"Why is there such a persistent gap between ambition and performance?" ask Robert Kaplan and David P. Norton in "The Office of Strategy Management" in the October 2005 Harvard Business Review. "The gap arises, we believe, from a disconnect in most companies between strategy formulation and strategy execution. . . . [But] it doesn't have to be like this."
Successful companies, they write, are establishing a new corporate-level unit called the office of strategy management. This unit is distinctly different from the strategic planning unit and plays a unique coordinating role to help bring strategy to fruition.
For this e-mail Q&A, Kaplan, the Baker Foundation Professor at Harvard Business School, teamed up with colleague Andrew Pateman, Principal of the Balanced Scorecard Collaborative.
Martha Lagace: You and David Norton have highlighted some troubling statistics about how strategy formulation is so often disconnected from strategy execution. What is an office of strategy management, and when and why is it needed? What are its typical activities? How it is distinct from a strategic planning unit?
Andrew Pateman and Robert Kaplan: The statistics surrounding the success that organizations have in executing strategy is low. Our article, "The Office of Strategy Management," using data from a Bain Consulting study, notes that seven out of eight companies in a global sample of 1,854 large corporations failed to achieve profitable growth, though more than 90 percent had detailed strategic plans with much higher targets. Our own work with clients supports the existence of a persistent gap between the strategic goals organizations set for themselves and the results they achieve.
Over the past fifteen years, we have studied the root causes of this disconnect between strategy and performance. We have learned that most organizations do not have a strategy execution process. Many have strategic plans, but no coherent approach to manage the execution of those plans. Consequently, many key management processes remain disconnected from strategy. We have also learned that:
(a) Many organizations don't have a consistent way to even describe their strategy, other than in a large strategic planning binder. We believe strongly that organizations need to find a consistent, coherent way to translate their strategy into operational terms.
(b) Sixty percent of typical organizations do not link their strategic priorities to their budget, virtually ensuring that key strategic initiatives do not get funded and resources may not be supplied to deliver on the strategic plan.
(c) Two-thirds of HR and IT organizations develop strategic plans that are not linked to the organization's strategy. This is extraordinary.
(d) Seventy percent of middle managers and more than 90 percent of front-line employees have compensation that is not linked to the strategy.
(e) Most devastating, 95 percent of employees in most organizations do not understand their [organization's] strategy.
In short, there is often a chronic disconnect in organizations between strategy formulation and strategy execution.
An office of strategy management, or OSM, is intended to close that gap. It is typically a new unit at the corporate level of an organization, overseeing all strategy-related activities—from formulation to execution. It is not intended to perform all of this work, but to facilitate the process so that strategy execution gets accomplished in an integrated fashion across the organization. Typically, a strategic planning unit has little or no influence over the process of executing the strategy it helped to create. In our view, one unit should facilitate both strategy formulation and execution process, making an enhanced strategic planning unit a natural home for the OSM.
The OSM can become an area where future leaders gain a strategic perspective on the organization.
Since our focus reflects the preeminence of the Balanced Scorecard as the vehicle through which strategy is described and executed, an OSM is typically an outgrowth of a good scorecard program. Such a program tends to raise common questions: How do we use these scorecards to align the organization? How can we ensure that our people understand our strategy? How do we use the scorecard to improve how we conduct our management meetings?
An OSM typically emerges when the Balanced Scorecard team incrementally and organically assumes more and more responsibilities on its own initiative—responsibilities that were formerly not performed by any person or unit in the organization. So, early on the BSC team fills a gap in the management of the organization. While many of our examples are from Balanced Scorecard users, the same principles of strategy execution apply to non-scorecard users.
Based on our research and client work, we created a model to describe the roles and responsibilities of an OSM, as described in the recent Harvard Business Review article. Some of these roles are owned by an OSM outright, such as scorecard management and cascading. There are other roles where it plays a coordinating function, essential to ensuring that strategy informs critical processes like budgeting, operational planning, and performance management.
Q: Your article discusses Chrysler Group and the U.S. Army as designing successful programs that extended their Balanced Scorecard work. Is a Balanced Scorecard initiative necessary as a first step before creating an OSM? If not, how might a company set up an OSM without it?
A: A Balanced Scorecard is an important, though not a necessary, first step in creating an OSM. First, the principles we describe about the need for an OSM are universal—organizations need to improve how they link strategy formulation and execution, whether they use the Balanced Scorecard or not. Organizations failing to make this link are destined to be among the failures we mentioned above.
We feel that Balanced Scorecard users have a distinct advantage. These organizations have found ways to describe and communicate their strategies using powerful and tested approaches. They have recognized the need to make strategy execution a recognized competency of the organization, distinct from simply having a good approach to formulating strategy.
We recognize that there are different approaches being used to manage strategy. An OSM could easily be established in a non-scorecard organization using the identical approach as scorecard users. The same set of questions apply: What is our strategy? How is it being measured? Are we allocating resources to support our strategy? Do our people understand it? Are we having outstanding sessions to discuss and monitor our strategy? How do we pull all of this together into a coherent process?
We believe that strategy must be managed explicitly, like any other major process in an organization.
Q: You write that an OSM can serve in effect as the CEO's chief of staff. In a typical organization, how many staff would be in an OSM, what are their career backgrounds and/or training that make them best for this function, and what are their roles vis-à-vis other important units such as finance, HR, marketing, and so on?
A: A typical OSM in a large and complex company seems to require about six to eight full-time people. Typically, these people are not new hires and consist of the scorecard team and elements of the strategic planning group or finance. The OSM is most definitely not new bureaucracy or overhead for an organization. We have seen many OSMs that are smaller, consisting of between three and five people.
OSM staffing requires a mix of talent. The OSM can become an area where future leaders gain a strategic perspective on the organization. Clearly, people able to understand and think in strategic terms are critical. They need good interpersonal skills since they must interact effectively and authoritatively with senior business units and functional heads. Project management experience is desirable to oversee scorecard projects and initiative management. Operational experience is also vital, since the essence of good strategy execution is about "getting things done" and people who understand the relationship between strategy and operational reality will make enormous contributions to the OSM.
An OSM naturally interacts with other business units and functions. In this regard, it has two roles. First, it provides support to operating units to ensure they have the tools required to support the corporate strategy. Second, it ensures that strategy informs the work of the key functional units like HR and finance, to name two key players. For example, in a typical organization the budgeting process is partitioned from the strategy development process. The result is that key strategic investments often get lost in the pressures of daily operational management, or worse, the budget becomes the de facto strategy of the organization. A good OSM will collaborate with the CFO to "integrate" strategy into operational planning and budgeting. We have yet to see a CFO resist the effort to make the planning process more strategic and useful for the organization.
Q: You write that OSMs are "facilitating organizations, not dictating ones." While they would seem to create the risk of more top-down management, the opposite effect happens. Could you give some examples of positive effects in companies you've seen? What activities should OSMs not be involved in?
A: We believe that strategy must be managed explicitly, like any other major process in an organization. In most organizations, this process either does not exist or is incomplete. Shareholder value is left on the table. The purpose of an OSM is to unlock unrealized value by making strategy execution a distinct and recognized competency in an organization. It can only do this by enabling others—operating units and functions—to do their jobs in a way that supports the organization's strategy. We don't believe that this will always make everybody happy, since an OSM is helping to establish a new management discipline, which may or may not be welcomed by all.
The positive effects are being most keenly felt in the organizations we cite in our article—the Army, Chrysler Group, and Canadian Blood Services since they are the earliest adopters. As the concept of the OSM matures and as we hear more and more stories, we will be able to add to this list of stories that confirm an OSM's role as a facilitating organization.
As for activities not to be involved in, the OSM should not be seen as dictating strategy either at the corporate or business unit levels. It should not attempt to take over functions already being done by other functional units, such as finance, IT, and HR. Its role is to facilitate, coach, and coordinate.