The fact is that their scorecard targets were tied to bonuses so, again as with the budget, managers fought for the easiest possible targets. Why wouldn’t they? The fact is these scorecard targets were, in reality, forecasts. As with the budget, a rational outcome of incentive-compensation being based on tar-geted performance, but equally, it might be the consequence of a toxic culture where it is “better to be dead than red.”
Assumption Management
So, organizational leaders must understand that a target and a forecast are dif-ferent things, and this acceptance leads to significant benefits, especially when
“key assumptions” are used to compare the two numbers, which might be external, (e.g. a macroeconomic development, a main competitor’s behav-iour) or internal (e.g. productivity gains, product launch success).
When assumption management is used, the infrastructure is in place for a rich and material conversation about what can and needs to be done to close the performance gap on the KPIs (the gap between present and desired per-formance, which collectively close the value gap between present and desired performance to the quantified vision).
For instance, if the forecast suggests that a financial target will be missed by 10%, it then becomes possible for an informed and honest exploration of the key assumptions (supported of course by good analytics) and to reach a con-clusion as to what is really happening in that market and the likely conse-quences on financial performance. From that basis, there can be an agreement on next steps. Initiatives or other actions might be launched to close any performance gaps, or it might be agreed that market conditions have changed materially and thus the target cannot be hit.
The same thinking applies to non-financial targets. Perhaps something has happened that will materially affect a targeted customer KPI, for instance.
The conversation can focus on whether this is a controllable issue that can be resolved through a particular intervention or is not controllable so not hitting the target can be accepted.
there would need to be “initiatives” around eating healthier/less and exercis-ing, as examples. The same principle holds for improving performance on a scorecard, which is through continuous process improvements (see Chap. 7) and through strategic initiatives (Chap. 8 considers how to implement and manage initiatives). Here, we consider selecting initiatives.
Research Evidence
2014 research by the Palladium Group found that only 9% of almost 1300 firms surveyed believe they have the capability to optimize their strategic ini-tiatives fully [5]. Findings such as these indicate there are significant problems here to address throughout the initiative management process.
One key reason for such disappointing findings is that, and unlike the selection of strategic objectives or KPIs, choosing initiatives means commit-ting what might be scarce financial and human resources. A much more com-plex and politically charged process than choosing objectives and KPIs.
In addition, there are often too many initiatives on a scorecard (as there are usually too many objectives and KPIs). About 12 should suffice, and these should be high impact and, wherever possible, impacting more than one objective at the enabler lever. Initiatives should not be identified at the out-come level, as these are the result of the work done below.
Oftentimes, there are too many initiatives because a significant percentage are not initiatives, but regular work. As Kaplan and Norton explain, initiatives are one-off discretionary efforts and so are not repeated or business as usual.
For example, publishing the annual report or completing scheduled mainte-nance problems are not initiatives.
Steps to Prioritizing Initiatives
In our work with hundreds of organizations, we have observed that there is a significant challenge in prioritizing initiatives amongst the many possible candidates.
An Initiative Inventory
We recommend that as a first step, all current initiatives should be inventoried and mapped against the objectives on the Strategy Map. Those that do not support an objective will not move to the next stage of prioritization.
Interestingly, it is our experience that this exercise delivers myriad benefits.
It enables the culling of projects that might well have been launched for a good reason but are no longer strategically relevant. Furthermore, it invariably unearths instances of where similar initiatives exist in different parts of the organization and so enables the culling of initiatives that are misaligned with the strategy of the organization.
Other times, it is found that several initiatives are underway, which are really components of one bigger initiative; this enables the pooling together and streamlining of these efforts. Overall, the inventorying and mapping pro-cess by itself typically leads to significant cost-savings.
Prioritization Model
Nevertheless, due to resource constraints, organizations cannot usually fund all of the initiatives that successfully map to the Strategy Map. Therefore, all initiatives require a robust analysis of strategic, financial, and other benefits as well as costs and risk. A useful model for doing this—used by a government entity in the United Arab Emirates—is shown in Fig. 5.3.
It is also worth noting that not all selected initiatives have to be imple-mented at the same time. Sequencing of initiatives is important. All initiatives are of equal value over the lifetime of the strategy, but high-impact initiatives
Fig. 5.3 Initiative scoring model
that drive quick wins might be prioritized. Moreover, there might be times during strategy implementation when one theme is more important than oth-ers and priority funding is directed to supporting initiatives (see also the pre-vious chapter and the discussion on strategic themes).
Parting Words
With the organization-level Balanced Scorecard system established, the next step is to align each part of the enterprise to those strategic goals. Oftentimes, this is where any hoped-for performance agility gets smothered in overly restrictive diktats and controls, as well as ridiculously long timeframes for developing scorecard systems for lower-level units and functions. We explain how to overcome this agility-sapping conundrum in the next chapter.
Panel 1: Key Risk Indicators
Strategy cannot be managed effectively without understanding both the “per-formance” story (KPIs) and “risk” story (KRIs). The proper use of KRI provides for much greater insight into the future and promotes much greater quality of man-agement conversation than can be gained by simply using KPIs.
To be fair, many organizations are using both KPIs and KRIs: although this is certainly an improvement on KPIs alone, they still tend to feed into different reporting and decision-making processes.
As the KPIs (which answer the question “Are we achieving our desired levels of performance?”) and KRIs (“How is our risk profile changing and is it within our desired tolerance”?) are not integrated, they deliver a siloed and often compet-ing, view of the organization and its performance. Therefore, the executive team does not have the appropriate data and information to inform the required high-quality management conversations that provide a more complete view of progress towards the strategic objectives or enable the trade-off between risk and reward to be discussed, understood, and acted upon.
A simple likelihood multiplied by impact equation is often used to assess the level of risk the organization is facing. KRIs provide a base of data and trend information that informs the calculation of risk exposures and informs manage-ment conversations as to current level of risk- taking, changes in risk-taking, and about how much risk needs to be taken to successfully deliver to the strategic objectives.
The other function of KRIs is that they help translate risk appetite into opera-tional risk tolerances (expressed as thresholds around the indicators). If the orga-nization has a high appetite, it would be expected that the threshold would be wider, allowing for greater levels of variation away from the baseline; whereas a low risk organization is going to have tight thresholds to promote a higher level of control.
Self-Assessment Checklist
The following self-assessment assists the reader in identifying strengths and opportunities for improvement against the key performance dimension that we consider critical for succeeding with strategy management in the digital age.
For each question, any degree of agreement to the statement closer to one represents a significant opportunity for improvement (Table 5.1).
KRIs are typically derived from specific events or root causes, identified inter-nally or exterinter-nally, that can prevent achievement of performance goals. Examples can include items such as the introduction of a new product by a competitor, a strike at a supplier’s plant, proposed changes in the regulatory environment, or input price changes.
We strongly recommend the tracking of KPIs and KRIs on separate scorecards.
A risk scorecard (or dashboard, to avoid terminology confusion) will complement the more conventional performance scorecard—but reported together.
As Professor Robert Kaplan, in an interview with one of the authors in late 2015 on integrating strategy and risk management, said, “Identified risks should be managed through a separate risk dashboard. The scorecard is a about managing performance and the dashboard about managing risk, which are different things.”
For example, Infosys has a strategy focused on large contracts with large corporations. The concentration of revenues was identified as a significant strategic risk (a large account failure would show up on the income state-ment). The company identified a strategic risk indicator, credit default swap (CDS) rates, for its risk dashboard. If the CDS rate, the price for insuring against a client’s default, went outside a specified range, then mitigation steps could be taken to cope with the client’s increased risk.
A risk mitigation might well be a strategic initiative that impacts both sets of indicators and, ultimately, the delivery of the strategic objectives.
As we move deeper into the digital age (or the 4th industrial revolution), it will become increasingly critical to manage performance and risk equally as part of the strategy management process. As Professor Kaplan said:
With good data and insights from both strategy and risk officers, the exec-utive team can then make informed decision about how much risk they are willing to take in their strategy implementation efforts and how much to spend on strategy execution and risk management.
With a deep knowledge of the performance/risk dynamic, managers might even take on more risk than their competitors—knowing that their risks are visible, that they are tracked through the strategic management system and that the limit of the risk taking is understood. In this way risk manage-ment becomes another tool for competitive advantage: as much about say-ing yes as saysay-ing no.
Table 5.1 Self-assessment checklist
Please tick the number that is the closest to the statement with which you agree 7 6 5 4 3 2 1
When implementing strategy, my organization focuses on a small number of KPIs
When implementing strategy, my organization focuses on a large number of KPIs
We have a very good
understanding of the purpose of KPIs
We have a very poor
understanding of the purpose of KPIs
We use value drivers, or similar, in assigning KPIs to strategic objectives
We use brainstorming, or similar, in assigning KPIs to strategic objectives My organization has a very
good understanding of the strategic questions a KPI will answer
My organization has a very poor understanding of the strategic questions a KPI will answer
My organization places much more importance on initiatives/actions than on measures
My organization places much more importance on measures than on initiatives/actions Those tasked with collecting
and/or reporting KPI
performance have a very good understanding of how measures work
Those tasked with collecting and/or reporting KPI
performance have a very poor understanding of how measures work When setting KPIs, we closely
consider the potential negative behaviours that might be triggered
When setting KPIs we do not consider the potential negative behaviours that might be triggered My organization has a very
good understanding of how to set performance targets
My organization has a very poor understanding of how to set performance targets We have an appropriate
number of strategic initiatives
We have too many strategic initiatives
We have a very good process
for prioritizing initiatives We have a very poor process for prioritizing initiatives
We have a very good understanding of the difference between strategic initiatives and business as usual
We have a very poor understanding of the difference between strategic initiatives and business as usual
My organization has clearly identified the key risk indicators to track
My organization has not identified the key risk indicators to track
References
1. Bernard Marr, James Creelman, Doing More with Less: measuring, analyzing per-formance in the government and not-for-profit sector, Palgrave Macmillan, 2014.
2. Bernard Marr, James Creelman, Doing More with Less: measuring, analyzing per-formance in the government and not-for-profit sector, Palgrave Macmillan, 2014.
3. Adapted from a quote attributed to John Ruskin.
4. Jeremy Cox, The Work is Not the Problem, LinkedIn, June 2017.
5. James Creelman, Jade Evans, Caroline Lamaison, Matt Tice, 2014 Global State of Strategy and Leadership Survey Report, Palladium Group, 2014.
© The Author(s) 2019 113
D. Wiraeus, J. Creelman, Agile Strategy Management in the Digital Age, https://doi.org/10.1007/978-3-319-76309-5_6