In recent years there’s been significant effort toward creating a “balanced scorecard” of metrics to serve as a guide to performance improvement with real value creation versus improvements via tradeoffs. Moreover, efforts to include non-financial and leading indicator metrics to help redirect worker behavior are being used to balance purely financial goals with strategic imperatives. Yes, in the end we want an upward trend in financial indicators, but if this is all we’re managing, the strategy will be short term and reactive.
Below are principles that we’ve discovered in setting up an effective value-adding strategy monitoring and control process.
- The starting point is strategic goals, and then the initiatives to achieve them (see “Accepting the Fundamental Challenge of Strategy Implementation”). The selection of metrics then follows from the questions: How will we know if this is working? What leading and lagging indicators will guide us?
- But what does one do with these measures? The most beautiful and balanced scorecard in the world won’t compensate one iota for a poor review process — namely, an executive who reviews the metrics and uses them to drive behavior change. The change occurs less because the metric is being reported and more because that’s what management is paying attention to. Yes, what gets measured gets managed … if that’s what the boss is watching.
- The actual review process can be informal or a rigid periodic review. It is the style and openness of the review that makes all the difference in whether the organization will quickly seek effective course adjustments, seek excuses or praise with little real direction change, or ignore much of the scorecard because in the end, the old lagging metrics are still implicitly the most important thing. When a review meeting is well run it is much more than a control tool. It is a problem-solving session where the business examines what it has learned since the last review, with data (the metrics), that serves as a basis for ongoing adjustments for even better performance. These adjustments are in the form of how resources should be reallocated, especially the most important and scarcest resource of all: how people in the organization will use their precious time.
- The good thing about lagging metrics is they are usually objective and available via the company’s systems. Leading measures often are not easily available and have only an assumed correlation with performance. These are limitations, and the organization must determine that the value they’ll receive from these metrics far exceeds the cost and time of assembling them. In our extensive strategic planning experience, after the most important goals have been defined, and the balanced slate of metrics has been whittled down to the essential ones, invariably, within the next six months, we will need to cut back the number further and find easier-to-assemble surrogates because of this point. The easiest way around the leading indicator challenge is through the use of milestones. To be actionable, a strategy needs to be stated as a set of programs and initiatives. Once that’s done, one of the most important leading indicators is achievement of critical milestones for each initiative. The planning process needs to outline these milestones, which is where the rubber meets the road regarding linking how people spend their time with the strategy. In our experience, milestones should be the top leading indicator. Milestones should be substantial achievements that are assignable and are needed within the next six months.
- After the metrics are set, including a healthy set of milestones as leading indicators, targets must be set. People respond well and are often motivated when there’s something to aim for. A key choice is whether to set incremental steps or stretch goals. The latter is often useful when it’s critically important that the organization break out of old habits if they are to achieve a strategic goal.
- Finally, senior management needs to be committed to both the strategic planning process that will generate the goals and the control/review process that follows, or all of this will have been a waste of time. In our experience, after the plans are done and the ideal metrics defined, it takes a full year for the organization to assemble, routinely report on and begin adjusting course based on the metrics. That’s if management diligently follows through with “inspection.” If they don’t — if they continue to follow their old guides, which are usually the monthly accounting figures — forget value creation through measuring the right things.
In summary, strategy monitoring and control is a lot more than reporting metrics. The starting point for developing your approach is the question “What metrics, targets, review process and review style will most change behaviors toward the work that will create the most value?” The emphasis must be on the review process, with the goal being course adjustments, not measurements. But with this philosophy, there is greater likelihood that the right metrics will be chosen and their use will indeed be value creating.