Wednesday, April 23, 2008

Dear Boss

Dear CEO:

I'd like to thank you for the nice pizza party you threw at our ISO 9001 kickoff event. Everybody enjoyed it and appreciated your inspiring words. The joke you told about the elephant, the preacher and the procedure notebook was very amusing. Your sense of humor is exceptional, especially for a member of top management.

The purpose of my letter is to prepare you for the work we have ahead of us. I know how busy you are, and it's easy to get caught up in the day-to-day issues of running our organization. However our new quality management system (QMS) is the way we're going to run our organization, and you'll be a key to its success. Your engagement in this effort will determine whether we use our QMS to become more competitive and customer-focused, or if it will be only a piece of paper on the wall.

Chief, we need a little strategic planning

As you know, identifying processes is a key step in implementing our management system. Let's make sure we identify at least one customer for every process. Whether it's an internal customer or an external customer doesn't matter. What matters is that the people working within every process understand that they serve someone outside of their own little kingdom. Right now, some of our processes operate as if they serve only themselves. We need to drive a customer focus from one end of this organization to the other, and our QMS will help us do it.

One of the key processes is strategic planning. ISO 9001 doesn't require strategic planning, but it's the logical starting point for a lot of things that the standard does require. Everything we do demands the high-level guidance that strategic planning delivers. At least once a year you should assemble your best and most diverse advisors and scan our competitive environment. What do our customers require and desire? How are these requirements and desires changing? As an organization, how well are we positioned to address the changing market and our ever-evolving customers? We need to match ourselves against the realities of our environment, identify actions that will drive us forward and implement these actions with a clear plan. This is the essence of strategic planning. If our ISO 9001 system is disconnected from strategy, then we have a serious problem.

Ditto for objectives

Objectives flow directly from our strategic plan. They tell everyone what specific initiatives are important to our success. Please help us choose strategic, hard-hitting objectives. They should tie directly to our strategic plan, translating that document into simple metrics that everyone can understand. Because our strategic plan will be focused on better serving our customers, our objectives will also be tied to customers. Each process will have objectives that directly relate to the customers it serves.

Resist the temptation to have two sets of objectives, one for the sake of ISO 9001 and the other for "really" running the business. We only need one set of objectives that everyone understands. Don't bother to call them "quality objectives" because that will only cloud the issue. Somebody might hear the term "quality" and try to narrowly define what the objectives may address. Our objectives should address how we drive success, period.

As chief executive, you are uniquely qualified to communicate our objectives and their significance. This message could come from somebody else in the organization, but it's much more effective coming from you. Explain to everyone how each of our objectives affects our long-term success, and ensure that all employees know exactly how they contribute to achieving objectives. Above all, make sure that we all know how we affect our customers in our everyday actions.

Which brings me to management review

You should strive to make management review your forum for reviewing data and making decisions. We're not doing it for the sake of ISO 9001; we're doing it to ensure our success. Management review should occur regularly and rely on timely information. If we already have top-level meetings for reviewing our organization's progress, then let's just turn these into our management review. It doesn't matter how we do it; the only requirements are that the review is your event, and we must cover the specified inputs and outputs. We can get as creative as we want. Management review should never be done just to satisfy an ISO 9001 requirement. The point is to review data, make decisions and become a more successful organization over the long term.

Communicate broadly about all aspects of our QMS. We have a wide range of communication media; it's just a matter of using them. Take every opportunity to talk honestly to our organization about what we're doing and where we're going. Try to connect your message to the things we're doing in the QMS and how they affect our customers. Don't assume that we'll immediately understand. Be very explicit in your communication, and don't forget to allow room for us to respond.

You rule customer feedback

Customer feedback is another key aspect of our QMS, possibly the most important. It's certainly the most critical data we receive. It communicates even more than our financials, which tell us only what has already happened and are poor predictors of the future. Not only can customer feedback predict our future, it's our gateway to long-term success.

As our chief executive, you need to obsess about customer feedback. You should thirst for every bit of feedback we collect--positive or negative. Collect it we must because we can't sit around and wait for customers to call us. We need simple, concise tools for capturing feedback proactively. To collect feedback, let's use existing customer interactions instead of inventing new ones. Our organization already has multiple contacts with customers day in and day out, and these interactions can easily be leveraged to gather feedback.

When customers complain, you should take it personally, mobilizing all of our resources to take corrective action. Not everyone realizes how critical customer complaints are, so you must remind them. Make it easy for customers to complain, and make it easy for us to fix their complaints. When customer feedback indicates something positive, find out what's causing the satisfaction. Share what you learn with everyone, and make it our new standard. If you're constantly asking about customer feedback, everyone will understand how important it is.

Can you fix this?

Another thing to keep on your radar is our corrective and preventive action system. I suspect we're going to have difficulty motivating people to use these processes. Nobody likes extra work, and very often that's what these appear to be. Investigating and solving problems aren't extracurricular activities--they're a key job function for everyone. When problems come up or customers complain, you should say, "Let's open a corrective action." When a potential problem is revealed, you need to say, "Let's initiate a preventive action." In both cases, make sure that adequate resources are applied and that we follow through to completion.

Very few of us have had training on problem-solving techniques. Can you fix that? Getting everyone up to speed on problem solving will be a huge step in our development as an organization. It will prepare us to take part in the corrective and preventive action process. You should participate in the training, too. You're busy, but you're not too busy to become a better problem solver. Your presence would also underline the significance of this training. If you're agreeable, I'll have a purchase order on your desk tomorrow for problem-solving training. Becoming better problem solvers is one of the best investments we can make. The better we are at problem solving, the better we will be at addressing the changing needs of customers.

One word: training

That brings me to training in general. Training is one of our key processes for preventing problems in the first place. It's not optional. We don't have to spend piles of money and weeks of time, but we do have to train our people. I've worked for too many organizations where training was considered good to do if time and circumstances allowed. Once we got busy, training was abandoned. "Hey, we've got work to do!" everyone shouted. "Who's got time for training?" Then they wondered why customer complaints skyrocketed. It's simple cause and effect: Neglect training, and people will make mistakes.

Here's a deal for you: We'll strive to keep the training lean, concise and relevant. In return, you'll frequently ask managers and supervisors how their training programs are going. Maybe you could periodically drop in on training to remind trainers and trainees alike of how important this process is to our success. You should keep yourself in a constant state of learning, too. Nobody needs training more than you, given the huge responsibilities that you face.

Let's work smart on internal auditing

Internal auditing is a process you'll be involved with in the near future. You may never actually perform an audit (although it would be great if you did), but you'll certainly be an essential part of the process. A key role you'll play is making sure that audits are properly resourced. Insist that smart, insightful personnel are selected as auditors. Don't let auditor selection become an exercise in "who can we spare?" Invest the process with smart people, and the results will drive improvements. When audits reveal opportunities, ensure that we take corrective and preventive action. Our audits should focus on important, strategic issues. Ask how the audits are helping us become a better organization. Ask why our customers should care that we're doing audits. Help us keep our eyes on the things that matter, and audits will produce strong results.

Boss, are you listening?

One of the final topics I'd like to talk about is trust. Please trust me when I recommend that we do something to improve our organization. It's your prerogative to disagree with me, of course, but at least trust that I have our organization's best interests in mind. Just because I'm an employee doesn't mean I can't have good ideas. Too many business leaders fall into the trap of thinking that great ideas have to come from outside the company, especially from someone with a briefcase and a business card with the word "consultant" printed on it. The answers to most problems lie right here within our organization; we just have to listen to them. The title CEO should be changed to CLO, for Chief Listening Officer. You'll listen to data, listen to customers, listen to competitors, listen to suppliers and, of course, listen to us, the employees. All this listening, combined with wise action, will ensure that we do the right things.

You hold the key

Finally, be aware that our QMS is a bellwether of our success. A failing management system is a predictor of much larger failure. If we let our QMS decay, become bureaucratic or too inwardly focused, we'll seal our doom. We must use our system to look outward and see where the market and our customers are moving. Your interest, involvement and leadership are the only ways that our QMS will remain viable and improve. If a piece of our system serves no purpose, have it removed. If we're not following our procedures, find out why. If something we do doesn't make sense, investigate further. The words "why" and "I'm listening" are your best friends. You have the power, through these words and your own innate wisdom, to keep us customer-focused and always improving. You hold the key.

Wednesday, April 9, 2008

Building a Balanced Scorecard

Most sane people wouldn't consider steering a ship by looking backward, but that's exactly what most companies do when they focus entirely on financial measures for decision making. The balanced scorecard, one of the most significant management philosophies of the last quarter-century, confronts that stratagem head-on with a simple core concept: Stop trying to manage your organization by financial measures alone. Why? Because financial measures always look backward. They tell you what happened last month, last quarter or last year, but they say little about what will happen in the future.

Financial measures are important, but so are others. Robert S. Kaplan and David P. Norton, authors of The Balanced Scorecard (Harvard Business School Press, 1996), advocate the use of a balanced portfolio of business measures. What exactly is a balanced scorecard? It's a model of metrics, with four boxes representing different measurement categories. The four categories drive performance across different time frames: short, medium and long term. The intent is that organizations will analyze their performance across all four categories of metrics instead of just analyzing and acting on financial measures. Focusing on a balanced portfolio of measures will drive improvement over the long term. Anyone with any amount of business experience knows that financial success in the short term doesn't always translate into long-term success, and that's the underlying wisdom of the balanced scorecard.

The specific measures that reside within each box of the balanced scorecard will be different from one organization to the next. In fact, one of the challenges of the balanced scorecard is in determining logical measures and getting accustomed to acting on them. Here's a summary of the four boxes and how they relate to one another:

• Financial measures. These metrics drive performance over the short term because actions taken to improve financial measures show results quickly. Examples include revenue, profit and cash flow. Financial measures are important because they represent the immediate survival of the organization. They are usually considered the starting point for any balanced scorecard.

• Internal performance measures. These drive achievement in the medium term because actions take longer to show results. Examples include efficiency, innovation and inventory turnover. Internal performance measures rarely show up on financial and accounting reports, but they indicate how well the organization manages its internal processes. Success on internal performance measures will have a direct, positive effect on financial measures, but the effect may take a number of months to appear.

• Customer and marketplace measures. These drive success over the medium to long term because actions might take months or years to show tangible results. Examples include customer perceptions, brand loyalty and market share. Customer and marketplace measures look at success through the eyes of customers, a point of view that is often ignored or minimized. These directly affect financial measures but shift gradually over time. Once customer perceptions begin to move, their momentum is hard to control. This underlies the importance of having a strong grip on what customers really think and what the organization plans to do about it.

• Human resource measures. These drive success over the long term because actions might take years to show tangible results. Examples include hours of training per employee, employee survey results and employee retention rates. Human resource measures are possibly the furthest removed from financial measures because they're often difficult to trace back to bottom-line numbers. But make no mistake---how well an organization manages its human resources certainly affects financial success.

Organizations should try to produce effective results not just for next month but also next year and next decade. Actions taken to improve medium- to long-term metrics are investments in the organization's future. Other themes of the balanced scorecard include linking metrics to strategy, communicating metrics to all personnel and regular progress reviews. These common-sense concepts fit perfectly with the ISO 9001 requirement for measurable objectives.

Are you ready to build a balanced scorecard for your organization? If so, here are some steps that will help ensure success.

Involve top management

The balanced scorecard represents a significant shift in the way organizations gauge their performance. For this reason, top management must embrace the concept fervently enough to become its primary champion. This kind of sales job is no small feat. How do you generate such enthusiasm for a seemingly radical concept? Here's one path:

• Describe what the organization is doing now, which is using financial measures primarily to make all decisions. Show how this has led to shortsighted decisions and mistakes. Make sure to be very diplomatic in how these problems are portrayed.

• Describe the balanced scorecard and explain why it's superior to the measurement methods used by most organizations. Discuss companies that have utilized the concept and provide examples of the measures they used. Make sure to mention that the measures on a balanced scorecard are derived directly from the organization's strategy, which links them perfectly with long-term success.

• Describe how the balanced scorecard could be used in your organization. Outline the strategic benefits to managing a balanced portfolio of measures that drive performance over the short, medium and long term. Explain how a balanced scorecard would remove the ambiguity and confusion that usually accompany the deployment of strategy.

Get top management energized by the concept. Having top management's ear can be very helpful. To achieve this, your sales job is actually twofold: You must sell the people who have top management's ear and then have them assist you in selling top management. The concept almost sells itself when presented correctly. Kaplan and Norton's book can facilitate your preparation, as can a number of others. If you've sold yourself on the concept and truly believe in it, then you'll be in a good position to spread that enthusiasm.

Your best allies during this sales and education process can be your finance people. This might sound a little strange because these would seem to be the people with the most to lose from focusing on things other than financial measures. A smart CFO understands the pitfalls of managing for the short term, though. Use the financial leaders in your organization as sounding boards. It's likely that they'll see the obvious benefits of the approach. Once you have the finance people convinced, your president or CEO should be easy.

Ask the right people the right questions

After top management has become engaged by the concept, someone has to do the dirty work--i.e., build the scorecard itself. A project of this sort will be challenging because the metrics of the past and present might not be much help. The starting point is the organization's strategy. What broad actions are you taking during the next year to stay competitive? The measures on the balanced scorecard will support the strategy, examining it from the perspectives of four quadrants: financial, internal performance, customers and the marketplace, and human resources. That means you'll have to go to the process owners and stakeholders who are tied to these perspectives. Typically, these are the people who are best prepared to assist in developing the respective parts of the balanced scorecard:
• Financial measures: finance, accounting, top management and sales
• Internal performance measures: production, design, quality assurance, engineering, purchasing and logistics
• Customer and marketplace measures: sales, marketing and customer service
• Human resource measures: human resources, training, health and safety

Note that top management is present in only one of these groups. This is so it won't unduly influence measures in the other three groups. There's no benefit to upholding the paradigms of the past when building a scorecard.

The best way to engage each group is through a facilitated session during which you guide participants through an exploration of their own experiences and knowledge about the issues at stake. If the organization has a well-defined strategy, this process is relatively simple. What measures will support achieving the strategy? Define these from each of the four quadrants, and the resulting set of measures will become your balanced scorecard.

The problem is that many organizations don't have a well-defined strategy. Some never get around to doing strategic planning at all. In that kind of organization, developing a balanced scorecard will prove challenging. Even when there's an existing strategy, it's often the result of "group think" or has little connection to the organization's practical requirements.

I recommend holding a series of facilitated meetings with representatives from the four groups listed earlier. During these sessions, you'll guide the participants through a SWOT (strengths, weaknesses, opportunities and threats) analysis specifically focused on their functional areas. For example, participants in the customer and marketplace group will examine strengths, weaknesses, opportunities and threats through the eyes of their customers. The resulting measures will seek to maximize strengths and opportunities, and minimize weaknesses and threats, as viewed through their customers' perceptions. Here are some of the questions in each of the balanced scorecard sections:

• Customer and marketplace SWOT analysis:
--In the eyes of our customers, what do we do especially well?
--What was our biggest customer service success last year?
--What problems do customers keep telling us about?

• Human resource SWOT analysis:
--What makes our people better than employees in other organizations?
--What employee skills and abilities could be improved?
--What skills and abilities do we think will be critical 10 years from now?

• Internal process SWOT analysis:
--What part of our organization experiences the least waste? What enables this efficiency?
--What efficiencies do our competitors have that we don't? What could we do to adopt these efficiencies?
--What's one process improvement we could implement that would put us ahead of the competition?

• Financial SWOT analysis:
--What financial assets do we manage especially well?
--What problems do our accountants keep telling us about?
--What financial advantages do our top competitors have we that we don't?
--What are the three most likely ways our capital could dry up in the next
five years?

The full versions of these SWOT worksheets are available for download:
SWOT--Human Resources
Proposed Measure Evaluation Worksheet

Each of the SWOT analyses will produce a set of measures. Not all the measures will appear on the final scorecard, of course, but at least one measure from each group will. The groups can trim their lists through a multivoting methodology (i.e., where each group member casts a predetermined number of votes) or through a more quantitative process. A tool called the proposed measures evaluation worksheet is also available at Quality Digest's Web site. Regardless of the method used to select your final measures, keep your list short. Having a punchy list of five to 10 measures will clearly communicate to everyone what matters most. If you adopt more than 10 measures for your balanced scorecard, the focus becomes diminished. People are able to concentrate on only a few things at a time, so don't overcomplicate the process. If your balanced scorecard is linked to your competitive reality, then it can be an indispensable tool to drive your long-term success