Abstract
If integrated into Project Portfolio Management, the Balanced Scorecard can change the way an organization does business. It will keep a firm from becoming distracted by every new technology and new idea, and instead keep a focus on results. Balanced Scorecard helps with two problems that plague organizations:
- Balanced Scorecard can translate a high level strategic plan into operational plans
- Balanced Scorecard introduces a feedback loop in the strategic planning process
Traditionally, project management has focused on tactical measures, measuring effective execution. However, a good project should not reflect only tactical excellence, but also strategic importance. Project Portfolio Management can bridge project management and organizational strategy when Balanced Scorecard is integrated into selection criteria. Strategy implies the movement of an organization from its present position to a desirable but uncertain future position. This paper examines the process by which Project Management and Project Portfolio Management can contribute in concrete ways to the success of strategic goals.
Problem statement
Why align projects with business strategy?
The strategy a company intends to follow can be very different from the strategy that actually gets realized (Bower & Gilbert, 2006, p 26). If the projects that get funded, approved and resourced in an organization are not tied directly to the organization's strategy, where is it going?
For decades, organizational leaders acted as though that they only needed to design and communicate their strategy – that execution was the job of the rest of the organization. When strategy was not realized, executives became frustrated, as they felt their strategic directives were ignored. However, the reason strategy was not executed was more complicated. Without determining a connection to execution, the strategy was merely loose words – pretty, perhaps, but without relevance to the worker's day-to-day job and the company's operations.
Disconnects happen in many places – employees don't understand the strategy, managers don't have incentives tied to strategy, sufficient time is not dedicated to revisiting, maturing and refining the strategy over the course of the year, and budgets are not linked to strategy (Kaplan & Norton, 1996). Many factors impede organizational performance. The impediments can be removed if employees better understand organizational strategy, understand the key initiatives chosen to achieve it, and select the correct performance measures. This way they can more clearly view how what work they do contributes to results.
However, not all the great strategic ideas come from management. A truly balanced organization includes a feedback loop to allow strategic concepts to also flow upward. The Balanced Scorecard strategic management system offers a framework for this communication. As metrics from implementation of a strategy show that the specific strategy is failing in its objective, the project team can find a receptive audience for new ideas in refining the current strategy or implementing a whole new one (Kaplan & Norton, 1996).
Strategies are not managed like projects
Most companies’ operational and management control systems are built around financial measures and targets, which bear little relation to the company's progress in achieving long-term strategic objectives (Kaplan & Norton, 1996). Companies pour good money after bad, not realizing they are funding a poor strategy. Without clear data, executives wait for performance to turn around, instead of acting.
The way strategies have been defined and managed for years is doomed to failure. Multiyear results rarely meet projections. In order to get approved, strategy proposals include unrealistic financial expectations. The budget ends up driving initiatives, rather than the strategy (Niven, 2002, p 224 – 227).
Balanced Scorecard
Overview
Employees can only implement a strategy when they clearly understand it and their role in achieving the company's strategic objectives (Cokins, 2004, p 7). Balanced Scorecard was developed in the 1990's to bring strategy down to the employees, and help keep the whole organization in alignment.
Organizations are composed of strategic business units, departments or functional areas. What those groups do, what projects they undertake, compose the organization's strategy, not the words on paper. If an organization's goal is to plant trees, but their activity is planting flowers, then their stated intention doesn't matter.
If implemented correctly, the Balanced Scorecard can change the way an organization does business. It will keep them from becoming distracted by new technologies and new ideas, and instead keep focus on results. Balanced Scorecard helps with two problems that plague organizations:
- Balanced Scorecard can translate a high level strategic plan into an operational action plan
- Balanced Scorecard brings a feedback loop to strategic planning. The Scorecard measures performance against goals, determines if the goals are appropriate, and determines if the strategy or measures should be changed.
Developing the Components of a Balanced Scorecard
Typically, most project managers will be working in an environment where the Mission, Core Values and Vision have already been defined. Let's review those concepts briefly, and then go into what a strategy is, and how it is developed.
Mission, Core Values and Vision Statements
A Mission Statement defines the purpose or broader goal for being in existence or in the business. It serves as a guide in times of uncertainty, vagueness. It is like guiding light. It has no time frame. The mission can remain the same for decades if crafted correctly (Collins, 1996).
Core Values are the things organizations believe in so strongly, that they're willing to follow them even if they will reduce competitiveness or valuation. Practices, processes and strategies change over time in reaction to challenges, but values are the very essence of the organization, providing strength and wisdom to decisions (Collins, 2000).
While Mission and Values shouldn't change over time, Vision Statements are temporary – looking 3-5 years in the future. You want to draw a very specific picture of what the world will look like in this time period. While a Mission Statement helps foster values in employees, the Vision Statement has direct bearing on the bottom line and success of the organization. The Vision Statement can galvanize the people to achieve defined objectives. A good Vision engages both the heart (it pulls you in and touches you) and the mind (it is logical and makes good business sense). A Vision engages and motivates people because it connects them to what is important and gives meaning and energy to work (Collins, 1996).
Strategy
At many companies, strategy is a highly abstract concept, and is not something that can be easily communicated or translated into action. But without a clear sense of where the company is headed and why, lower levels in the organization cannot put in place executable plans. In short, the link between strategy and performance can't be drawn because the strategy itself is not sufficiently concrete.
So what is a strategy, and what is not? Many companies fail to distinguish between operational effectiveness and strategy. Operational effectiveness means performing similar activities better than rivals perform them. Greater productivity, fewer defects and faster deployment are not strategic objectives. Improvements can be dramatic, but you can't translate those gains into a sustainable differentiator. Competing based on operational effectiveness is mutually destructive, leading to wars of attrition (Porter, 1996).
So what are the characteristics of a strategy?
- Strategy is about choosing a different set of activities from rivals, providing a unique position in the market. Effective strategy is about what not to do as much as it is about which path to take.
- The activities chosen must fit together for sustainable success.
- Strategies can be refined over time, but, in general, aren't constantly overhauled.
- Strategy requires analyzing complex data, and interpreting that data within the larger context of the industry, market, community, etc.
- Finally, it's critical that employees firmly grasp the strategy, as they can only implement a strategy when they clearly understand it, and how they contribute to realizing it (Niven, 2002, p 90).
Let's review how strategy fits within the concept of a Balanced Scorecard. A lot of companies focus on the financial results, because they're easiest to measure, and because they are what capital markets demand. But sustainable financial results are built up to by doing a lot of foundation work.
Perspectives
The Balanced Scorecard was developed to address the problem that traditional measurements of an organization focus on financials, which tend to look backward, rather than forward. The Balanced Scorecard attempts to provide both historical and future insights, by balancing financial results with efforts that create value over the long term. That's the “Balanced” of “Balanced Scorecard.” These efforts are categorized into perspectives, or categories of strategic objectives. The traditional four perspectives (Niven, 2002 p 117 – 139) are defined below:
- Employee Growth and Learning: The organization must be able to innovate and refine efficiencies in order to break into new markets and increase margins. The foundation for all other perspectives, these are employee skills and information systems. What improvements here will drive other objectives? The organization must be able to innovate and refine efficiencies in order to break into new markets and increase margins. Measurements supporting this perspective may include R&D expense, the ratio of new products to total offerings, and planning accuracy.
- Internal Processes: Look at those processes that have the greatest impact on customer satisfaction, and also examine core competencies. At which processes must the organization excel? Look at both innovation and incremental improvement. For a traditional manufacturer, factors might include product development, manufacturing, delivery and post-sale processes.
- Customer Satisfaction: An organization must talk to its customers to understand what their expectations are, and measure against their expectations, not what the organization assumes them to be. For example, cost to a customer might not be just the price of the product, but can include everything about how easy the vendor is to do business with -- ordering, delivery, reworking and obsolescence. (Kaplan & Norton, 1992) Think beyond a customer survey here -- look at measurable areas like response time, retention and acquisition.
- Financial: Financial performance should be the logical result of doing the fundamentals well. Financial results are easiest to measure, but are limited, as they have a backward-looking focus, and because of that, tend to focus on the short term. Primary metrics include profitability, growth and shareholder value.
These four perspectives serve as a good template for what any individual organizational perspectives should be. It's possible to have more than four, or fewer, and they may be completely different. A company's perspectives may include such categories as innovation, research and development, and the environment, depending on what the business and vision is. For example, the Project Management Institute's (PMI®) perspectives are Resources, Culture and Capabilities, Internal Business Process and Stakeholder Intimacy (PMI, 2004).
Strategy Maps
Strategy maps create a logical, visual depiction of the overall vision, and how the organization will achieve it, by linking the strategies together to tell a story. The organization's entire vision is embodied by the relationships between its strategies (Niven, 2002, p 163 – 165). It's not just a few key unrelated activities that comprise an organization's strategy – it's the sum of all activities.
Why a map? Strategy implies the movement of an organization from its present position to a desirable but uncertain future position (Cokins, 2004, p 68). Because the organization has never been to this future state, the pathway to it consists of a series of linked hypothesis. A Strategy Map specifies these cause and effect relationships, making them explicit and testable. Visually representing those cause-and-effect links helps communicate the strategy clearly.
Measures
A strategy represents a leader's best guess as to an appropriate course of action, given the best available knowledge of the company and its environment. Think of strategy as a hypothesis. Projects are the experiments to test the hypothesis. Project management is the execution of the experiment; analogous to scientific rigor, it's how management knows the experiment was conducted accurately. Metrics are the data that validates the hypothesis. Metrics are fed back to executives, to adjust the strategy (Alleman, 2003).
Effective measurement must be an integral part of the management process (Kaplan & Norton, 1993). For each strategic objective, the organization creates appropriate measures, and an associated target. Projects may then be designed and implemented to meet each objective.
Measures must be focused on moving the company forward (Kaplan & Norton, 1992). In the same way that the Strategy Map encompasses the entire Vision, each objective should be wholly addressed by the measures behind it. That doesn't mean having dozens of small measures, but rather define a few larger measures for each objective. These measures include incremental, medium, and long term targets, though the organization may not have all levels for all strategies (Niven, 2002, p 181).
Traditionally, project management has focused on tactical measures. The project is on time, on budget, risks and issues are properly addressed. Tracking and reporting on such tactical measures are critical to good project governance.
Strategic measures are how the organization knows that it is working on the right things. Even areas that don't seem inherently tied to strategy, such as a simple maintenance project, can free up funds for new development. If described in those terms, more value will be recognized in a project. Risks should be described in terms of impact on strategic objectives, not just project status. Strategic measures may address elements such as resource optimization, cycle time, customer retention and governance (Alleman, 2003).
As project managers, cost and schedule are primarily measured as lagging indicators. What has happened and when? For proper execution, the project needs to also measure leading indicators. A leading indicator, if promptly reacted to, can change the outcome of the strategic objective it influences. For a leading indicator to be effective, it needs to be continuously measured, not just at the end of large phases, so corrective action is possible (Niven, 2002, p 115). In projects, Earned Value can be a good leading indicator of the overall financial, time and resource expenditure of the project. In the same way, an organization doesn't want to limit their measures to the lagging metric of total monthly sales, but also include the leading indicator of total number of prospects contacted, to determine what sales will be in the future.
Everyone within the organization should be measured on corporate goals, but beware of pitfalls. It may be tempting to measure a Human Resources professional not by hiring goals, but on sales goals, as great salespeople, properly motivated, will produce great sales. It can be argued that the HR person is then motivated to hire great salespeople, and to ensure proper training and rewards are in place (Kaufman, 2006, p 30). The thought is in the right place here, as companies become bureaucratic and ineffective when metrics are not aligned – when each department is working towards separate goals. However, when people are measured by things that are outside of their control, they get frustrated and no longer respond to the measures (Cokins, 2004, p 69). A balance must be struck between tactical, department-level goals and the overall goals of the business, giving people fewer, more vital goals that they can control, and that are aligned with organizational strategy.
Roles and Responsibilities
In most organizations, roles in this process will break down in this manner:
- Executive leadership – defines mission, vision, values and strategy
- Portfolio Manager – builds portfolio to meet strategic objectives, determines metrics, targets, and project priorities
- Project Manager – delivers project to meet objectives. Presents constraints in terms of reduced ability to meet strategic objectives, as well as tactical outcomes. Delivers metrics to validate (or disprove) strategy.
The traditional disconnects have been between executive leadership and portfolio management, and between portfolio and project management, as each appears to have different concerns, and none speak the same language. Balanced Scorecard attempts to address this disconnect with a systemized method of communication, focusing the entire organization on implementing long-term strategy (Kaplan & Norton, 1996).
Implementation
Integrating Balanced Scorecard into a Portfolio Management practice
Project Portfolio Management is the bridge between project management and organizational strategy, as defined by the Balanced Scorecard. Balanced Scorecard cannot be implemented without good Portfolio Management, and neither can be implemented without excellent project management (Cabanis-Brewin, no date). When managers use their goals from Balanced Scorecard as the basis for determining which projects are selected and given priority, the end result is that only those projects that move them towards their long-term goals will be undertaken.
Project Portfolio Management is designed to select the best projects to help the organization achieve its business goals. There are always too many projects, not enough resources, and not enough impartial analysis to figure out which projects to focus on. Much of what companies call portfolio management is merely prioritizing and choosing a selection from a pool of desired projects, rather than evaluating which projects, perhaps not yet defined, will help achieve strategic objectives (Alleman, 2003).
Balanced Scorecard gives greater purpose to Project Portfolio Management, as projects are seen as the means to fulfill strategy in the organization. Rather than simply measure projects against each other to determine which has the stronger return, the first step is determining whether this project moves the organization in the direction it wants to go.
How does an organization start the process?
- Inventory current projects
- Map to Balanced Scorecard (be honest!)
- Identify and add missing projects
- Consider removing projects that do not map to strategies
- Prioritize what's left based on business case and strategic importance (Niven, 2002, p 190).
Not every project is going to map to strategy – the organization also has to perform operational efficiency projects in order to keep the lights on. Those projects should not be dealt with explicitly as exceptions, but rather should be recognized for how they will free up or constrain resources for strategic initiatives (Benson, Bugnitz & Walton, 2004, p 10)
It may be tempting at this point to try to fit Balanced Scorecard into the current project selection process, rather than implement it carefully, as a project, complete with education and training. If a project is identified as desirable, and shoehorned into the strategy rather than properly evaluated and aligned, the end result will be projects that only appear to be aligned at the surface, and no real change to the way the organization does business. Employees need to see the value, and understand how this will help them perform their jobs better, in order for alignment to be successful (Alleman, 2003).
Special concerns for integrating Balanced Scorecard
Balanced Scorecard should be implemented as a project, but buy-in is critical. Successful implementation requires an open conversation with executive management about strategy. Organizations where executives are accustomed to setting direction, but not accustomed to getting feedback on the results, will require a different mindset about the role of strategy in the organization.
To properly align organizational activities, it's best to implement balanced scorecard at every level of the organization. While it's ideal to start at the corporate level and cascade down, it may be more effective to start at a lower level, prove the benefit, and spread throughout the organization (Kaplan & Norton, 1993).
Benefits of successful integration
By connecting Balanced Scorecard directly with project management, the organization is directly linking strategy with tactical execution. With this system in place and functioning well, two things will change:
- Executive management won't be frustrated that the organization isn't following through on their strategy. Today, a corporate leader can dream up all kinds of strategies that the organization has no intention or ability to follow up on (Cabanis-Brewin, no date). Tying strategy directly to results ensures that “pie in the sky” strategies are not developed, and that tactical plans are developed to fulfill the objectives.
- Fewer projects will “fail,” as projects will be evaluated much more thoroughly in the feasibility phase, to ensure they align with organizational goals, and to allocate appropriate resources and targets through Project Portfolio planning.
Project managers have a pivotal role in this process, actually realizing organizational strategy. Ultimately, being more closely tied to strategy can help with tactical decisions of scope control and change management. Rather than focus entirely on impacts to cost, schedule and resources, every change proposed is an opportunity to measure against strategic objectives, to determine whether this change will bring the organization closer to its goals, or merely serve as a distraction.
Strategy is not simply a top-down exercise. As the project team conducts lessons learned on a completed effort, after examining what went well and what could be improved in tactical execution, the team can take the time to also evaluate how well the project met the overall strategic objective – the reason the project was undertaken in the first place. What strategic measures were defined for this project? Was it executed well, yet failed to meet the strategic objective? Perform some investigation into the root cause behind the strategic, as well as any tactical failures. Finally, be sure that data and analysis is communicated up through the management chain, so that the strategy can be refined or revised based on the new data the project has produced.
Executive management has not traditionally come from a project management background. A lot of things that seem obvious to us are not necessarily obvious to senior executives. Project and Portfolio Managers can help organizational leadership learn to manage strategy like a project. The benefits include increased visibility for the project manager, more recognition for project management as a profession, more relevant, actionable strategic plans, and a stronger, smarter company.
