Thursday, December 13, 2012

Implementing IT Balanced Scorecard

Source: ISACA, Board Briefing on IT Governance 2nd edition

With IT increasingly becoming an enabler of business, more and more organizations are looking for effective and efficient management of IT, so that the investment in IT fetches optimum value. On the same lines, the need for better IT Governance is being felt by the Board of increasing number of organizations. One of the key domain of IT Governance is Performance Measurement. Going by "what is not measured cannot be managed", there need to be plans and processes in place for measuring the performance of IT so that it can be better governed.

Much of the value returned by IT are intangible. While it is easy to measure the tangible benefits, measuring intangible benefits is difficult. Business Scorecard (BSC) which evolved in the early 1990s has evolved into an very useful tool for measuring both tangible and intangible benefits segmented into four perspectives - Financial, Customer, Internal Process and Learning. IT BSC as derived from the Business Scorecards were found to be a a very effective measurement system addressing the concerns of reporting the intangible benefits to the Board.
The Balanced Scorecard as it has evolved over a period of time is being looked at not just as a performance measurement tool, but as a strategic planning and management system. This is because, the Balanced Scorecards can be cascaded down smaller business units including IT and aggregated upwards to the higher-level. IT BSC, which is cascaded from the Business Scorecard can be further subdivided into one for each of the technology domains, for instance one for managing the IT Operations and another to manage the IT Development areas. While doing so, it is important to maintain the linkages between each such cascaded Scorecards and this way the Balanced Scorecard can facilitate Strategy Mapping, thereby improving the Alignment of the objectives of the smaller business and IT units into the business strategy.

The perspective of the IT BSC may be redefined to better represent the IT organization. For instance, the following four perspectives may be used in IT BSC:

  • Corporate Contribution - Equivalent to the Finance perspective of the Balanced Scorecard, this represents the view of business executives on the IT department. 
  • Customer Orientation - Equivalent to the Customer perspective of the Balanced Scorecard, this represents the view of the end users on the IT department. 
  • Operational Excellence - Equivalent to Process perspective of the Balanced Scorecard, this represents the effectiveness and efficiency of various standards, processes and policies followed by the IT department. 
  • Future Orientation - Equivalent to Learning and Growth perspective of the Balanced scorecard, this represent a view of how well IT is prepared to meet the future needs of the business.

To be effective, the following three principles need to be built into the balanced scorecards:

  • Cause-and-effect relationships - the identified performance measures have a cause and effect relationships amongst them, for instance a measure on Improved developer skills (Future Orientation perspective) as a cause will result in improved quality in the applications delivered(Operational Excellence perspective), which in turn should contribute for user statisfaction (User Orientation perspective) 
  • Sufficient performance drivers - While it is common to measure all the possible outcomes (measuring what you have done), it is also important to identify and include suufficient performance drivers(how you are doing). A good mix of both outcome measures and performance drivers are essential for the Scorecard to be effective. 
  • Linkage to financial measures - IT Scorecard, being cascaded from the Enterprise Business Scorecard, the measures in the IT Scorecard should link up to a corresponding measure in the top-level business scorecard. 

To have the Balanced Scorecard implemented as part of the IT Governance initiative, the following steps are recommended:

  • Obtain commitment - Make a presentation to the board and executives explaining the concepts, benefits and cost of implementing it and get a commitment to go ahead. 
  • Kick-off - Kick off the Balanced Scorecard initiative as a project and as part of this activity, train the staff and identify the project team members. 
  • Strategy map - Get an understanding of the corporate business strategy and the sub unit level strategies and then establish a strategy map. 
  • Metrics selection - Understand the existing metrics if any and identify the required metrics, which should be a good mix of both outcome measures and performance drivers 
  • Metrics definition - With respect to each identified metric, create a standard definition, related processes to collect and manage the data. As part of this, the cause and effect relationships should also be clarified and the linkage with higher level scorecards should also be established. 
  • Assign ownership - Assign owners for each metric. 
  • Define Targets - With respect to each metric, set targets (may be a range) for the function heads to achieve and devise strategic initiatives to achieve these targets. 
  • Act on the results - Have the appropriate executive management or board as may be required to review the resulting measures and then act on the results. 
  • Review periodically - The metric definitions, the linkages and the cause-effect relationships may require revision based on experience and this achieved through periodic reviews. 

Successful execution of strategy requires the successful alignment of four components: the strategy, the organization, the employees and the management systems. As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious attention, combining both leadership and management processes to describe and measure the strategy, to align internal and external organizational units with the strategy, to align employees with the strategy through intrinsic and extrinsic motivation and targeted competency development programs and finally, to align existing management processes, reports and review meetings, with the execution, monitoring and adapting of the strategy.”