Transforming management systems and accounting functions to meet the challenges of information age competition

Introduction
Various management systems and methodologies have been developed to address the multitude of issues facing organisations from one decade to another. At the on sought of technological and industrial developments, numerous books have been written full of advice and suggestions about how to manage one business issue or another. For the benefit of the readers, whom I appreciate, are constantly bombarded with information from a multitude of sources, this article seeks to condense much management thinking and effectively organise diverse insights in a practical manner. As the first decade of the twenty-first century comes to an end, contemporary management thinking has been profoundly reshaped by the conviction that developing necessary skills to manage organizational knowledge effectively is a prerequisite for sustainable competitive success. Nowadays, sustainable competitive advantage is no longer gained by merely deploying new technology into physical assets rapidly and by managing financial assets and liabilities. A prerequisite for meeting the challenges for sustaining competitive success and steer organizations toward excellent future outcomes is the development of the necessary skills to manage organizational knowledge effectively. The process to build a scorecard is described and more importantly a description of the actions that are necessary to build solid foundations for the implementation of this new framework are set out in this this article. Practical examples of aligning objectives and measures to organisational strategies through balance score cards and strategy maps are also provided.

Industrial age competition vs. information age competition

Companies are in the midst of a revolutionary transformation. Industrial age competition is shifting to information age competition. In the industrial age, technology mattered, but, ultimately, success accrued to companies that could embed the new technology into physical assets that offered efficient, mass production of standard projects. During the industrial age, multinationals such as General Motors, DuPont, Matsushita, and General Electric developed an integrating device such as the Return on Investment metric to facilitate and monitor efficient i allocations of financial and physical capital . An overarching financial objective such as return-on-capital-employed (ROCE) or Return on Investment (ROI) could direct a companys internal capital to its most productive use whilst monitoring the efficiency by which operating divisions used financial and physical capital to create value for shareholders. By the mid-twentieth century, multidivisional firms were using the budget as the centrepiece of their management systems. In the 1990s, companies had extended the financial framework to embrace financial metrics that correlated better with shareholder value, leading to economic value added (EVA) and value-based management metrics. Today these principles are firmly entrenched in most industries. Whilst the ROI calculation of dividing net income by assets employed ignores a capital charge, EVA adjusts accounting net profit to factor in an explicit capital charge by applying a business-specific and perhaps even an asset-specific cost of capital. Businesses that are earning above their risk-adjusted cost of capital are considered to be creating shareholder value, whereas businesses earning less than their cost of capital are destroying shareholder value. EVA addresses the defect in a pure accounting income calculation that ignores the cost of assets employed to generate accounting profits. The emergence of the information era, however, in the last decades of the twentieth century, made obsolete many of the fundamental assumptions of industrial age competition. It is very unlikely that todays best financial frameworks capture all the dynamics of performance in todays knowledge-based competition. The impact of the information era is even more revolutionary for service organizations than for manufacturing companies. Many service organizations, especially those in the transportation, utility, communication, financial, and health care industries, existed for decades in comfortable, non-competitive environments. They had little freedom in entering new businesses and in pricing their output. In return, government regulators protected these companies from potentially more efficient or more innovative competitors, and set prices at a level that provided adequate returns on their investment and cost base. Clearly, the past two decades have witnessed major deregulatory and privatization initiatives for service companies throughout the world as information technology created the seeds of destruction of industrial-era regulated service companies. Sustainable competitive advantage is no longer gained by merely deploying new technology into physical assets rapidly and by managing financial assets and liabilities. To steer todays organizations toward excellent future outcomes it is vital to obtain an accurate understanding of: a) the complex competitive environment; b) the organisations goals; and c) the methods available for attaining those goals.

Organisational management in a competitive environment and the organisations goals

An initial step is to obtain an understanding of the cyclical process of organisational management in a competitive environment. The four-stage process shown in Diagram 1 starts off from the early stages of formulating strategy all the way through monitoring and control of operational plans.
Diagram 1: The four-stage organisational management process

1. Formulate strategy

2. Communicate strategy

3. Develop & implement tactical plans

4. Monitor and control

To start off with, the unique and sustainable way by which organizations create value is through their strategies. This is true for any type of organisation be it large or small, manufacturing or service, mature or rapid-growth, public or private, for-profit or not-for profit. Strategic business planning sets the overall direction for the future that integrates organisations processes, people and technology into concrete, achievable business goals. When strategy is being formulated, accounting information is the basis for financial analysis which is one aspect of the process of evaluating strategic alternatives. Strategies that are not financially feasible or that do not yield adequate financial returns cannot be appropriate strategies. There three different strategies used by organizations to differentiate themselves in the market place are: i. ii. iii. Product leadership. Customer intimacy. Operational excellence.
ii

Organisations following a product leadership strategy must excel at the functionality, features, and performance of their product or service. Organisations following a customer intimacy strategy will stress the quality of their relationships with customers and the completeness of the solution offered to customers. Organisations following an operational excellence strategy need to excel at measures of competitive price, customer-perceived quality, and lead-time and on-time delivery for purchasing. At stage 2, organisations today need a language for linking vision with strategic business planning. The building blocks are in communicating strategy, managing roll-out and gaining feedback about the strategy. The overarching mission of the organization provides the starting point; it defines why the organization exits or how a business unit fits within a boarder corporate architecture. Ultimately, success comes from having strategy become everyones everyday job. Accounting reports constitute one of the important ways that strategy gets communicated throughout the organization. Good accounting reports in this early stage of the process are thus reports that focus attention on those factors that are critical to the success of the strategy adopted. At stage 3, strategy needs to be translated to operational terms. Michael Porter describes the foundation of strategy as the activities in which an organization elects to excel: Ultimately, all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or iii services. Differentiation arises from both the choice of activities to be undertaken and how they are performed .

It follows then that specific tactics as well as processes and systems must be developed in support of the overall strategy. Financial analysis is one of the key elements in deciding which tactical programs are most likely to be effective in helping an organisation meet its strategic objectives. At a tactical level, the critical issue is to understand what the key value and cost drivers are. Organizations can benefit considerably if management has a detailed understanding of the value creation processes within the organization itself and the wider value network. An important factor to consider is that costs and value creation are spread unevenly across the activities in the value chain and value network. So some activities are more crucial to value (or cost) creation than others but this will vary with the type of business and with the circumstances in which it is operating. Diagram 2 gives some examples of key cost and value drivers that vary in line with strategic considerations dependent on the source.
Diagram 2: Identifying key cost drivers and considerations for value creation

Source Capital Capital expenditure

Cost drivers/Value drivers Cost of capital Enhanced products; reduction in working capital requirements; or reduction in operating expenditures Number of employees, turnover per square metre, floor area, machine time, rate per hour, advertising per revenue, etc. Material cost and regulated prices or prices dictated by distributors

Strategic consideration Debt vs equity Improve revenues or reduce costs elsewhere

Driven by Financial or business risk Capital intensity and therefore relative importance of sales volume

Operating costs

Low cost Product differentiation Revenue growth Innovation

Cost structures : direct costs and overheads Product/Service

External factors

Select, motivate and control suppliers and distributors Make or buy decisions

Competence in maintaining performance of key suppliers or distributors along the value chain

Key cost and value drivers may change over time. For example, during the introduction of a new product the key factor may be establishing sales volume. Once the product is established in the market place, prices and unit cost may be more important. During decline, improving cash flow through stock and debtor reduction may be essential to support the introduction of the next generation of products. At stage 4, controls must be developed and introduced to monitor the success of the implementation steps and continuously align the organisation to strategy to succeed in meeting the strategic objectives. Rather than having

managing control systems, contemporary thinking calls for a paradigm shift towards the implementation of strategic management performance systems that look beyond financial measures and concentrate on factors that create economic value. The extent to which managers are able to control items of cost and value creation will vary with context. For example, in commodity markets price is externally determined so managing for value must concentrate on other items, mainly operating costs and the supply chain. At divisional level in both the private and public sectors the cost of capital may be determined at the corporate level. So divisional managers must focus on controlling other cost drivers and value creating measures. In the public sector there is a growing need to deliver best value within financial limits.

Methods for attaining organisational goals

Traditionally, vision, strategy, and resource allocation flowed down from the top. Ability to execute strategy was given more importance than the quality of the strategy itself and good vision. Exclusive reliance on financial indicators promoted short-term behaviour that sacrificed long-term value creation for short-term performance. Recognizing the limitations of managing only with financial numbers, many organisations attempted to transform themselves to compete successfully and concentrate on other factors apart from pure financial measures, by turning to a variety of improvement and reengineering initiatives, amongst which: Business process reengineering Just-in-time (JIT) production and distribution systems Building customer-focused organizations Total quality management Time-based competitions Activity-based cost management Lean production/lean enterprise Employee empowerment

During the 1980s and 1990s, organisations adopted quality as their central rallying cry and organizing framework. But quality alone was insufficient, as were the pure financial measures the quality programs hoped to replace. Beyond financial and quality measures, some organisations have emphasized customer focus, implementing programs to build market-focused organization and establishing customer relationship management systems. Others have opted for core competencies or reengineering of fundamental business processes. Still others have emphasized strategic human resources management, showing how motivated, skilled employees can create economic value, or have deployed information technology for competitive advantage. But many of these improvement programmes were introduced as separate independent initiatives, fragmented and many a time not in alignment with the organisations strategic direction nor designed to achieve specific financial and economic outcomes. Each of these perspectives financial, quality, customers, capabilities, processes, people and systems is important and can play a role in creating value in organizations. But each represents only one component in the network of management activities and processes that must be performed to generate superior, sustainable performance. To focus on and manage only one of these perspectives encourages sub optimization at the expense of broader organizational goals. It is not unthinkable that an organization may have made significant investment in an area

that wasnt its core competency and later the newly developed capability was outsourced. Such reengineering initiatives turned out to be counter-productive, wasteful and stole resources from other strategic projects. It is not surprising therefore, that key stakeholders and sponsors may be sceptical about further investment in management systems and management may find it difficult to garner the level of support needed in terms of money and resources. Despite this situation, it is recognised that breakthroughs in performance require major change, and that includes changes in the measurement and management systems of an organization. The key to successful implementation is to become more strategic in prioritising efforts for performance improvement. Although strategic success cant be achieved through a set of rules and priorities which apply in equal measure to all organizations at all times, there are three broad common issues facing organisations of all types.
Diagram 3: Common issues facing organisations

1.Managing for value (value and cost drivers) Funds from operations Investing in assets Financing costs

Strategy
2. Funding strategies Business and financial risks Phases of development Portfolio issues 3. Financial expectations (of stakeholders) Bankers Employees Suppliers Community Customers

Firstly, managing for value, whether this is concerned with creating value for shareholders or ensuring the best use of public money is an important consideration. Seeking to strike a balance between business and financial risk is the second consideration. Finance managers need to ensure that the nature of the funding of strategic development is aligned to the type of strategy being followed and vice versa. Thirdly, financial expectations of stakeholders will vary both between different stakeholders and in relation to different strategies. This should influence managers in both strategy development and implementation. The determinants of value creation are also governed by three key drivers as illustrated in Diagram 4.

Diagram 4: The determinants of value creation Drivers

Value drivers (increase shareholder value) Sales volume Revenue Prices Disposal of fixed assets Reduction in current assets Stock Debtors

Cost drivers (reduce shareholder value) Direct costs Operational costs Overheads

Operations

Investment

Capital investment (fixed assets) Reduction in current liabilities Creditors

Equity

Financing

Cost of capital Loans

Funds from operations are clearly a major contributor to value creation. In the long term, this concerns the extent to which the organisation is operating profitably. A thorough understanding of the detailed cost structures of businesses is crucial since it varies considerably from sector to sector and hence the relative importance of specific cost items. For example, service organisations are generally more human resource intensive than manufacturing underlining the importance of salary structures. On the other hand, retailers are concerned with stock turnover and sales volume per square metre, reflecting two major drivers. The extent to which assets and working capital are being stretched is also a key consideration. Highly competitive organisations develop competences in supporting much higher levels of business from the same asset base than others. The mix of capital in the business between debt and equity will determine the cost of capital and also the financial risk. The issues facing the public sector are very similar. The problem for most public sector managers is that their financial responsibilities are usually confined to managing their budget. They will usually be doing this with little understanding of the other financial issues, normally managed by the corporate financial function. There is a real need for managers to be much more familiar with the impact of their day-to-day management decisions on the wider financial health of the organisation. More importantly, due to the inter linkages and intertwined complexities of todays economy, organisations have to move away from management systems linked exclusively to financial frameworks. New opportunities for creating value are shifting from managing tangible assets to managing knowledge based strategies that deploy an organisations intangible assets. Navigating to a more competitive, technological, and capability-driven future cannot be accomplished merely by monitoring and controlling financial measures of past performance. Realistically, however, it is difficult to place a reliable financial value or measure on an organisations value-creating activities from its intangible assets.

Undeniably, these are the very assets and capabilities that are critical for success in todays and tomorrows competitive environment: process capabilities; employee skills, competencies and motivation and flexibility of employees; customer loyalty and relationships; data bases and information technologies; efficient and responsive operating processes, innovation in products and services and systems as well as political, regulatory, and societal approval. In the 1990s, the groundbreaking work of Kaplan and Norton brought to managements attention the need to measure performance in a more holistic way. Therefore, organisations have to replace any narrow or specific focus with a comprehensive view in which strategy becomes a continual and participative process and the heart of v management systems. Kaplan and Norton came up with four perspectives for strategic mapping and a balanced vi scorecard was emerging as a possible solution to the performance measurement problem. Parmenter recently increased the four perspectives to six. The balanced Scorecard provides a new framework to describe a strategy by linking intangible and tangible assets in value creating activities. The old adage what gets measured gets done is still true. Although, the scorecard does not attempt to value an organisations intangible assets, it measures these assets, but in units other than euros. The scorecard allows innovative organizations to build a new kind of management systems having three distinct dimensions: 1. 2. 3. Making strategy the central organizational agenda through effective communication Creating incredible focus through a continual process of aligning resources and activities to strategy Organising logic and architecture to establish linkages across business units, shared services and individual employees
iv

The Balanced Scorecard seeks to translate a business units mission and strategy into tangible objectives and measures. The measures represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation and learning and growth. For instance a customer focused strategy can be executed by decentralising the organization into market-facing business units where each business unit is held accountable for its profitability and central staff functions are restructured into shared service groups. The measures are balanced between the outcome measures the results from past efforts and the measures that drive future performance. And the scorecard is balanced between objective, easily quantified outcome measures and subjective, somewhat judgmental, performance drivers of the outcome measures. Whilst retaining an emphasis on achieving financial objectives, the scorecard measures organizational performance across the following six balanced perspectives: 1. 3. 5. financial internal business process employee satisfaction 2. 4. 6. customer learning and growth the environment/community

The objectives and measures of the scorecard are derived from an organizations vision and strategy. It enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth.

Rather than assessing financial performance just by measuring asset utilization or simple cost reduction ratios, one of the principal contributions of the Balanced Scorecard is to highlight the opportunities for driving financial performance through two basic strategies: growth and productivity. The revenue growth strategy focuses on developing new sources of revenue and profitability. On the other hand, the productivity strategy focuses on cost reduction and efficiency by focusing on the efficient execution of operational activities in support of existing customers. Organisations that are in early-stage start-up mode or see opportunity for extremely rapid growth will emphasize objectives and measures from the revenue growth strategy. The next perspective that needs to be considered is the customer segment or niche market that the organisation chooses to serve. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy. But so is deciding not to serve other customers or needs and not to offer vii certain features or services. Connecting a companys internal processes to improved outcomes with customers is the value proposition delivered to the customer. The value proposition describes the unique mix of product, service, price, relationship, and image that the provider offers its customers. Porter claims that activities are the basic units of competitive advantage. The art of developing a successful and sustainable strategy is ensuring alignment between an organizations internal activities and its customer value proposition. The value proposition determines the market segments to which the strategy is targeted and how the organization will differentiate itself, in the targeted segments, relative to the competition. Learning and growth initiatives are the ultimate drivers of strategic outcomes - they are the true starting point for any long-term, sustainable change. This perspective defines the intangible assets that are needed to enable organizational activities and customer relationships to be performed at ever-higher levels of performance. Managers and individuals lower down in organisations usually control resources and competences that are crucial in enabling strategic success and also likely to be the most knowledgeable about changes in parts of the business environment with which they interface. Cognisant of this fact, contemporary management thinking encourages execution that flows back from the front lines and back office whilst management directs efforts to implement, innovate, provide feedback and stimulate learning across the entire organisation. Moreover, investing in, managing, and exploiting the knowledge of every employee whilst maintaining employee satisfaction has become critical to the success of information age companies. Both the development of unique resources and core competences in parts of an organisation may provide the springboard from which new strategies are developed.

Relevance of Information, accounting systems and structures

To meet up with the challenges of information age competition, we need to move away from having accounting functions and financial systems that are developed merely for compliance and financial reporting purposes. As mentioned earlier, cost and value creation are spread unevenly through the activities in the value chain and are to be catered for across all business units taking into consideration internal and external factors. Information is a key resource and the ability to access and process information efficiently can build or destroy an organisations core competences. Better information through IT allows managers and external stakeholders to bypass some of the traditional gatekeepers, who gained power from their gate keeping of information. Within organisations, many middle management roles have been as information conduits between the senior managers and the front-line. With the ever increasing application of IT, direct communication between the top and the bottom of an organisation is better facilitated, thereby creating a link with all employees, bypassing the traditional hierarchy. Front-line employees in fact hold the key to valuable knowledge from the day-to-day issues that they encounter like customer queries. The more efficient organisations operate flatter structures and promote direct communication of strategy to and from the front line and also promote more direct interaction at much lower levels across the organisation. The same is true externally the sales force is no longer the primary route through which customers gain their product knowledge or even place orders. So the role of sales people is moving from closing deals to relationship management and advice. Perhaps that one of the pitfalls consequent to the rapid IT developments is that over the years too many disjointed systems have been implemented, each system independent of any other, duplicating effort and processes along the way, whilst giving little regard, if any, to the business strategy. Changing the ways of doing business and the redesign of accounting functions and systems and the scope of any roll out of new IT platforms should primarily be driven by the need to provide data and information that assist in the implementation of business strategy. Optimal benefit will only be derived from having integrated management systems that cater for ease of data extraction and manipulation of data to satisfy the multiple roles that accounting information is intended to play. More often than not, data integration draws from the diverse information sources residing within various databases, both from within the organisation as well as externally. In this regard systems developments have made important contributions to the performance of many organisations for example enterprise resource planning has helped with resource integration. However, it is not sufficient to regard resource management and resource integration as being solely about the systems and procedures of an organisations business functions. Moreover, unless managed effectively, these systems and procedures may actually hold back strategic change and will not, by themselves, achieve resource integration. Needless to say, for data integration to become a reality within any organisation, no matter of its size and nature, management needs to make a conscious effort and dedicate a substantial amount of time to plan and integrate systems across functions in a concerted manner. A common database interacting with all information systems will reduce duplication of effort as well as minimise human error. The key question is whether the overall fit with strategy is appropriate. For example a target cost system with tight, engineered cost allowances may be an excellent tool for assessing manufacturing performance in a business

following a strategy of being the low-cost producer. However, adopting such an accounting tool might be dysfunctional in a business pursuing a strategy of differentiation via product innovations. Another example is the relevance of the application of accounting concepts to different situations. A typical example is the use of return on investment analysis which may have little relevance for assessing the performance of middle-level managers in situation where investment decisions are made centrally. On the contrary, this concept may at the same time be critically important in assessing the attractiveness of different strategic investment options. It therefore follows that the relevance and efficiency of accounting systems and tools applied must be judged in light of their impact on business success whilst ensuring that they are mutually consistent among the various elements of the strategic framework of the organisation. Four key management questions need to be answered to assess the relevance of accounting activity and information systems and functions to strategy. 1. Do they serve an identifiable business objective? For example to facilitate strategy formulation or assess managerial performance in relation to a cost leadership or product differentiation strategy. Does the accounting activity enhance the chances of attaining the objective it is designed to serve? For example measure the organisations sales volumes against those of the industry to evaluate a revenue growth strategy. Does the financial objective fit strategically with the overall thrust of the business? For example an increase in ROCE fits in with the overall strategy of the business to increase its share of the market within a specified period of time. Does the impact on all organizational units along the value chain bring about enormous improvements in cost, quality, and response time? Even though an organisation may participate in only a part of the value chain, it should analyse its technological investments from the standpoint of their impact throughout the chain, from customer orders upstream to raw materials suppliers.

2.

3.

4.

The building blocks

It is of little help to tell the senior management team that the horse has bolted halfway through the following month. If management is told immediately the stable door has been left open most are soon able to close it. Only the continual process of realignment and participation in regular monitoring and reporting at executive level will ensure the timely action that will deliver nonlinear performance breakthroughs. Whilst resources, activities and competences may reside in various areas of the organisation to support selected strategies, the ability to pull a range of resources and competences together both inside the organisation and in the wider value chain is essential to sustain competitive advantage. To mention but a few, local/global branding, reduction in operating expenses, focused Research and Development on shorter-term specific business opportunities, striking strategic alliances with customers, suppliers and competitors all contribute towards driving the responsibility of the profit and loss accountability deeper into the organization. Also, only part of knowledge can be captured in systems. Long-term sustainable competitive advantage is gained from knowledge that cannot be codified since it will be more difficult to imitate and which cannot be replaced by any system. Therefore, integration also results from peoples embedded behaviours and the way things are done

in an organisation. This is likely to be potential benefit, since this embedded knowledge will be difficult to imitate. Should the embedded knowledge not be well catered for, it can also prove to be the Achilles heel of an organisation as managers find it difficult to challenge and change this knowledge and the behaviours in the organisation and fail to respond to change. The effective co-ordination and in certain instances re-thinking of the competitive priorities such as quality, price, delivery speed, delivery reliability, flexibility to adopt latest trends and innovation, reduction in operating expenses, bottom-line improvement, increased customer satisfaction and retention are the building blocks of organizations to help them concentrate on maintaining performance in qualifying factors and improve competitive edge factors. In the short run, financial results can be affected by temporary factors the weather, interest rates, exchange rate movements, energy prices, and economic cycles. But what determines how an organization does in the long run is how well it is positioned relative to its competitors. If organizations can continue to invest, even during economic downturns, in customer relationships, process improvements, new product development, and employee capabilities, they can improve their position relative to competitors, so that when the external environment improves, they will enjoy profits much higher than the industry average. How senior executives react during shortterm downturns speaks volume to the commitment of the organization to creating long-term, sustainable value. Just as long as the investment is aligned with the strategic direction, such a project might turn out to be the most critical to the future of the business. Furthermore, investments must be guided by the broader perspective including that external to the organisation at critical steps in the chain. The key enabling initiatives that complement each other and are equally important are therefore: i. the optimisation of processes and streamlining those processes to the defined objectives and strategies followed by the organisation, leveraging of technology to the right extent, and maximising output from tangible and intangible assets.

ii. iii.

Linking financial framework to value creating activities

The ability of a company to mobilize and exploit its intangible or invisible assets has become far more decisive than viii investigating and managing physical, tangible assets . Intangible assets are crucial since they enable an organization to: Develop customer relationships that retain the loyalty of existing customers and enable new customers segments and market areas to be served effectively and efficiently; Introduce innovative products and services desired by targeted customer segments; Produce customized high-quality products and services at low cost and with short lead times; Mobilize employee skills and motivation for continuous improvements in process capabilities, quality, and response times; and Deploy information technology, data bases, and systems.

Due to the very nature of intangible assets, creating the link between intangible and tangible assets may prove to be quite challenging, in particular since it is highly complex to place a financial value to intangible assets. An

understanding of the four elements driving the links between tangible and intangible assets is necessary to start the transformation process that ultimately impact organisational processes, customer and financial outcomes. 1. Value is indirect. Intangible assets such as knowledge and technology seldom have a direct impact on the financial outcomes of revenue and profit. Improvements in intangible assets affect financial outcomes through chains of cause-and-effect relationships involving two or three intermediate stages. For example: a. Investments in employee training lead to improvements in service quality; b. Better service quality leads to higher customer satisfaction; c. Higher customer satisfaction leads to increased customer loyalty; d. Increased customer loyalty generates increased revenues and margins. The financial outcomes are separated causally and temporally from improving the intangible assets. The complex linkages make it difficult if not impossible to place a financial value on an asset such as workforce capabilities. 2. Value is contextual. The values of intangible assets depend on the context and strategy of the organisation. They cannot be valued separately from the organisational processes that transform them into customer and financial outcomes. For example, a senior investment banker would have immense valuable capabilities for developing and managing customer relationships. That same person, with the same skills and experience, would be worth little to an e-gaming company that emphasises operational efficiency, low cost, and technology-based trading. The value of most intangible assets depends critically on the context the organisation, the strategy and the complementary assets in which the intangible assets are deployed. Value is potential. Tangible assets, such as raw material, land, and equipment can be valued separately based on their historic cost the traditional financial accounting method or on various definitions of market value, such as replacement cost and realisable value. Industrial age companies succeeded by combining and transforming their tangible resources into products whose value exceeded their acquisition cost. Profit margins measured how much value was created beyond the costs required to acquire and transform tangible assets into finished products and services. Companies today can measure the cost of developing their intangible assets the training of employees, the spending on databases, the advertising to create brand awareness. But such costs are poor approximations of any realisable value created by investing in these intangible assets. Intangible assets have potential value but not market value. Organisational processes, such as design, delivery, and service, are required to transform the potential value of intangible assets into products and services that have tangible value. 4. Assets are bundled. Intangible assets seldom have value by themselves. Generally, intangible assets must be bundled with other assets intangible and tangible to create value. For example, a new growth-oriented sales strategy could require new knowledge about customers, new training for sales employees, new databases, new information systems, a new organisation structure, and a new incentive compensation program. Investing in just one of these capabilities, or in all of them but one, would cause the new sales strategy to fail. The value does not reside in any individual intangible asset. It arises from creating the entire set of assets along with a strategy that links them together.

3.

Building a scorecard and strategy mapping

This framework does not attempt to value an organisations intangible assets, but measures these assets in units ix other than currency . The scorecard is the tool that can effectively be used to answer key questions like: Where is our industry going? Where is our organisation headed? What does all this mean for each employee? What is expected of employees? How do we go about achieving the strategy? What resources are required to help us achieve targets? What activities do we need to have in place? What processes to do we need to have in place?

Strategy maps are the relevant tools in the balance score card process that make it possible to understand causeand-effect linkages and also describe how intangible assets get mobilised and combined with other assets, both intangible and tangible, to create added-value customer value propositions and desired financial outcomes. As already outlined in this article, the main steps to build a scorecard of objectives and measures that reflects the strategy of the organisation are outlined below: Assessment of the competitive environment Learning about customer segments and preferences Developing a strategy to generate breakthrough financial performance Articulating the balance between growth and productivity Selecting the targeted customer segments Determining the value proposition for the targeted customers Identifying the critical internal business processes to deliver the value proposition to customers whilst meeting financial and productivity objectives Developing the skills, competencies, motivation, data bases, and technology required to excel at internal processes and customer value delivery

Most organisations consist of multiple business units and a collection of shared service units. Such organisations must link their high-level scorecard developed at corporate level, down to their decentralised organisational units. This creates alignment and synergy across the organisation. As a typical example, lets consider an organisation, Company X, which has decided to have customer focus as its new strategy. As part of its new strategic process, Company X has dissolved its centralised, functional organisation and created smaller geographic business units so that each unit would be able to react to the companys local market conditions in different ways. In addition, the previously centralised staff functions such as information services, finance, planning and analysis, human resources and health and safety, have been transformed into smaller shared service units. The smaller shared services units had to sell their services to the local business units and get agreement from them on prices and levels of service provided. The new organisation created two challenges for senior management. The first was figuring out how to keep the geographic business units focused on the same high-level strategy. The second was upgrading the skills of the newly appointed business unit and shared service heads. The business unit heads had all been nurtured within a structured, top-down functional organisation. Only the top two senior executives had accountability for a P&L statement. Everyone else either managed costs (as a manager of the manufacturing plant or distribution facility) or revenues (as a district sales manager). The challenge was to transform the managers of the units into leaders of more entrepreneurial profit making businesses. The mind set of these managers with functional expertise had to be redirected to think strategically, as general managers of profit-oriented businesses. The Balanced Scorecard was deployed to create strategic awareness and skills among the new unit managers and to align the strategies of the decentralised units with each other and at corporate level. The scorecard developed at corporate level established the major objectives that were common for the entire organisation. The main objectives established at corporate level were the following: 1. 2. 3. 4. 5. 6. Achieve financial returns (as measured by ROCE) Delight targeted consumers with a great buying experience Develop win-win relationships with retailers Improve critical internal processes low cost, zero defects, on-time deliveries Reduce environmental, safety and other health-threatening incidents Improve employee morale

These high-level objectives were then transmitted throughout the organisation by incorporating them in scorecards developed by individual business units. Each unit formulated a strategy appropriate for its target market, but each strategy had to be consistent with the themes and priorities of the template established at corporate level. The business unit scorecards were customised to factor in geographic circumstances such as competitors, market opportunities and critical processes, but were all based on the high-level corporate scorecard.
Diagram 5: Corporate Level Balanced Scorecard

Strategic Themes Financial Financial Growth

Strategic Objectives 1 2 3 4 5 Return on Capital Employed Existing Asset Utilization Profitability Industry Cost Leader Profitable Growth

Strategic Measures - ROCE - Cash Flow - Net Margin Rank (Vs. Competition) - Full Cost per item of delivery (vs. competition) - Volume Growth Rate vs. Industry - Premium Ratio - Revenue per unit and Margin - Share Of Segment In Selected Key Markets - Mystery Shopper Rating - Retailer Gross Profit Growth - Retailer Survey - New Product ROI - New Product Acceptance Rate - Dealer Quality Score - Yield Gap - Unplanned Downtime - Inventory Levels - Run-out Rate - Activity Cost vs. Competition - Perfect Orders - Number of Incidents - Days Away from Work Rate - Employee Survey
Personal Balanced Scorecard (%) - Strategic Competency Availability - Strategic Information Availability

Customer

Delight the Consumer

1 Continually Delight the Targeted Consumer 2 Build Win-Win Relations with Retailers 1 Innovative Products and Services 2 Best-in-Class Franchise Teams

Win-Win Dealer Relations

Internal

Build the Franchise

Safe and Reliable Competitive Supplier

3 Manufacturing Performance 4 Inventory Management 5 Industry Cost Leader

Quality Good Neighbor Motivated and Prepared Workforce

6 On Spec, On Time 7 Improve H&S 1 Climate for Action 2 Core Competencies and Skills 3 Access to Strategic Information

Learning and Growth

The business unit managers were free to choose local measures that would influence the measures on corporate scorecard, but the measures were not necessarily a simple decomposition of the higher-level scorecard. Whilst many measures at a local level may be similar to those on the corporate level scorecard, additional measures may be identified at local level. For example, Retailer Commitment that sought to align all retailers with the corporate objective of a fast, friendly service as a buying experience. Each district developed its own initiative and measures to seek strategic alliance with the retailers falling under that particular region. Other regions could however adopt different approaches. So the measures for this objective could be different for the different districts and therefore could not be aggregated at corporate level. However, the strategies of all business units were aligned so that the cumulative impact of each unit performing well would be reinforced by the actions of all other units. The next linkage was at the level of the shared service units. These units now had to sell services to the natural business units and get agreement from them on prices and levels of services provided. To get the staff functions

(or shared service organisations) responsive to business unit needs, Company X formed buyers committees. Each committee had representatives from business units who worked out an annual agreement with a shared service unit. Rigorous negotiations occur annually between the buyers committee and the shared service units executive team on the menu of services that the service unit proposed to supply and the cost of supplying each service type. The discussions eventually culminated in a service agreement describing the set of services that the business units wanted the service unit to supply and an authorised budget for the supply of these services. Often services that the shared service group wanted to offer were not perceived as valuable by the business units buyers committee, so the services were discontinued. In other cases, the buyers committee wanted the service but not at the prices being quoted. The shared service unit would then reduce some of the functionality, to deliver a lower-cost basic service. The converse also occurred. The buyers committee often identified services that were high priority for them, which the shared service unit had not proposed to offer. The negotiation process is an iterative process, providing learning and bonding opportunity for each side of the table as they go through each iteration, until agreement is reached. Once agreement was reached, each service units construct their own scorecard, developing their strategies for functional excellence. However, the service units strategies have to be directed at helping the business units achieve their strategies. The customer perspective of the shared services Balanced Scorecards reflects the business units satisfaction with the delivered services. In this way, the shared service unit success measures were linked to the measures on business unit scorecards and the corporate scorecard. At the end of this process, each decentralised unit would have developed its unique strategy. But each strategy is linked to the others and, ultimately, to common organisational themes and objectives. As highlighted in the above example, the score card makes it possible to describe strategy in a consistent and insightful way. The next step is to draw up strategy maps that portray the cause-and-effect relationships of how the strategic themes drive improved customer and financial outcomes and a motivated workforce as set out in Diagram 6.

Diagram 6: Corporate Level Strategy Map

Increase ROCE to 12%

Financial Perspective

Revenue Growth Strategy

ROCE Net Margin (vs.

Productivity Strategy

New Sources of Revenue Revenue and Margin

Increase Customer Profitability Volume vs. Industry Premium

Become Industry Cost Leader Cash Expense (Cost per unit) vs. Industry

Maximize Use of Existing Assets Cash Flow

"Delight the Consumer" Customer Perspective Mystery Shopper Rating Share of Segment Differentiators Speedy Purchase Friendly, Helpful Employees Recognize Loyalty

"Win-Win Retailer Relations"

Basic Clean Safe Quality Products Trusted Brand

More Consumer Products

Help Develop Business Skills

Retailer Profit Growth Retailer Satisfaction

"Build the Franchise" Create new Products and Services

"Increase Customer Value" Understand Consumer Segments Share of Target Best-in-Class Franchise Teams Retailer Quality Rating

"Achieve Operational Excellence"

"Be a Good Neighbor"

Internal Perspective

Improve Hardware Performan Yield Gap Unplanned

Improve Inventory Management Inventory Levels Run-out Rate Industry Cost Leader

Improve Health and Safety

New Product ROI New Product Acceptance Rate

Health and safety incidents

On Spec On Time

Perfect Orders Activity Cost vs. Competition

A Motivated and Prepared Workforce Climate for Action Learning and Growth Perspective Competencies - Functional Excellence - Leadership Skills - Integrated View Strategic Skill Coverage Ratio Technology - Process Improvement - Systems integration Systems Milestones

- Aligned - Personal Growth

Personal Scorecard Employee Feedback

So the simple act of describing strategy via strategy maps and scorecards is an enormous breakthrough. In this way, the Balanced Scorecard uses strategy maps to describe how intangible assets get mobilized and combined with other assets, both intangible and tangible, to create value-created customer value propositions and desired financial outcomes. Whilst retaining, via the financial perspective, an interest in short-term performance, the Balanced Scorecard clearly reveals the value drivers for superior long-term financial and competitive performance. Diagram 7 sets out

balanced score card of the financial perspective and the respective objectives and measures for both productivity and growth strategies.

Diagram 7: Financial Perspective Scorecard

High-level financial objective defined: increase return on capital employed (ROCE) from its current level of say, 7% (below the cost of capital) to 12% within three years. Two financial themes are selected to measure ROCE, each theme having two components. For each component, the goal is clearly established from the outset and the measurement criteria are also identified as shown below: Strategy 1. Productivity i. Cost reduction Measure operating expenses vs industry 2. Growth i. Volume growth Volume growth rate vs industry growth rate and increase % of volume in premium products grow faster than industry average and increase premium product sales ii. Expand product line at retail level revenues and margins

Goal

become the industry cost leader

ii. Asset intensity Measure cash generation from existing assets plus any benefits from inventory reductions handle greater volumes without expanding asset base

Goal

develop new sources of revenue by offering a wider range of products for resale

In this example, the juxtaposition of two contrasting strategies - productivity vs. growth - is a frequent cause of strategic failure. In the absence of the scorecard, organisations become confused by apparent contradictions and tend to fall back to one-dimensional behaviour. The Balanced score card allows the definition and clarifications of these contradictions to make the organization aware of the tradeoffs and to manage them - across their internal value chain - in a visible and effective way. Rather than view the multiple measures as requiring complex trade-offs, the strategic linkages enables the scorecard measures to be tied together in a series of cause-and-effect relationships. Collectively, these relationships describe the strategic trajectory, for example of how investments in employee re-skilling, information technology and innovative products and services can be interlinked to dramatically improve future financial performance. Whereas strategy is about choice, strategy realignment does not simply rely on cost reduction and downsizing. In the above example, the organisations strategy to improve its margins is two-pronged as follows:

i) Reduce costs and improve productivity across its value chain; and ii) Generate higher volume on premium-priced products and services. As such, the organisation can compete for price sensitive consumers by lowering costs throughout its value chain and/or attract a niche segment/s by offering a superior buying experience to its customers. It need not follow one strategy (productivity) at the exclusion of the other (revenue). Intrinsically strategies can be executed with the same products, same facilities, same employees and same customers. People are at the heart of strategies in most organisations. The organisational set-up of people within the organisation is a determinant factor for success the structures, roles, processes and interrelationships within and external to the organisation. This involves issues about how people should be developed as a resource but is also concerned with understanding, managing and gaining advantage from the cultural and political context that people create. If we are to build an effective organisational structure, we must have a consistent way of positioning it relative to other management processes. The new framework is a tool to reposition the organization in its competitive market space by adopting a new set of cultural values and priorities and driving the performance mind by intangible drivers. However, successful implementation of the scorecard is achieved by adopting a mindset of a continual change process primarily mobilised through executive leadership. The information age organization operates with integrated business processes that cut across traditional business x functions . It combines the specialization benefits from functional expertise with the speed, efficiency, and quality of integrated business processes. Indeed, the scorecard can be used as the mechanism to encourage dialogue between business units and corporate executives and board members, and not just the means to achieve shortterm financial objectives. The implementation of the scorecard concept should transpose into transformational processes. These concepts need to be embedded into the meetings, information systems, and everyday life of organizations. For example, organisations competing with low price strategies may find a centralized bureaucratic configuration to be appropriate. This bureaucracy must deliver routine business processes which reduce cost whilst maintaining threshold quality levels. IT can facilitate this cost reduction through routine processes whilst also enabling complex co-ordination. On the other hand, highly devolved organisations are less concerned with complex co-ordination and require accurate and timely information about the performance of business units against pre-agreed targets. This is the core of the relationship between the corporate centre and the business units. The scorecard is principally developed by the senior executives of the organisation, as a team project with a view of creating a shared model of the entire business to which everyone has contributed. Senior executives come together as a team to build a credible business strategy as part of the corporate team and to identify new business opportunities. The scorecard objectives become the joint accountability of the senior executive team, enabling it to serve as the organizing framework for a broad array of important team-based management processes. Objectives, strategies, goals and measurement criteria are the product of teamwork and consensus among all senior executives, regardless of previous employment experience or functional expertise. Indeed, the Balanced Scorecard should drive the agenda of management meetings.

Before the development of strategy scorecards, managers had no generally accepted framework for describing strategy: they could not implement something that they couldnt describe well. Once managers understand highlevel objectives and measures, they can establish local objectives that support their business units local strategy. The scorecard facilitates a new integrated governance framework that measures and reports performance concisely, in a timely and efficient manner emphasizing learning, team problem-solving, and coaching in a way that results in action. Events/activities covering the critical success factors are to be reported on a daily/weekly/monthly basis depending on their significance and focusing on decision making. The scorecard is used to establish the framework for obtaining strategic feedback and creating an environment for a continual learning process. Even for companies in industries with relatively long-product-life cycles, continuous improvement in processes and product capabilities is critical for long-term success. Organisational performance measures will be modified in response to the performance measures developed at team level. In turn, performance measures are meaningless unless they are linked to the organisations Critical Success Factors (CSFs), the balanced scorecard perspectives and the organisations strategic objectives.
Diagram 8: Linking Critical Success Factors and Performance Indicators

Mission / Vision / Values

Strategies (Issues & Initiatives)

Financial Results

Customer Satisfaction

Learning & Growth

Internal Processes

Staff Satisfaction

Community & environment

Critical Success Factors

Key result indicators (max 10) Performance indicators (80 or so) Key performance indicators (max 10)

Financial Results

Customer Satisfaction

Learning & Growth

Internal Processes

Staff Satisfaction

Community & environment

Ascertaining an organisations CSFs is a major exercise. CSFs identify the issues that determine an organisations health and vitality. When CSFs are first investigated, the list may be made up of 30 or so issues than can be argued are critical for the continued health of the organisation. The second phase of thinning them down is easy, as the more important CSFs have a broader influence cutting across a number of Balance Score Card perspectives. Better practice suggests that there should be only between five and eight CSFs . Once the CSFs have been identified, the next step is to identify the Key Performance Indicators (KPIs). The process of identifying the KPIs is much easier, as they will reside within these CSFs.
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Sustaining the new strategies

Implementation of new strategies calls for the continuous alignment of business units, shared service units, teams and individuals around overall organizational goals. Without a comprehensive change strategy there is little hope for the future. Whilst the future cannot be predicted, review meetings are steered by looking at the future direction to continually explore how to implement strategy more effectively and continually assessing what changes should be made to the strategy, drawing from experiences learned from the past. Review meetings and the data extracted from information systems are useful tools to re-examine the way that business is being done and whether the work performed by frontline and back-office employees is aligned and supportive of the objectives set out in the scorecard. This forum is also as a strategic communication tool to inform, educate, motivate and align workers to meet new operating realities. The human resource team has an important role to play to ensure that the workforce perceives performance measurement in a positive way and to educate staff and management about the new processes and systems to the extent that staff is in a position to intuitively work with the new concepts on a daily basis. One of the initial steps is to document the common thread of processes which are clearly apparent across the organisation. Such a document is clearly reported and explained to management at the various levels of the organisation via, say a report and to staff, via a notice board or an intranet page. Without better maps, it is extremely unlikely that organizational change efforts will ever sustain themselves. Each new adventure will be the first. Strategy maps are thoroughly explained to all staff and management expectations and supporting processes are clearly explained. Senior management needs to be committed to hold regular meetings to sustain the transformational process. The periodic meetings need to be entrenched in the reporting structure, the scope of which is to facilitate the continuous assessment of the impact of past strategies and outside influences focusing on processes such as planning, resource allocation, budgeting, operational, measurement and reporting itself. The fact that information age environment for both manufacturing and service organizations requires new capabilities for competitive success cannot be overemphasized. Active leadership at the helm of the organisation and ongoing reinforcement at the functional levels is imperative for any organisation to benefit from the significant results that the implementation of the balance scorecard framework is meant to give. Consequently, the leaders driving the score card process need to be effective continuous change management leaders. They also need to have the influencing skills to educate and persuade senior colleagues about the new process. The leaders role is mainly to instigate all the stakeholders involved not only to change what they do but to alter their basic way of thinking itself. A danger in the introduction of the scorecard is that employees will see it as just another Program of the Month. This danger will certainly materialize if the process is fully delegated to an external staff group. To preclude this possibility, the leader/s must ensure that the process becomes the responsibility of line managers and fully owned by internal staff. Moreover, if the organisation is in fact seriously committed to the process, then great care must be taken to carefully position the process relative to the other program and operations within the organisation. Otherwise, confusion will result and enormous energy will be expended on pointless internal politics about which program is superior. Nevertheless, the expertise to build this extensive and somewhat complex process may not reside within the firm. It is imperative that senior management understands the full potential of the entire balance score card process, be it by exercising their professional knowledge or by attending dedicated training programmes or even through consultation with their external networks.

External consultants may also be engaged to take on the role of facilitators and more importantly to transfer knowledge so as to enable the organisation to build its own expertise and take the initiative forward, well beyond its launch date, for an ongoing successful implementation.

Conclusion
The backbone for healthier organisations in the information age must be rooted in a continuous knowledge building process based on the following key underlying pillars: A clear vision; A balanced score card to leverage intangible assets; Clear strategy mapping; Flexible organisational and operational set-ups in alignment with strategies; A Transformational process; and A broader scope performance management system including a fully integrated finance function.

An outside observer should be able to infer the organizations strategy from its scorecard measures and linkages among them. Often this identification reveals entirely new internal processes that the organization must excel at for its strategy to be successful. The scorecard provides the communication vehicle for the new, more complex strategies. Only a continual process of realignment and participation will deliver nonlinear performance breakthroughs. Indeed, in our role as accountants we have a key role to play in transforming management systems and accounting functions with a view of realigning them with the organisations strategy as well as with internal and external factors whilst also allowing for sufficient flexibility to instigate resource development so that value creating objectives are also achieved. I hope that this article has provided some insights to enable us to think about executing our organisational plans and furthermore instigate thoughts to develop strategies and systems that best suit the organisations culture and mentality to drive the organisation where the whole truly becomes more than the sum of the parts. The time for hesitation is gone; the time for action is now!

A. D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business , Cambridge, Mass.:Harvard University Press, 1997and T. H. Johnson and R. S. Kaplan, Relevance Lost: The Rise and Fall of Management Accounting, Boston: Harvard Business School Press, 1987

ii

M. Treacy and F. Wiersema, The Discipline of Market Leaders: Choose your customers, Narrow your focus, Dominate your Market, Reading, MA: Addison-Wesley, 1995 M. Porter, What is strategy? Harvard Business Review, Nov/December 1996

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iv

Robert S. Kaplan and David P. Norton, The Balanced Scorecard: Translating Strategy into Action, Boston: Harvard Busiess School Press, 1996

Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Boston: Harvard Business School Press, 2004.

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David Parmenter, Developing, Implementing and Using Winning Key Performance Indicators, New Jersey: John Wiley & Sons, Inc., 2007 M. Porter, What is strategy?, Harvard Business Review, Nov/Dec 1996 H.Itami, Mobilizing Invisible Assets, Cambridge, Mass.: Harvard University Press, 1987

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viii

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Robert S. Kaplan and David P. Norton, The Strategy-Focused Organization, Boston, Massachusetts: Harvard Business School Press, 2001

J. Champy and M. Hammer, Reengineering the Corporation: A Manifesto for Business Revolution, New York: HarperBusiness, 1993
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David Parmenter, Developing, Implementing and Using Winning Key Performance Indicators, New Jersey: John Wiley & Sons, Inc., 2007