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An Overview of Strategic Alignment
Most of the people we speak to are already pretty sold on the value that strategic alignment brings. But when it comes to quantifying that value, things get a little trickier. Creating true strategic alignment isn't easy, and requires focus, human effort and sometimes financial investment.
As such, it's important that organizations have the ability to quantify both the cost of creating strategic alignment, with the return from doing so. In other words - this post is all about helping you to create a Return on Investment (ROI) around strategic alignment.
The Benefits of Strategic Alignment
Let's start off by looking at the 'return' side of our ROI. Below, we've outlined two major benefit areas resulting from strategic alignment, as well as an examples of how to can go about quantifying this benefit.
The easiest way to think of this is from a project perspective since there's more data and research available for projects than the more broad concept of 'goals' - but you can easily extrapolate these same benefits to Objectives, Initiatives, KPIs and more.
Part 1: Elimination of Wasted Efforts
How many of the projects in your organization are not actually helping drive towards one of your agreed upon focus areas?
To give you an idea, when we implement Cascade, we typically find that anything up to around 40% of all the projects that get loaded into the platform doesn't have clear alignment to strategy.
The costs of these unaligned projects are actually far larger than you think when you consider:
- Capital investment costs for the projects
- Hourly wages of people involved in the projects
- And perhaps most importantly...the opportunity cost from not working on other things
Unaligned projects happen for all sorts of reasons. It could be the pet project of a senior executive, a legacy project that has carried over from before the organization had a clear strategy or just a poor approval process around new project initiation.
There will occasionally be times when unaligned projects need to exist - perhaps for compliance reasons, or other 'keep the lights on' reasons that don't make it into the strategic plan.
There's a whole debate about whether any project should exist outside of your plan, but we'll leave that for another time.
Sufficient to say, if you do allow for projects that are not strategically aligned, you need to ensure that this accounts for less than 10% of your overall activity.
Quantifying the benefit of reducing wasted efforts
I promised to help you actually quantify the returns around improving strategic alignment and I'll make good on that promise - but, there are some caveats.
Organizations differ wildly based on what they do, and so these parts of the article will be focused more on methodology rather than giving you hard dollars figures.
I'm afraid you'll need to work those out for yourself! Also, another note - I'll be referencing 'Benefit of Successful Project' repeatedly in these sections - so scoot on down to the notes to check out my methodology of calculating this for your business.
The formula you want to use to calculate this benefit looks something like this:
Benefit = (No. of Unaligned Projects * (Average Capital Investment + Wages Lost)) + (No. of Unaligned Projects * (Benefit of Successful Project))
I'll walk you through how to use this formula below!
Part 2: Increased Project Success
OK so we've looked at how you can save money from not doing unaligned things. But did you know that strategic alignment actually has the wonderful halo effort of creating additional business value from projects themselves?
More specifically, the dollar return of a project has been proven to be higher when that same project is done in a strategically aligned way, versus being done outside of alignment to the strategic plan.
You may ask how the same project can deliver different benefits based on its alignment - so let's dive into that in more detail. There are a few key reasons why strategic alignment increases the business benefit of a project:
- Strategically aligned projects get prioritized/don't get de-prioritized. This means that they receive the focus required, and don't suffer from the 'stop/start' effect that often afflicts projects.
- Resources are more readily available. People throughout the organization tend to offer help for projects when they understand the value. Projects which aren't strategically aligned rarely get that kind of boost.
- Scope-creep is easier to manage. That's because any changes to scope can be run against the same 'strategic alignment' filter. If the scope changes don't directly contribute to the strategy, they get ruled out straight away.
You might think that the above sounds a little theoretical, but the Project Management Institute (PMI) actually went about measuring the specific differences between strategically aligned and non-strategically aligned projects.
They found that strategic alignment in the project space resulted in:
- 57% increased likelihood to deliver the business case
- 50% increased likelihood to finish on-time
- 45% increased likelihood to stay within budget
If you want to read more about those stats, head over to this article for the detail (subscription required I'm afraid).
The most important finding of all, and the one that we're going to use to calculate the ROI of strategic alignment is that on average, strategically aligned projects delivered net business benefits which were 37% higher than their unaligned equivalents.
Quantifying the benefit of increased project success
OK so we've got some stats around how strategically aligned projects are 'better' than ones which have no strategic alignment. But how do we convert that to a tangible business benefit in terms of dollars?
Benefit = (No. of Aligned Projects * (Benefit of Successful Project * 0.37))
Again, I'll walk you through how to use this formula in the example below...
Adding Up the Benefit of Strategic Alignment
Now that we have a clear way to start calculating the benefits of strategic alignment, let's look at what that might mean in terms of actual bottom line improvements. For this example we're going to use a business that looks like this:
- Current revenue of $5,000,000
- 25 Employees
- 12.5 projects completed per year (1 for every 2 employees)
- Average capital investment per project of $200,000
- Average salary of $100,000 per employee
- 30% of projects currently not aligned to strategy
- An appreciation that even after going through this process, 10% of projects will remain strategically unaligned
Let's start by looking at the dollar benefits from reducing wasted efforts by putting the numbers above into our formula:
Benefit = (No. of Unaligned Projects * (Average Capital Investment + Wages Lost)) + (No. of Unaligned Projects * (Benefit of Successful Project))
translates to...
No. of Unaligned Projects: 12.5 * 20% (remember, 10% will remain unaligned even after the process) = 2.5
Average Capital Investment: = $200,000
Wages Lost: 2 * $100,000 = $200,000
Benefit of Successful Project: = $400,000 (see below for more detail)
translates to...
(2.5 * ($200,000 + $200,000)) + (2.5 * $400,000) = $2,000,000
So based on the simple calculation above, this company could increase revenue by $2,000,000 simply by reducing unaligned projects from 30% to 10%.
Now let's add on the benefit of ensuring all projects are strategically aligned:
Benefit = (No. of Aligned Projects * (Benefit of Successful Project * 0.37))
translates to...
No. of Aligned Projects: 12.5 * 90% (since 10% remain unaligned) = 11.25
Benefit of Successful Project: = $400,000 (see below)
translates to...
(11.25 * ($400,000 * 0.37)) = $1,665,000
In other words, by ensuring the strategic alignment of projects we were already doing, we can add a further $1,665,000 of benefit to our bottom line.
The Importance of Alignment
Now let me be the first to say that the formulas and assumptions in this post are incredibly simplified.
The intention is not to give you a set of hard and fast rules to follow, but rather a framework to help you start thinking about and calculating the tangible benefit of strategic alignment, and how it can bring real business growth.
Despite this being a high-level exercise, I hope you've enjoyed the process and that it made you think about the importance of ensuring you have strategic alignment throughout your own organization.
Every day we see the benefits of alignment (along with the damage caused by its absence), and how it plays a huge part in the successful implementation and execution of a strategic plan.
If you want to use a software tool to help you build and visualize that alignment, check out Cascade, our strategy execution platform, and start a free trial today.
NOTE: Benefit of Successful Project Calculation
In a lot of the calculations above, we've needed to reference the dollar benefit that a successful project brings to our business. The trouble of course is, that the dollar benefit of a successful project is going to vary widely based on the size of your business.
A small startup may consider a successful project to be something that brings them 100 new customers. Whilst a multinational bank may need success to be a cost saving in the billions of dollars.
To help, we've come up with a simple (and admittedly very broad) formula that you can use to make this a relevant number for your own business.
The approach essentially assumes that a successful project will help your business 'grow' and that the level of growth you'll deliver will be proportional to the size of your business today.
Benefit of Successful Project = Current Annual Revenue / (Number of Current Employees / 2)
The broad assumptions in the above formula are:
- A revenue to employee ratio of around $200,000: 1
- A typical project requires around 2 full time employees to complete
- A typical project length is 12 months
- A realistic best-case growth target in terms of revenue of 100% per annum
So for example, let's say you're running a company earning $5,000,000 revenue with 25 employees:
$5,000,000 / (25 / 2) = $400,000
In other words, each successful project is worth $400,000 in incremental revenue and in a best-case scenario you complete 12.5 of these projects per year (i.e. 1 project for every 2 employees) - you'll grow your revenue by $5,000,000 ($400,000 * 12.5) which is equal to 100% growth.
Please note that the above approach is intended merely as a starting point and you'll need to adjust the inputs for your own industry/situation.
