Acknowledgments

With the second edition of this book I continue to realize how we help each other expand our knowledge, improve our lives, and improve our world. I am very grateful for the opportunity to have worked with so many outstanding people. It is to the many high energy, hardworking, and spirited people I’ve worked with that I dedicate this book.

I want to thank Michael Seifert, CEO of Sitecore, and Lars Petersen, Head of Sitecore’s Business Optimization Services for the opportunity to work with a global group of dynamic, intelligent people who are changing the way the world does business.

James Coffey deserves praise for not just reviewing the sections on strategy and Balanced Scorecard, but also for adding depth that comes from his years of experience in Balanced Scorecard consulting and working for the Palladium Group, Drs. Kaplan and Norton’s consultancy.

Michael Alexander had the difficult job of reviewing the technical sections that covered three versions of Excel. His experience added to those sections. Michael’s expertise in Excel and Access is visible in his books for John Wiley & Sons as well as his consulting website, DataPig Technologies.

Having been a consultant for almost 30 years, I realize that one of the responsibilities of a consultant is collecting and filtering ideas that help clients, and then putting the best ones into practice in ways that make them productive and beneficial. There are many people and sources who have built the foundation of the ideas presented in this book. Here are a few I would like to thank.

Thank you to Drs. Kaplan and Norton of the Palladium Group for furthering the advancement of management science with Balanced Scorecards and Strategy Maps.

Each year, a few consultants complete the Balanced Scorecard certification program delivered through the Balanced Scorecard Collaborative, the educational division of the Palladium Group. Thank you to Edward A. Barrows, Jr., independent consultant and former Vice President of Balanced Scorecard Collaborative, a Palladium company, and Karen A. DiMartino, Manager, Advisory Services, for conducting excellent Balanced Scorecard certification programs.

The consulting profession can often be lonely, and the opportunities to develop our professional skills are neglected as we help clients and spend time with family. Many people have committed extra time to developing the professional skills of consultants, and we consultants owe them a debt of gratitude. Throughout the years I’ve enjoyed their camaraderie and shared learning. A few of these people in northern California are:

• Harry Chapman, Bay Area Consulting Group, founder of the Bay Area Consultants Network
• Rogene Baxter, the Bridgewater Group, former president of the Institute of Management Consultants, Northern California Chapter
• Jane Stallman, Center for Strategic Facilitation

After having written more than 20 books, I wasn’t sure I wanted to write again, but working with a great team from Wiley Publishing has made it easy to get back in the saddle. Thanks to:

• Jim Minatel, Associate Publisher, for proposing and expanding on the second edition
• Carol Long, Executive Editor, for working out all the business details
• Sydney Jones Argenta, Project Editor, for being so easy to work with while maintaining an even flow of work. She seemed to magically make the work flow.

There have been many people who have reviewed this book, but the responsibility for accuracy and the descriptions of real-world business solutions lie with me. If you, the reader, find an error or something about which you have a question, please contact me through www.criticaltosuccess.com.

To Your Best Performance,

Ron

Introduction

This book is a guide to how your organization can create a competitive advantage by successfully executing strategy and accelerating performance. You must begin with a vision held by and communicated through leadership to every employee. That vision is achieved when employees work in concert, knowing how they contribute to strategic success and operational performance. A Strategy Map and Balanced Scorecard are the tools you need to gather the information that shows you how you can achieve strategic success. Operational maps and operational dashboards are the tools and measures that show you how to accelerate operational success.

Since I wrote the first edition of this book, the world has undergone significant change. With continued globalization and the global recession, it’s even more apparent that winning organizations possess two attributes. They must be flexible enough to pivot in new directions, and they must focus on their core strategic strengths:

• Winning organizations continually monitor their performance and are willing to pivot with a better strategy. To monitor their performance, they need operational dashboards that measure the Critical Few operational metrics specific to their organization.
• Winning organizations must focus their people, processes, and technology. To do that, they need a Balanced Scorecard that helps the organization stay aligned with its core strategic strengths.

As I move between organizations of all types, I am continuously amazed at the cultural differences between winners and those that just get by. The culture I see in winning organizations is one of high energy, proactive execution, and continuous learning. In general, everyone is aligned with the key strategic and operational objectives. When an effort works, it’s leveraged. When an effort doesn’t work, time isn’t spent on blaming. Instead, everyone works to improve performance. This attitude comes from the leadership and the people, but the tools that identify performance are operational dashboards and Balanced Scorecards.

I enjoy, and am continually heartened by, the 10 to 20 e-mails per week from readers. Among these is the occasional request for a list of generic metrics. This piques my curiosity, because one of my main reasons for writing this book was to emphasize the importance of the Critical Few objectives and metrics. The Critical Few are specific to your organization. The best way I’ve found to identify them is to use the group brainstorming and mapping processes described in this book. Don’t pick metrics from a generic list! Use the processes described here to identify the Critical Few objectives, identify their drivers and success measures, and then look for metrics to measure their performance.

After 30 years as a road warrior consultant, I have amassed a huge performance-improvement toolkit. I want to share with as many people and organizations as possible this collection of tips, tools, and techniques. If you’d like to benefit from this collection, I welcome you to. Go to http://www.criticaltosuccess.com.

To your best performance!

Ron

Success through Strategic Execution and Accelerating Operational Performance

Business horror stories repeat themselves. We’ve all seen the numbers that define the stories:

• 90 percent of corporate strategies fail to achieve their expected results.
• 80 percent of projects are late or over budget.
• 70 percent of mergers fail to exceed the value of the original companies.

Those are pretty uncomfortable statistics. On the other hand, some organizations succeed well beyond expectations. One famous bank merger achieved a 19-fold profit increase in three years. One hotel chain increased its profit margin 3 percent over the industry average in three years. What is the difference between the terrible failures and the huge successes?

Whether at the macro level of executing your strategy and aligning your company or at the micro level of creating a project team that meets deadlines, a few core principles remain the same:

• Create a “burning platform” that moves people away from business as usual.
• Identify the objectives most critical to success.
• Define the initiatives that will make those objectives succeed.
• Select the Critical Few metrics that track performance and alignment.
• Create a culture of measurable high performance while breaking down silos.
• Maintain and sustain the high-performance culture.

Some of my clients who have been through the processes described in this book have said the following:

• “Our leadership team had the best strategic discussions they have ever had.”
• “The budget process was significantly easier than in any previous year.”
• “This process is changing our entire culture to keep up with our high growth.”

Who This Book Will Help

This book is built to be a practical guide; it doesn’t contain much theory. Many other books describe theory and case studies for Balanced Scorecards, Six Sigma, Lean, and other performance-improvement methods. This book is intended to be a guide for the people who take action. It will help you map your future, identify the Critical Few metrics, implement the Balanced Scorecard, and create operational dashboards.

This book has three different audiences: the executive sponsor or operations manager, facilitators and consultants, and software developers.

Executive Sponsor

Balanced Scorecards and performance-improvement programs don’t succeed without an executive sponsor. Members of the executive leadership team and the senior managers who are team leaders should scan Parts I and II of this book to understand the time frames and commitments involved in creating success.

Members of the executive leadership team who have heard the term Balanced Scorecard may not know what it takes to drive strategic success with a Balanced Scorecard. They can scan Part I to see what is involved. It takes time and commitment from the executive leadership team.

Two telephone calls from senior managers remind me that many do not know what is involved in creating a Balanced Scorecard or how it affects an organization when implemented correctly. In one call, the manager said, “We’re having a two-day corporate retreat for the executive leadership team. Could you do a Balanced Scorecard for us in two hours?”

Another call illustrated the business buzzword effect. It was from a manager whose division executive had heard about a Balanced Scorecard being used at a pharmaceutical competitor. He had been assigned to put together a Balanced Scorecard for the division within the next week.

Neither of these cases had executive commitment or the time frames necessary to create a Balanced Scorecard that drives success and creates a culture of high performance.

Facilitators and Consultants

Facilitators and consultants are vital to creating a Balanced Scorecard or operational dashboard. They are the guides who help the executive leadership team and managers through sticky spots. When discussions get too easy because no one is asking the hard questions, the facilitator must be able to step in and ask probing questions that put a tough issue in the spotlight so that it will be addressed. It is imperative, especially in the case of strategic Balanced Scorecards, to have a consultant who has no agenda and who is politically impartial.

Software Developers

The majority of Balanced Scorecards and operational dashboards are created in Microsoft Excel. You don’t need to be an Excel Visual Basic guru to build them when you know the correct combination of worksheet functions. Part III describes most of the building blocks for creating and maintaining powerful scorecards and dashboards.

Additional skills the software developer needs are the ability to interview users to discover their needs, understand what is critical in a business process, design user interfaces, build maintainable architectures, and integrate live data.

How This Book Is Organized

This book has three parts. Part I covers the steps and processes required for building a Balanced Scorecard to execute strategy. Part II introduces the basics of mapping operational processes and identifying critical metrics. Part III shows intermediate-to-advanced Excel users techniques specific to creating dashboards.

Part I

Part I describes the journey of building and rolling out the Strategy Map and Balanced Scorecard. It is used by over 50 percent of Fortune 1000 companies and more than 70 percent of international corporations. It begins with an overview of the tools commonly used to develop organizational strategy. A chapter is devoted to building the Strategy Map, the diagram that visually defines the strategic themes on which the organization will focus and the objectives that will drive success. The next chapter describes how the Strategy Map must be converted into an action plan that details the initiatives to reach success and the metrics required to keep those initiatives on track and on time. Once the metrics are defined, the Balanced Scorecard can be developed and used—not just as a dashboard for strategic progress, but as a core mechanism to guide ongoing strategy meetings. The last chapter of Part I describes some of the communication and rollout processes necessary to communicate the change.

Part II

The three chapters in Part II describe a few methods of mapping operations. These include process maps and economic value maps, as well as how to use them to identify the Critical Few metrics that drive an operation and measure its success.

Part III

Part III gives many specific examples of how to use Excel 2003, 2007, and 2010 to build Balanced Scorecards and operational dashboards. Excel is the most widely used business analysis and graphics tool in the world; the majority of Balanced Scorecards and operational dashboards in the world are built using Excel. Scorecards and dashboards in Excel do not need to use Visual Basic for Applications, but they do need a good architecture, and they require a few little-known worksheet functions.

Free Resources That Extend This Book

There is much more to executing strategy and creating high performance than will fit in this book. You can find newsletters, articles, tools, video demonstrations, and software at http://www.criticaltosuccess.com.

Download Free Excel Sample Files

The Excel training examples featured in Part III are available for free download. Go to my website or the publisher’s website:

http://www.criticaltosuccess.com

http://www.wiley.com/go/scorecardsanddashboardswithexcel2E

Free Balanced Scorecard and Operational Dashboard Tips, Tools, and Tutorials

Staying ahead of the competition and keeping your organization performing at its highest level is an ongoing process. To get a jump start on improving your execution and performance advantage, go to http://www.criticaltosuccess.com for additional tips, tools, tutorials, and videos.

While you are at the Critical To Success website, be sure to sign up for the newsletter. It will keep you up to date with the best tips to help you grow as a business owner, manager, or professional.

Videos and Online Tutorials

No book can convey all the lessons learned through years of experience. Some processes and techniques are just too difficult to convey completely in text. And many tips, templates, and toolkits just can’t fit in this book.

To learn more about the video and online tutorials to help you and your organization improve, go to http://www.criticaltosuccess.com.

Part I

Strategic Performance with Balanced Scorecards

In This Part

• Chapter 1: Accelerating Strategic Performance
• Chapter 2: Developing Your Strategic Foundation
• Chapter 3: Preparing to Build Your Balanced Scorecard
• Chapter 4: Step-by-Step to Building Your Strategy Map
• Chapter 5: Step-by-Step from Strategy to Action
• Chapter 6: Step-by-Step to Selecting Metrics and Setting Targets
• Chapter 7: Step-by-Step to Developing Your Implementation Plan
• Chapter 8: Step-by-Step to Rollout and Strategic Reviews

Chapter 1

Accelerating Strategic Performance

The essence of strategy is choosing what not to do.

—Michael Porter

The rate of change in the business world is accelerating. To get ahead—in fact, just to keep up—organizations of all types must accelerate their strategic performance.

They have to work with better performance, more precise focus, and better strategic alignment. For this to happen, all parts of the organization must clearly understand and be firmly aligned with strategic goals.

In the last two decades, a strategic management system has been developed that enables organizations to achieve the clarity and alignment necessary to accelerate strategic performance. That system is the Balanced Scorecard.

Managing with a 500-Year-Old System

Until recently, organizations have used the same accounting system to track assets and value production that was used 500 years ago in Venice, Italy. In 1494, Fra Luca Pacioli, Franciscan monk and friend of Leonardo da Vinci, wrote Everything about Arithmetic, Geometry, and Proportions (see Figure 1-1). It was the first best-selling business book to come off of Gutenberg’s printing press.

Figure 1-1: Over 500 years ago, Fra Luca Pacioli, on the left, documented the double-entry accounting system we still use today.

Luca Pacioli’s Portrait, Gallery of Museum of Capodimonte, Naples

What made his book a best-seller throughout Europe was that it contained detailed instructions on how the merchants of Venice kept their accounts using double-entry accounting. The book included sections on

• Modern accounting cycles
• Double-entry accounting
• Journals and ledgers
• Assets, liabilities, capital, income, and expenses
• Closing
• Trial balances

The book blazed through the halls of commerce in Europe because, for the first time, it gave business people a way to value their tangible assets and measure how they were producing value. But what is surprising is that we still use the same accounting system used by the merchants of Venice 500 years ago.

The Failure of Modern Management Systems

Research by Margaret Blair of the Brookings Institute into the market value of corporations listed in the Compustat database shows that the market value of U.S. corporations has shifted significantly from tangible to intangible assets. As shown in Table 1-1, in the ten years from 1982 to 1992, the contribution of intangible assets to market value rose from 32 percent to 68 percent. Subsequent studies from multiple sources estimate that since 1998, intangible assets’ contribution to corporate value is approximately 85 percent.1

Table 1-1: The Growth of Intangible Asset Contribution to Corporate Value

Year	Intangible Assets	Tangible Assets
1982	32%	68%
1992	68%	32%
1998	85%	15%

More recent research reflected in the Ocean Tomo 300 Patent Index shows that 80 percent of the market value of companies in the United States’ Standard & Poor’s 500 Index is due to intangible assets for the period from 2005 to 2010.

How can intangible assets such as people, processes, patents, and data be monitored and managed effectively using a 500-year-old system designed for use with tangible assets?

Ram Charan, international consultant and coauthor of Execution,2 wrote an article in Fortune magazine titled “Why CEOs Fail.” In writing about highly experienced, well-known CEOs who lead their companies into failure, he said, “In the majority of cases—we estimate 70 percent—the real problem isn’t the high-concept boners the boffins love to talk about. It’s bad execution.”3

Charan goes on to write that most CEOs are hard-working, experienced, brilliant people. His research found one problem common to all the failures:

Yes, strategy matters. A good, clear strategy is necessary for success—but not sufficient for survival. So look again at all those derailed CEOs on the cover [of the magazine]. They’re smart people who worried deeply about a lot of things. They just weren’t worrying enough about the right things: execution, decisiveness, follow-through, delivering on commitments.

So executives and managers face two serious problems. First, the source of value production has switched from tangible assets that can be monitored with current accounting systems to intangible assets that are difficult to manage. Second, most corporations fail at executing their strategy.

A Modern Strategic Management System

In 1992 Harvard professor Robert Kaplan and consultant David Norton published the article “The Balanced Scorecard—Measures that Drive Performance” in the Harvard Business Review.4 The ideas in this article sowed the seeds of a strategic management system to translate strategy into action, to monitor strategic execution, and to align organizations around strategy.

Initial attempts to use the Balanced Scorecard seemed to either propel organizations to success or burden them with administrative overhead and dismal results. The difference between failure and success was often in the selection of metrics used to measure strategic execution. In 2000, Kaplan and Norton published another article in the Harvard Business Review titled “Having Trouble with Your Strategy? Then Map It.”5 This article outlined how to build a visual map that shows the objectives and causal links necessary to execute a strategy. These causal links enabled executives to identify the key metrics that drive success. These two ideas, the Strategy Map and the Balanced Scorecard, combined with more recent developments, have built a strategic management system that is an important part of modern business management.

The Strategy Map represents how an organization will execute its strategy. The Strategy Map shows the objectives needed to execute the strategy and the causal links between objectives. The Strategy Map is a tool for clear communication and helps identify the “critical few” metrics to monitor strategic execution. You can learn more about Strategy Maps in Chapter 4.

The Balanced Scorecard is part of a system that translates strategy into action. The Balanced Scorecard gives a balanced view in four perspectives of how well an organization is driving execution and how successful the results are. The four perspectives in the Balanced Scorecard and Strategy Map give executives a more balanced view of their organizations. They go beyond financial measures to include finance, customer and marketplace, internal operations, and learning and growth. These categories include people, culture, intellectual property, and IT infrastructure.

The Strategy Map and Balanced Scorecard can take one to three years to fully implement in an organization, but the results can be impressive. A Balanced Scorecard helps you do the following:

• Clarify strategy. The discussions and thought that go into developing the Strategy Map bring clarity and understanding to the executive team in terms of the strategy and interplay between departmental silos. The graphical Strategy Map pinpoints for employees how they contribute to strategic success.
• Translate strategy into action and execute it. The Strategy Map, combined with an Action Plan and Implementation Plan, give everyone a clear road map showing how the strategy will be translated into action. The Balanced Scorecard is used to stay on track and to monitor execution.
• Align business units around the strategy. Most organizations develop “silos,” functional departments or divisions that are more concerned with their own success than they are with achieving success for the entire organization. But developing the Strategy Map and Action Plan requires that the walls between silos come down. Focusing on Strategic Themes that cross functional boundaries forces departments to work together, breaking down silos even more.
• Communicate the strategy to all levels. The process of cascading the Balanced Scorecard through the organization gives each level the opportunity to contribute to organizational success. It allows executives to communicate with functional managers about how to achieve strategic goals. It allows functional managers to provide feedback to executives about capability and capacity.
• Monitor and manage strategic execution. Research has shown that most executive staff members spend less than 10 percent of their time monitoring strategy and execution. Instead of leading through strategy, executive staff members often become embroiled in operational performance, something better left to managers. Using the Balanced Scorecard as an agenda gives executive meetings a central focus on strategic leadership.

Why Use a Balanced Scorecard?

Building a Strategy Map and Balanced Scorecard for an organization follows much the same process as taking a trip to a specific location. To take a trip you need to do the following:

• Select a destination.
• Agree on the type of trip.
• Agree on the route.
• Map the route.
• Plan time and resources.
• Travel.
• Stay on course.

Leading a business in our high-speed world isn’t that different from flying a jet. Imagine boarding a small jet, pausing at the entry, and asking the pilot a few questions:

You: “What is our destination?”

Pilot: “The crew got together and talked about a destination. We couldn’t agree, so we decided to go somewhere out West. If something better comes up while we’re en route, we might change direction.”

You: “What route will we be taking?” (Maybe I’ll still go. It sounds adventurous, although it could be a waste of time and fuel. It shouldn’t be too dangerous.)

Pilot: “Well, we aren’t sure about the exact route, but I’ve been that general direction before, so I don’t need maps. I’m experienced.”

You: “I notice that your cockpit dashboard seems a bit sparse. There aren’t any flight instruments—just stacks of paper. How will you monitor the flight?” (This is starting to sound a bit iffy. The pilot may be experienced, but how will she communicate her experience to the copilot, the flight engineer, the flight attendants, the ground crew, other aircraft, and the Federal Aviation Administration?)

Pilot: “Well, we’re comfortable with the detail of printed reports. While we’re in flight, I can request a short stack of printed reports that tell me the airspeed, altitude, attitude, and heading. The copilot gets a larger stack with operational data about radio settings, fuel, hydraulics, and technical details. We have to ask for the data, but it takes only a few minutes to get new reports. So we’re in pretty good shape as long as everything stays stable and we don’t have mechanical, weather, or crew problems.”

You: “Sounds like quite an adventure you’re about to embark on. Sorry I won’t be able to go with you.”

This metaphor isn’t that far from how some organizations manage. Many start-ups and high-tech companies define their strategy as going after “targets of opportunity.” I’ve actually heard executives of high-tech start-ups proclaim that having a strategy puts up boundaries. They feel their business changes too fast for any type of strategy. This seems especially true for companies making the organizational leap from small company (less than $50 million) to big company (over $100 million).

It is possible to be agile while having strategic objectives that cement the organization. For example, Eric Ries in his book The Lean Startup (Crown Business, 2011) describes the concept of Minimum Viable Product that evolves with agile adaptation to customer needs. At market failure points the lean startup method demands that a business pivot in a new direction. But nowhere does that prevent a business from having an overarching strategy and objectives. In fact, objectives such as minimum viable products, agile development, and pivots can be critical strategic objectives in themselves. They are objectives on which you want to build a culture. Without the use of strategic and operational dashboards to monitor customer and development metrics, high-tech companies can drive themselves crazy chasing customers and wasting resources.

Although the idea of a pilot flying by referring only to printed reports seems outlandish, consider how many organizations manage while looking only at financial reports. Financials show only lagging results from efforts that may be from months before. Doing this is almost the same as flying using printed reports alone.

Recent research confirms that executives and managers with over ten years’ experience in an industry can have a good gut instinct for making decisions, but how can they communicate that gut instinct to the hundreds or thousands of people they must lead and manage? How can employees and managers without such experience understand the strategy and make good decisions?

The Strategy Map gives an organization an excellent visual tool to explain what is important for strategic success and how and where in the strategy each employee contributes. Executives and managers at multiple levels can use the Balanced Scorecard to monitor whether they are actually driving strategic success. If the results aren’t happening as planned, the Strategy Map, Strategic Objectives, and Balanced Scorecard need to be revised until the organization has a valid model of what works.

Building a Balanced Scorecard

The activities for planning a trip listed in the preceding section correspond to similar activities in building a Strategy Map and Balanced Scorecard, as shown in Table 1-2.

Table 1-2: Building a Balanced Scorecard Is a Journey

Travel	Balanced Scorecard	Intent
Select a destination.	Destination Statement	State in one page what your organization wants to be at the end of your strategic horizon.
Agree on the type of trip.	Strategic Themes	Your trip’s journey might have a theme of speed or low cost. Your Balanced Scorecard might have Strategic Themes such as customer intimacy or operational excellence. How you execute your Strategic Themes differentiates you from your competitors.
Agree on the route.	Executive and Division Alignment	Leaders, managers, and employees must all be going in the same direction.
Map the route.	Strategy Map	Identify the route and objectives that will get you to your destination.
Plan time and resources.	Action Plan and Implementation Plan	Identify the measures, metrics, and initiatives, and who is accountable.
Travel.	Prioritize, budget, and act	Execute the strategy.
Stay on course.	Balanced Scorecard	Monitor your Balanced Scorecard to make sure your organization is on track.

Does the Balanced Scorecard Guarantee Business Success?

No killer methodology guarantees success in business. The Strategy Map and Balanced Scorecard do not guarantee success. Organizations can still fail by having the wrong strategy, by having a poorly built Strategy Map and Balanced Scorecard, by failing to use the Balanced Scorecard after it is implemented, or by failing to modify the Balanced Scorecard if their hypothesis of what works is wrong.

I occasionally meet consultants and executives who proclaim, “We tried a Balanced Scorecard and it didn’t work.” Their perception may be true. Some research shows that approximately 30 percent of Balanced Scorecard attempts fail.

There are many reasons for failure, and the Balanced Scorecard fails in companies for a variety of reasons. Here are some of the most common: