These days there is a lot of talk about the transformation of the finance organization from being a traditional back-office function to playing a more strategic advisory role. The CFO is being touted as the CEO’s wingman responsible for helping him/her execute the company’s strategy and improve performance. Once regarded as the bean-counter of the organization, finance is being demanded to partner with operations and sales and help grow the beans.
Despite the transformation of the finance organization’s role over the years, can we certainly say that CFOs and finance executives have successfully embraced their new strategic advisory role? Are they delivering reliable advice and information for the company CEO and the Board to act on? Can the CEO confidently vouch for the CFO and his abilities in helping shape and drive the company’s future direction?
Unfortunately, although progress has been made in reshaping the finance organization, there is still more room for improvement. Various research findings have revealed what many finance professionals do not like to hear – CFOs in the majority of organizations are not providing enough strategic counsel to the CEO. In these organizations, the focus is still on cost control and accurate financial reporting. There is minimal provision of forward-looking information to support decision making. The desire by the CFO to provide strategic input to board-level decision making is there, but constant unnecessary fires that need putting out are consuming much of the CFO’s energy, resources and time.
There is no doubt that the modern business environment requires the organization’s CFO to be strategic in nature. With disruptive changes taking place everywhere at unprecedented levels, it is the responsibility of the CFO and his team to protect the organization against the threats, harness the opportunities and strengthen the organization’s competitiveness. This means moving beyond cost management and wearing the new strategic hat of the business. Unless the CFO and the other finance executives transform, partner with the business and facilitate meaningful strategic conversations, finance business partnering will remain a far-fetched reality for many.
What then should CFOs do to command a seat around the strategy table?
Know Their Organizations Inside Out
Many finance professionals have a narrower view of the organization. All they know are the numbers and that is it. Ask them to articulate to you their company’s mission, vision and strategy, you will be fortunate enough to get a good answer. In order to play a strategic advisory role to the CEO and the Board, CFOs must have a clearer understanding and knowledge of what the organization stands for. They need to know where the organization is coming from, the direction it is heading, what the constraints as well as a deeper understanding of its differentiating capabilities.
In today’s technological and information age, CEOs are looking for real-time insights to help them make better decisions. In order to make these decisions, they need to have accurate information on the drivers of the business (both internal and external). Thus, it is imperative for finance to know what is driving the numbers to enable the finance team tell a better story of the organization’s strategic performance. Knowing the numbers alone is not good enough. You need to have a bigger picture, knowledge and an understanding of how the different functions of the organization collaborate together to ensure successful execution of the strategy.
Adapt to The Changing Environment & Provide Reliable Insights
Volatility, uncertainty, complexity and ambiguity are the norm these days. These factors alone are disrupting business models and causing company strategies to quickly become obsolete. Strategies that might have helped you to achieve higher performance in the past are no longer sufficient to sustain that performance. The risk landscape is rapidly evolving and the number of risks influencing enterprise performance are also sky-rocketing..
CFOs and management teams therefore need to be on the guard against the disruptive forces threatening the existence of their businesses. Achieving this success means a continuous scanning of the playing field to identify and evaluate possible threats and opportunities. In this environment, it is therefore critical for finance to improve its Financial Planning & Analysis (FP&A) capabilities and provide reliable actionable insights to improve strategic decision making. For example, the function must be able to model various scenarios and their outcomes and evaluate their respective impact on the overall strategy of the organization. In doing so, there is need to consider all sources of data, its reliability, relevance and accuracy.
Embrace Modern Technologies
Technology and digital transformations are also constantly evolving. With these new innovations comes both risks and opportunities. As a CFO you should be asking yourself – Which technologies can the organization embrace to optimize processes and drive performance? Is our organization’s performance management framework integrated enough to support decision making.
These days technology is acting as an enabler to drive strategic execution and performance. Yes you might have standardized your processes, data management systems and implemented a cloud-based solution, but think of Artificial Intelligence, Robotics, Advanced Analytics, Cognitive Computing, Machine Learning, E-Commerce, and Internet of Things (IoT). What impact do these technologies have now, and in the future on your business model? Do they threaten to force your business out of existence or sustain and enhance it?
The CFO needs to partner with the CIO/CTO and establish how the information strategy fits into the bigger picture. Which areas of the business should leverage technology to drive innovation and strategic success? Since CFOs in most organizations have taken over the responsibility of IT investments, the CFO must be conversant in IT language, and be able to clearly communicate the benefits accrued to the organization from investing in any one of these new technologies. He or she must also be able to lead the conversation around the table and secure buy-in from the CEO and other senior executives.
Turn Threats into Opportunities
CFOs and finance executives are known to say no to majority of company investments which in most cases causes them to be at loggerheads with their CEOs. Many finance professionals are trained to identify risks and everything capable of going wrong which often blinds them to the bigger picture. There is nothing wrong with identifying risks but what is important is for the CFO to avoid constantly saying no to strategic investments.
Instead of only seeing the threats and keeping the company purse closed, the CFO must also be able to identify the upside of the risks. They should help the CEO take a calculated risk that is within the risk tolerance and appetite levels of the organization. In order to advance in today’s business climate, successful execution of certain strategies requires the organization to develop a certain degree of risk appetite, otherwise the organization should not expect to make great leaps forward if it is always risk averse.
What else do you think CFOs should do to be successful strategic advisers to the CEO?
As the business and economic environment continue to change at alarming levels and become increasingly complex, the pressure on the finance organization to support the core business by strategically addressing volatility, uncertainty and risk is also intensifying.
This fast changing environment is making it extremely difficult for organizations to forecast business performance with a greater degree of uncertainty. What was once considered extraordinary is now the ordinary and the previously unthinkable is now reality. In this environment, organizations need to become more flexible and adaptable, as opposed to being reactive. Traditional planning cycles, such as the static annual budget, are no longer ideal for this dynamic economy.
Despite widespread evidence indicating this rapid change, many organizations are still relying on the annual budgeting process for planning purposes. They still have not mastered the fact that the annual budget gives a false view of a stable future. By the time the annual budgeting process is over, the majority of the assumptions used to prepare the budget are outdated. Also, when preparing their budgets, many organizations make use of historical performance as the baseline for predicting future performance. Again, they are failing to realize that past performance cannot be used to mirror future performance.
Most budgets prepared by companies have a financial focus, normally adding a percentage to last year’s numbers. They lack specific consideration of the forces driving the business and value creation. There is a broken link between the organization’s strategy, planning, resource allocation and performance reporting processes.
With the current volatility, uncertainty and complexity in the business environment, companies need to adapt agile and new ways of planning. Working together with the other business teams, the finance organization can drive this process and lead its success. Taking advantage of the function’s analytical and risk management skills, finance executives can use scenario planning to help decision makers identify and understand possible future events and their impact on strategy execution and business performance.
Using scenarios will help the organization to manage its business model, industrial and environmental uncertainties. Instead of taking a static view of the future and basing key decisions on gut feel, scenario planning helps business leaders understand their business environment (any significant emerging threats and opportunities), identify the critical drivers of value and correlate their impact on performance, both operationally and strategically.
When conducting a scenario planning exercise, organizations must:
- Define the purpose and scope of the exercise.
- Examine the internal and external environment for emerging trends and issues.
- Identify possible realistic future scenarios and evaluate their impact on the business.
- Formulate strategic and operational responses to each scenario.
- Monitor performance related triggers and regularly challenge assumptions
Regardless of your business’s industry sector, scenario planning is useful for getting different views of the future that reflect volatility, uncertainty, and complexity thereby helping you identify gaps in your organization’s ability to respond to threats and opportunities. Once you have identified the blind spots and gaps in your company’s response capabilities, you can then start building a dynamic risk management framework and gain knowledge of the risks you have direct control of or influence and those that you do not have.
Scenario planning is not about predicting the future accurately. Instead, it is about understanding the environments in which your business operates, discovering new insights, and increasing adaptability to changes in these environments. By constantly taking uncertainty into account when making decisions and also encouraging alternative thinking, you will be able test and evaluate the robustness of your company’s strategies against a range of possible futures. This in turn will assist you broaden your perspective and develop robust response plans.
Critical to note is that scenario planning is a continuous process rather than a once-off exercise and must be incorporated into processes for managing the business on an ongoing basis. The macro-economic environment is constantly changing and as such, an ongoing review of the drivers of performance and trigger points is necessary.
You need to constantly ask questions on the social, technological, economic, environmental, political and legal influencing factors and indicators.
Examples of questions that you might ask include:
- If you are an automaker, what is the impact of autonomous and electrical vehicles on our current business model? Are self-driving cars the future and how should we respond?
- If you are consumer company, how would the organization respond to growing emerging markets and the rise of the middle class workers?
- How would the organization respond to unexpected loss of a major contract that has sustained the company for a long time to a competitor?
- What are the short-term and long-term implications of a major product recall on our market position, reputation and the organization’s ability to meet performance targets?
- What is the range of likely impacts on our brand, our customers and our other products, if one of our key suppliers files for bankruptcy?
- What competing products or disruptive forces will have the potential of threatening and forcing us out of business?
- What is the impact on our quarterly and annual performance targets of material short term changes in key external variables such as commodity prices, inflation rates, interest and exchange rates, GDP and consumer spending?
- How would the organization respond to unexpected external events such as a major natural disaster, political or regulatory actions, or occurrence of a pandemic?
- What are the likely advantages and disadvantages of moving our enterprise systems to a cloud-based platform versus retaining them in-house?
- What are the global business implications of UK leaving the European Union, and how would our organization react to such a move?
By systemically monitoring a series of performance related triggers, the organization will be able to anticipate major trends and changes in the industry or broader business environment, respond dynamically, gain competitive advantage and seize growth opportunities in both developed and emerging markets.
Used properly, scenario planning shifts from being an only business threat analysis tool to also an opportunity identification tool.
Regardless of the nature of your business, you are either already dealing with disruptive forces operating within your industry or are preparing your company for change and disruption. Today’s business environment is different compared to what it was decades ago where everything was predictable and you would operate your business with greater certainty. Things have changed. Businesses across all sectors have to deal with a fast-paced changing environment and the message to current and future business leaders is “Disrupt or be Disrupted”.
Increased regulatory changes, advanced technological developments, a new breed of competitors, increased volatility and uncertainty, among other factors, are all changing the way companies operate and execute their strategies.
Companies that are failing or fail to adapt to this dynamic environment are digging an early grave for themselves. Sooner or later they will join the history books as the once regarded “Too Big To Fail” corporations.
In an era of constant change, uncertainty and increasing complexity, business leaders ought to challenge accepted ways of doing things and reappraise their business models to see if they are still fit for purpose. Unfortunately, many people are reluctant to adapt and change. Fear of the unknown often causes people to resist change, and this at times, results in far-reaching consequences. What used to work, say five or ten years ago, might no longer work in the current environment.
As a result of this fast changing environment, companies have to adapt a highly disruptive approach to managing almost every aspect of their business. As Marshal Goldsmith nicely puts it – What Got You Here Won’t Get You There. This ever-changing environment requires a new style of leadership and thinking. There is need, on the part of companies, to completely abandon legacy ways of thinking and embrace disruptive solutions.
What can companies do to prepare themselves for change and disruption?
Acknowledge That Disruption is Inevitable
Although it is difficult to predict the future with greater certainty and confidence, it is critical for organizations to know and understand that they are operating in an environment that is very unpredictable. Surprises are everywhere and these can abound anytime. To make it worse, we now live and function in a globalized and very interconnected world. Just because you are located in certain jurisdiction does not mean that events in another jurisdiction or industry will not have any major implications on your business.
The forces driving disruption within one industry might not necessarily have a direct impact on your business, but rather, indirectly affect the operations and performance of your business. What cross-industry issues are likely to have an impact on your business now and in the future and at what magnitude?
Instead of focusing on the past alone, management and their teams should start looking at the future and anticipate those forces capable of transforming the company’s existence and its operating model. In other words, having sharp risk-sensing tools capable of identifying risks and opportunities. This includes asking tougher questions about issues affecting the future of the organization, and having the right capabilities to respond accordingly.
You must be able to quickly identify any sudden shifts in the business environment that are capable of rendering your company’s broader strategy less relevant than it was in the past. In today’s era of data and analytics, companies can take advantage of these new technologies and use them to help predict the future and make fact-based and confident decisions. The challenge for many companies is having that ability to rise above all the noise out there and obtain the right insights for effective future decision making.
Take social media technology as an example. It has changed and continues to change the relationship between brands and customers. Control of brands has shifted to consumers. Consumers are constantly talking to each other on various social media platforms about different brands – the good, the bad and the ugly. It is no longer a case of the marketing team pushing the company’s products and services to the consumers, but rather listening to them.
Unfortunately, many companies are still reliant on internal sources of data to make key strategic decisions. They have not yet embraced new systems to mine unstructured external sources of data and tap into consumer conversations to hear what is being discussed about their products and services. Companies need to be reminded that managing in this environment requires them to adapt to this transition, get a grip on social media and start holding profitable conversations with consumers.
Given the massive proliferation of data, focusing on the right information is therefore a must.
Challenge Current Strategic Thinking
It is one thing acknowledging that forces of disruption are inevitable, and another thing to challenge current strategic thinking. What do you do when you have identified the various forces threatening to disrupt your business? Do you sit down, relax and allow nature to take its course?
Unfortunately, in today’s hyper-competitive and complex business environment, once an organization has identified potential disruption forces, it is critical to review the organization’s strategic choices and find ways of responding to the threats or opportunities presented on the table. This might require you to review your market and product portfolios and select the best candidates for investment. Some of the questions that you might ask yourself are:
- Given the finite resources at our disposal, what are the strategic choices that we should focus on and invest in?
- Which markets, customers and segments should we invest in now to position ourselves for the future?
- Who are our important stakeholders and how do we plan to satisfy their multiple sets of demands?
- How best can we realign our value chain in order to optimize our business performance and competitive advantage?
For many companies, their market share is under pressure from intense competition by current and new competitors. In order to survive and not disappear into the thin air, these companies must adapt and transform their business models. Strategies that might have worked for them in the past are now deemed unreliable. As a result, these companies have to respond faster and differently compared to their competition.
What is key is getting everyone within the company on the same journey. For people at the bottom to shed legacy ways of thinking, the tone of message from the top must be right. Leaders have the duty to provide a clear framework and steps required to move the organization from one position to the next. They must clearly communicate the plan to everyone, from top to bottom, and ensure the response plan is aligned with the overall company strategy and easily understood organization-wide.
When there is full buy-in and accountability from the top, there is a higher probability of buy-in from the lower level employees. A command-and-control approach cannot keep pace with a dynamic business environment.
Execute the Plan More Effectively
Various research findings have concluded that most companies, irrespective of industry, are good at planning but poor at effectively executing these plans. A lot of work and resources goes into these planning processes, unfortunately, these yield unsatisfactory results.
The difference between success and failure frequently comes down to how the organization implements its strategic plan. So often, there is a misalignment between strategy and implementation, resulting in poor performance. Preparing and responding to disruption requires business leaders to craft a simple to understand, but effective strategy, that is communicated consistently across the organization.
Clear communication of strategy throughout the company is key to creating alignment. Additionally, clear communication helps establish common goals for the different business unit managers to work collectively toward. On the contrary, poor communication creates barriers to effective execution. Getting everyone to work towards the same objectives improves cohesion.
In order to make sure that you are moving in the right direction, you must design and implement KPIs that measure progress towards achieving strategic goals. This helps set expectations and help identify any problems regarding execution.
Executing the plan effectively also demands the organization to have the right talent in place to implement the strategic choices that have been made. In most cases, lack of talent in key strategic positions has been proved to inhibit business growth. It is therefore imperative for leaders to know and understand that the capabilities required for success today are quite different from those that were needed in the past.
For example, the finance function of the past had chartered accountants as the team members. Today, the function has people with diverse backgrounds. This is because, as the role of the finance function evolves from being a bean counter to a bean grower, managing the function requires very different capabilities.
The onus is therefore on the company to develop and implement an effective talent sourcing strategy that attracts and optimizes talent and resources, and ultimately improve business performance.
Now or later, every business will experience some form of disruption. Business leaders must understand that disruptions will happen, and with each disruption comes risk and opportunity.
Are you prepared for the change and ready to respond?
As the demand on CFOs to provide real-time analytical insights, support senior management decision-making and become valuable strategic business partners continue to increase, a strategic transformation of the finance function is necessary.
Depending on whom you converse with, some finance professionals prefer to use the term finance transformation whereas others do not. It’s not the term you use that matters most but rather creating a more effective finance function that delivers sustainable value. It is about creating a finance vision that is aligned with the business and supports the organization’s strategic direction.
A number of challenges are confronting CFOs and keeping them awake at night. Challenges such as; market fluctuations, increased innovation and disruption, new technologies radically changing business operating models, increased shareholder scrutiny and public demands for transparency, complex regulatory operating environment, increased risk landscape etc. In the wake of these challenges, the finance function has to evolve from being a transaction processing function to a value-adding function. There is need for finance to have improved ability to respond to opportunities and risks as a result of better financial insight and forecasting. At the same time, finance must be able to implement new improved processes that enhance value and leverage new technologies and business models capable of delivering more efficient and effective services.
Although the doctrine of finance transformation started years ago, the light at the end of the tunnel is still a distance away. Quite a number of organizations have started the journey of reinventing their finance functions and are failing to reap the benefits of their efforts. Some of the common reasons why many finance transformations fail include:
- Focusing too much on finance costs as a percentage of revenue. In many organizations, there is this widespread tendency of viewing the finance function more of a cost centre and less of a profit. Instead, finance should view itself less a cost centre and more of a profit centre because of the reports and expert advice the function provides. Playing a strategic role requires finance professionals to look beyond costs and focus more on providing analytical insights that drive strategic decision making. Gone are the days where finance professionals were expected to spend their entire day in their cubicles glued to their computer screens. Today’s partnering role demands finance to go out there, build solid relationships with business unit leaders and help them advance their business plans and goals by providing them the data and analysis needed to execute their individual responsibilities in achieving corporate strategy.
- Viewing finance transformation as a once-off activity. Reinventing the finance function is not a once-off initiative with a stop date. This is a journey and a way of doing finance which must be ingrained in the organization’s culture. As mentioned earlier on, a number of factors and challenges are disrupting the business today and with disruption comes opportunity and risk, both inside and outside the organization. It is therefore critical that CFOs are adaptive to this disruption. They should be able to determine what the potential disruption and risk to the organization and to the finance function is should things do not go as planned. Does your organization’s finance function have the ability to detect changes in the business direction and help bring the organization’s vision into reality?
- Lack of collaboration between the organization’s different functions. Collaboration is critical if finance is to keep up with the changing needs and strategies of the business, instigate change and create sustainable value. The challenge is on CFOs to initiate cross-functional dialogue, lead cross-functional teams and build consensus throughout the organization. The CFO should be able to communicate to the business unit leaders the cause-and-effect of their actions on each business units’ strategy as well as the overall corporate strategy.
- Lack of C-suite buy-in and support. Creating a cost-efficient and more effective finance function should fit into the company’s larger strategy. The CFO should be able to translate the finance vision to other members of the C-suite and explain how finance can help boost growth and increase shareholder value. This necessary to secure C-suite buy-in and support which is critical for driving the transformation initiative throughout the organization. Senior management buy-in is also critical for reducing change resistance at the middle and lower level ranks.
- Creation of shadow costs. In order to become cost-efficient and effective, the finance organization has to deliver new processes, improve old ones and standardize disparate finance practices. This has led to some organizations adopting Shared Service Centre (SSC) business operating model and centralizing certain processes with the idea of reducing waste, eliminate duplication and ultimately reduce costs. For example, in these organizations, there is a centralized procurement centre for all global business units. The challenge arises when certain business unit leaders still want to own their procurement processes and do not want to transition to the centralized unit. There is always this fear that the centralized procurement centre will compromise existing long-term supplier relationships. If anything goes wrong in the early days, there is a tendency by business unit leaders to appoint someone to focus on procurement at a local level. Instead of reducing procurement costs, more costs are being added which in turn is counterproductive to the centralized procurement objectives.
In the past, most finance transformation processes have focused more on delivering efficient services (reduce costs, automate processes and remove non-core functions) as opposed to becoming more effective (delivering more insightful analytics, providing better business intelligence and enhancing financial flexibility). However, if the finance function is to properly transform, both efficiency and effectiveness objectives must be balanced. Finance professionals must be able to define the objectives of their transformation efforts to include both value creation and efficiency outcomes. Start by asking the following questions:
- What opportunities are there for us to reinvest savings from efficiency initiatives and create an effective finance function?
- How can we shift the mindset of our people and enable them to spend more time on analytics and value creation vs. transaction processing and data gathering?
- Do we have the right resources and the right operating model for effective service delivery and processing?
- Is there any duplicated work within our global finance function and if there is how best can we address this?
- What are the expectations of our internal clients from the finance functions?
Successfully answering these questions will help you come up with objectives and targets based on what value the finance function can provide throughout the organization as opposed to having narrowly defined objectives and targets based on unit costs as a percentage of revenue. It is therefore critical for finance professionals to increase their business acumen in order to transition from being scorekeepers to valuable business partners who are not reactive but rather providers of forward-looking and insightful analysis that assists the organization in planning, strategy and decision-making. It is also important that finance provides one version of the truth when it gives its detailed analysis and reports.
Although the finance function has to transition to a strategic business partner, this does not necessarily mean that the function abandons its stewardship role. Having the ability to create and enforce the rules and controls of the organization is still an important role for the CFO. In order to successfully balance their stewardship and strategic partnership roles, CFOs must be able to measure and evaluate the efforts spent on controls, performance management and operations. Transformation of the finance function involves risks. It is therefore important to balance the long-term benefits of the transformation initiative against the short-term risks inherent in the change process. Thus, proper controls must be put in place to mitigate risks.
Finance transformations must be business-led and not technology-led. Remember the finance vision must be aligned with the overall strategic direction of the organization. Many organizations make the mistake of driving their change initiatives from a technology point of view. Although technology is a key enabler of transformation, it is not a panacea. Before buying and implementing any software, CFOs must first build a business case for their initiatives and then look for the most suitable technology that supports and helps deliver the business outcomes. Looking at the end-to-end process vs. immediate compatibility of the technology will better serve the organization in the long-term.
It is also important to note that people play an important role in transformation initiatives. Technology can only be as good as people who operate it and interpret the outputs. CFOs will therefore need to conduct a detailed analysis and evaluation of their current resources and capabilities and realign these to deliver the services and competencies that are required as a resulting of the transformation.
In today’s VUCA world, finance transformation is critical if finance is to keep up with the changing needs of the business and play that critical business partnering role. It is time that finance professionals move outside their comfort zones, get their hands dirty together with operations and become the expert advisors to senior management. They must start implementing structural changes that both reduce overall complexity and provide greater flexibility, insight and value throughout the organization.
In addition to performing their traditional financial reporting roles, today’s financial executives are more than ever required to play the business partnering role and help CEOs create and execute strategy successfully.
As the business environment continues to increasingly become volatile, uncertain, complex and ambiguous (VUCA), finance executives must play a critical role in shaping the future of their organizations. Instead of being reactive at all times, they should rather become proactive, anticipate changes and seize opportunities that come along.
In order to successfully play the business partnering role, finance executives should see the bigger picture, move beyond the walls of traditional finance and involve themselves in the operations of the business. This means moving beyond managing by financial statements and throwing themselves into the playing field. Engaging with marketing, sales, operations and other facets of the business.
Rather than focus on the short term performance of the business, strategic finance executives must also consider the long term and be interested in things that are happening outside their company, industry and country. Are you able to look beyond the day-to-day work and really see other opportunities? Having this ability to see beyond daily responsibilities helps you identify any wastage of time and resources as well as existing unimportant goals.
CFOs who want to look at the bigger picture should therefore explore the future, look back at the past and learn from it and shift their attention beyond their companies, market and country.
Exploring the future helps you identify opportunities and risks and their implications. For example, you will be able to determine:
- The impact of current trends on business performance should they continue.
- The implications of current assumptions if they are wrong.
- Whether you will be able to survive or not should your existing market disappears.
- Implications of emerging risks on business performance and survival.
At the same time, looking backwards at where you are coming from also helps shape your company’s future. For example, by reviewing your past you will be able to:
- Identify the company’s previous success areas and determine if these are sustainable.
- Examine which strategies have worked previously and those that have failed.
- Evaluate projects that have previously been carried out, whether they were successful and reasons for failure.
- Identify what lessons have been learned and those that need to be unlearned.
By shifting their attention beyond the walls of their companies, finance executives will be able to:
- Identify the fastest-growing trends in the world, for example big data, social media, cloud technology etc.
- Evaluate the impact of social changes on business performance.
- Determine competitor activities and their implications.
- Determine new ways of conducting business and dealing with stakeholders.
- Benchmark your performance against the best performers.
- Establish what is being said about your company, products and industry.
Seeing at the bigger picture is about looking carefully at events and possibilities, imagine different scenarios, learn how these scenarios are likely to impact your organization’s existing and future business plans and develop effective strategies capable of shaping the uncertain future.
Previously, I focused on developing objectives for the Financial, Customer and Internal Process perspectives of the strategy map. In this post I will conclude on the four-part series “creating objectives for your organization’s strategy map perspectives” by focusing on the Employee Learning and Growth perspective. In the preceding posts, I emphasized on the importance of balancing the objectives of your strategy map as this gives a clear indication of the main drivers of your business’s performance. How balanced are the objectives on your corporate strategy map? Most organizations make the huge mistake of focusing only on financial objectives at the expense of other non-financial objectives.
Objectives in the Employee Learning and Growth perspective of the strategy map are really the enablers of the other perspectives. Remember the whole idea of constructing the strategy map is to communicate the strategy and identify the cause-and-effect relationships between organizational processes responsible for effectively executing that strategy and driving business performance. In today’s knowledge economy, it is critical for managers to know and understand that intangible assets are the main drivers of value creation. In the last two decades or so, the value of intangible assets in contributing towards business success has increased tremendously outpacing the contribution of fixed assets. These intangible assets of the business can be split into three distinctive areas of capital – human capital, information capital and organizational capital.
Human capital refers to skills, talent and know-how necessary to support the execution of the business strategy. Motivated employees with the right kind of skills, know-how and tools are the key ingredients in driving process improvements, meeting customer expectations and ultimately driving financial returns. Since people are any organization’s most critical source of value, having the right mix of human capital objectives in the Employee Learning and Growth perspective is critical. Possible objectives relating to human capital include “Close the skills gap in strategic positions”, “Train employees for success” and “Recruit and retain the best and the brightest employees”. Be clear though what you mean by “best” and “brightest” as these terms are relative.
When it comes to closing the skills gap in strategic positions, it is crucial to understand that not all jobs are created equally. At the same time, not all jobs being filled within the company are critical to achieving your strategy. It is therefore important to match your best people with the most strategically critical jobs. The starting point involves identifying those positions that are pivotal to ensuring the successful execution of key processes as set forth in the Internal Process perspective of your strategy map. This will ultimately drive your customer value proposition and in turn ensure you achieve your stated financial objectives.
Organizations that have successfully managed to close the skills gap in strategic positions have done so through training and retaining current key staff, tailoring recruitment of new employees to the strategic needs of the organization and putting in place effective succession planning programs to help capture the knowledge of long-term employees and pass it on to the next generation.
Training employees for success goes beyond simply counting the number of training hours per month, per quarter, per half year or per full year. This is unlikely to lead to sustained business success. What managers need to do is, after the training program, assess and evaluate a change in behaviour; a demonstration of the new skills or knowledge in action and an improvement in results. This helps determine the effectiveness of the training program, focus future training in specific areas to bolster skills and knowledge and ultimately improve the company’s future performance.
Information capital refers to the information systems, networks and infrastructure required to support the strategy. Today, technology is an enabler of business strategy. It is the engine that keeps companies and entire industries moving forward and remaining competitive. Thus having the right mix of information capital and aligning IT with strategy is critical to executing strategy effectively and achieving sustainable business performance. Given the pervasive influence of technology in today’s modern economy, almost every organization should consider information capital objectives on its strategy map. Possible objectives relating to information capital include:
- Improve the organization’s technology infrastructure.
- Leverage technology to manage risks, execute strategy and drive business performance.
- Increase knowledge management and information sharing within the organization.
- Create, share and use information effectively for better decision-making.
It is therefore critical to consider the linkage between technology and strategy in business. The objectives you choose under this class of capital should reflect the contribution of IT you require in order to successfully execute your business strategy.
Organizational capital focuses on the ability of the organization to rally and sustain the process of change required to deliver the strategy. When it comes to organizational capital, there are two key elements to consider – culture and alignment. How are things done at your workplace? Do you support team work, positive feedback, and innovation or a combative management and meeting style prevails? Every now and then, you need to gauge your organization’s current culture and determine whether it is aligned with your strategic direction. Should you wish to fully exploit the advantages of intangible assets such as culture and knowledge, it is therefore critical to ensure the actions of your employees are aligned with the organization’s mission, values, vision, and most ultimately, strategy. Thus employees should have a clearer understanding of the building blocks of the organization’s mission, values, vision and strategy.
Having the right culture that is aligned to the strategy can be achieved through:
- Recruiting and selecting people you believe embody the culture you are attempting to either maintain or create.
- Intense socialization and training initiatives which demonstrate what you expect from employees.
- Utilizing the organization’s formal reward systems to advance culture. For example, if you value teamwork, customer-centric approach and attitude and innovation, those traits should be tangibly rewarded in an effort to have that culture deeply entrenched.
Misalignment of culture and strategy can lead to disastrous results. To ensure alignment, you ought to review the cascaded Balanced Scorecards from throughout the organization. While most of your scorecards will rightly contain unique objectives and measures, they should be aligned toward a common corporate strategy.
To sum up, your strategy map should help you identify the specific capabilities in your organization’s intangible assets that are required for delivering exceptional performance in the critical internal processes.
I hope you enjoyed this four-part series on creating objectives for your organization’s strategy map. I welcome your thoughts and comments.
My previous two posts focused on developing objectives for the financial and customer perspectives. Once an organization has a lucid depiction of these financial and customer objectives, the next step is developing objectives for the internal processes and learning and growth perspectives. In this post, I will dwell on the objectives in the internal perspective.
Value is created through internal business processes. In other words, internal processes create and deliver the value proposition for customers. Thus objectives in your strategy map’s internal process perspective must describe how you intend to accomplish your organization’s strategy. There are so many processes operating in an organization at the same time, each creating value in some way. It is therefore important to focus on those processes that allow you to deliver on your strategy and differentiate your organization from its rivals.
The challenge for most organizations is selecting those critical few processes that exceptionally drive value for their customers and enable them to achieve the desired financial results. Robert Kaplan and David Norton, the originators of the Balanced Scorecard, have identified and grouped internal business processes into four categories. These categories are common to almost any business undertaking and can assist you to identify and focus on those critical few processes that result in the differentiation of your strategy. The four categories are:
- Operations Management Processes. These relate to the basic day-to-day processes you use to produce your existing products and services and deliver them to your customers. For example acquiring raw materials from suppliers, converting these raw materials to finished goods, distributing the finished goods to the market and managing business risks. Thus you could have objectives such as Increase throughput, Maximise yield, Attract channel partners and Minimize risk appearing on your strategy map under the internal processes perspective.
- Customer Management Processes. These are the processes that enable you to grow and strengthen relationships with targeted customers. Today, customers hold more power than suppliers and have an extensive say about the company’s products and services. It is therefore more critical to understand your customers and their behaviours in order to win in the marketplace. The critical processes involved in managing customers involve:
- Customer Selection: Identifying customers based on a set of customer characteristics that describe an attractive customer segment for your company and for which the company’s value proposition is most attractive. Attributes that can be used to define your customer segments include income, wealth, age, family size, lifestyle, price sensitiveness, early adoption and technical sophistication.
- Customer Acquisition: Acquiring the targeted customers through generating leads, communicating to new potential customers, choosing the right entry-level products, pricing the products and closing the sale.
- Customer Retention: Retaining customers by offering them excellent services and being responsive to their requests.
- Deepening customer relationships: This can be achieved through managing existing relationships effectively, cross-selling multiple products and services, and establishing your organization as the most trusted adviser and supplier.
- Having objectives such as Increase customer retention, Cross-sell products to customers and Maximise share of customer spending on your strategy map.
- Innovation Processes. These are the processes that focus more on creating new products, processes and services which ultimately help the company to infiltrate new markets and customer segments. In today’s fiercely competitive environment, an organization must be creative and have the ability to identify opportunities for new products and services. It must clearly understand its industry, engage its employees and customers to generate new ideas and apply innovative technologies in order to outshine the rivals. Having identified opportunities for new products and services and generated ideas, a decision has to be made on whether to finance the projects internally, work with joint ventures or outsource entirely. The next innovation sub-process includes design and development of the new products and services with objectives related to the introduction of new products to the market. Finally, the new products and services are delivered to the market. It is important to note that the innovation process, for a particular product or service, wraps up when you have achieved your sales and production targets at the desired levels of functionality, quality and cost.
- Regulatory and Social Processes. These help the organization to repeatedly earn the right to operate in the communities and countries in which they produce and sell. National and local regulations inflict standards on companies’ practices. Instead of just complying with the least standards established by regulations, companies must strive to go beyond the minimal standards and perform better. Having an excellent reputation for performance along regulatory and social dimensions will help the company attract and retain high-quality employees. Also, avoiding or lowering environmental incidents and improving employee health and safety improve productivity and lowers operating costs. Thus companies should have objectives such as Exercise best-in-class governance, Maintain health and safety of employees, Become more involved in our community and Encourage community prosperity on their strategy maps.
Given the vast number of processes available to create value, managers must identify and focus on just the critical few processes that will allow them to execute their strategy effectively. The selected strategic processes should also be selected from all four categories above. This way, the value creation process is balanced between the short and long term and this also ensures that growth in shareholder value is sustainable over time.
Watch out for my next post on developing objectives for the employee learning and growth perspective.
Not all prospective customers will support your revenue and profitable growth or find your offerings worthwhile. Because of this, many organizations face the challenge of determining which factions represent the best market for their particular products and services and focusing their strategy map objectives on that group of customers. Although many organizations profess to serve a subset of core customers, in reality, they are following “same-for-all” approach, attempting to serve a broad landscape of customers. As a result, they end up doing little for anyone.
When developing objectives for the customer perspective of the strategy map, it is important to ask two questions:
- Who are your target customers?
- What is your value proposition in serving them?
To answer the first question, it is necessary to conduct a customer profitability analysis of existing and potential customers. Some customers might appear profitable on face value, whereas in reality they are resource suckers and are not aligned with your strategy. Thus you need to come up with a strategy that enables you identify particular customer segments that have greater growth and profitability potential.
The second question helps you express how you will differentiate yourself and, subsequently, what markets you will serve. In other words, your organization’s value proposition helps you define your customer strategy by describing the distinctive blend of product, price, service, relationship and image that your organization offers its target customers. The value proposition should communicate what the organization expects to do for its customers better or differently than its rivals.
The value proposition you select will greatly influence the objectives you choose since each will entail a different emphasis. It is also important to note that the objectives and measures for a specific value proposition define the organization’s strategy. By developing objectives and measures that are explicit to its value proposition, the organization will be able to convert its strategy into tangible measures that are easily understood by all employees and capable of being improved.
Depending on your organization’s mission, vision and strategy, below are four customer value propositions you can choose to follow:
- Operational excellence: Following this value proposition means your focus is on lowest total cost, convenience and often ‘”no extras”. Your objectives for operational excellence should underscore attractive prices, excellent and consistent quality, short lead times, ease of purchase and good selection. Possible objectives under this value proposition include:
- Attractive prices – Ensure lowest prices, Offer lower prices than competitors and Offer best value to the consumer.
- Excellent and consistent quality – Reduce manufacturing defect rates and Eliminate service errors.
- Convenience – Reduce customer complaints relating to service or delivery.
- Good selection – Maximise inventory turns, Ensure product availability and Minimize stockouts.
- Product innovation and leadership: For you to be able to deliver on this value proposition, your products must offer superior functionalities that leading-edge customers value and are prepared to pay more for them. Being a product leader means you should be prepared to promote your organization’s brand image and build strong brand awareness to ensure the market recognizes your innovative new products. The objectives you may include in your customer perspective are:
- Monitor help line calls per product. This will help you determine the level of interest in your latest products or services.
- Increase number of customer needs satisfied. This enables you ensure expectations are being met.
- Customer intimacy: The organization must completely understand its customers and be able to provide them with customized products and services bespoke to their needs. Thus you must strive to offer a complete solution that ensures the customer receives the greatest benefit from the products offered. Should you follow the customer-intimate approach, below are some of the customer-intimate attributes and objectives you might use:
- Customer knowledge– You need to possess a deep and detailed knowledge of your customers. Using an objective such as “Increase training hours on products and services offered” enables you to determine staff knowledge and see if more training is required.
- Solutions offered – It is important to note that customers turn to you because you are offering them an unmatched total solution. You may therefore include as an objective within the customer perspective”Increase total number of solutions offered per client”.
- Customer data – In order to deliver complete customer total solutions, organizations require abundant and insightful data on their customers. “Increase % of employees with access to customer information” may be stated as an objective to ensure this key differentiator of success will be monitored.
- Customer relationships – As a customer-intimate organization, your goal should be to build long-lasting relationships with your customers. “Provide staff at client locations” could be an objective illustrating the deep relationships your organization maintains with its clients.
- Lock-in: This arises when companies create high switching costs for their customers by making their products the standard of the industry. “Create barriers to entry and high switching costs” may be stated as an objective to ensure the organization remains as one of the dominant suppliers.
Watch out for my next post on developing objectives for the strategy map internal process perspective.
In my previous blog post, I touched on why your organization needs a strategy map. I discussed what a strategy map is and how it helps organizations translate their strategy. The strategy map provides the visual framework for integrating the organization’s objectives in the four perspectives of a BSC. It shows the cause-and-effect relationships that link desired outcomes in the customer and financial perspectives to exceptional performance in key internal processes. Furthermore, the strategy map highlights the precise capabilities in the organization’s intangible assets that are essential for delivering outstanding performance in the critical internal processes. In this post I will turn my attention on developing objectives for the financial perspective.
The balanced scorecard was developed to help organizations overcome their reliance on financial measures of performance. Proponents of the BSC argued that an excessive focus on any particular area of measurement often led to poor overall results. In order to successfully measure, manage and deliver performance, organizations must find a balance between financial and non-financial measures. The BSC provides this much needed balance. The tool balances the accuracy and integrity of financial measures with the drivers of future financial performance of the organization.
Although some criticism has been levied against the overabundant use of financial measures, a question that is normally raised is, “Should organizations include a financial perspective when developing their strategy map and BSC?” Despite their evident weaknesses, the answer is yes. Financial indicators represent a vital component of the scorecard process. Without financial objectives and measures of performance, even a well-built strategy map and BSC is incomplete. Financial performance measures show whether the company’s strategy, including its implementation and execution, are contributing to the bottom line improvement.
For profit-seeking organizations, the ultimate aim is to create greater long-term value for shareholders. To achieve this, the company must improve its revenue growth and productivity. Profitable revenue growth can be achieved through selling completely new products, selling to customers in entirely new segments and deepening relationships with existing customers. Strengthening existing relationships enables the company to sell more of its existing product or service, or additional products and services.
Enhancing productivity is achieved through improved cost structure and increased asset utilization. Implementing ABC/M enables you to gain complete visibility about your product, service, customer, channel and segment costs. This in turn will help you eliminate defects, reduce cash expenses and improve yields. Such cost reductions enable the organization to produce the same quantity of outputs while spending less on people, materials, energy and supplies.
Improving asset utilization is often achieved through managing capacity from existing assets and reducing the working capital and fixed capital needed to support a given level of business. For example, suppose you are a manufacturing organization or retailer, utilizing techniques such as just-in-time gives you the opportunit
- y to support a given level of sales with fewer inventories. Also, reducing unscheduled downtime on equipment provides you with an opportunity to produce more without experiencing an unnecessary increase in fixed assets investment.
Thus when developing the objectives of the financial perspective, the challenge is achieving a balance between the short-term and long-term objectives. Actions to improve revenue growth normally take longer to create value than actions to improve productivity. Under the day-to-day pressure to show financial results to shareholders, the norm is to favour the short-term over the long-term. As an organization you have to ask yourself, “How much further can you grow without overspending?” At the same time, “If you decide to focus more on austerity as a business model, what is the risk of distancing your company from customers who are hungry for innovative new products and services?”
Developing the first layer of the strategy map forces the organization to address this tension. Thus in order to drive shareholder value, the financial component of the strategy must include both revenue growth and productivity objectives. Balancing these two dimensions will ultimately set out the framework for the remainder of the strategy map.
Watch out for my next post on developing objectives for the strategy map customer perspective.
Rated as one of the most popular management tools, the balanced scorecard has been in use for more than two decades and the benefits gained by organizations that use the tool are widely evident. Initially designed as a measurement tool, the balance scorecard has transitioned into a useful strategic management tool. Over the years, organizations that have adopted the balanced scorecard have managed to effectively measure performance and implement their strategies successfully.
In many organizations, very few employees have knowledge of the strategy being pursued. How is it possible then to effectively execute strategy if the very people charged with the responsibility of implementing it do not even understand it? Without a complete description of strategy, it is very difficult for executives to easily communicate the strategy among themselves or to their employees. Furthermore, if there is no shared understanding of the strategy, it is also difficult for the executives to create alignment around it. This lack of alignment often impedes successful strategy execution.
Strategy execution is far more important than strategy formulation. Working in harmony with the BSC, the strategy map helps executives to communicate the organization’s strategy clearly and briefly to all the stakeholders and execute it successfully. It is therefore imperative for executives to understand strategy and be able to bring clarity to everyone in the organization that is charged with carrying it out. For any strategy to be effective, it must contain descriptions of financial aspirations, market to be served, processes to be excelled in and the people who will be responsible for carrying it out. The strategy map achieves this. It provides the visual framework that integrates the organization’s objectives into the four perspectives of the BSC.
Furthermore, the strategy map helps you determine what you must do well in each of the BSC perspectives in order to successfully execute your strategy. It helps you describe your strategy in a uniform and consistent way that enables objectives and measures to be established and managed. In other words, the strategy map provides the missing link between strategy formation and strategy execution. It illustrates the cause-and-effect relationships that link desired outcomes in the customer and financial perspectives to outstanding performance in critical internal processes.
So how can you successfully develop your strategy map? One important aspect to consider when building a strategy map and BSC measures is how many and which perspective you will choose. Depending on the nature of your organization it might be worthwhile for you to consider additional perspective to the four original perspectives – Financial, Customer, Internal Processes and Employee Learning and Growth. Additional perspectives might be in the areas of innovation, R&D, environment, suppliers, CSR and governance. When choosing the perspectives of your strategy map and BSC it is important to ensure that your chosen perspectives communicate the complete story of your strategy and create a competitive advantage for your organization. It is also important to capture the key stakeholders contributing to your organization’s success. However, take note that you do not need to include every possible contributor otherwise your map will become cluttered.
Since the main purpose of the strategy map and the BSC is to communicate clearly and briefly the organization’s key drivers, it is important that you select the perspectives that enable you to capture the organization’s key stakeholders and describe how you are going to serve each of them and thereby successfully implement your strategy. Questions such as – What value propositions will ensure that our customers are satisfied and remain loyal? What processes must we excel at in order to drive this customer valued proposition, and what competences must our employees possess? – will help you develop a strategy map and BSC that clearly communicates your strategy and demonstrate how you plan to execute that strategy.
The success and credibility of your strategy map and BSC also depends on the pool of information used to develop them. You need to gather and review as much background material as you can find for each perspective. Sources of material that can be used to gather information include annual reports, the organization’s mission statement, strategic plan, project plans, competitor data, analyst reports, benchmarking reports, trade journals and news articles. Since the sources of information vary, it is critical to ensure that the source documents provide a single view of your organization’s mission, core values, vision and strategies. Any discrepancies identified should be resolved.
In sum, the strategy map is a one-page graphical representation of what you must do well in each of the four BSC perspectives in order to effectively execute your strategy. It helps you outline the critical objectives necessary for the success of your organization. Remember, the essence of strategy is doing different things than your rivals to create value. You must therefore avoid copying the objectives and metrics of your competitors as these may prove counterproductive to your efforts. You need to understand your processes and value propositions because it is the determination of the key drivers of your particular organization that will ultimately differentiate you from your rivals.