There are few management concepts that are as powerful and as misused as the Balanced Scorecard. Properly used, it can be both a tool for management to measure progress toward the achievement of strategic goals as well as a means to communicate the organizational strategy to the people doing the work. Sounds great! So, why is this so often a mishmash of irrelevant numbers that seem to add to the confusion?
Overview: Balanced Scorecards for IT Organizations
There are three big reasons for this. First of all, the Balanced Scorecard (which we will call BS going forward because that’s hilarious) has a structure, and that structure was defined by two really smart guys, Kaplan and Norton. Because the name is so intuitive, most people think, “I get it” and start building without ever having grasped the purpose of the scorecard in the first place. We will discuss the BS structure as it relates to IT in case you don’t feel like clicking that link and reading the original.
The second reason is that for a BS to be effective, it has to be linked to organizational or departmental strategy. First of all, that means that management needs to be able to clearly state what the strategy is. Though that shouldn’t be a common barrier, let me just mention humbly that it is an unavoidable prerequisite, and we will discuss a few ways to lead the department to water. Linking the metrics to measure the progress toward achieving that strategy is an extremely valuable exercise for management, but it is impossible if that strategy is not clearly stated, and in the end, nobody can do it for you.
Finally, we have the drunk looking for his keys by the light post, because that’s where the light is best. Scorecard builders often include the metrics they have rather than the metrics they need. In this metaphor, the drunk’s keys are business value, and the lamp post is the data you already have.
There’s always a tradeoff between the cost of gathering data and the value that data provides, but when it comes to strategic-level data, it’s almost always worth making the investment. At a minimum, it’s worth including the metrics missing data on the scorecard to prioritize the data gathering effort. Integrating the data is no longer the issue it was 5 years ago given the current data visualization technologies available. If integration is the alleged roadblock, give us a call immediately.
Integrating Metrics with Strategy
In order for a BS to be effective, there needs to be a clear statement of strategic intent, and the metrics on the scorecard need to measure the progress toward the goal stated or measure the capability to achieve that goal in the future. That’s relatively straightforward for a product-oriented firm with a profitability bottom line. There are some twists and turns for not-for-profit organizations, educational institutions, and support departments which we will discuss below.
Strategy and Support Departments
The Boston Consulting Group (BCG) states pretty emphatically that strategy can only be defined for a business unit. Basically, if the entity you are measuring has a dollars and cents bottom line, then the strategy can be formulated meaningfully – otherwise, you’re just talking nonsense. That definition doesn’t fit the IT function that well, and I’m not going to do a bunch of hand waving about transfer pricing (though I have been a cost accountant in a previous life – long live Activity Based Costing!).
Never say never. BCG never saw a 2X2 matrix they didn’t love. Let’s not let them have the final word. Can a meaningful statement of strategic intent be formulated for a support department? In truth, that is a topic for an article in itself, but let’s discuss high level.
On the surface, there are two ways to go about it. One direction is to state definitively that IT’s strategic purpose is to support the strategic initiatives for one-to-many business units in the organization. To operate this way, IT must be included as a part of the strategic planning process for the organization (ideally it always should be). In some specialized cases, IT should be leading it.
Statement of Strategic Intent
The other option is to define a statement of strategic intent for IT as a whole. It’s worth stating a few examples so we can get the gist of what that would look like.
- Komatsu – Encircle Caterpillar
- Coca-Cola – should always be within arm’s reach of desire
- Apollo – Put a man on the moon before the Soviets
These are all bangers, and like most successful ones, they have these three components:
- Capture the essence of winning
- Stable over time
- Set a target that deserves personal effort and commitment
Now it’s tough to write a hit song, but I have good news for you. There are a few fundamental components that comprise the strategic purpose of every IT department, but the priority will differ depending on the type of organization:
- Develop new features and capabilities
- Provide a stable environment for existing capabilities
- Secure information without diminishing its utility
Depending on the organization, each of these elements may be emphasized more or less in the statement of strategic intent.
For Example:
Consumer Bank – Provide our customers access to their money more quickly and safely than cash in their own wallets.
Software Company: Half of the revenue will come from features developed in the past 2 years.
See, I just made those up (well, I kind of cribbed Coca-Cola and 3M respectively). Feel free to use those if you want, you’ve made it this far in the article. We’ll go deeper into Strategic Intent for IT in a future article, but that’s probably enough to get started on Balanced Scorecards.
Balanced Scorecard Structure
Now I don’t get emotional very often, but my eyes welled up a bit when I understood how elegant the structure of the Balanced Scorecard really is – especially considering the name is so unbelievably milquetoast. There are four categories of measures in a BS, aka Perspectives, from which to view the achievement of strategic success:
- Financial Perspective
- Internal Business Perspective
- Customer Perspective
- Innovation and Learning Perspective
We’ll get into the detail of each, but the elegance is that these compass points, properly used, force a holistic view of the organization. There are leading and lagging indicators, hard and soft evaluations, and evaluations of long and short-term success. There is a reason this tool has outlived forty years of management fads.
Financial Perspective
Sounds intuitive. This used to be the only perspective in evaluating organizational success. Note also that these metrics are typically lagging. The traditional metrics were intended as a report to shareholders:
- Market Capitalization
- Net Profit
- ROI
These metrics, while appropriate for a profit-making entity, obscure the real purpose of the compass point. These metrics are supposed to be the ones measuring success from the outside. There’s no arguing with cash, as it were. We actually made a profit last quarter. That’s a big deal, but it might not be the whole story.
Suppose we were an auto manufacturer having turned in the highest quarterly profit number in our 100-year history. Imagine also that our time to produce an equivalent vehicle had increased 25%, a number worse than all of our competitors. We also experienced a part defect rate 31% higher this quarter, the customer satisfaction rating with our dealers has plummeted, and we lost our two top designers. Is that a good quarter? In a shallow sense, Yes but holistically very much No. With these metrics, however, I do have a more sophisticated view of the organization than I would if I had only the financial perspective.
How does this translate to IT? We do not cram in pure financial measures just because that’s the title of the compass point. If this were the space program, the metrics would be the number of days ahead of the Soviets, last milestone, average per milestone, current milestone, and man on the moon. There isn’t a single dollar there.
To make this transformation, we look back to our statement of strategic intent. If we are supporting our organization, we look at the success of the initiatives we are supporting. If we have stated strategic intent for IT independently, then we ask ourselves – did we achieve success as we have defined it?
Consumer bank (as per above):
- Average Speed of Transaction
- % Transactions completed successfully
- % Identities Compromised
Both the number and the trend are important here, and perhaps a goal for the time period. If the numbers here are in decline, then IT had darn well better have ongoing initiatives to drive improvement.
Internal Business Perspective
The remaining perspectives require no similar transformation. The Internal Business Perspective simply asks: Are we executing on the operations that enable us to improve the metrics defined in the financial perspective? These metrics tend to be real-time or very slightly lagging.
For IT, typical metrics include:
- Mean Time to Resolve
- % Changes Completed Successfully
- Application Availability
Again, the metrics chosen should align with the statement of strategic intent and will evolve as processes mature and the initiatives undertook progress.
Customer Perspective
If customers don’t recognize the value of the services we provide, they will stop spending money on them. This makes just as much sense for an internal support department as it does for a services firm. In IT we must be very clear about who our customers are and make sure that they are declaring openly that they find significant value in partnering with us.
Metrics that evaluate performance from the Customer Perspective tend to be leading indicators. If our customers are having a good year, our next year is likely to be good. Typical metrics for IT include:
-
% Service Targets Met
- Customer Satisfaction Survey Scores
- First Call Customer Resolution
Innovation and Learning Perspective
This perspective tends to be the least evolved but considers important. This is asking the organization – are we doing the things today
that will enable us to succeed in the foreseeable future?
These are the foundation-building activities that tend to cease when not recognized. By putting these activities on the front page of a scorecard, their fundamental importance is duly recognized. This is especially important for a support department, as the foundation that is laid is extremely valuable, and unless recognized, executives may subscribe to the illusion of frictionless transition to outsourcing.
Typical metrics for IT include:
- % Incidents Using Knowledge Article in Resolution
- Training as % of Salary
- % Increase in Stock of Knowledge Articles Used > 10 Times
Discourse on Style
One thing that may become apparent when considering what metrics are relevant, even when measuring for a single function like IT, is that there are an enormous number of metrics that have previously been used to govern operations that are candidates for the scorecard – far too many to include at the executive level.
There are two ways to handle this. The first is to select representative metrics that communicate the progress toward organizational goals particularly well. This requires a real understanding of the goals, the operational activities under evaluation, the purpose of the perspectives, and fluency with the data being produced. A consultant can help with the process, but internal management needs to be actively involved in the selection.
Alternately, the breadth of individual metrics can be aggregated into an overall measure with any manner of weighting or calculation. These often appear as health metrics on a dashboard and are typically called Composite Metrics in the literature. Examples of IT would be Incident Management Health, Network Health, Cloud Health, etc. Composite metrics that are properly constructed will resonate with organization goals better than representative metrics. However, a composite metric loses the immediacy and the mandate to improve. For example, what is a Cloud Health score of 8 and how can I improve it? Those are answerable questions, but there is an intermediate step that can blunt the impact somewhat.
There is no wrong answer. I’ve seen both approaches work effectively across a range of industries and types of organizations. The choice just needs to fit your organization’s management and strategy. If there is consensus on those two items, you’ve made a good choice.
Discourse on Method
When the Balanced Scorecard was originally implemented, data was gathered from a variety of sources by hand and the results were either written for the time period or stored in spreadsheets as an aggregate answer. The metaphor was that the metrics on the BS are like the gauges in a cockpit for an executive piloting the organization. Only the gauges were really slow and would provide feedback once a quarter.
We can torture that metaphor a bit with modern technology. First of all, systems integration and data warehousing should eliminate any manual process involved. The benefits here may be obvious, but let’s put them in bullet points as they are particularly significant.
- Elimination of manual error
- Increased objectivity
- Increased timeliness of data
- Increased granularity
Here’s where the cockpit metaphor breaks down. A fuel gauge will tell you how much fuel you currently have, but it won’t tell you the trend, it won’t tell you what the fuel level is on every plane in the fleet or what the burn is related to altitude, engine type, air temperature, speed, or any number of operational attributes that may help to diagnose overall performance. These relate to granularity – the ability to slice, dice, and aggregate observations down to the moment and the object observed.
Additionally, the improvement in visualization tools enables the ability to touch a metric and access all views of the data previously considered relevant (standard reports) as well as a capability to query the granular information to answer new questions raised by unexpected results (ad hoc reporting/analytics).
Properly constructed, a Balanced Scorecard is a portal into the strategic issues facing the organization with the capability of identifying the root causes of exceptional performance.
Conclusion
The Balanced Scorecard is a lot like the movie Highlander. It’s been a classic for decades, and there’s never been a compelling sequel. It also looks a lot better on modern technology – think Blu-Ray vs. VHS. Perhaps this approach can revitalize your department like Highlander reinvigorated careers of Sean Connery and Queen.
We’ve also established here that strategy is meaningful for the IT function, and that the Balanced Scorecard approach is a powerful tool in providing leadership and practitioners a holistic view of the collective progress toward achieving strategic goals. Perhaps the only warning is that knowledge is power, and some may handle that better than others. It’s quite a rush.
If you need an experienced partner to assist with any of the processes or technology, click any of the pictures in the article to schedule a meeting with Northcraft Analytics, and perhaps we can quicken the effort.