The research is compelling. Some researchers estimate that 90% of all strategic plans fail to be fully executed. Other estimate 70% -75%. Either way, the probability is high that the important task of strategy development is largely a waste of time.
This white paper will address one of the more critical issues in strategy development and the challenges of executing strategy. One of the critical elements of successful execution of strategy is the alignment of intangible assets with the strategic vision of the organization. In their book, Strategy Maps, Converting Intangible Assets Into Tangible Outcomes, Robert Kaplan and David Norton (Harvard Business School Press, 2004) describe three types of intangible assets:
1. Human capital: Employees skills, talent, and knowledge.
2. Information capital: Databases, information systems, networks, and technology infrastructure.
3. Organizational capital: Culture, leadership, employee alignment, team work, and knowledge management.
Intangible assets are different than real assets. Real assets are understood as plant and equipment. A manufacturing organization buys high end milling equipment, which transforms raw steel into precision parts for the next generation high performance jet fighter. The milling machine creates value by what it can do with a piece of raw steel.
While different than real assets, intangible assets are no less important. Their value is not in the transformation of raw materials into finished products. Their value as Kaplan and Norton state is derived from their ability to help the organization implement its strategy. Thus it makes sense that staff must have skills, talent, and knowledge to program the computers that drive the milling machine which produces the parts for the high performance jet fighter. It also makes sense that the culture and organizational structure will be aligned to produce precision manufacturing products.
The same applies for nonprofit, not-for-profit, and public sector organizations as well. In fact, these types of organizations may even even more on the value creation ability of intangible assets than real assets. The hospital, even though it is supported by very expensive technology, relates heavily up the skills and intellect of doctors and nurses to diagnose and treat illnesses. The church, synagogue, and temple rely on the intellect and compassion of its leaders to make sense of a world that often sees in chaos. City government relations on the leadership skills of mayors and councils to produce budgets that will support the delivery of essential services like fire suppression and police (which skills are all intangible). The social service agency relations on the passion, the skills, and the mission minded staff to manage emergency housing for victims of domestic violence and homelessness.
While real assets support the delivery of these critical services, the primary value creating assets are intangible. Supplying a residential fire requires expensive trucks, hoses, and water (real assets) to cool and extinguish the flames. However it is the very intangible assets of human capital, (men and women with intensive training) that carry the hoses into burning homes and pull the family to safety. Fire suppression is also supported by extensive information infrastructure (an intangible asset). This information places fire houses in the correct location so fire trucks can respond within the first few minutes of a fire, saving lives and property. It is also information systems that guide the trucks to the fire by the fastest routes and turn red traffic lights green so the trucks can get through busy intersections without having to stop.
So it makes sense, especially for the nonprofit, not-for-profit, and public agency, that these intangible assets should be adjusted for maximum impact at the lowest possible cost. For example, the suburban bedroom city must align its fire department with the needs of a residential community rather than urban city with multiple high-rise office towers. The intangible and real assets of a police force in a primary income residential community will have different alignment requirements than that of a police force in a low income neighborhood with a transient population.
Organizational readiness occurs when each of these intangible assets are aligned with strategy and mission. For example, a social service organization with a strategy to help latch key youths growing up in poverty to break the cycle must have its leadership, culture, staff skills, and information infrastructure aligned with the strategy to accomplish this vision. If the transformation change strategy focuses on after school education then it makes sense that staff be skilled in providing education rather than skilled in food distribution.
Aligning the intangible assets is actually harder than it may seem. This is especially true as an organization grows and becomes more complex. The greater the complexity the greater the requirement for strategies that are clear and well defined.
For example, a large urban school district hires a new superintendent. She has excellent training, outstanding experience, and unpredictable references. She immediately initiates the development of a new strategic plan. This plan promises to close the gaps in minority vs. major scholastic achievement, it will rebalance resources between schools that need more vs. schools that do not need as much, it will close schools where there are too many and it will open new schools in impoverished neighborhoods.
After a year in development the plan is presented to the school board. It is presented as the vision for the future and enthusiastically adopted.
There are only two problems with the plan.
1. The success of the plan is dependent upon several new educational initiatives for which no budget has been allocated; and
2. Buried within the 30 page document is a single one sentence statement of how the district expects to raise test scores – improve reading.
Everything else in the plan is visionary statements of aspiration. Consequently, rank and file teachers, except reading specialists, conclude there is little they need to do differently; IT staff determine that they are unaffected by the new plan; HR determinates that the plan does not affect them; the board determines that they are bystanders and their sole responsibility is to exceed the superintendent; culturally there is nothing that needs to change; the management staff determinates that there is no impact on organizational culture and design; consequently the plan fails to achieve its aspirations and the superintendent is asked to resign in five years (about the average tenure of an urban school superintendent) and the process begins anew.
The failure was not a plan to fail. Nor was it a failure to plan. One of the solutions that a Balanced Scorecard provides is a structure to strategy formulation that produces alignment. For example, if improving reading scores is determined to be the transformational theory of improving scholastic test scores, then all of the intangible assets of human capital, information capital, and organizational capital must be aligned to this requirement. For example:
Human Capital Alignment Requirements:
• HR must look for hires with specialized training in reading;
• Teachers who lack reading instruction skills are provided an opportunity to add this to their skill sets; and
• Promotions are based on demonstrated reading instruction skills.
Information Capital Alignment Requirements:
IT must have systems aligned with the district's emphasis on reading instruction by being able to provide seamless data on reading skills. These systems must have the capability to provide both reactive and predictive data.
Organizational Capital (leadership, culture, knowledge mgt, and the board) Alignment Requirement
The organizational capital also needs to be aligned with the transformational theory that improvement in reading is what will drive growth in scholastic achievement. This means that the culture must respect and value those teachers who can teach reading. It means that the board is provided regular reports on reading test scores and they are responsible for approving budgets that reflect reading as an institutional value. It may also mean that best practice standards and benchmarking opportunities are developed for reading curriculums. This would provide the opportunity to learn the links between specific reading curriculums and those that have a clear link to improving test scores.
Only when the intangible assets are aligned with the transformational theory of change (reading is the way to improve scholastic improvement) is the institution ready to move forward to the implementation phase of its strategy.
Identifying the Strategy Gap
No one operating in today's complex information centric economy doubts the value of clear strategy. Defining how to develop strategy and how to execute it may be up for debt but the value of strategy is not. Simply stated, strategy is the way an organization will move from its current performance to its targeted performance. A law firm wants to grow from 10 attorneys to 25 advocates in three years and develops a strategy accordingly. A health care clinic wants to grow from 10 practice specialties into a full service health care system in five years and develops a strategy to accomplish this objective. An insurance company wants to grow from $ 250 million in revenues to $ 500 million in revenues but must have a clear strategy to double in five years.
The strategic gap therefore, is the difference between where the organization will be if nothing changes vs. where it wants to be. The educational institution wanted to increase test scores by 25% over five years. The city wants to reduce crime by 15% over three years. And the homeless Shelter wants to add 500 beds to its facility in the next five years, requiring an annual increase in beds of 25% every year. Strategy, therefore, is the methods to accomplish these objectives.
For the nonprofit, not-for-profit, and public sector organization, one of the most important factors in strategic success is the alignment of intangible assets. The absence of financial resources is an obvious strategic deterrent. However, even full funding is of little help if the intangible assets of human, organizational, and information capital are not in place for successful execution. If the school district raises $ 50,000,000 to improve reading skills but does not change the culture, improve staff skills, and align IT to this strategy there is little hope that the institution will be successful. Similarly, if the health care clinic can not support the growth in practice specialties with quality leadership, IT systems, and nursing staff then it will not be successful.
The intangible assets are foundational to strategic execution and must be planned for in disciplined and structured way to achieve strategic objectives. Lawrence Hrebiak PH.D, Professor at the prestigious Wharton School of Economics states in his book, Making Strategy Work (Wharton School of Publishing):
… a disciplined approach to execution is needed to make strategy work. A reliance on a few sound bytes, anecdotes, or stories is not sufficient …. Only an integrated, disciplined approach can cut through this complexity and achieve execution success.
Case Study – Washington State Transportation Improvement Board
In 2001 Steve Gorcester took over as executive director of the Washington State Transportation Improvement Board. This small but important agency acts much like a bank, investing state funds in city and county transportation projects.
When he started he was in for a bit of a shock. On his fourth day he discovered that many of his customer agencies would not have paid until the new fiscal biennium, five months away. The agency had over committed itself to transportation projects and had no way of paying the incoming bills. In addition, there was no system to know where projects were at in the construction cycle, they had no idea if they had over funded projects or underfunded projects, and projects were generally late getting to completion. Consequently, they were not a favorite department within the State government by any measure. In fact, the director of the Chairman of the State Transportation Committee told Steve: “You will never get a dime out of me”. There was even a move within the Governor's office to shut down the agency.
To improve the performance of the agency, Steve commenced several new initiatives, all centered around developing and aligning his intangible assets.
1. Cultural. They shifted the success date, or the date the agency determined their part of the project was completed, from the date the grant was awarded to the date the project was completed. This had an intense cultural shift as staff realized that awarding a grant was just the beginning of the project, rather than the end of the project. It also the focused staff from being the awarders of dollars to becoming partners with communities in developing road infrastructure.
2. Organizational. They established performance measures around the structure of a Balanced Scorecard. This provided a balanced perspective in meeting the needs of their customers who wanted funding for their road projects, while maintaining the State Legislature's needs for transparency and accountability.
3. Informational. They developed an information system that monitors all projects from project award to project completion. In fact, the system is linked to Google Maps so anyone can track the construction at the street level as well as monitor the costs, and project timeline. It is arguably the most transparent scorecard system inside Federal, State, and local government.
So what is the result of the development and alignment of the intangible assets? For one, customer service has improved dramatically, there has been a significant cultural shift within the organization, and the Chairman of the State Transportation Committee is now one of the agency's largest supporters. In fact, as of this writing, there are two bills in the state legislative session to increase the department's budget. This is happening while the state is struggling with the demands of a $ 5.4 Billion dollar reduction in spending.
Daniel B Edds, MBA, PMP can be reached for comment at: Dan@PraxisSolutionsNP.com