Strategic planning and the Balanced Scorecard

Manisha FERNANDO

Dawn of the 21st century, and a decade gone - yet a large number of organizations in Sri Lanka (and across the world) are yet to emerge from the conventional management systems and practices that were introduced to organizations during the colonial ages nearly two centuries ago.

These ancient practices have cascaded down generations of managers, almost unchallenged and unchanged, despite the dynamism in the market place. The result of such narrow practices hinders the achievement of strategic goals and is perhaps the major influence for failure.

Lack of proper management techniques and strategic planning affects the organization's capacity to reap the full potential of its core competencies in the market and sustain performance in the long run.

The key factor for failures is the inability of conventional management techniques to help an organization develop a suitable corporate strategy encompassing its vision, and implement such strategies in daily operations throughout the organization.

Though many would disagree with this statement, most organizations - irrespective of whether they are profit-oriented, non-profit organizations or even government institutions believe that achievement of the annual budget reflects the attainment of strategic goals and that the strategy had been successfully implemented to its full potential - which is never the case!

The achievement of annual goals is actually the achievement of the budgetary targets and in most organizations this is simply the achievement of the financial targets measured through the income statement (profit and loss), the balance sheet and sometimes the cash flows.

This definitely is not strategic planning nor the implementation and achievement of strategic goals! Whilst budgeting is solely focused on the financial aspects and is more short-term in nature, a strategy focuses on a broader horizon and should include the non-financial aspects - most of which are sometimes elaborated in detail in the annual reports, but hardly measured, managed or used in actual operations.

For example, the skill development of employees, which is highlighted as a priority in most Blue Chip companies, is hardly measured quantitatively and is rarely aligned to the organization's overall strategic goals.

Strategy can be simply explained as the way we would execute a desired course of action to achieve a stated goal. The key words would 'be the way', 'the action' and the level of achievement of the 'stated goal'.

A goal can be either financial or non financial and in most cases is initially expressed as a statement or directive of the Board or the CEO (or the Ministry, if it's a government institution).

Most organizations confuse the annual budgeting process and consider it to be the actual strategic planning session, which is a misconception. The lack of strategic planning and the incapability to align strategy to action creates what can be called a 'management myopia', a situation where most organizations are deceived to believe that they are performing well simply because they had either achieved the annual financial targets or had performed comparatively better compared to a previous period or even their own competitors.

The issue in such instances is that the performance is comparative to either its own past performance or that of a competitor who could be better-off or worse in one or many competencies.

In any case the actual performance had in reality never been measured in terms of the actual market potential or the competitive advantage the organization possesses or in line with its stated vision.

The concept of looking or focusing only on the financial aspects is more or less like conducting a post mortem - because managers of such organizations are looking at the history. Financial results and derived financial indicators are prepared for a specific period and the 'actual figures' relate to a period that is already past (historic) - a period of performance that managers can virtually do nothing about, except perhaps learn from the mistakes and avoid repeating them in the future.

Sadly in most instances, it can be seen that management spends millions in trying to analyse the root causes for non-performance looking at a variety of financial indicators, and arriving at 'assumptions' on 'factors' that may have attributed to the low performance.

Then it's back to the drawing board a process that clearly shows the lack of strategic planning and non-alignment to strategic goals.

For example, if the cost is rising, simply looking at the overheads and down-sizing may only benefit an institution in the short run, whilst other options such as diversification of product lines or niche marketing strategies may never even be explored! Sometimes, the lack of such strategic foresight is blamed on the macro environment.

In Strategic Planning, an organization would have to take into account whatever possible eventualities that may occur in the macro environment and assign suitable strategies to be implemented during such times if the necessity arises.

But unfortunately, this is not how most businesses or organizations operate today in Sri Lanka and many parts of the world.

Strategic Planning - a must

Strategic planning starts at the very top of the organization, and ideally the owners or in most cases the board of directors agree on a suitable vision - a 'dream' of what the organization wishes to be or achieve within a foreseeable future period.

This is the starting point in any strategic planning session.

Once an organization knows where it wants to go - whether it's a private business, a government institution or even a non-profit organization, the second step is to plan out the strategy, the 'best way' (out of several options) and the course of action that has to be adopted.

Strategic planning should at least take into account a minimum period of three years or if possible five years - but this is not a hard and fast rule and needs to be decided upon the type of business we are in.

This is no easy task - a goal that is identified simply as a statement has to be converted to a measurable strategy by the strategic planners. As a deliberate example to illustrate this concept, a non-financial strategic objective for a health care institution (whether private or government) can be stated as 'the best and preferred community health care provider in the market'.

The statement on the face of it infers aspects of cost efficiencies, income (for the institution), growth of market share, service standards and even processes. The strategist would have to break this statement down to measurable terms in line with corporate objectives and other goals that the organization wishes to achieve, identifying the relevant strategic aspects that are either financial and/or non-financial.

On the other hand, the profit, assets and liabilities of an organization are actually the result of its operations.

If we take the same vision above (in the health care industry), perhaps one of the goals would be to reach as many people as possible, and this means that the service should be affordable or comparatively priced lower than competition since the statement focuses on the mass market.

Another goal would be the implementation of efficient processes within the organization to make it lean (cut off excess fat - unnecessary waste etc.,) whilst maintaining the suitable infrastructure to operate competitively.

Lastly it would require skilled people to provide the service - to be selected as the best.

This example clearly illustrates that the organization should measure its performance on four basic dimensions to implement the strategy, namely:

1. The competence of people

2. The processes efficiencies

3. The market share or customer (in this case the patient)

4. The income and other financial factors which are the result of the above three aspects.

The four aspects above cannot be measured in isolation because they are related and needs to be aligned with the overall vision of the organization.

If we take the financial industry to illustrate this relationship, one key and obviously a common strategic objective for most Banks would be the 'growth factor', or more specifically the 'growth of assets' (or size).

Assets would include the loan book, investments and cash among other items. Some banks may cater a niche market in certain business areas such as leasing, whilst some would focus on project lending or retail lending or credit cards.

Where and on what business domains we need to focus would depend greatly on the competitive advantage the organization has in each area.

Once this is identified clearly, the bank would need to assess the skills of its employees and the desired level it requires to provide the service.

Aligning the skills to a specific strategy would mean that the strategist should identify the correct indicator.

For example should the organization measure the 'skill gap' or should it measure the 'existing skill level' in relation to a benchmark?

The processes and delivery channels (mediums of service) that are required to provide the service has to be then decided upon.

The customer segments, markets (demographically and geographically segmented) would have to be decided, and finally the desired level of income, possible income sources and cost efficiencies required to sustain the business in the long run have to be planned in line with other corporate goals.

As you can see, this is the minimum level of strategic planning required for the business to operate, and therefore simply focusing only on financial aspects alone as conventionally done would not help the organization achieve its strategic goals or vision or even sustain its business momentum in a dynamic world.

The Balanced Scorecard concept for Sri Lankan businesses

As Management or even Board of Directors, we must realize that a process requires strategy and not whimsical decisions. Any action (strategy) should be validated and converted to more quantifiable and measurable terms.

Specifying errors and suggesting improvement plans without supporting data is like a trial-and-error methodology or an ad-hoc approach to face problems and generate solutions - a method that is now quite ancient and doomed to fail as seen in the recent past.

These approaches would waste a considerable amount of time, manpower, and money and in a worst case the brand image and reputation!

Among the several techniques and business tools used by strategists, through experience perhaps the best, most effective and the easiest approach to align strategy to operations throughout an organization would be the implementation of the balanced scorecard concept.

Generally, a balanced scorecard is a management tool or approach that can be customized and used for any businesses, non-profit organizations, government institutions or any other type of institution.

The tool ensures that the activities of the employees - no matter how small, are aligned with the organization's vision and direction.

In essence, this is a means of measuring performance in all areas of the organization and getting everyone to 'pull in one direction'.

The reason for its need is to guarantee that the data are intact and available and that the organization measures what it needs to achieve its strategic goals - both short-term and long-term.

In addition, the data can be used to manage the processes carefully and objectively as well as help executive management decisions and in rolling out future strategic plans.

It has always been said that we can only manage what we measure.

The balanced scorecard is a widely known concept globally, which a lot of corporate directors and managers use in planning the direction organizations needs to take.

In fact the balanced scorecard concept itself has evolved greatly since its theoretical introduction in the early nineties to become a powerful and effective strategic tool that can be adopted, modified and used in any type of organization, to translate strategy to action (operations).

What it does is to help managers formulate action plans that are simple yet gives high impact on performance.

As a result, these plans are executed very well and the strategies are implemented effectively especially since it measures the performance on the four different planes stated above, namely; the people aspect (employees), the process aspects (processes, delivery channels, technology etc.), the customer aspects (target markets, customer profitability, service standards etc.,) and the resulting financial aspects such as profits, efficiencies and growth rates etc.

Implementing the balanced scorecard would provide the organization several key advantages.

The first and foremost is that it helps decide on the suitable course of strategy and align the strategy to daily operations in all areas of the organization, from its employees, to processes and customer service, resulting in achievement of intended financial and non-financial targets.

Secondly it functions as a communication tool.

The scorecard if properly implemented would help any strategic business unit or cost center to evaluate its performance at a glance and take corrective action pro-actively.

The scorecard serves to inform the future targets whilst allowing room for re-forecasting and analyzing any short-comings by facilitating managers to communicate from top-down or bottom-up.

This helps the strategic planners to take timely and necessary action when deviations are about to occur in contrast to the post mortem approach of analysing only the past performance through financials alone!

Thirdly the scorecard helps manage all aspects of the business or organization which is an essential prerequisite to achieve overall goals within the stipulated time frame with limited resources.

This helps the management and even the board to identify any short-comings in a more focused manner.

It identifies where resources are needed and where resources are not optimized. And lastly the scorecard can be adopted to function as a performance management system if properly implemented.

This would mean that the organization can induce the right behaviour among its people by linking the performance to the overall strategic objectives through the scorecard and aligning the rewarding mechanisms as appropriate in a transparent and equitable manner.

Common mistakes in implementing the Balanced Scorecard

The common mistake that many companies are bound to do in the balanced scorecard implementation process is to copy or adapt the scorecard of another organization in the same industry.

It should be understood that each company-even if they are in the same industry has different strategic objectives and of course their individual and unique competitive advantage over others.

Hence obviously the scorecards should be unique to an organization. What may seem as an important attribute for one company may be of lesser essence to the other one, precisely because there are varying factors that each company should consider in doing business.

Some of these factors may be location, target markets, technology, delivery channels and its people (employees).

What is important is that the people who manage the company should be able to grasp the basic framework of how the business should be done and then translate the metrics into key performance indicators (or KPIs).

You don't have to call it the 'balanced scorecard' at all, but in reality this transcends to the same balanced scorecard concept.

Another common mistake that most organizations do is to waste corporate time and resources (throughout the organization) in too many discussions on the results or analysis of the scorecard without taking an objective decision and implementing that decision. Often enough, too much time is spent on crossing the't's whilst the actual strategic debate is evaded - mostly due to lack of strategic foresight.

This is perhaps the biggest mistake an organization can do when the scorecard is implemented and in the end, the concept of the scorecard becomes a burden to the operational levels.

The scorecard is a strategic performance management tool and hence it should be used for this purpose only.

Some believe that the Balanced Scorecard is a panacea for 'all illnesses' and try to incorporate every single operational detail to be measured through the scorecard.

This is not healthy for a strategic level scorecard, but if such a need arises, then such details can be used for an operational scorecard linking it to perhaps the organizations data warehouse.

The functions of these two types of scorecards (Strategic and Operational) are different and hence should not be mixed up.

The key principle is to use KPIs that are relevant and aligned to the overall strategy.

Another mistake that should not be done by organizations is to spend millions to purchase various software packages to implement the scorecard. The perception that software is a pre-requisite is actually a misconception, especially since any software package purchased would need to be customized for the institution before using it.

The return on investment of such software, unless it has other attributes and benefits for users would not be worth for a majority of organizations in Sri Lanka, unless the packages are provided at reasonable rates lower than the prices quoted for organizations in other parts of the world.

Especially as developing nations, the concept of scorecards and developing a balanced scorecard system can be effectively done through spreadsheets, if supported by appropriate data sources and sensible employees.

And finally the original concept of the balanced scorecard advocates that individual performance should be measured by the scorecard, but through personal experience, this concept would do more damage than good.

It is sad to note that most organizations in Sri Lanka are too keen to implement any 'foreign' remedy introduced by a foreign consultant without modifying it or evaluating its suitability in the Sri Lankan context of business.

We must not forget that despite myopic perceptions, every nation has an inherent culture, and the cultural attributes play a significant role in how people behave and perceive things around them - even at the workplace.

As Sri Lankans, our culture is more team oriented which despite Western philosophies is actually a blessing in disguise. Team cultures if properly aligned to the strategy and managed can breed synergies, whilst the Western focus is more individualistic, that breeds greed and selfishness that eventually result in the downfall of organizations in the long run as witnessed in major financial institutions that collapsed during the financial crisis.

Therefore the writer wishes to advocate that if the scorecard system is to be implemented in Sri Lankan organizations, it should measure team performance and not be cascaded down to individual levels, especially when it comes to operational and middle management levels.

Team performance of strategic business units measured through the scorecard would help synergize the performance of all and induce employees to pull in one direction.

Measuring the performance of individuals at lower management levels or operational levels through a scorecard would breed a rat race and a 'back-stabbing' selfish organizational culture.

However, at Corporate levels, individual scorecards can be implemented provided the targets and rewarding mechanisms are transparent and equitable to all across all levels of the organization - which is an essential and key pre-requisite to creating an environment of trust between all levels of the organization and making the scorecard a success in translating strategy to operations.

(The writer is a banker with experience in corporate and business strategy, strategic planning and market research. He has experience in change management and developing performance management systems. He has a Commonwealth Executive MBA from the Open University of Sri Lanka; is an Associate of the Institute of Bankers (AIB, Sri Lanka, and is a Member of the Association of Business Executives (ABE), UK. He also has Diplomas in Management and Human Resource Management)