In a world characterized by volatility, uncertainty, complexity, and ambiguity, effectively executing strategy presents a unique set of challenges. This article explores the potential of an iterative approach that privileges innovation, rapid action, and customer satisfaction as vital tools in navigating this complexity. Leveraging Key Performance Indicators (KPIs), Objectives and Key Results (OKRs), and Artificial Intelligence, the outcome-oriented steering model offers a dynamic solution. Crucially, this discussion underscores the significance of behavioral change in successfully adopting such models, and further highlights how OKRs can prove instrumental in proficiently managing portfolios and projects.
Read on to navigate the intricacies of this exciting terrain.
VUCA world and the need for agility in strategy execution?
Over the last century, the way of value creation in organizations changed dramatically. In the past, value creation was often based on repetitive processes and competitive edge was to focus on efficiency targets. The question always raised was “how we can become the best in executing these repetitive processes?”. Nowadays value creation is much more complex. Organizations often do not really know what adds most customer value. Or do you believe Nokia expected that the iPhone will replace all their phones?
If the value creation is not clear it is all about speed and innovation – we could also state that the mantra of strategy changed from “becoming the best” to “becoming the first”. What that means for strategy execution should be quite clear. Strategy has to be executed in an iterative way with short feedback loops that allows the organization to consider changes in customer behavior more frequently. But it is not only about a more frequent iteration on the strategy, it is also about focusing on customer values. Why? Because this is what strategy actually is about.
What is strategy? - Implications for nowadays strategy execution
As a former consultant I could say “strategy is some high-level slides describing what to do or how to position yourself over the next years in order to reach you financial targets – probably developed by the most important people in the organization”. But from my perspective the best and most simple explanation of what strategy is, delivers Felix Oberholzer-Gee who describes strategy as “the plan to create value for customers and employees”. Why? Because if you’re able to deliver more value for customers and employees you can increase your prices or decrease compensation both leading to higher margins for the organization (very simplified). Financials oftentimes part of strategy decks are just the result of your strategy and a consequence of the past.
If strategy describes the plan of value creation for customers and employees, this should be considered in the strategy definition and execution of today’s organizations, what means:
- Strategy should always start with the value for the (internal or external) customer and everyone in the organization can contribute to it.
- As the perception of value may change over time, strategy needs to be reviewed and adjusted on a regular basis.
- Financials are not the right tool to steer strategy execution as they are only describing the development of the past.
A steering model for the VUCA world: Outcome-oriented strategy execution with OKRs
No worries, I will not only talk about OKRs as for me this is just a methodology for strategy execution that might disappear one day. I will rather talk more general about how to establish a steering model for outcome-oriented strategy execution that steers value creation for the customer in an iterative way.
This steering model has three components:
- KPIs – in order to assess retrospectively the impact and if we have achieved our strategic targets.
- Outcomes (e.g. OKRs) – an outcome is a measurable value for the customer and describes our plan of value creation.
- Outputs (e.g. projects) – concrete actions how to deliver a certain value to the customer.
KPIs are an established steering instrument in today’s organizations and mostly relevant for the bonuses of managers and decision-makers. You cannot get rid of them easily as people are used to them and transforming people’s behaviors is rather a marathon than a sprint. The Solution, keep KPIs and use them as a vehicle to bring top management closer to outcomes (OKRs).
Outcomes are not really established as of now but describing a measurable outcome for the customer and thus should be an incremental part of strategy execution. One thing that should be considered, only leading indicators help you to get a real picture of the current development or predict the future. To use them for steering you should be able to check continuously if you have moved the needle and created value for customers. Only that allows you to react fast and effectively to changing conditions and circumstances or stop things that add no value. By connecting outcomes to KPIs you can predict future developments of your most important lagging performance metrics.
Outputs is the way people currently work and think - in projects and initiatives. They are answering the question “What needs to be done to achieve a certain goal?” The problem so far, it took way too long to realize if the work on projects and initiatives really had an impact. But if they are connected to outcomes, you avoid moving in the wrong direction for too long.
I remember a keynote at HfWU (Hochschule für Wirtschaft und Umwelt) on “agility in strategy execution” where a student answered my question “what is strategy” with “strategy is testing the hypothesis you made about the future”.
This answer really got my attention because it already indicates that strategy is nothing static. Strategy is always about assumptions on value creation and these assumptions can change over time as soon as new information is available.
Integrating outcomes (OKRs) in a steering model and connecting them to KPIs and projects is just about creating and testing a system of assumptions and hypotheses on a frequent basis.
Depending on what part of the steering model you look at you can test different assumptions:
- Lagging indicators (KPIs) tell you if you have prioritized the right customer values.
- Leading indicators (OKRs) tell you how if you have selected the right actions to drive customer value or can predict future developments of lagging ones.
Using AI to identify leading indicators for steering strategy execution
As people are used to lagging indicators, they mostly struggle in finding good leading indicators. But what are criteria for good leading indicators?
- The metric reviews if the promise you made in your goal is fulfilled.
- The metric can be assessed several times over a strategy execution cycle to validate progress and iterate on it.
- The effort to track the metric only takes up a fraction of the actual work on the topic.
You now just need a sparring partner that supports you in finding these metrics. This is where AI comes in. AI can easily tell you what data point can be used to validate a certain promise in your objective with a leading metric. And this is exactly the prompt you should enter.
Let’s make an example. I ask ChatGPT about “What data points can be used to validate if an organization’s travel expense process has been improved in terms of costs, speed and usability. I'm looking for leading indicators.”
The answer ChatGPT provides is:
- Cost savings: A key metric for evaluating the success of any travel expense process is the amount of cost savings achieved. You could track this by comparing the total travel expenses before and after implementing changes to the travel expense process. Additionally, you could track the percentage of expenses that fall within the organization's budget, as well as the average cost per trip.
- Approval time: Another leading indicator could be the time it takes for travel expenses to be approved. You could measure this by tracking the average approval time for expense reports or by analyzing the percentage of expense reports that are approved within a certain time frame.
- Compliance: Ensuring compliance with travel policies and regulations is critical for any organization. A leading indicator of improved compliance could be the percentage of expenses that meet the organization's travel policies and regulations, as well as the number of violations or discrepancies identified in expense reports.
- User satisfaction: Lastly, measuring user satisfaction can help you determine if changes to the travel expense process have improved usability. You could track this by conducting employee surveys or analyzing feedback received from employees regarding the new travel expense process. This could help identify any areas for improvement or further streamlining of the process.
Probably not all metrics the AI suggests are available and some might also not fit 100 %. But from my perspective it is very helpful to get further ideas for the validation of promises in the objective with proper leading metrics. Another option is to ask for metrics that are leading indicators for lagging ones, e.g. what is a leading metric for revenue from the perspective of a sales team. Probably AI comes up with metrics such as conversation rate.
At Workpath we already built a solution called OKR Generator that uses AI for drafting OKRs and suggesting potential metrics for validating the values created for the customer. My proposal, the initial Drafting should still take place in a personal meeting allowing open discussions on priorities. Formulating the final OKRs including the definition of leading metrics is then up to the OKRs owner who can use AI as a sparring partner.
If you scale OKRs across your organization and ensure all teams are working with leading indicators and connect them to lagging ones, steering strategy execution is much more efficient.
Because at the end it is quite simple. When you are leaving the house and realize that it has rained that information is useless for future decisions. Only a weather forecast, or rain map can help you to decide if you should rather go for an umbrella or your sunglasses.
However, I do not only want to look at KPIs and OKRs, but also at the output level, as there is an implication for many other processes connected to strategy execution such as project or portfolio management.
Processes around strategy execution: OKRs and long-term projects
But let’s start one step earlier. Efficient strategy execution starts with the definition of a strategic plan and the derivation of KPIs as long-term targets on a 1-5 years’ time horizon. Next step is the definition and management of outcomes as mid-term priorities for the organization. This ensures the continuous value creation for the customer and provides the possibility to steer strategy execution with leading metrics.
The plan to drive these metrics is then described in the initiatives and projects that are executed on a short- and mid-term basis. Which projects are prioritized or where budgets are spent should always follow the definition of mid-term priorities. Because you cannot manage your portfolio efficiently when you don’t understand the organization’s most important priorities described in values for customers.
You may now challenge that this sounds logical but it’s unrealistic that all projects just last as long as the priorities of your 3 – 12 months outcome management cycle – especially when we are talking about huge transformations or integrations.
Can OKRs still be the right approach to implement these?
To be honest, it is hard to finally answer this question because it depends somehow on an organization’s goals and circumstances. Nevertheless, I believe that it is still valuable to steer these projects with Outcome Management. Cause Outcome Management is the ability to assess values for customers early on to avoid waste by moving wrong. As every transformation or integration follows a certain goal it should also be possible to determine the value for the (internal or external) customer. To be able to assess early on if you deliver these values, you should break down these projects into smaller slices with individual outcomes. Maybe the first step is to validate the scope of the transformation, second one is about conception, third and fourth about implementation and fifth about validating the outcome.
Outcome Management ensures that you never lose focus on the values you want to create for your customers and support in managing this change.
What kind of project management approach you apply for implementing a slice – agile or waterfall – depends on the value you want to deliver.
But what happens if a customer value you want to achieve with implementing a project is not delivered? Will the project then simply be killed?
Processes around strategy execution: OKRs & Portfolio Management
I believe it is not that simple because there are other factors than created value that should be considered. But projects that do not deliver the aspired value should be reviewed carefully and stopped if needed to ensure an efficient resource allocation.
Nevertheless, taking a portfolio decision in these circumstances could be tough because it always means that a wrong decision was made in the past – by the management itself or at least a predecessor. Considering that fact highlights that it is about improving the decision-making by delivering the right information.
A steering model for outcome-oriented strategy execution can answer the following questions:
1. What progress do we make on our priorities?
2. How are resources allocated towards these priorities?
3. Which projects tend to fail?
4. What is the impact of different scenarios on the aspired outcome?
Starting with the progress on priorities allows to identify the ones where further attention or resources are required. Looking at the current resource allocation allows to determine from which priorities resources can be diverted. Looking at risks and blockers on project level helps to identify which projects tend to fail. And last but not least looking at the scenarios regarding impact on aspired outcomes could deliver further information on dispensable projects – which are then to be stopped!
It seems quite simple so I’m just wondering why not more organizations have implemented such a steering model?
Hurdles of implementation: What hinders organizations in changing their strategy execution process?
From my perspective there are several reasons stopping organizations from changing their steering model for strategy execution, but the main one: Transforming the steering approach is a people business and requires the transformation of behaviors.
However, changing behavior requires significant effort and is often not considered to be value-adding.
Quite often I’m confronted with arguments such as:
- “We can also use KPIs for steering as long as they are leading indicators. But why implement a time-consuming methodology like OKRs?!”
- “We can also do more customer interviews and share the results within the organization to ensure value creation for the customer. But why implementing a time-consuming methodology like OKRs?!”
- “We can also sit together on a regular basis and assess if the purpose of our project has changed. But why implement a time-consuming methodology like OKRs?!”
But I’m quite sure you can’t! In a perfect world teams collaborate around outcomes without having established a structured approach for executing their strategy. But only if they have learned it from an early age. The problem is we are used to thinking in outputs. We always think about “what we want to do” and rarely reflect “why we are doing something”. I would even say we are educated to think in outputs. I could remember how often my teachers could not answer the question “why do we have to learn this?”.
To change a behavior, you need a structured approach. A process that guides you to proactively change the behavior. Thinking about the value you create for the customer, discussing who is required to deliver that value and being reminded to actively reflect on the progress you made.
And a process helps you to scale that approach across an organization. Steering with leading KPIs works as well, but ensuring the whole organization is learning how to work more outcome-oriented requires a structured approach. Thus, the OKR process is not a new fancy methodology but answers the question "how do we get there?".
From my perspective we could describe the OKR process as "governance around strategy execution” because to change people's behaviors effectively, it is essential to have clear processes, rules, and responsibilities for executing the strategy, especially in the initial stages. Otherwise, individuals will not have the opportunity to truly experience the value of OKRs firsthand. After all, would you alter your behavior simply based on someone telling you it might be beneficial?
Moreover, I have also observed that good governance in strategy execution can be measured through the quality of OKRs and the behaviors of OKR teams.
- Are teams formulating outcome-oriented goals?
- Are they well-aligned and collectively taking ownership of their goals?
- Do they regularly convene to discuss progress and address obstacles?
Our Research Team has conducted an analysis of over 30,000 goals set by 3,600 teams across more than 50 organizations. The findings described in the research paper revealed that certain planning behaviors significantly contribute to higher OKR progress. To me, this emphasizes the importance of establishing governance around strategy execution through an OKR process. It not only enhances efficiency in executing strategies but is also indispensable for implementing OKRs on a large scale.
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