Organizational Alignment Using Strategy Maps & Balanced Scorecard

Organizational Alignment Using Strategy Maps & Balanced Scorecard Presented by Rajesh Naik @ Bangalore SPIN, Nov 2009 1

Do these sound familiar? The organization says it will do business only with Fortune 500 companies But keeps signing small projects from small customers Cost reduction is a focus But you are asked to travel by train, spend billable time and stay in hotels (costlier than airfare!) New skills are a must for promotion and growth But the best people are busy (fire fighting) with existing projects and the mediocre folks get trained on new technologies 2

Do these sound familiar? CEO says low cycle-time, low-cost and feature-richness are critical to their success But the project and process goals are schedule variance, effort variance and defect density do these match with the critical success factors? CEO says we MUST grow in new products But the sales targets (for salespersons) are based on total order value there are no product line specific targets 3

Initiatives What Direction? CMMI Lean Innovation Organization Reuse Agile 4

How Do They All Tie Together? Employees Do not know why they are doing something Do not understand how various initiatives are interlinked Management Often starts new initiatives without fitting into a bigger picture Does not explain relationship between initiatives and overall objectives 5

We Need to Execute Strategy (not just formulate it ) Of the strategies effectively formulated, less than 10% are effectively executed Fortune It better to effectively implement a mediocre strategy, than to ineffectively implement a great strategy 6

But what is strategy? The art or skill of careful planning towards an advantage or a desired end Oxford English Dictionary 7

Key Elements of Effective Strategy Implementation Clarify strategies Understand and explain inter-linkages Resolve conflicts of alignment Communicate to employees Relate internal process goals to organizational strategic goals Align investments in people, technology and organizational capital for greatest impact on strategic objectives Prioritize initiatives based on potential impact 8

How do we get Breakthrough Results? World Class Strategy Implementation = Describe the Strategy + + Measure the Strategy Manage the Strategy Strategy Maps Balanced Scorecard 9

A Software Products/ Services Org Financial (Shareholder/ Owner) Perspective Revenue Profits EPS 10

A Software Products/ Services Org Revenue Profits EPS High Quality Solutions High Speed Implementation Cost-Effective Services Single Point for Insurance Industry Fortune 500 Customers Customer Perspective 11

A Software Products/ Services Org Revenue Profits EPS High Quality Solutions High Speed Implementation Cost-Effective Prod/ Svcs Single Point for Insurance Industry Large Scale Implementations Fortune 500 Customers Software Products Reuse Hi Fidelity Processes Program Management Cross Selling Brand Building in Insurance Industry Large Account Management Cost Effective Infrastructure Cost Effective Financing People, knowledge, systems, innovation and improvement perspective Knowledge Management Employee Engagement Insurance COE Innovation Tech/ Domain Regulatory Compliance IP Creation Automation Of Processes Competency Development Continuous Improvement 13

The Concept Financial/ Owners/ Shareholders Customers Business Processes Learning & Growth People, Systems & Technology Vision & Strategy 14

The Four Perspectives FINANCIAL PERSPECTIVE How should we appear to our Owners/ shareholders? CUSTOMER PERSPECTIVE How should we appear to our customers? What products/ services? What markets? INTERNAL PERSPECTIVE What business processes must we excel in? LEARNING PERSPECTIVE What do we need to change, learn, innovate and improve? 15

Cause & Effect Relationship Financial ROCE Customer Customer Loyalty On Time Delivery Business Processes Process Quality Process Cycle Time Learning & Growth Employee Skills 16

Successful Balanced Scorecards start with a strategy map Example Mobil (US Marketing & Refining) Growth Theme Improve quality of revenue by understanding customer needs and differentiating ourselves accordingly. Productivity Theme Maximize utilization of existing assets and integrate the business to reduce total delivered cost. Financial Perspective Return on Capital Increased from 6% to 16% Competitive Position (profitability) From last (1993) to first (95, 96, 97, 98) Customer Perspective Volume Growth Exceeds industry by 2-2.5% annually Customer Satisfaction Continuous improvement for 3 consecutive years Reduce Cash Expenses Down by 20% Improve Cash Flow From -$500 M/Yr to +$700 M/Yr Internal Perspective Product Innovation Speedpass Active Increasing at rate of 1M per year Customer Management Dealer Quality Perfect Orders Continuous Continuous improvement for 4 improvement for 4 consecutive years consecutive years Learning & Growth Perspective Operational Excellence Quality Capacity Utilization Safety Annual value of lost yield reduced from $175m to $50m Continuous improvement for 4 consecutive years Lost work incidents down from 150 to 30 per year Motivated & Prepared Workforce Strategic Awareness Annual employee survey shows awareness of strategy increased from 20% to 80% Good Neighbor Environmental Number of incidents reduced by 63% Source: The Balanced Scorecard D. Norton & R. Kaplan 17

Cascading and Layering of Goals Organization Delivery Group HR Group 18

Purpose of Strategic Measures Convert a strategic objective (stated in English) into a measurable target (stated in numbers) 19

Balanced Scorecard: Airline example Strategy Map: Cause-and-effect between strategic objectives Strategic Theme: Operating Efficiency Financial Fewer planes Profitability More customers Statement of the strategy How success will be measured Performance Needed Key action programs Customer Flight Is on time Lowest prices Objectives Measurement Target Initiative Internal Fast ground turnaround Fast ground turnaround On Ground Time On-Time Departure 30 Minutes 90% Cycle time optimization Learning Ground crew alignment 20

Balanced Scorecard: Airline example Strategy Map: Cause-and-effect between strategic objectives INITIATIVE Strategic Theme: Operating Efficiency Financial Fewer planes Profitability More customers Statement of the strategy How success will be measured Performance Needed Key action programs Customer Flight Is on time Lowest prices Objectives Measurement Target Initiative Internal Fast ground turnaround Fast ground turnaround On Ground Time On-Time Departure 30 Minutes 90% Cycle time optimization Learning Ground crew alignment LEAD MEASURE LAG MEASURE 21

Balanced Scorecard: Airline Example Financial Strategic Theme: Operating Efficiency Fewer Planes Profitability More Customers Objectives Profitability More Customers Fewer planes Measurement Market Value Seat Revenue Plane Lease Cost Target 30% CAGR 20% CAGR 5% CAGR Initiative Customer Flight Is on Time Lowest Prices Flight is on -time Lowest prices FAA On Time Arrival #1 Rating Customer Ranking (Market #1 Survey) Quality management Customer loyalty program Internal Fast Ground Turnaround Fast ground turnaround On Ground Time On-Time Departure 30 Minutes 90% Cycle time optimization program Learning Ground Crew Alignment Ground crew alignment % Ground crew trained % Ground crew stockholders yr. 1 70% yr. 3 90% yr. 5 100% ESOP Ground crew training

The Balanced Scorecard Measures Strategic Objective Outcome Measures At the end of a time period Lag Measures Eg : Year-end-sales, Market Share Performance Drivers Intermediate Processes Lead Measures Eg : Hours spent, Product Mix Hours Studied for Entrance Exam College Admitted to Marks/ Rank in Entrance Exam Efforts in College Marks/ Rank in College Preparation For Job Interview Category Of Hiring Company 23

Selecting BSC Measures Caution Do not select what can be measured: select what should be measured Ensure balance between lead and lag measures Have a practical number of measures 24

Attributes of Measures in BSC Identify measure(s) for each goal Each measure will have the following elements The corresponding goal/ objective in the strategy The measure The operational definition of the measure Type (Lead or Lag) Past values for measure (for defined time period) Target (values and time periods they correspond to) For different periods (1 year, 2 year, 5 year) Reporting Vehicle and Frequency Person responsible for measuring and reporting Person responsible for meeting target 25

A completed Balanced Scorecard example Obj No. F1 F2 Objective Measure Type Unit Frq. Obj. Resp. Data Resp. PBT Lag Rs Cr m MRD TS Actual Target Initiatives Revenue Market Share Lag % q TS Revenue Lag Rs Cr m AS TS P1 Monthly Churn Lag nos m MK Subscriber base Lag nos m OM F3 Manage risk effectively Average collections/bill cycle after 25 days Lag % m TA AR P5 F4 Average collections/bill cycle after 60days Lag % m SNK Bad Debt Lag % 1/2y CP Acquisition cost per subscriber Lag Rs 1/2y UP KS P4 Cost to serve per subscriber Lag Rs 1/2y KS Cost of funds Lag % q KS C1 Offer VFM & reward loyalty Average customer lifetime Lag Months q MI DS P2 C2 C3 Calls per 1500 subscribers Lead nos m LK GA Complaints per 1500 subscribers Lead nos m GA Customer survey index Lag Index q GA Average acquisitions/dealer Lead nos m RJ GA P11 Average activations & recharges/ distributor Lead nos m GA C4 Receive superior training for team Dealer Satisfaction Index Lag Index q AA CR P10, P6 C5 Get HR support for identification & recruitment of sales executives Dealer Satisfaction Index Lag Index q CS BB P9,P11 C6 Receive adequate ROI opportunity Average ROI for dealers Lag % q RN KSK P22 I1 Significantly reduce churn Monthly Churn YK P14,15 I2 Grow dealer sales force to increase customer reach; and increase width in retail # sales executives per dealer Lag % q GS VS I3 # outlets per distributor Lag % q VS % penetration of new products, services Lag % q KD DS Average channel cost/acquisition Lag Rs q KSK Advtg & promo cost as % of sales revenue Lead % q KSK I4 Target product to appropriate segments Penetration in targeted segment Lag % q TK RD I5 I6 Achieve sustained profitability (PBT) from March 2000 Meet volume & revenue targets by significantly increasing subscriber base Improve operating efficiency Get reliable & consistent service Receive sustained demand Create and execute a coordinated sales & marketing plan by key segments Ensure superior service delivery levels at contact points Improve collection processes Customer service delivery index Lead Index q PL ON Network service delivery index Lead Index q MK Average collection period L1 Improve employee motivation & productivity Subscribers/employee Lag nos q AR RCX Revenue/employee Lag Rs. q RC Employee Satisfaction Survey Rating Lead Index 1/2y RC L2 Close skill gaps by regular training Skill gaps closed Lead % q OR RC L3 Rationalize organizational structure KMS achieved Lead % q MK RF L4 Build strong systems support & knowledge-base IT Delivery Index Lag Index 1/2y SR PP L5 Improve coordination between all departments # forum meetings held Lead nos q OJ KK IM Illustrative 26

Initiatives and the Strategy We need initiatives to achieve the objectives Initiatives may impact different objectives in different ways Strongly or weakly Directly or indirectly Positive or negatively In the short-term and the longterm We must evaluate each proposed initiative, and prioritize and select Lean Lean 27

Where do Strategy Maps and BSC fit in the overall scheme of things? Mission (Why we exist) Values (What is important to us) Vision (What we want to be) Strategy (Our Game Plan) Strategy Maps (How the strategy translates) Balanced Scorecard (Measure and Focus) Initiatives (What we need to do and change) Individual Performance Goals (What I need to do) Adapted Rajesh from Naik, Strategy 2009Maps by Kaplan and Norton 28

BSC and Individual Performance Goals An individual s performance targets should be derived from all relevant scorecards. Depends on Strategic Theme: Objectives Measurement Target Initiative Operating Efficiency Financial Profitability Market Value 30% CAGR Profitability More Seat Revenue 20% CAGR Customers Plane Lease 5% CAGR Strategic Theme: More Fewer planes Objectives Cost Measurement Target Initiative Fewer Planes Operating Customers Efficiency Financial Profitability Market Value 30% CAGR Custome Profitability Flight is on -time More FAA On Time Seat Arrival Revenue #1 20% Quality CAGR r Rating management Flight Lowest Lowest prices Customers Plane Lease 5% CAGR Strategic Theme: Is on Time Prices More Fewer Customer planes Objectives Ranking Cost Measurement Customer loyalty Target Initiative Fewer Planes Operating Customers Efficiency #1 (Market Survey) program Financial Profitability Market Value 30% CAGR Custome Profitability Flight is on -time More FAA On Time Seat Arrival Revenue #1 20% Quality CAGR Interna r Fast ground On Ground Time 30 Minutes Cycle time l Rating management Flight Lowest Lowest prices Customers Plane Lease 5% CAGR Fast Ground Is on Time turnaround On-Time 90% optimization Prices More Fewer Customer planes Ranking Cost Customer loyalty Fewer Planes Turnaround Customers Departure #1 (Market Survey) program program Learning roles and responsibilities, initiatives involved in Other Scorecards Custome Flight is on -time FAA On Time Arrival #1 Quality Interna r Ground crew Fast % ground Ground crew On Ground yr. 1 Time 70% 30 ESOP Minutes Cycle time l Rating management Flight Lowest Lowest prices alignment trained yr. 3 90% Fast Ground Is on Time turnaround On-Time 90% optimization Prices Customer Ground Ranking crew Customer loyalty Ground Crew Turnaround % Ground crew Departure yr. 5 100% #1 (Market program Alignment training Survey) program stockholders Learning Interna l Fast Ground Ground Crew Turnaround Alignment Learning Ground Crew Alignment Ground crew Fast % ground Ground crew On Ground yr. 1 Time 70% alignment turnaround trained On-Time yr. 3 90% % Ground crew Departure yr. 5 100% stockholders Ground crew alignment % Ground crew trained % Ground crew stockholders 30 ESOP Minutes Cycle time 90% optimization Ground crew program training yr. 1 70% yr. 3 90% yr. 5 100% Strategic Theme: Operating Efficiency Financial Fewer Planes Custome r Flight Is on Time Interna l Learning Profitability Fast Ground Turnaround Ground Crew Alignment More Customers Shengdeng Scorecard emage Scorecard Org BSC ESOP Ground crew training Personal development Lowest Prices Objectives Profitability More Customers Fewer planes Measurement Market Value Seat Revenue Plane Lease Cost Flight is on -time FAA On Time Arrival #1 Lowest prices Rating Customer Ranking #1 (Market Survey) Fast ground turnaround Ground crew alignment LOB BSC On Ground Time On-Time Departure % Ground crew trained % Ground crew stockholders Target 30% CAGR 20% CAGR 5% CAGR 30 Minutes 90% yr. 1 70% yr. 3 90% yr. 5 100% Initiative Quality management Customer loyalty program Cycle time optimization program ESOP Ground crew training Individual Performance Goals For Shredni Vashtaar BNS LOB Goals 1. Revenue 2. Profits 3. New Orders 4. Repeat Orders 5. Order of New Services 6. Compliance to Statutory.. 7. Productivity 8. Cycle Time 9. Customer Satisfaction 10. Attrition 11. Employee Engagement 12. Competency Growth 13. Ready Successors 14. Patents Registered Shared Goals 1. Company Revenue 2. Company Profits 3. Success of emage project 4. Making Shegdeng facility operational Additional Goals 1. Learning and Developing 29

Elements to Balance and Align Align objectives across multiple perspectives (financial, customer, ) Align measures to the objectives Ensure balance between lead and lag measures Align initiatives to the objectives Maintain alignment while cascading Org division/ dept projects individuals 30

Success Factors for Strategy Implementation Roll out needs to be driven as a Project Initial co-ordination Integration amongst the individual objectives, measures & initiatives Senior level Strategy Implementation Project Leader A Strategy Implementation Core Team 31

Common Pitfalls Middle Management Team: Lack of Senior Management Commitment Done by One or Two Individuals Held at the Top: For Senior Management Only Too Long a Development Process: Best Becomes the Enemy of the Good Done Only for Compensation Ignoring the aspect of Change Management Lack of communication & awareness 32

Communication and Awareness Every employee should be able to related his/ her goal to a higher level goal Every action by the management is a communication many actions need explicit communication to provide a perspective Why did we take up the retail supply chain management project when we said we are specializing in the insurance domain? Why are we hiring so many senior level managers when we said that we will promote internal talent? Why have we signed up many projects with small customers when we said we will focus on Fortune 500 companies? 33

The Journey - How Balanced Scorecard has evolved Measurem ent System Strategy Implementat ion Total Strategy Management 1992 1996 2000 2004 Articles in Harvard Business Review: The Balanced Scorecard Measures that Drive Performance January - February 1992 Putting the Balanced Scorecard to Work September - October 1993 Managing Alignment 2006 Using the Balanced Scorecard as Strategic Management System January - February 1996 1996 2000 2004 2006 Note: Concepts in this presentation have been sourced from these books 34

About this Presentation Author: Rajesh Naik Consulting Partner QAI India Limited rajesh.naik@qaiglobal.com naik.rajeshnaik@gmail.com +91 9845488767 More resources on the subject are available from the creator of this presentation at: http://www.rajeshnaik.com This work is released under a Creative Commons Attribution- NonCommercial-ShareAlike 3.0 Unported License license. This means you can use it for non-commercial purposes so long as you include the copyright line ". If you create derivative works using this work, they should also be made available under a similar license. For further information go to http://creativecommons.org/licenses/by-nc-sa/3.0/ For uses outside the scope of the license, contact Rajesh Naik at naik.rajeshnaik@gmail.com 35

Thank You Rajesh Naik Consulting Partner QAI India Limited Email rajesh.naik@qaiglobal.com OR naik.rajeshnaik@gmail.com Mobile +91 9845488767 Website www.rajeshnaik.com Also, have a look at the latest business novel : Aligning Ferret: How an Organization Meets Extraordinary Challenges By Swapna Kishore & Rajesh Naik Website: http://www.postscript-impressions.com 36