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1:07 PM Friday August 1, 2008
It's been more than 15 years since Bob Kaplan and I first wrote about the Balanced Scorecard (BSC). Since then, we've chronicled the evolution of this performance management framework, in a series of articles and books.
Our experience inside organizations has taught us that superior strategy execution requires a system, not a series of diverse projects performed in different parts of the organization.
Most organizations have parts of a strategy management system, such as strategy planning, budgeting, HR planning, or performance reporting.
But they function as silos, losing much of their potential value through lack of integration. Companies generally fail at implementing a strategy or managing operations because they lack an overarching management system to integrate and align these two vital processes.
Marriott Vacation Club International (MVCI) confronted this issue in the late 1990s after the high growth company was transformed into a process based organization that used multiple metrics - process time, cost and quality - to manage each of its leading brands and properties. The company included Marriott Vacation Club, Grand Residents by Marriott, Horizons by Marriott Vacation Club and The Ritz-Carlton Club.
The company had hundreds of simultaneous unrelated initiatives under way. Efficiency gains in a given process generated only limited benefits because the gains weren't leveraged or integrated with the efforts of other groups.
In 2002, MVCI created a strategy management team to craft a new strategy and an enterprise level strategy map and Balanced Scorecard. The proposed strategy emphasized offering complete customer solutions to resort property owners, including dedicated vacation planning assistance and 24/7 access to information. The strategy required complete integration of the company' operation and support process.
After the new strategy and scorecard was approved, the strategy management team then cascaded the scorecard to operating process. The team implemented a "kill the initiative campaign" to streamline MVCI's portfolio of initiatives. By 2004 MVCI further cascaded the Balanced Scorecard down to individual property levels both for on-site resort operations and for each site's sales and marketing team. MVCI's project team also led the communication of the strategy to all employees and worked with the human resource department to ensure that each employee's personal objectives were linked to one or more of MVCI strategic objectives.
MVCI enjoyed rapid and substantial gains - what we refer to as the execution premium - by linking the planning of strategy to its operational execution. Operation profit rose from $149.3 million in 2003 to $206 million in 2007.
MVCI, like other organizations used the Balanced Scorecard framework to accomplish two things:
(1) To focus their performance improvement programs on the strategic priorities of the organization.
(2) To link their programs to the broader execution program, such as the BSC initiatives, strategic expenditures (StratEx) and reviews. In retrospect, it should be obvious that if you can't get focused and you can't execute, you probably can't get value.
In our new book The Execution Premium, we present our solution to the problem - a six stage, closed-loop management process that (1) defines the strategy, (2) translates the strategy, (3) aligns the organization, (4) links to operational processes, (5) monitors & learns, and (6) tests and adapts the strategy. This six stage process touches virtually every other management system, so you can imagine that this could become very complex.
In upcoming posts, we'll talk about how The Balanced Scorecard (BSC) and the Strategy Map (SMAP) allow companies deal with this complexity.
MVCI isn't the only company that consolidated their metrics across the organization and aligned them all with the central strategy.
I'd be interested to hear from you about how you prevent the many good performance improvement programs--such as TQM, COSO, Ideation and others--in your organization from becoming isolated approaches in a Tower of Babel.
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Robert S. Kaplan is Baker Foundation Professor at the Harvard Business School and co-founder of Balanced Scorecard Collaborative, a Palladium company. He also serves as Chairman of Professional Practice at Palladium. Kaplan joined the HBS faculty in 1984 after spending 16 years on the faculty of the business school at Carnegie-Mellon University, serving as its Dean from 1977 to 1983. Kaplan is co-developer of both activity-based costing and the Balanced Scorecard. He has authored or co-authored twelve books, fifteen Harvard Business Review articles, and more than 120 other papers. In 2006, Kaplan received the Lifetime Contribution Award from the Management Accounting Section of the American Accounting Association. The Financial Times named him on its 2005 list of Top 20 influential business thinkers. He received the Telecom Italia "Prize for Leadership on Business and Economic Thinking” in 2004, the Distinguished Service Award from the Institute of Management Accountants (IMA), the CIMA Award by the Chartered Institute of Management Accountants (UK), and the Outstanding Accounting Educator Award of the American Accounting Association. Kaplan received a B.S. and M.S. in electrical engineering from the Massachusetts Institute of Technology and a Ph.D. in operations research from Cornell University.
David P. Norton is Founder and Director of Palladium, and co-founder of Balanced Scorecard Collaborative. Norton was previously the president of Renaissance Solutions, Inc., an international consulting firm he co-founded in 1992. Before Renaissance, Norton co-founded Nolan, Norton & Company where he spent 17 years as president, prior to its acquisition by KPMG Peat Marwick. A frequent lecturer and writer, Norton’s work with the Balanced Scorecard has been the subject of many articles and public conferences. He is the co-author, with Robert Kaplan, of eight Harvard Business Review articles and five books: The Balanced Scorecard, The Strategy-Focused Organization, Strategy Maps, Alignment, and The Execution Premium. His books have been translated into 23 languages. The Balanced Scorecard concept was selected by the editors of Harvard Business Review as one of the most influential management ideas of the past 75 years. Norton earned a B.S. in electrical engineering from Worcester Polytechnic Institute, an M.S. in operations research from the Florida Institute of Technology, an MBA from Florida State University, and his doctorate in business administration from Harvard Business School.
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Comments
Dave,
Congratulations on your trajectory into the 21st century blogisphere! Many writers who start blogging aspire to end up some day in HBR. You started in HBR, and have ended up blogging.
Welcome to the future!
Rob
- Posted by Rob Howie
August 15, 2008 9:29 PM
Dear David,
I agree that consolidated metrics are important in providing cohesion between strategy and operations. But in all fairness aren't you running the risk of creating another type of silo? I could envisage the following scenario:
A major corporation suffers from sales decline and the management team becomes disillusioned with the strategic planning process, especially after the plans fail to come to fruition the second year running.
The split between operations and strategy is cited as the cause of the problem. The management style is largely technocratic and a consultant is brought in to perform the analysis. The consultant produces a report that recommends BSC and distributed metrics linked to employee performance and the bonus scheme.
The management team supports the recommendation and chooses a bunch of strategic activities to include in the pilot. After running BSC for a year, results are improving and generally everybody is happy. The initiative is declared a success.
Two years later the corporation is becoming plagued with high operational costs in distribution. Now this new problem is not directly linked to the original problem, nevertheless, it does share some of its attributes. The management team launches a new effort to address the high distribution costs. Again another consultant is called in to specify a solution.
Now you could argue that the BSC approach could prevent this from happening; distribution wouldn't achieve its metrics, a flag would be raised and the problem corrected. But in fact it doesn't matter, the issue here is that another problem popped up and reactively the technocratic management team decided to solve it.
The point I would like to make here is very subtle but very important. Until organizations start addressing their underlying social subsystems correctly, they may implement a new BSC approach every two years - it is not going to cure the disease.
Once again I agree that the silo issue causes big problems in organizations; but you are still talking about a technocratic solution to address a "learning" problem. Yes, linking strategy to operations is good and for sure it must be done. However, if the organization implementing BSC is not working as a learning organization then I am afraid that the benefits will be rather short-term. The organization will start to regress and slip back into its old ways; the problems that were there "before BSC" are still there "after BSC" - and popping up in different guises throughout the organization.
The bottom line is this: BSC will link strategy and operations, but it will not solve the strategic issues that are plaguing organizations, issues that produce the kinds of symptoms that could lead to a technocratic implementation of BSC.
Kind regards,
James Wood
Prime Factor cz
- Posted by James Wood
August 26, 2008 12:27 PM
hi dave,
There is always something to learn from you, the parspectives are new, Thanks
Ernest
- Posted by Ernest nnagbo
September 10, 2008 6:16 PM
To James Wood
Thanks for the insightful response. You used the term “technocratic” on several occasions to describe BSC implementations that follow the book and don’t leave time for the softer issues like organization learning.
I don’t think that there need be a dichotomy that only allows either “technocratic” or “learning” solutions. In my experience, you need both and you need them to work simultaneously. While good leaders have good intentions, insights and the ability command, they also require structures and disciplines with which to frame and to focus their intuitions. When we write about the Balanced Scorecard, Strategy Maps, Stratex, etc., we tend to emphasize the structure because these tools are tangible and discrete and prone to description. However, we have come to learn that the real value is created by the way in which leaders use the tools to facilitate change in their organizations.
For example, through the eyes of an engineer (like me), the Strategy Map is a thing of beauty, artistically showing the cause-effect assumptions of the strategy. To a good executive, designing the Strategy Map provides an opportunity to create debate and to gain consensus among the executive team about the strategic directions and priorities.
Through the eyes of an engineer, Stratex is a clever accounting concept that separates strategic investments from operational ones. To a good executive, Stratex represents a way to break through the financial power of the silos by funding and managing a portfolio of cross-business initiatives.
Through the eyes of an engineer, a Balanced Scorecard allows you to use data as an objective way to manage. To a good executive, the monthly Balanced Scorecard review is a way to reinforce the new strategy, as well as to teach the executive team – through interactive debate – the values upon which decisions will be made and culture will be shaped.
So, I believe that executives need to have both a “left brain” (structure) and a “right brain” (intuition) to be effective. The structures that we create through the Balanced Scorecard are only one part of the solution. If I may use an analogy, the BSC is like a very good paintbrush. But you don’t have art until an artist uses these tools to translate his or her insights and visions to a new reality. So too it is with an executive.
Dave Norton
- Posted by David Norton
October 6, 2008 3:34 PM
I always enjoy reading your postings, you ask how do we keep various efforts from becoming isolated. For the past ten years I have been pushing my clients to fully integrate BSC metrics into their ISO 9001 objectives. this raises the stakes for performance because not only are the metrics being monitored by Senior Management, it is reviewed internally by internal auditors and externally by the ISO auditors. The new changes to the ISO 9001:2008 Standard clarify the requirements for objectives (metrics) for ALL proceses. This means that not only do we have to measure customer satisfaction we have to measure each process in the business system for effectiveness. It would be really interesting to see the "Big 3" automotive companies adopt ISO/TS instead of just forcing their suppliers to comply.
- Posted by Thomas Arneson
December 5, 2008 1:57 PM
Great articles, very insightful indeed…
However, one challenge remains constant: if the organization doesn't have the right metrics to begin with, the whole practice of consolidation of those metrics would be more like aggregating the wrong metrics that would not really correspond to the realities experienced on the ground by the organization, hence making them more irreversible, AKA "Look Ma, I'm doing the wrong thing, much, MUCH faster!
- Posted by Rozita
February 10, 2009 6:14 PM
Dear David,
Our firm is now using Strategy map and BSC as a management tool for measuring the performance and translate our strategy to plan and project. We wonder how the business plan and strategic plan is linked. In the above article, "Strategy Execution Needs a System", the company included Marriott Vacation Club, Grand Residents by Marriott, Horizons by Marriott Vacation Club and The Ritz-Carlton Club. Do they still have business plans, if yes, how the business plan link to the closed loop management system: linking strategy to operation(The Execution Premium).
BRGS,
Thusanai Piarabutr
- Posted by Thusanai Piarabutr (Ph.D.)
March 3, 2009 12:30 AM