Connecting IT and Business Value Through the Balanced Scorecard
by Glen B. Alleman
INSTEAD OF "ISN'T IT ENOUGH?" IT SHOULD BE "IS IT ENOUGH?"
Nicholas Carr's "Does IT Matter?" asks the question, "Isn't it enough for IT to enable companies to operate more efficiently or deliver better services, to reduce costs or heighten customer satisfaction?" . This question is an infrastructure question. Carr suggests that investments in IT have "gone to waste" after the collapse of the Internet bubble. Carr's thesis is that IT has become a commodity service and not the basis of a differentiated strategic advantage. Like the railroads and electric utilities, if IT is only a "utility," it will have difficulty describing its differentiated advantage.
If IT is a commodity, what strategic advantages can a business achieve with it? IT has the capacity to provide intelligence about the business, to create new and unique user experiences not available through a traditional sales force, and to project these capabilities onto devices and into locations not envisioned when Carr formulated his thesis. The notion of IT as a strategic enabler presupposes the successful implementation of IT as infrastructure.
CHOOSING BETWEEN OPERATIONAL EFFECTIVENESS AND STRATEGY
As IT searches for its seat at the table, negotiating IT's value to the business and the business's need for the value IT provides reveals a visible gap in many organizations. When the CIO acts like a CTO, he or she provides the technologies needed for the business but does not engage in a conversation about the strategic needs for these technologies. IT then continues to provide services and focus on operational excellence. If the operations continue to function as the business expects, this reinforces the notion that IT is providing all the needed service -- the "dial tone" -- so why should it change its approach?
A CORE CONVERSATION MUST TAKE PLACE BETWEEN THE BUSINESS AND THE CIO
There is another set of questions the business must ask IT and IT must ask the business. These questions are the basis of the balanced scorecard approach described here, but the answers do not depend on a specific strategy-making method. They are at the root of the business value of IT. The questions are:
- Is IT a strategic enabler of the business or simply an operational
- Should IT focus on developing new services that support business operations and
customers, or should it focus on improving the infrastructure so that the business
units can stay focused on the customer?
- How much responsibility should IT have in meeting the business
- What does IT need to do to ensure its place in the business's strategy?
- Why is there a disconnect between what corporate strategists want and what IT
is actually doing?
One source of disconnect is the failure to realize that the "value" IT offers is a negotiated entity -- and this negotiation of IT's value must be completed before any discussion of IT strategy can take place. Any disconnect between IT's perception of its own value and the business's perception of IT's value creates gaps between strategy, governance, and delivery of the needed IT services .
The CIO must responsibly govern all aspects of the business's information; the facilities that produce, manage, consume, and protect this information; and the staff that leads and operates these facilities. As the "I" in "CIO" indicates, information should be the CIO's primary job. Many CIOs are actually CTOs and are focused far too much on the technical aspects of their job.
WHEN IT BECOMES JUST AN INFRASTRUCTURE PROVIDER
When IT provides infrastructure services, measuring operational excellence is the means of negotiating a shared definition of value. Establishing the needed business value is the starting point for defining this infrastructure. This operational excellence approach must connect the provided services with some form of a business case, a business strategy, or business outcome measures. These measures must be in units of dollars. 1
Measuring the business value of these services obviously requires understanding what the business sees as valuable. Issues that must be negotiated include the units of measure, what these units of measure are attached to, and when the units of measure will be recognized by the customer as having value. Not only must the business acknowledge the value of this infrastructure, it must be able to connect the measure of this value to its own performance measures in ways that are meaningful. The operational aspects of the infrastructure are not very interesting to the business. It's the capabilities created by these operational aspects (100% availability, lowest-cost services, business intelligence, lowest operational footprint, fastest time to market, etc.) that are the basis of the value conversation.
WHEN IT PERFORMANCE BECOMES PART OF CORPORATE PERFORMANCE
When corporate performance depends on IT, its contribution starts by connecting IT strategy with the delivery of business value that's traceable to the balance sheet. The corporate focus starts with connecting any activity IT performs with a business element and a line on the balance sheet. The units of measure of these connections must be in dollars or percentages of dollars.
Asking and answering, "Why are we doing this?" is next. Increasing discretionary spending and decreasing nondiscretionary spending should be the goal of any credible IT strategy built around supporting corporate growth. Defining how to separate discretionary from nondiscretionary spending requires the participants in both the infrastructure and the business processes to arrive at a shared vision of what should be done. Engaging the participants starts with a conversation about the value of the various approaches to IT operations, each of which is based on the business's products, architecture, and the deployment of this architecture. This is the technical strategy that supports the business strategy. The infrastructure processes themselves must have a strategy, so there is really no separation between strategy and infrastructure -- one faces out and one faces in.
BOTH INFRASTRUCTURE AND BUSINESS ENABLEMENT ARE NEEDED FOR SUSTAINABLE VALUE
When IT starts conveying its value in technical terms, the business has a hard time "connecting the dots." That is because the currency of the business is dollars or percentages of dollars. Once this has been established, the conversation can turn to how this monetary value can be connected to the specific activities of IT.
This conversation is really a business negotiation: "I'll give you X dollars, and you'll return Y value." Or in other words, "I'll give you X dollars, and you'll be responsible for providing Y services of which I can measure the value in dollars." The critical success factor (CSF) of this approach is to not measure the technical performance of the IT services, but rather to measure the IT performance in monetary value to the business.
The balanced scorecard can be used to communicate as well as control the performance of IT. With a strategy map, IT can answer the questions:
- Why are we here?
- What is our value?
- What contribution are we making to the financial performance goals of this
Once visible goals, CSFs, and key performance indicators (KPIs) are identified, IT and the business can negotiate their measures and agree to the resulting description of "performance success." With this map, IT can then combine infrastructure and business contribution in a single negotiated value process, with both sides -- IT and the business -- sharing in the vision and mission of IT.
CONNECTING INFRASTRUCTURE AND BUSINESS VALUE WITH THE BALANCED SCORECARD
For the connection between IT and business to be valuable, a formalized way of measuring both the value of the connection and the performance of the efforts that deliver this value should be implemented. The balanced scorecard is one way to identify the value, state the benefits, and guide the work efforts in delivery of this value. 2
Table 1 shows a notional example of a business strategy. The next step of developing IT and business scorecards and making the connections between them is not always well developed. Table 1 replaces the well-known balanced scorecard perspectives with four notional balanced scorecard perspectives applicable to an IT strategy:
- Financial Perspective becomes User Orientation
- Customer Perspective becomes Business Value
- Internal Processes becomes Operational Excellence
Learnings and Growth becomes Future Orientation
CREATING THE STRATEGY MAP FOR CONNECTING IT'S VALUE WITH THE BUSINESS
Connecting both infrastructure and business enablement into a coherent strategy can be done by addressing the contents of the balanced scorecard perspectives. Figure 1 is a notional example of a map in a different arrangement than the traditional balanced scorecard, one focused on IT instead of the general business functions. This strategy map is a visible indicator of the connection between strategic goals and execution. The CSFs are the measures of performance for these goals. The process of strategic thinking starts with this cause-and-effect map of strategies. Connecting CSFs with KPIs provides traceability from execution at the project level to the fulfillment of strategic objectives.
IT'S ALL ABOUT MANAGING THE INFRASTRUCTURE PERFORMANCE TO ENABLE STRATEGIC PERFORMANCE
A conceptual framework is needed for a performance measurement and management system. Effective internal and external communication is the key to successful performance measurement. Accountability for results must be clearly assigned and well understood. Performance measurement systems must provide intelligence for decision makers, not just compiled data. Compensation, rewards, and recognition may be linked to performance measurements, and performance measure systems should be positive, not punitive. Results and progress toward program commitments should be openly shared with employees, customers, and stakeholders .
Measurement of IT performance that is meaningful for the business must start with strategy. Each measure is:
Derived from strategy -- a way to operationalize the
vision of the business and move from an infrastructure basis to a
Activity-based -- actions guided by performance measures,
each connected to an element of the balanced scorecard
Customer-focused -- actions guided by customer feedback,
both internal and external
Dynamic -- with new metrics developed as needed
Characterized by a participative development approach --
engagements between supplier and consumer are the basis of the negotiated
value of IT
CONNECTING STRATEGY WITH EXECUTION
Unless it begins by negotiating its value to the business, IT cannot engage the business in a meaningful conversation about its contribution to corporate performance. This value negotiation can address both the strategic and tactical capabilities of IT, thus avoiding the dilemma found in many organizations.
To start this conversation, a shared vocabulary is needed. Figure 2 provides a map for the strategy "Increase Customer Retention," but this map would fail if the participants didn't use the same definitions and semantics. Most importantly, the "units of measure" exchanged during this conversation must be in dollars or percentages of dollars. Only when these units of measure, the value they speak to, and the connections between strategy and execution are all in place, can IT start to look at its operational excellence activities.
ANSWERING THE QUESTION "WHAT IS IT'S ROLE?"
We can now answer the questions asked at the beginning of this article in the context of a balanced scorecard:
1 Or euros, or yen, or what have you. While I will refer to "dollars" in this article, my point is simply that the business measures value in units of actual currency.
2 It is beyond the scope of this article to present the balanced scorecard. For more information, consult the References section.
1. Carr, Nicholas G. Does IT Matter? Information Technology and the Corrosion of Competitive Advantage. Harvard Business School Press, 2004.
2. Guide to a Balanced Scorecard Performance Management Methodology. National Partnership for Reinventing Government, US Department of Commerce, 1999.
3. Weill, Peter. "Don't Just Lead, Govern: How Top-Performing Firms Govern IT." MIS Quarterly Executive, Vol. 3, No. 1, March 2004.
ABOUT THE AUTHOR
Glen B. Alleman is the Practice Director, Strategy and Performance Management, for Lewis & Fowler of Denver, Colorado, USA. Mr. Alleman's role is to define, develop, deploy, and assess the benefit of strategy and performance management processes for IT and business clients using Lewis & Fowler's balanced scorecard, project portfolio management, enterprise project management, and program management office offerings. Mr. Alleman can be reached at Lewis & Fowler, 8310 South Valley Highway, Suite 300, Englewood, CO 80112, USA; Tel: +1 303 241 9633; E-mail: firstname.lastname@example.org; Web site: www.lewisandfowler.com.
Back in the 1990s, IT was considered the genie in the lamp. Want to revise a business process or achieve some other information goal? Just turn the problem over to IT, which will somehow magically make it happen.
Over a decade later, the bloom is definitely off the rose. Today there are many views as to how involved IT should be in business strategy. Nicholas Carr and his acolytes say IT's role is merely to do what the business says should be done as cheaply and efficiently as possible. Others believe that IT can enable competitive advantage by converting new capabilities into better products faster than competitors and by quickly translating know-how into business value.
Join us as we debate the ways IT can -- or can't -- enable business strategy. Learn how to determine whether your IT organization is a strategic enabler or a tactical one -- and how those roles can change over time. Discover how one IT group went from providing basic services to participating in a true business partnership thanks to its "well-formed strategy statements" and savvy industry scanning. If you'd rather be contributing innovative ideas instead of simply executing what you've been handed, don't miss this issue!
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