Managing Strategy is Managing Changeby David P. Norton

To execute strategy is to execute change at all levels of an organization. Seems self-evident, but overlooking this truth is one of the greatest causes of a failed transformation effort. Best practiceorganizations give equal weight to the “soft” issues of leadership, culture, and teamwork, undergoing three phases in their evolution intoStrategy-Focused Organizations. Here’s the path they’ve taken.

Managing strategy is, in essence, managing change. That simple observation adds an important dimension to the topic of strategy, one that is frequently overlooked.Strategy has a “hard” side and a “soft” side. The hard side involves describing strategy (with maps and measures) and executing it (with processes and procedures).The soft side, while less understood, is no less important. It involves leadership, culture, and teamwork — all prerequisites for organizational change. To execute strategyis to execute change at all levels of an organization. If we are to succeed, we need tohave a better understanding of the soft side.

A recent review of our Balanced Scorecard Hall of Fame organizations revealed some striking commonalities. Every one of them happened to be introducing a new strategy at the time they

were implementing the Balanced Scorecard. These strategies defined new customervalue propositions, new products, new work processes, new skills, new technologies,and new cultures. In short, the new strategies required everything to change. The issueof change management was high on the agenda of each executive. Although each ofthem approached the process differently, they all went through three similar phases:

Phase I — Mobilization: a three- to six-month period devoted to executive-levelmomentum building by communicating the need for change, building the leadershipteam, and clarifying the vision/strategy. Balanced Scorecards helped clarify the strategy.

Phase II — Design & Rollout: a six-month period in which the new strategy wasrolled out at the top levels of the organization. Balanced Scorecards were used to cascade, link, and align this rollout process. Immediate and significant results wereachieved.

Phase III — Sustainable Execution: a 12- to 24-month period where the strategy was integrated into the day-to-day work and culture of the organization. BalancedScorecards were used to educate and align individuals. Sustainable, long-term resultswere generated.

Although their approaches and styles differed, every organization was able to achievedramatic results rapidly (within a two- to three-year window) and, further, to sustain

Volume 4, Number 1January – February 2002

In This Issue:

It’s a new year, and what better time to focus on managing change— specifically, those make-or-break“softer” elements of leadership, people, and culture? Plus, calls torecommit to measures and lobby for analytic applications that cantruly help optimize performance.

New Perspectives ................6Managing Change: The Power of LeadershipWhy do most leaders fail at organizational change? John Kotter,the preeminent authority on leader-ship and change, puts forth his eightessential ingredients to effectiveleadership that make change happen.

Executive Insight................8New Tools for a New Corporate Culture: The Budget-less RevolutionOut with the budget! And in with a tailored, four-tool approach to performance management and strate-gic planning. Borealis, the Europeanplastics manufacturer, used its found-ing merger as a perfect opportunity tooverhaul the unwieldy, increasinglyirrelevant budgeting process.

Point of View ......................10

After September 11th: TheHeightened Role for Cost andPerformance ManagementValid measures, not rhetoric, are the best way for managers to conveyto employees the value of their workand the value their organization contributes to society. Robert Kaplanmakes an impassioned case for whygood cost and performance measure-ment systems are more vital than ever.

In the Trenches ..................12

How to Mobilize the ExecutiveTeam for Strategic Change: TheSFO Readiness AssessmentWhere can organizational missionariesget hard-hitting ideas about improvingcompany performance that can wintop-level support for strategic change?How can they gauge whether suchan initiative might be premature —thereby saving precious resources(and their credibility)?

Technology Corner ............15

The BSC and Analytic Application IntegrationHenry Morris of IDC weighs in onthe IDC/BSCol 2001 survey of BSCsoftware use and the state of strate-gic, operational and “foundational”applications. Integrating them is crucial — yet woefully unfeasibletoday. Business must speak up.

HARVARD BUSINESS SCHOOL PUBLISHING

Continued on next page

these strategic results for four to fiveyears. And, although each one usedits management system in differentways, at the end of three years, each

had built a new management system that was nearly identical in both formand function. Each had created aStrategy-Focused Organization

(SFO). We can draw some valuablelessons from them about the process of managing strategy and, hence,about managing change from theseorganizations.

The Strategy-FocusedOrganization

Our research into successfulBalanced Scorecard organizations,described in Robert Kaplan’s and my book, The Strategy-FocusedOrganization, identified five principlesapplied by every organization:

• Mobilize Change throughExecutive Leadership — (executives) take the initiative formanaging the change required tosupport the strategy.

• Translate the Strategy to aBalanced Scorecard — create aBalanced Scorecard which translatesthe strategy to operational terms.

• Align the Organization to theStrategy — use the BalancedScorecard to link the goals of corporate, lines of business, andsupport units.

• Make Strategy Everyone’s Job — educate, empower, andincent those at all levels of theorganization to execute the strategy.

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Balanced Scorecard Report

Editorial AdvisorsRobert S. Kaplan, Professor, Harvard Business SchoolDavid P. Norton, President, Balanced Scorecard CollaborativeWalter Kiechel, III, Editorial Director, HBS Publishing

Executive EditorRandall H. Russell, Balanced Scorecard Collaborative

EditorJanice Koch, Balanced Scorecard Collaborative

Consulting EditorAngelia Herrin, HBS Publishing

PublishersRobert L. Howie, Jr., VP, Balanced Scorecard CollaborativeEileen R. Marks, Associate Publisher, HBS Publishing

Circulation ManagerPaul Szymanski, HBS Publishing

DesignRobert B. Levers, Levers Advertising & Design

Letters and Reader FeedbackLetters, editorials, ideas for articles, and other contributions may be submitted to: Randall H. Russell, Balanced ScorecardReport, 55 Old Bedford Road, Lincoln, MA 01773 orrrussell@bscol.com.

Subscription Information To subscribe to Balanced Scorecard Report, call 800.668.6705.Outside the U.S., call 617.783.7474. Web: www.hbsp.harvard.edu/bsr.For group subscription rates, call the numbers listed above.

Services, Permissions, and Back IssuesBalanced Scorecard Report (ISSN 1526-145X) is published bimonthly. To resolve subscription service problems, please call 800.668.6705. Outside the U.S., call 617.783.7474. E-mail: BSR@hbsp.harvard.edu

Copyright © 2002 by Harvard Business School Publishing Corp. Quotation is not permitted. Material may not be reproducedin whole or in part in any form whatsoever without permissionfrom the publisher. To order back issues or reprints of articles, or for information about group subscription rates, please call800.668.6705. Outside the U.S., call 617.783.7474. E-mail: BSR@hbsp.harvard.edu Web: http://bsr.harvardbusinessonline.org

Harvard Business School Publishing is a not-for-profit, wholly-owned subsidiary of Harvard Business School. The mission ofHarvard Business School Publishing is to improve the practice ofmanagement and its impact on a changing world.

Balanced Scorecard Collaborative, Inc. (BSCol), a professional services firm, facilitates the worldwide awareness,use, enhancement, and integrity of the Balanced Scorecard as avalue-added management process. Founded and led by BalancedScorecard creators Drs. Robert S. Kaplan and David P. Norton, the Collaborative provides organizations and individuals with aglobal center of Balanced Scorecard excellence through consulting,conferences, training, publications, consortia, certification, andonline services. Join Balanced Scorecard Online atwww.bscol.com or call us at 781.259.3737.

Targets & Initiatives

Balanced Scorecard

Strategy MapBurning Platform

Leadership Team

Vision & Strategy

Meetings

IT

Budgeting & OperationsManagement

IncentivesPersonal Scorecard

Communicate

SBU – Support

Corporate – SBU

TranslateStrategy

Develop strategymaps and Balanced

Scorecards

ExecutiveLeadership

Mobilize changethrough executive

leadership

ContinualProcess

Feedback systems to facilitate

learning

OrganizationalAlignmentCascade the scorecard to create linkage

Everyone’sJob

Link the strategy to personal

behavior

Not yet under consideration

Considering; no action yet

Acting upon

Fully implemented or executed

Best practice

Key to Levels

Figure 1. The SFO Readiness Profile

Editor’s Note

Just before the November/December2001 Balanced Scorecard Reportwent to press, Dr. Ulrich Viethen of Siemens ICM, our featuredExecutive Insight interviewee,changed positions within the company,becoming Group Vice President of Health Services — ImageManagement Systems at SiemensMedical Solutions. The new executives at Siemens ICM withresponsibility for the BalancedScorecard are Dr. BernhardGueldner and Dr. GuenterLeyendecker. Our apologies to Drs. Gueldner and Leyendecker for not noting this change in the previous issue.

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• Make Strategy a ContinualProcess — through the BalancedScorecard, link the governanceprocess (budgeting, reporting, planning, reviews) to the strategy.

Successful BSC organizationsbecome world-class practitioners in each of these five dimensions. The SFO Readiness Profile, shownin Figure 1, is a useful tool todescribe the status of your organiza-tion’s ability to execute strategy. Our successful organizations haveprofiles in the outer rings for each of the five principles. But they didn’t get there overnight. Instead,they realized each of these principlesat different points in time to create and sustain momentum, to breakthrough different barriers, and tobring strategic change to differentparts of the organization.

Phase I: Mobilization

Before the term “BalancedScorecard” was ever mentioned, each of our successful SFOs went

through a process of executive-levelpositioning. Each began by clarifyingthe need for change within theirorganizations. Some, like Mobil,CIGNA, and AT&T Canada were per-forming poorly. If performance didn’timprove, they would become extinct.The executive role was to provide awake-up call to their organizationthat mediocre performance would not be tolerated. In other cases, likeWells Fargo and UPS, new technology(the internet) threatened to allowcompetitors to leapfrog traditionalindustry leaders. Here, the executiverole was to provide a wake-up callabout the threat and to appeal to theorganization’s pride to remain num-ber one. Each organization developeda vision and the outline of a strategy.

At the heart of each strategy was afundamental shift in the customervalue proposition. Mobil was shiftingfrom price-based competition for acommodity to becoming a conveniencestore retailer. Brown & Root wasshifting from price-based competitionfor engineering services to being a

“solutions partner” that would sharethe risks and rewards with the cus-tomer. Wells Fargo was shifting frombeing a traditional bricks-and-mortarbanker to an internet bank with radi-cally different costs and conveniences.The use of the customer as a focalpoint in the new strategies played animportant role in the change process.It caused the organization to lookbeyond traditional internal roles to anew external ground where rules androles were not yet defined.

Finally, each organization developeda leadership team to guide the processof change. New faces were added totraditional executive teams, reflectingthe new expertise required by thestrategy. Marketing, Human Resource,and IT executives frequently foundtheir roles elevated. Most importantly,the seeds for “team accountability”were sown. Executing strategyrequires integrated, cross-functionalbehavior: the opposite of traditionalpower structures built around func-tional or departmental silos. The creation of a holistic view of strategyand the executive role to support itwere important starting points in aprocess of change that would berevisited continually in the monthsand years ahead.

Education and awareness-buildingabout strategic management are particularly important during theMobilization phase. It is essentialthat the executive team understandsthe journey on which it is about toembark. Team members need to getcomfortable with the strategy, as well as with the approach required to implement it. This is an ideal timeto introduce the Balanced Scorecardframework because it moves themindset from the passive formulationof strategy to active execution. Theexecutive team at AT&T Canada wasrequired to read The BalancedScorecard: Translating Strategy intoAction and discuss its implications ata staff meeting. Mobil, CIGNA, andChemical Bank invited an externalexpert (yours truly) to discuss the

Continued on next page

Targets & Initiatives

Balanced Scorecard

Strategy MapBurning Platform

Leadership Team

Vision & Strategy

Meetings

IT

Budgeting & OperationsManagement

IncentivesPersonal Scorecard

Communicate

SBU – Support

Corporate – SBU

TranslateStrategy

Develop strategymaps and Balanced

Scorecards

ExecutiveLeadership

Mobilize changethrough executive

leadership

ContinualProcess

Feedback systems to facilitate

learning

OrganizationalAlignmentCascade the scorecard to create linkage

Everyone’sJob

Link the strategy to personal

behavior

#1

#1

#1

Figure 2. PHASE I: SFO Mobilization

BSC approach at a staff meeting.Saatchi & Saatchi and Wells Fargoexecutives attended conferences.

An executive team that accepts itsrole as drivers of transformationalchange; an organization that under-stands the need for change; and acustomer-based vision of the newstrategic objectives provide theessential foundation for a Strategy-Focused Organization (see Figure 2,preceding page).

Phase II: Design & Rollout

The Design & Rollout phase isintended to get movement at the topof the organization. It generallyrequires about six months to clarifythe strategies and define the linkagesbetween corporate, SBUs, and supportunits. The Balanced Scorecard playsan essential role here in two ways:(1) helping to better define the strategyand build executive-team consensus;

and (2) creating meaningful linkagebetween organization units (seeFigure 3). While the executive teamis formed during the Mobilizationphase, true team behavior has yet to be developed. The shared visionand strategy exists in varying degrees.The development of a BalancedScorecard takes both of these ingre-dients of change to the next level.The Rockwater organization, specialistsin undersea construction, was formedthrough a merger. The developmentof a Balanced Scorecard was used to help it clarify its new strategy.During the Design phase, Rockwaterdiscovered that each of its predecessororganizations had had a differentview of the customer value proposition:one competed on price, the other on value-added relationships. Byworking this issue out together in the context of the company’s BSC, it was able to develop a unique, two-tier marketing strategy that catapulted

it to industry leadership in both growthand profits. More importantly,Rockwater developed a team consen-sus on the customer value propositionand the strategy for moving forward.Executives felt that without thescorecard exercise, these differingviews of the customer, based on thecultures of two different organizations,would have remained hidden, leadingto conflict and confusion instead of asource of differentiation and dominance.

The National ReconnaissanceOrganization (NRO), operators ofAmerica’s satellite-based intelligencenetwork, emerged from a veil ofsecrecy at the conclusion of the Cold War. The chief executive of this government agency decided todevelop a Balanced Scorecard tohelp clarify the strategy of the new,more public NRO. In an excellentarticle on the process of change1, Dr. Julie Chesley, then director ofstrategic planning, described how the development of the NRO’s strategic model facilitated debate and discussion, particularly aboutdefining “customer.” Building theBalanced Scorecard was actuallytheir vehicle for building a sharedvision — and a team — from a groupof executives with widely different perspectives and priorities.

Once the scorecard has been developedat the top of the organization, it isthen cascaded to the next level ofbusiness units and support units. The Design & Rollout phase extendsthe process of change, but is stillconfined to the upper strata of theorganization. The leadership of eachbusiness unit needs to get comfortablewith the approach, clarify its strategies,link its scorecards with higher levelsand peer groups, and begin workingwith the new framework. This phaseof the program creates momentumfor change across the top of the orga-nization. (At Mobil, an organizationof 7,000 employees, a total of 18SBUs and 14 support units haddeveloped scorecards by the completionof this phase. This created a newfocus and a framework to discussstrategy.) But the Design & Rollout

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Targets & Initiatives

Balanced Scorecard

Strategy MapBurning Platform

Leadership Team

Vision & Strategy

Meetings

IT

Budgeting & OperationsManagement

IncentivesPersonal Scorecard

Communicate

SBU – Support

Corporate – SBU

TranslateStrategy

Develop strategymaps and Balanced

Scorecards

ExecutiveLeadership

Mobilize changethrough executive

leadership

ContinualProcess

Feedback systems to facilitate

learning

OrganizationalAlignmentCascade the scorecard to create linkage

Everyone’sJob

Link the strategy to personal

behavior

#1

#2A

#2A

#2A

#2B

#2B

Figure 3. PHASE II: SFO Design & Rollout

Phase III, Sustainable Execution, which includes the principles of “Everyone’s Job” and “Continual Process,” begins almost concurrently with Phase II.

phase achieves more than discussion;organizations realize immediate ben-efits. For example, both ChemicalBank and BC Hydro used theirnewly designed BSCs to prioritizeinvestment programs. Both achievedconsiderable savings by shuttingdown programs that did not impactthe scorecard. Both CIGNA and Mobilused the scorecard as a rationale toshut down underperforming assets andlines of business. The simple focusprovided by the BSC permitted aquick payback on the journey tomore sustainable strategic benefits.

Phase III: Sustainable Execution

Strategy is formulated at the top but executed from below. In order to sustain the performance of anorganization over time, two ingredi-ents are required: (1) everyone mustunderstand the strategy and tailortheir activities and behavior accord-ingly; and (2) the governance processmust be linked to the strategy. Inother words, a new way of managing— one focused on strategy — mustemerge. Phase III of the changeprocess accomplishes these objectives(implied in the lower right-hand segments of Figure 3, previouspage). First and foremost, seniormanagement must build its routinemeetings around the scorecard. Thisshould begin within 60 days of BSCdesign. A simple information system(frequently an Excel spreadsheet) is

adequate to get started, but the realsustainable value of the new manage-ment process will come from usinginformation to analyze things likecustomer profitability, product quality,and employee skills. Plans for a moresophisticated and enduring informationsystem should be quickly put in place.

Communication of the strategy to the workforce is another priority.Communication is not a one-timeevent; it must be comprehensive andcontinual. Personal communicationhas the greatest impact. Executivesfrom Hilton Hotel’s senior leadershipteam personally visited each of theirhundreds of properties to roll outtheir strategy and BSC. Other organi-zations embed BSC education intoemployee orientation and/or theircorporate universities. Ann Taylordeveloped a creative board game,based on its BSC and strategy, thatallowed employees to “have funwhile learning” in more than 600stores across the country.

This new awareness of strategybecomes institutionalized when it is “hard-wired” into the managementprocesses of the organization.Management by Objectives (MBO)approaches for setting personalobjectives, as well as incentive compensation, are tied to the BSC.The budgeting process and opera-tional management programs like Six Sigma are linked to the BSC to

ensure strategic alignment. When this is accomplished, the organizationhas completed a significant transfor-mation. Not only does it have a new strategy, but it has the ability to execute that strategy. It is this lattercapability that permits performanceto be sustained. This transformedstate is what we call a “Strategy-Focused Organization.” And the abilityto manage strategy by managingchange is perhaps the greatest asset a company can have for dealing with the world of uncertainty inwhich we live. 1 J.A. Chesley, M.S. Wenger, “Transforming

an Organization: Using Models to Foster a Strategic Conversation,” CaliforniaManagement Review, (Spring 1999),pp 54-73.

TAKEAways• Strategy execution has two

sides: a “hard” side and a“soft” side. For deployment,the hard side relies on tools like strategy maps and measures and managementprocesses such as goal-setting,incentive compensation, and budgeting.

• These tools are as important to execution as the surgeon’sscalpel or the painter’s brush.But they are only tools.

• The soft side of strategy execution is equally importantto success — and determineshow effective the hard toolscan be. Leadership, culture,teamwork, and learning comprise the art of strategicmanagement.

• Successful organizations, likeBSC Hall of Fame members,have learned how to integratethe hard and soft sides ofstrategy — creating organiza-tions that can manage strategyby successfully managingchange.

In the News

The Strategy-FocusedAdministration?As part of the Bush administration’splans to streamline the federal gov-ernment, the Office of Managementand Budget and major federal agencieslaunched scorecards in November.According to a memo issued byOMB Director Mitchell E. Daniels,Jr., the scorecards are intended tohelp achieve President Bush’s fivemanagement priorities: reshaping thefederal workforce, increasing public-private competition for federal work,expanding electronic government,improving financial management,

and integrating budget and programplanning.

Bush, who got his first glimpse of thescorecards in December, will viewfollow-up reports on a regular basis.

The first scorecards (which Danielsexpects will show many low scores)will be used in preparing thePresident’s fiscal 2003 budget.

Reactions? Public policy experts generally give the administration an “A” for effort, but worry that the apparent lack of an articulatedexecution strategy will undermine the initiative.

Reprint #B0201A 5

Organizations need change. We allknow that. But how can an enterpriseembrace great ideas, tools, and methods,incorporating them in a way to effectchange and get superior results? I’ve been observing this process foralmost 30 years, and what intriguesme is why some leaders are able totake these tools and methods and get their organizations to change dramatically — while most do not.

How many times have we seensomebody get very excited aboutsome new tool? Yet two years laterthere is no performance improvement

because, in a sense, the body of theenterprise has rejected the changeneeded to make it happen.

What makes a person good at incitingchange that translates into superiorperformance? What makes a leaderadept at spotting new ideas and thenmaking the organization embracethem? Admittedly, that can only happen through a lot of change. Butthe results can be dramatic.

Take Jack Welch, who transformedGE from a sleeping giant to a topglobal organization. Although hissuccesses have become the darling ofcase studies and textbooks — and his business philosophy a mantra forcorporate change — the fundamentalsof his formula for leadership still hold.

Let me offer a few words of wisdomabout leadership that Welch sharedcandidly with a group of my studentsmore than a decade ago. His ideas,quite revolutionary then, are truerthan ever today. The big thing aboutorganizational change, he said, is that

no one personat any onemoment isever happyabout thewhole thing.Too many

are only interested in the short-term,or conversely, the long-term.

So there is a constant pull betweenshort- and long-term viewpoints,which is actually what makes for a strong management process. Astrong business leader lives withthose tradeoffs every day. Conflictand tension are OK, as long as theyare not about stupid or personalthings — and as long as they movethe enterprise forward quickly.

Another key to success is people.Welch, despite his tough-guy persona,had a strong feeling about people. He told my students, “We look forpeople who will treat others the waythey would treat themselves. Weabsolutely insist on that. It’s what we call the ‘merit test.’ The onlyleaders we want in our company are people who do the right thing,and who don’t focus on doing allthings right. For all of you who wantto be bureaucrats and do everythingright, it’s a lousy game out there. But for people who want to do theright thing, the opportunities areunbelievable.”

To change an organization success-fully, you have to make big moves.No matter who you are, there is thattendency to want to take the ball forward only a couple of yards, thenwait, and then take a couple of moresmall steps forward. But that doesn’twork. You can’t coax people intochange. Incremental nudges in aworld that’s moving in nanosecondsis absolutely not acceptable. AsWelch said, the thing to do is strikeboldly when you believe in some-thing. Take the action and live withthe consequences. If it’s right, soarwith it; if it’s wrong, cut your lossesand do something else.

When asked in the early days of hisleadership what he could be doingbetter, Welch said, amazingly, that he thought he didn’t move fast ordecisively enough — that he was too cautious because he wanted toomany of his constituencies to be onboard. And this was at a time whenhe was being widely criticized formoving too fast!

So it all comes down to the speed of change. Welch was on this bandwagon way before consultantspicked up on it. If you study enoughsituations — as I have — where people need to make big changes significantly and effectively, you’llfind that there are generally eightbasic things that must happen:

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Perspectives

Managing Change: The Power of Leadership John Kotter, the recently retired Konosuke MatsushitaProfessor of Leadership at Harvard Business School, is widelyregarded as the leading expert on leadership and change. He joined the Harvard Business School faculty in 1972 andbecame one of its youngest tenured professors ever. Theauthor of many books and countless articles on change leader-ship, including On What Leaders Really Do (1999) and the1996 Leading Change, his work has been frequently awardedfor its innovative and insightful perspectives. Professor Kotterrecently spoke at Balanced Scorecard Collaborative’s NorthAmerican Summit. A distillation of his remarks follows.

...what intrigues me is why some leaders are able to take these tools and methods and gettheir organizations to change dramatically —while most do not.

1. Instill a sense of urgency. Maybeit begins with only a single person,but it’s a leader who manages to shake enough people out of their complacency — away fromdisinterest, fear, or anger — toengender a sense of opportunity, a sense that everybody’s got to do something about seizing thatopportunity. All too often peoplesay they buy the urgency, but they really don’t. Maybe it’s complacency, maybe false pride— though, increasingly, it’s fear.

2. Pick a good team. Companieswith great track records of changeare very effective at assembling a group of people that can worktogether as a real team to drivethe change. Too often, you see the wrong people involved, orpeople who are working like acommittee. Or the initiative getsdumped on some task force sixlayers down in the organization,where people might desperatelywant to do something — but lack the connections, reputation,or authority to make it happen.

3. Create an enterprise vision.The leadership group works with others to create a vision and the strategies to support it.They have a clear sense of purposeand direction. In less successfulsituations you generally findplans and budgets, but no visionand strategy; or the strategies areso superficial that they have nocredibility.

4. Communicate. Once the vision is created, there must be a hugeeffort to communicate it to asmany people as possible. Peopleneed to hear the mandate forchange loud and clear, with messages sent out consistentlyand often. That means usingevery vehicle possible to send outclear, candid, heartfelt messages.In less successful cases, leader-ship either communicates tooinfrequently or uses standard

channels that simply don’t affectpeople very much — like boringmemos that nobody reads orbelieves.

5. Remove obstacles. The next step: get rid of anything blockingchange. Enable people to moveahead and make something happen. Typically, though, theobstacles in our organizations arehuge — like bosses stuck in theold ways, lack of information systems, lack of self-confidence.To succeed with change, you’vegot to go after those obstacles — which, I think, is by far thebest meaning of “empowerment.”Empowerment has nothing to dowithputtingpower ina bag andshoving itacross thetable. It ismovingobstacles out of peoples’ way sothey can make something happen,once they’ve got the vision clearin their heads.

6. Change fast. Little victories are essential for creating momen-tum and providing sufficient credibility to pat the hard-workingpeople on the back and to diffusethe cynics. The initial emphasis is on quick wins, without losingsight of the long-term vision. Inless successful situations, eitheryou don’t get the wins, or theyare not fast enough or credible.Holding 63 meetings is not a win.

7. Keep on changing. After change enterprises get rolling and have some wins, they don’tstop there. They go back andmake wave after wave of otheractions necessary for long-term,significant change. They don’t do it all at once; it requires onepiece moving out, another jump-ing ahead. But successful changeleaders don’t drop the sense of

urgency. On top of that, they are very systematic about figuringout all the pieces they need tohave in place before they candeclare victory.

8. Make change stick. The last bigstep is nailing big change to thefloor and making sure it sticks.And the way things stick isthrough culture. If you can createa totally new culture around somenew way of managing, it willstay. It is not dependent on oneboss or a couple of enthusiasticpeople who will eventually move on. It’s held in place bysomething more powerful. I find it truly sad to watch a group

of people kill themselves for twoto three years to get somethingoperating successfully in a newway, and take their eyes off it,assuming the job is done. Then,because it didn’t get nailed down,tradition begins to eke its wayback into the situation and thehard work evaporates. Goodchange leaders can’t let that happen.

The key to good leadership is to stay focused on the change, and to keep focused on the differencebetween the trivial and the important.Then, through regular, candid communications, keep everyone else in the organization focused.What’s most effective is to be able to engender a commitment to change.

To Learn More

Dave Norton and John Kotter on “LeadingChange and the BSC” can be heard atwww.bscol.com/ocs

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After change enterprises get rolling and havesome wins, they don’t stop there. They go backand make wave after wave of other actions necessary for long-term, significant change.

Reprint #B0201B

David P. Norton: Tell us a bit about the situation you faced thatstarted your budget-less revolutionand Balanced Scorecard effort.

Thomas Boesen: When Borealiswas established in 1994, our firsttask was to explore synergies. One of our founding values was to create one company which wasnew, different, and better — valuesfor all employees which would serve as the foundation for our way ofworking in the new company. Welooked at the different businessprocesses used previously at each

company. And we realized the mergerrepresented a unique opportunity to develop a new culture. We couldthink about how to develop the kindof culture that helps you react toopportunities and threats in the neweconomy.

DPN: Rather than letting one company’s budgeting or planningapproach prevail, you agreed tocome up with a new approach thatwould be different for both compa-nies. Explain how you got there.

TB: At the time of the merger weheld a big team-building event:building a traditional annual budget.Quickly we found that it didn’t have any value. Market conditionshad changed, so all the work we didended up on the shelf. We figured wehad to find new ways of managing thatfit the new, fast-changing environment

— and our new corporateculture. We reviewedthe budgetand asked

“what could we do differently?” Welooked at the traditional options:communicating better, involvingmore people earlier on, improvingthe iterative process. Then one execu-tive wondered, “what if we got rid ofbudgets altogether?” So we examinedall the different purposes the budget serves and divided them up. For each

purpose we tried to find a suitablesolution.

DPN: How many pieces did the old budget get split into?

TB: Today we have four tools inplace: rolling financial forecasts, for financial and tax planning; theBalanced Scorecard, for performancemanagement; a fixed cost toolbox;and a resource investment decisiontoolbox that allows us to revise ourinvestment project plans during theyear and reallocate resources asneeded.

DPN: So what used to be wrapped up in one package — causing a lot ofcomplexity, confusion, inflexibility —was split into four different systems,each pointed at a different need.

TB: Right. The rolling financial forecasts are for financial and taxplanning. Compared to budgeting,these make for a very simplifiedprocess. Very few people are involved,and the goal is to make the most honest forecast possible. It’s the fullP&L and the balance sheet, updatedfor five quarters, which lets us reactto changes in the marketplace on aquarterly basis.

DPN: Then you split cost manage-ment into two pieces: operating costsand investments, or capital costs.Explain how that works.

TB: As part of our quarterly update,we get an update of our investment projects. Since investment projects in our industry run for more than five quarters, we might as well fore-cast projects for their full time period,so we’re usually ten quarters ahead. We get forecasts project by project,so we can learn about delays or pro-jects that come in ahead of schedule.From these, we can prioritize theinvestments that will best advancethe company’s strategy. For example,we’ve developed our own proprietarytechnologies for producing polyeth-ylene and polypropylene plastics.Prioritizing those investments isobviously crucial because they create value.

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New Tools for a NewCorporate Culture: TheBudget-less Revolution

An interview with Thomas M. Boesen, former financial controller and secretary to the executive board, Borealis Group

Borealis, Europe’s leading polyolefin plastics manufacturer, produces plastics used in every-thing from diapers to dashboards. Created fromthe merger of the petrochemical divisions of

Statoil of Norway and Neste of Finland, Borealis immediatelyreplaced the traditional budgeting process (which was almostinstantly obsolete) with a quartet of core management systems,among them the Balanced Scorecard. Besides improving performance, the company achieved strategic focus and clarity,which earned it a place in the BSC Hall of Fame in Spring of2001. Thomas Boesen, who oversaw the implementation ofBorealis’s BSC, spoke with David Norton at BSCol’s recentNorth American Executive Summit.

We realized the merger represented a uniqueopportunity to develop a new culture… the kindthat helps you react to opportunities and threatsin the new economy.

DPN: What about the portion devoted to operating budgets andmonth-to-month activities?

TB: We’ve split our capital expenditures forecast into differentgroups: small investments we capturethrough trends; and medium invest-ments we manage through varioushurdle rates (whether the interestrate used for net present value calculation, or the internal rate of return, or the payback time). Wecould also elect to put in frames.During the past year, for example,we had heavy capital expenditures on certain strategic projects (in technology and in our expansionbeyond Europe), so we decided that investments generally wouldhave to be more profitable to justifymaking them.

DPN: By having investments in one category and costs (activity costs and fixed costs) in another,you’re able to manage those as two separate processes, so you don’t rob one to pay the other.

TB: That’s right. For the fixed costpart, when we first introduced our“beyond budgeting” model, we alsointroduced activity-based costingmethods. On a stand-alone basis wefound them to be very flexible forour needs and methods of analysis.But when we plugged them into anintegrated system, they lost flexibility.We now manage fixed costs throughbenchmarks. Everyone has to performup to first quartile benchmarks, sothere’s not a lot of discussion aroundfixed cost issues — we just have to perform. In specialty areas, how-ever, we allow a handicap, becausespecialties require more cost. But webelieve that’s justified, since theydeliver superior value.

DPN: Explain how the BSC relates toyour rolling forecasts, investmentplanning, and fixed cost managementefforts.

TB: We put a lot of effort into sepa-rating forecasting from performancemanagement. With forecasting wewant honest answers about what webelieve the future will bring in terms

of P&L. For performance manage-ment (which is what the BSCserves), we want to set stretch targetsfor the organization and find innova-tive ways of reaching them. The BSCis very important at Borealis for both target-setting and performancemanagement.

DPN: Has your new approachchanged the way people behave —and manage?

TB: I’d say so. Even though we’veused other nonfinancial KeyPerformance Indicators (KPIs) such as on-time delivery, they werenot put into a systematic frameworkthat focused on strategic objectives.Measures were all operational measures. Management meetingstended to beoperationallyfocused(prices andvolumes, andimmediatedevelopmentprojects). TheBSC allows us to step back and askright off the bat: “Are we accom-plishing what we said we want to?”

DPN: What about results?

TB: We measure ourselves in relativeterms, comparing ourselves to thebest performers. We were not thebest when we first started, and stillaren’t — but we have certainlyclosed the gap. We’re very happywith how we measure and how ourperformance has improved.

DPN: What are your lead indicatorstelling you?

TB: They’re showing us that we’revery successful at introducing ourtechnologies, which is one of thekeys to our growth. Obviously, wedon’t have positive results in allareas, but the BSC gives us a greatframework for giving attention tothose areas that need improvement.

DPN: If you had it to do over again,what would you do differently?

TB: In the beginning we made themistake of focusing too much on the

measures. The BSC we launched wasvery ambitious and very complicated.We didn’t get quite the buy-in wehad hoped for. But once we simplifiedit, buy-in grew. Then, managerswanted to make the scorecard morecomplicated because they didn’tthink the simplified version told thereal story! So the people who use the scorecard to manage their ownperformance and to achieve resultsbegan to build upon it.

DPN: Being able to modify the scorecard enhanced their sense of ownership.

TB: Yes. And this relates to the mistake we made at first in focusingon measures instead of objectives.The measures we selected at the

corporate level were quickly cascadedthroughout the organization, whichwas clearly a mistake. We shouldhave focused on the objectives.People can relate to objectives muchmore easily; they can see where theycontribute. That was a very importantlesson. Today, in all the units belowthe corporate level, managers basicallydefine objectives in their own terms.They have to relate to our corporatestrategic objectives, of course. Butthis way, we get the greatest buy-in.

To Learn More

• For the full story of Borealis’s path towardthe budget-less organization, see “CreatingBudget-less Organizations with theBalanced Scorecard” in Nov. – Dec. 2000BSR (Reprint #B0011B).

• Borealis’s entry to the BSC Hall of Fame is described at: www.bscol.com/hof.

• For more on Borealis, visitborealisgroup.com.

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People can relate to objectives much more easily [than measures]; they can see where they contribute. … Today, in all the units belowthe corporate level, managers basically defineobjectives in their own terms.

Reprint #B0201C

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We were all shocked and saddenedby the events of September 11th. The unexpected and savage attackshave caused employees everywhereto reflect on the meaning of theirlives and their work. In these times,people look to their leaders — notjust political leaders, but the leadersin their work environment — for meaning and purpose. More thanever, organizational leaders mustconvey that what employees do intheir working lives is important. The importance of employee contri-butions should be communicated at several levels.

First, employees need to feel thatthey are working for an organization

that is contributing value to theworld. They should understand howthe success of the organization notonly benefits its shareholders, butalso its customers, suppliers, and the communities in which the organi-zation operates. Employees want toknow that society benefits from themission and strategy of their organi-zation and its products and services.

Second, employees need to feel that they are making a contributionto the organization. They want tounderstand where they fit within theorganization and how they contributeto helping the organization achieveits mission and objectives.

Finally, employees should feel thattheir organization functions both efficiently and effectively. Theyshould be reassured that the organi-zation does not squander resources in pursuit of its mission. Poorly functioning organizations, bureaucraciesthat bog down decision-making, andturf battles arising from the narrow-mindedness so often spawned byfunctional silos are visible to every-

one anddemoralizingto all.

What is therelevance ofthese ideas to readers ofthe Balanced

Scorecard Report? My experience over the past 20 years indicates that measurement matters. Valid measurements, when aligned withorganizational economics and objectives, empower and motivateemployees. Invalid measurements,based on operating technologies andcompetitive environments of decadespast, inhibit change and adaptation.Poor measurement systems causeemployees to question the competence

of managers who “manage by thenumbers” when the numbers conflictwith economic reality and the organi-zation’s objectives.

Two innovations in measurementtechnology that I have been involvedwith — the Balanced Scorecard and activity-based costing — givemanagement the tools to managetheir organizations efficiently andeffectively. They also give employeesthe information to perform their jobs better and in greater alignmentwith organizational objectives. Allorganizations have financial systemsthat capture, often at considerableand excruciating levels of detail, how much they are spending — bycategory, function, department, andregion. Enterprise Resource Planning(ERP) systems, costing tens or evenhundreds of millions of dollars, providethe uniform, comprehensive, andreal-time capture and reporting oforganizational spending, expenses,and revenues. But knowing howmuch you are spending, and howmuch revenue has been created, tellslittle about what anything costs orwhere and how the organizationearns profits.

Attacking Waste, Identifying Opportunities

Organizations need valid cost systemsthat link spending to the cost of performing activities and businessprocesses and to the products produced,services delivered, and customersserved by these activities andprocesses. Activity-based costingsystems enable managers to see, usually for the first time, the fullcosts of inefficient activities andprocesses — and the high percentageof unprofitable products, services,and customers they are currently sustaining. Organizations need toattack waste wherever it arises — in inefficient processes, or withunprofitable products, services, orcustomers. Activity-based costingprovides the measurements andinformation that reveal where unex-pected waste and losses exist in the

After September 11th: TheHeightened Role for Cost andPerformance Managementby Robert S. Kaplan

The tragic events of September 11th have made many questionthe meaning and purpose of their everyday lives. It’s up toorganizational leaders to communicate to employees theimportant role they play and to reaffirm the value the organiza-tion contributes to society. The new year is a perfect time forexecutives to recommit to the measurement and managementsystems that support and demonstrate value — and empowerand motivate employees.

More than ever, organizational leaders must convey that what employees do in their workinglives is important …[and] employees need tofeel that they are working for an organizationthat is contributing value to the world.

organization. Management can thenmake informed decisions and takeactions that transform inefficiencyand loss into profit opportunities that can be quickly realized.

Valid cost systems are critical for identifying opportunities forimprovements in existing operations,as well as for rooting out unprofitableproducts, services, and customers.But cost systems alone cannot drivethe organization toward strategicobjectives. Leaders must also be ableto articulate how the organizationcreates value.

A Full Picture of Value Creation

An old joke describes an economistas someone who knows the cost of everything and the value of nothing. The Balanced Scorecardprovides leaders with a process to describe strategy — both whatthe organization wants to accomplishand how it intends to realize itsstrategic outcomes. Objectives and measures in the financial andcustomer perspectives of theBalanced Scorecard describe the outcomes the organization seeks with the entities that supply funds — shareholders and customers (donorsand constituents, for nonprofit andpublic sector organizations).Objectives and measures in the internal and learning and growth perspectives describe how employ-ees, suppliers, and technology get

aligned around critical processes thatdeliver superior value propositionsfor customers and shareholders.Taking all the objectives and mea-sures together into a strategy map of cause-and-effect relationshipsacross the four perspectives providesa comprehensive picture of the orga-nization’s value-creating activities.

This new representation of strategycommunicates to everyone in theorganizationwhat theorganization is about: howit intends tocreate long-term value,and whereeach individual can make a contribu-tion to organizational objectives.Individuals are freed from narrow and restrictive job descriptions,a legacy of the scientific manage-ment movement of a century ago.They are now encouraged to come to work each day to do their job differently and better, helping toadvance the organization’s successand realize their personal objectives.New information, ideas, and actions,aligned with organizational objectives,emanate from the organization’s frontlines and back offices. Employeesbecome truly empowered by under-standing what the organization wishesto accomplish and how they can contribute to these accomplishments.Organizational units — business

units, departments, support groups,and shared services — understandwhere they fit within the overallstrategy and how they can createvalue within their units and by working cooperatively with other units.

A Seriousness of Purpose

Communication by leaders is critical.Their expressions of empathy after

September 11th can only go so far in re-energizing the organization.Employees expect more than rhetoricand sympathy. They want to knowthat the organization is serious aboutwhat it intends to accomplish, andthat they, the employees, are criticalin achieving success. But not just in words. Measures make objectivesfar more specific, and, as we havelearned during the past ten years, farmore likely that the objectives willactually be achieved. So leaders must continue to invest in improvedcost and performance measurementsystems. These are the foundation for data and fact-based managementsystems that motivate and guidefuture organizational success.

Poor measurement systems cause employees to question the competence of managers who “manage by the numbers” when the numbers conflict with economic reality and theorganization’s objectives.

Reprint #B0201D

In the News

Accountability on the RiseRock-and-a-hard-place dept.: Arecent study by the London-basedBusiness Intelligence showed that talent management is sorely lacking.Respondents from 150 companiesand more than 25 countries noted thatkey processes are either completelyabsent or mismanaged and that newthinking is rarely put into practice.Fully 85% have no talent risk man-agement policies or procedures, andthe majority lack a defined valueproposition or even competitive compensation packages. A separatereport by Business Intelligence found

that HR professionals are increas-ingly expected to measure theirperformance and demonstratebusiness results. ... Tough medicine:Alan Milburn, Britain’s health secretary, recently gave an ultimatumto the CEOs of the nation’s 12worst-performing hospital trusts:improve in three months or get thesack. (Newly appointed chief executives were given a year.)League tables, based on BalancedScorecards, ranked 173 hospital trustsacross 21 performance measures.“We must have the guts to breakthrough the culture of inevitability,”Milburn said.

Coming Up in BSR

• Robert Kaplan on Strategic Themes:Part II (exploring organizational, rather than business unit, themes)

• Managing a strategic transformation:The National ReconnaissanceOrganization’s remarkable change initiative

• Change Agents: stories from scorecard missionaries

• David Norton on the true history of the Balanced Scorecard

• Technology case studies

11

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Simple: conduct an SFO ReadinessAssessment. This quick, but rigor-ous, process evaluates an organiza-tion’s readiness to undertake thechange required to become aStrategy-Focused Organization andachieve breakthrough results. It’salso the best litmus test around forrevealing top-level commitment tothe change. And if the SFO ReadinessAssessment reveals such commitmentis lacking, it will have preventedmany headaches and much needlessspending — and spared the credibilityof well-intentioned organizational missionaries.

Mobilizing Leadership with anSFO Readiness Assessment

The SFO Readiness Assessment isdesigned primarily for companiesthat either recognize the need for anew strategy or have already definedone and are preparing to implementit. It’s the missionary’s tool forengaging and involving the senior executive team in the SFO journey. Italso provides an unvarnished pictureof the scale and scope of the changeprocess. The Assessment combineshard analysis with an emotionalpunch that can galvanize a reluctantexecutive team into action. But it canalso demonstrate — before resources

are committed — that the time may not, in fact, be right.

A four-week, six-step process, theSFO Readiness Assessment involvesevaluating the current state of thebusiness and its culture, building thechange architecture, demonstratingthe value of change (and the costs of not changing) and developing aplan (see sidebar, page 14). It’s basedon the three phases of becoming aStrategy-Focused Organizationdescribed in this month’s On Balance:Mobilization (Phase I); Design &Roll-Out (Phase II); and SustainableExecution (Phase III).

An Assessment reveals:

• the major strategic issues andopportunities the company faces;

• the current executive view of company strategy;

• the points of executive alignment (and misalignment) around the strategy;

• the capability gaps that will have to be closed to achieve the strategy;

• the existing culture and the culture change needed to achievethe strategy;

• the financial business case for achieving the strategy; and

• the implementation plan, projectstructure, and governance processneeded to proceed.

The process begins with a quickappraisal of the external environment(e.g., the industry, competitors).Next, we review existing strategicdocuments and conduct interviewswith key executives and managers.Simultaneously, we conduct a Web-based survey of employees to obtaina bottom-up view of the leadership,strategic focus, and company culture.(Web surveys are not only fast, theygenerally yield a far greater response.)We then compile preliminary findingsinto a Balanced Scorecard SWOT(Strengths, Weaknesses, Opportunities,Threats) analysis1, a draft strategy map,and a high-level financial gap analysis— all of which are the basis of aone-day working session with theexecutive team.

This working session is designed toachieve executive alignment aroundthe strategy and the strategic issuesand opportunities the business faces.The analyses and strategy map helpengage the executive team in a livelydiscussion about issues and opportu-nities, and reflect their conception ofthe current strategy, pinpointing gapsand areas of alignment or misalign-ment. We ask them: Will this strategydeliver your financial goals? Whatare the major impediments to success?What is the plan? Who will do what,by when?

Answers aren’t the goal; the idea isto edge the team into discomfort andprovoke thinking, preparing them forthe tough road ahead.

Leveraging all of the outputs andanalyses, we then sit down with a teamof company-savvy managers to do a blow-by-blow assessment, rankingthe company‘s preparedness accordingto the five principles of the Strategy-Focused Organization and their criticalsuccess factors. Finally, we presentto the executives a comprehensiveassessment and a comprehensive planfor achieving breakthrough results.

IN THETrenches

How to Mobilize the ExecutiveTeam for Strategic Change:The SFO Readiness Assessment by Terry S. Brown, vice president, manufacturing and process industry practice,Balanced Scorecard Collaborative

Ask any BSC advocate and they’ll concur: mobilizing executivescan be one of the biggest hurdles to launching a strategictransformation. Senior executives have boards to please, analysts to convince, and “hard” business issues and initiativesto manage. They are (rightfully) wary of management fads and the consultants who push them. So how can companiescut the cycle time? Where can organizational missionaries get hard-hitting, persuasive ideas about improving companyperformance to make their case? How can they boost theirchances of succeeding? And how can they test whether thetime is right for change?

Pain Avoidance and Unique Roadmaps

Like all people, senior executives aremotivated not just by the desire toachieve goals, but by the desire toavoid or eliminate pain. Therefore,the Assessment needs to contain:

1. Clear evidence that the organizationis in pain and/or that not changingwill create significant pain.

2. A case for change that shows: (a) the financial and nonfinancialcosts of not changing; (b) thecosts of implementation; and (c) the potential financial benefits.

There’s no such thing as a cookie-cutter recommendation. For onecompany, the first step may be astrategy study or a campaign of com-munication and education. For another,it may involve a waiting period untilnew leadership is in place. For stillanother, the time may be right for animmediate, full-scale transformationeffort. Though companies tend not to focus on first-step responses, theserecommendations are often the mostvaluable output of the SFO ReadinessAssessment. In every case, the solu-tion is built around an understandingof the scope and scale of changerequired to execute the new strategy.

To Assess or Not to Assess?

Once the exception, I now think theSFO Readiness Assessment shouldbe the rule for all companies imple-menting a new strategy. If the CEOand executive team already support aBalanced Scorecard initiative, anAssessment will quickly help establishthe starting points in leadership,capabilities, and culture — and helplaunch a rigorous project plan toensure a speedy, efficient, and effectivechange program.

But unanimity of buy-in is rare.Invariably, there are key members of the executive team — and oftenthe CEO — who are not on board.The SFO Readiness Assessment isthe best way I know to educate theexecutive team quickly — and toensure that the program is prominenton their agenda. Without it, they may

only view the Balanced Scorecard as another worthwhile program thatgets little of their attention. If theAssessment does reveal the lack oftop-tier commitment, missionariesmust keep educating the skepticsuntil they build sufficient awareness.Only then (and with sponsorship),should they even consider launchinga pilot program.

Hard Lessons, or Spare theAssessment, Spoil the Initiative

There is no shortage of worthy transformation initiatives that wereundertaken without true buy-in fromthe top — and therefore stalled orwere aborted outright. The BSC is no exception:

• The business unit head of a major consumer products company, a passionate champion of theBalanced Scorecard, began implementing the BSC before garnering the commitment of the broader senior executive team and the interim CEO. Midwaythrough the assessment, a perma-nent CEO was installed; neither he nor the senior executive teamsaw the BSC as a tool for strategyexecution. Result: after $1 million,the program got canceled.

• A leading international shippingcompany killed its BSC initiativeshortly after launching it, spookedby a negative economic forecast.Although the lone change agenthad the authority to undertake thisinitiative, the lack of senior-levelbuy-in proved just how fragile his authority was.

False Start Leads to Plan B

Innovation has been integral to onehigh-tech company’s success. But the firm’s intense focus on innova-tion and revenue growth have been atthe expense of business process andmanagement discipline — capabilitiesof particular importance today, withthe company’s near billion-dollarsize and amid an economic downturn.

In response, the CEO recently createda strategy that balances innovation

and cost management. The transfor-mation team convinced him of theneed to develop and institutionalizefive core process disciplines.Balanced Scorecards were approvedto drive the execution of the newstrategy and organization structure.

But the transformation team sawtrouble. A quick analysis against thechecklist of critical success factorsfor the Mobilization phase (see side-bar, next page) illustrates their rightfulconcerns:

1. Without major strategic change,the company could go out ofbusiness. (Now that’s a burningplatform.)

2. The executive team is alignedaround the new vision and strategy— but not around a corporatestrategy map, Balanced Scorecard,or key initiatives. While the CEOand the second-in-command seevalue in the scorecard, they don’tsee it as “a new way of managing.”Nor do they view strategy as achange process.

3. There is no strategic plan, only a financial plan. Worse still, thereis no implementation plan for thefive core processes that the CEOagreed were essential to the futureof the business!

4. The transformation team has no real power. They have permissionto proceed, but no resources orauthority to act.

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Continued on next page

Keep in mind

The SFO principles are a conceptualframework, not an action plan per se. Theyare not synonymous with the three phasesor steps of the change journey. They providea framework for analysis — for understandinga company’s status and progress along thejourney. While some elements must occurin order (mainly, Mobilizing Change throughLeadership), most SFO principles aren’tsequential steps; they should be happeningconcurrently and, more importantly, shouldbe ongoing and evolving. Successful com-panies are effectively always engaged inall SFO Principles. And leadership shouldbe constant.

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5. There is no sponsorship, structure, or governance to drivethe transformation forward.

These obstacles didn’t surface until thecompany began building a corporate-level scorecard. It was really broughthome by the CEO‘s comment to melater that he and his deputy had toomany other priorities and that a man-agement process wasn’t necessary.“We just need to do it,” he declared.

So, the company shifted its focus to a “friendlier” business unit and tooperations, both of whose leaderswere willing to commit to the changeprocess. They’ve jumped to Phase II,with the intention of piloting the concept. Later, they plan to return to Phase I to win the commitment ofthe entire leadership.

What went wrong? Quite simply, the mistake was in assuming that thegung-ho enthusiasm of the transfor-mation team signaled receptiveness,if not an outright endorsement, fromsenior executives to move ahead withimplementation.

An SFO Readiness Assessment could have avoided all this. Instead

of advancing the scorecard idea, the Assessment could have helpedthe executive team understand therequirements for successful executionof the new strategy. The transformationteam and my team would have workedas one to create a solid baseline, acompelling business case for change,and an implementation structure thattook into account the organization’sleadership style and culture. Ultimately,we would have requested a limitedpilot program — which is where weare today, only without the false start.Instead of climbing an uphill battle to regain credibility and buy-in afteran initial failure, the BSC initiativecould have indeed been an innovativeexperiment for an innovation company.

Conditions Must Be Right

We now know clearly: no matter howwell-intentioned a change team, wecan’t assume their enthusiasm equalssenior executive buy-in. Companiesshouldn’t invest in any strategicchange program if conditions aren’tright. Recently, an executive with aFortune 500 company postponed hisfirm’s BSC initiative, after their SFO

Readiness Assessment clearly showedthey wouldn’t be ready till a new CEOand two business unit heads wereinstalled. We applaud that decision.

Before committing to a BSC effort,every organization needs to know itswhereabouts on the road to becominga Strategy-Focused Organization. At a minimum, the SFO ReadinessAssessment may spare considerablewasted effort and resources — andfrustration. At best, it’s a fast, efficient,and effective way to engage the executive team, check your company’scurrent status, and design a programto ensure the most targeted path tobreakthrough results. 1 “Building Executive Alignment, Buy-In, andFocus with the Balanced Scorecard SWOT,”in May-June 2001 BSR (Reprint #B0105E).

To Learn More• See “The Strategy-Focused Organization”

at www.bscol.com/archive.

Editor’s note: In the next issue of BSRlook for the first installment of our new feature, Change Agents. We’ll be profiling the heroics (and setbacks) of real-life BSC missionaries, sharing their experiences, insights, and lessons learned.

Reprint #B0201E

For each criterion, organizations rank themselves on a scale ranging from absolute beginner (“notyet under consideration”) to best-practice status.

Principle 1: Mobilizing Change through Executive Leadership

■■ Executive team has created a sense of urgency— the “burning platform”

■■ Executive team is aligned around a clearly articulated and communicated vision, mission, and strategy

■■ Each team member is individually accountable for achieving some component of the strategy

■■ Executive team has identified and empowereda cadre of qualified change agents to managethe effort

■■ A formal, structured change program is in place

■■ Executives are modeling and reinforcing “a new way of managing”

Principle 2: Translating the Strategy into Operational Terms

■■ Corporate strategy is refreshed annuallythrough a strategic plan

■■ Strategic plan is translated into a strategy map and Balanced Scorecard as part of theplanning process

■■ Measures and targets are balanced acrossfinancial and nonfinancial perspectives

■■ Corporate initiatives are clearly defined; exec-utives are accountable for successful execution

■■ Strategic priorities are repeatedly communicatedthrough multiple media across and down theorganization

Principle 3: Aligning the Organization to the Strategy

■■ SBU and corporate strategy are linked through a formal strategic planning process

■■ SBU strategic plan is translated into a strategy map and Balanced Scorecard as partof the planning process

■■ Corporate/SBU measures and targets arelinked, aligned, and balanced across financialand nonfinancial perspectives

■■ Support organization objectives, measures, targets are linked to Corporate/SBU strategythrough a formal alignment process

■■ Initiative and action plans at all levels arealigned, rationalized, and prioritized againstthe strategy

Principle 4: Making Strategy Everyone’s Job

■■ Employees have foremost awareness of the corporate vision and strategy

■■ Team/individual objectives and goals are alignedto the strategy through a formal process

■■ Individuals understand their role in achieving the strategy and believe they can make a difference

■■ Teams and individuals are accountable for strategic results

■■ Contributions are recognized and rewarded

■■ Failure to deliver has predictable consequences

■■ Teams and individuals have a feedback forumin which their ideas are heard and acted upon

Principle 5: Making Strategy a Continual Process

■■ The Balanced Scorecard is an integral part ofthe strategic and business planning processes

■■ Formal, monthly/quarterly strategic and operational review processes drive strategicresource allocation decisions

■■ Leaders at all levels make rapid strategic decisions based on timely, accurate strategicmeasurement and analysis

■■ The budget is driven by the strategy, specificallyby discretionary strategic initiatives

■■ Management and communication processesenable learning and best practice sharing

The SFO Assessment Checklist How does your organization stack up against these critical success factors?

Let me first define “analytic applica-tions.” Where traditional applications(order systems, call center systems)capture data, analytic applicationsextend the business processes sup-ported by transactional applications,thus helping to improve performance.They do this either by enhancingcontrol (increasing efficiency andreducing costs) or enabling opportunity(growing revenues).

With the advent of such transactionalapplications as SAP and PeopleSoftcame the rise of new methodologieslike the Balanced Scorecard, whichcould improve the organization’sdecision-making strategically as wellas operationally. But many suchapplications are functionally-based;they cannot link to broader perfor-mance metrics. That’s a critical ability— or disability — because organiza-tions need to be able to apply feedbackand learning from the vital and ever-growing stores of informationthey gather to help improve operationsand decision-making.

The Growth of AnalyticApplications

The fledgling market for analyticapplications, now over $2 billion ayear in worldwide software revenue,comprises three major categories ofapplications:

1. Financial/Business PerformanceManagement: like packaged BSC

applications, planning, budgetingand financial analysis (excludingcore financial systems like thegeneral ledger).

2. Customer RelationshipManagement (CRM): applicationsthat perform functions like cus-tomer segmenting and relatedanalysis used for marketing andsales campaigns.

3. Operations/Production: internalprocess applications: everythingfrom supply chain optimization to portfolio analysis to frauddetection to workforce planningand optimization.

These categories fall within threebroad levels of analytic applications(systems) that help build intelligenceacross an organization:

• Strategic: corporate performancedashboards, like the BSC, whichshow financial, internal process,learning and growth, and customerperformance;

• Process-specific/Operational:financial-intensive, production-intensive, people-intensive, andcustomer-intensive processes; and

• Foundational: activity models, drivers, and metrics.

Balanced Scorecard use is becomingmore widely automated (see surveyhighlights, sidebar, next page). Butthat is happening at only one level.

BSC applications have not yetevolved to the point of tying theprocess-specific applications of thecompany’s functional areas to strategicsystems. Nor is there a consistentway to develop metrics. Systems likeactivity-based management (ABM)and Economic Value AddedTM (EVA), can provide measurement consistency,but true analytic functions are typically beyond their scope. Moresignificantly, what’s lacking todayare standards of interoperability forthese applications. Businesses needto be able to exchange informationbetween and among these differentapplications.

In my view, the automation in traditional packaged applications hasn’t gone far enough. Analyticcapability is limited, and they can’tdo predictive modeling. They don’tenable the crucial “closed feedbackloop” connecting the tracking, analysis, and adjustment processesbetween operations and strategy.Executive Information Systems (EIS)and Decision Support tools wereintended to address these analyticneeds. But EIS systems deal only withthe executive level, so the informationis not visible to mid-level managersor front-line employees. The decisionsupport tools don’t necessarilyadvance the decision-making processbecause of this disconnect betweenanalysts and decision-makers.

An automated performance measure-ment application (like an automatedBSC) enables users to build a strategymap and determine which metricsshould be tracked to measure actualperformance. It not only provideshigh-level measures, it lets users adjusttheir policies governing operations.Besides analyzing pricing, for example,users can apply the trend data toadjust pricing policies dynamicallyand strategically to improve perfor-mance. The idea is to provide processsupport throughout the organization:to automate the rule-setting thatdetermines what a company charges,or, in another example, how it com-pensates salespeople.

The BSC and AnalyticApplication Integrationby Henry Morris, Ph.D., vice president, applications and information access,International Data Corporation

At IDC, the global technology industry research firm, HenryMorris’s purview includes business intelligence and data warehousing and how they are applied to business applicationsand processes. In 2001, IDC and Balanced ScorecardCollaborative jointly surveyed BSC Online members on their use of technology with the Balanced Scorecard. Herewith, Dr. Morris’s reflections on the survey and the state of what he calls “analytic applications” — those that help companiescapture vital information from existing operational software toimprove decision-making and, ultimately, performance.

Continued on next page

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The Feedback Loop and the Policy Hub

The ideal feedback loop links analyt-ics to operations. And only analyticapplications can support this criticalloop. Besides tracking, analysis, andaction, they allow scenario modeling,so organizations can test the keyassumptions upon which their exist-ing performance measures are based— like whether a leading indicator is still valid. The “policy hub” is thepoint in the loop where an organiza-tion revises its business rules (e.g.,the discount policy), then acts uponthem. Information and action areintegrated; improvement is enabledwithin and by the system, automatically.

Automating the rule-setting and decision-making processes is importantfor many reasons, including organi-zational ones. People often lack theincentive to collaborate. Consider the resistance front-line salespeoplefrequently show to strategy-makerson how they should market to differentcustomer segments. Technologicalconsiderations matter, too. Withmore customer channels and lesstotal personal interaction with cus-tomers, customer processes are moredata-driven. Information-sharing acrossapplications is that much more vital.

The policy hub, enabled by integratedanalytic applications, supports infor-mation-sharing, and thus a learningculture. It provides greater access toanalytic models, like costing, andsupports business rule and policyformation. Organizations can deliverthe model and rules to each actionsite. Are you factoring in the expectedlifetime value of customers in yourcustomer segmentation policies? Can you set a business rule this week that determines what you’lloffer to the gold or the silver segmentthrough your marketing campaignand customer service channels? Can you make these recommendationson a scheduled basis (when you contact customers) or real-time(when customers come to you)?

Whither the Market?

I foresee two possible scenarios forthe emerging analytic applicationsmarket. Single vendors, like SAP, PeopleSoft, or Oracle might providea suite of applications at all these levels,much like their existing suites for trans-actional applications. But it’s unlikelythat a suite-of-suites will come froma single source, given the specializedexpertise each application requires.

The other possibility is a frameworkproduct which buyers would combinewith best-of-breed applications, follow-ing the “build, buy, and integrate”approach. It would include a commondata model — a BSC, say, or an ABM.The organization would then pickapplications from different vendorsfor the various process areas, since no one vendor has expertise in every

process for every industry. But sucha scenario requires greater buyerawareness. It also calls for supportfor standards that allow data-sharingbetween and among applications.Survey respondents underscored thispoint in the technological obstacles theycited to automating the BSC, specifi-cally the complexity of data sourcing.

Wanted: Standards of Interoperability

Where do we stand in terms of inter-operability standards? At the strategic,foundational level, the BSCol and itscertified software vendors recentlydeveloped XML standards thatenable the exchange of informationbetween BSC applications, so orga-nizations with scorecards in differentareas can now integrate them. AnXML-based standard has also beenproposed for data exchange betweenBSCs and ABC systems. But the marketstill lacks standards for interoper-ability across the levels of analyticapplications, from the foundational(like ABM) to the strategic (the BSC)to the process-specific (like budgeting).

Without pressure from buyers, vendorswill just keep building applicationsand bigger suites. Getting businessand technology stakeholders to commit to developing the necessaryapplications and standards of inter-operability is crucial. Companiesneed analytic applications for feedbackand learning to enable better decision-making. Software that supports a collaborative policy hub helps makeinformation actionable. With theability to make positive changes in operations, organizations can optimize performance on a continualbasis.

To Learn More

• “Policy Hubs: Linking Analytic andOperational Applications,” by Henry M. Morris, Jul.–Aug. 2000 BSR, (Reprint #B0007B).

• For a listing of articles by Henry Morris,visit www.bscol.com/certification(Technology Watch).

• The “Balanced Scorecard Adoption Trends:2001 End User Study,” along with additionalpublications on analytic applications andpolicy hubs, is available through IDC. ContactHenry Morris at: hmorris@idc.com.

Product #B02010 Reprint #B0201F

Highlights from theIDC/Balanced ScorecardCollaborative 2001 Survey

In 2001, IDC and Balanced ScorecardCollaborative surveyed 165 BSC Online members from a broad range of industries tolearn about their practices and plans regardingBSC technology.

Use of Automated BSCs is Growing

• 39% of respondents would consider technology tools while or before buildingtheir BSCs (25% indicated “while building,”14% said “before”) — up about 6% fromthe 2000 survey.

• 31% of respondents plan to develop theirBSC first and consider technology toolslater, a drop of 9% from last year.

What Kinds of Tools?

• In just one year, interest in BSC softwarehas risen considerably, and there’s been adramatic shift in the kinds of tools peopleregard as automated.

• 22% of respondents said they plan to buyBSC-specific software tools. Far morerespondents than last year were exploringpackaged BSC applications, customizedapplications, and BSC modules within suchlarger applications as ERPs.

• In 2000, only 10% used packaged BSCapplications, though many said they expectedto use commercially available BSC apps inthe future.

• But the purchase of (or intent to purchase)other analytic applications was very low,ranging from 6% (for financial analysistools) to 10% (activity-based managementtools).

What’s Hindering BSC Users from Automating?

• Complex data sourcing remains the singlebiggest challenge to automating theBalanced Scorecard (32% of respondents).

• The next biggest obstacles: measurementdata that don’t exist, and the unavailabilityof data in a timely manner.

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