Gaining Strategic Alignment: Making Scorecards Work, Part 2

By William Fonvielle and Lawrence P. Carr

Building Commitment

As with any other major organization alignment, the successful development, implementation, and institutionalization of a scorecard or similar performance measurement system requires executives, and ultimately employees at all levels, to be reasonably aligned and committed to it. In the absence of broad commitment, the performance measurement system is likely to totter under its own weight and eventually be widely ignored or abandoned.

A group of managers in the Microelectronics Division of IBM decided to craft a balanced scorecard for their business. After considerable time and effort, the team succeeded in devising a simple scorecard that was rooted in the division's vision and that identified critical success factors for the business strategy. The scorecard also encompassed customer and innovation measures that previously had been lacking.

However, the team found it difficult to obtain top management buy-in, perhaps in part because senior managers were not involved in the scorecard's creation. The team also encountered resistance in trying to deploy the scorecard to the division's business units. In time, the initiative's champion left the organization, and the measures by and large reverted to the financial measures that previously had been in place.

The challenge for companies is two-fold: first, to make sure a strategy exists and that it is appropriately communicated and understood; second, to put in place mechanisms and processes to direct and steer alignment.

Tools and Techniques

Dr. Bob Frost describes two situations he frequently encounters. The first is one in which an executive group is convinced of the value of performance measures and is committed to the development of a performance measurement system. An executive group characterizes the second, more common situation, with some interest in performance measures or scorecards. The group discusses the idea and typically appoints a member or a staff person to gather more information about the concept. Often, executive enthusiasm wanes by the time the preliminary data gathering is completed. In the face of incomplete or waning commitment, the challenge is to re-energize the group.

Performance Measurement Associates has defined three key steps in building commitment to a scorecard or set of performance measures. These are assessing the state of executive alignment, gaining executive commitment, and driving commitment down and across the organization.

Executive Alignment

Two questions arise when addressing the issue of executive alignment and performance measures. The first and most critical is whether the executive group is aligned around strategy. The second is whether the executive group is aligned around the need for a strategically linked performance measurement system. The Executive Group Alignment Process (EGAP), developed by Dr. William Bernstein of Bernstein Associates, is useful in addressing either question.

EGAP is a consulting process for assessing and promoting alignment among senior executives around their organization's strategic plan and its implementation. The process begins with interviews and continues with surveys of team members to assess both levels of commitment to strategic goals and perception of "strategy relevant ideas." These are ideas about internal organizational factors and external environmental factors that might be important for successful strategy execution.

The surveys quantify individuals' commitment to the strategic goals or to the new initiative, identify the conditions required for effective implementation of strategy or initiative, and measure how well executive team members work together.

The results of the research conducted among team members is fed back in an initial group meeting, which is designed to:

Dr. Bernstein notes that strong commitment to strategic goals can engender strong feelings or longings in people. Weak commitment to goals is associated with low energy and nonaction. See Figure 2.

 

When commitment is strong, the team is aligned and can move forward to implementation without hesitation. When commitment is weak, the odds of successful implementation are very low. The strategic element or initiative in question should be dropped or at least shelved until the causes of the weak commitment are dealt with.

Understanding the area of uncertain commitment is of central importance for leaders. The group's commitment may be uncertain because the group is split into two or more factions on a given strategic element or initiative. Or it may be uncertain because members of the group may be uninformed or undecided about the value of the strategic element and lack strong feelings either way. Making these aspects of uncertainty explicit allows groups to engage the issues actively and, ideally, to build common understanding and a new consensus.

Gaining Executive Commitment

In the absence of an existing performance measurement system, building executive commitment to the development of a scorecard or other system is inevitably the first step. As Bob Frost puts it, "The scorecard initiative has to have executive support, or it will fall on its face."

Tactics that frequently are used to gain this support include:

One of the keys to gaining executive support is to find an effective champion or sponsor for the measurement initiative. A champion may be a senior staff person, but ideally he or she should be a member of the senior executive team. Such a person should have peer credibility, a persistent nature, and good influence skills.

The preparation of a strong business case to demonstrate the value of performance measures is a persuasive technique and is useful in that it can focus discussion on benefits. Traditionally, a business case is couched in financial terms and includes a multiple-year estimate of a future project's costs and revenues. However, while financial returns from the possession of a better strategic focus and the availability of detailed performance feedback ultimately may be enormous, large integrating frameworks such as business scorecards are very difficult to quantify from a return-on-investment perspective.

A performance measurement system is, after all, a tool to reach some other ends and not an end in itself. Such systems are best presented in terms of usability and benefits. One of the chief benefits offered by performance measurement systems is the very capability for creating organizational and individual alignment.

Bama Pies, Inc. rationalizes its scorecard as a means to:

Air Products and Chemicals defines its scorecard as a means to:

Educating key decision makers and influencers is a necessary step in building support and alignment. If senior executives are to be aligned around the need for performance measures, they must share a common understanding of the subject. This can be accomplished in a variety of ways, including:

Probably some mix of these alternative modes of education will be in order. An important consideration, however, is to select and stage educational venues so that a consistent point of view is presented. A scattershot approach might confuse people more than it will enlighten them.

If, indeed, seeing is believing, then staging a pilot project to demonstrate the viability, uses, and benefits of performance measures can be a useful tactic. A pilot cannot only demonstrate value, but it can provide a ready-made and homegrown model and "recipe book" for others in the organization to adopt. The experience gained by pilot participants may enable them to function as consultants for the rest of the organization as the concept spreads. Moreover, a pilot can uncover issues, problems, and implementation obstacles that could possibly be corrected before performance measures are developed for the larger organization. A pilot project, then, can have numerous benefits beyond that of simply demonstrating the value of measurement systems.

Gordon Masiuk succeeded in gaining executive commitment at TransCanada. Formerly an independent total quality consultant, Masiuk was a senior process and performance measurement consultant with NOVA prior to its merger in 1998 with TransCanada. With the combined companies, he took on the added role of corporate organizational and business effectiveness consultant.

NOVA had used a balanced scorecard since 1993. This scorecard had been set up on a stakeholder basis, and users found it hard to link it to the company's strategy. With the merger, a new approach seemed in order.

Musiak had read a description of an improved version of the balanced scorecard called the "Dynamic Business Scorecard" in the book Customer Centered Growth by Richard Whiteley and Diane Hessan. Following up on the idea, he discussed the concept at length with William Fonvielle, its originator. Musiak felt that the attributes of the dynamic scorecard were very attractive and completely consistent with quality precepts. Shortly after the merger, the executive leadership team (ELT) of the combined organizations began a strategic planning process, thus providing an opportune time to integrate measures with strategy.

Musiak started using the framework of the dynamic scorecard in sessions with executives as a process picture to show how different areas linked up. Soon he began working with the Transmission Business Unit, developing the dynamic scorecard concept along with an organizational, business process, and employee-focused performance management approach dubbed the "Integrated Performance Framework." The combination of these two concepts provided a holistic model for integrated planning, goal setting, performance measurement, leadership, culture, performance management, and incentive compensation.

By conducting frequent workshops, meetings, and presentations, Musiak began to build support for these concepts. Eventually, he gained agreement to pilot the fundamental cascading of goals and measures from the corporate strategy down to the business unit strategy, down to a functional area (customer service), and down to individual teams. With the ongoing demonstration in process, Musiak turned his attention to selling the ELT on this big idea.

"I had to find someone on the ELT who could embrace the concept," Musiak explains. "I was fortunate enough to spend some time with Sarah Raiss, who is the corporate vice president of Human Resources, and also my boss's leader," he recalls. "Sarah is new to the company. She has a very open mind, is receptive to new ideas, and is supportive of her people. When I took her through the IPF and Dynamic Business Scorecard concepts, she was convinced that these approaches were exactly what our 'New TransCanada' needed. Sarah excitedly said, 'We need to get you in front of the ELT as soon as possible!' Within a few weeks I had delivered to the ELT a 45-minute presentation of the model with sample goals and measures. It was Sarah's sponsorship and support that 'got me in the door.' Following the presentation, I received a go-ahead to work in partnership with the HR vice presidents and their business unit presidents to develop their business unit goals and measures."

Musiak found that he didn't need to write a business case in order to persuade the ELT of the soundness of his approach. "I think that one reason a business case was not needed was that the DBSC and IPF intuitively make a great deal of sense," he says. "They help to simplify, focus, and integrate the business planning process, and this integrated approach is adaptable to whatever business environment we are currently in or will be moving toward in the future."

Driving Commitment Down and Across

Once executive-level acceptance is gained, the next step is to gain support and commitment throughout the rest of the organization. Some of the same tools and methods used to align executives-especially educational materials, in-house workshops and presentations, and successful demonstration projects-may also be useful with other employees. Many employees, however, may be predisposed to dismiss measurement initiatives as yet another management fad or, more seriously, as a sinister management tactic to monitor employees. The very fact that measurement involves the gathering and manipulation of numbers may be off-putting to some.

Michael Tipping, president and CEO of Panorama Business Views, stresses the need for the top of the organization to demonstrate its commitment. "A performance measurement system can only succeed if the company's leadership is committed to direct the initiative throughout the organization," Tipping says. "There will always be players with an interest in 'scuttling' the process…the best way to bring these people on board is to demonstrate why and how this measurement system is useful for everyone wanting to improve performance."

At Serono, the Swiss biotech firm, CEO Ernesto Bertarelli set an example by using the scorecard to measure his own performance. This action provided tangible evidence of his support for the use of the tool, thereby assuring its acceptability for other parts of the organization.

Six Steps to Alignment

A strategy-relevant, fully functioning performance measurement system is inherently an aligning mechanism. The trick, therefore, is to make certain that the performance measurement system becomes "the way we do business." The first step in this process is to make certain that the measurement system is indeed strategy relevant.

David Hunter of Panorama Business Views is addressing this step when he writes that, "Measurement is the key to achieving vertical alignment because it informs employees (about) the extent to which they are achieving goals in key strategic areas such as quality and customer service."

Hunter suggests that alignment may be achieved through six steps:

  1. Articulate the key strategic drivers of your business and the main areas of focus that will make your organization successful.

  2. Define critical strategic goals that you perceive should be deployed throughout your organization.

  3. Develop performance measures for each of these key goals.

  4. Ensure that everyone understands the measures of both their department and their company and how they all are linked together into the strategy.

  5. Link each of these measures to a formal feedback and recognition system, and communicate the results regularly.

  6. Formally review the goals' performance often, and develop corrective actions to ensure that they are met.

Beyond the development and operation of the performance measures lie two system considerations: (1) communications and (2) rewards and recognition.

Effective Communications

Communication is a critical component of every measurement-related activity. Without the ability to transfer information from one person to another, alignment would be improbable if not impossible. The U.S. government's 1997 benchmarking study, "Serving the American Public: Best Practices in Customer-Driven Strategic Planning," reported that among the most successful companies, "Effective internal communication was necessary for successful development and deployment of strategic and business plans. Internal communication was seen as the linkage between planning and practice. The entire workforce has to fully understand its role in achieving success and what is expected throughout the process. Leadership's strategy must be clearly understood at all levels of the organization."

Rewards and Recognition

No discussion of alignment is complete without a discussion of rewards and compensation. Traditionally, compensation has been regarded as a major driver of employee behavior. While a considerable body of research suggests that extrinsic rewards may be a less powerful source of motivation than intrinsic rewards-such as the simple pleasure associated with knowing that one has done a good job-tying at least some part of compensation to strategically linked performance measures makes sound business sense.

According to William J. Smith, director of the Northwest Compensation Consulting Practice of Watson Wyatt Worldwide, "Effective scorecards provide reasonable, measurable benchmarks with which top management and other employee reward systems can be aligned, with an appropriate balance between short- and long-term perspectives, and different stakeholder influences."

The U.S. government's benchmarking study reported that many benchmarking partners stated that measures are not effective without tying incentives to them. It noted that in the best companies:

"Performance measurement, tied to incentives and compensation, is employed at all levels of the organization, with clearly assigned and well-understood accountability for results. Most of the (benchmarked) partners linked performance evaluations and rewards to specific measures of success. This, they believed, sent a clear message as to what was important. These measures were almost always different at different levels within the organization, but each was linked to overall organizational strategies."

At Mobil Oil Corporation's Marketing and Refining Division, linking the organization's strategy to compensation through a balanced scorecard was an early step. Edward T. Lewis, Jr. noted that the division first needed to understand the direction the scorecard was setting, what the results were, and whether the desired results were being driven.

"The existing variable pay compensation program for nonexecutive employees was a merit-based pay program, similar to what a lot of companies have," Lewis explained. "The division was granting annual salary increases in the range of three to six percent, regardless of whether the company was doing well or poorly. Under the new variable pay compensation program, a pot of money is available to employees that, in effect, ranges up to a maximum 30% bonus opportunity. As much as 30% of one-time annual salary opportunity bonus is tied to the scorecard measures."

Tying compensation and incentive to performance measures, however, must be undertaken with care, especially at nonexecutive levels. Changes in the way that people are compensated almost always generate anxiety and in some cases may run afoul of local legal constraints or union rules. Moreover, people must feel that the system is fair and the measures are accurate. To this end, avoid penalizing or rewarding people for results they cannot influence or for observed changes in results that may be due to error or chance variation.

The System's Power

Much of the power of a strategically linked performance measurement system lies in its ability to forge alignment among units, functions, and individuals. Strategic alignment is difficult to achieve, but it is critical to the successful implementation of a strategy. But before a useful performance measurement system can itself be implemented effectively, key decision makers must reach alignment around its need, form, and content.

It is very clear from our experience that scorecards must be custom designed to fit the particular strategy of an organization. A clear link of measures to strategy is essential for successful scorecard implementation. Many firms have been quick to embrace scorecards but have been very disappointed with the results. We believe the root cause of this dissatisfaction is management's lack of attention in linking measures to strategy. The tendency is to follow a generic balanced scorecard recipe, which may or may not fit the strategy and key success factors of the organization.

From alignment around strategic measurement, it is but a short step to performance management. General Motors' Martin Shotbolt has remarked that, "Overall, scorecard adoption has strengthened strategic performance management because it has helped all operating units across GME to focus on and understand how their performance and capabilities impact on business strategy. "

"Naturally, some parts of the business are more advanced than others and, at times, we have had to tackle skepticism," Shotbolt adds. "Conversely, we were surprised at the positive response most people had since, by nature, they want to contribute and help the company achieve its objectives. We must credit that and the fact that we now have an integrated set of leading indicators which drive collective performance."