Translating strategy into results: public sector applications of the balanced scorecard.
The Origins and Evolution of Charlotte's Corporate Scorecard
Responding to public calls for greater accountability and efficiency, governments at all levels are now using performance measurement in one form or another. However, establishing an effective system for setting priorities, allocating scarce resources based on those priorities, and measuring outcomes is an ongoing challenge for most governments. Despite the difficulty, public administrators, including finance officers, continue to advance the practice of performance measurement in the public sector by trying new ideas and sharing what they learn with their colleagues.
This article discusses the evolution of strategy development and performance measurement in the City of Charlotte, with an emphasis on the lessons learned from nearly 10 years of using the Balanced Scorecard model. Developed for the private sector in an effort to balance measures of organizational performance between financial results and other critical success factors, the Balanced Scorecard has been adapted for the public sector by a number of local governments. (1) From implementing and using the Balanced Scorecard to the most recent challenge of linking strategy to resource allocation, Charlotte's story is one characterized by continuous improvement.
Now the 25th largest city in the country, Charlotte has grown from a population of 395,000 in 1990 to approximately 623,000 today. Charlotte is the nation's second largest banking and financial center, and is the corporate headquarters for both the largest and fourth largest U.S. banks. Several other Fortune 500 companies also call Charlotte home.
The City of Charlotte operates under a council-manager form of government and has an annual operating and capital budget of approximately $1.56 billion. The government is administered by a city manager who serves under the direction of the mayor and the City Council, who are part-time elected officials. Charlotte employs 6,066 employees in 14 key business units.
In the early 1990s Charlotte rode the first wave of the reinventing government movement. The city restructured in an effort to become more customer-focused, results-oriented, decentralized, competitive, and innovative. As part of the organizational restructuring, Charlotte consolidated its 26 departments into 13 and renamed them key business units, introduced managed competition, and made customer service a focal point for the organization.
Several years after the city's restructuring process, the need for a more strategic and results-oriented performance management system became apparent. Like many other governments that had been measuring performance, Charlotte was ready to move beyond measuring mere outputs to a system that would provide actionable data on efficiency and effectiveness. Instead of simply counting and recording data, the city wanted its performance management system to facilitate a transformation to mission-driven government, a government focused on defining strategic goals in terms of outcomes for the community. Charlotte turned to the Balanced Scorecard as the tool for moving the city in this direction.
BUILDING THE STRATEGIC FOUNDATION
Charlotte's approach to the Balanced Scorecard benefited from the city's earlier efforts to improve the priority-setting process. In 1990, the City Council participated in a strategic visioning exercise to establish consensus on the strategic themes that would guide goal setting, performance measurement, and resource allocation. After a series of follow-up workshops, the City Council settled on five themes, which they called "focus areas:" (1) community safety, (2) housing and neighborhood development, (3) restructuring government, (4) transportation, and (5) economic development. The City Council also outlined broad objectives for each focus area. The focus areas have remained virtually unchanged since 1990.
The City Council went a step further by creating institutional mechanisms to ensure that the objectives for each focus area would be met. City Council committees are structured around the focus areas. At the staff level, focus area cabinets were established to ensure that the City Council's priorities are being implemented. Comprised of senior managers whose units directly affect one of the focus areas, the cabinets meet at least once a month to discuss progress toward strategic outcomes. The work of the focus area cabinets has created positive changes in organizational culture. City business units now think more strategically, and their activities are better aligned with the priorities of the City Council. The cabinets play an active role in the policy process; not only are they responsible for developing a strategic plan for their focus area, but they also draft or review policy items before they are presented to the City Council for consideration.
Since 1990, when it first identified the five focus areas, the City Council has held an annual priority-setting retreat. Prior to the retreat, a professional facilitator interviews the members of the City Council and makes a list of their goals and concerns. From this list, the Council identifies the top priorities for the next budget year, organized by focus area. The focus area cabinets develop performance measures for each focus area based on the direction of the City Council. These measures are then consolidated into a strategic focus area plan that is approved by the City Council.
THE CORPORATE SCORECARD
Charlotte was the first municipality to implement the Balanced Scorecard. The city organized a leadership team and hired consultants to guide the Balanced Scorecard implementation process. Led by staff from the Budget and Evaluation unit, the team used the city's strategic plan as the foundation for what became known as the corporate scorecard. The city then piloted the new performance measurement system in four business units, each of which developed its own scorecard.
Exhibit 1 illustrates how Charlotte's vision statement, validated at the annual City Council retreat, is used to guide the development of focus areas and priorities, which in turn direct the work of the Council committees and focus area cabinets throughout the year. Exhibit 2 is the corporate scorecard itself, which includes 16 objectives that connect the focus areas, Council priorities, and key business unit scorecards. (The City Council recently designated smart growth as an umbrella for city strategy, which is why it is shown above the focus areas.) Performance measures are used to gauge the city's progress toward achieving the 16 objectives. Examples of corporate measures include service delivery ratings, the quality of life index, crime rates, and transit ridership. The corporate scorecard has proven to be a useful tool for setting strategic targets and fostering the organizational collaboration necessary to accomplish strategic initiatives.
Organizational Integration. Charlotte has worked to integrate the corporate scorecard into all levels of the organization. Each of the key business units develops a scorecard outlining how it plans to address the focus areas, City Council priorities, and corporate scorecard objectives. The business units determine which corporate objectives they have a direct impact on and develop measures to track their progress in contributing to the achievement of those objectives. In developing their scorecards, the key business units answer key questions organized around the four perspectives of the Balanced Scorecard:
* Serve the Customer. In order to meet the needs of our customers/citizens, what are our objectives? How can these objectives be achieved? How is our success best measured?
* Manage Resources. In order to succeed financially, what are our objectives? How can these objectives be achieved? How is our success best measured?
* Run the Business. In order to meet our objectives, what internal processes are required? How can these processes be established? How is our success best measured?
* Develop Employees. In order to succeed, what skills and resources do we need? How can we obtain and maintain these skills and resources? How is our success best measured?
The corporate scorecard is also reflected in each employee's performance evaluation. Since 1995, the city has rewarded employees when their business unit achieves the productivity and other key objectives in the business unit scorecards. Business units identify key objectives in the scorecards that link individual goals to organizational goals and strategy.
KEYS TO SUCCESS
Charlotte's experience with the Balanced Scorecard suggests that there are three keys to making this approach work in a government setting. First, strategy must be supported. Consistent support of senior management is particularly critical, but there must be support for the effort at all levels of the organization. Second, strategy must be operationalized. The best strategy benefits no one unless it is put into action. Finally, strategy must be communicated. After all, it takes the entire organization and all of the people who are a part of it to translate vision and strategy into results.
Supporting Strategy. Organizational support for strategy development and implementation is fundamental to success. This support must reach from the governing body and the chief executive through the entire organization. Strategy can and should become institutionalized within the culture of the organization to the point that it becomes part and parcel of how you operate, as opposed to an add-on that most people expect will eventually go away. For this to happen, the organization must invest in people, technology, and research. Finally, to ensure that strategy remains a visible priority for the organization as whole and a meaningful exercise for all levels of the organization, staff at all levels should be recruited to champion the effort and to make the most of the scorecard tool.
Operationalizing Strategy. Exhibit 3 illustrates how a specific performance measure, in this case fleet availability, can be traced from one of the City Council's focus areas through all of the levels of the strategy process. The chain does not end at the key business unit, but extends down to the individual employee. For organizational strategy to reach the operations level, where it gets translated into tangible results, employees need to be able to see how their daily activities contribute to the accomplishment of overall strategy. One method Charlotte is using to strengthen this relationship is to link employee performance evaluations and compensation to the achievement of key business unit scorecard goals.
Communicating Strategy. The Balanced Scorecard is a particularly useful tool for translating vision and strategy into operational terms to which all levels of the organization can relate. Organizations should utilize established internal communications channels to help employees understand the strategic planning process, inform them of progress and significant milestones, and continually remind them that strategic planning is a high priority. Charlotte has learned that when communication about the corporate scorecard stalls, employees lose sight of strategy. To ensure that this does not happen, Utilities, a key business unit with a large trade-based workforce, produces a regular companion document to the business plan. This enables management to more effectively communicate the contents of the business plan to employees in a manner that links their daily duties to the achievement of strategy. This year, the city manager's Corporate Strategy Award will go to the business unit that has been most effective in communicating strategy. This type of recognition helps maintain the visibility of the Balanced Scorecard.
LINKING STRATEGY AND BUDGETING
Establishing a meaningful connection between strategy and resource allocation is fundamental to effective public budgeting. Like many other local governments, Charlotte has worked to link its performance measurement system--the corporate scorecard--to its budget process. While the city has made great strides in this area, allocating resources based on the mayor and City Council's focus areas remains a challenge.
One of the benefits of the scorecard framework is that it directly connects the focus areas and corporate objectives to each of the key business units. The fiscal 2000-2001 budget presentation marked the city's first attempt to demonstrate how the spending plan reflects the priorities of the City Council. Charlotte renamed the budget document the "strategic operating plan" and changed the format to include funding levels, objectives, and measures for each of the five focus areas. The city manager's budget transmittal letter highlights key initiatives within each focus area, further demonstrating how budgets at the business unit and line-item levels roll up to corporate strategy.
Charlotte's fiscal 2005 budget continues the commitment to integrating strategy and the budget. Because of the cumulative impact of the uncertain economy and recent operating budget reductions, it is more important than ever that limited resources are allocated in such a way as to maximize the accomplishment of corporate objectives. The corporate scorecard thus becomes a critical tool for the key business units as they develop their budget requests and for Budget and Evaluation as it analyzes those requests.
Implementing strategy is not easy, but it is one of the most important factors in shaping how organizations will respond to community needs and prepare for the future. Governments should not wait until they have devised the perfect performance management system to begin institutionalizing organizational strategy. Even the governments with the most sophisticated performance management systems are constantly refining them in a continuous effort to do better. As Charlotte's city manager puts it: "We learn and we keep trying. No matter what you've done for your community, you can always see that there is a bar out there that can be raised." Indeed, Charlotte's Balanced Scorecard approach to performance management has constantly evolved over the last 10 years, helping focus the organization on the outcomes that matter most to the community.
OVERVIEW OF CHARLOTTE'S FOCUS AREAS
Community Safety. In 1994, the City Council adopted a five-year community safety plan. That plan has been expanded and combined with housing and neighborhood development initiatives and the implementation of community problem-oriented policing. Therefore, the city considers community safety from the perspective of the livability, stability, and economic viability of a neighborhood--not just the lack or presence of criminal activity.
Housing and Neighborhood Development. This is the city's comprehensive approach to meeting the economic development and quality of life issues in the neighborhoods and business districts. This includes efforts such as providing adequate code enforcement; developing strategies for affordable housing; and requiring neighborhoods and business districts to take an active role in problem identification and solution development.
Restructuring Government. This initiative started in the early 1990s as an effort to flatten and redesign the city organization and how services are delivered. This effort continues with emphasis on initiatives focusing specifically on service delivery and meeting growing customer needs through innovation. This includes competition and privatization efforts, as well as assessing performance, identifying gaps in service delivery, and recommending process improvements.
Transportation. This initiative is broadly defined as addressing all issues related to transportation opportunities and challenges, including maximizing public transit; implementing and maintaining roads, adopting and implementing land-use policies to support growth and transit goals; and ensuring adequate pedestrian and bicycle connections while meeting stringent federal air quality standards.
Economic Development. This initiative involves sustaining the prosperity and assuring the opportunity for participation by all residents. It also involves a focus on keeping jobs and the tax base in Charlotte by building and maintaining infrastructure, as well as building a skilled and competitive workforce to encourage businesses to locate and remain in Charlotte.
(1.) Conceived by Robert Kaplan and David Norton, the Balanced Scorecard first gained notoriety after a 1992 article by the authors in Harvard Business Review entitled "The Balanced Scorecard: Measures that Drive Performance." Kaplan and Norton later co-authored a book on the Balanced Scorecard (Harvard Business School Press, 1996).
KIM EAGLE is the evaluation manager for the City of Charlotte and a Ph.D. candidate at Virginia Tech's Center for Public Administration and Policy. Charlotte's Budget and Evaluation Web site (www.ci.charlotte.nc.us/Departments/Budget+-+City/Home.htm) provides additional information about strategic planning and the Balanced Scorecard. The site includes Charlotte's strategic operating plan and year-end reports, a list of Balanced Scorecard references, and frequently asked questions.
Counting What Counts at the Central Arizona Project
By Theodore C. Cooke and Terri Sue C. Rossi
Public sector organizations can count with the best of them. But when profit is not the ultimate indicator of success, measuring performance can devolve into counting things that just don't count. For the Central Arizona Project, a multi-county water conservation district that delivers Colorado River water to central and southern Arizona, business planning used to be little more than a vision and mission statement coupled with a few broad objectives.
Today, CAP has matured into an organization that demands strategic thinking of every employee, requires managers to develop and track measures to see if their strategies are working, and expects managers to communicate their strategies and measures to employees, customers, the Board of Directors, and others. The Balanced Scorecard, pioneered by Robert S. Kaplan and David P. Norton, is the basis for the system CAP uses to implement, manage, and communicate its organizational strategy.
This article explains CAP's strategic performance management system and how it works. We share the key lessons we have learned from developing and implementing this system. Finally, we conclude with a forward-looking discussion about where CAP hopes to take its performance management system.
CAP'S PERFORMANCE MANAGEMENT SYSTEM
CAP's performance management system is a collection of components that goes beyond a vision or mission statement. These components establish connections or "linkages" among strategic direction, measures and targets, and business activities, thus ensuring that the organization is achieving its mission and vision. Like any successful performance management system, CAP's system includes a strong link between the organization's vision and mission and employee performance, a strategic map linking the organization-wide strategies together, a measurement tool (the Balanced Scorecard), and a direct connection to the budget process.
Linking Planning and Measurement. Ideally, an organization's planning and measurement activities at all levels are linked to one another. An organization's values, mission, and vision form the foundation. Management establishes broad themes or perspectives that drive organization-wide strategy. These themes also become the framework for understanding organization-wide strategies and related performance measures. To avoid expending resources unwisely, the organization's budget, business activities, and even individual performance plans must ultimately be linked to the themes, organization-wide strategies, and measures.
While not all of the components of the performance management system need to be in place initially, understanding how existing components should be linked is critical. CAP started out with just a mission and vision. Over time, CAP developed themes and strategies and designed performance measures and targets aligned with those strategies. Specific business activities were then linked to strategies and related measures. Finally, CAP organized these components into its strategic business plan and balanced scorecard.
The Strategic Map. In implementing a performance management system, the first critical step is developing a strategic framework map. The strategic map tells the story of the organization. The map describes management's theory about how the mission and vision will be accomplished by explaining how organization-wide strategies relate to themes and how those themes relate to one another. This is the most critical step in establishing proper organizational alignment.
Performance management systems are organized around themes or perspectives. The Balanced Scorecard performance management system is divided into four business perspectives: learning, internal processes, customer, and financial. In the private sector, the learning perspective is the foundation of the strategic map, while the financial perspective occupies the pinnacle, emphasizing profitability as the desired outcome. In the public sector, the internal processes perspective still serves as the foundation, but the financial perspective is not usually positioned at the top. For most public sector organizations, the financial perspective is a resource needed to attain objectives not usually related to profit.
As shown in Exhibit 1, CAP established six themes or perspectives consistent with its mission, vision, and values. CAP refers to these themes as key results areas. Two key results areas share the top of CAP's strategic map: water supply and public trust. Human resources and technology, the equivalent of the learning and internal processes perspectives combined, are situated at the bottom of CAP's strategic map. CAP views financial viability and project reliability as necessary precursors to the top two key results areas. Twenty-one organization-wide strategies are organized within the six themes.
The Balanced Scorecard. Once the strategic map was established, CAP developed its balanced scorecard. The scorecard translates organization-wide strategies into action using organization-wide measures and targets. CAP's balanced scorecard is shown in Exhibit 2.
A balanced scorecard can get complicated. Management must develop a scale to evaluate the whole scorecard--a scale that is appropriate for all of the strategies. Each measure must be standardized to work within that scale. Consideration must be given to how strategies should be weighted relative to one another.
CAP uses a scale of one to 14. For each strategy, the target score is 101 scores above or below 10 indicate over or under performance. With one exception, all of the strategies carry a 5 percent weight (management can change these weightings over time). The score for each strategy is multiplied by its respective weight. The weighted scores for each strategy are then summed to arrive at an overall score for the balanced scorecard.
Each year, management evaluates the 21 strategies and the related measures and targets to ensure that they capture CAP's performance. As needed, appropriate changes are made to strategies and measures and new targets are established. On a quarterly basis, management assesses CAP's progress in meeting its strategic objectives by reviewing each measure based on progress to date and projected progress at year-end. The results of this review are published in CAP's financial reports and are discussed at board meetings. CAP uses the simple graph in Exhibit 3 to communicate the results of the balanced scorecard.
The Budget and the Business Plan. The strategic framework and balanced scorecard provide the foundation for CAP's budget and business plan, which are published in a single integrated document. The business plan identifies the goals and objectives for the year, while the budget quantifies the resources nee(led to accomplish those objectives. The balanced scorecards for both the current budget year and the upcoming budget year are included in the budget and business plan.
Each business unit must submit a business plan with its budget request. These plans must include unit-specific goals, strategies, and measures directly linked to CAP's organization-wide strategic framework. Once managers have established new business goals, they determine what resources are required to accomplish those business goals, including individual budget line items such as capital projects, outside services, or additional employees. Ideally, the resources requested are linked to specific organization-wide strategies. The unit business plans are used by senior management to prepare the organization-wide business plan.
Through the school of hard knocks, CAP has learned that there are pitfalls to avoid and tactics that can help organizations be successful in their performance measurement efforts. The following is a list of the most important lessons CAP has learned:
* Appoint a management sponsor for each objective. Assign each organization-wide strategy to a senior manager. This manager is responsible for determining how to measure progress toward meeting the strategy; collecting, measuring, and reporting data related to the strategy; and recommending targets for each year.
* Don't link pay increases to strategic measures. Measure the individual performance of managers and employees on how well they conduct strategic business planning and how well they perform strategy-related tasks. Avoid creating the perception that if the target for a strategic measure is not hit, that the manager or staffer is performing poorly or, worse yet, that his or her compensation will suffer as a result.
* Keep measures simple and repeatable. Select measures based on data that can be captured easily, perhaps even by someone other than the line manager. Use measures that can be tracked year after year, thus generating trend data that can show changes over time.
* Develop realistic yet challenging measures. Governing bodies and constituents will be unimpressed by and even suspicious of "perfect" scores. Conversely, consistent underperformance may indicate that the bar is too high. If goals are never reached, the organization can become discouraged.
* Use a few good measures, and not one more! To avoid over measuring, encourage line managers to use the scorecard measures before developing their own. If none of these meets the needs of the manager, then new ones can be developed.
* Use consistent language. Decide what to call different strategic planning terms (strategies, business goals, key result areas, etc.) using language free of business jargon. Define these terms in your training materials and avoid changing them from year to year.
* Help managers focus strategically Because thinking strategically is so difficult, managers at all levels of the organization will migrate toward tactical measures. For example, output measures such as the number of newsletters published on time measures staff performance, not whether or not constituent needs are being met.
* Communicate results. Find simple ways to communicate balanced scorecard results. Exhibit 3 is an example of the graph used by CAP in its quarterly financial snapshot.
Establishing a performance management system is a long, constantly evolving process. For CAP, the next steps are both strategic and tactical.
Strategically, management must better engage the Board of Directors in the strategic business planning process. The board currently reviews reports and offers comments and suggestions. In the future, management will seek board involvement in setting and evaluating performance goals.
Many of CAP's original objectives have now been accomplished. CAP's political and business climate has changed dramatically over the last five years; as a result, the creation of new strategies is on the horizon. Board involvement in developing a new direction is paramount.
Tactically, management must pursue a user-friendly approach to encourage managers to actively use their newly developed strategic business planning skills. This translates into business plan templates, providing support for measure development and regular training.
Finally, CAP must improve the measurement of organization-wide strategies. Measuring strategic performance is perhaps the most difficult part of business planning. Albert Einstein once said, "Not everything that can be counted counts, and not everything that counts can be counted." CAP will continue to revise existing performance measures, try new ones on for size, and wear them around like a new suit until we are satisfied that we are indeed counting what counts.
Exhibit 2: Balanced Scorecard Objective Measure 2005 Target Support Effective Board Percent Improvement Cumulative 18% Leadership in Board Support Since 2003 Meet Customer and Percent of Planned 100% Completed Constituent Needs Activities Completed Build Stakeholder Alliances Percent of Planned 100% Completed Activities Completed Further Public Awareness Percent of Planned 100% Completed Activities Completed Protect Colorado River Water Water Supply Threats Aggressively Rights Opposed Oppose All Threats Secure CAGRD Water Supplies Develop a 10-Year Plan On Schedule to of Operation Positive Determination Firm Future M&I Water Supply AWBA Water Delivered 195,000 Acre for M&I Feet Effectively Maintain CAP Percentage of 30% or More System Preventive Maintenance Preventive Labor Divert the Full Available Arizona Apportionment 2.8 Million Water Supply Consumptively Used Acre Feet Ensure Regulatory Compliance Regulatory Compliance 10 Index Maintain Adequate Reserves Percent Variance to 6% Target Manage Budget Performance Budget Variance 95% to 102% Percentage Manage Maintenance Costs Maintenance Spending $18.5 Million Achieve CAGRD Financial Change in Reduce by Independence Administrative $210,000 Debt Level Assess and Use Technology to Percent of Planned 100% Completed Support Business Functions Technology Projects Completed Capture and Retain Vital Number of Vital Record 23 Record Information Series Protected Series Ensure Network and Number of Network Zero Network Information Security Vulnerabilities Vulnerabilities Identified Use the Strategic Framework Percent of Departments 100% and all to Lead the Business Using Metrics Departments Publish Metrics Foster a Capable and Percent of Jobs 50% Motivated Workforce Expected to be Vacant in 5 Years with a Workforce Plan Provide a Healthy, Safe and Number of Safety 29 Incidents or Secure Workplace Incidents / VPP Less Star Status Develop and Sustain Balanced Scorecard Minimum Score Effective Leadership Year-End Score of 1000
THEODORE C. COOKE, CMA, CFM, CGFM, CFE, is assistant general manager of finance and information technologies for the Central Arizona Project, Dr. Cooke holds a doctorate in business administration from California Coast University. TERRI SUE C. ROSSI is a planning analyst for the Central Arizona Project. Ms. Rossi holds a master's degree in public policy from the Eagleton Institute of Politics at Rutgers University, where she was a fellow.
Dr. Cooke and Ms. Rossi have authored four business plans receiving the Distinguished Budget Presentation Award from the Government Finance Officers Association. More information on CAP's strategic framework and balanced scorecard can be obtained on CAP's Web site at www.cap-az.com in the downloadable budget documents.
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|Author:||Eagle, Kim; Cooke, Theodeore C.; Rossi, Terri Sue C.|
|Publication:||Government Finance Review|
|Date:||Oct 1, 2004|
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