3 Key Trends in Performance Management and Balanced Scorecard

I have had the pleasure to spend the past two days with Bob Kaplan and Dave Norton, inventors of the Balanced Scorecard and the Strategy Execution Premium Framework, as well as a number of leading practitioners to discuss some of the recent trends and developments in the field of performance management. Here is my initial take on some important development you should be aware of: Trend 1: Linking performance management and risk management The realisation that risk management is a flip side of performance management is not new and as you might know I discussed the importance of integrating risk management and performance management in my book 'Strategic Performance Management' back in 2006. So why is it on the list again? The reason for why I see it as a key trend is that more and more organisations are actually linking the two areas more explicitly and an increasing number of software solutions now offer integrated risk and performance management. There is some momentum in the idea and we are starting to see a critical mass of early adopters. The way I have always proposed to link risk and performance is to look at risk for every strategic objective on your performance framework and develop key risk indicators (KRIs) that sit next to key performance indicators (KPIs) and allow you to assess and mitigate the risks of not achieving your strategic goals. Bob Kaplan presented an emerging framework for risk management in which he categorised risks into Category I: Risks from Employees Undesirable and Unauthorized Actions; Category II: Risks of Not Achieving the Enterprises Strategic Objectives; and Category III: Risks from Uncertain, Uncontrollable External Events. He also explored how the different elements of a strategy execution framework could be used to address them: (1) Using values, mission and vision to set clear boundary condition so employees dont act in ways that are undesirable or unauthorised, (2) identify key risk events and risk indicators for each strategic objective on your strategy map and aggregate the risk indicators into a risk scorecard, (3) use scenario planning, war gaming and tail risk meetings to address the unknown unknowns (to re-cite the poetry of Donald Rumsfeld). Actually, the use of scenario planning in scorecard design is something I have explored in my article The Future Scorecard: Using internal and external scenarios to create strategic foresight, published back in 2005. As you might find it an interesting read I have put the article up on our website for download: http://www.ap-institute.com/resources_academic.asp I would love to hear from anyone who has successfully aligned risk and performance management on either of the categories or is there someone out there that has done it across all? Trend 2: Creating a strategy and intelligence competency center Strategy management and strategic business intelligence and analytics require a team that not only has the relevant skills but is structured in the appropriate way. Dave Norton made the point that

strategy management requires cross-functional processes and traditionally our structures and competencies are based on functional silos. In order to sustain the management of strategy Dave suggested creating (1) a strategy council, (2) strategic theme teams, and (3) an office of strategy management: THE STRATEGY COUNCIL: A team made up of senior executives responsible for oversight of strategy development and execution. THE THEME TEAM: A cross organization team empowered to execute the objectives of a strategic theme at an operational level THE OFFICE OF STRATEGY MANAGEMENT: A small team of performance management specialists who are responsible for designing and managing the Strategy Management Process objectives of a strategic theme at an operational level. For me the key is the latter but I would go further than this and not only give them responsibility for strategy management but also strategic insight, i.e. the BI and analytics capabilities to turn data into insights. Some might remember my blog post on the integration of business analytics with performance (http://theintelligentcompany.blogspot.com/2010/07/business-analytics-mergewith.html) in which I made that point. It is good to see that companies such as Volkswagen, TNT and Merk have put in place the office of strategy management while many others have created BI competency centers. However, it is still rare to see companies that have created a wider strategy management and BI competency center or at least created close links between them. If you have created the link between PM and BI then let us know! Trend 3: Linking strategic performance management with leadership and change management In his foreword to my latest book More with Less, David Norton gave his personal definition of performance management: the execution of the organization mission through the coordinated effort of others. He then went on to say PM is a system and process that impacts everyone in the organization. You can argue that performance management is the most important job of a manager. In fact, you could argue that the execution of the organization mission is the only job of management. I whole-heartedly agree to this but still see that many companies use performance management in an administrative reporting or tick-box fashion. In order to ensure that the agreed performance targets and objectives are in fact the focus of everyones day-to-day efforts companies have cascaded scorecards down to individual levels and have aligned the achievement of targets with incentive systems and bonuses. In my experience with many of the leading global companies this is still an area that many get wrong. When you hard-wire any incentives to targets you run the danger that people just hit the target but miss the point. And when you give individuals their own scorecards you often generate a focus on personal performance over team or company performance, which in turn can drive dysfunctional behaviours. What became clear over the past 2 days was that the softer side of performance management and change management play a key role in getting this right. It is less about creating a system of cascading, reviewing and aligning targets and measures and much more about leadership, inspiration and conversations that engage people on an emotional level. I believe one trick is to involve HR in the role-out of strategic performance management.

Interestingly, in Carlsberg the strategic performance process is owned by HR because they see it as a strategic change initiative and in another of my client companies the delivery of the corporate dashboard is driven by the chief change officer. Bob Kaplan make an important point when he said: Successful Organizations Need Both Inspirational Leadership and Effective Management, Working in Harmony, Together: Leadership creates the vision and sense of urgency. Leaders communicate, inspire and motivate. Management provides the rigor, alignment, and discipline required to implement the strategy and achieve the vision. In my view leadership remains the most crucial ingredient of any successful performance management initiative. One of the best examples I have personally experienced comes from the perfect balance between leadership and management provided by Sir Terry Leahy at Tesco (download the full case study on Tesco here: http://www.apinstitute.com/resources_casestudies.asp As always, I would love to hear from you if you feel that in your organisation you are getting this right, or indeed, if you feel the opposite and you are getting it completely wrong

Wednesday, 29 June 2011

Five Top Tips for Corporate Performance Management (CPM)

CPM is about managing and improving business performance, which, of course, is at the top of the agenda of senior executives across the globe. While businesses are pressing forward with CPM initiatives and shedding blood, sweat and tears to put balanced scorecards, KPI dashboards and business intelligence applications in place, there is mounting evidence that the execution of CPM is often too mechanistic, too number-focused and not integrated enough. As a consequence, many organizations are not seeing the performance improvements they desire. In principle, CPM should be easy: agree on your strategy, collect meaningful and relevant performance information, and use this information to gain quality insights that allow you to improve your strategy and its execution. So how can we move beyond the meaningless collection of data and metrics to a situation where we collect relevant performance information that helps us to learn and improve?

Here I want to outline how to avoid some of the most common CPM traps and provide practical advice on how to turn your business into a truly performance-driven

organization. A lot of the dos and donts of CPM are based on common sense. Unfortunately, common sense is not always common practice and organizational realities often mean that we end up focusing on processes and individual parts of a larger jigsaw such as measurement and performance reporting instead of real performance improvement. Based on research and experience, here are the key areas to make CPM happen in your organization: 1. Map your strategy If a company wants to reach its goals, it must first know what those goals are. If the over- riding strategy is clearly articulated, everyone will be able to pull in the same direction and will be more likely to focus on what matters the most, to produce real results. Research has shown that producing a strategic map outlining your value creation logic on one piece of paper can be one of the most important success factors in any CPM implementation. Such maps ensure strategies are focused, coherent and integrated and they allow easy communication of the strategy to all employees and external stakeholders. Important is that these maps include the outcome objectives, the core activities or core processes to achieve the outcomes, as well as the enabling elements and intangible drivers of performance. It is also important that these maps outline the cause and effect relationship between these different elements and how one supports the other. [Many examples of strategy maps can be found in this case study collection: www.ap-institute.com/resources_casestudies.asp] Dont just populate existing strategy map templates without thinking about your unique strategic objectives and their causal relationships. Strategic maps have to reflect your unique business strategy at this point in time. 2. Collect meaningful information by asking the right questions Without the right performance data, organizations would be stumbling around in the dark, having little idea of whether they were on track or not. Yet, to be of value, performance indicators should help measure the things that matter the most. This means indicators need to be tightly and directly linked to the strategic objectives of an organization. In addition, performance indicators need to have a high information value (i.e. they have to provide you with information that helps answer your critical business questions). A new concept in CPM is called key performance questions (KPQs). KPQs are developed to identify the most critical performance related questions managers need to have an answer to. KPQs therefore ensure any indicator that is subsequently collected helps to answer a critical question and has real information value. Best practice is to identify between one and three KPQs for each of your strategic

objectives, before you start collecting any data or information. [Learn more about KPI and KPQ design from these white papers: http://www.apinstitute.com/resources_whitepapers.asp] Dont just collect everything that is easy to measure. 3. Ensure strategic alignment CPM is more than just collecting performance measures based on your strategic objectives. It is about aligning key elements and processes of organizational management with your strategic objectives. This means aligning budgeting, the management of projects and programs, performance reporting, knowledge management and the management of risks with your strategic objectives. Top performing organizations are able to identify strategic objectives and ensure their budgets and projects are aligned to deliver on their objectives. In addition, they ensure that performance indicators are used to monitor performance and risks related to their strategic priorities. Dont run performance measurement, budgeting, project management and risk management in parallel to each other without tight alignment. 4. Create a positive learning culture supported by analytics Once organizations have collected performance information, they must analyze it before they can work out what it means and to gain insight into how they may need to change things to improve success against their goals. Knowledge is power but only if it can be extracted quickly and efficiently from an ever-growing mass of data. Business intelligence tools provide the capability to convert performance data into relevant information and knowledge. The difference between good and bad information is determined by how well it supports critical decision-making. Without analysis that leads to insights and actions, any CPM exercise is of little or no value. Leading organizations now use their information to quickly and accurately answer their key performance questions. In addition, they put in place processes that create a positive learning culture in which performance insights are discussed and acted upon. A key to this are regular performance review meetings in which key individuals get together and discuss performance openly and honesty, where the results from the analytics are used to inform a dialogue about performance, and where collaborative decision making leads to actions and performance improvement. These meetings are not there to look into the past or to fingerpoint at bad performance but to identify possible shortcomings in the future and to ensure actions are being taken to avoid them. Dont spend all your time and efforts on collecting and reporting data and not enough on extracting valuable and actionable insights from it.

5. Automate appropriately Having the right IT infrastructure in place and using it appropriately is a key success factor. CPM software applications facilitate data integration, process alignment, analysis and reporting to a level that would never be possible without automation.

Many software vendors are focusing in on CPM but these solutions only deliver benefits if they contain the right information and if they are used appropriately to improve decision making. It is important to understand that automation is clearly not the magic pill that will sort out all your CPM problems. Indeed many organizations are seen to implement CPM software only to find that, once the initial excitement had worn off, they are left with a costly IT system and a slow realization that CPM is not about technology but the people and their processes. [Find a comprehensive list of CPM software vendors here: www.ap-institute.com/software.asp?ID=1] Dont just buy a software solution without a clear understanding of how it will enable your CPM processes to drive better decision-making.