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IN THIS ISSUE:
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Christmas upside down
Integrity through integration – using business alignment to assure business success
Measuring the performance of the HIA
The audit of tax
Business report writing
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Integrity through integration – using business alignment to assure business success

Business alignment is a fresh approach used by a number of private and public sector organisations to grasp the holy grail of effective governance, as Neville de Spretter explains.

 

In the article, governance is defined as the system by which the whole organisation is directed, controlled and held accountable to achieve its core purpose over the long term. (BS 13500:2013 Code of practice for delivering effective governance.)

 

An outcome is defined as the result and benefit of achieving an objective, a desired future state, what an organisation wants to achieve. Outcomes are permanent, long-term and independent of organisational structure; objectives are temporary, short-term and specific to a particular organisational structure.

 

My last joint article with Peter Bebb, Creating value for money by rethinking cost structures, was published in April and generated some passionate debate at IACON in July (thank you to all who read and digested the eBulletin!).

 

Much of the debate, and later questions and discussion, centred on the wider application of business alignment and how it can be used in practice. I was asked to write an article on my experience of business alignment to this effect; here it is…

 

In the mid-to-late 1990s I worked for a large PLC in which the executive team met to review performance over the year and to set targets for the next year. There was much debate about past and future key performance indicators (KPIs) and a general feeling emerged that, despite the organisation’s continuing success, there had to be a better way to govern, lead and manage the organisation to ensure its future success.

 

At the time, the strategic imperatives, initiatives and KPIs were unlinked, disconnected from what actually happened in the business, and had little apparent commitment from staff. Much depended on the attention of the CEO, who stated that a robust, efficient and effective governance and management framework and system was needed, but rightly disliked bureaucracy and transfer charging.

 

Outcome strategy map
To this end the CEO set up a team and, working with all stakeholders over six months, we developed the outcome strategy map, which distilled the business’ 45-page strategy into the 13 outcomes that were most critical to the realisation of its vision. It also defined the causal relationships between the outcomes, ie which outcomes are dependent on which other outcomes. In so doing, it validated and assured the quality of the strategy. [See Diagram 1: Outcome strategy map, level 1 (corporate strategic outcomes)]

 

The executive team, led by the CEO, recognised a solution to the age-old problem of prioritisation. There was a quick win in cutting out projects that didn’t add to the economic, efficient and effective realisation of outcome delivery. Traditionally it is easy to add projects in businesses, but stopping initiatives is a real challenge.

 

With business alignment outcomes are clearly prioritised by their inclusion on the strategy map, and actions are prioritised by their relationship to the strategic outcomes. Those actions, which directly deliver the strategic outcomes, are automatically top priority.

 

Not all actions result in something useful and hard work is not always productive. Relating actions to the strategic outcomes ensures that only useful actions are included. This meant that over 150 projects were reduced to fewer than 15 in just three months of analysing whether the projects actually did deliver outcomes more economically, efficiently and effectively, resulting in significant consequential savings to the business.

 

The executive team also saw that the cause and effect relationships between outcomes provide a means of predicting the delivery of the vision. If one of the prime causes is failing, there is early warning that the mission is at risk of failure. KPIs do not provide this predictability.

 

Business alignment team
The CEO immediately set up a business alignment team, which included my role as director of business assurance. This led to our changing the whole business management process using business alignment – about integrating and replacing existing management processes, including corporate governance, business planning, budgeting, risk management, resource management, portfolio and programme management, performance management, reward management, information technology strategy, knowledge management and corporate communication.

 

It is wrong to see business alignment as a programme or project. It is simply a more economic, efficient and effective way of running an organisation. It firstly transforms the organisation and then continuously improves it.

 

Consequently this isn’t a quick fix, though there are quick wins along the way, as with the weeding out of unaligned projects described above. It certainly wasn’t plain sailing. The timescale, 36 months at the PLC, can be longer than may be anticipated, but forcing the pace doesn’t work with a programme that is aimed at creating self-managing teams. The main reason for the long timescale is the need, or distraction – depending on your viewpoint – of the daily issues, which business alignment will eventually help to smooth out.

 

Business management system
As we picked up pace with the business alignment approach we quickly produced a lot of information and needed somewhere to store it and process it so that we could use it to support and audit the business. To this end we developed reporting into a single process, system and dashboard, the business management system, utilising technology as an enabler, to provide the following benefits:

 

  • integration – everything the organisation needs to do and employ to deliver its required outcomes is linked at all levels across the whole value chain from customers through staff to suppliers
  • predictability – the probability of the required outcomes being delivered is objectively predicted, enabling risk mitigation
  • transparency – any stakeholder is able to see what the business intends to employ, do and deliver, and the progress being made and expected.

 

Effective communication of the strategy was a necessary condition of its implementation. The strategy map tells the story of the strategy without additional explanation. It explains how the strategy will be delivered. It is possible, by following the arrows, to understand the chain of cause and effect that will lead to the ultimate outcome that achieves the mission.

 

The strategy map was seen as a powerful tool in the business. It fitted onto one page. It provided unexpected insights into the future of the organisation – it set the future benchmark. The outcomes on the strategy map were concrete, specific and measurable. The causal connections between the outcomes gave credibility to the story it told. And the combination of these factors created understanding of the strategy and brought people on board.

 

The executive team discussed, amended and agreed the strategy map with the board. Led by the chief executive, they communicated the strategy map to the PLC’s staff. In consequence, many more people understood the company’s strategy, and there was consensus on what needed to be delivered strategically.

 

Balanced scorecard
While the strategy map was being communicated, the business alignment team started to develop a balanced scorecard to measure and predict the delivery of the strategic outcomes. The balanced scorecard differs from key performance indicators (KPIs).

 

There is a unique measure of the achievement of an outcome that avoids the ambiguity caused by multiple KPIs. There is also a predictor (lead) measure, which tells the management team whether they are likely to achieve the outcome. Finally the business alignment team worked with the business to identify the key risk to each outcome, aligning risks with outcomes, and giving clarity and transparency to the activities that managed and mitigated each risk.

 

For audit purposes this was also a powerful tool; with clarity on the audit universe we could assure, in a non-adversarial, business-enabling way, that the activities worked to manage or mitigate each risk to a level of residual risk that was acceptable to the business. If they didn’t, it was simple to facilitate the actions needed to do so, or directors could agree to leave the level of risk where it was. This was visible to all.

 

As time progressed, we discussed and modified the balanced scorecard with project sponsors, the project leaders, the executive team and the board. The CEO also involved our major investors, partners and analysts, as part of positive engagement in ensuring that their agendas were taken into account in outcome delivery. The remuneration committee agreed that the executive team’s incentives would be determined by the achievement of the strategic outcomes as measured by the balanced scorecard. Much clarity, objectivity and productivity was obtained through the strategy map and the balanced scorecard.

 

Of course, it’s not enough to know what you need to achieve. You also have to achieve it.

 

The business alignment team next worked out what the business needed to do to achieve its strategic outcomes. We deliberately ignored current processes and projects in order to get an objective view of what was really necessary, in line with Michael Hammer’s original principle of business process re-engineering. We then compared these with current processes and initiatives to identify those that could stop. The relationships between the outcomes and the activities required to deliver them defined outcome-oriented organisational units and teams that successively added value to the stakeholders of the business by delivering the strategic outcomes.

 

The skills required by the teams were defined as the ability to carry out the activities needed to deliver the outcomes, and the competences were defined as the ability to produce the outcomes. (See Diagram 2: outcome-oriented organisational units and teams)

 

The business quickly found that outcome-oriented teams are more productive than skill-based teams such as marketing or human resources because they focus people on the delivery of outcomes rather than operations within a skill silo.

 

The value chain was discussed, amended and agreed with the executive team. Following this agreement, the business alignment team derived a service-oriented architecture from the value chain which revealed that the existing portfolio of around a hundred computer systems and many more data stores could be reduced to just seven systems and three databases, saving significant sums of money, whilst dramatically improving the service provided to staff and members. Over a 20 month period the business went on to cut costs by 30%, gain significant market and revenue growth, and win an award for strategy and business transformation best practice from the Management Consultancies Association.

 

Estimating resources required
The final step in the alignment of the PLC corporately was to estimate the resources required – the skills and facilities required to carry out the activities. The volume of skills required was calculated from an estimate of the time needed to carry out each activity multiplied by the number of outcomes to be delivered. This resource optimisation process identified a potential productivity gain of 20%. (See Diagram 3: resource optimisation; this example relates to one area in one division within the company.) 

 

The business alignment team next sub-divided the strategic outcomes, activities and resources into their contributory outcomes, activities and resources. We formed lower-level business areas from these and agreed them with the executive team, who then formed business area teams to define the areas in more detail.

 

Successive levels of the existing organisational structure were invited to say what they could contribute to delivery of higher-level outcomes. In defining their own contributions, people declared their accountability and responsibility for the delivery of these outcomes. This ‘pull’ approach created genuinely self-managing teams, empowered and supported by the CEO and the executive team to deliver the outcomes, and thereby also completely changing the culture of the business from command and control, top-down management to teams of people motivated to do the right thing.

 

A number of diverse organisations, private and public sector, have now applied business alignment since the business alignment team developed the approach in the late 1990s.

 

Some are still part way through the process, but all have benefited significantly from the integration, predictability and transparency provided by the process.

 

Neville de Spretter

 

Neville is a member of ACCA UK’s Internal Audit Network Panel, an independent specialist in governance, risk management and control, principal at AdLibero2, an associate of Perendie, a non-executive director of StyleSeeker Ltd, a steering committee member for the CRSA Forum, and a committee and drafting panel member for BSI’s BS 13500 code of practice for delivering effective governance.

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