but I got them from this article here. This appeared in the Financial Times on 1 April. In it Kaplan and Norton are asked about what sort of measures should there be in scorecards, and the reply was the objective is to identify the measures that best communicate the meaning of a strategy. Every strategy is unique, so every scorecard will contain several unique measures. However, in Kaplan & Norton's experience certain core measures do appear repeatedly on scorecards. Now, the sorts of things that are on that scorecard there, they're the sorts of things that are appearing on the scorecard that the Halifax have developed. But, to my mind, there's a problem with that because which firm does this represent, this scorecard; which industry sector does it represent; it doesn't does it. It's completely neutral. These measures could be anything and we're back to this problem with the mission statement; when everyone thought the mission statement was great, and everyone had the same mission statement. We all think our scorecards are great, but unfortunately we're all going to end up with the same balanced scorecard. It does not express strategic intent. I would say that most scorecards are necessary, but they are not sufficient. They do not reflect anything particularly unique about an organisation and that's a problem, because if you try to implement a business strategy from that, you won't know if you've succeeded or not on the basis of your scorecard measures.
On to strategic architecture.
This is a page from Competing for the Future again and this is Gary telling us how to reinvent our industry. It's a basic three page plan. You have to plan the future, build it and then exploit it and in this planning phase all he's saying is we have to establish intellectual leadership. We have to gain industry foresight by probing deeply into industry drivers. You have to develop a creative point of view about the potential evolution of functionalities, core competencies, the customer interface, and summarise this point of view in a strategic architecture. That's what we need to do, but how do we do it?
Strategic architecture building blocks. What is strategy made of? In my experience most different strategies are made of paper and what's upon it. From an IT background, being educated in the object orientation paradigm, I looked at this business strategy problem and I thought, well, there must be some sort of basic component, 'building blocks', that you can use to build strategy, and I started digging in the literature and making a few things up and came up with a set of building blocks that you can use to build business strategy and I'll go through these objects. The first one is a core competency. That's some sort of organisational skill. The next one is a core capability, that's something the organisation can do, that's a competency leveraged for some financial purposes. This next one is a hybrid of these two. I'll call it an internal process because business strategies are usually complete bundles of different competencies and capabilities. It is often difficult to distinguish the from one another. This fourth one is strategic asset. Now this is something which the firm owns that gives it some sort of monolithic advantage in the market place. I guess in the case of the Halifax, I think the Halifax brand name can be classed as a strategic asset and the Halifax mortgage book, being 20% of the UK housing market, could also be a strategic asset, something which the Halifax successfully leverages.
The next object is a strategic initiative, because if you action, you need to implement strategy. At the top here we have the primary objects. The first one is a customer value case. This is something that appeals to one or more customers in the commercial market place. New lamps for old; customer value case. Corresponding to that we have an economic value case. Well, does this new lamps for old policy make any sense financially? So we have an economic value case. Combine those two things together, we have something called a customer value proposition, which is an expression of commercial strategic intent. Well, that's my basic building blocks. I'll show you how you can build strategy with them in a moment.
The only proof I've got for those things being so, first of all is this reference, core competencies. Hamel & Prahalad came out with the core competence of the organisation in 1990 and I think they've got the wrong reference in the handout, I was a bit premature with 'Strategic Intent'. We have Stalk, Evans & Schulman that came out two years later in the Harvard Business Review and they said well, that's all very good Gary, but it's not just about core competencies, it's also about business processes. So, they introduced the idea of core capability, based on core competencies as being the stuff that strategy is made of. And finally we had Collis & Montgomery in 1995 who said yes they're both right - it's core competencies, it's core capabilities, but it's also strategic assets and maybe there are others - this gave me a clue, actually - this article said there may be other things which strategy is made of. So, that's the only evidence I've got for claiming that those objects are real.
But, you can build pictures with these objects, and this is a simple example of a strategic architecture. It was done not in a strategic area of the business; it was done in the IT Data Centre in fact, but I'll just comment on the basic structure of these pictures. First of all, there's an implication of time. We're starting over here on this side of the picture and we're moving through time towards some goals. The second point about this is that we start with an existing set of core competencies. These are the things that this particular Business Unit majors in, competency wise. And we always finish up with one or more strategic objectives over this side of the picture. So, the picture converges. You start with a lot of detail on this side and it converges to simplicity on the other side. This is in contrast to some planning methodologies which do completely the opposite; they decompose. They start with something simple like a mission statement and then decompose into activities and this, that and the other, and the thing just grows and grows and you get tons and tons of detail at the bottom that you can't manage. The approach here is to actually get the thing to converge to something toward strategic intent. This is a real military outlook. In fact, I was talking to someone who was doing some work with the British Army and the British Army apparently has only three strategic scenarios. One is total war, the other one is co-operative war - as in the Gulf, and the third one is skirmish, as in Bosnia. They tried to use decomposition methods because they're very popular in the US Department of Defence. But they gave up very quickly because of the frightening complexity of the sort of activity that they are undertaking. This sort of methodology would work very well in their sort of environment because the Army know very well what it's current competencies and capabilities are over here, and it's already stated what it's future objectives are here, so they can do this sort of methodology to produce its pictures and show how current capabilities could improve and modify over time and deliver on their particular strategic intent.
Eureka
So we have these ideas about the Balanced Scorecard, more ideas about how does it fit together? So here are my 8 objects for building strategy. There's the scorecard, and the tools that I built worked because you get a very simple mapping between those objects and the scorecard, so we see that the core competencies are measured in the innovation learning quadrant; core capabilities are measured in the internal quadrant; internal processes are measured in both those two quadrants, although they relate to the internal perspective; and strategic assets are acquired and leveraged in that internal perspective as well. At the top of the picture, customer value cases are mapped into the customer quadrant; the economic value case comes out in the financial quadrant; and the hybrid of the two is related to this external perspective which can be measured in either of the two quadrants. And, finally, strategic initiative, is in fact the basic, and defines any measures of strategic initiatives in any of the quadrants. So the tool I am showing you - that's why it works because I've got a simple map in between the objects, between strategy and the scorecard.
So this is the tool. It's called CASM which stands for Computer Aided Strategy Management which I stole from the acronym CASE which stands for Computer Aided Software Engineering. It's a 3 phase tool: the first part of the tool is a strategic architecture tool which, as I say, I can use to map out pictures on strategy. That's the interesting bit.
Then we get the boring bit in the middle. We have to map all the objects within that strategic architecture on to your critical success factors and then, finally, there is a scorecard comparison, which takes all that information you've put into the tool and churns out a specification for your balanced scorecard. And because it was all derived from here, you are absolutely 100% guaranteed that that scorecard truly reflects that strategic architecture. That strategic architecture scorecard rule will embody your strategy and as you execute the strategy and as you use the things in there, you will get real feedback from how successful that strategy is - and that is my point.
I've got the tool on the PC so I'll see if I can show you the tool. This is the Data Centre scorecard and in my innovation learning programme, I've got things like remote operation and UNIX skills - those are definitely Data Centre type measures. Here, I've got things like the Electronic Data Interchange implementation statistics and maintenance contracts and problems caused by change. And here, I've got things like services covered by service level agreements. And that sort of stuff. I mean the financials - renewal versus new investment and Data Centre costs and I claim that that scorecard there for the Data Centre is necessary and sufficient and contains the sort of general measures you'd expect to see in a Balanced Scorecard but it does contain the things that are driving actions in that particular area.
Now what I'd like to do is a quick demo of scorecard. You'll find this in the second handout you've got. I brought this in case the technology failed.
There are 4 basic tools in here: the first one I'll show you - each one is a scenario from the Data Centre, and this is the picture you've got in the handout. On the left-hand side of it - here we have the core competencies of the data centre. I know it's pushing it a bit talking about core competencies in something like the Data Centre because according to Gary Hamel core competencies are something that your organisation possesses and no-one else in the world possesses - pretty tough to find those. So we've got service management because these guys are pretty good at servicing their customers. We have technology management because they have rooms full of expensive computers and software; cost management because they are under constant threat of outsourcing and must remain competitive with outsourcers. Enabling infra-structure is all about the tools they need to do their job that's at management level. Change management because that room full of hardware and software is constantly changing and HR management because they really do need highly motivated people because the biggest driver of cost in the Data Centre is people and the best way to get the costs down is to get the most use of their people and this is a task which they go about with remarkable enthusiasm.
On the right-hand side - when we did the workshop with these guys there were two sorts of things, two ideas, that emerged. First of all with this one in the middle - this economic value case: data centre cost effectiveness. This is the thing that was really driving them they said. This is what it's all about - stripping out costs from this operation. But they also conceded that was this thing, building a partnership between themselves and their business customers so they have this customer value problem over here. So when we talked it through, they came to understand that there was an inherent conflict between these two objectives because service costs money. If you start to reduce the costs in the Data Centre you start to affect service - so it's a balancing act. How to strip out the costs whilst maintaining the service. Their ultimate strategy in my view is this one - to optimise this service cost equation (how to get more bang for your buck) and I have a vested interest in the outcome of this strategy. This capability is central to the whole thing according to balanced scorecards. And then the rest of the model is made up of all sorts of strategic initiatives that these people are undertaking in the pursuit of these goals. When we did the workshop with them it was not just a matter of documenting what the initial reaction had planned. In fact, there is one case where there is an initiative they hadn't thought about just by questioning the sort of things they were doing. That was this here - external data interchange - which it turned out was to do with their use of tapes which they hadn't really thought of. When you automate a Data Centre one of the things you need to put in there is a tape robot to remove the expense of manual loading of tapes, but when you do that, you need to achieve 99% automation. But there's always this 1 per cent of tapes that you have to mount by hand and when they started thinking about it they realised that a number of the tape mounts they were carrying out was for information requested by external organisations from the Halifax. But they didn't know quite who these external organisations were or what the tapes were being used for, but it's always been that way, they have always done that job, put the stuff in envelopes and send it out. So we thought it might be a good idea to track these things down find out who they were sending the stuff to and why, and then start the process of automating those links, using electronic links to disperse the information instead of messing about with tapes and couriers.
Therefore as a result of all these initiatives the thing that the Data Centre managers have realised about this was : we now have from a single sheet of A4 an overview of the entire strategy; something you can stick on the wall. This is a map of the world, something that can be recovered from the Intranet. Now the Data Centre Manager was sure that everyone on his team had a clear understanding about what we're trying to achieve in life and that's a very compelling advantage of this tool, that you can try to embody the essence of a business strategy on a single sheet of A4. So that's the first part of the tool, drawing pictures of the strategy and I'd say that that that is the interesting bit, because you have to now look at this boring place, trying to determine the critical success factors and performance indicators. In this tool here we have something called a strategy brick. What happens here is that in this part of the tool the software takes every object within the picture you have drawn and puts it down in the left-hand side of this matrix, whilst along the top its the Scorecard Quadrants. Its one matrix but it's actually divided into separate pages for this, so the strategic page contains all your core competencies, the operational page contains your capabilities, the commercial page the strategy outcomes and the transitional page the strategic initiatives.
What you can do now is to plod through this matrix and start to document your critical success factors. Now the fact that you've got down the left-hand side every object in your strategic architecture means you will at least be presented with the opportunity to think about Critical Success Factors (CSF's) so, for example, technology management decided that the internal quadrant should be thinking about effective supply performance. The next thing to do is to weight CSF's as to measures, and so if I click on any of these CSF's and go to measures, then here we get with this particular CSF which has three measures proposed which will measure the success or otherwise of this thing. And the concept here is that we have a list of KPI's . This is the entire list of measures that the Data Centre is currently collecting and tracking and the concept here is that both measures can be linked to any critical success factors in theory anywhere in that strategy. The reason it is designed this way is ultimately if such a tool were deployed across an organisation, you can get to the point where you can have all your KPI's in your data warehouse and have them all reusable in any different service. For example, you might have Employee Satisfaction Index, you would then be certain that employee satisfaction measured in Business A is the same thing as being measured in Business B. That's a very powerful concept as then the HR Director can sit down and he can see all his employee satisfaction measures across the organisation on one screen and he can be confident that this one is red and this one is green, then these guys will be more than happy than these guys. So, this is the tool we use and, as I say, take any of those and add it to the CSF total. The final part of the tool which is pulling the rabbit out of the hat is this one which is the scorecard itself and if we hit that key it goes away and thinks about everything that you have said, and you can see the measures at the top of the screen here, its sifting through the whole thing, and then here you have it, the scorecard specification. Its as simple as that.
Thank you very much.
Trevor Nicholas, BTI Ltd:
One thing I didn't quite follow. When you had your chart on the left side - Strategic Building Blocks - and on the right-hand side what your strategic objectives were, is there a danger that you have had to force things into others, to make what's on the left actually fit into what's on the right and what happens if, in fact, they don't? Supposing you don't actually possess the building blocks necessary?
Phil Aisthorpe:
There's no real danger of that. It's a deliberate attempt to force people to think how we get from the left hand side to the right hand side.
Trevor Nicholas: Yes, but is there not a danger that you do it? And actually people haven't really thought through because they want to make sure that the linkage is good?
Phil Aisthorpe: You mean do we really have to do this in order to do that ?
Trevor Nicholas: I was only thinking I can see how the tool works to an extent, but there must be circumstances where what you actually possess in the way of strategic building blocks and assets etc. doesn't enable you to achieve the objective at the other end. How's it going to show up?
Phil Aisthorpe: Then you will have to put in strategic initiatives. Develop those missing links. For example, in this picture there's a strategic initiative there to develop the Data Centre scorecard which will deliver on developing this performance management culture in the Data Centre which currently does not exist. Is that what you were thinking about?
Trevor Nicholas: Yes. That sort of thing where you actually build those in as far as your target
Phil Aisthorpe: Going back to that Gary Hamel saga, the one about developing core competencies, and that if you decide that in order to maintain your market leadership you need to develop this core competence, then yes, that would appear half way across the spreadsheet, and you have to say how are you going to use your existing competencies in order to develop that new one.
Trevor Nicholas: Where do individual people assets occur? For example, if you take Virgin - Branson himself is a massive asset in a whole range of ways, and I'm not quite sure where he'd fit in the building block.
Phil Aisthorpe: In that case, I would take this object here - strategic asset - and I'd fix in a new one and the name is Branson and he's available and complete - okay? We have him now in the picture and we're going to fit him in just there and we're going to say that we're going to leverage that particular core competency through Richard in order to achieve that goal there and that's defined in the picture being leveraged to some commercial end.
Trevor Nicholas: Thank you.
Liz Spencer, Royal Sun Alliance: I wonder if you could tell me the difference between core competencies and core capabilities.
Phil Aisthorpe: I knew someone would ask that. The core competencies are something that the organisation excels at externally, whilst capabilities are about internal processes.
Gareth Hughes, Item Plus Consulting: On a practical level of gathering data to populate the matrices. The data centre contains empowered people, pretty confident, capable, ambitious, and yet this is an overlay of control and reporting. Does this cause a problem with what you are trying to implement, or you are implementing?
Phil Aisthorpe: If I had more time I could show that the actual score card management system, the actual technology used on the desktop. All this tool produces is a specification for the score card on paper, and you have to implement that as part of a performance management system and we have an Intranet based performance management system, and that gets implemented, and one of the features of that PM system not only does it give you on the screen the Scorecard itself but it allows individuals in that group to go away and customise their own personal view of performance. So under proper organisation control you've this sort of cloud of measures in the system ad anyone can go away and pick out the ones that are important to them and put them on a page on this Intranet base and can see the ones that apply to their particular role in life.
Questioner: That's helping, easing the implementation?
Phil Aisthorpe: The whole thrust of the implementation is based on .... this is not an MIS system it is not one designed to enable heavy duty drill down; the idea was to highlight group messages, to enable teams of managers to work together more effectively. I went to the General Manager in IT who was saying that there's no point in having a Balanced Scorecard in here because I've just taken over and I know it's out of control and the whole thing's going to be blood red all over the screen, and I explained to him that it's not like that because what happens is - yes, if you set your threshold too high then it will turn red, what you have to do is be sensible about this and get the measures on the score card and on the screen, and you can set the threshold levels to make things go green and yellow and red, but what you do is identify the 3 most critical issues that need resolving lower the bar on everything else so that these things aren't red, and you manage the critical issue until they are yellow or green, and then raise the bar on other things to maintain the improvement. That's what the whole thing is about, managing issues and maintaining balance across an organisations - not about gathering traditional management information to be used in management reports.
Questioner: May I ask do the traditional reports exist in that environment?
Speaker: Yes, because it's an Intranet implementation, if you use on the web browser you can integrate any information source at that level so if, for example, on the score card you have a measure of mainframe service availability, which may be showing red because the mortgage might have crashed, then it is possible to click on other links around that issue and see reports on what happened and the relevant action plans.
Jan Cowper of BACS: Obviously I'm impressed with the model but to play Devil's Advocate for a moment, I look at the Balanced Scorecard as a way of seeing however you express your objectives, that you've got them all in relative harmony, and that you can easily say well lets increase shareholder value by making more profits but at what expense to the rest of the organisation in terms of the other objectives and what you are doing? It is a case of juggling and getting that balance right. If we take the example as set out in HR Management at the Data Centre, these guys are definitely keen to remove everybody from the organisation; fine if you've achieved everybody out then employee satisfaction doesn't matter. But if you've still got 10 left and they're wondering are they the next, for example, how are you getting that balance right? Have you still got satisfaction?
Speaker: The way its been managed on the ground is that if anyone's job is to disappear then they're not made redundant but redeployed and they are advised that there are better jobs available elsewhere within the organisation.
Jan Cowper: No, but I think that's important because if you haven't got that, and it's easy to say well I can make improvements here, but it is getting that balance right between your upsetting your suppliers say or your staff, and if you didn't know what its value was at the beginning, how do you know you've actually got better?
Speaker: I hold my hands up to that one.