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Measuring and Improving
Corporate IT Performance
through the Balanced Scorecard
Prof. dr. Wim Van Grembergen [email protected]
University of Antwerp (UFSIA)
University of Leuven (KUL)
See Prof. Dr. Van Grembergen’s related article in ISACA’s
Information Systems Control Journal (volume II 2000).
View www.isaca.org for subscription information.
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IT EVALUATION IT INVESTMENT PARADOX A GENERIC IT BALANCED SCORECARD BUILDING AN IT BALANCED SCORECARD IT BALANCED SCORECARD AND BUSINESS BALANCED SCORECARD IT BALANCED SCORECARD PRACTICE
Contents
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IT Evaluation
Intangible
Tangible
Benefit/Costs
IT Balanced Scorecard
Information Economics Cost/Benefits Analysis Return on Investment Internal Rate of Return Net Present Value Payback Period
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investments in IT never cease to grow
business managers worry about its benefits
in academic publications it is reported that the benefits
of IT investments might not be as high as could be expected
this phenomenon is called the "IT investment paradox" or
the "IT Black Hole”: large sums are invested in IT and seem
to be swallowed by a large black hole
without rendering many returns
IT Investment paradox
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Kaplan and Norton developed the balanced scorecard in the early 90's
their idea: traditional financial measures should be supplemented with measures concerning customer satisfaction, internal processes, and the ability to innovate these additional measures should assure future financial results and drive the organization towards its strategic goals while keeping all four perspectives in balance
they propose a three layered structure for the four perspectives: - mission: "to become our customers' most preferred supplier" - objectives: "to provide our customers with new products" - measures: "percentage of turnover generated by new products"
their BSC can be translated into the more specific needs of an IT function
The Balanced Scorecard
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The Balanced Scorecard
Financial Perspective
Objectives Measures
Internal Business Process Perspective
Objectives Measures
Customer Perspective
Objectives Measures
Learning and Growth Perspective
Objectives Measures
How do we look to shareholders ?
How do customers see us ?
What must we excel at ?
Can we continue to improve and create value ?
Source: Robert S. Kaplan and David P. Norton, 1994
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Customer Perspective
How do the customers view
the company?
Mission
To deliver the best added
value to the customer
Objectives
new products
partnership with customer
Measures
% of new products of
turnover
joint development efforts
The Balanced Scorecard
Financial Perspective
How do the shareholders view
the company?
Mission
Assure added value for
shareholders both in the short
and long term
Objectives
survive
prosper
Measures
ROI and cash flow
market share
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Internal Business Process
Perspective
How can the company improve its internal
operations to improve the service to the
customers?
Mission
Efficiently produce and deliver products
and services
Objectives
excellence in production
excellence in deliveries
Measures
cost price per unit
average throughput time for orders
The Balanced Scorecard
Learning and Growth Perspective
What should the company do to remain
successful in the future?
Mission
Innovate, improve and learn to the
maximum
Objectives
technological leadership
product focus
Measures
time necessary to develop a new
generation of products
number of old products to number of
new products
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A generic IT Balanced Scorecard
Corporate Contribution
Operational Excellence
Future Orientation
User Orientation
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A generic IT Balanced Scorecard
User Orientation
How do the users view the IT department?
Corporate Contribution
How does management view the IT department?
Operational Excellence
How effective and efficient are the IT processes?
Future Orientation
Is IT positioned to meet future challenges?
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User Orientation
How do the users view
the IT department?
Mission
To be the preferred supplier
of IS and to exploit business
opportunities maximally
through IT
Objectives
preferred supplier
partnership with users
user satisfaction
A generic IT Balanced Scorecard
Corporate Contribution
How does management view
the IT department?
Mission
To obtain a reasonable
business contribution
of investments in IT
Objectives
control of IT expenses
business value of new
IT projects
business value of the IT
function
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A generic IT Balanced Scorecard
Operational Excellence
How effective are the
IT processes?
Mission
Efficiently deliver IT products
and IT services
Objectives
efficient software development
efficient computer operations
efficient help desk function
Future Orientation
Is IT positioned to meet
future challenges
Mission
Develop opportunities to
answer future challenges
Objectives
permanent training and
education of IT personnel
expertise of IT personnel
research into emerging
information technology
age of application portfolio
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Control of IT Expenses percentage over or under IT budget allocation to different budget items IT budget as a percentage of turnover IT expenses per staff member Business Value of new IT Projects financial evaluation based on ROI, NPV, IRR, PB business evaluation based on Information Economics Business Value of the IT function percentage of the development capacity engaged in strategic projects relationship between new developments/infrastructure investments/replacement investments
A generic IT Balanced Scorecard Measures for Corporate Contribution
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New Information Economics (Parker, 1996)
Traditional ROI (+)
+ value linking (+) + value acceleration (+)
+ Business Value Strategic match (+) Competitive advantage (+) Competitive response (+) Management information (+) Service and quality (+) Environmental quality (+) Empowerment (+) Cycle time (+) Mass customization (+)
Business strategy risk (-) Business organization risk (-)
+ IT Value Strategic IT architecture (+)
IT Strategy risk (-) Definitional uncertainty (-) Technical risk (-) IT service delivery risk (-)
= Adjusted ROI
= VALUE (business contribution)
+ value restructuring (+) + innovation (+)
- Business Risk - IT Risk
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A generic IT Balanced Scorecard
Measures for User Orientation
Preferred IT Supplier percentage of applications managed by IT percentage of applications delivered by IT Partnership with users index of user involvement in generating strat. applications index of user involvement in developing new applications User Satisfaction index of user friendliness of applications index of user satisfaction
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A generic IT Balanced Scorecard
Measures for Operational Excellence
Efficient Software Development number of lines of code per person per month average days late in delivering software average unexpected budget increase percentage of projects performed within SLA percentage of maintenance activities Efficient Computer Operations percentage unavailability of mainframe and network response times per category of users percentage of jobs done within time Efficient Help Desk Function average answer time of help desk percentage of questions answered within time
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A generic IT Balanced Scorecard
Measures for Future Orientation
Permanent Education of IT Personnel number of educational days per person educational budget as percentage of total IT budget Expertise of IT Personnel number of years of IT experience per staff member age pyramid of IT staff Research into emerging Technologies percentage of IT budget spent on research Age of the Applications Portfolio number of applications per age category
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1. presentation of the concept to senior and IT management 2. establishing a project team 3. data-gathering phase where information is collected on: - corporate and IT strategy - IT metrics already in use for performance measurement 4. developing the organization-specific IT balanced scorecard
Building an IT Balanced Scorecard
Project phases:
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start with a "standardized" model as presented
apply the Kaplan and Norton principles build in cause-and-effect relationships include sufficient performance drivers linkage to financial measures
implement the IT balanced scorecard as a Strategic Management System clarify and translate vision and strategy link strategy to team and individual goals link strategy to resource allocation organize strategic feedback
Building an IT Balanced Scorecard
Developing principles:
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IF we increase IT employee's motivation (future orientation) THEN this will result in better quality of the developed applications (operational excellence) THEN this will meet better user expectations (user orientation) THEN will enhance the support of business processes (business contribution)
Building an IT Balanced Scorecard
Cause-and-Effect Relationships
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Building an IT Balanced Scorecard
Outcome Measures and Performance Drivers
Outcome measures Performance drives lines of code per person number of educational days index of user satisfaction response time of help desk
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"A failure to convert improved operational performance into improved financial performance should send executives back to the drawing board to rethink the company's strategy or its implementation plans". (Kaplan and Norton)
Building an IT Balanced Scorecard
Financial Outcomes
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Clarify and Translate Vision and Strategy
align IT and corporate strategy
clarify cause-and-effect relationships
build in sufficient performance drivers in order to visualise
how the IT strategy will be achieved
build in sufficient outcome measures in order to monitor
whether the strategy is successful
link to financial objectives in order to visualise how IT strategy
is improving the company's financial performance
Building an IT Balanced Scorecard
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Link Strategy to Resource Allocation stretch long term targets
define long term targets that are realistic
take strategic initiatives to achieve the stretch targets
define short term milestones for the IT BSC
link priority settings for IT investment projects to the IT BSC
Link Strategy to Team and Individual Goals communicate the IT BSC to the employeees
link individual objectives of IT employees to the IT BSC
link incentive system to the IT BSC measures
Organise Strategic Feedback act upon the measurement results
Building an IT Balanced Scorecard
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IT has to focus more on creating business value
IT has to shift from the efficiency and cost cutting concern to a better support of today's and future business needs
an IT balanced scorecard has to address IT operational and business strategic concerns
operational: monitoring within the IT department (IT manager)
strategic: IT's contribution to the business (CIO)
Included IT-Based Capabilities in a Balanced Business Scorecard (Nolan Norton Institute)
Strategic IT Balanced Scorecard (GartnerGroup)
IT Balanced Scorecard and Business
Balanced Scorecard
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IT Balanced Scorecard and Business
Balanced Scorecard
Department 1 CIO Department 2
CEO
Systems
Development
Manager
Data Center
Manager
Business
Balanced
Scorecard
IT Balanced Scorecard
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Relationship between IT and business scorecards BALANCED BUSINESS SCORECARD Business planning Senior management Business value of IT STRATEGIC IT BALANCED SCORECARD IT planning IT management (CIO) Effectiveness of IT OPERATIONAL IT BALANCED SCORECARD IT supply planning IT supply management Effectiveness and (IT manager) efficiency of IT supply
IT Balanced Scorecard and Business
Balanced Scorecard (Nolan Norton)
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A bank included IT-based capabilities in it's balanced business scorecard
Financial perspective
Net income growth
Sales growth Operating costs down
Customer perspective
Improve "low cost" perception of potential & current clients
Make products more accessible through new and old distribution channels
Internal perspective
Start up call centers and automated electronic distribution channels for internet
Reduce costs by designing IT enabled processes
Learning and growth perspective
Increase employee productivity through ubiquitous capabilities Learn employees to
use productivity tools
Improve awareness about IT opportunities in the context of business activities
IT Balanced Scorecard and Business
Balanced Scorecard (Nolan Norton)
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Financial perspective
Increase sales by internal growth
Customer perspective
Increase sales with current clients through higher client satisfaction, minimize out-of-stock
Win new clients through excellence in service and products
Lower costs of staff and materials by using more efficient planning models
Internal perspective
Automated planning of supplies by integrating POS with external suppliers to distribution centers
New marking effort by introduction of client loyalty card linked to direct marketing systems
Learning and growth perspective
Train employees in use of IT sales forecasting tools
Train employees in service and selling skills
A retailer included IT-based capabilities in it's balanced business scorecard
IT Balanced Scorecard and Business
Balanced Scorecard (Nolan Norton)
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Cascade of Business and IT balanced scorecards
Financial 1. EPS Customer 1. Retention 2. Wallet share Internal 1. Service delivery 2. New services Innovation 1. Customer profiles 2. Web interface
Customer 1. Web interface 2. Customer profiles Technology 1. Web tools 2. Data warehouse Process 1. Rapid prototyping 2. Data mgmt People 1. Recruitment 2. Training
IT SCORECARD
BUSINESS SCORECARD
IT Balanced Scorecard and Business
Balanced Scorecard (Gartner Group)
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Some start-ups in Belgian organizations: Belgacom, Belgian
Gendarmerie, BBL, ...
Problems in applying the IT BSC:
IT balanced scorecards tend to be more operational than
strategic management systems
insufficient cause-and-effect relationships and performance drivers
the distribution of the IT balanced scorecards is restricted
to senior and IT management
developing and implementing the IT balanced scorecard is
not seen as a project
IT Balanced Scorecard Practice