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Balanced Scorecard Report the strategy execution source march–april 2010 : vol 12 no 2

A Bottom-Up Approach to National Governance By Jesus P. Estanislao, PhD, Chairman, Institute for Solidarity in Asia; and Member, Advisory Board, Palladium Execution Premium Community (XPC) Around the world, more and more governments—federal, provincial, and municipal—are recognizing the power of the strategy map and the Balanced Scorecard in helping shape social and economic goals. Few efforts have permeated any society as deeply as the Renaissance Initiative has in the Philippines. The author, a leader in this initiative and a leading proponent of public- and privatesector governance throughout East Asia, recounts the remarkable transformation that is taking place in his nation. It has been more than 20 years since the institutions of democracy were reestablished in the Philippines. Since 1986, four presidents have served at the top of a national government that meets the basic test of a democracy: it has regular elections, a tripartite structure that abides by the principle of checks and balances, and a free press, and it adheres to the rule of law. Yet, when measured by almost any standard of good governance, the Philippines

ALSO IN THIS ISSUE: Commentary by David P. Norton One Government, One System of Governance: Reflections on the Work of Jesus P. Estanislao . . . . . . . . . . . 7 Boosting Performance—and Performance Management—with Driver-Based Budgeting and ResearchBased Analytics at Louisiana Workers’ Compensation Corporation . . . . . . . . . . . . . . 8 Using Dashboards to Revolutionize Your Performance Management System, Part 2: Implementation . . . . . . . . . 11 Clash of the Titans: Managing the Strategy-Finance Tension to Advance Your Organization’s Performance . . . . . . . 14

remains at the lowest level. In the corruption index, it competes for a spot at the top among the countries in East Asia, and in the real-GDP-growth league table, it falls near the bottom. In the Asia-Pacific Economic Cooperation indicators for ease of doing business, the Philippines ranks last among the region’s 21 economies in starting new businesses and hovers in the bottom four to six in everything from obtaining credit and enforcing contracts to dealing with construction permits, trading across borders, and employing workers. It is no surprise, then, that in public opinion surveys, Filipinos generally express great dissatisfaction with their national institutions of public governance, from the presidency on down. These dismal scores reflect a high degree of cynicism and

NOW AVAILABLE: BSR Index 1999–2009, a compendium of the more than 325 articles published in Balanced Scorecard Report since its inception. Download it—free—at www.index09.hbr.org.

loss of hope in democracy’s capacity, under its current form in the Philippines, to deliver the benefits of good governance and societal development.

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Philippines 2030

the economy—its productivity and

vision that various sectors of society,

Against this bleak prospect for effecting

growth—to the desire to provide for the

national institutions, and local govern-

significant change in the Philippine

welfare of all the people in the Philippines.

ment units could rally around—and

polity, a diverse group of concerned

In particular, they pinpointed govern-

contribute toward.

citizens decided to take action. In 2004,

ment, business, schools, and the family

under the auspices of the Institute for

as the key drivers of change in the

Solidarity in Asia (ISA), a group I founded

economy and society.

and head,1 the Renaissance Initiative was launched to break current molds and, where necessary, to create new paradigms. Although the group was small (no more than 30 individuals), its members came from many sectors of society: business, academe, youth, media, the military, labor, and civil society. More than a few had served in the cabinets of previous administrations. They came as individuals, but were bound together by their civic duty to promote the common good of the country. Indeed, their shared commitment to the general welfare of the Philippines and the Filipino people made it easy for them to agree on three fundamental principles: the personal dignity of every Filipino; solidarity with fellow Filipinos; and “subsidiarity,” or greater local autonomy in decision making.2 Based on these shared principles, and the recognition that their key challenge— speeding the country’s transition from a

To help achieve that vision, Philippines 2030 needed a tool that would assist those interested to easily adopt the road

In a country where anything marked

map. The group developed the Public

“official” is often treated with suspicion,

Governance System (PGS), a Balanced

a national road map formulated by a

Scorecard–based system modified for

patently unofficial group of responsible

public sector and government use.

citizens who were acting in their

The PGS process featured four phases,

capacity as individuals was viewed with

each with its own required actions and

respect. Media reaction was in general

outcomes: (1) Initiation (defining a

positive, and because the road map was

time-bound agenda and translating the

nonthreatening and noncontroversial, it

strategy into measurable targets); (2)

was easy for the public to accept. Its

Compliance (organizing stakeholders for

broad and idealistic emphasis on country

the governance process; establishing

and on what citizens can contribute to

accountability and deliverables; planning

nation building made it difficult for

and budgeting); (3) Proficiency (monitoring

people to object to. Indeed, rather than

and reporting strategic performance,

focus on political leaders, it trained its

establishing an Office of Strategy

attention exclusively toward the country

Management); and (4) Institutionalization

and the aspirations of its people. Instead

(achieving breakthrough results, linking

of limiting the time horizon to political

individual performance and compensa-

cycles (anywhere from three to six years),

tion to strategy).

The group formulated a road map, called Philippines 2030, that contained a set of strategic priorities ranging from values (spiritual and moral) to institutions that should be the main drivers of social change.

traditional “feudal” culture to a modern, open, democratic society—was long-

it extended it some 25 years into the

standing, the Renaissance Initiative

future. Instead of zeroing in on one or

agreed to forge a program of good gover-

two specific issues, it interconnected

nance and responsible citizenship.3 The

strategic priorities that covered every

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group formulated a road map, called

significant facet of national life. And

Philippines 2030, that contained a set of

instead of identifying tactical programs,

strategic priorities ranging from values

it mapped a strategic path—a mission

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(spiritual and moral) to institutions that

for the Philippines as articulated in the

should be the main drivers of social

Philippine Constitution—toward the

change; from the internal capacity of

realization of a national vision by 2030.

these institutions to the national infra-

In sum, Philippines 2030 laid out a gover-

structure within which they work; from

nance strategy aimed at achieving a

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1 The Institute for Solidarity in Asia fosters good governance throughout the public and private sectors in East Asia. It works with industry leaders, institutions, and public officials to develop best practices, systems and standards, and leadership programs. 2 “Subsidiarity,” a term used widely in Europe, is also conceptually complementary to “solidarity,” a teamwork approach to achieving general welfare. 3 The group’s choice of the terms “good governance” and “responsible citizenship” derive from Renaissance painter Ambrogio Lorenzetti’s famous mural in the Siena, Italy, town hall. 4 The Local Government Code of the Philippines, enacted in 1991, provides for the devolution or decentralization of power and authority from the national government to local government units (LGUs). This tranferred responsibility for delivering health, education, agricultural, and other public services from the federal to the local level, and allowed for the transfer of records, equipment, and other assets and personnel of national agencies and offices corresponding to these devolved functions.

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B A L A N C E D

S C O R E C A R D

R E P O R T

From Ideals to Initiatives With the public generally receptive, the

Building a Nation: Philippines 2030 Sense of Community

Shared Values

next step was to sell the idea of a governance strategy to the stakeholder that

Sense of Prosperity & Progress

Proud of the Philippines

The Filipino

was positioned to advance it most readily. One promising group stood out: eight city mayors who learned of the

The Economy

initiative through the League of Cities of the Philippines. The country’s 118 mayors had been invested with new

Infrastructure

Progressive at last: enjoys benefits of development Growth in partnerships for development

Growth in economic indicators

Clean and green environment

Modern and competitive infrastructure

powers under the Local Government Code of the Philippines,4 and these mayors— dedicated and honest, committed and competent—were eager to test the application of a governance strategy in

SRPs spread to all sectors and segments of society

Internal Capacity

Institutions

Government “lean and mean” partnering with the private sector

Standards aligned with global standards

Strengthen drivers of change

their jurisdictions. Eight cities agreed to test and adopt the

Responsible citizenship

Values

Good governance

PGS: Marikina, at the eastern periphery of metropolitan Manila; San Fernando

FIGURE 1: PHILIPPINES 2030 ROAD MAP

(Pampanga) and San Fernando (La Union),

Effectively a national strategy map, this road map shows core values (the equivalent of strategic

both north of Manila on the main island

themes) identified by the Renaissance Initiative: Sense of Community, Shared Values, and Sense

of Luzon; Naga, on Luzon, south of

of Prosperity & Progress. It also shows strategic priorities and the players (from individuals to

Manila; and Cebu, Iloilo City, Tagbilaran, and Calbayog, cities on the Visayas islands. Using Philippines 2030 as a basic reference, each city formulated its own governance strategy map (or road map). To begin, each city crafted a charter statement that articulated its core values, a mission statement, and a vision statement. Each city laid out its strategic priorities, connecting them under strategic themes, and proceeded to specify measures of progress, targets for the interim periods leading up to 2030,

institutions) that are the key drivers of change in society.

business, academic, and civic organiza-

verified by external audits. From 2005

tions—that were willing to work as a

(pre–Balanced Scorecard adoption) to

multisector governance coalition, an

2008, Iloilo City saw local gross income

entity many have since formalized. Each

rise from P825.3 million to P1.2 billion;

sector within the coalition agreed to

capitalization of the local manufacturing

develop its own support strategy maps.

industry increase from P926.85 million to

But the component parts of the maps—

P3.97 billion; and the number of business

measures, targets, and an initiative

process outsourcing service providers

portfolio—needed to be formalized.

grow from zero to 12. Public governance

Moreover, performance needed to be

no longer remained the exclusive respon-

monitored.

sibility of top officials, particularly the

and a portfolio of initiatives. At a Public

To address these two requirements, each

Governance Forum held in Manila in 2005,

city established an Office of Strategy

seven of the original eight cities formally

Management, positioned within City Hall

unveiled their city road maps, to broad

as an adjunct to the mayor’s office. The

acclaim.

cities chose their annual State of the City

Inspired by this feedback, the seven PGS cities began to cascade their maps in two ways. First, each cascaded its map to the major departments within City Hall (e.g, police, finance, human resources, social services, community relations), which, in turn, committed to create its own

Address (delivered by the mayor) and City Charter Day as natural occasions for formally reporting departmental and

mayor: it became a shared responsibility among City Hall department heads as well as private citizens in key sectors, as they all began to contribute towards the realization of their common vision for their city. Gradually, the PGS even became an approach toward democratic governance, as it welcomed positive, substantive contributions from every

key sector performance. (Because of the emphasis on breakthrough performance, the P in PGS came to stand for “performance,” instead of the original “public.”)

level of the population, including grassroots organizations, to elevate the standards of public services and accelerate development. Through the multisector

support strategy maps—each with its

Within two to three years, a few of the

governance coalition, the city mayor,

own detailed measures, targets, and initia-

PGS cities managed to move beyond

members of the city council, and other

tives portfolio. Each city also cascaded its

implementing and adhering to the system

public officials hold two formal meetings

map laterally, across key sectors—chiefly

to achieving breakthrough results—as

each year at which they report on

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progress and difficulties and solicit ideas,

sectors. Although regulatory authorities

The Management Association of the

suggestions, and commitments to partici-

had begun requiring proof of companies’

Philippines (MAP) was instrumental in

pate in specific initiatives to achieve road

compliance with the nation’s new corpo-

getting the business sector to take note

map targets. This shift of the public

rate governance rules and regulations—

of Philippines 2030. MAP, the Philippine

governance system into an instrument

developed in 1999 in response to the

business community’s most prestigious

of democratic governance prompted

OECD’s global corporate governance

organization, counts as its members

more cities to become partners in the

principles and the Asian financial crisis

virtually all public corporations, as well

PGS program. By 2007, 12 additional cities

of 1997—actual boardroom practice was

as many privately held businesses of all

had become PGS partners (participants

perfunctory. So the ICD began taking

sizes. With its help, a business sector

officially committed to the Renaissance

decisive steps to raise corporate gover-

strategy map was developed, which MAP,

Initiative’s PGS scorecard program),

nance standards throughout the business

the government, and analysts used to

bringing the total to 20. In local elections

sector by heightening companies’ aware-

identify “sunrise” industries—those of

that year, in 19 of the 20 PGS cities, either

ness of governance. The ICD developed a

particular promise that would be

the mayors were reelected (in various

prototype corporate governance score-

expected to yield breakthrough results

instances with only token opposition),

card for publicly listed corporations—a

through the PGS scorecard effort. Big

or the candidates they endorsed as their

more robust means of monitoring the

business’s involvement helped attract

successors were elected. By 2009, the

companies’ compliance every year—and

the participation of various professional

number of cities had grown to 40. Two of

enlisted the SEC and the Philippine Stock

groups—in particular, accountants and nurses. These professions have since

Not only have compliance levels improved over the years, but a third-party econometrics study showed that enterprises with high corporate governance scores tend to enjoy a share-price premium and generally superior business results.

formulated their own strategy maps, which outline their contributions to achieving Philippines 2030. The Renaissance Initiative made a similar outreach to the schools sector. We made

the original implementers—Iloilo City

Exchange as partners in the initiative.

and San Fernando, Pampanga—passed

Since then, variations of this scorecard

the test for institutionalizing the PGS.

have been developed for commercial

San Fernando became the first city to be

banks (with the central bank as the ICD’s

named to the Maharlika Hall of Fame, an

partner), for government-owned and

award jointly conferred by the Institute

-controlled corporations (with the part-

of Corporate Directors (ICD)5 and the

nership of the Department of Finance

ISA to organizations, public or private,

and the Office of the President), and for

that have achieved breakthrough results

insurance companies (with the partner-

by using the PGS to execute strategy.

ship of the Insurance Commission). Not

In 2009, Iloilo City was named to the

only have compliance levels improved

Palladium Balanced Scorecard Hall of Fame

over the years, but a third-party econo-

for Executing Strategy, the first organiza-

metrics study showed that enterprises

tion from the Philippines to be inducted.

with high corporate governance scores

From Local Government Units to National Government Agencies

tend to enjoy a share-price premium and generally superior business results.6

a strategic decision to first target the Philippine Military Academy (PMA). The PMA trains the nation’s military officers, who, by law, must retire at age 56. In retirement, many officers move on to key leadership positions. Not only is the PMA recognized as a leadership training center, but also its vision statement proclaims its goal of becoming the premier leadership school in the country. The PMA considered the personal (individual) governance scorecard as a requirement of the institutionalization phase (which includes linking individual performance to the strategy)—and persuaded its cadet corps to create them. This was the first use of the PGS framework at the individual level,

Important as this incipient groundswell

and one that was implemented relatively

of support at the local level was, the

quickly—evidence of how much can be

broader purposes of Philippines 2030 still

accomplished with the PGS framework in

required outreach to the nation’s other

a limited amount of time.

5 The Institute of Corporate Directors, which I also founded, is a sister institute of the Institute for Solidarity in Asia that focuses on corporate governance. The premier advocacy group in the Philippines working to advance higher (and globally accepted) standards of corporate governance, ICD works with national regulatory agencies and is accredited by them to train corporate directors. 6 The 2009 study, “Corporate Governance and Firm Valuation in the Philippines,” was conducted by Yan-leung Cheung of the Hong Kong Baptist University School of Business and commissioned by the Philippines Stock Exchange. The exchange purposely sought econometricians from outside the Philippines to analyze four years’ worth of scorecard performance results of publicly listed companies. The researchers found a strong correlation between high governance scores and company stock price.

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B A L A N C E D

S C O R E C A R D

R E P O R T

From the individual level, the scorecard

publicly report their performance

committed to under their respective

could now roll up to the level of the

through the Office of the President. Four

strategy maps—with the involvement of

family—the last key sector for promoting

additional national government agencies

the Office of the President at the center

social change. Indeed, family governance

have been asked to formulate strategy

of that mechanism—there is hope that

has now been initiated under the broader

maps; eventually, all 30 national govern-

when the new presidential administra-

PGS initiative; it completes the outreach

ment agencies and key departments will

tion takes office in mid-2010, the pyramid

aimed at all four sectors (and key drivers

be PGS partners. The goal is that by the

will have been scaled. The major compo-

of change): government, business,

time the next presidential administration

nents for an integrated, comprehensive

schools, and the family.

takes office on June 30, 2010, the national

national governance strategy map are

government will be starting from a higher

already in place. Philippines 2030 serves

baseline of governance.

as a broad, universal blueprint; a number

The family scorecard is developed in one of two ways: many individuals who build one for their family, and Philippine

From the Bottom of the National Governance Pyramid to the Top

family associations, such as Families for

Given the path of the PGS initiative

the Family (an NGO), are promoting the

thus far, and its arrival at the top echelons

practice.

of national government, it appears that

create their own scorecard decide to

Just as big business helped the PGS take off throughout the business sector, the Philippine Military Academy has had the same multiplier or snowball effect not only on the school sector but also on the government sector. Its PGS involvement helped pave the way for the Philippine Navy to draw up its own “Sail Plan,” in effect, a strategy map for the Navy that acknowledges the earlier strategy maps

of sectoral “anchors” (organizations of influence within their sectors), national institutions, and national government agencies have already become PGS partners; and a base of local government units, business enterprises, schools, and

the door is already open for the formal

families are already using the PGS as a

adoption of the PGS framework and

common governance discipline.

governance discipline at the top of the national governance pyramid. And looking

We have by no means reached critical

at the mechanism being instituted

mass; we still need to multiply the

for regularly reporting on governance

number of PGS partners at all levels and

performance, based on the measures

in all sectors—in particular, the number

and targets that these agencies have

of national government agencies—to hit

Philippines 2030 Objectives

Measures & Targets

Philippine Marines and the Philippine

Proud of the Philippines

Confidence index = 80

Fleet. The National Electrification

Progressive at last

Quality of life = 70

Growth in productivity

Export growth = 25% per annum

Growth in GDP per capita

GDP per capita in purchasing power parity terms = 40

Clean and green environment

Rate of deforestation = –1,500

Modern infrastructure

Road network = 300,000 kilometers

Global ethics standards

Professional standards = 30 groups

Department of Education, Department

SRPs widespread

9 sectors with Social Responsibility Programs

of Health, Department of Transport

Strengthen drivers of change

Family movement = 1.5m families

Government “lean and mean”

PGS accreditation = 90 cities

Responsible citizenship

PGS personal scorecards = 1.0m

Good governance

PGS corporate scorecards = 1,000

created by its component units, the

Administration, which had been seeking ways to improve its governance, approached the ISA for guidance and soon became a PGS partner. Its buy in, in turn, proved influential at the top, prompting the Office of the President to mandate six national agencies—the

and Communications, Department of Public Works and Highways, the Bureau of Internal Revenue, and the Philippine National Police—to draw up their own strategy maps with governance

Savings ratio = 25%

EFI = 2.25

Waste management modern by Asian standards

85% of T and 75% of P/S accredited

ISO accredited = all gov’t corps

scorecards. These agencies have since presented their strategy maps at a Public Governance Forum, where they also enrolled as PGS partners. A regular

FIGURE 2: A SUMMARY OF ROAD MAP OBJECTIVES, MEASURES, AND TARGETS This table shows 2030 targets for selected measures (interim targets for 2010 and 2015 have also been set). Many metrics are used internationally; for example, the “quality of life” metric is a United Nations Development Program metric and component of the UN's Human Development

reporting mechanism was recently estab-

Index. EFI is the Economic Freedom Index developed by the Heritage Foundation. In the accredita-

lished for these government agencies to

tion metric in the objective “Strengthen drivers of change,” “T” refers to tertiary education, and “P/S” to primary and secondary education.

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the tipping point, where the process itself

discipline for three or four years. Those

and cooperation through public-private

becomes institutionalized throughout

results are attracting attention. Between

sector partnership; persistence and

the polity, the economy, and the society.

2005 and 2008, San Fernando, Pampanga,

perseverance in promoting the dignity

Most importantly, considering the realities

saw investment capital mobilized

and welfare of every individual Filipino—

of prevailing Philippine culture, a push

through public-private partnerships

the very core of a national governance

from the very top would be a necessary

increase from P19.15 million to P147.89

strategy; and the realization that gover-

coup de grâce.

million; processing time for business

nance is a duty not of the governors

permits shrink from two weeks to two

alone, but also of all the governed.

There is as yet no guarantee that this ideal outcome—a top-down, as well as bottom-up, movement—will come to pass. The Philippines, being what it is, never fails to surprise and, all too often, for the worse. Nonetheless, we have already gained sufficient momentum to secure higher standards of public governance at various levels: at the personal, individual level, through the spread of personal governance scorecards and, increasingly, family governance scorecards; at the business enterprise level, through a higher-level, performanceoriented corporate governance movement that has adopted the PGS; at the school and university level; and at the level of public governing units, from LGUs to national institutions to national government agencies. This bottom-up approach to fostering higher standards of national public governance, as illustrated by the Philippines case, looks decidedly untidy. It is fluid, and it occurs where opportunities arise; its trajectory is far from systematic. Nonetheless, the fact that this movement continues to gather momentum underscores the underlying pressure that will continue to rise until, as a matter of formal national policy, it eventually reaches the very top of the national governance pyramid. This grassroots pressure for good governance has been building for a long time, and thanks in part to the PGS movement, perhaps soon it will be difficult for those in top national leadership positions to disregard or resist such pressure.

6

hours; and the number of scholarships number of cities instituting the PGS has grown from the original eight to 40—a testament to the potential awaiting those that follow suit. But then, one might ask, What are three or four years in a time horizon that stretches up to 25 years? If breakthrough results can be achieved in such a relatively short time, what more dramatic transformation can be accomplished through sustained PGS

To learn more

discipline over a much longer period?

For more on the use of strategy maps to shape national agendas, see the following BSR articles:

If separate units in the private and public sector are independently achieving dramatic results through the PGS framework, how much more would they be able to accomplish in a coordinated, integrated, mutually reinforcing manner? In the polity, economy, and society of the Philippines, given its many divisions and its apathy about national unity, the bottom-up approach may be the only realistic path toward improving the standards of national governance over

September–October 2007 (Reprint #B0709B)

• “Promoting Economic Development: Strategic Agendas in Action” November–December 2007 (Reprint #B0711D)

• “Brazilian Industry Association Shapes National Agenda—With the BSC” July–August 2006 (Reprint #B0607B)

• “Why Strategic Agendas in Government Matter to Business” September–October 2007 (Reprint #B0709C)

looking for constructive alternatives. It

Continue the dialogue

offers new avenues of participation—

Palladium Execution Premium Community (XPC) members can continue the discussion at: www.thepalladiumgroup.com/EstanislaoBSR

substantive, meaningful participation— for a variety of groups, particularly civic groups, which tend to be vocal about the issues they care about. Those avenues lead such groups to consider the interrelationship of issues, thereby expanding their interest beyond their narrow, partisan, sectoral spheres to the broader imperatives of the common good. Furthermore, traveling on those avenues has forced people to focus on the multifaceted demands of the common

in those LGUs and corporations that have

national good. These demands require

adopted the PGS and adhered to its

unity rather than dissension; teamwork

S C O R E C A R D

• “Strategic Agendas: A New Tool for Economic and Social Development”

the long term. It engages those who are

Breakthrough results are already evident

B A L A N C E D

Jesus P. Estanislao, a former finance minister of the Philippines (1990–1992), is a leader in the corporate and national governance movement in the Philippines and throughout East Asia. He founded the Institute for Solidarity in Asia (www.isacenter.org) and the Institute of Corporate Directors in Manila (www.icdcenter.org).

rise 27-fold, from 243 to 6,471. The

R E P O R T

Not a member? Join at: www.thepalladiumgroup.com. Reprint #B1003A

One Government, One System of Governance: Reflections on the Work of Jesus P. Estanislao By David P. Norton, Director and Founder, Palladium Group, Inc. During the 18 years since Robert Kaplan

see an artist at work building a gover-

and I introduced the Balanced Scorecard

nance system for the Philippines. On the

(BSC), the use of BSC-based performance

surface, this is a classic case study of

management systems has grown in

managing change; Estanislao defines the

both scale and complexity. From depart-

need for change through the eyes of the

ments to business units to conglomer-

citizens and then organizes a leadership

ates, these systems have become the

coalition that develops a vision, measures,

engine of performance management for

and initiatives.

organizations of every size and type.

Although the article describes a process

The creation of a common performance

of orchestrated changes in the most

management process for national gover-

complex of environments, what is particu-

nance represents, in our view, the

larly noteworthy is Dr. Estanislao’s role

ultimate use of the BSC.

as change agent. His leadership at every

Logic argues for one government, with

step comes through forcefully. From his

one system of governance. Reality shows

own personal vision for the Philippines

that the use of multiple performance

to the construction of a multisector

management systems throughout a

governance coalition to his “show the

government’s agencies creates barriers to

value” awards program, he has given us a

coordination, teamwork, and knowledge

true role model for managing change.

transfer that make the execution of

The challenges facing the Philippines are

that government’s agenda nearly impos-

immense. A performance management

sible. Complexity is to blame for this

system alone is no guarantee of an

intractability.

improved quality of life for its citizens.

The BSC approach to performance

Yet benefits are already accruing as

management provides a solution for this

the movement continues to grow. We

problem: simplicity. It begins with a

thank Dr. Estanislao for sharing these

philosophy: having executives who are

experiences with us.

focused and can mobilize their people,

Reprint #B1003A

strategies that are measured, organizations that are aligned, people who are motivated, and governance that is strategic. This philosophy is embedded in a strategy management system that facilitates change in a purposeful, coordinated way. A common approach to governance requires buy in throughout the organization, particularly at the top. How this buy in is achieved is an art. Among those of us who study, design, and implement performance management systems, Jesus P. Estanislao is a hero. In his article, we

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CASE

Boosting Performance—and Performance Management— with Driver-Based Budgeting and Research-Based Analytics at Louisiana Workers’ Compensation Corporation By Larry Yuspeh, Director of Research and Development and Strategy Management, Louisiana Workers’ Compensation Corporation With strategy management discipline and fact-based decision making, a company can perform impressively in even the toughest business environment. So it is with Louisiana Workers’ Compensation Corporation (LWCC), Louisiana’s largest workers’ compensation insurer. From an initial loan of $5 million in 1992, LWCC’s invested assets have grown to $1.2 billion, and for eight straight years (during which Hurricane Katrina struck), the company has won a top-50 profitability ranking among the nation’s 3,000 property-casualty insurers. LWCC’s steady ascendancy is, according to the author, a direct result of and coincident with its adoption of the BSC—and of its disciplined use of driver-based budgeting and analytics.

create value. And we offered the maxims familiar to BSC users: “You can’t manage what you can’t describe” and “You can’t manage what you can’t measure.” Sustaining financial health is especially important to a long-tail2 line of insurance such as LWCC, because in workers’ comp, the carrier owns the injury until the person either is completely healed or reaches maximum medical improvement. If an insured has a catastrophic accident, we may be dealing with it for the next 40 years. In addition, because we’re responsible for promoting economic stability in Louisiana, we must have enough resources to backstop the entire state market should another crisis arise. So we are obligated to take steps that go beyond simply taking care of our own policyholders. Better understanding our expenses is crucial to improving performance. Most insurance companies intend to break even on their underwriting and make money on their investments—a challenge in difficult markets. Few operating expenses are driven by premiums; rather,

Created in 1992 by state law in response

Why Driver-Based Budgeting?

they are driven by activities. If you reduce

to a workers’ compensation crisis, LWCC

We felt it was important to have a

your rates and your revenues decline

is a private, nonprofit (i.e., tax-exempt)

process through which managers could

accordingly, it doesn’t take any less time

mutual insurance company and

talk about what they did, not merely

to underwrite a case. We therefore had

Louisiana’s largest workers’ compensa-

about what they spent. And we wanted

to understand our activities at an

tion carrier. Between 2003 and 2008, we

our planning discussions to center on

elemental level, step by step, to manage

earned record income (about $275 million

our actions and decisions. Driver-based

costs most efficiently.

cumulative net), returned $120 million

budgeting seemed to be the answer.

Next, we examined driver models by

As a first step, we educated everyone

function, asking managers to identify

involved on our strategy management

what currently drives activities and

process. We reminded them of LWCC’s

efficiencies in their areas. This data

fundamental purpose (“Creating value

would give us a baseline, which in turn

for its policyholders consistent with its

would help us determine our capacity

mission”), mission, values, and vision

to grow. We asked them, “Without extra

(“To be a world-class workers’ compensa-

resources, how much more work could

tion company that promotes safe work,

your area perform if LWCC grew, without

prompt healing of the injured, and

diminishing the quality of your work?”

economic stability in Louisiana by being

The Rollout

faster, better, and easier to do business

We introduced the driver model approach

with”). Our strategy defines how we will

in 2007 (for the 2008 budget) in Under-

achieve these goals—how we intend to

writing and Claims, our two largest units.

in dividends to policyholders, and saw policyholder surplus nearly double, from $300 million to almost $600 million. And since the company’s beginning, we’ve reduced rates 55%—with more reductions expected, thanks to strong combined ratios.1 More recently, driverbased budgeting, a central element of our BSC-based management system, has had a major impact on our financial success. We foresee significant results from our use of analytics based on research we conducted with the Johns Hopkins School of Medicine.

1 In the insurance industry, a combined ratio equals the loss ratio (cost of losses) plus the expense ratio. Most insurers aim for a 100% combined ratio, which means they break even on their underwriting and make money on their investments. 2 A long-tail liability is one in which an injury or harm takes time to become known and the claim may occur years later; a typical example is black lung disease.

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We had communicated the approach to

hours, or 1,200 hours per year. That calls

the entire company, but we wanted to

for 0.63 FTE. The entire Reporting and

The Power of Analytics in Controlling Claims Severity

start slowly. Every unit was given the

Compliance budget (made up of 10

Driver-based budgeting is one way that

goal of building driver models for the

processes) calls for 2.36 FTEs; only two

analytics has improved performance

2009–10 budget by 2008. By then we

were budgeted. So there’s a shortfall.

management at LWCC. Research-based

would have the benefit of experience in

Within Analysis, the budget constitutes

analytics is also contributing to this

our primary operating units.

an activity. Reforecasting the budget

improvement, specifically in controlling

involves two activities taking an average

the severity of claims—an effort crucial

of 360 hours each, or 720 hours per

to ensuring our financial stability as

year. These require 0.38 FTE. The total

well as to fulfilling our commitment to

budgeted for the unit was 17, but our

promote economic stability in Louisiana.

Examples of activity-based drivers include “New medical-only/lost-time claims” and “Total claims managed” (examples from our Claims unit); “Financial reports” (Finance); and “Help tickets” and “Equipment maintenance”

actual was 16 because we had to replace someone.

Over the past several years, the frequency of workers’ comp claims has

(Information Technology Services, or ITS).

In ITS, the Help Desk and Operations is

fallen dramatically across industries.

In Legal (our in-house law firm), “Claims

one area whose activities range from

Simultaneously, the severity of claims

litigated” and “Claims under manage-

technical help requests and employee

has risen at nearly the same rate. This

ment” are activity drivers for lawyers, but

moves to application updates and equip-

trend is puzzling—and its ramifications

the number of lawyers drives the number

ment repair. For all seven of its primary

made it important to investigate.

of paralegals and legal secretaries. The

processes we need four FTEs. Here, driver-

same goes for Underwriting, where appli-

based budgeting helped produce a metric

cations, renewals, and physical audits

for our Balanced Scorecard because we

drive the number of underwriters, whose

realized that for the help desk, we had an

number, in turn, dictates the number of

inventory management problem.

switched from a budget cycle to a governance cycle, integrating BSC preparation and strategy development for the year. (We’re on a rolling two-year cycle.) This enables us to discuss strategy matters first—including strategic initiatives and risk management—before considering the budget. At midyear we conduct a reforecast to check our performance against the year’s budget.

Deconstructing Our Processes Our 2009 reforecast focused exclusively

medical network in our state specifically for occupational medical treatment. OMNET, as it is called, gets small discounts, following the Preferred

support people. To better link strategy and budgeting, we

By law, LWCC was required to form a

To better link strategy and budgeting, we switched from a budget cycle to a governance cycle. This enables us to discuss strategy matters first—including strategic initiatives and risk management—before considering the budget. Provider Option (PPO) model. But all the

Inventory here constitutes “Number of

benefits from this model have already

help tickets.” We needed to achieve an

been realized; utilization has been

average ending inventory of 42 tickets, but ITS couldn’t have more than 60 tickets at month’s end because having too

offsetting the discounts. A 1998 study by Dr. Edward Bernacki, head of Occupational and Environmental Medicine at Johns

many would prevent them from getting

Hopkins University School of Medicine,

caught up.

caught my attention; in a clinical environ-

LWCC’s reforecast process has been

ment, Bernacki’s team had identified

successful on several levels. This year,

the school’s best physicians and steered

our budget came in 4.5% below the

workers’ comp cases to them. Doctors

previous year’s—largely, we believe,

were left alone to work unencumbered

because of the discipline that budget

by utilization reviews or any other

drivers brought to the process. People

insurance company controls. Interestingly,

analyzed in detail their activities and the

these doctors got the best medical

necessary funding. Furthermore, by

results—with efficient durations and

analyzing the details of all our activities,

concomitant cost. We approached

To illustrate, consider these support unit

we were able to identify and eliminate

Bernacki and asked, Could this be done in a

examples. One activity within Reporting

non-value-added activities within a

multiprovider environment—in our state?

and Compliance (a function within our

process. Any decisions to eliminate such

Accounting and Compliance unit) is bank

activities, moreover, involve not only

reconciliations. Reconciliations involve

VPs but also those responsible for the

48 discrete tasks, each taking about 25

operations and processes themselves.

on the driver-based budgeting process. Assuming 1,900 hours for a full-time equivalent (FTE) employee, we asked managers to provide an activities reforecast for 2009 and an activity budget. They had to justify the activities and explain their processes—step by step. This would guide us in creating the 2010 budget.

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LWCC formed an alliance with Johns Hopkins. We selected 200 of our OMNET physicians (of about 1,600) and created

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an expert provider organization called

This work helped us fortify the logic

We examined 10 years of claims and

OMNET Gold. We gave the physicians the

underlying our reserving process. In

plotted their closing probability. By year

same free rein to practice that the Johns

insurance, consistent reserving is impor-

10, 0.5% of our claims remained open.

Hopkins physicians had received: they

tant. Many expenses are estimates: you

Of 10,000 claims, that translates to the

were free to make all treatment decisions

estimate your losses, and an actuary

last 50. But in year 10, there is still a 30%

on their own, with no utilization review.

comes in behind the Claims people

chance a claim will close that year. Our

After the first year, we saw major

(who perform case-based reserves) and

work with Johns Hopkins thus provided

improvements at OMNET Gold compared

adds his estimate onto theirs to yield

important validating information that

with the OMNET and non-OMNET group

an “incurred but not reported” figure—

put us in the position of justifying the

as a whole: millions of dollars in savings,

the figure that’s booked as the ultimate

use of “most probable case” for our

as well as far better results in concluding

loss expense. Consistent reserving is

reserving process. Now, we can be

3

claims. Two years later, after claims

important, but so is having sound logic

confident that we needn’t assume the

had developed and we had more data,

and process behind how you reserve.

worst-case scenario in every situation.

a clearer picture emerged, confirming

Because we are a long-tail insurer, people

Such research-based analytics are critical

the preliminary findings that OMNET

assume that a five-year claim should be

when you are breaking new ground

Gold was delivering far better results

reserved for the worst case—taken out

and seeking to excel in a particular area.

than the other group. Overall, fewer

to 40 years. Our experience tells us,

Benchmarking is not helpful here,

claims developed into long-term claims—

however, that it’s wrong to assume that

because it tells you only whether you are

the costliest kind.

a five-year (or nine-year) claim has no

as good as the rest in known areas. You

chance of closing in the current year.

cannot benchmark when you are the first

To understand what makes claims develop into long-term claims, we analyzed five years’ worth of claims—some 36,000. To our surprise, we found that only 3% of claims (about 1,400) represented 66% of our expense (more than $300 million). Half (about 700) were catastrophic claims for injuries resulting from such things as falls from high places and car accidents. The rest resulted from non-serious accidents, some as mundane as a stubbed toe. But in duration and cost, these nonserious injuries developed into claims equal to catastrophic claims, at an

In duration and cost, these nonserious injuries developed into claims equal to catastrophic claims, at an average of about $150,000 each. If we could pinpoint which features led to this migration, perhaps we could identify the nonserious claims early on and prevent them from worsening.

average of about $150,000 each. If we could pinpoint which features led to this

to do something. Larry Yuspeh has been with LWCC since 1998. Yuspeh has also served on the advisory committee of the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania.

To learn more See “An Investigation of the Effects of Healthcare Provider Network on Costs and Lost Time in Workers’ Compensation,” by Edward J. Bernacki, MD, MPH; Xuguang Tao, MD, PhD; and Larry Yuspeh, Journal of Occupational and Environmental Medicine, January 2010, one of a series of articles the authors published on LWCC’s OMNET study.

migration, perhaps we could identify the nonserious claims early on and

Continue the dialogue

prevent them from worsening. Even a

Palladium Execution Premium Community (XPC) members can continue the discussion at: www.thepalladiumgroup.com/YuspehBSR

10% reduction in such migrations would amount to considerable savings. What did we find?

Not a member? Join at: www.thepalladiumgroup.com.

Some key elements in such cases were claim duration, the presence of a lawyer,

Reprint #B1003B

ICD-9 code,4 age, gender, and marital status. Based on this analysis, we can now flag such cases early on to try to prevent them from developing catastrophic claim costs.

3 In Louisiana, a workers’ comp claim is concluded when the injured person is brought to zero disability or maximum medical improvement as declared by a physician, or the worker is entitled to remain off work indefinitely until such can be achieved. 4 ICD-9 code is the international code for diagnosis (revision 9). Every disease and condition is identified by an ICD-9 code. Research shows that certain diseases and conditions correlate to certain results. For example, there is an ICD-9 code for lower back pain, and lower back pain correlates to claim development.

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TOOLS & TECHNIQUES

Using Dashboards to Revolutionize Your Performance Management System, Part 2: Implementation By Mark J. Lorence, Director, Palladium Group, Inc. Besides clarifying the differences between dashboards and scorecards, Part 1 of this article (BSR January–February 2010) discussed two major approaches to dashboard design: bottom-up and top-down. Here, Mark Lorence examines three key considerations of dashboard implementation, offering valuable do’s and don’ts from actual implementation projects. When you move from design to implementation—to building, testing, and deploying your dashboard application— the specific technology you choose will, of course, have significant impact. The amount of custom coding required to implement the dashboard screens, the ease of accessing multiple data sources, and the overall performance of the resulting application are all dependent on the particular software tools you choose. So are the maintenance, usability, and reliability of the application: adding new dashboard measures, modifying screen views, and updating the dashboard with new data. Every software platform has its own strengths, weaknesses, and idiosyncrasies, and examining the risks associated with various software platforms is beyond the scope of this article. However, regardless of the technology you choose, there are three general considerations you must address to implement your dashboards properly: ensuring data accuracy, allowing for iteration, and testing sufficiently.

Ensuring Data Accuracy You’ve no doubt heard the real estate maxim, “There are only three things that matter: location, location, location.” For dashboards, they’re “data, data, data.” The biggest challenge in implementing a robust dashboard solution is ensuring the accuracy of the underlying data used to populate the dashboard measures. Dashboards contain numerous key performance indicators (KPIs), which are often calculated by rolling up lower-

level numbers—a process that can introduce errors into the final results. When planning your dashboard implementation, ensure adequate time in the project plan to address three specific data considerations.

1. How available or accessible is the data? Simply put, is the data available in electronic form? Although financial data may be easily accessible from your general ledger system, operational data is often maintained in hard copy format, making it difficult to incorporate into the dashboard system. If so, additional input tools may need to be developed. For one large dashboard implementation project we carried out, only 30% of the data elements were available electronically; 50% were available from paper documentation and logbooks, and the remaining 20% weren’t available at all. Most of the 30% were financial measures easily obtained from the client’s back-end systems. For the 50%, we built several input templates for manually entering and validating the data before uploading it to the dashboard database. A planned enhancement will eventually replace the paper logbooks with automated systems, and a middleware application will transfer the data at the appropriate times. Collecting the unavailable data required both technical and process changes. For example, the company wanted to track the reasons customers were switching to a competitor. The company knew which customers were defecting, when they were switching, and—in some

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cases—which competitor they had switched to. But the customer service representatives weren’t documenting the reasons customers were switching, making it impossible to display an accurate measure. The “switch out” process metric was modified to include a reason code, reps were trained to record this reason code along with the other data, and the results were aggregated and displayed on the dashboard. Such changes, of course, require additional testing time to ensure that the measures—especially the new ones—are being captured and summarized accurately. Examples like this confirm why a large dashboard implementation often represents a good opportunity to undertake an enterprisewide data validation initiative to ensure that data is clean and consistent throughout the organization. This can be a daunting task, given the number and diversity of legacy systems in most large organizations. But at a minimum, consider taking the same “go deep” approach we discussed in Part 1 and tackling a subset of your data—say, a specific function or group (e.g., revenues and expenses for finance, or head count and employee job level for HR).

2. Has your organization established common definitions? Is the definition of each measure clear to all users? Dashboard projects would certainly be simpler if every measure were as clearly defined as “When the red light appears on your gas gauge, you have one gallon of gas left in the tank. Find a gas station—quickly.” In reality, the aggregation of underlying data into dashboard measures and KPIs can introduce ambiguity, especially when time periods are being measured. Take “On-time delivery.” Does the value of your metric represent an average for last quarter, or yesterday’s result? That must be clear so that every user is working from the same assumptions. When low-level values are aggregated into summary values, the dashboard display must indicate the time period. You can accomplish this through naming (“Daily on-time delivery results for Thursday, July 8, 2010”) or by grouping

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measures with similar time periods on the same screen and including an “as of” date at the top of the screen. For consistency, standardize these dates; if you’re displaying weekly values, make them all “as of Monday” or “as of week ending MM/DD/YYYY.” Even financial ratios, like return on invested capital (ROIC), can be calculated differently. The textbook definition is straightforward: ROIC = (operating earnings × (1–tax rate)) ÷ invested capital. Yet some companies include goodwill and intangible assets in the calculation of invested capital. Make sure you’re calculating such values consistently across all the dashboard screens in your organization. Don’t forget to clarify measures that have similar names, especially if users will be expecting certain data to reconcile between dashboard screens. We were implementing a dashboard for a health insurance company that had a summary measure of “patient days” on one screen and detailed measures for individual departments on other screens. The values, however, didn’t add up. The detailed screens showed 100, 200, and 300 patient-days, but the summary screen showed 620. All four values (100, 200, 300, and 620) were being calculated from detailed transactional data; the total was not being derived by adding the figures from the three departments. The reason for the discrepancy? The word “day” was defined differently throughout the company. For some departments, a “day” started at midnight, but for others, it began when the patient was admitted to the hospital. So before we could display any meaningful dashboard metrics, we had to establish common definitions for the specific data elements, calculate the data correctly, and aggregate it accordingly—ensuring we were comparing apples to apples when we displayed the metrics on the screens. In some cases—especially when using data feeds from external sources— this may require additional manipulation of the input data stream before it is loaded and calculated in your dashboard database. For the health insurance company, the resulting common defini-

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tions were documented in a data dictionary that was accessible from the dashboard and used for online help as well as for all subsequent modifications to the dashboard screens.

3. How well do you manage different data sources? Does the data come from multiple sources? The most actionable dashboards are those that include not only internal data from the organization’s financial or operational systems but also external data from websites, commercial databases, and other sources. External data would include sales or market share information from third-party providers, website analytics from Internet service providers, and compliance statistics from government agencies. External sources introduce another layer of complexity into your implementation, because each source must be identified and the data brought into your dashboard in a standardized, consistent fashion. Robust dashboards require a significant technical infrastructure, including an extract, transform, and load (ETL) layer. There are several tools that can perform ETL, but all require extensive coding to ensure the data is being loaded correctly. Data accuracy and common definitions must also be addressed, along with the actual format of the data elements: for example, is the data in a commadelimited file? Are leading zeroes suppressed? How are negative numbers represented? Most providers publish specifications for their data files, which must be incorporated into your ETL layer and updated if the provider’s format changes. This is especially important if the provider is sending low-level information (e.g., “market share by ZIP code”) that needs to be aggregated and displayed in a different format (e.g., “market share by county”). Don’t assume that every provider looks at data the same way your organization does.

Allowing for Iteration The second major consideration is the need for iteration. Unlike transactional systems, in which you’re automating a

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known process and can design 90% of the functionality in the first pass, it takes several iterations to get a dashboard right—that is, before the final dashboard application is usable. This is largely because when users see what a dashboard can do, they invariably identify additional functionality or analytical support that they want incorporated into the application. One company’s dashboard application included a screen displaying sales and orders by business unit. Executives used this screen during management meetings to review their sales pipeline and identify factors affecting projected revenue. While testing the first iteration, we noticed that much of their discussion focused on orders for which the revenue could not be booked because the shipments were being detained by customs officials in foreign ports. So we added indicators to the screen that would flag new orders as potentially troublesome and calculated a “customs adjusted” revenue number for planning purposes. In other situations, users have asked to change tabular displays to graphical ones, or vice versa. Sometimes these kinds of preferences can be identified in the design phase through the use of paper dashboard screen mock-ups and use cases, as we described in Part 1. But more often, new requirements arise when users interact with a functioning application. One way to manage the iteration process is to build a prototype—a functioning dashboard application with limited scope that gives users a chance to interact with the application before the final version is built. This allows you to test the screen layouts, the types of measure displays, and the overall usability of the dashboard. It also allows you to tailor the implementation to specific user groups—adding extra detail screens for those who require drill-down capability; augmenting the summary screens with additional, action-based measures; or streamlining the flow between the variance, trend, and forecasting analytical paths common in most implementations.

Sometimes the results of the prototype are surprising. We built a prototype dashboard for an energy company, taking advantage of the new graphical capabilities in the latest version of one software tool; we had speedometers, gauges, dials, even a map of the country with push-pin icons showing the location of their power plants. When we presented the prototype to executives, they said, “That looks great, but could you give us something that looks a little more like the Excel spreadsheets we’re used to? We prefer rows and columns of numbers rather than those maps.” We modified the design to include a mix of graphical and tabular data.

Testing Sufficiently The third major consideration is testing. Given the amount of data from multiple sources, testing time for a dashboard implementation needs to be double—or even triple—that required for a typical transactional system. Nothing will undermine your dashboard effort—or, worse still, your decision making—more than a dashboard that displays incorrect information. It’s in the testing phase that organizations often uncover data disparities or bugs. Dashboard testing should be both automated and manual. Scripts can be written to load data, update the database, and populate the dashboard screens. Typically, these scripts will set the dashboard to a “known” state, such as the first day of the month or the last day of the quarter. Dashboard values are then set to known quantities, which provides a clean starting point for testing. Scripts can also be used to simulate the passage of time; from the clean starting point, data can be loaded to the dashboard to represent the next day, next week, next month, or next quarter. These scripts test how easily the data loads into the dashboard database as well as indicate whether additional manipulation or calculations are required before the resulting metrics are displayed. Manual testing can be done to improve navigation and information display. Users walk through the dashboard’s capabilities and

validate numbers, thinking out loud as they interact with the dashboard— saying what they’d like to see, where they expect the information to be, and what they will do with the result. This testing is similar to the usability testing done for large websites.

Implementation Gotchas

Keep in mind that the latest dashboard designs are incorporating capabilities for mobile devices such as iPhones and BlackBerrys. These devices extend the functionality of your dashboard by providing key information to users even when they’re not at their desks, but they also add to the testing time because there’s another delivery vehicle that must be validated.

The Value of Doing It Right Implementing a dashboard application is a challenging task. You have all of the development issues inherent in a transactional system combined with the usability demands of an interactive website, complicated by the need to satisfy a diverse group of users, each of whom has different information needs and preferences. The leading software vendors are making dashboard implementation easier, but the process still requires disciplined project management, a thorough knowledge of the software tools, and attention to the three major considerations described here. Dashboards are an integral part of your performance management system and, when designed and developed correctly, will help you achieve revolutionary results. Mark J. Lorence is a member of the Strategy practice at Palladium Group. His recent work focuses on linking strategic objectives to operational measures via dashboards to improve performance management systems.

Continue the dialogue Palladium Execution Premium Community (XPC) members can continue the discussion at: www.thepalladiumgroup.com/LorenceBSR Not a member? Join at: www.thepalladiumgroup.com.

Local software variations. While using a leading spreadsheet’s add-on to input and validate weekly sales numbers, we discovered that there were differences between the German and U.S. versions of the underlying Visual Basic macros. If your dashboard will have international users, make sure you test the input as well as the output tools. Page-display capacity and response time. Most dashboard development tools limit the amount of data that can be displayed before performance is impaired. For one leading tool, if the number of cells (rows × columns) exceeds 1,300, performance will degrade significantly. Be aware of the technical limitations of any tool before you design screens with voluminous data. Security. Different tools apply security controls at different levels. Some tools limit you to the screen level, others to the field level. If you have different users with different levels of access, make sure you design the screens to display information at the appropriate level. Displaying “Current Head Count” is probably acceptable for all users; displaying “Current Average Salary of Level 13 and Above” probably is not. Traffic lighting. All tools allow you to colorcode values with red, yellow, or green trafficlight icons. However, the threshold values may be different based on the metric; for some values, +/- 5% may be green, whereas for others, the tolerance may be only +/- 0.5%. In a given performance area (such as “monthly warehouse operations”), try to group metrics with similar tolerances together to avoid the visual chaos that can result from too much traffic lighting. Browser compatibility. Although your corporate standard may be Internet Explorer, remember that users may be accessing the dashboard from home machines, older PCs, or even mobile devices. Test a variety of browsers. Layout. Typical analysis paths through a dashboard environment include variance views, trend views, and forecast views. Combining these views on one screen is easier from an implementation standpoint—and enables you to see numbers and trends at the top. The downside? Space limitations will reduce the amount of data you can show on a given screen and make visibility harder. Separating these views across different screens may increase the usability of the application but requires more development steps and time.

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Clash of the Titans: Managing the Strategy-Finance Tension to Advance Your Organization’s Performance

financial modeling—intended to ensure

By Duane Punnewaert, Vice President, Palladium Group, Inc.

plan that are reconciled to the annual

Strategy execution is difficult in the best of times. It takes focus, agility, and the ability to make hard decisions, including making tradeoffs between short-term financial decisions and long-term strategic goals. In tough economic times—amid falling profits, staff reductions, and increased financial pressures from every angle—strategy becomes secondary for many organizations; survival becomes the imperative. The tension that has always existed between the strategy function and the finance function— a healthy checks-and-balances tension—becomes aggravated. How can companies control that natural, but escalating, tension so that they can adapt to volatile times without losing sight of their long-term strategy?

the strategy’s feasibility and financial rigor. The theoretical strategic plan and the concrete annual budget are, in most organizations, only loosely connected through the short-term (one-year) financial measures and targets in the strategic budget. (At many companies, the financial targets—or worse, the measures— used by the two functions are different, and that creates confusion and impairs decision making.) Absent some organizing framework, the two functions have little opportunity to link their work in a substantial way. What does this mean? Suppose management calls for a 5% budget reduction. Without a clear idea of the relationship between strategy and operations, the company will make budget cuts independent of strategy considerations.

Strategy and Finance think and work in

strategic goals are being reached. Finance

The disconnect becomes even more

quite different ways. The strategy func-

often assumes that by managing the

pronounced as the two functions grow

tion (which includes strategic planning,

budget it is in fact managing the strategy.

increasingly sophisticated in their

strategy development, and all strategy

Inherently, the two functions have always

processes. Information gaps, inaccurate

management activities) conceives the

been out of sync, if not at odds.

projections, and misunderstandings are

enterprise’s possibilities. It defines and

even more likely to occur.

Strategy’s work is, by definition,

The current global recession, unique among recent ones in duration and impact, has exacerbated the historical tension between the two functions—in many cases putting them on a collision course. But the tension needn’t be destructive; in fact, like Schumpeter’s “creative destruction,” 1 this tension has the potential to be creative. When managed right, it can make both functions stronger, more robust—and better integrated.

abstract—high level and broad based.

The Causes and Effects of Tension

Finance, in contrast, deals in the

Strategy develops abstract, long-term

tangible—concrete budget numbers,

ideas based on hypotheses (often using

line item by line item. Strategy deals in

multiple frameworks), which it hands

three- to five-year time horizons; Finance

over conclusively to Finance. Finance

adheres to a one-year outlook. Because

must then convert these abstract ideas

strategy is naturally more difficult to

into tactical output—a detailed, one-year

How do organizations reconcile these

measure, the strategy function is not

financial plan (the budget), variance

disparities? Does Finance extend its time

always adept at communicating when

analysis, management reporting, and

horizon, or should Strategy shorten its

describes the basis of the enterprise’s competitive differentiation. The finance function (including financial planning, analysis, and financial management) translates strategic goals into revenues, quantifying the resources needed to execute the strategy and the returns expected from successful execution. It does this primarily through the budget— a sort of annual game plan.

Beyond the material differences in the two functions’ output, the disparity in their time horizons can create further tension. Traditionally, the strategic plan looks out multiple years—often five. Financial planning, on the other hand, typically follows the traditional 12-month budgeting process established nearly a century ago by Alfred P. Sloan at General Motors. Meanwhile, the traditional time horizons of both functions are being challenged by increasingly shorter business cycles.2 Projecting a five-year strategic view has become harder, and the traditional budgeting process yields plans that are often obsolete before the ink has dried.3

1 Joseph Schumpeter (1883–1950) was a European economist and political scientist who popularized the notion of creative destruction in economies. 2 However, the terrorist attacks of 9/11 have prompted some organizations to bolster their risk and scenario planning and extend time horizons. 3 Disenchanted with the limitations of traditional budgeting (it takes too long, requires too many resources, is quickly outdated, and is inflexible), many organizations are embracing such techniques as rolling forecasts and driver-based budgets that offer a more dynamic view that allows them to make decisions on a continual basis. 14

B A L A N C E D

S C O R E C A R D

R E P O R T

analysis, and better customer and

and budget. Strategy must communicate with Finance to help translate the strategy into operational terms throughout the organization by clearly defining enterprise strategy and carefully constructing strategic measures and targets that will inform the annual budget. Finance must use the multiyear financial targets set in the strategic plan as the starting point for each year’s budgeting process. Short-term operational measures must be linked to and support longer-term strategic measures.

competitor information. Those that lack

Strategic targets (and their measures)

view? Unfortunately, for many organizaBalanced Scorecard Report A joint publication of Palladium Group, Inc., and Harvard Business Publishing

tions, the recession has already answered

Editorial Advisers Robert S. Kaplan Professor, Harvard Business School

a greater adherence to the budget and

David P. Norton Director and Founder, Palladium Group, Inc.

modified or overhauled their shorter-term

Publisher Robert L. Howie, Jr. Managing Director, Palladium Group, Inc.

than ever, when decision making requires

Executive Editor Randall H. Russell VP/Director of Research, Palladium Group, Inc. Editor Janice Koch Palladium Group, Inc.

this question. Survival-mode thinking has reinforced the one-year outlook, causing a dwindling commitment to long-term strategy. Many organizations have (operational) measures and targets. Scenario planning is more critical now more real-time information, deeper

this capability continue making decisions

should not change unless the strategy is

based on financial performance alone.

changed. And organizations that need to

The heightened pressures on financial

adjust in response to market changes

performance—if not sheer survival—

should look further than only financial

has, at many organizations, put strategy

targets. Sound contradictory? Not at all.

on the back shelf. Without Strategy-

Organizations might reassess initiatives,

Finance alignment, the short term will

cutting less critical ones, or tweak

Copyright © 2010 by Harvard Business School Publishing Corporation. Quotation is not permitted.

trump the long term. Budget-based deci-

Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher.

With the appropriate communication, cooperation, and interaction, the two functions’ differences actually constitute a strength. Each tests the other, keeping assumptions and projections honest, and reinforcing the test-and-adapt method so crucial to successful strategy management.

Harvard Business Publishing is a not-forprofit, 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. Our expertise in strategy, performance management, and business intelligence helps our clients achieve an execution premium. Our services include consulting, technology, conferences, communities, and certification. 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.

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employee incentives. For example, in

sions will prevail, regardless of (and at

the expense of) strategy. This can create

response to a lower-than-expected sales

a reactive, myopic culture preoccupied

forecast, a consumer products company

with today’s problems. The wrong initia-

might discount one product line to stim-

tives will get funded, shifts in customer preferences will be ignored, and changes in the competitive landscape will be

ulate sales to meet an existing target. A high-growth company might respond to a forecast of reduced market share by

overlooked. Managing strategy through

adopting aggressive hiring tactics to

the budget creates a cycle that is hard

quickly plug strategic talent gaps—such

to break.

as hiring a few extra product developers

So how can these two functions ensure that their work, equally critical for executive decision making and strategy execution, is consistent—and integrated? How can they exploit their different perspectives and time horizons to advantage—reinforcing the checks-andbalances roles they play in advancing organizational performance and strategy?

to accelerate the release of a new product. With the appropriate communication, cooperation, and interaction, the two functions’ differences actually constitute a strength. Each tests the other, keeping assumptions and projections honest and reinforcing the test-and-adapt method so crucial to successful strategy management. In effect, this interaction

Adapt to the Short Term Without Forsaking the Long Term

describes the strategy-operations linkage

First, the enterprise must convey the paramount importance of linking strategy

management system—a framework

M A R C H – A P R I L

2 0 1 0

:

prescribed by the Kaplan/Norton strategy that outlines the cycle of strategy and

V O L U M E

1 2 ,

N U M B E R

2

15

operations activities, from strategy

needed to be consistently defined, of

Confront It—and Capitalize on It

development to monitoring to testing

high quality, easily accessible, and

As organizations approach the 2010

and adapting, that must occur on a

actionable. Finally, executives were held

annual planning cycle, the tension

continuous basis.

accountable for the success of the entire

between Strategy and Finance will once

organization. They were compensated

again emerge. Ignoring it will, at best,

not only for achieving short-term budget

create confusion; at worst, it can weaken

numbers (revenue, expenses, etc.), but

your value proposition, ultimately

also for hitting long-term nonfinancial

creating opportunity for your competi-

targets such as employee turnover,

tors. Addressing and reconciling these

employee development, and customer

tensions take management discipline,

willingness to repeat-shop.

especially in a tough business environ-

A Case Example Fashion retailers are driven by constantly changing trends, which makes long-term strategic planning difficult. Retailer Fashionista, however, boldly adopted a three-year strategy of rapid growth through acquisitions. But problems quickly arose. After each acquisition,

Fashionista further reinforced the

Finance scrambled to understand the

balance between financial planning and

acquisition’s strategy and integrate

strategic planning by instituting separate

its data with enterprise data, produce

reporting processes for each. Strategy

a reliable current-state financial picture

used its own reporting platform for

of the enterprise, and create forecasts.

strategy review. It devised concise,

Consolidating multiple budgets and

multiyear nonfinancial measures to

forecasts strained Fashionista’s planning

complement its financial measures—

resources and technology systems.

the customer, key process, and human

Finance also had to create a financial

capital and technology elements of the

plan that would project future organiza-

strategy. These measures then became

tional performance that reflected longer-

the language the executive team used

term strategy. Strategy, for its part, had

to describe organizational success.

similar data integration and forecasting

Executives analyzed strategic perfor-

challenges.

mance every quarter, and any changes

To better align Strategy and Finance, Fashionista set three requirements. First, long-range strategy could not be executed without Finance providing valuation and business-impact analysis for every new acquisition. Second, both Finance and Strategy had a role in acquisition integration: Strategy was

(such as modifying a target or measure) would be immediately incorporated

ment. But by doing so, your organization can only advance its performance, both over the short term as well as the long term. Duane Punnewaert is a member of the Strategy practice at Palladium Group. He has particular expertise in strategic and financial planning.

To learn more BSR has published numerous articles on the relationship between strategy, planning, and budgeting. Consult the new BSR Index 1999-2009 for a complete listing. The index is available free via download at www.index09.hbr.org.

into the budget (or forecast); they ran scenarios to see the impact. By segre-

Continue the dialogue

gating the strategic and operational

Palladium Execution Premium Community (XPC) members can continue the discussion at: wwww.thepalladiumgroup.com/PunnewaertBSR

review meetings, Fashionista was able to keep its eye on the long term while adjusting for the short term.

accountable for integrating organiza-

At Fashionista, strategy became some-

tional strategies, measures, and targets,

thing that was developed and managed

and for strategy reporting, whereas

continuously, not treated as a one-

Finance was accountable for integrating

time project. Like other best practice

the budget, forecasting, and analysis and

organizations, Fashionista used opera-

for financial reporting. Both functions

tional and strategic data to continuously

were responsible for supporting the

test and adapt strategy on a regular

integration of the technologies they used.

(quarterly) basis.

Not a member? Join at: www.thepalladiumgroup.com. Reprint #B1003D

And the data relevant to both functions

Sign up for the electronic version of BSR—available only to subscribers—at www.bsronline.org/ereg. Product #B1003o