First recognise that different tools in the overall Balanced Scorecard approach to strategic management are for different planning horizons.  Tangible future for 10 years, strategy map for 2-5 years, and scorecards measures for 12-24 months, whilst targets [...]]]> So what planning horizon should I use for my balanced scorecard?  1 year, 2 years, 6, 10 perhaps?

First recognise that different tools in the overall Balanced Scorecard approach to strategic management are for different planning horizons.  Tangible future for 10 years, strategy map for 2-5 years, and scorecards measures for 12-24 months, whilst targets and actions are only 6- 12 months  (typically).

It also depends entirely on the industry and their situation.  I have worked with clients where the time horizon for strategy and their strategy map is 3 to 5 to 10 years.  I have worked with at least two clients whose planning had to be limited to 12 months.  I have had others whose planning horizons were three generations (c 60 years).  The scorecard on the  other hand is usually refreshed every 12-24 months at various levels.

In part it depends on the capital intensity of the industry, so aircraft design, investment in oil and gas exploration and long term planning for a society or community is typically operating around 20 years.

Sure, stuff changes.  More importantly assumptions prove wrong or risks and concerns come to fruition.  That is why we help clients invest in EPIs: External Predictive indicators or listen to this webcast about External Predictive Indicators

By the way I think it is a a nonsense to suggest that “today’s pace of change is faster than before”.  Take any decade over the past 100 years and look  at the changes, especially the 1910′s (first world war) the 20, global recession bigger than the last one, the 30′s technology advancement, the 40′s again a global war, I could continue.  it is only because we are in it that it seems to change so much.  Its only a matter of perspective.

Neither is it about guessing revenues.  It is about thinking through the structure of an industry, the demands of consumers and how the business models will change.  Then looking for persistent patterns of behaviour that will underpin positions (and ultimately lead to revenue).

I’ve been thinking about this and asked myself the question, “Why would the balanced scorecard not include the management of risk?” A little thought brought me to three conclusions:

* The first [...]]]> The question was asked, how do you manage risks with the balanced scorecard and how is risk management integrated with the balanced scorecard?

I’ve been thinking about this and asked myself the question, “Why would the balanced scorecard not include the management of risk?” A little thought brought me to three conclusions:

* The first is about risk of the strategy not being implemented: A balanced scorecard is about implementing strategy and so when we ask the management team what their strategy is, they respond, including how they wish to manage the risks of that strategy not being implemented. They (should have) have already though about the risks and should be articulating a strategy that already has risks considered and mitigated in the way they intend to implement changes, develop capabilities and their choices of objectives, measures, targets, actions, initiatives. So, one would expect that the risk to the implementation of the strategy is already embedded and operationalised in the strategy map and balanced scorecard. You can make sure by asking in the articulation and design stages about the risks. You can easly add it by asking the question, for each objective, what risks are in here and have you mitigated them. Having them implicit perhaps does not help, but they should be there if the right questions have been asked, and the management team have a well thouight through strategy that you are capturing.

* There are lost of different risks that need to be identified. The balanced scorecard is primarily a tool of strategy articulation, communication and implementation. But there are risks for finance, health and safety, fraud, compliance (Regulatory risks), there are operational risks (processes failing) there are market risks (external events) and many others (the Chief Exec gets run over by a bus). Having spent six months sitting in a compliance team helping them develop reporting for the FSA there are many detailed risks specific to particular activties and aspects of the business that I would not expect a strategy focused balanced scorecard to address in detail. It is not a panacea. It is not the only way the organisation is managed. I would expect those risks to be identified in objectives by managers at the level at which those risks would be managed (as a part of the management of that objective, at the level at which that needs to be managed). I would expect them to be managed by the risk management processes that sit in different parts of the business. Given “a strategy map and balanced scorecard is for a management team, and a set of balanced scorecards is for an organisation” the mechanism of exception reporting between layers should escalate those issues about risks that need to be raised upwards to manage the operational detail in addition to the strategic intent.

* Its about what gets discussed in use. This is about discussing the ongoing and emerging risks that have been identified, monitored and are being mitigated, as the strategy is being implemented and the operation is being managed. This puts the question, “Are we considering the risks and are we managing them appropriately?” or something similar, firmly in the agenda of the operational and strategic review meetings. It is in the meeting agendas I give my clients.

So I think we need to be clear:
* what sort of risks we are addressing and which others we may not address directly.

* How the way that the startegy map and balanced scorecard were designed includes of excludes risks and whether it is dealing with their identification, monitoring or mitigation (or another part of the management of risks).

* The balanced scorecard should not get in the way (and should support) the normal management of risk that a management team are/should be thinking about and acting upon in their review meetings.

I hope this helps (Sorry for long answer, but I was thinking about it too long) ;-)

Phil

Today I opened my email and found out that my “BT yahoo search is now powered by the nations favourite search engine – Google!”. Yes Yahoo uses Google. It is hard to believe that these rivals from only a few years ago [...]]]> How do you handle rapidly evolving and changing strategy with a balanced scorecard?

Today I opened my email and found out that my “BT yahoo search is now powered by the nations favourite search engine – Google!”. Yes Yahoo uses Google. It is hard to believe that these rivals from only a few years ago are now in such close cooperation. But that is the nature of Internet technology.

The environment and the strategy are changing rapidly and you need an approach to strategy planning, communication and implementation that can accommodate this rate of change.

Likewise with the credit shortage (I refuse to call it a crisis).  Again it came upon us quickly and probably more severely that we expected. We also still have the uncertainty of when it will recover and how it will recover.  Thick business plans will be hard to change.

This is why I like strategy maps. They describe the strategy in short (1 page) documents. You can easily put a business plan behind them that sets out the details of the financials, markets, competitions, competitors and what you are going to do.

When I was on the management team of a dot.com the strategy completely flipped inside six months. We moved from a net market providing auctions for commodities in an industry, to a collaborative supply chain solution in the same industry. The strategy map could see that coming: On the main strategy map for the net market auction model, we introduced the supply chain capability, initially as a small theme to the right. Over six months the auctions business slid into a thin sliver of a theme on the left as the collaborative supply chain solution took hold with the customers and became the focus of attention (and the source of money).

The business plans, finances, resources, staff all followed behind as the organisation rotated through 90 degrees to provide a completely different solution to the same customers.

Strategy mapping helps you explain strategy as it evolves. It provides a quick and effective way to describe the strategy, that is rich and powerful in its description yet at the same time can also change and evolve far more easily than a written document.

That is why strategy maps are often used to describe alternative strategies when they are being tested and thought through. It is also useful to develop a strategy map when acquisitions are on the horizon. It means that you concentrate on the main business whilst developing your strategy for the acquisitions and can then feed the integration often two businesses into the strategy map.

Having the strategy map allows you to then develop the measures, targets, projects, actions and responsibilities (The balanced scorecard) beneath the strategy map. That way as the strategy map evolved you can more easily refine the balanced scorecard with reference to the strategy map.

For more on strategy maps and balanced scorecards, read our introduction to strategy maps on the main website http://www.excitant.co.uk/pages/strategy_mapping.htm

Phil Jones

The current environment is an excellent test of your balanced scorecard. Does it still serve you well as the economy changes, with credit tightening, interest rate and exchange rate changes, with concerns over governance (just ask a banker), as you need [...]]]> How your balanced scorecard should be helping you in this economic climate (part 1)

The current environment is an excellent test of your balanced scorecard. Does it still serve you well as the economy changes, with credit tightening, interest rate and exchange rate changes, with concerns over governance (just ask a banker), as you need to find ways to change costs, or as you seek ways to maintain existing revenues or find new ones?

There are ways of doing well in this environment? Given all the doom and gloom in the car industry I have a friend in the trade who has never been busier. Why? He is exporting UK cars to people who are finding the pound so cheap that it is worth buying cars here. In every cloud, as they say. Of course it’s a change of strategy but you do have to spot opportunities and grasp them and youir balanced scorecard should be helping you. Here’s how:

1) Supporting governance and decision making

The first thing that your balanced scorecard should do is provide your board and your management with good quality governance and assurance. To do this it needs to provide a clear overview of performance across the balanced scorecard’s perspectives (Financial, customer, process & learning & growth). The relationships between perspectives provide lead and lag indicators of success so you know you are staying on track or something is going wrong that will lead you off track. You have the ability to drill into detail as you need it. The well presented information should promote and encourage informed discussion, backed up with evidence. Overall this should provide your board with information they can trust so they understand the risks, can act with confidence, or be assured that things are in control.

2) Knowing what drives costs and revenues for better decision making

If you are going to make decisions about costs and revenues you have to be clear what drives them. Your balanced scorecard’s cause and effect model that crosses the perspectives should be telling you what drives costs and what drives customer behaviour and revenue. If it isn’t, particularly if you have measures in perspectives that don’t have any relations between perspectives, you won’t be able to make informed decisions about which levers to pull to change costs of revenues. You might cut costs that undermine quality or sales.

As an example, some colleagues of mine have recently been using lean management practices to eliminate waste from processes and activities. The lean principles map well onto the cause and effect model of the balanced scorecard. In one case (from financial services) they identified savings of £300,000 per annum, in just one department. This was in an organisation with a total operating costs of only £11m. That is nearly 3% improvement in profits. In another example (from the public sector) a customer’s application took 3 months and travelled 1.5 miles to get processed. This was reduced to 45 minutes and 1 yard. You can imagine how this improved both services and costs. In each case it is the underlying capabilities that drive processes, to serve customers and deliver revenues, economically: that is the cause and effect model of the balanced scorecard.

3) Focusing on the right investments, Eliminating the wrong ones

One danger at the moment is across the board cuts. Perhaps cuts to discretionary spend or perhaps 10% across the board in every department. Of course some costs, such as rent or IT system costs, are fixed and indirect. They are hard to cut. Others, like training, marketing and even wages, are easier to cut. However these might not be the right things to cut, they get cut disproportionately because they are softer targets and the internal dictate dominates the logic of business performance.

In one organisation we worked through their projects aligning them to their strategy map. From a total project spend of £100m we found £40 that were not directly contributing to their strategy. That is potentially a £40m saving. In another organisation the simple process of exposing their project portfolio (over 130 projects in an organisation with a cost base of only £150m) and allowing that portfolio to be seen as a whole, provided the management team with the incentive to get a better grip on project approval, project costs overrun and, most importantly, the delivery of promised benefits.

4) Refining measures, whilst maintaining objectives

Modern balanced scorecards don’t start with measures. They start with objectives. This means you know what you want to achieve and the characteristics of the objective help you to tell what you should be measuring.

When things change, and some measures have become inappropriate you don’t just want to add more measures, do you. That will add cost as well. When your approach is anchored in objectives, it is far easier to refine your measures, and targets, whilst still communicating your overall objective. Your balanced scorecard should be able to adapt like this.

Only four tips today: There will be some more in a week or so time. While you are asking these questions you might just wonder how out of date or “modern” your balanced scorecard is. To read about how the approach introduced some vital and fundamental developments between 1992 and 1994, have a read of my new article, “What really makes a balanced scorecard balanced?”.

I hope your balanced scorecard is as least as good as those from 1995?

Phil Jones

Strategic Balanced Scorecard Specialists
Excitant Ltd