27 Mar 08 Countering Over-Optimism: A role for the Balanced Scorecard?

Gavin Cassar’s (Assistant Professor of Accounting at Wharton) latest research is interesting and may confirm a trend that many of us suspected was lurking behind the scenes. The problem is that when preparing business plans, managers tend to be overly optimistic. There may be an inbuilt tendency for us all to be just that little bit too optimistic when looking into the future. How many business plans have you seen painting a picture of pain today, jam tomorrow?

Interestingly, Cassar points to some evidence that the tools used in the budgetting process may actually exacerbate this problem. I have noticed that when ideas are expressed in numbers – financially – there seems to be a hypnotic trance that takes over. Because the plan is expressed in a financial format, the creators seem to believe in it.

To overcome this problem and improve forecasting accuracy, Cassar suggests:

1. Don’t just rely on a budgetting system. A good internal progress reporting system is also needed. Used together, these tools can improve forecasting and planning accuracy.
2. Go back and look at past experience. Reflecting on the actual past experience of generating revenue may be sobering. I find it helpful to contrast managers’ revenue projections with a robust forecasting model – such as time series decomposition – using actual historic data without any management intervention. The results can help us get back to reality.
3. Do ensure that external trends are properly factored into any agreed projections. Do the right research. Get external opinions. Don’t just sit in a darkened room to prepare the plan.

So there is a role for the Balanced Scorecard here.

Firstly, as tool that can illustrate the potential enormity of tasks that are needed to generate revenue growth if a proper correlation exists between the financial objectives and the remaining people, process and customer dimensions. Which really brings me back to a key point missing in many Scorecards – and that is validation of the linkage between Balanced Scorecard measures and actual desired performance. Scorecards only work if you are sure of the linkage between actions and end outcomes – financial performance. Secondly, the Balanced Scorecard makes an excellent performance tracking tool that Carras observes must be used hand in hand with budgetting and forecasting tools.

Tags: Balanced Scorecard, Business Planning, forecasting, forecasting accuracy

28 Feb 08 The Dangers of Stretch Targets

Reading Stefan Stern’s article “The art of stretching employees” (Financial Times February 25th 2008) reminded me of some of the problems associated with the popular management by “stretch” philosophy. You know what I mean – asking employees to do the seemingly impossible for example achieve 60% growth after a year of 30% growth.

There’s more to leadership than asking employees to do the near impossible – there’s an order to things and a couple of pitfalls to avoid.

A Certain Order to Things
I spent a fair amount of time reviewing more recent research when compiling my last Executive Briefing on the Balanced Scorecard – and I came across an interesting piece of academic research on stretch targets. The basic conclusion of the the research is that there should be a certain order to things when considering using stretch targets. The central message is “think about the skills, experience and knowledge that your employees need to take on that near impossible stretch target and set a target to achieve those competences before you hit them with the stretch objective.”

Quite commonsense really. So make sure that your scorecard can measure new competency acquisition as well as stretch.

A Couple of Pitfalls
Whilst writing this entry on a rather grey Thursday afternoon, two other potential pitfalls spring to mind. These are:

(a) Capacity. What if your people are successful and pull in that 60% growth. How are going to handle it? Is your business planning (and financial modelling) process good enough to link growth with that most precious of all resource – people – I mean here the capacity to handle all those new customers?

(b) Exhaustion. In my Executive Briefing Success: Your Biggest Problem? I warn against corporate exhaustion “here growth and acquisitions stimulate internal reorganization and restructuring. Such structural changes bring with them risks of loss of control and even loss of identity. The enlarged business starts to wonder what its core activities really are.” So just be careful – years of stretch may lead to tiredness, confusion and failure – if you don’t keep an eye out for the symptoms.

It’s great to be ambitious and leaders must build ambition – but they need to build capacity as well – there is after all a certain order to things.

Tags: Balanced Scorecard, business failure, stretch targets