Strategic performance measurement: Creating a common language to drive execution
V. Chandrashekhar, Arjun Saxena, Vladislav Gil, Prateek Jain
October 6, 2017
The execution of strategy is often difficult and always critical to a company’s success. Companies that excel in execution consistently stand above their peers. To help drive strategy execution and performance improvement, executives in a range of industries should consider using strategic performance measurement (SPM). SPM is an approach that makes an organization’s strategic goals more transparent to line executives and provides an ongoing mechanism to monitor progress toward these goals through simple and intuitive performance measures. SPM creates a common language among all parts of the organization so they can interact transparently and effectively, thus helping to break down silos. SPM has four elements: (1) aligning and cascading strategic objectives down to day-to-day operational goals; (2) developing balanced scorecards for reporting; (3) making reporting easier and focusing on “metrics that matter”; and (4) testing and validating operational and strategic decisions.
Choosing the right metrics to track is the key to successful SPM implementation. In this report, we share several best practices for determining the correct metrics for a company’s specific strategic goals. We also elaborate on some of the common challenges that companies confront when trying to put SPM into action — such as ineffective communication, an excess of data, and the need for executive buy-in — along with possible solutions. Three case studies involving global financial institutions describe in detail how CEOs have employed SPM to align strategic goals with day-to-day operations and on-the-ground, agile decision making.
As the U.S. and world economies continue to grow, we are gradually entering a period where many companies in a variety of industries and geographies are finally able to shift from a cost-cutting agenda to a growth-focused, capabilities-building agenda. But for any new growth strategy to succeed, all levels of the organization must clearly understand enterprise and corporate goals, how they cascade down to individual executive goals, and the strategy to achieve those goals. Senior leaders are expected — and need — to make fact-based decisions at all levels of the value chain, and align incentives across the organization and achieve traction against strategic objectives.
Indeed, what sets a firm apart from its peers is how well it executes its strategy. In a recent Strategy& survey of more than 500 senior executives, nearly two-thirds of the CEOs said executing a strategy is more difficult than developing the strategy and 80 percent felt that their overall strategy was not well understood even within their own company. (For more information, please refer to the book Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap.) With this need for execution in mind, executives should consider strategic performance measurement (SPM), an approach that makes an organization’s strategic goals more transparent to line executives and provides an ongoing mechanism to monitor the achievement of these goals through simple, intuitive performance measures.
All companies have some performance measurement practices in place, yet many common challenges persist. These include a lack of clear linkage between strategic objectives and operational performance measures, limited accountability for outcomes at the operational level, an unmanageable number of sometimes random metrics, fragmented and redundant systems and efforts, and a greater focus on metric analysis than on management decision making.
Without a consistent framework for measuring performance that is explicitly and clearly linked to the overall strategy and anchored in strategic goals, organizational units often don’t understand what is expected of them to achieve strategic alignment. At a more basic level, there is often no uniform approach to describe the performance of a business unit, a functional organization, or a department. Consequently, performance-related conversations are often based on anecdotes rather than a common fact base of outcome measures and a common understanding of causal drivers.
To seize growth opportunities today, companies across industries must become much nimbler. In large organizations, success has always depended on all levels of the organization understanding corporate strategy and how it translates into their day-to-day actions. The difference now is that the business environment is in constant flux and changes so rapidly. Agility is essential to keep up, and that means being able to quickly change performance benchmarks and cascade those changes down through the organization so the entire company can work in concert to deliver on strategic goals. SPM is a powerful methodology that can close the gap between strategy and execution.
Case study 1: A leading discount brokerage
A large discount brokerage had integrated several acquisitions successfully over the previous 10 years, fueling fast growth, and its newest acquisition was poised to increase the company’s revenues by 50 percent. The new CEO and CFO wanted to connect their strategy to day-to-day operations more effectively — particularly when it came to meeting the changing expectations of customers for more digital and self-service offerings. They also wanted to better understand profitability by each client segment, product, and geography.
The company rolled out strategic performance measurement to accomplish three key goals. First, it translated strategic objectives into outcomes so it could measure using a limited number of key performance indicators.
Second, these KPIs were cascaded down to all functional areas — such as marketing, technology, operations, and other supporting functions — by creating drill-down views of the metrics, thus linking strategic goals to operational-level actions and performance. Dashboards were aligned by using a common language: for example, using the same definitions and parameters to calculate the metrics across different business units and functional areas.
Finally, KPIs were designed to better evaluate client segments. In the past, the company understood revenue, but costs were more difficult to calculate and allocate as there were many common costs spread across the organization. The new set of KPIs allowed leaders to allocate costs more precisely to determine the true profitability of business units and client segments.
Case study 2: A U.S. bank holding company
New U.S. regulations required an international bank with large U.S. operations to create a U.S. bank holding company for all its business units, which included a commercial bank, retail bank, wealth management unit, auto lending unit, and investment banking arm. In the past, these business units reported results independently with little uniformity. But the new holding company structure required that these BUs report results as a bank holding company so results could be rolled up.
The new CEO settled on three strategic objectives: creating a common language among the BUs; driving consistency of reporting across business units; and using uniform monthly reporting to understand performance across the businesses on a regular basis. One of the big changes for this institution was to delve much deeper into nonfinancial metrics, such as client segments, products, and operations. In the past, it had focused only on financial income statements.
The executive also wanted to evaluate switching the business strategy from branch-based sales to product-based sales. That required organizational changes and the implementation of new metrics to measure profitability by branch, client, and product. SPM offered a way to stress-test the idea and various scenarios before full implementation. A prototype of the reporting templates for the executives was tested and refined before being moved into production.
Case study 3: A global asset servicer
The CEO of this global asset servicer felt that the company’s strategy was not well connected to the operational goals. Moreover, there was little consistency in reporting among business units, and executives were being sent too many reports on a daily basis — anywhere from five to 10 — that did not aid decision making.
Here, the SPM framework was used to streamline the reporting process, help the company focus on “metrics that matter,” and execute the strategy better by drawing a clear line from strategic goals to the outcomes. KPIs were defined to measure the progress against the outcomes and the specific on-the-ground operational initiatives that drove the KPIs. For example, one of the company’s strategic goals was to improve the client experience. The metrics selected to measure progress against that goal were a client satisfaction index and a net advocacy score (which measures current customers’ willingness to promote the institution to others).
One specific operational goal the company settled on to improve those two metrics was to drive average hold time in the inbound customer service call center to less than one minute. This led to internal debates on whether the company should hire more customer service reps or invest in making the process more efficient, questions that were resolved through some rigorous financial modeling and cost-benefit analysis — a good example of connecting strategic goals to day-to-day operational decisions.
Strategic performance measurement: Creating a common language to drive execution