25 year history of Balanced Scorecard: Execution premium – part four

James Creelman Apr 2017

By James Creelman and Elena Gómez Domenech. Reviewed and approved by Drs Kaplan and Norton.

In this, the final part of the series, we describe the six stages of the Execution Premium Process (XPP). Integrating strategy and operations, the book that introduced the XPP served as Kaplan and Norton’s final instalment in their series of works on the Balanced Scorecard system.

The Execution Premium: Linking Strategy To Operations for Competitive Advantage (2008)

Kaplan and Norton observed that most companies using the Balanced Scorecard were generally able to master three of the Strategy-Focused organization’s principles: mobilize the executive team; translate the strategy into a strategy map, measures, and targets; and align the different parts of the business through linked scorecards.

But most organizations struggled to develop the other two: making strategy everyone’s job (which means changing key human resources systems, such as performance management and incentives) and making strategy a continuous process (which required the redesign of various planning, budgeting and control systems). In those cases where the new strategy management approach was not fully embedded into existing organizational management systems, the performance was hard to be sustained over time. There was a need to better integrate strategy management into the organization’s way of doing business.

In the Execution Premium book, the authors explain how to enhance the link between strategy and operations, through a six-stage process: The Execution Premium Process. Figure 1.

The Execution Premium Process (XPP) can be defined as a multidimensional framework for describing, implementing and managing strategy at all levels of an organization by effectively linking strategy to day-to-day operations. The XPP is a framework for implementing complex programs of change and indeed for managing strategy-focused organizations.

This powerful and comprehensive approach builds on the concepts presented in the previous books but adds important contributions:

•  A new step dedicated to the alignment of operations to strategy (4. Plan Operations)
• A framework for management review meetings included in stage 5. Monitor and Learn
• The description of the Office of Strategy Management (OSM) as the overall coordinator of all the strategic management processes

We will now review each of the stages in turn.

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Stage 1: Develop the strategy

In this stage, executives develop the organization’s strategy. Four main questions need to be answered:

1. What is the main purpose of the organization? An organization has to clarify its mission, vision, and values. The vision (what the organization wants to achieve in typically a 3-5 years time frame) has to be quantified (with high-level metrics of success).  As an example from a University, “By 2015, our distinctive ability to integrate world-class research, scholarship and education will have secured us a place among the top 50 universities in the world.”
2. What is the value gap? – the difference between current and future state, as quantified by the vision- establish a relevant guideline for formulating and executing the strategy.
3. What are the key issues? Here, executives review the situation in their competitive and operating environment, especially if major changes have occurred since they last crafted their strategy. Sources for this process include (i) the external environment, through a PESTEL analysis (Political, Economic, Social, Technology, Environmental and Legal/Regulatory), (ii) the internal environment (i.e. a status of human capital, operations, innovation, etc.) and (iii) the current strategy performance. All is summarized in a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats), and based on that, the executive team builds a Strategic Change Agenda to describe and communicate main shifts to be done on the strategy. Figure 2.
4. How best can an organization achieve its vision? A strategy is formulated by identifying the targeted customers, the value proposition to satisfy their needs, the key processes to ensure full coverage of the value proposition, the key skills and competencies required to implement the strategy and the technology enablers.

Stage 2: Plan the strategy

Planning the strategy (now more commonly called “translating the strategy,”) includes defining strategic objectives, measures, and targets, strategic initiatives and their associated budgets. While these elements have been introduced earlier, it is worth highlighting three new aspects explained in this book: an enhanced concept of strategic themes (introduced in the strategy maps book, but more sophisticated and evolved here); detailed framework about identification and prioritization of strategic initiatives; and the STRATEX (Strategic Expenditure) concept.

1. How is the strategy described?  This is achieved by developing the organization’s Strategy Map. Strategic objectives are grouped into categories, called strategic themes, to help executives manage the complexity of having 15-25 objectives in a Strategy Map. Kaplan and Norton state, “By building a Strategy Map around a collection of strategic themes, executives can separately plan and manage each of the key components of the strategy, but still, have them operate coherently. The themes, which operate across functions and business units, also support the boundary-less approach necessary for successful strategy execution.”
2. How is the plan measured?  The overall value gap defined by the vision statement is decomposed to understand the required performance gap each objective must close over the strategy plan time horizon. For the objectives, measures are identified and targets are set.
3. What initiatives does the strategy need?  Strategic initiatives are essential for closing the gaps between current performance and targets. If “themes, objectives, measures, and targets represent what the organization wants to accomplish”, “strategic initiatives represent the how”. Potential initiatives will be matched against the strategic objectives to ensure alignment and guarantee there is no major gap that is not addressed by a strategic initiative. A matrix to map candidate initiatives against the strategic objectives is often used for this purpose.
   
   To be able to select the few key initiatives out of a potentially large list of candidates, Kaplan and Norton propose to use some prioritization criteria, based on their strategic impact, complexity, and risk. An example of an initiative scoring system is shown in the following.
4. How to fund strategic initiatives?  Initiatives are time-bounded projects, different from the business-as-usual activities and require specific funding to be executed. Very often strategic initiatives are comprehensive programs cutting across different organizational functions. Therefore, funding needs for strategic initiatives should be separated and managed apart from regular OPEX and CAPEX budgets. Kaplan and Norton propose that a special budget category is created called STRATEX to facilitate its management. Figure 4.
5. Who will lead the execution of the strategy?  The authors propose a new accountability structure for executing strategy through strategic themes. Executives are assigned to become theme owners, they are funded with STRATEX, and supported by theme teams drawn from across the organization. With this new kind of structure, “theme owners and teams provide accountability for, and feedback on, the execution of the strategy within each theme.”

Stage 3: Align the organization

To ensure a successful strategy execution, all individual business and support units need to be aligned to the corporate strategy. At the individuals level, all employees have to understand the strategy and be motivated to support strategy implementation.

The Strategy Map and the Balanced Scorecard provide a powerful reference for creating alignment across units and individuals. Two forms of alignment are required: vertical and horizontal.

Top-down cascading – from the corporate level down to units, departments, teams, and even individuals – create vertical alignment.

Horizontal alignment happens when units of the same organizational level consider and integrate their peers’ objectives in developing their strategy maps or scorecards. This is the kind of alignment of the shared services units. This procedure enables each unit to define and execute a strategy that effectively supports the strategies being implemented by business units.

Stage 4: Plan operations

In this fourth stage, we see the developing of strong relationships between strategy processes and operational processes, so that they become intrinsically linked.

Kaplan and Norton identify two main operational sub-processes that can be used to effectively create those linkages.

1. Alignment of business process improvements to strategy

Very often, organizations embark on huge process improvements efforts just for the sake of improving, without a clear view of the strategic rationale of the initiative. Process improvements are of course legitimate and desirable, but considering the limited resources available in any organization, why not concentrate efforts on those aspects with a higher impact on the delivery of strategic results?

Kaplan and Norton propose that organizations leverage the strategic objectives of their strategy maps and scorecards to enhance and align their process management programs. Of course, many processes are vital but not strategic (for instance, payroll payments is a typical example of a vital but not strategic process) and they have to work at an acceptable quality level. But the strategic processes, identified in the Strategy Map, are those that produce greater benefits for the organization. Therefore organizations should excel at those processes, which should be the priority focus of improvement efforts

2. Connecting operating plans to strategy

A key component of the operating plan is the financial plan. This stage is about ensuring that strategic measures and targets on the Balanced Scorecards are connected to the financial plan and budget for the year. It is not enough that strategic initiatives get the required funding, it is also essential that the rest of spending and resources are allocated with strategic criteria.

Kaplan and Norton introduce an approach for linking the strategic plan to forecasts for spending on operating and capital resources. This process ensures that resource capacity, operational plans, and budgets reflect the direction and needs of the strategy.

The approach is made of five steps:

Step 1.  Use driver-based revenue planning to obtain sales forecasts for future periods.

Here the connection to strategy should be made by considering the expected results of strategic initiatives and the growth targets for financial and customer metrics in the Balanced Scorecard, into the near-term revenues forecast revenues. To drill down the overall growth and customer targets in the Balanced Scorecard into actionable inputs for the revenues forecast, the authors recommend the usage of driver-based planning. Key measures in the Balanced Scorecard can be further decomposed into more specific factors or drivers that can then be used as key inputs of the revenue model for forecasting. Kaplan and Norton also advocate for the use of dynamic rolling forecasts to overcome the issues of the traditional budgeting.

Step 2.  Translate the high-level sales forecasts into a detailed sales and operating plan.

Step 3.  Enter the sales and operating plan, as well as projected process efficiencies, into a TDABC (Time-Driven Activity-Based Costing) model that forecasts demand for resource capacity.

Step 4.  Derive dynamic forecasts (budgets) for operational and capital spending (OPEX and CAPEX).

Step 5.  Estimate pro forma financial profitability by product, customer, channel, and region.

Intermittent Stage

Between stages 4 and 5 is where “execution” takes place and so is where initiatives are managed and where strategically critical process improvements take place. Both play a part in strategy execution: initiatives typically drive breakthrough change (and are typically longer-term) while process improvements deliver more incremental change (more typically over shorter-term).

Stage 5: Monitor and learn

It is important to regularly monitor how well the organization is implementing the strategy and whether the strategic results are being achieved. Organizations conduct regular management meetings to track revenues, costs or quality performance. There is a strong temptation to use the existing meetings to also track the strategy implementation. What usually happens in these situations is that meetings get “invaded” by operational issues and discussions, and strategy is never discussed.

Kaplan and Norton maintain that operational and strategy review meetings should be different and separated – different agendas, and maybe attendees – and explain their differences.

• Operational review meetings should focus on the question “Are our operations under control?” These meetings are to review short-term departmental, functional, and financial performance and respond to recently identified problems that need immediate attention. Operational review meetings can be weekly, bi-weekly or monthly. Their frequency will depend on the availability of new data about the operations or tactical urgencies.
• Strategy review meetings respond to the question “Are we executing our strategy well?” In this meeting- normally held monthly or quarterly- the management team reviews the measures and initiatives from the Balanced Scorecard, and assess their progress, barriers, and risks associated with the successful implementation of the strategy. The reporting about the performance of the Balanced Scorecard measures and initiatives should be distributed to the attendants before the meeting. Therefore, the focus of the strategy review meeting should be on deciding actions to correct the cause and assigning responsibility for achieving the targeted performance.

To launch an effective strategy monitoring process, the following elements have to be considered:

• Ownership. All strategic execution elements (strategic objectives, measures, initiatives) must have an owner assigned. The owner is the ultimate person responsible for driving the implementation of his / her assigned objective, measure or initiative, and has to ensure a timely and quality tracking and analysis of the performance of the strategic element over time.
• Strategy performance report. Organizations must define the structure and templates to use to report on the performance of the strategic objectives, measures, and strategic initiatives.
• Reporting processes described and reporting calendar set. A detailed flow of information, and a reporting and strategic review meetings calendar has to be defined.

Stage 6: Test and adapt

Finally, organizations need to address a critical question as they progress in the implementation of their strategies: “Is our strategy working?”

A strategy is a set of hypotheses and assumptions about how the organization can create sustainable value. As organizations progress in the execution of their strategies, they gather invaluable data and learnings to validate if hypotheses were right or require adjustments. Also, changes in the marketplace or new events or ideas proposed by employees need to be considered to adapt the existing strategy.

Kaplan and Norton consider this last stage is critical to ensure the long-term success of the organization’s strategy and propose that there are periodic test-and-adapt meetings.

Different tools and techniques can be used to support in this sixth stage. To name some of the best known: statistical correlations between measures in the Balanced Scorecard – based on actual data gathered in the strategic review reports; wargaming; scenario modelling, etc.

Office of Strategy Management (OSM)

Just as there are executives in charge of processes like quality management (quality director), budgeting (CFO) or employee performance management (CHR), Kaplan and Norton propose that there is a function which is the owner of the strategy execution system. They call this the Office of Strategy Management (OSM).

According to the explained strategy execution framework (the XPP model), some of the existing processes run by different functions – performance management, communications, budgeting or process management – would have to be changed and coordinated to become better aligned to strategy. The strategy execution framework also means creating additional processes – such as developing and cascading strategy maps and Balanced Scorecards across the organization or reporting about strategy implementation- that all need to have an owner.

The OSM occupies a previously missing link in strategy execution: runs several new strategy management processes and connects and aligns existing but fragmented processes. In a broad sense, its primary responsibility is the oversight and administration of strategy development and execution.

More specifically, the OSM plays three kinds of catalyst functions in designing, implementing and sustaining the Strategy Execution system.

• The OSM, as an architect, must design the overall framework so that all the strategy-related processes are integrated with a closed-loop process, perfectly synchronized and compatible with one another. The OSM will need to ensure, for instance, that budgeting and employee performance management processes receive the right inputs, on time, from strategy planning processes. Also, the OSM will have to design the governance mechanisms (roles, forums, meetings, etc.) required to continuously review strategy implementation.
• As process owner, the OSM takes primary responsibility for several of the new strategy execution processes, those related to stage 2 (plan the strategy), 3 (align the organization), 5 (review the strategy), and 6 (test and adapt the strategy), while incorporating the required responsibilities of stage 1 (strategy development process)
• As an integrator, the OSM ensures that the existing processes related to strategy performed by other functions (finance, human resources, information technology, quality management or communication) are properly aligned to the strategy.

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Parting words: the journey continues

From measurement, through strategy-focused organizations to the integration of strategy and operations, Kaplan and Norton’s canon of work from 1992-2008 represents a complete and comprehensive body of work on strategy management (especially execution).

Thousands of organizations have benefited from the Balanced Scorecard system and at various steps in its evolution, around 200 of which have been inducted into the Balanced Scorecard Hall of Fame for Strategy Execution™, a much sought after award reserved for organizations that have demonstrated breakthrough performance improvement using the Balanced Scorecard system. A rich library of best practices, from both the commercial and not-for-profit sectors, is available for organizations setting out on their scorecard journey or for experienced users who wish to learn from others to build on their current successes.

But the Balanced Scorecard story is not over. Global thought leaders and practitioners will continue to evolve and refine the Balanced Scorecard concept and methodology to ensure continued relevance and value: indeed, back in 1990, Kaplan and Norton set out on a journey to reshape management and measurement systems for the knowledge, as opposed to industrial eras. This journey continues as the knowledge era plays out to the backdrop of the complex socio-economic dynamics ushered in by the digital economy and globalization. Precisely how the Balanced Scorecard concept will evolve is yet to be seen. But we have some pointers.

Analytics

Norton has spoken a great deal recently about the role that advanced data analytics will play in positioning the Strategy Map and Balanced Scorecard as an analytics framework, enabling much better insights into the hypotheses and assumptions that underpin the strategy. The promise of the Strategy Map is demonstrating cause-and-effect (or at strong correlations between enablers and outcomes) will be significantly enhanced.

OSM

To strengthen this ability, the OSM might begin to integrate greater analytics capabilities into the office to deliver better decision-support to executives and others (and we are already seeing some organizations take this route and reaping the consequent rewards).

Networked organizations

Moreover, the Balanced Scorecard system will be used more extensively as a vehicle for creating common focus and leveraging synergies among collaborative, network organizations that will often involve multiple organizations. Applying the Scorecard to networks seeking to bring together commercial, Government and other organizations in delivering economic and social value to communities across the world is one such example.

However the Balanced Scorecard evolves, it is fair to say that the canon of work produced by Drs Kaplan and Norton has already made an immense contribution to the development of management theory, in particular, the management and execution of strategy. Those that follow will stand on the shoulders of giants.