Linking strategy to action

When created, most organizational goals are
realistic and achievable
but without a mechanism to convert them into
concrete action items,
it's pure luck if those goals are ever realized.

by Paul Sharman

The contemporary approach to strategic planning involves much analysis, soul searching, and preparation of a vision statement, objectives and goals. Often, however, the plans don't get any further than the top management because they are unable to create a clear linkage to those people in the organization who actually perform the work. A new management performance framework is necessary to create alignment between strategy and action.

Over the years we have seen many senior executives that believe that they have a well-developed, well-understood and articulated vision that most employees buy into. During a visit to a company in England a few years ago, in a room called the "Quality Training Centre" I noticed a sign that read as follows:

XYZ Corporation -- Our Vision

Our goal is to achieve the number two position in the automotive parts market by the year 2000.

The needs of our customers are our number one priority and we will strive to provide them with high quality products and service, on time at the lowest cost.

Our employees are the most important asset we have.

The sign was interesting because it was four years old and was clearly out of date. I spoke to an employee of the company about the sign and asked, "What market position is the company in now? Are the customers happy about quality? And what happened to the employees?" The employee gave a small ironic smile as he answered. He said, "Don't quote me on this but our market position declined, who knows where we are! But obviously we have lost market share. As for employees, well, we have downsized, must be about 30 per cent. Morale is the pits and it seems like customers are complaining more."

I had to ask one more question, "What about cost, did the company achieve its goal of 'low cost'?" He responded "I guess so, if you consider firing all of those people, but even so, we have gone from being a profitable company to one that has lost money in each of the last three years. It doesn't seem as if the executives got what they expected!"

So much for that vision. As one comedian said, "Vision without reality is hallucination!" No doubt the managers of that company would argue that conditions had changed between the time they established their vision and when we discussed their performance. Certainly it would be reasonable to suggest that a more frequent review of their goals would be appropriate. Perhaps the goals were not reached for another reason. Perhaps this company had fallen into the trap that we all see so frequently: the executives had created expectations without understanding or providing an adequate mechanism with which to actually accomplish the goals.

Decision making

Managers are paid to make decisions. When doing so, managers utilize three basic techniques: they evaluate the facts and consider the alternatives; discuss the facts and alternatives with people whose opinion the managers value; and finally, managers go with their gut instinct. Yet in most circumstances, the conditions for effective decision making are inappropriate.

Most organizations have a remarkable lack of facts and basic performance measurement information. For example, we know that accounting information reports on financial results from periods that are already complete. The results reflect the impact of decisions made by managers, often long before the initiation of the period being reported on. Another aspect of financial reports is that the numbers are configured in accordance with GAAP rules that were designed by people who had not even heard of the company being reported on, let alone possess any knowledge of the actual circumstances of the business. GAAP may be generally accepted, but it is hardly generally applicable.

Managers continue to make significant decisions without having an adequate understanding of the impact of their actions. They make decisions to re-design the organization, downsize, re-engineer processes or install new all-singing, all-dancing computer systems without having any information about what processes and activities cost or which customers, products or services make or lose money. Nor do they understand the current performance of their processes in terms of operating cycle time or quality, let alone the impact of proposed process changes before they are made. During an executive meeting last year that I was attending, I listened to the information systems vice president make a pitch to engage consultants to implement a new GL-based system at a cost of roughly $15m without even a rudimentary understanding of return on investment. In another instance, a project manager who had just finished implementing a well-known "client-server" systems solution commented, "It is a good system but if I could do it all over again, I wouldn't -- so much money for little real return."

Recently, when talking to a senior vice president of a bank about its performance and how to measure it, he made the comment that they were in the process of installing a new financial and operations reporting computer system that was costing millions of dollars. I asked how he knew it was going to solve their information problems, help manage the business better, and drive improved earnings. His response was, "Many other large banks have implemented this system, so it must be right." And yet the experience in many organizations, banks included, is that taking such an approach is highly trusting and often significantly disappointing. Disappointing because they had not adequately understood the economics of their business before making the decision.

By the time
performance data
gets to the executive level, much of it
is a blur of
disconnected facts.

Thus, one might conclude that for the most part decision making has more to do with the manager's gut call than the facts. In many organizations there are considerable gaps in understanding between those who are responsible for establishing strategy and those who perform activities and processes with which the work of the organization gets done. Hence, by the time performance data gets to the executive level, much of it is a blur of disconnected facts. Often executives are in the dark and do not know it.

Information is central to decision making

At the heart of good decision making is the availability of correct and timely information premised on real facts which are organized and available in a suitable fashion for managers to use. Yet people have different perspectives of what the facts are or what is important. For example, I have spoken to strategic planners who would rather not bother themselves with information on cost (therefore profitability) by product market segment. Similarly, I have heard from operations people who believe that optimization of throughput of operating facilities will lead to maximized profits. We have all often seen managers make decisions based on information that was diametrically incorrect.

Some organizations have responded to these concerns by working to implement a measurement approach referred to as "The Balanced Score Card." This approach attempts to create linkage between different perspectives of performance, including financial, customer, internal process and learning. However, implementation of a measurement tool that appears to be intuitively obvious can appear, deceptively, to be easy. In two recent examples, people from different large well-known sophisticated organizations asked me to review and comment on "their" balanced scorecards. In each case we discovered situations where executives had read about this "new methodology" and without really understanding what they were asking for, instructed managers to "just do it!" The outcome in each case was that staff had prepared lists of measurement names that operating people were prepared to collect data on. These measures provided no obvious way in which to influence people to align their activities or behavior with organization strategy.

Designing the new performance management process

Given the problems associated with traditional management approaches, perhaps a more thoughtful solution is to design a measurement and management structure that actually depicts the real activities and processes of the organization, one that clearly identifies the links to strategy. To design and implement an integrated management process that aligns strategy and the work that people do is somewhat intricate and worthy of detailed and significant attention. In the new structure, goals are established, premised on the needs of stakeholders, by executives who have access to well-developed facts in which they have invested significant effort to obtain and validate them. During the development process executives spend substantial time working through the components together so that they develop a common understanding of how the pieces influence each other, what is important and what is not. Finally the process leads to joint commitment.

Software solutions are developed based on the disciplined analysis of the actual intelligence or fact management requirements of the organization. It is these requirements that are considered before any software solutions are purchased or developed. Finally, the facts, the goals and the systems become the fabric of the intellectual architecture that drives human performance.

There are two basic stages in developing and implementing an integrated performance management system. These are:

1. the foundation stage, and;

2. the on-going management stage.

In simple terms, this means you have to design the system before you can run it.

The foundation stage

The foundation stage involves application of five basic analytical tools, each of which has been described in CMA magazine over the last few years. The purpose of the foundation stage is to undertake a holistic and critical analysis of current conditions and opportunities that confront the organization. The tools are applied simultaneously in order to develop a common multi-attribute framework in which all of the components are visible. This provides a framework within which executives can establish organization priorities and then to assign resources to the most critical.

The linking device of financial and non-financial measures is activity and process information
that focuses on the way in which work is done
and results are achieved.

It is most important to recognize the critical aspect of the foundation stage. Although the tools being applied are well understood and commonly applied, it is the interdependency that is actually the significant issue. In practice, each of the tools appears to be used quite frequently but with incomplete results. For the purpose of managing performance, each is necessary but by itself insufficient.

These tools include:

* Clarification of strategic goals, critical business issues and critical success factors.

* Analysis of activities and processes.

* Activity-based costing.

* Performance measurement development.

* Definition of the roles and responsibilities of people withinthe organization

During the foundation stage of implementation, teams of employees examine basic characteristics of the organization and create detailed documentation of how it operates. This includes performing activity and process analysis, assigning activities to processes, developing process maps, new cost models and computer applications to obtain operating information, process it and to deploy it to managers throughout the organization. Team members conduct analysis to assess current performance and to identify gaps in performance logic.

The outcome of the analysis in the foundation stage is a comprehensive understanding of strategy and key leverage points where critical success factors (CSFs) and critical business issues (CBIs) are mapped to business processes. ABC and process analysis provide information on how much activities and processes cost, how long it takes to perform them and how well the work is performed. This becomes the foundation upon which goals are established for all levels of organizational performance -- strategic goals for the organization in general, process goals that decompose organization goals, and activity goals that define what people are expected to do. It is during goal setting that managers establish what actions will be taken by employees that will cause the organization to perform differently. The formulation of strategic goals and the setting of individual employee goals may all take place in the foundation stage, but they should be done at different times in the process and will involve different teams of managers.

The on-going management stage

The on-going management stage is concerned with how the information is used to run the business. People work towards achieving the goals established earlier, results are monitored and a cycle of continuous management occurs. Ongoing management involves four basic modules, each of which has a number of significant components:

Performance planned initially involves operationalizing the goals established during the foundation stage, but later becomes the ongoing review of strategy and updating of goals and budgets.

Performance managed involves basic day- to-day performance measurement (and maintenance of the analysis developed during the foundation stage) and management response to deviations from plan.

Decision support is the intelligent process of evaluating alternative business choices on a prospective basis, using the power of software tools and data bases, and drawing in the information architecture developed during the foundation stage.

Work performed is the most critical module in the on-going management stage. It is the actual doing of work, people and machines performing activities and processes being managed. It is these processes and activities that are the attention of all of the rest of the planning and measurement effort.

From the initiation of this stage going forward, strategy is reviewed frequently, CSFs and CBIs are updated, process goals modified and activities managed. Maintenance of the five tools of the foundation stage is vital to the success of the business because they provide the facts used to fuel management decisions. Ongoing management involves assignment of people to new positions such as "director of continuous improvement" and "process owner."

Another important issue during the on-going management stage is the use of decision support analysis and simulation modeling. This is more familiar territory for management accountants, used to developing forecasts and budgets or reviewing requests for capital acquisition. It involves evaluating alternative decision options to determine likely outcome before decisions are made. Computer simulation tools and the masses of information available will clearly differentiate how this work is performed in the future.

Perhaps the most significant change to be accommodated by management accountants is to focus on other dimensions of performance beyond money. This requires us to analyse the organization in different ways but still reconcile everything back to financial performance. The technologies may appear challenging but learning them is a far less daunting prospect than that of becoming obsolete because we have not kept up.

In summary, facts and measurements are critical to effective management of performance. Strategy is deployed to the people who take actions by the establishment of goals, which are defined by measures. The linking device of financial and non-financial measures is activity and process information that focuses on the way in which work is done and results are achieved in an organization in alignment with strategy.

For many, these tools are things we have only heard or read about. Indeed the language and logic are completely unfamiliar. It might seem unrealistic to expect accountants to become familiar with whole new capabilities. Yet, it is these tools that provide the basis with which we can understand organizational performance. People from disciplines other than accounting are already implementing all of the tools. None of the tools is new. However, each tool by itself requires management accountants to learn new skills and master business terminology that is outside our previous experience. Time marches on; new technologies in computing and communications have changed the world. It is our responsibility to maintain the relevance of our professional performance. cma

Paul Sharman, features editor for CMA magazine, is president of Focused Management Information Inc. The company helps business to implement new cost management techniques.