Applying the Balanced Scorecard in the IT Organization

DEC 1, 2003 1:00am ET
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The information technology (IT) department in most corporations today faces a phenomenon that can be compared to an IT black hole or an IT investment paradox. While investments in IT have been steadily growing in the last two decades, business sponsors often have a question: Are the benefits/returns from the IT investments as high as initially expected?

As a business discipline, IT has become crucial to most organizations for achieving their business goals as well as differentiating the company from the competition (see Figure 1). Achieving market leadership is increasingly a function of getting the right data inputs from the field, interpreting the raw data and passing this value-added information to the strategic decision- makers. The quality of business intelligence decides the fate of many organizations.

If companies are to survive and prosper in today's competitive environment, the corporate IT portfolio-planning function needs to plan IT initiatives strategically. They must use performance measures that are derived from the overall strategies of their business.


Figure 1: Role of IT in the Enterprise

Overview of the Balanced Scorecard

Historically, performance measurement systems for most businesses have been financial in nature. However, in many business situations, financial indicators don't tell the entire story. Comparing two companies with similar financial situations but in completely different market environments could be disastrous.

The originators of the balanced scorecard concept, Robert S. Kaplan and David Norton, saw the necessity for a framework to obtain and implement feedback on the effectiveness of any company's strategies within the organization. They coined the term "balanced scorecard" in a series of articles for the Harvard Business Review in the mid- 1990s. Instead of focusing solely on a company's financial goal, this tool requires decision-makers to consider the impact of strategic decisions on staff, customers and the organization's function.

More specifically, the balanced scorecard model offers a way for a corporation to gain a wider perspective on its strategic decisions by considering the impact on finances, customers, internal processes and employee learning. The analysis takes into account financial and non-financial measures, internal improvements, past outcomes and ongoing requirements as indications of future performance.

To measure success in organizational performance, you must view the organization from the following perspectives:

  • Customer perspective
  • Financial perspective
  • Internal business process perspective
  • Learning and growth perspective

The four perspectives should contain measures that have a unity of purpose directed toward achieving an integrated business strategy for the organization. Every measure selected should be part of a link of cause-and- effect relationships, ending in financial objectives that ultimately affect the growth of the organization.

A well-defined scorecard should contain a good mix of outcome measures (or long-term targets) along with performance drivers to track the progress in the short term. Usually, outcome measures are generic in nature (e.g., employee productivity, user satisfaction) and are lagging indicators. In contrast, performance drivers are usually company-specific measures that reveal the effectiveness of the company strategy.

A word of caution here in spite of capturing multiple perspectives, the balanced scorecard must still retain a strong emphasis on financial outcomes if the tool is to be accepted by senior management. In fact, according to Kaplan and Norton, if a company's improved operation performance fails to get converted into overall improved financial performance, the managers responsible for the balanced scorecard should rethink the company's strategy or its implementation plans.

Utilizing the Balanced Scorecard in the IT Environment

Let us now examine how the balanced scorecard can be successfully applied in the IT department of any business organization.

Typically, the IT department can use the balanced scorecard approach to assess the impact of the organization's business strategy (e.g., entering a new business line or product category) on the existing IT portfolio. It can further determine how the IT organization can align itself to support the organization's overall objectives. Alternatively, IT could use the scorecard tool to track its own departmental initiatives, such as how moving to a different hardware platform would affect the department's processes, budget, training requirements and the user groups it serves within the corporation.

IT departments can apply the balanced scorecard to help keep their business-focused initiatives on track with the overall business plan of the enterprise. In fact, leading- edge IT solutions in the e-commerce, customer relationship management (CRM), supply chain management or data warehousing/decision support software (DSS) areas will be accepted into the corporate world only when viewed as enablers of the overall business plan of the traditional enterprise.

IT managers developing a balanced scorecard for their projects should take the following steps to develop measurable goals in each of the model's four areas of concern (see Figure 2):


Figure 2: Overview of the Information Management Scorecard

  • Financial Contribution: Determine the overall business value of the IT department after weighing the overall cost of an IT project against the benefits it will deliver.
  • Customer Focus: Consider the impact of IT projects on the customers of information.
  • Operational Excellence: Define the core internal processes of the IT department that determine operational excellence.
  • Organization Maturity: Determine whether the organization promotes learning and growth among employees to meet future technology challenges.

For example, in the customer perspective, the following measures can be considered as performance drivers for the IT scorecard:

  1. System availability
  2. Responsiveness on development requests
  3. Timely delivery of new applications

Similarly, the IT department may invest significantly in employee training in order to boost overall department productivity. Top managers in IT cannot measure whether their overall strategy is effective without tracking both actual training days as a performance driver measure, as well as the outcome measures in the form of employee productivity (e.g., function points).

Implementing the Information Management Scorecard

Figure 3 depicts a typical information management (IM) scorecard. During the initial stage, the IM scorecard is a shared vision for a corporate IT strategy that the entire organization is trying to achieve. It is a shared strategic framework used for sharing best practices that facilitate synergies across the organization.


Figure 3: Example of an Information Management Scorecard

However, the shared vision is only the starting point because organizations can benefit only when the strategic initiatives identified in the scorecard are implemented by the IT organization.

Companies need to begin by identifying the strategic initiatives that focus on:

  1. Continuous improvement programs (e.g., improving software process maturity, improving data quality, etc.)
  2. Reengineering and transformation programs (e.g., introduction of new software packages, major application redesign, etc.)

These strategic initiatives will close the gap between ambitious plans set forth in the scorecard and the current performance levels in the organization.

The cause-and-effect relationships between the various measures in the IM scorecard enable the organization to embark on a strategic learning process. While implementing the scorecard in the organization, the strategic feedback and learning process is a critical factor in determining the success of the IT initiatives in the organization. Ultimately, the strategic feedback/learning mechanism helps the organization adapt the information management strategy to emerging conditions in the business environment (see Figure 4).


Figure 4: Role of Feedback/Learning Process in Scorecard Initiatives

The IM scorecard objectives should be communicated throughout the IT department in order to maximize employee commitment. In addition, individual objectives of IT employees should be linked to the IM scorecard for maximum effectiveness because often individuals in different parts of the organization cannot understand how their individual pieces fit together. Understanding the correlation between two or more measures enhances cross-functional systems thinking for individual managers across divisions and could lead to further performance improvements.

To achieve long-term success, the IM scorecard must be integrated with other management systems/monitoring mechanisms in the IT organization. During the capital budgeting process, IT managers should use the IM scorecard as a key mechanism for tracking progress on strategic initiatives. IT portfolio planning should also include corrective steps identified from the IM scorecard to ensure alignment of future investments and discretionary spending plans with company-wide priorities.

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