measuring and improving corporate it performance through...

© W. Van Grembergen - 1

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.


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


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


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


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



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


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


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


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


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


A generic IT Balanced Scorecard

Corporate Contribution

Operational Excellence

Future Orientation

User Orientation



User Orientation

How do the users view the IT department?


How does management view the IT department?


How effective and efficient are the IT processes?

Future Orientation

Is IT positioned to meet future challenges?


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



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




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


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


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



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



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



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


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:


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


Developing principles:


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)


Cause-and-Effect Relationships



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


"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)


Financial Outcomes


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



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



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



Balanced Scorecard

Department 1 CIO Department 2

CEO

Systems

Development

Manager

Data Center

Manager

Business

Balanced

Scorecard

IT Balanced Scorecard


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


Balanced Scorecard (Nolan Norton)


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




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




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


Balanced Scorecard (Gartner Group)


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

measuring and improving corporate it performance through...

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