M ay –J u n e 20 09 | Vo l u m e 1 1 , N u m b e r 3
O N
B A L A N C E
T H E
S T R AT E G Y
E X E C U T I O N
S O U R C E INSIDE THIS ISSUE
How a Management System Helps You Cope with a Recession
Case File ......................................................6 Instilling a Strategy Management Culture at St. Vincent Catholic Medical Centers
By David P. Norton
Cost cutting is no formula for surviving tough economic times. Across-the-board cuts that ignore the strategy and key objectives and their causal relationships can knock a company off course entirely, jeopardizing its long-term strategy and mission. Instead, says David Norton, adapt the strategy map. With the six-stage management system as your guide, you can shift to a short-term plan—with speed and agility—knowing the causal impacts up front. Recently Bob Kaplan and I published our fifth book, The Execution Premium. In it, we talk about the importance of having a system to manage strategy. It turns out that most organizations don’t have one. Those that do have a 70% chance of succeeding,1 which are pretty good odds for something as complex as a strategy. The book makes the case for a strategy management system that has six components (see Figure 1). In recent months, as the world has plunged into recession, some people have asked, “Isn’t it overkill to have a system with six components to manage a strategy? We all know what we have to do, right? We have to cut costs in order to survive.” Continued on next page
Figure 1. Adapting Your Strategy Map for a Recession
Leading in an Uncertain World: Make Better Decisions (and Make Decisions Better) The Kaplan-Norton six-stage management system (aka the execution premium model) is also an elegantly simple decision-making system, with built-in mechanisms for testing, adapting, and modifying ideas, assumptions, and actions. Palladium CEO David Friend outlines ten ways to improve organizational decision making using the system as your guide. Building a Best Practice Sharing Program That Works
• Change the strategy TRANSLATE THE STRATEGY • Strategy map/themes • Measures/targets • Initiative portfolios • Funding/StratEx 2
DEVELOP THE STRATEGY • Mission, values, vision • Strategic analysis • Strategy formulation
1 • Analyze • Find new opportunities STRATEGIC PLAN
ALIGN THE ORGANIZATION • Business units • Support units • Employees
• Strategy map • Balanced Scorecard • StratEx
TEST & ADAPT • Profitability analysis • Strategy correlations • Emerging strategies
3
6
LINK STRATEGY & OPERATIONS • Strategy framework • Operations process model • Management framework • IT platform
• Sales forecast • Resource requirements • Dashboards • Budgets
What’s Missing from Your Scorecard? Eight Vital—but Often Overlooked—Metrics
MONITOR & LEARN • Strategy reviews • Operational reviews
5
4
EXECUTION Process Initiative
Like motherhood and apple pie, best practice sharing is hard to criticize. But for many reasons, organizations struggle with instituting a formal mechanism for disseminating best practices—or getting employees to stick with it. Ricoh Americas, however, beat the odds. Marilyn Michaels, former director of performance excellence, shared with BSR her team’s approach, drawn from the Baldrige Award model and a little wisdom about human nature. Tools & Techniques..................................15
OPERATING PLAN
• Focus on the short term • Protect the long term • Use rolling forecasts
Executive Insight......................................10
Strategy Management Officer..............12
• Be clear about objectives and measures • Reprioritize investments • Manage StratEx
• Communicate • Shift priorities • Realign the organization
From near collapse to bankruptcy protection to two years of reorganization: St. Vincent Catholic Medical Centers was as battle-weary as it was in need of deep transformation. With its Strategic Alignment Roadmap (STAR) to galvanize and guide the team, this major New York medical center has emerged a StrategyFocused Organization—with big plans for the future.
• Shorten the time horizon • Respond rapidly
The strategy map and strategy management system inherently promote speed, flexibility, and adaptability to change. Modifying the emphasis in difficult periods is easily accomplished.
Forget customer satisfaction. It’s customer aggravation you should be measuring. Performance measurement expert Mark Graham Brown busts a few myths and offers eight vital measures that are often missing from (or woefully mismeasured on) BSCs.
Balanced Scorecard Report
I want to make the case that, in fact, you do need such a system. More than ever, you need a structure to help you to execute your strategy. In its latest CEO Challenge Survey, the Conference Board asked a cross-section of 769 CEOs a simple question: “What challenges are your greatest concern?” The top three issues were (1) excellence in execution;
manage your strategy, you’d better have a way to describe it: you’d better have a strategy map.
Figure 2 provides a simplified example of a strategy map for a national consumer bank. This map shows how the bank intends, over the long term, to create shareholder value. The bank has a long-term strategy to develop new products and brands and Changing the strategy means you have foster customer intimacy. Its to move from your long-term development long-term path to a short-term survival plan. directions are balanced by a short-term focus on reducing (2) consistent execution of costs, enhancing productivity, strategy by top management; and minimizing risk. and (3) speed, flexibility, and 2 Let’s assume that you’re the CEO adaptability to change. of this organization and that These responses, in the midst suddenly the world has changed. of a worsening worldwide recesYou know that banks are going sion, are very enlightening. down all around you; they’re The CEOs are not talking about being bailed out or they’re being strategy. They’re not talking about acquired. Between the industry products. They’re not talking fallout and the loss of consumer about customers. They’re talking confidence, you have an emerabout execution. In a recession, gency on your hands. Because the margin for error is very thin. even if you’ve been prospering— Failure to execute can be fatal. doing everything right, not incurWhile many things may change ring excess risk—the environment in a bad economy, I believe that has changed so dramatically that two fundamental things remain your goals and expectations must the same: (1) you still need a change. What worked for the strategy, and (2) you still need past five or ten years is irrelevant to execute. now. So what are you going to Let’s look at the six-stage model do? Well, let’s go to the system— and each major activity within you’ve got to change the strategy. it, and reflect on how this model Changing the strategy means would help an organization to you have to move from your cope in a recession without losing long-term development path to sight of its long-term strategy. a short-term survival plan. You have to rebalance the strategy. Stage 1: Develop the Strategy. One of the things that we’ve Let’s think about how you would learned from the past 15 years do that. In a typical setting, you’d of building and refining perforget the executive team together mance management systems in and come up with lists of things organizations is that you can’t that you have to do. With the manage what you can’t measure— strategy map, all that is different. and you can’t measure what you The strategy map allows you can’t describe. If you’re trying to to look at long-term and short-
2
Balanced Scorecard Report Editorial Advisers Robert S. Kaplan Professor, Harvard Business School David P. Norton Director and Founder, Palladium Group, Inc. Publishers Robert L. Howie Jr. Managing Director, Palladium Group, Inc. Edward D. Crowley General Manager, Newsletters, Harvard Business Publishing Executive Editor Randall H. Russell VP/Research Director, Palladium Group, Inc. Editor Janice Koch Palladium Group, Inc. Circulation Manager Bruce Rhodes Newsletters, Harvard Business Publishing Design Robert B. Levers Levers Advertising & Design Letters and Reader Feedback Please send your comments and ideas to
[email protected]. Subscription Information To subscribe to Balanced Scorecard Report, call 800.668.6705. Outside the U.S., call 617.783.7474, or visit bsr.harvardbusinessonline.org. For group subscription rates, call the numbers above. Services, Permissions, and Back Issues Balanced 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. Email:
[email protected] Copyright © 2009 by Harvard Business School Publishing Corporation. Quotation is not permitted. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. To order back issues or reprints of articles, please call 800.668.6705. Outside the U.S., call 617.783.7474. Harvard Business Publishing is a not-for-profit, wholly owned subsidiary of Harvard University. The mission of Harvard Business Publishing is to improve the practice of management and its impact on a changing world. We collaborate to create products and services in the media that best serve our customers—individuals and organizations that believe in the power of ideas. Palladium Group, Inc. is the global leader in helping organizations execute their strategies by making better decisions. Our expertise in strategy, risk, corporate performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, conferences, communities, training, and technology. The Palladium Balanced Scorecard Hall of Fame for Executing Strategy™ recognizes organizations that have achieved an outstanding execution premium. For more information, visit www.thepalladiumgroup.com or call 781-259-3737.
Explore the many resources available on the Balanced Scorecard and executing strategy at BSC Online. Join today— membership is free. For details, visit www.thepalladiumgroup.com/bsconline. Sign up for the electronic version of BSR—available only to subscribers— at www.bsronline.org/ereg.
May–June 2009
Figure 2. Strategy Map for a National Consumer Bank
Create Outstanding Value for Shareholders
Financial Perspective
Achieve XX% ROE Manage risk
Grow new revenue sources Fund strategic investments
Customer Perspective
Improve the Financial Success of Our Customers Provide quality products
Build high-value relationships
Provide competitive prices
Be involved in the community
COSTS
Internal Process Perspective CREDIT
Drive Quality Growth
Deliver Distinctive Service
Increase Quality and Productivity
• Increase fee income • Build the brand • Manage risk
• Improve convenience • Develop new products • Increase cross-selling
• Streamline processes • Maximize LOB profitability • Optimize capital and taxes
Learning and Growth Perspective
Develop human capital to support strategy
Leverage information technology
CAPITAL
Create a high-performance culture
Without abandoning its long-term strategy, the bank is simply refocusing on three short-term issues— costs, credit, and capital—that represent its lifeline during the downturn.
term objectives and requirements. Rather than cutting 10% across the board (which guarantees you will cut things that are important), you end up rebalancing the strategy. That means prioritizing your objectives—identifying those that should receive the most immediate attention and resources during the downturn. The strategy map is the critical tool that allows you to change the strategy. Imagine yourself as the general on a battlefield. Conditions are changing, the reports are coming in. Pressure is being applied on the flank; you need to redistribute your assets to match the changing conditions on the battlefield. You need to change the strategy—but how? Where do you turn? You turn to the map. The map shows where your resources are, where the enemy is, the advantages (and obstacles) of the environment—
and what you have to change. The same is true in business. You go to the map—the strategy map. The strategy map tells you in which direction (or directions) you were moving and shows you to which areas you must shift. In Figure 2, you can see how the bank now is refocusing on three short-term issues—costs, capital, and credit. It doesn’t mean the bank’s management team has thrown out the long-term strategy. It means it has extended the timetable. I remember one of the employees in this bank talking about her reaction to the changed strategy map. “We knew our company wasn’t going under,” she said. “We knew our company wasn’t giving up on our long-term goals; we knew that they had a way to deal with the short-term. The strategy map was our lifeboat.”
Stage 1 of the process is an important first step. The strategy has been changed in a thoughtful way. The entire executive team will have participated and will likely have reached consensus. The entire process probably took one day, illustrating the “speed, flexibility, and adaptability to change” that top management deems essential to success, according to the Conference Board survey. Stage 1 has started the process at the top. Throughout the remaining stages, management will add the details and disseminate the changes to all parts of the organization. Stage 2: Translate the Strategy. To be executed, a strategy has to be translated into budgets, initiatives, measures, and targets. Revamping the strategy means that all of these elements—all the assumptions and plans—need to be changed. Think about the
3
Balanced Scorecard Report
complexity that you just went through; you changed the strategy. Now, within a matter of hours you go to your strategy map and to your Balanced Scorecard, and you define new measures, new targets, and most importantly, new initiatives and new budgets. You’re able to make all of these changes fast, in days rather than months. Again, the system permits these changes to be done quickly, flexibly, and systematically. Stage 3: Align the Organization. Stages 1 and 2 changed the strategy and converted it to a plan in a relatively short period of time. The speed of action was possible because the number of people involved in the revision process was relatively small.
have a structured way to take a strategic change at the top and disseminate it throughout all levels of the organization. This is an important example of where the use of a strategy management system permits speed and reliability of execution that would not otherwise be possible. With the shared framework of a strategy map, a process of strategy communication, and the process of cascading, new strategic directions can be introduced and acted on in a matter of weeks. Without such a system, such changes would be near impossible.
Stage 4: Link Strategy and Operations. While operational effectiveness is always important, As we’ve demonstrated—and as a recession puts a premium on we’ve established as one of the it. Most recession strategies build five principles of the Strategyon a foundation of improved Focused Organization—the key productivity and quality to reduce to executing strategy in organizathe cost of doing business. These tions is to make strategy everyoutcomes are derived from operaone’s job. Employees at all levels tional processes, such as manufacneed to understand the new turing, distribution, and sales. It strategy and determine how to is more important than ever that adapt their own behavior. This these processes be linked to the is alignment—the process of strategy. For example, Six Sigma cascading the strategy from the and TQM programs should be higher levels of the organization focused on the strategic issues to the lower levels. It can be identified on the strategy map. Referring to the internal process perspective In the recessionary world, game-changing in Figure 2, events seem to happen on a weekly, if not the strategy daily, basis. To manage in this environment, places emphasis organizations must shorten their time horizon. on increased fee income and risk reduction done vertically, where corporate (under the strategic theme Drive communicates with group, section, Quality Growth), line-of-business region, and so forth. Or it can profitability and capital and tax be a horizontal cascade, where optimization (under the strategic the point is to ensure that IT and theme Increase Quality and ProHR are integrated with the strategy ductivity) to impact the short-term or that your supply chain partners goals of costs, capital, and credit act in synch with it. With this improvement. process of alignment (with the One of the major barriers to emphasis on “process”—it’s more strategy execution is the complexthan just a concept), you now
4
ity of managing programs that cross organizational boundaries. Many organizations create special purpose teams (or theme teams), made up of executives and specialists, to oversee the management of specific parts (or strategic themes) of the strategy. Groups with titles such as Innovation Councils, Productivity Teams, and Risk Reduction Teams are given the resources, authority, and accountability to implement portions of the strategy. These cross-business teams help reduce the time needed to make the complex decisions prompted by a new strategy. Stage 5: Monitor and Learn. While plans are important, the ability to monitor performance against those plans and to make informed adjustments is fundamental to success. Typically, a strategy doesn’t change rapidly; executives may meet on a quarterly basis to review specific strategic themes and make appropriate changes. The recessionary world presents a different environment. Game-changing events seem to happen on a weekly, if not daily, basis. To manage in this environment, organizations must shorten their time horizon. Some organizations move from quarterly to monthly or even weekly performance review meetings. Good information is the critical ingredient that supports this process. A Balanced Scorecard is used to monitor the strategy; dashboards are used to monitor operational performance. The technology that supports business reporting is an essential part of the management system, and one that contributes significantly to improving reaction time. Stage 6: Test and Adapt. Necessity, as they say, is the mother of invention. From the economic pressures created by the recession, new ways of doing business
May–June 2009
will emerge: just look at how companies like Southwest Airlines and Best Buy emerged from the 2001 recession with new business models that catapulted them ahead of their competitors. The tools available to management today for building these new approaches are much improved over those found in past recessions. Specifically, business intelligence (BI) tools provide new ways to get beneath the surface of an organization’s performance to test hypotheses about the factors driving performance and to gather insights that may fundamentally change the business. A management system that clearly defines the strategy, converts it into measures and targets, links these to operational processes, and reviews performance is precisely the kind of rich environment that BI approaches were designed to support. The payoff from BI has never been more important than it is today. A System Hardwired to the Strategy In summary, the process described in Figure 1 starts with a recognition that changing business conditions require a change in strategy. The strategy map provides a vehicle to do this rapidly and transparently. It allows organizations to refocus their strategy on short-term survival without destroying the elements of long-term success that will be crucial when the recession abates. Secondly, the revised strategy must be converted to new measures, targets, initiatives, and budgets. The Balanced Scorecard allows these instruments of change, defined in the strategy map, to be developed rapidly and unambiguously. The key to executing the strategy is moving responsibility for implementation from the top to the bottom of the organization. With thousands of employees and customers and scores of suppliers and partners, this is probably the
most challenging of activities. The third stage of the management system involves a process of communication and cascading that ensures everyone’s alignment to the new direction. Alignment is the most important facet of the execution process. In the fourth stage, the operations of the business are modified to reflect the new strategic priorities. The fifth stage provides for the critical feedback and monitoring process that allows for rapid reaction times, while the sixth stage involves using business analytics to improve insight and to identify the new ways of doing business that will lead to success not just through, but beyond, the recession. The CEO of a Balanced Scorecard Hall of Fame company, speaking recently at one of our conferences, made the observation that “my Balanced Scorecard frightens me.” When asked why, he said, “If I change one measure or target on the BSC, it will happen. The scorecard is tied tightly to every part of our management process. If I change a measure on the scorecard, somebody will change an initiative, somebody will change the budget, the incentive compensation system will change and the measures that management talks about will change. Our management system is ‘hardwired’ to the strategy.” “Frightens” might be accurate, although I wish he’d have said something like “awes” instead. For what he described is exactly what the BSC is supposed to do. He was clearly referring to the power and effectiveness of the BSC in effecting change: a management system that is hardwired to the strategy; a system that is responsive, not ponderous; a system that is integrated around a common framework, not fragmented around many. These are precisely the characteristics that make the six-stage management
system an essential ingredient to survival in a recession. This system was built and refined during the good times, when the world economy was booming. It gave organizations a way to describe, translate, align, and adapt their strategies. It increased the odds of successful execution from 10% to 70%.3 Such a system is needed even more today to cope with the dramatic changes in strategy required by the economy. Without such a system, how would you manage? I 1. According to a survey of 143 performance management professionals by Balanced Scorecard Collaborative, March 2006. 2. These findings come from the Conference Board’s updated 2008 survey, issued as the Financial Crisis edition in October. The Board updated the findings from the original survey, released in July/August. “Excellence in execution” was also the number-one top concern in the earlier survey, but “speed, flexibility, and adaptability to change” was number seven. 3. Balanced Scorecard Collaborative research survey of performance management professionals, March 2006.
Coming Soon
The Balanced Scorecard Hall of Fame Report 2009 Don’t miss the latest edition of the Balanced Scorecard Hall of Fame Report, due out in June. The 2009 Report highlights the breakthrough achievements and Strategy-Focused Organization best practices of the 20 members of the Hall of Fame class of 2008—a roster that includes Dubai Electricity and Water Authority, the French Ministry of Defense, Grupo Modelo, HSBC Bank Brasil, and the University of Leeds. Previous Hall of Fame Reports— published since 2004—are available at www.executionpremium.org.
Reprint #B0905A
5
C A S E
F I L E
Balanced Scorecard Report
Instilling a Strategy Management Culture at St. Vincent Catholic Medical Centers By Wendy Garling, Contributing Writer; with Ann Nevius, Vice President and Healthcare Industry Practice Leader, and Peter LaCasse, Managing Consultant, Palladium Group, Inc.
The challenges facing healthcare institutions are overwhelming, from rising costs and shrinking reimbursements to policy constraints and uncertainties. But the solutions St. Vincent Catholic Medical Centers, a major New York institution, devised to face its particular challenges offer lessons for any organization facing a harsh operating environment. How SVCMC moved from crisis management to strategy management is a textbook case of process rigor, decision making discipline—and unwavering dedication to the mission. Saint Vincent Catholic Medical Centers (SVCMC) was founded in 1849 by the Sisters of Charity to provide high-quality medical services to New Yorkers, regardless of ability to pay. What began as a 30-bed hospital in a small brick house in Greenwich Village has mushroomed into a flagship 727-bed hospital, a nationally recognized medical center that provides specialty and subspecialty inpatient care, trauma services, and community-centered ambulatory care. Its area network includes a behavioral health hospital, skilled nursing facilities, substance abuse treatment centers, a hospice, and a home health agency. As the academic medical center for New York Medical College, St. Vincent’s Hospital provides training for some 366 residents. In addition, SVCMC operates the Uniformed Services Family Health Plan for dependents of active-duty servicemen and women and military retirees. SVCMC owns the last Catholic hospital in New York City—St. Vincent’s Manhattan— and has a workforce of 6,300 largely unionized employees that serves a diverse population throughout the New York metropolitan area.
6
Providing more than $35 million in charity care services each year, St. Vincent’s has increased its focus on philanthropy and fundraising to support its mission. With its customer-centric focus, SVCMC seeks to build a culture driven by its values of respect, integrity, compassion, and excellence, created and sustained within a state-of-the-art healthcare environment. It also seeks to become a trusted neighbor and central resource serving the health education and ambulatory care needs of the community. Weathering Marketplace Storms In 2000, SVCMC was formed from the merger of three healthcare organizations in New York City— a merger that could not erase the financial ills of its individual entities. Early in the decade, after years of mounting debts and falling revenues, SVCMC soon found itself teetering on the brink of collapse. Like many healthcare institutions in New York State, St. Vincent’s was suffering from the combined effects of policy, cost, and revenue constraints, including Medicare and Medicaid payments that grew increasingly insufficient for covering the costs of care. A 2006 public commission report characterized the state healthcare
industry as “chronically unstable,” with 70 hospitals and more than 63 nursing homes shuttered since 1983.1 In July 2005, SVCMC filed for bankruptcy protection, thus avoiding layoffs and keeping its doors open. After two years of aggressive reorganization—including the shedding of several underutilized assets—SVCMC emerged from bankruptcy. Looking to long-term viability, it announced plans to replace the antiquated St. Vincent’s Hospital building with a state-ofthe-art “green” facility across the street, set to open in 2016. From Short-Term Fixes to Long-Term Strategy While SVCMC emerged from bankruptcy leaner and stronger, it still lacked a process for thinking about strategy, executing plans, and fulfilling the commitments made in the reorganization. In addition, over the next few years, leadership turnover and an exhausted workforce signaled the need for deeper organizational transformation. In July 2007, a new president/CEO took the helm: Henry Amoroso, a lawyer with a solid track record as head of Catholic healthcare organizations and philanthropies. He swiftly identified the organization’s need to transition from crisis management to a performance-oriented culture and introduced the Balanced Scorecard methodology, dubbed STAR (Strategic Alignment Roadmap). The overarching challenge: to serve the mission and build a new hospital while instituting the internal changes needed to gain financial stability and navigate the onerous healthcare environment. Building a strong team unified around STAR was the first step. In the spring of 2008, Amoroso and his 11-member senior management team (business- and support-unit heads and the SVP for mission) conducted a
May–June 2009
comprehensive environmental assessment and SWOT (strengths, weaknesses, opportunities, threats) analysis. They created a change agenda for SVCMC, defining its current and desired future states by articulating a “Strategic Shift” for every BSC perspective. In the financial perspective, for example, they identified transitioning from being in bankruptcy and having limited access to capital to having sufficient operating margin and access to capital. For learning and growth, they envisioned the culture shifting from being resistant to change and lacking performance expectations to being customer-focused and valuesdriven, where high performance and collaboration are recognized and rewarded. To give legs to the mission, they developed a new, four-part vision of SVCMC as a healthcare system “recognized for excellent quality care, a customer-centric environment [and] financial stability, and for being a trusted advocate for the communities we serve.” As the organization’s new strategy planning and management tool, STAR would enable the vision and fulfill the CEO’s mandate: “Make sure it is measurable.” An enterprise strategy map and scorecard soon followed, with three cascaded maps and scorecards (HR, nursing, clinical operations) launched during the summer of 2008. Reporting began within months of each cascade, while the simultaneous task of communicating the strategy to employees assumed top priority. In monthly meetings, the senior management team brought the strategy message to the Performance Council, a forum of SVCMC’s top 50 VPs and senior executives. The Council focused on answering the question, “How do you support the strategy?” With a giant strategy map on the wall, participants marked with Post-its the places where they had an impact. These leaders were then
tasked with introducing the strategy message to their areas of responsibility through similar interactive forums. A strategy communication program was launched, first throughout business and support units, then cross-functionally (e.g., to nursing).
way we do business”—gradually gained ground, spawning the beginnings of a new, more flexible, and forward-thinking culture built on shared goals and trust.
"The Way We Do Business"
SVCMC moved quickly. In July 2008, it launched monthly, halfday strategy review sessions for all scorecards. Besides assessing
Creating Accountability, Building Collaboration
Yet the STAR implementation itself faced a test. Employees were battle-weary from the obstacles they had overAs the organization’s new strategy planning come in the preand management tool, STAR would enable vious few years. the vision and fulfill the CEO’s mandate: Across SVCMC’s siloed depart“Make sure it is measurable.” ments, many employees kept their heads down, figuring STAR performance in the four perspecwas “just another project.” Leaders tives, reviews focus on four needed a way to jump-start the themes within the internal process transformation program and reen- perspective: (1) Growth and ergize employees. They needed a Business Development, (2) Cusway to more forcefully make the tomer Experience, (3) Clinical case for balancing financial and and Operational Excellence, and nonfinancial goals—to help (4) Community. Each enterprise employees understand that fundobjective is championed by a ing the mission was critical “performance advocate” (from to fulfilling the mission. either the enterprise leadership team or a unit leadership team), Amoroso was convinced that who is often assigned crossthe new strategy program was functionally. For example, a key essential. He regarded STAR objective within the Growth and not just as the right mechanism, Business Development theme is but also as an opportunity for “Develop a brand [that] establishes a fresh start. He constantly comour value within the healthcare municated how vital SVCMC’s marketplace.” The person chosen financial strength was, not just to be its performance advocate to fulfilling its mission, but to is the SVP and executive director delivering quality care—and to for continuing care, rather than securing the institution’s very the more predictable choice of future. For a patient-care culture, marketing head. Performance particularly a mission-driven advocates also lead strategy disone, this was a radical position. cussions at Performance Council Throughout 2008, Amoroso and meetings. Participants explore his senior team acted as strategy strategy execution ideas and take ambassadors, moving throughout action plans back to their areas. the organization and holding town hall–style brainstorming Many enterprise objectives are sessions that engaged employees also supported by cross-functional in the strategy dialogue. SVCMC’s working groups led by perforin-house newsletter was reposimance advocates, with members tioned to serve as Amoroso’s drawn from the senior team and strategy-messaging forum. His the Performance Council. The message—that “STAR is now the working groups develop and 7
Balanced Scorecard Report
manage measures and initiatives and prepare reports for the monthly reviews. Some working groups are created ad hoc, while others are new or retooled standing committees that consolidate previously redundant activities from across the network. For example, the new Internal Branding Committee merges disparate branding projects and joins together personnel from marketing, community health outreach, mission, admitting, behavioral health, and other areas. Additional top-level committees formed through Q3 2008 include the Communications Committee, the Initiative Portfolio Committee, and the Survey Committee (which analyzes survey results and creates processes to make better use of survey data). STAR’s cross-functional architecture continues to evolve. Recently, SVCMC appointed the chief medical officer to the executive team to help embed physician participation at multiple levels of the organization. Additionally, a program called “Rounding with a Purpose” (modeled on clinical rounds in medicine) brings crossfunctional senior and management leaders to the employee and staff front lines to ask the question, “How can we help you do your job better?” and to patients, “How can we improve your experience at St. Vincent’s?” In 2009, SVCMC will cascade STAR into three business units— Continuing Care, Behavioral Health, and St. Vincent’s Hospital—areas previously lumped together in the clinical operations scorecard. Another cascade is also planned this year for the U.S. Family Health Plan, SVCMC’s military insurance business. Plans for creating an Office of Strategy Management are also under way. Aligning Resources to Strategy STAR also provides a framework for aligning a new goal-setting
8
and performance review known as LEADS (Leadership Evaluation and Development System). This year, SVCMC is rolling it out at the Performance Council level; individual objectives and measures will align with enterprise strategy across the four perspectives and serve as annual performance contracts. At semiannual reviews, managers and their direct reports will devise action plans to close any performance gaps. Over the next two years, SVCMC plans deeper cascades to nonunionized management and supervisory levels. Besides energizing leadership around strategy, SVCMC’s transformation program has helped Amoroso and his team position SVCMC favorably as a preferred employer in its market, based on its ability to reward employees who “consistently demonstrate high performance, collaboration, and accountability in…accomplish[ing]…their daily functions.” 2 A newly designed initiative management program emphasizes developing, funding, and executing a coordinated portfolio of initiatives that will help SVCMC achieve enterprise strategy map objectives. These initiatives support objectives in each of the four strategic themes —as well as those in the learning and growth perspective. Previously, initiatives had been developed piecemeal, which led to competing agendas, redundancy, and unnecessary costs. Prior to Amoroso’s arrival, for example, SVCMC lacked a coordinated process for managing and acting on patient feedback data. In addition, it had ended up with 125 IT applications. With the new streamlined process, proposed initiatives now flow from the working groups to a centralized Initiative Portfolio Committee led by Amoroso. All initiative decision making and budget allocation takes place through that committee. Proposed initiatives are vetted and prioritized around the question “What part of the strategy map
does this support?” Before STAR, SVCMC had had hundreds of initiatives; now, it manages a coordinated portfolio of about 50. “STAR has allowed us to establish discipline and budgetary rigor for initiatives that we didn’t have before,” says Paul Goebel, SVP and chief administrative officer. SVCMC focuses on patient care quality benchmarks and measurements that reflect the organization’s ability to deliver on that care. This is do-or-die in the healthcare industry, because government payors, such as Medicare and Medicaid, now mandate measures and post results on a consumer website.3 Just as onerous is the fact that these payors are increasingly linking reimbursements to quality outcomes. SVCMC has therefore aligned its patient satisfaction survey tool with mandated measures and launched multiple initiatives aimed at closing quality gaps. For example, under the objective “Optimize the customer experience by continuously improving process flow and interaction,” waiting time for admission is targeted at a maximum of four hours by Q4 2009 (see Figure 1). To reduce wait times, SVCMC has implemented such initiatives as renovating the Emergency Department so that it better supports patient traffic flow and increased patient volume, and redesigning the patient admitting process, which will improve coordination between the different functional areas involved in patient admission. Moving Forward In just one year, SVCMC has made significant progress with its STAR implementation. Soft benefits are already visible. Employees are more engaged in the strategy, thanks to team problem-solving efforts and task forces. Managers and employees are communicating regularly about performance and strategy. Staff is better aligned
May–June 2009
Figure 1. Detail of an Objective in the Customer Experience Strategic Theme
STRATEGIC THEME: Customer Experience Financial
F1. Consistently achieve sufficient cash flow and operating margin to sustain our mission
F3. Build market through ambulatory patient base
Customer
Internal
OBJECTIVE
MEASURES
TARGETS
INITIATIVES
(What the strategy is trying to achieve)
(How performance against objectives is monitored)
(The required level of performance or rate of improvement)
(An action program to achieve target)
F4. Grow through targeted services
C2. “The most patientand family-friendly experience”
P4. Optimize the customer experience by continuously improving process flow and interaction
Optimize the customer experience by continuously improving process flow and interaction
a. 240 minutes by Q4 2009
• Emergency Department Technology Initiative
b. Average discharge time
b. 1:30 p.m. by Q4 2009
c. Number of direct admits
c. 60
• Patient Access/ Admitting Redesign Initiative • Front Lobby/ Main Entrance Renovation
a. Waiting time once being identified for admission (ED and Direct Admission)
• Becoming Home Program Initiative Learning & Growth
L3. Build a value-based, customer-centric culture driven by respect, integrity, compassion, and excellence
This detail of a STAR objective shows its underlying measures and targets, along with the initiatives SVCMC has carefully identified to achieve them.
with strategy, as demonstrated by employee survey feedback. Senior leadership and management are accountable for strategic performance and initiatives. Initiatives have been streamlined and aligned to the strategy; in fact, the rationale for initiatives is clearer—and easier to communicate to the board. In a broader sense, the concept of connecting strategy with operations has finally clicked, according to Goebel. “Employees don’t often fully grasp this connection, because the processes for developing strategic plans and achieving yearly deliverables are different. But STAR has changed that paradigm for us. Our strategy map describes where we want to be in five years—and everyone now truly sees that. This is an enormous step forward for St. Vincent’s.”
Yet SVCMC still faces tough challenges: increased competition, reduced government reimbursement rates, nursing shortages, and a growing number of uninsured— not to mention many still unanswered questions stemming from recent White House and congressional recommendations on healthcare. A tough credit market and weak economy pose additional challenges. Progress with the new hospital inches forward, despite pushback from community groups concerned about the neighborhood’s historic status and complications surrounding construction of the new facility in a densely populated area. (In March, however, SVCMC scored a major win when the New York City Landmarks Commission approved the new hospital, one of several required approvals.)
In early 2009, a new strategic plan was crafted to address these and other challenges, identifying STAR as the navigation tool moving forward. Amoroso is confident as he looks ahead: “Strategy management has enabled us to measure the St. Vincent strategy rather than the tactics. And, it has provided a mechanism to inventory, prioritize, and rigorously report on progress against the strategic initiatives that will allow us to achieve that strategy.” I 1. Report by the Commission on Health Care Facilities in the 21st Century, 2006. 2. From the SVCMC 2009 Strategic Plan, p. 34. 3. Referenced in the 2009 Strategic Plan, p. 12, which indicates the information will be up as of January 1, 2009. See the Centers for Medicaid and Medicare Services (CMS) website, Hospital Compare, or http://www.hospitalcompare.hhs.gov.
View SVCMC’s new Strategic Plan on the Palladium Group website: www.thepalladiumgroup.com
Reprint #B0905B
9
I N S I G H T
Leading in an Uncertain World: Make Better Decisions (and Make Decisions Better)
E X E C U T I V E
Balanced Scorecard Report
By David Friend, Chairman and CEO, Palladium Group, Inc.
Poor decisions made at many levels. That, contends Palladium CEO David Friend, is a major cause of today’s financial crisis. Friend created a “top ten” list of ways organizations can make better decisions—and make decisions better. This must-do list is based on the Kaplan-Norton six-stage management system, also known as the execution premium model of management (see Figure 1, page 1). A decision-making “flywheel,” the model has guided top-performing organizations in defining, executing, monitoring, and adapting their strategy. And now more than ever, organizations need such a systematic, yet flexible, management approach. 1. Have a philosophy of management. Many organizations are in truth run like dictatorships. I’ve heard clients actually say “If decisions are made on facts, and everyone has the relevant facts, then everyone is equal. If decisions are based on opinions, then my opinions count a lot more than anybody else’s.” That theory of management has led to many problems. If you’re going to make all the decisions yourself, whether you’re running a department or the entire company, you’re just going to do what you want to do. But who will have decision rights? Who’s going to access and control the data? How do you deal with inconvenient truths? Who’s the keeper of the truth? What’s the implication of Web 2.0—e.g., blogs, social networks, wikis— which will generate a tremendous amount of new data that will empower people? Having a philosophy of management—a deliberate, thought-through approach—is critical. 2. Understand that organizational decision making is multifocal and iterative. Organizational decision making is no longer a point process. It increasingly depends on many things happening in the six-stage
10
management cycle, from strategy setting to alignment, planning to execution, monitoring and learning to testing and adapting. Take a physician in an intensive care unit. He diagnoses the patient with an infection. Then he plans: makes the resources (nursing, medications) available, monitors the treatment. Is it working? If not, he must determine why, then test and adapt and try another treatment. Many players are involved in this treatment decision. Linking strategy to operations is much the same. Organizational decision making is multifocal and iterative. Furthermore, cycle times are accelerating. Last fall, Goldman Sachs executives had to completely rethink their strategy in 72 hours, recasting the organization from investment bank to bank holding company. They didn’t have the luxury of a two-year study. Cycle times will only accelerate. And the current financial system crisis will separate out the people who can respond rapidly from those who cannot. 3. Make decision making a team sport. The era of the single individual presiding over the decisions of an entire enterprise is over. In his 2007 book The Age of Turbulence, Alan Greenspan
wrote about going to the Soviet Union and meeting the five people who, with a slide rule, map, and five-year plan, boasted of controlling the entire 200 millionperson economy. Greenspan left in amazement, wondering how they actually got things done. We all know the outcome. Leadership guru Warren Bennis observes that the company with the most leaders at the most levels wins. In other words, the company with the most decision makers closest to the problem wins. Involve your customers. Apple, for example, understood what customers really wanted out of an MP3 player and developed the iPod. Other MP3 players existed, designed by companies that never thought to ask what customers wanted. 4. Help your people make good decisions. Alignment and communication are more important now than ever. Communicate the strategy to employees. They must understand what you’re trying to accomplish. Give them data, tools, the philosophy, technology. Give them a process. These resources will also help attract and retain people with good judgment. 5. Make decisions come to life through planning. Decisions are only as good as your ability to implement them. Plans are imperative. And you must plan for both good and bad circumstances. Watching Hurricane Katrina on TV made it clear that leaders had never actually planned to deal with a natural disaster of this magnitude. They were utterly unable to mobilize government resources. Yet New Orleans sits on the Gulf of Mexico, where hurricanes are no surprise. Many organizations don’t spend enough time planning. A budget is not a plan. And since the military tells us that no battle plan survives the first hour of battle, flexibility is crucial.
May–June 2009
6. Transform data into information, and information into insight. Just having data is not enough. Knowing that your cholesterol level is 173 tells me nothing about your overall health. Many organizations are siloed, so often the data keepers are in one place, while the budgeters and planners are in another, and the strategy folks are somewhere else.
a lesson gleaned from his trip to Anbar province. He realized that he could pay locals who had been shooting at U.S. troops $30 a month and get them to shoot at the “bad guys” instead. This tactic was integral to the turnaround.
In medicine, morbidity and mortality rounds are conducted to analyze poor outcomes. The physicians on call are grilled about every treatment deciIf the CEO is charged with growing the sion they made. business 30%, what are the odds that he’ll try It’s a powerful learning experiso hard to hit that target that he blows the ence, and one company up? That’s why risk management must in which senior be embedded in your decision-making process. physicians share their past misThey don’t talk to each other. takes. How often do business The only people who can conleaders do this? nect the dots are the CEO and In 1996, Charlie Munger, Warren the board members. Making good Buffett’s partner, gave a now-classic decisions depends on breaking lecture on “24 Standard Causes down those silos and getting of Human Misjudgment.” 2 The people to understand that manleading cause he identified was agement is a “flywheel” process.1 the wrong incentives. Other major Moreover, with the advent of Web causes included denial and social 2.0 and the resultant torrent of proof (“everyone else is doing unstructured data, organizations it”). Munger’s causes go far in will be inundated with data. Data explaining the subprime crisis. will come at us in unimaginable Base your decisions on results, volumes. The 80/20 rule will be and understand why things go the only way to survive. The risk awry. That is the only way to learn. of analysis paralysis is only going 8. Understand the risks. If you to grow. Transforming data into have a strategy map, you should information and information into also have a risk map. If you have insight—and then mixing insight key performance indicators, you with good judgment—will be should create key risk indicators. paramount. Risk management must be embed7. Base your decisions on ded in your decision-making results. In the execution premiprocess. If the CEO is charged um model, this is the Monitor and with growing the business 30%, Learn stage. People are rational what are the odds that he’ll try beings and can rationalize anyso hard to hit that target that he thing. Yet most organizations do blows the company up? That’s in not learn because people don’t fact what happened in many admit they make mistakes. The organizations. U.S. Army, which performs postPlan for bad things. A budget mortems of every operation, truly is not a contingency plan. If learns from its failures. People a catastrophic hurricane hits credit the 2008 troop “surge” as or the stock market falls 15% or the key factor in improving the your sales drop 10%, what will military situation in Iraq. But you do? The time to explore your General Petraeus had also applied options is not in midcrisis.
Finally, test, test—and test again. You need to model not just the “what-ifs,” but also the rare, but consequential, events. 9. Adapt and innovate. Organizations that are nimble have a better chance of surviving rough waters. But you can only adapt and innovate if you follow this execution premium process, because you need all the information and insight it yields. With many people throughout your organization thinking about how to get better, you will outperform the organizations that only have one person thinking about it. But remember, if your people are afraid to take risks—and thus afraid to make decisions—you will never adapt. Work with your customers and sup-pliers. Know their strategy maps. This will allow you to find ways to create more value for them, to become more valuable to them. That’s how organizations survive in a downturn. Those that think this way will do extraordinarily well. 10. Reserve the right to get smarter. As your organization moves through these decision cycles, it will learn. You’ll get smarter. And then you’ll restart the process anew, with the benefit of data, experience, and insight. The BSC success stories demonstrate the power of these ten key ideas. In government agencies, nonprofits, and companies in every industry across the globe, we’ve seen leaders who have discovered how to turn their organizations into decision-making engines. And those with better engines simply outperform the rest. I 1. A metaphor attributed to Jim Collins to describe reaching breakthrough performance: “…the process resembled relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough and beyond.” Good to Great (HarperBusiness, 2001), p. 14. 2. “24 Standard Causes of Human Misjudgment,” speech by Charles Munger to Harvard Law School, 1996.
Reprint #B0905C
11
S T R AT E G Y
M A N A G E M E N T
O F F I C E R
Balanced Scorecard Report
Building a Best Practice Sharing Program That Works Adapted from a presentation given by Marilyn Michaels, former Director, Performance Excellence, Ricoh Americas Corporation, at the Palladium Group's Office of Strategy Management Workshop, November 2008, in San Diego, CA By Lauren Keller Johnson, Contributing Writer
Best practices—those uncommonly efficient and effective ways of accomplishing particular tasks in an organization— aren’t worth much unless they’re shared and then replicated throughout the enterprise. During Marilyn Michaels’ tenure at Ricoh Americas Corporation (a 2005 BSC Hall of Fame winner), the Strategy Management Office played a key role in developing and maintaining the processes needed to disseminate best practices in this large company and its parent. Managers talk about “best practices” all the time. But what are these practices, really? And why do they stimulate so much discussion in corporate corridors and in the business press? According to Marilyn Michaels, former Director of Ricoh Americas Corporation’s Performance Excellence team, “Best practices are the most efficient (i.e., requiring the least amount of effort) and effective (i.e., yielding the best results) ways of accomplishing a task, based on repeatable procedures that have proven themselves over time.” When shared by the people who developed them—and then adopted by others throughout an organization—best practices pay big dividends, notes Patricia Bush, vice president and best practice sharing thought leader at Palladium. For example, they save time, mitigate risk, and generate lessons managers can use to improve business processes. Moreover, they create a store of knowledge that can be drawn on even after the individuals who created the practices leave the organization. Indeed, companies that make best practice sharing a core competency exhibit important strengths, says Bush, such as innovativeness, a capacity to
12
absorb new ideas, and a collaborative culture. Yet getting others within your organization to adopt best practices isn’t easy, and those who try to facilitate the best practice sharing process typically encounter daunting obstacles. Among the most common (according to the American Productivity & Quality Center) are a lack of awareness of best practices currently in use in the organization, an unwillingness to make the changes needed to adopt a best practice, and a lack of the skills required to adopt. And in Michaels’ view, the “not invented here” syndrome can also block adoption of best practices. “It seems that there are twice as many ways people can find to reject an idea that didn’t originate with them than they can find to support the idea,” she notes. “It’s either ‘We don’t have the budget,’ or ‘It’s never been done here before,’ or ‘It’s not going to work.’ We’re pretty inventive in how we kill others’ ideas.”
automation equipment), the Performance Excellence (PE) team1 decided in 2001 to establish a kind of “über” best practice— a process aimed specifically at facilitating the identification, dissemination, and adoption of best practices throughout all of Ricoh. The impulse for taking on this challenge came from the parent company, which believed in the importance of sharing best practices across cultural boundaries throughout the company. Members of the PE team knew they faced a tough road, given Ricoh’s size, reach, and complexity. After all, Ricoh Company, Ltd. is parent to numerous regional companies, operates in 150 countries, and boasts a 75,000-person workforce. The New Jersey–based RAC is no small unit itself. It does business on two vast continents, has 13 corporate offices in 12 countries, and employs around 9,000 people. Furthermore, it has grown significantly in complexity since its founding in 1962, not only from a series of acquisitions, but also because it began developing software for its parent firm as well as fulfilling its original purpose (selling, marketing, and distributing products developed by Ricoh in Japan). Given RAC’s scale, PE team members understood they would have to put in place a rigorous set of structures and processes if they hoped to overcome the traditional obstacles to best practice sharing. They decided to draw inspiration from RAC’s long experience with qualityimprovement models, particularly the Malcolm Baldrige Award.
An “Über” Best Practice
Building on Baldrige
At Ricoh Americas Corporation (RAC), the North and South American sales and marketing unit of Tokyo-headquartered Ricoh Company, Ltd. (a leading global manufacturer of office
The Baldrige Award criteria are organized into seven categories: leadership; strategic planning; customer and market focus; human resource focus; process management; measurement,
May–June 2009
analysis, and knowledge management; and business results. Judges allocate a specific number of points to each category, weighted according to performance impact. For example, excellence in leadership will net an applicant 120 points; in process management, 85 points. Excellence in business results can rack up as many as 450 points for an applicant, depending on strength in various types of outcomes. (Excellence in process-effectiveness outcomes, for instance, generates 70 points, as does excellence in customerfocused outcomes.) In 2001, RAC used an adapted version of the Baldrige approach to evaluating candidate applications and allocating points in a five-step process it established to manage best practice sharing within the unit as well as throughout Ricoh Company. The process started at the local level, with units submitting their best practices. Then it escalated to a global level, whereby winners of best practice awards presented their practices across regions and Ricoh companies. Finally, it cycled back to the local level, with units deciding whether to adopt winning practices they learned about at the global-competition level. Here’s a closer look at each step in the process. 1. Hold local sharing rallies. Ricoh units’ PE teams would send out a call for best practice applications. Any group within a unit that believed it had developed a best practice submitted a short description of it. These practices could be in any of the Baldrige categories; for example, they may have represented an exceptional way to increase employee engagement, to improve customer loyalty, or to develop leadership bench strength. A best practice team comprising members of the PE teams and other volunteers who had been
trained in the Baldrige assessment process screened the applications using specific criteria. For instance, proposed practices had to be transferable and relevant across the company’s regions. And they had to show several cycles of improvement over time (such as a decline in on-site injury rates or a measurable increase in customer profitability). Weighing these criteria, the team selected the strongest 10–15 applicants. A small circle of executives, including the unit’s CEO, CFO, and strategy and planning head, then reviewed the applications and narrowed down the winners to those they considered the three most promising. 2. Develop global applications. Each of the three winners chosen by the local executive team developed a much more comprehensive application reflecting the Baldrige Award requirements. For example, applications provided: • An organization profile, including information on the unit’s products, services, mission, values, workforce, regulatory environment, customers, competitors, strategic challenges, and performance management system • An approach used in the proposed best practice, including how the practice supported the organization’s strategy, mission, or values • Deployment of the practice, such as where in the organization the practice was used, and what the costs of developing and deploying the practice were to date • Cycles of refinement, including explanations and examples of how the practice was improved • Results of the practice depicted through trend charts and other graphic representations or through benchmark comparisons (for example, on-site injury
rates in the application organization versus those of industry leaders) 3. Submit global applications for judging. The heads of Performance Excellence in each Ricoh region around the world would meet to review all applications coming from the various units and regions. Each judge identified every applicant’s strengths and opportunities for improvement, requesting further information from the originating unit if more was needed (which, in the Baldridge program, would typically call for a site visit). The judge also scored each applicant based on established rules. For example, scores of 301–400 receive “Bronze” certification; scores of 401–500 receive “Silver,” and scores of 501 or more receive “Gold.” Any applicant with a Gold certification received the Global Award. All applicants receive a feedback report containing the judges’ ideas for building on strengths and leveraging opportunities for improvement. 4. Share global winners’ practices. At the biannual enterprisewide Global Strategy meeting in Tokyo, the Global Award winners’ best practices would be described to the CEOs of each Ricoh region. Winning practices were also shared at the Global Customer Satisfaction conferences, major qualityimprovement gatherings held in different regions each year. The company also added the winning practices (along with the judges’ feedback reports) to a database that all regional PE heads could access. PE heads were responsible for disseminating best practices within their regions and working through feedback reports with applicants to prioritize improvement efforts. 5. Adopt winning practices locally. Each unit’s PE team encouraged adoption of winning
13
Balanced Scorecard Report
best practices at the local level. For example, at RAC’s annual Chairman’s Leadership Forum, where the top 100 leaders gather to discuss strategy, awards were presented to any team in the unit that won the best practice awards (bronze, silver, or gold level) at the global level. Winners led breakout sessions for leaders, in which they described their best practice in detail. The expectation was that participating leaders would then bring these descriptions back to their departments and encourage adoption of the practices. “Our goal in the PE offices,” says Michaels, “was to create an environment where people would come together to talk about what they’re doing and see the wisdom in each other’s best practices—where they’d want to adopt.” But people didn’t have to adopt a practice whole-cloth, Michaels adds. They could select bits and pieces from a winning practice and adapt it to their own situation, including linking it to other practices they developed. (See sidebar.)
Honing the Über Practice Like all practices, Ricoh’s best practice management process had strengths as well as characteristics that could have benefited from improvement. Says Michaels, “Since 2001, several best practices that made it to the global-competition level were adopted across regions, and others were adopted within regions. But we could still have done better in the areas of sharing and adopting.” Senior unit leaders, for example, might have played a more dominant role in ensuring that best practices are shared and adopted even more widely throughout Ricoh. RAC encouraged continual honing of the best practice application process itself—by recognizing improvements over time. For example, the first time a business unit submitted an application, it would receive a baseline score. If the unit didn’t win but resubmitted a refined application the following year that received a score 50 points or higher than the previous year’s, the unit would receive an Improvement Award. If a resubmitted application earned an even greater increase
over its baseline score, the unit would win the much-coveted Achievement Award. Disseminating best practices throughout a large, complex organization will never be easy. But the Strategy Management Office at RAC established a systematic process that had two crucial ingredients: a mechanism for disseminating best practices that capitalized on peoples’ competitive spirit, and one that was high-profile and linked to rewards and recognition. I 1. RAC’s PE team is responsible for managing processes including Six Sigma, customer loyalty, Baldrige assessments, and best practice sharing. The team is part of the company’s Strategy and Planning Office, which also manages strategy formulation, strategy execution (through the Balanced Scorecard), and new business development.
T O
L E A R N
M O R E
Ricoh Americas has implemented numerous other best practices besides best practice sharing; see its profile in the Balanced Scorecard Hall of Fame Report 2006, available at www.executionpremium.org. Reprint #B0905D
Adapting a Winning Practice In 2002, Lanier (a newly acquired unit of RAC) won a Global Best Practice Award for its Customer Vision program, a set of practices designed to deepen the unit’s understanding of customers’ businesses. These practices include shadowing client managers as they go about their jobs and sending people from the unit’s executive offices to meet face-to-face with customers.
pants patronize successful and struggling companies in other industries (including hospitality and retail—not clients, though) and then later convene to discuss these experiences. Participants’ experiences and the ensuing discussions enable them to draw lessons from both positive and negative examples and use those lessons to improve customers’ experiences with Ricoh Canada.
The program was shared at the 2003 Chairman’s Leadership Forum, where the program’s VP presented Customer Vision to 115 RAC leaders. The CEO of Ricoh Canada attended that session and directed the head of Ricoh Canada’s PE team to build a similar program for that region. She and her team developed a program that drew on several elements of Customer Vision. Known as MyCustomer, it was announced in 2005 as an associated program to Ricoh Canada’s Manager to Leader program.
In 2006, the Manager to Leader program (having been enhanced by the MyCustomer practice) won the Global Best Practice Award. Ricoh Canada’s PE team head was invited to Tokyo to present the program to all Ricoh CEOs at the Global Strategy meeting. Ricoh Europe then adopted the Manager to Leader program.
Like Customer Vision, MyCustomer is intended to sharpen focus on the customer throughout Ricoh Canada. For example, it includes a training program in which partici-
14
In 2007, Ricoh Canada won the National Quality Institute’s highest award (which is similar to the Baldrige Award). Ricoh Canada had also made a dramatic turnaround, enjoying a significant jump in revenues. And Ricoh Canada’s CEO was promoted to head of Ricoh U.S.
T O O L S
&
T E C H N I Q U E S
May–June 2009
What’s Missing from Your Scorecard? Eight Vital—but Often Overlooked—Metrics By Mark Graham Brown, author and global performance measurement expert
Everyone, even companies with model Balanced Scorecards, struggles with developing performance metrics. Many organizations don’t properly account for frequency of variation, identify the right data sources and ensure their reliability, or use enough leading (vs. lagging) measures that can reveal trouble before it’s too late. And some unwittingly choose measures that drive the wrong behavior. Consider these ideas for eight important, but often ill-designed or completely absent, metrics. Each of these key areas should be tracked with an analytic metric— an index. A composite measure provides more information than a single measure, while simplifying analysis. It also provides a more well-rounded picture. 1. Customer Aggravation. Most companies have no idea how much aggravation their customers endure in doing business with them. Counting all the ways you aggravate your customers daily is a more reliable predictive measure of customer loyalty than any survey. Besides, most people are poor predictors of their future behavior; they’re loyal until the next “cool” thing comes along. If any vendor aggravates us enough, we won’t bother filling out their survey; we’ll just leave. Create a customer aggravation index. Hold customer focus groups and ask them “How have we driven you crazy?” For software companies, the answers will likely include calling the help line and not getting through, or getting through to someone who doesn’t understand you—and whom you don’t understand, or getting transferred four times. Airlines drive customers crazy with missed flights, lost baggage, and dropped calls. Count daily occurrences. For greater precision, multiply each occurrence by a severity factor. For example, FedEx might rate losing a package
as a “10,” but delivering it to the office next door a “1.” 2. External Factors. Most organizations track external factors, but they rarely include them in their BSC. Yet external events can have a huge, potentially devastating impact on your business. For a bank, one key external variable is interest rates; for an airline, the price of fuel; for a water district, rainfall. Pilots can’t control the weather, but tracking it is vital for determining their route and how they fly the plane. By putting external events on your scorecard, you’ll readily account for them along with the other key measures that drive your business. 3. Employee Satisfaction. To measure employee satisfaction (“engagement”), most companies conduct an annual survey. Annual surveys have no place on your BSC. An annual metric moves once a year; morale changes on a daily basis. Here’s an inexpensive but effective solution. Get bags of green, yellow, and red marbles and put them, along with an opaque vase, beside each door where employees depart every night. Have every employee deposit a green marble if they had a great day, a yellow one if a typical day, and a red marble for a terrible day. Every morning, collect all the vases and
log the results in a spreadsheet. The vase will identify the department, allowing you to call the manager to inquire why he or she had so many red marbles the day before—and the manager to address the problem immediately. This system cost one of my clients less than $1,000 (versus the $80,000 they’d been spending)— and gives it a daily statistic it can act on. This basic approach can also be done electronically; when people submit their timesheets, have them rate their week on a 1–10 scale. Include in your index such measures as how many hours people are working, meetings they must attend, and emails they get daily. 4. Brand Image. What are people saying about you? Do they even know who you are? Brand image matters to every organization. Many organizations track awareness only, ignoring reputation. Besides tracking the number of news stories or website hits your organization garners, a brand image index might also track whether the coverage is positive or negative. What are people saying about you on blogs? A leading measure might track an improvement effort under way, such as the response to a marketing campaign. 5. Customer attractiveness and relationships. Some customers are more important than others. Some are a pain and cost too much to please. Customer relationships should therefore not be measured with a survey. You don’t necessarily want a close relationship with every customer. You can rate customer attractiveness on a 1–10 scale, where “10” represents a profitable, highvolume, stable customer that pays on time and partners with its suppliers. Gauge each customer relationship. How long have you worked together? What percentage of their business do you have?
15
Balanced Scorecard Report
6. Communication Effectiveness. Most employees complain about company communications, while executives wonder “What more can we do?” Typically, management isn’t communicating properly. “Frequency of communication” combined with “variety of methods” is a useful metric. Some companies follow the “5 * 5” rule: anything important should be communicated five times in five different ways. Did people get the message? (That’s a lagging metric.) A government client favored briefing meetings, although anonymous “exit” polls showed that attendees could not remember anything the executives had presented. The client quickly switched to interactive, small-group meetings. 7. Employee Health and Safety. Most safety measures are lagging. How many accidents? How severe? But leading measures such as “How many near-misses did we have yesterday?” and “How are our people performing on their safety training tests?” can help prevent accidents. Some forward-thinking companies are including employee health on their dashboards. Health increasingly costs businesses,
16
directly and indirectly—and affects other metrics on your dashboard. One client gathers data for this metric by requiring every employee to get an annual physical from the company nurse. Employees are ranked “red” (unhealthy), “yellow” (average), and “green” (extremely healthy). “Red” employees do not get company-paid health insurance, while those ranked “green” get maximum coverage. (The company helps employees get healthy, for example, if they need to lose weight.) Realage.com 1 provides a handy physical age “score” without invading the employee’s privacy. 8. Ethics. Too few companies have an ethics scorecard metric, yet an ethical breach can quickly put your company out of business. Consider Arthur Andersen, Enron’s accounting firm. It had a BSC. Client satisfaction was high (no surprise), the company was profitable, and morale was high. But its BSC revealed nothing about an ethics problem. An ethics index might track knowledge of the rules (do people know right from wrong?); perception of the rules (is it OK to bend them?), and behavior (documenting unethical—as well as exemplary—behavior). Track outcomes: how many people were fired for stealing, lying, or otherwise violating company policy? 2 The Perils of “Chicken Efficiency” Whatever you measure, carefully consider the kind of behavior your metrics will drive. People can be very crafty about affecting outcomes. Twenty years ago I was engaged by a fried chicken restaurant chain to study the best practices of its top restaurant managers. A key metric for the company was “chicken efficiency,” a measure of how much scrap food managers discarded each day. One manager
C O M I N G
U P
I N
B S R
Linking Strategy to Operations, Part I: David Norton and Randall Russell (Palladium’s director of research) discuss building your organization’s integrated model of operational processes Sustaining Strategic Success: Following up on 2002 BSC Hall of Fame winner SMDC Health System’s enduring BSC program and its impact on the institution’s continuous achievement Merck’s SMO: Driving Transformational Change through Smarter Strategy Execution Building a Business Intelligence Competency Center Building Strong Leaders: A Key to Change Management at Pfizer Australia
I visited had a 100% rating in chicken efficiency. How did he do it? After 6:30 p.m. he would only cook chicken to order—even though his restaurant didn’t close until 10:00 p.m.—thus ensuring no waste. But what about the customers? “They got mad,” he said, because of the long wait. “Most of them would turn around and leave, and I’d never see them again.” But, he noted, “the company doesn’t measure that; it only measures chicken efficiency.” Chicken efficiency was certainly an important measure for that fast-food chain, but clearly, the company needed to balance it with the customer relationship. Moral: be careful what you measure, because you will surely get it. I 1. Realage.com is a doctor-designed website that takes an individual’s data on lifestyle, family history, and current health statistics, and arrives at one number that represents the person’s physical, versus chronological, age. 2. The Council for Ethical Organizations, a nonprofit, has developed a model for an ethics program, for organizations interested in implementing process measures.
Mark Graham Brown is one of the world’s leading experts on performance measurement. His clients range from Pepsi, Wells Fargo, and Bechtel to the U.S. Navy and the City of Los Angeles. He is author of three books on Balanced Scorecards, the latest, Beyond the Balanced Scorecard: Improving Business Intelligence with Analytics (Productivity Press, 2007). Reprint #B0905E
To subscribe to Balanced Scorecard Report, call 800.668.6705. Outside the U.S., call 617.783.7474. bsr.harvardbusinessonline.org
Product #B09050
Is the client willing to be a reference? Track this regularly, as customers can rapidly get betterlooking (or uglier). This index can be strategically important, enabling you to decide, for example, to drop certain customers, or even an entire industry segment. It also promotes selectiveness, encouraging the pursuit of attractive customers—as opposed to just any customers. Customer satisfaction doesn’t correlate well with improved financial performance. If you build stronger relationships with the right customers, profits and margins tend to improve. Who needs a level 10 (“marriage”) relationship with a level 2 (“fairly ugly”) customer?
