170520-It BSC

Measuring and Improving
Corporate IT Performance
through the Balanced Scorecard
Prof. dr. Wim Van Grembergen

wim.vangrembergen@ufsia.ac.be
University of Antwerp (UFSIA)

University of Leuven (KUL)
See Prof. Dr. Van Grembergen’s related article in ISACA’s © W. Van Grembergen - 1
Information Systems Control Journal (volume II 2000).
View www.isaca.org for subscription information.
Contents
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
© W. Van Grembergen - 2
IT Evaluation
IT Balanced Scorecard
Intangible
Information Economics
Benefit/Costs
Cost/Benefits Analysis
Return on Investment
Internal Rate of Return
Tangible Net Present Value
Payback Period
IT Investment paradox
 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
The Balanced Scorecard
 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
How do we look to Financial Perspective

shareholders ?
Objectives Measures
How do customers What must we

see us ? excel at ?
Customer Perspective Internal Business Process
Perspective
Objectives Measures
Objectives Measures
Learning and Growth

Perspective
Objectives Measures
Can we continue to
improve and create value ?
Source: Robert S. Kaplan and David P. Norton, 1994 © W. Van Grembergen - 6

Customer Perspective Financial Perspective
How do the customers view How do the shareholders view

the company? the company?
Mission Mission
To deliver the best added Assure added value for
value to the customer shareholders both in the short
and long term
Objectives
 new products Objectives
 partnership with customer  survive
 prosper
Measures
 % of new products of Measures
turnover  ROI and cash flow
 joint development efforts  market share
Internal Business Process Learning and Growth Perspective

Perspective
How can the company improve its internal What should the company do to remain
operations to improve the service to the successful in the future?
customers?
Mission Mission
Efficiently produce and deliver products Innovate, improve and learn to the
and services maximum
Objectives Objectives
 excellence in production  technological leadership
 excellence in deliveries  product focus
Measures Measures
 cost price per unit  time necessary to develop a new
 average throughput time for orders generation of products
 number of old products to number of
new products
A generic IT Balanced Scorecard
Corporate
Contribution
User Operational
Orientation Excellence
Future
Orientation
User Orientation Corporate Contribution
How do the users view How does management

the IT department? view the IT department?
Operational Excellence Future Orientation
How effective and efficient Is IT positioned to meet

are the IT processes? future challenges?
User Orientation Corporate Contribution
How do the users view How does management view

the IT department? the IT department?
Mission Mission
To be the preferred supplier To obtain a reasonable
of IS and to exploit business business contribution
opportunities maximally of investments in IT
through IT
Objectives
Objectives  control of IT expenses
 preferred supplier  business value of new
 partnership with users IT projects
 user satisfaction  business value of the IT
function
Operational Excellence Future Orientation
How effective are the Is IT positioned to meet

IT processes? future challenges
Mission Mission
Efficiently deliver IT products Develop opportunities to
and IT services answer future challenges
Objectives Objectives
 efficient software development  permanent training and
 efficient computer operations education of IT personnel
 efficient help desk function  expertise of IT personnel
 research into emerging
information technology
 age of application portfolio
Measures for Corporate Contribution
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
New Information Economics (Parker, 1996)
Traditional ROI (+)

+ value linking (+) + value restructuring (+)
+ value acceleration (+) + innovation (+)
= Adjusted ROI + Business Value + IT Value
 Strategic match (+)  Strategic IT architecture (+)
 Competitive advantage (+)
 Competitive response (+)
 Management information (+)
 Service and quality (+)
 Environmental quality (+)
 Empowerment (+)
 Cycle time (+)
 Mass customization (+)
- Business Risk - IT Risk
 Business strategy risk (-)  IT Strategy risk (-)
 Business organization risk (-)  Definitional uncertainty (-)
 Technical risk (-)
 IT service delivery risk (-)
= VALUE (business contribution)
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
Building an IT Balanced Scorecard
Project phases:
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
Developing principles:
 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
Cause-and-Effect Relationships
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)
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
Financial Outcomes
"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)
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 Balanced Scorecard and Business
Balanced Scorecard
 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)
Balanced Scorecard
CEO
CIO Department 1 Department 2
Systems Business
Development Balanced
Manager Scorecard
Data Center
Manager IT Balanced Scorecard
Balanced Scorecard (Nolan Norton)
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
A bank included IT-based capabilities in it's balanced business scorecard
Net income
growth
Financial Sales growth Operating costs down
perspective
Improve "low cost" perception Make products more accessible

Customer through new and old
of potential & current clients
perspective distribution channels
Internal Start up call centers and Reduce costs

perspective automated electronic by designing
distribution channels IT enabled
for internet processes
Learning and Increase employee Improve awareness about

growth productivity through IT opportunities in the
perspective Learn employees to ubiquitous capabilities context of business
use productivity tools activities
A retailer included IT-based capabilities in it's balanced business scorecard
Increase sales by
Financial internal growth
perspective
Increase sales with current Win new clients
Customer clients through higher client through excellence in
satisfaction, minimize service and products
perspective out-of-stock
Internal Lower costs of staff and Automated planning of New marking effort
materials by using more by introduction of
perspective efficient planning models
supplies by integrating
client loyalty card
POS with external suppliers
to distribution centers linked to direct
marketing systems
Learning and
growth Train employees in Train employees in
perspective use of IT sales service and selling
forecasting tools skills
Balanced Scorecard (Gartner Group)
Cascade of Business and IT balanced scorecards
Financial 1. EPS
Customer 1. Retention BUSINESS SCORECARD
2. Wallet share
Internal 1. Service delivery
2. New services
Innovation 1. Customer profiles
2. Web interface
Customer1. Web interface
2. Customer profiles
Technology 1. Web tools
2. Data warehouse
IT SCORECARD Process 1. Rapid prototyping
2. Data mgmt
People 1. Recruitment
2. Training
IT Balanced Scorecard Practice
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

170520-It BSC

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Measuring and Improving

Prof. dr. Wim Van Grembergen

University of Antwerp (UFSIA)

A GENERIC IT BALANCED SCORECARD

BUILDING AN IT BALANCED SCORECARD

IT BALANCED SCORECARD AND BUSINESS BALANCED SCORECARD

IT BALANCED SCORECARD PRACTICE

 investments in IT never cease to grow

 business managers worry about its benefits

 in academic publications it is reported that the benefits

 this phenomenon is called the "IT investment paradox" or

 Kaplan and Norton developed the balanced scorecard in the

 their idea: traditional financial measures should be supplemented

 these additional measures should assure future financial

 they propose a three layered structure for the four perspectives:

 their BSC can be translated into the more specific needs of an

How do we look to Financial Perspective

How do customers What must we

Learning and Growth

Source: Robert S. Kaplan and David P. Norton, 1994 © W. Van Grembergen - 6

Customer Perspective Financial Perspective

How do the customers view How do the shareholders view

Internal Business Process Learning and Growth Perspective

User Orientation Corporate Contribution

How do the users view How does management

Operational Excellence Future Orientation

How effective and efficient Is IT positioned to meet

User Orientation Corporate Contribution

How do the users view How does management view

Operational Excellence Future Orientation

How effective are the Is IT positioned to meet

Business Value of new IT Projects

Business Value of the IT function

Traditional ROI (+)

Measures for User Orientation

Partnership with users

Measures for Operational Excellence

Efficient Computer Operations

Efficient Help Desk Function

Measures for Future Orientation

Permanent Education of IT Personnel

Research into emerging Technologies

Age of the Applications Portfolio

1. presentation of the concept to senior and IT management

2. establishing a project team

3. data-gathering phase where information is collected on:

4. developing the organization-specific IT balanced scorecard

 start with a "standardized" model as presented

 apply the Kaplan and Norton principles

 implement the IT balanced scorecard as a

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

(Kaplan and Norton)

Clarify and Translate Vision and Strategy

 align IT and corporate strategy

Link Strategy to Resource Allocation

Link Strategy to Team and Individual Goals

Organise Strategic Feedback

 IT has to focus more on creating business value

 IT has to shift from the efficiency and cost cutting concern to