Making strategy operational: to bring about effective change, insurers have to identify and control the true drivers of the business. A Balanced Scorecard approach can help.

Key Points

* Balanced Scorecard methodology allows companies, including insurers, to transform their strategy into quantifiable measures.

* For every critical success factor, one or more key performance indicators are created to measure how the company is achieving the desired outcome for that factor.

* After the key performance indicators have been created, a company should use a software solution to bring the Scorecard to life.

Although seen by some as just another performance measurement tool, Balanced Scorecard methodology is significant because it allows companies, including insurers, to transform their strategy into quantifiable measures. Consequently, chief executive officers and boards of directors can communicate their strategy throughout the organization. The strategy may actually be measured and monitored, and needed operational changes may be identified and implemented on a timely basis.

The most important benefit derived from using a Scorecard eludes many companies. That benefit is the ability to make strategy operational and to achieve operational commitment, in which associates and business units are committed to achieving the strategic outcomes outlined in the Scorecard and to using operational resources in support of the Scorecard. Without achieving this result, the strategy cannot be implemented. It remains just words on paper.

Successful execution of a Balanced Scorecard methodology requires specific dynamics. The first step involves getting the CEO and the board of directors to accept the following:

* The need for change in today's rapidly evolving, globally impacted marketplace;

* A Scorccard initiative will take time and is a living process that will change the way the company identifies and responds to marketplace pressures and opportunity; and

* To change the future, the past, with its errors, has to be exposed and excised.

Should any of these points be a cause for consternation, then that company may not be a good fit for a Scorecard initiative.

The next step is a thorough review of the company's strategy, or more importantly, the process by which it arrives at its strategy. Was it born from a holistic approach taking into account the perspective of stakeholders, both internal and external to the organization? Or was it born from just a few while sequestered in an ivory tower? The strategy should state the company's beliefs, where it is going and how it will get there. The strategy process should identify the company's true operational assets and liabilities as well its its go-to-market strengths, weaknesses, opportunities and threats. Without this honest operational assessment of itself, the strategy is nothing more than a wish list that will not become operational nor prove successful.

It's always a good idea to have an independent business analysis test the strategy against stakeholders' observations, including but not limited to, agents, brokers, insureds, key internal operating units and members of the board. If the strategy process has been an honest search for the truth and representative of the true operational state of the organization, then the outcome of the Scorecard initiative will be in line with the operational needs of the organization. Sad to say, in some cases the strategy process was not truthful to the detriment of the company and its executives.

Strategies and Goals

A typical strategy statement is illustrated on page 83. Once the strategy has been clearly articulated, the next step is to begin quantifying the strategy by creating the strategic goals. The goals should manifest themselves easily if the outcome of the strategy process truthfully reflects the state of the organization. A list of strategic goals may include those on page 83, answering the question: What are the strategic goals for which ABC is striving?

Once the strategic goals have been identified, the next step is to continue quantifying the strategy and create the critical success factors, answering the question: What does ABC need to do well to achieve its strategic goals? (See page 83.)

The critical success factors should then be related to the four perspectives of the Balanced Scorecard methodology--financial, customer, internal business processes and organizational development. In each perspective a question is raised. The goal is to place each critical success factor in the perspective(s) where it is expected to have an impact. For example, the critical success factor, Generate financial results that create value, only impacts the financial perspective.

The critical success factors are color coded to the appropriate strategic goals so that managers can see if they have a balanced number of critical success factors and ultimately key performance indicators within the remaining perspectives. Also, when it comes time for software, the color coding allows managers to view the key performance indicators according to their association with the strategic goals, critical success factors or the Balanced Scorecard perspectives. In this example, the critical success factors are balanced within the perspectives, so the key performance indicators can be created as shown on page 83.

For every critical success factor in each perspective, one or more key performance indicators are created to show how the company is doing in achieving the desired outcome for that factor. In this example, 28 key performance indicators are created. Of those 28, 17 are more "lead" than "lag." Lead indicators are proactive and provide an early indication about whether the strategy is being implemented successfully from an operational basis. They focus the organization on the drivers of future success; that is, what people should be doing well today in order to produce the desired outcomes in the future. They allow the company to make educated decisions regarding its strategy and where changes need to be made in order to drive the desired outcomes.

Lag indicators are reactive in nature since the results are often a surprise without much foreknowledge as to the reason for, and source of, the results. They report results which reflect decisions and actions taken much earlier. In the example, 11 performance indicators are more lag than lead, meaning 60% are lead and 40% are lag. Managers should strive for a minimum 60% lead/40% lag relationship in every engagement.

It is imperative in a Scorecard initiative to determine the correct lead indicators in order to make the strategy operational. If a company does not have the right kind or number of lead indicators, then it will not be able to properly communicate and drive the strategic outcomes it desires.

Software Support

After the key performance indicators have been created, a company should use a software solution to bring the Scorecard to life. The screen shots on page 84 are examples of software. The main page shows the strategic goals and the key performance indicators associated with them. It shows the year-to-date and monthly results. If the result is in the green section, it means the company is meeting or exceeding plan. Results in the yellow are off plan, but within an acceptable variance set by the company. Results in the red are off plan and beyond the acceptable variance. Indicators in gray are without data at the time this screen shot was made.

The relationship page takes the 28 indicators shown in the main page and redistributes them in a lead- and lag-indicator format. The indicators are categorized as organizational drivers, organizational outcomes and financial outcomes. Starting from the left, the organizational drivers (outlined in blue) are lead/lead, the first group of organizational outcomes (outlined in purple) are lead/lag, the second group of organizational outcomes (also outlined in purple) are lag/lead, and the financial outcomes (outlined in orange) are lag/lag. If someone were to draw a line down the middle of the relationship page, every indicator to the left should be more lead than lag and every indicator to the right should be more lag than lead.

This is significant for a few reasons. First, it takes the 28 indicators and focuses the users on the 17 lead ones. Note that three of the 17 (accident-year loss ratio, claims frequency and claims severity) were placed in the second group of organizational outcomes at the client's request. Second, it now focuses the users on the true drivers of the organization. In the past, this company was trying to drive change by focusing on the lag indicators and failing. But now the managers have identified the true drivers of their organization, and by focusing on these they will be able to drive the change they seek in the lag indicators. This means a significant change in the way they look at and manage their company.

For a company to be successful in this transformation, the managers should have a facilitator work with them as they get used to this new management tool. A good candidate for this role can usually be found in the human resources department since they have responsibility for training and facilitating large groups of people.

The software used to support the Scorecard project should allow for drilling down on each indicator to gather detailed information; work well with the company's ad hoc query tool; be Web-enabled for off-site viewing; be easily maintained, and be easy to link to the company data.

Last, but not least, is to have a capable person whose role will be to maintain the system and data links. This person will also be expected to make changes to the system. A candidate for this role usually comes from the information technology department.

In conclusion, a Scorecard implementation has a very good chance of succeeding if:

* The culture within the organization is open to change.

* The company is not looking for a quick fix. The effects of the Scorecard process take time before they will be felt in the operations.

* Management is willing to expose the past in order to change the future.

* The strategy process is a truthful one asking and answering hard questions regarding the state of the operations.

* The correct lead indicators are identified and used to drive the operations.

* A software tool is used to bring the Scorecard to life and make it easy to use. All company reporting should be based upon, and tie back to, the Scorecard results.

* Competent people facilitate management meetings and maintain the Scorecard system.

Ian MacDonald is chief executive officer of The Maitland Group, Montville, N.J.