The Knowledge Exchange / Risk Management / Filter a signal from the noise

Filter a signal from the noise

“Risk comes from not knowing what you are doing.” ~ Warren Buffett

Organizations have mountains of data, thousands of metrics and hundreds of key performance indicators (KPIs), but many only track indicators that are easy to obtain, instead of tracking those most relevant to the business’ strategy – those that monitor the progress toward accomplishing an organization’s strategic objectives. That translates into too much “noise” and not enough understanding about how, why or if those metrics support strategic outcomes. To complicate matters, strategy begins as a hypothesis, and many are blinded by its eloquence – unable to see strategy as a set of causally linked objectives that result in the executives’ vision.

This increases the risk that scorecards and dashboards will cause employees to concentrate on the wrong things, in the wrong context, at the wrong time. Unfortunately, few can prove, let alone recognize, that the issue of poor guidance even exists. As a result, employees may waste time, act in isolation, pursue pet projects, or resort to guesswork or instinct. Further, they are unable to perceive or prove a flawed strategy. Management and executives become frustrated and question the organization’s ability to move to a data-driven and fact-based culture. For the organization, it means suboptimal performance and the potential for pursuing flawed strategies for months or years – at higher cost and risk.

While most organizations communicate performance through dashboards or scorecards, there are many variations – from tables with traffic lighting, gauges and dials to more sophisticated strategic scorecards and strategy maps. The hundreds or even thousands of metrics being tracked can make it difficult to focus. Strategic scorecards go further by showing which metrics or KPIs are strategically important and how they are interrelated. They also make it easier to trace and understand how strategic objectives get cascaded across multiple departments or units and down into the organization.

As good as strategic scorecards may be, though, there is still the fundamental problem of strategy being based on hypothesis or an informed hunch. This means that relationships that communicate “influence” are based more on instinct and intuition than fact. Analytics can help organizations:

  • Communicate results.
  • Investigate to gain insights.
  • Provide context and alignment.
  • Statistically prove relationships.
  • Forecast future performance.

The executive team’s primary role is to set direction and answer the question, “Where do we want to go?” With their strategy communicated in a way that it can be understood – with targets – their managers and employee teams can answer, “How are we going to get there?” There is navigation and control. A good strategy supported with analytics reduces the risk of poor enterprise performance and weak strategy execution. Here’s another post that I’ve written about reducing risk by answering the right questions.

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2 Comments

  1. Safdar Imam
    Posted October 29, 2011 at 7:52 pm | Permalink

    Very true. The fundamental problem is that strategy is often based on hypothesis or hunch in the absence of sensible and relevant business intelligence.

    • Posted October 30, 2011 at 1:22 pm | Permalink

      Safdar,

      Thanks for your comment to my article. I partially agree. It is true that strategy should not be based on a hunch, intuition, instinct or gut feel. However I debate your point that it should not be based on a hypothesis. Ok to disagree?

      Every strategy is a hypothesis. The beauty of a strategy map and its companion balanced scorecard with its derived KPIs is that one can validate the feasability of the strategy to be implemented. For example, the KPI targets may not be achievable without additional resources. That is, the strategy may not be affordable without more spending. Analytics allow the hypothesis to be proved or disproved … the scientific method. Decision making needs more science than guesswork.

      Gary

      Gary Cokins, SAS

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