How do you decide between implementing a CRM system and upgrading to Windows XP? Are those initiatives more or less important than improving data security systems? Now, compare those investments to the dozens of other IT proposals on the table -- which do you pursue? What will deliver the most value to the company? One solution -- Prioritize and select IT initia-tives based on their contribution to the balanced scorecard.
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Linking IT Initiatives to Balanced Scorecard
1. Linking IT Initiatives to the
Balanced Scorecard
A UMT White Paper
Introduction
In the current environment of budget cuts and increased scrutiny due to the enormous amount of money spent on IT in
recent years, businesses need a way to compare and rationalize the value of all new IT initiatives. How do you decide
between implementing a CRM system and upgrading to Windows XP? Are those initiatives more or less important than
improving data security systems? Now, compare those investments to the dozens of other IT proposals on the table --
which do you pursue? What will deliver the most value to the company? One solution -- Prioritize and select IT initia-
tives based on their contribution to the balanced scorecard.
Balanced Scorecards
Balanced scorecards are growing in popularity as a method for communicating, measuring, and monitoring company
strategy. While the end goal of most enterprises is financial return, financial gauges used alone are lagging indicators
that often fail to properly capture short-term benefits of certain business initiatives. In contrast, balanced scorecards
are designed to measure all of the operational factors that influence the success of a business (financial or otherwise),
providing a holistic view of a company’s operations across multiple
performance categories. Created by David Norton and Robert Kaplan in 1992, the original Balanced Scorecard has be-
come a widely accepted methodology to render overall company strategy into measurable objectives within four cate-
gories: financial, customer, processes, and organizational learning. Gartner Group estimates that at least 40 percent of
Fortune 1000 companies have adopted the Balanced Scorecard. Since its release, many forms of scorecarding have
been created and implemented, most of which can serve as an adequate departure point for determining investment
priorities.
A Rational Investment Approach
A balanced scorecard answers the call for changing times and changing budgets. IT organizations have long enjoyed an
entitlement to choose IT investments without the rigor of developing a business case or a system of comparing one
proposal to another, leaving investment decisions to be made by the most politically powerful or persuasive managers.
The result? Millions of dollars invested in ERP and CRM systems, e-commerce infrastructure, Y2K preparedness, and
implementations of the latest technologies without much sense of the value these initiatives contribute to the busi-
ness. As budgets have tightened in recent years, executives need a rational methodology to compare, prioritize, and
select the portfolio of initiatives that deliver the highest value to the business. Linking IT proposals directly to a bal-
anced scorecard offers a much-needed single reference point to best align IT investments with company strategy.
2. <2>
Scorecarding Alone is Insufficient
Two important issues must be considered before using a balanced scorecard to decide IT investments. First, while there
are many scorecard models a company can use, as Frank Buytendijk of the Gartner Groups suggests, don’t thoughtless-
ly accept and force fit a particular scorecard’s given performance categories to your business, but rather use your com-
pany’s unique strategic objectives as a starting point. Second, once consensus is reached on a scorecard’s strategic ob-
jectives and key performance indicators, you must have a system of finding the rank and relative importance of each
objective. Only then can you know how to weight your investments in each strategic area. You need to reach consensus
on which initiatives are more important than others and to what degree. For example, is "Improving Operational Effi-
ciency" a more or less important objective than, say, "Improving Employee Satisfaction", and if so, how much more im-
portant (i.e., the relative weight). At that point you can start to assess the impact of proposals on each objective based
on quantifiable criteria. Specifically, will a proposed order automation system affect the "Operational Efficiency" objec-
tive "Strongly" (reduce shipping cycle by 5 days), "Moderately" (reduce shipping cycle by 3 days), or "Low" (reduce
shipping cycle by 1 day)? The bottom line is this: you need a tried and true system for ranking and weighting strategic
objectives and for determining effects of proposals on each objective.
Best-in-Class Methodology for Linking IT and Balanced Score Cards
Linking IT investments to business objectives requires 5 steps to achieve optimal results:
1.Balanced Scorecard: If a generally accepted scorecard exists and it captures all strategic objectives in an organization,
then step one is complete. If you need to create or change one, leverage the multitude of scorecard formats available
while ensuring that you capture your company’s unique objectives. If you need help with the process, find a consulting
company with years of experience in determining strategic objectives. A qualified software consultancy will provide
business objective libraries that will quickly help you develop your balanced scorecard.
2. Priorities of Objectives: Once you have all of the relevant objectives captured in your scorecard, you must determine
their relative priorities. While general discussion and consensus are part of the determination process, the right soft-
ware is equally important. Look for software that uses a conjoint analysis methodology to mathematically derive the
relative importance of each strategic objective. The method asks executive stakeholders to rate each objective against
each other on a Likert scale ranging from "Extremely More Important" to "Extremely Less Important."
Once the ratings are complete, software should derive the relative value of each strategic objective in the scorecard to
determine how much they should be investing in each area. In the example below from an actual case study, we see
that the scorecard objective "Profitability of financial advisors" is considered almost 16 times more important than
"Improve employee satisfaction," and thus should likely be considered for a similar ratio of investment.
3. 3.Impact Analysis: Once the scorecard
weightings are determined, all proposals
can be assessed for their impact on each
objective. Prioritizing IT proposals begins
with an evaluation of each proposed IT
initiative on a 5-point Likert scale to assess
the expected quantifiable impact on each
scorecard objective. For example, imple-
menting a CRM system might have an
"Extreme Impact" (e.g., decrease by 20%)
on the Customer Turnover objective, but
"No Impact" on the Risk Management ob-
jective.
4. Prioritization: Software is also used to
determine a strategic value for each IT pro-
posal based on the expected impact of
each initiative on each weighted scorecard objective. Rank your IT proposals by their expected strategic value.
5. Optimization: With a list of initiatives prioritized by their strategic value, the software will optimize against budget
and headcount constraints to find the portfolio of IT initiatives that will deliver the most value and alignment with
corporate strategy. For example, it might require $100 million and 250 people to pursue all of the proposed IT initia-
tives, but if you only have $60 million and 180 people, you must optimize against those constraints to achieve the
highest value portfolio of IT initiatives, all driven originally by your balanced scorecard.
Conclusion
A good balanced scorecard is an excellent system for communicating, measuring, and monitoring enterprise strategy
-- it can also be an effective and rational filter to determine how a company commits its resources. Given the tradi-
tionally huge expenditures on IT, the recent economic downturn, questions about the business value of IT, and new
regulations requiring business transparency and accountability, the balanced scorecard provides a rational and sys-
tematic methodology to ensure that IT expenditures both align with strategy and maximize business value.
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