Qualitative Methods for Calculating IT Value: Balanced Scorecard, Information Economics, Portfolio Management and IT Scorecard

Balanced Scorecard

“You can make it as hard or as soft and fluffy as you want.”

Nuts and Bolts: Balanced Scorecard has been around long enough that it’s hard to remember how radical the concept was when Robert Kaplan and David Norton first proposed it in a 1992 Harvard Business Review article. The two were looking to join traditional finance lag indicators with operational metrics and integrate them into a broader framework that accounted for intangibles like corporate innovation, employee satisfaction or effectiveness of applications. The Scorecard puts those measures into four perspectives?financial, customer satisfaction, internal processes, and growth and learning?then asks managers to evaluate each perspective against the business strategy.

Investors Group, a Winnipeg, Manitoba-based conglomerate of three insurance firms, uses Balanced Scorecard to measure the effectiveness of its newly centralized IS organization. The department inserts metrics and measures into the Scorecard’s four perspectives to gauge every aspect of its performance, from the Information Systems Audit and Control Association’s IT governance framework, which helps monitor governance effectiveness and process performance, to a series of touchy-feely questions aimed at determining employees’ engagement in their jobs.

“You can make it as hard or as soft and fluffy as you want,” says Investors Group Senior Vice President and CIO Ron Saull, of the Scorecard. “We make it harder because that’s the nature of our executives, that’s what they want to see, and because I like to manage with numbers.”

Word of Mouth: Because the Balanced Scorecard is primarily a tool for managing strategy, it rarely works without top-level executive sponsorship. If companies skip the initial step of mapping out a business strategy with clear cause-and-effect relationships, they can wind up measuring factors that don’t link to business performance. Critics who don’t care for the Scorecard’s softer sliding-scale side charge it’s used as a way to justify behavior rather than effect meaningful change. Even proponents acknowledge IT faces a special challenge in correctly mapping its activities to strategic corporate goals.

Time and Money: About three months; as high as $500,000 for a complex, enterprisewide Scorecard.

Information Economics (IE)

“What’s important is getting the senior people to agree on what’s important to the business.”

Nuts and Bolts: Information Economics aims to provide a neutral method of evaluating a portfolio of projects and allocating resources where they will be of greatest benefit. The idea is to force IT and business managers to articulate, agree on and rank priorities, and draw more objective conclusions about the strategic business worth of individual projects.

“The value of IT will be improved over time if you invest in high-value projects. The underlying philosophy is to spend your money where it’s going to make the most impact,” says Tom Bugnitz, president of The Beta Group, the St. Louis consultancy that champions Information Economics.

Both IT and business managers first list 10 decision factors and evaluate each for its relative importance (positive) or risk (negative) to the business. Each line of business has different decision factors that can be added, deleted or changed as priorities change. Next, IT projects are evaluated against those decision factors. The result is a total relative value number for each project in IT’s portfolio. With a master list of projects ranked by score, it’s simple to determine which should be continued and which should be killed.

Lafarge Canada, a construction materials company in Montreal, had a good track record for IT project starts, but decisions were based more on the power of the business sponsor than on sound strategic principles, says Michel Therrien, director of IT planning and e-business. “Now we can argue around specific definitions. Each of our imperatives is mapped to [our] goal.”

Word of Mouth: IE is a relatively fast way to prioritize spending and align IT projects with business goals. Its risk analysis is fairly detailed, if still subjective. This isn’t designed to manage projects, and it won’t unless IS and business managers are willing to participate and to possibly revamp current planning models to accommodate the process.

Time and Money: Six to eight weeks; plus or minus $75,000.

Portfolio Management

“Transforming the business tends to be a high-risk, high-yield activity.”

Nuts and Bolts: Portfolio Management was built around a premise that many other valuation approaches have since borrowed. To contribute to a company’s bottom line, organizations must view IT staff and projects not as costs but as assets managed by the same criteria a fund manager would apply to any other investment. That means CIOs should continuously monitor existing investments and evaluate new investments by cost, benefit and risk. Just as stock managers diversify risk in a stock portfolio, so too should IT managers assess risk of technology projects and diversify accordingly.

“You have investments to run the business, grow the business or transform the business,” explains Howard Rubin, developer of Portfolio Management and research fellow at the Meta Group in Stamford, Conn. “Run-the-business investments are low risk, low yield. Growth is medium on both sides. And transforming the business tends to be a high-risk, high-yield activity.” The level of risk associated with a component should determine the tightness with which it is managed.

Walter Weir, CIO at the University of Nebraska in Lincoln, says adopting ProSight Portfolio software has helped clarify IT priorities?no small task for a department that services 50,000 students on four campuses and has responsibility for universitywide computing, administration, SAP, student information, budgeting, facilities and Internet initiatives. Weir now divides projects into four categories?administration, service, production and enhancement?then tries to emphasize the higher-level strategic activities as much as possible. “The first three I try to cut down on so we can add resources to the enhancement piece,” he explains. “It’s been a wonderful tool to help me say no when I need to and to help me get extra funding when I need that.”

Word of Mouth: This is not to be undertaken lightly. If your organization isn’t willing to undergo a change of management processes to accompany its new asset philosophy, Portfolio Management won’t be as effective. It can also take time to get the proper mind-set ingrained in the organization.

Time and Money: Full implementation in three to six months; cost ranges from about $180,000 for companies in the annual revenue range of $500 million to $2 billion, to $500,000 and up for large companies with revenue at the $50 billion level.

IT Scorecard

“Why kill yourself developing financial scorecards when the discussion is just going to get pushed back down to operational issues?”

Nuts and Bolts: Michael Bitterman, a principal with the IT Performance Management Group in Bethel, Conn., spent two years trying to fit IT into the Balanced Scorecard but found it just wouldn’t fit to his standards. “The cause-and-effect linkages of the pure Balanced Scorecard don’t work,” he says. “Some of the [Balanced Scorecard] perspectives don’t apply, for example, knowledge and growth. And pure Balanced Scorecard requires a strategy map, but IT organizations are for the most part tactical organizations whether they want to be or not.”

For an antidote, he developed an IT-centric approach that emphasizes moving IT toward a strategic involvement. In place of the Scorecard’s four perspectives, Bitterman substitutes business growth, productivity, quality (both internal and external to IT) and decision making. “The idea is to build toward value but start with an internal view for IT to use,” says Bitterman.

It’s an approach that works for Firemen’s Fund Insurance in Novato, Calif. “One thing we faced was a dearth of information. We felt we had to build some credibility with basic measures and show how those fit [into the strategic objectives],” says Jon Cooper, project manager for the IT department.

Word of Mouth: If you like Bitterman’s IT-centric, bottom-up philosophy, chances are you’ll find stability in the program’s highly specific, many-layered approach.

Time and Money: Between six and eight weeks; consultant’s fees run from $75,000 to $250,000; software can be as little as $20,000 or as much as $150,000.