dinsdag 12 maart 2019

Relevance Lost 2.0

When Robert Kaplan and Thomas Johnson wrote about the fall of management accounting systems and pleaded for new perspectives and approaches to strategic process control they wrote a most relevant statement that still stands today. But as organisations are implementing performance measurement systems as applications of their business intelligence infrastructure, news risks of losing the most relevant part of strategic management arise. There is a clear need for a new, extended approach to the balanced scorecard (BSC). If you wonder what this may be, then read more.

In this article I describe the generic strategy process, compare this with the performance management process, how it is implemented in some organisations and analyze the aspects of this process related to the organization’s leadership style and thus the consequences for the balanced scorecard’s effectiveness.

The Strategy Process: Formation and Formulation
Every organisation has its own way of forming and formulating a strategy. It is in the organizational DNA: the way strategic objectives are grounded on a clear problem statement, SWOT analysis, competitive analysis, etc… and evaluated, proper to that same DNA.

Fig 1. The Strategy Process The strategic objectives entail the position of the company for mid- and short term, wanted behavior from clients, associates and partners. These objectives are then dissected, evaluated, scored and appreciated according to the organization’s values and beliefs, the organizational culture and past experience. 
The last phase is the decision phase where the objectives are translated into concrete actions and measurable products and outcomes of these actions.

As the illustration shows, the strategy formation process is usually done in four process steps:

  • definition, 
  • dissection, 
  • evaluation and 
  • decision

In the definition process, the strategic problems and opportunities are described and expressed in statements like: “We are not well positioned in the high end market”. Input for this process step is SWOT analysis, as well as analysis of the competition and the customer base. 
In the dissection process, expressions like “We are not well positioned…” are set in context and translated into critical success factors, e.g. “In order to improve our position in the high end market we need to upgrade our image, educate the sales force, identify more high end customers.”
The eva luation process is mainly concerned with prioritizing the dissected elements and looking for causal relationships between these elements to prepare a cohesive and consistent strategic plan which can be communicated to all parties concerned.
Finally in the decision process, the prioritized and feasible targets and ways to achieve these targets with global action plans are chosen. Some targets are based on decisions with tangible and measurable results and others are based on long term decisions with immaterial and almost immeasurable outcomes. 
The following decision points are ranked from very concrete and “hard” targets to more “soft” and less quantifiable decisions:

  • which critical performance indicators will receive priority in the action plans and budget allocation,
  • which actions are needed in the market place,
  • which organizational behavior needs adjusting
  • what needs to be improved in the organization’s culture

In the strategy formulation process steps, communication exercises will adjust these elements to match them with the various target groups: associates, clients, suppliers, shareholders, government officials, press, etc…

The Degrees of Collaboration in the Strategy Process
If we imagine a continuum in leadership styles, ranging from autocratic to democratic leadership, the four strategy formation process steps will be subject to shared inputs, transformation and outputs on a scale of zero to hundred percent.
In an autocratic leadership all four process steps are in the hands of the leader. Only the leader decides what is important in the environmental scan, what the objectives are, how the actions  are prioritized. Some autocratic leaders have problems formulating the strategic plan as they still hold up the adage “knowledge is power”. What they gain on control may get lost in the execution phase when their subordinates try to interpret their ambiguous communication.
Long time ago, I studied the biographies of dictators (which names I won’t mention because they deserve to be forgotten) and it struck me that often they communicated very vaguely about their strategic vision, priorities, objectives and the way to accomplish these objectives. Zealous and ambitious subordinates would then translate these cryptic messages into complete (and often horrific) action plans which would then be meticulously and ruthlessly executed. After which the dictator either rewarded the zealot or had him sent in exile because he became too popular or was a liability for the regime to the outside world.  Nevertheless, autocratic leaders can be highly successful in process industries, retail, service organisations and this leadership style emerges everywhere there is a crisis and fast response times are more important than a well pondered decision making process, balancing all market factors, interests and wishes in the organisation.
 In the democratic leadership all four process steps may be in the hands of the entire team. Lengthy discussion and negotiation may require a lot of resources but the upside is that everyone in the organisation is on the same page and the execution phase has less need for control and clear instructions as the organisation members act in a more autonomous way, responding faster to changes on the terrain. Organisations of professionals prefer democratic leadership as knowledge and competence are far more important than rank and power and the status that go with it.
Finally in mixed forms, the definition process may be initiated by the strategic apex, shared with the ranks and business analysts may be called in to dissect the statements into  manageable chunks.
The evaluation and the decision process, depending on the level of democratic leadership, may be done by the leader, a management team or a management team extended with staff members and analysts.
Today, as organisations become flatter and more democratic leadership styles are proper to new industries, there is a need for faster feedback loops to combine the advantages of autocratic leadership with the responsiveness of democratic organisations.

The Performance Management Process
The strategy process, seen from a performance management perspective, is a machine-like approach to define, monitor and manage the actions as defined in the strategic plan.
Let’s see how the strategy process is broken down into the performance management process. The performance management process breaks down the strategy formation process into smaller chunks to decompose the formation (definition, dissection, evaluation and decision) into nine steps.
This is a top down exercise:
·        Analyze the situation (SWOT, competition,…) (Definition Process)
·        Determine the objectives after the analysis (Definition Process)
·        Define the critical success factors (CSF) (Definition & Dissection Process)
·        Derive the critical performance indicators (CPI) from these CSFs (Definition & Dissection Process)
·        Mapping the CPIs on the organizational units down to the individual associate (Dissection & Evaluation Phase)
·        Adapting the HRM policies to these mappings (if trade unions allow, of course) (Evaluation Process)
·        monitor, manage and readjust the CPIs (Execution process)
·        monitor, manage and readjust the CSFs (Execution process)
·        Adapt the objectives to the new SWOT results (Execution process)

Remark how implicit the decision process is embedded in the dissection and evaluation process steps of the performance management approach.

Strategy automation?
In the past ten years I have worked on IT-support for balanced scorecards (BSC) in a university, a bank, an insurance company and a manufacturing company. In all of these cases, a poignant conclusion was unavoidable: “If all you use is a hammer, everything starts looking like a nail”. The ICT tool became a substitute for the strategy process and forced a freeze on the organisation. Let me explain this.
The BSC was used as an instrument to implement a top down strategic governance of the organisation. The strategy decomposition as described above is then modeled in the ICT tool creating links and correlations between the various CSFs and CPIs. Identifying these cause and effect chains is not a trivial matter. If sales go south, all sorts of explanations may present themselves to the organisation. E.g.: Are lower sales due to:

·        … lower consumer confidence?
·        … a competitive move?
·        … a government announcement?
·        … simple seasonality or a gradual shift in seasonality?
·        … the weather?
·        … all of the above?

Or can the sales slump be explained by a factor we can influence like the number of sales training hours received by the sales reps? But then the question arises if there is a correlation between the amount and quality of the training received and employee satisfaction? Or is it the other way around:  because our employees are not very satisfied with their job, they respond poorly to the training received[i]?
But that is not all. As we all know, strategic management is about adapting to the environment. If the ICT tool does not capture  the environmental change either bottom up or top down, then what? There is also another side of the coin: if the strategic decomposition leads to individual targets, personal development plans and other HRM tools how does this affect the flexibility of the organisation to adapt to change?
People act accordingly to the incentives from management: either they integrate the CPIs in their work planning and their approach to the job or they look for ways to beat the system. I remember sales people holding back order forms for a yearly publication to “smoothen” the CPI measures of bookings per month since management did not take seasonality into account when the performance indicator was defined.

Strategy Dialectics Are the Way Forward
It is clear that the latter is unwanted behavior but those who conform with the system should be rewarded, shouldn’t they?
The answer is an ambiguous “Yes and No”. “Yes” if their response, steered and governed by the performance indicator, is in sync with customer demand. And “No” if this is not the case. Needless to add that any strategy which is not sanctioned by your customers is not worth the paper it is written on.
But how are the designer, the monitor and the manager of the balanced scorecard to know this? Henry Mintzberg (1994)[ii] makes the distinction between intended and emergent strategies and the way I see it and experienced it, the balanced scorecard is an almost perfect tool for managing intended strategies. It uses a negative feedback loop, just like a thermostat. And just like a thermostat it sometimes oversees the efforts needed to keep everybody in line with the intended strategy. So people who don’t meet their targets are stimulated to do so or they are made redundant if they are not likely to comply with the desired behavior. But as John Lennon so rightly said “life is what happens while you are making other plans”. Management may have misinterpreted the signals from the environment or changes in the market may be unnoticed by management. In that case,  emergent strategies may provide the answers to these situations as there is some form of “wisdom of the crowds” in the collective response from front office workers and anyone else who is in contact with customers, competitors, prospects, suppliers, researchers and government officials, to name a few. To capture these emergent strategies, the system needs to provide positive feedback loops to reinforce unplanned but successful behavior, even when it is non compliant with the intended strategy. In other words, if top management makes a mistake, it will get noticed in three to five years but if the front office worker makes a mistake, the organisation has an acute problem.
This calls for a special form of management, allowing dissidence in the ranks and considering experimenters and contrarians as assets instead of a liability. “Is this May 1968 all over again, when it was forbidden to forbid?”, I hear you say. No, thanks.
But imagine an organisation form where the exchange between the hierarchy and the ranks is formalized, open, unbiased and where everyone’s fact findings and opinions are accessible to everyone for discussion, refining and leading to decisions and actions.
Imagine a special form of knowledge management which goes further than a glorified chat room and text mining.
Imagine a system supporting both bottom up and top down strategy processes, using the collective wisdom of the entire organisation. Technology may be able to design and build such a system but if management is not prepared to adapt its ways of developing, forming and formulating strategies then the developers needn’t bother.

Knowledge Management and Performance Measurement Systems in Modern Organisations
Remember the initial point I was making: intended strategy is only a partial explanation of the realized strategy because emergent or grassroots strategies contribute to-or reduce- the results of the intended strategy. Since no entrepreneur or manager likes to be only partially in control, we need a new approach to the balanced scorecard implementation. Maybe that won’t be enough, maybe we need to extend the scorecard’s toolset.

What if the exchange process were more important than the results of it?
What if the true outcome of the dialectic strategy process were -other than a plan with measurable results:

·        enhanced motivation because people see the context, the bigger picture and have  contributed to it,
·        a shared vision and sense of direction that enhances group cohesion,
·        a higher level of entropy, turning each individual into autonomous decision making entities without the usual chaotic side effects,
·        increased responsiveness to changing conditions or unexpected phenomena in the market?
What if the strategy process became a strategy dialogue?
What if the system could capture the dialogues between the workers and:

                 middle- and top management,
                 the customers,
                 the suppliers,
                 opinion leaders,
                 government officials,
                 the data warehouse,
                 the external information sources?

What if this dialogue were supported by a tool requiring almost no extra effort from the organisation?
Let’s examine the actions people perform in an office which are –often without knowing- valuable strategic information bits and are already captured partly or wholly by the existing systems.
Searches on the Intra- and Internet,
Consulting information providers ranging from Wikipedia to academic and government sources,
Sending and receiving e-mails,
Creating and reading documents like meeting notes, documentation, process descriptions, …
Handling customer complaints
Dunning customers,
Online and offline meetings, chats,
Analysis and decision making,
All these activities leave traces in some or another information system. What if you could combine the most relevant words and constructs into input for your strategic plan, supported by a balanced scorecard approach but avoiding a rigid approach to the strategic process management? Let me have a go at specifying such a system and check if the technology is already available.

Performance Measurement Systems 2.0., a Functional Specification
The short description of this system is: ”A Collaborative Strategy Process Manager”   The architectural view is visualized in the schema below.

Fig. 2. The Core Architecture of a Collaborative Strategy Process Manager The architectural picture consists of three interconnected pillars: strategy, individual development and knowledge support. For simplicity reasons we leave aspects like servers, APIs and user interfaces out of the schema. Only the relevant functional blocks are listed. Remark that the planning and execution of the strategy is not in scope. Tools like ERP and CRM can provide the necessary support for that part.

The Organizational Strategy Management Process: this is basically the support for the balanced scorecard with a link to the personal development plans of the people needed to execute the strategy. We refer to vendors like QPR, SAS, and others to discover the features of a balanced scorecard software. But the link to personal development plans (PDP) needs to be established. Imagine this PDP as a database with relevant and “nice to have” competence development plans which are maintained during appraisal and evaluation interviews. If the HRM application can make the link with salary scales, a proper analysis can match the desired competences with the future wage cost trend.
The Individual Development Support: this is a personal balanced scorecard where the interconnections between interests, competences, knowledge and the track record inside and outside the organisation are managed. Imagine a kind of personal LinkedIn with extra depth in the competence area. Instead of generic labels like “marketing” one would find hierarchies like “Marketing > Market Research>Qualitative Market Research>Focus Groups>Brand Experience”
The Knowledge Support System: this pillar is not readily available of the shelve, but some components are.
The first block Search Engine Logs and Ratings bundles the information search behavior, the rating of the results but also the ratings of colleagues search results, and all other communication and processed information. It also includes ratings for decisions to be made by a group or an individual be it multicriteria analysis, simple voting, rule based decision making or more complex algorithms like ELECTRE. Bundling the information search and decision behavior can yield interesting results for the knowledge management team answering questions like “What information did he/she (or didn’t!) look for before making a decision?”
The Object Database is the engine behind the object aware user interface, suggesting hyperlinks whenever users integrate (potential) knowledge objects like information sources, notions, definitions, persons, etc… in their communication. This forces users to be clear about what they communicate and to what ontologies[i] their concepts relate to. These objects, ready for the object aware user interface are structured and edited by a knowledge manager or by the group, depending on the configuration which supports both autocratic and democratic environments. But the object database will also act as a repository for unstructured data which can then be presented to the group or the knowledge manager by “emerging publishers”.
The Object Database also disposes of easy configurable agents which respond to events or trigger events themselves, e.g. “Present the weekly list of most used ontologies”.
The Knowledge Modeling System is where ontologies, learning blocks and documentation blocks are created and managed. These learning blocks and documentation blocks are complete sentences or groups of sentences whether or not combined with illustrations to create the basic material for documentation like ISO process descriptions and procedures, help files and learning material for distance learning or learning on the job.
Finally,  the E-Learning System is where the previous material is used in learning paths, documentation maps and presented in a presentation layer which can be simple text and image, sound and/or video. The material can be used on purpose or pop up spontaneously whenever users struggle with knowledge gaps.

The three connections: the first connection is between the organizational strategy management and individual development tools. With this link, important questions can be answered and reality checks become possible.  A sample of these questions and checks:
                                      “Do we have the competences in house to deliver the desired actions?”
                 “How big is the knowledge gap we need to close”
                 “Where are biggest obstacles for change management?“
                 “What unused competences suggest opportunities for new strategic directions?”
The second connection, between individual development and knowledge support tools makes knowledge management more manageable by delivering information to questions like:
  • “What knowledge objects are most used by individuals, groups, teams, divisions,… ?”
  • “When and where does who contribute to the development or the extension of knowledge objects?”
  • “What e-courses have been successfully taken by whom?”
The third connection, between the strategy management support and the knowledge support challenges assumptions and probes for answers to questions like:
·        “Do we have the necessary capacity for the personal development plans?”
·        “Have we made the CSFs and KPIs sufficiently operational for the workforce to understand, adopt and apply them?”
·        “What level of comprehension of the strategy matches with a certain level of compliance to the proposed KPIs?”
·        “What new information can influence adjustments to the initial strategy?“What new information can influence adjustments to the initial strategy?”

If the “What” and the “Why” are implemented properly, the “Where” and the “How” will become easier to manage in an adaptive way because management control 2.0. will increase self control with individuals and groups but leave enough room for new initiatives to respond better to consumer demand.

Fig. 3 The Strategy Execution Process As the illustration suggests, there are two major directions to take when executing a strategic plan: changing the rules of the game or the organisational behaviour in case the results are disappointing or optimize the existing, successful strategy.  The “how” to this “what” can be both shock therapy or an incremental “frog in the pot of tepid water” approach. ultimately it will lead to managing the organisational competences, be they individual or group competences. The “where” is in projects or in processes, i.e. in new ventures or in routine things people do in the organisation. The “why” is not in this picture as it is supported by the collaborative strategy process manager as described above.

Strategy management is a slightly more complex phenomenon than the cybernetic view some scholars and managers have. An organization is a living thing, the environment is something even the biggest organisations can’t control (unless they are in a socialist island republic). Therefore, adaptive strategy management is the way forward.
Strategy management 2.0. will be adaptive or it will become obsolete in a flattened society, where successful organisations in the new economy have exchanged the hierarchical, top down, cybernetic management paradigm for a customer centric, responsive and adaptive organisation where people are motivated, empowered and share a clear vision, a sense of purpose and understand the general  direction the organisation is heading. Only that way, these organisations can face the challenges of a mobile, fragmented and volatile generation Z and build a sustainable business.

[i] I use the definition from Tom Gruber from Stanford University: “In the context of knowledge sharing, I use the term ontology to mean a specification of a conceptualization. That is, an ontology is a description (like a formal specification of a program) of the concepts and relationships that can exist for an agent or a community of agents. This definition is consistent with the usage of ontology as set-of-concept-definitions, but more general. And it is certainly a different sense of the word than its use in philosophy.” From: T. R. Gruber. “A translation approach to portable ontologies.” Knowledge Acquisition, 5(2):199-220, 1993

[i] In many cases, this cause-effect identification process is a matter of preparing the strategy formulation phase which has the implicit message: “This is how we see things” or a misused word in the business jargon: the often overstated “paradigms”.

[ii] From: Mintzberg, Henry: “The Rise and Fall of Strategic Planning” pp. 24-27, The Free Press 1994.

vrijdag 1 maart 2019

About Ends and Means, or Beginning and Ends...

It has been a while since I published anything on this blog. But after having been confronted with organisations that –from an analytics point of view- live in the pre-industrial era, I need to get a few things off my chest.
In these organisations (and they aren’t the smallest ones)  ends and means are mixed up, and ends are positioned as the beginning of Business Intelligence. Let me explain the situation.

Ends are the beginning

sea ice
A metaphor for a critical look at reporting requirements is like watching heavy drift ice 
and wondering whether it’s coming from a land based glacier or from an iceberg...

Business users formulate their requirements in terms of reports. That’s OK, as long as someone, an analyst, an architect or even a data modeller understands this is not the end of the matter, on the contrary.
Yet too many information silos have been created when this rule is ignored. If an organisation considers report requirements as the start of a BI project they are skipping at least the following questions and the steps needed to produce a meaningful analytics landscape that can stand the test of time:

  • New information silos emerge with an end-to-end infrastructure to answer a few specific business questions leaving opportunities for a richer information centre unexplored.
  • The cost per report becomes prohibitive. Unless you think € 60.000 to create one (1) report is a cinch…
  • Since the same data elements run the risk of being used in various data base schemas, the extract and load processes pay a daily price in terms of performance and processing cost.

Ends and means are mixed up

A report is the result of an analytical process, combining data for activities like variance analysis, trend analysis, optimisation exercises, etc.. As such it is a means to support decision making; so rather than accepting the report requirements as such, some reverse engineering is advised:

What are the decisions to be made for the various managerial levels, based on these report requirements?

You  may wonder why this obvious question needs to be asked but be advised, some reports are the equivalent of a news report. The requestor might just want to know about what happens without ever drawing any conclusions let alone linking any consequences to the data presented.

What are the control points needed by the controller to verify aspects of the operations and their link to financial results?

Asking this question almost always leads to extending the scope of the requirements. Controllers like to match data from various sources to make sure the financial reports reflect the actual situation.

What are the future options, potential requirements and / or possibilities of the required enhanced with the available data in the sources?

This exercise is needed to discover analytical opportunities which may not be taken at the moment for a number of reasons like: insufficient historical data, lacking analytical skills to come up with meaningful results… But that must not stop the design from taking the data in scope from the start. Adding the data in a later stage will come at a far greater cost than the cost of the scope extension.

What is the basic information infrastructure to facilitate the above? I.e. what is the target model?

A Star schema is the ideal communication platform between business and tech people.
Whatever modelling language you use, whatever technology you use (virtualisation, in memory analytics, appliances, etc…) in the end the front end tool will build a star schema. So take the time to build a logical data star schema model that  can be understood by both technical people and business managers.

What is the latency and the history needed per decision making horizon?

The latency question deals with a multitude of aspects and can take you to places you weren’t expecting when you were briefed about report requirements. As a project manager I’d advise you to handle with care as the scope may become unmanageable. Stuff like (near) real-time analytics, in database analytics, triple store extensions to the data warehouse, complex event processing mixing textual information with numerical measures… But as an analyst I’d advise you to be aware of the potentially new horizons to explore.
The history question is more straightforward and deals with the scope of the initial load. The slower the business cycle, the more history you need to load to come up with useful data sets for time series analysis.

What data do we present via which interface to support these various decision types?

This question begs a separate article but for now, a few examples should make things clear.
Static reports for external stakeholders who require information for legal purposes,
  • Reports using prompts and filters for team leaders who need to explore the data within predetermined boundaries,
  • OLAP cubes for managers who want to explore the data in detail and get new insights,
  • A dashboard for C- level executives who want the right cockpit information to run the business,
  • Data exploration results from data mining efforts to produce valid, new and potentially useful insights in running the business.

If all these questions are answered adequately, we can start the data requirements collection as well as the source to target mappings.

Three causes, hard to eradicate

If your organisation shows one or more of these three causes, you have a massive change management challenge ahead that will take more than a few project initiation documents to remedy. If you don’t get full support from top management, you’d better choose between accepting this situation and become an Analytics Sisyphus or look for another job.

Project based funding

Government agencies may use the excuse that there is no other way but moving from tender to tender, the French proverb “les excuses sont faites pour s’en servir” [1] applies. A solid data and information architecture, linked to the required capabilities and serving the strategic objectives of a government agency can provide direction to these various projects.
A top performing European retailer had a data warehouse with 1.500 tables, of which eight (8!) different time dimensions. The reason? Simple: every BU manager had sovereign rule over his information budget and “did it his way” to quote Frank Sinatra.

Hierarchical organisations

I already mentioned the study of Prof. Karin Moser introducing three preconditions for knowledge co-operation: reciprocity, a long term perspective for the employees and the organisation and breaking the hierarchical barriers. [2]
On the same pages I quote the authors Leliveld & Vink and Davos & Newstrom who support the idea that knowledge exchange based on reciprocity can only take place in organisational forms that present the whole picture to their employees and that keep the distance between co-workers and the company’s vision, objectives, customers etc. as small as possible.
Hierarchical organisations are more about power plays and job protection than knowledge sharing so the idea of having one shared data platform for everyone in the organisation to extract his own analyses and insights is an absolute horror scenario.

Process based support

Less visible but just as impactful, if IT systems are designed primarily for process support instead of attending as well to the other side of the coin, i.e. decision support, then you have a serious structural problem. Unlocking value from the data may be a lengthy and costly process. Maybe you will find some inspiration in a previous article on this blog: Design from the Data.
In short: processes are variable and need to be flexible, what lasts is the data. Information objects like a customer, an invoice, an order, a shipment, a region etc… are far more persistent than the processes that create or consume instances of these objects.

 [1]    Excuses are made to be used
 [2]    Business Analysis for Business Intelligence pp. 35 -38 CRC Books, a Taylor & Francis Company October 2012