Journal of International Information Management

Volume 13 Issue 4 Article 1

2004

Development of an IT Balanced Scorecard

Theophilus B. A. Addo
San Diego State University

Chee W. Chow
San Diego State University

Kamal M. Haddad
San Diego State University

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Addo, Theophilus B. A.; Chow, Chee W.; and Haddad, Kamal M. (2004) "Development of an IT Balanced
Scorecard," Journal of International Information Management: Vol. 13 : Iss. 4 , Article 1.
Available at: https://scholarworks.lib.csusb.edu/jiim/vol13/iss4/1

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 Addo et al.: Development of an IT Balanced Scorecard

Development IT Balanced Scorecard Journal of International Technology and Information Management

Development of an IT Balanced Scorecard

Theophilus B. A. Addo
Chee W. Chow
Kamal M. Haddad
San Diego State University

ABSTRACT

There is a generally acknowledged dearth of metrics for effectively measuring organizational

performance. This is particularly true of the IT function, whose contribution to a firm's "bottom line"
has been frequently called to question. This paper describes the development of a performance
measurement tool called the Balanced Scorecard, which can be used to assess IT performance within the
cordetU of overall corporate strategy and financial performance. Data for the scorecard was obtained via
a sur^'ey of senior IT executives in various organizations. The paper concludes with a set of guidelines
for successfully implementing an IT Balanced Scorecard, as well as potential pitfalls to avoid in the
process.

INTRODUCTION

Increasingly, more and more organizations are beginning to realize the critical role that information
technology (IT) can play in the quest for competitive advantage. Gone are the days when the IT department in most
organizations was relegated to a predominantly reactive role, comprising mostly of hardware and software
troubleshooting and the automation of routine business processes. Systems developed during this era provided
organizations with improvements in internal efficiency and effectiveness, but did not provide them with any
sustainable competitive advantage. This is primarily because these systems were easily duplicated by the
competition (Gibson and Hammer, 1985; Bakos and Treacy, 1986; Wysocki and DeMichiell, 1997; Stratopulos,
2000).

Information systems are still needed today for internal efficiency and effectiveness improvements.
Howerier, there is greater opportunity now to utilize IT for much more than that. Advances in computer and
telecommunications technologies have provided organizations with the ability to leverage IT for sustainable
competitive advantage. Indeed, IT has permeated the very core of business, helping to create new products or
enhance existing lines of products, redesign core business processes, create new distribution channels, enable total
quality management and, in more recent times, has ushered in the era of electronic business. Various authors have
noted that for many, if not most, organizations today, IT is actually driving strategy formulation and implementation
(Earl, 1987; Henderson and Venkatraman, 1993; Venkatraman, 1994; Feeny and Willcocks, 1998; Maas, 1998;
Magretta, 1998; Nault, 1998; Applegate, et al, 1999). In a study using firm-level data on IT spending by 370 large
firms, Hitt and Brynjolfsson (1996) conclude that "IT has increased productivity and created substantial value for
consumers."

Some specific examples of companies that have successfully deployed IT for competitive advantage
include Cisco Systems, Inc., which was able to save over $2 billion over four years by implementing an Internet-
based ordering, manufacturing, financial, and human resources system (Business Week, March 20, 2000). After
iinplernenting SAP R/3, an enterprise resource planning (ERP) software system, Colgate-Palmolive reduced the
number of its global data centers from 75 to 2 (with only 40 employees), reduced its domestic inventories by 33
percent, reduced order acquisition and processing time from 2-7 days to 4 hours while, at the same time, improving
on-time deliveries (Kalakota and Robinson, 1999). Dell Computers is almost legendary for its speedy delivery of
computers to its customers. Using highly integrated information systems, Dell is able to bypass retailers and ship
the prciducts directly to the customers, usually within 48 hours.

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With respect to e-business, there is no question that IT is at the heart of this growing phenomenon,
providing the necessary tools and infrastructure to ensure success in the new Net economy (Motwani et al., 2001;
Venkatraman, 2001). Louis Gerstner, Jr., IBM Chairman & CEO, states the following about e-business:

"It [e-business] really does present CEOs with an extraordinary opportunity to transform their
companies' competitiveness, to change the industries in which they operate, to fuel innovation, to
open up alternate distribution channels, and to create entirely new cost structures. It is a fundamental
change, one that occurs at the molecular level of business..." (Business Week, March 27, 2000, p.40).

Wen and Yen (1998) perhaps capture the transformation of the IT function best when they state that: "IT
has grown from being a means of automating data processing to being the critical infrastructure for doing business
today." It is no wonder, then, that many organizations are investing quite heavily in their IT functions. According
to one estimate, about one-third of the annual capital investment by US corporations is in IT (Wen and Yen, 1998).
Another states that, on average, it costs a company 2.2 percent of its armual revenue to provide IT services (Axson,
1996). Global IT spending was expected to reach $3.3 trillion by 2002 (News Report, 2001).

Unfortunately, in spite of the many successes and the heavy investments that many organizations have
poured into their IT projects and initiatives, many of these projects and initiatives are unsuccessful. For example, a
poorly implemented supply chain management system, which resulted in extreme shortages in raw materials and
supplier parts as well as productivity inefficiencies, led Boeing Aircraft to write off $2.6 billion in 1997 (Kalakota
and Robinson, 1999). Also in 1997, Nabisco lost 2 percent of its value on Wall Street as a result of poor integration
between its two separate supply chains (one for Nabisco biscuits and another for its Food Groups), which led to
gross inefficiencies and, ultimately, to poor business performance (Kalakota and Robinson, 1999).

According to a survey by the Standish Group, 73 percent of corporate America's IT projects in 1996 were
late, over budget, or canceled. Project failures cost an estimated $145 billion per year (Thorp, 1999). IT project
failures have been attributed to a number of factors, including the failure to use appropriate measures (Bharadwaj,
2000 ; Thorp, 1999), ineffective project management (News Report, 2001), lack of alignment of the IT project with
the business strategy (Floyd and Woodridge, 1990), lack of organizational readiness (Parker, 1996), and lack of
integration of IT into the activities of the people who use it (Bates, M., 1999).

In this paper, we present a technique that can be used to address the problems listed above and, hence,
ensure the success of IT projects and applications. The technique is called the Balanced Scorecard, and was first
proposed by Kaplan and Norton (1992). Traditional measures of IT performance have focused almost exclusively
on financial aspects (such as Return on Investment [ROl]), presumably because these are tangible and, as such,
relatively easy to measure. It is becoming increasingly clear, however, that ROI and other similar measures are
inadequate since they only look at one piece of the complete performance picture. Additionally, these financial
measures are indications of past performance (lag indicators). They give no indication of future performance (i.e.,
no direct linkage to strategy).

With IT now emerging as a significant player in corporate strategy, new measures of performance are
needed. IT projects yield many tangible benefits that can be very readily measured (e.g., the cost reduction and/or
time saving that can be attributed directly to an automated system). However, IT also yields significant benefits that
are intangible and hence, not so easily measurable. Examples include an information system that provides a major
convenience to customers and thus results in a high level of customer satisfaction and loyalty, or a decision support
system that provides superior analytical tools and data to management, resulting in better quality decisions. The
problem in these examples is: How do we measure "increased customer satisfaction " or "better quality decisions, "
and how do we relate these measures to the overall financial performance of the company? The situation is further
compounded by the fact that the benefits of many IT projects are not realized for several years. Yet, senior
management typically requires ROI justification in an annual review cycle.

The Balanced Scorecard not only provides an effective IT performance measurement tool but, also, a
means to link the performance to strategy. It is enlightening to note that 45 percent of companies spend no time
reviewing or making decisions about strategy but, rather, focus exclusively on performance reviews and operations
(Kaplan and Norton, 1996a). The Balanced Scorecard combines the tangible, well-established financial measures of
past performance {lag indicators) with intangible measures of the firm's drivers of future performance {lead

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indicators), aind shows cause-and-effect linkages among the component measures. This is a very important feature,
given the fact that the source of value for most businesses today has shifted from tangible assets (e.g., machinery) to
intangible assets (e.g., selling business solutions) as a result of the emergence of a new, knowledge-based economy.
More specifically, tangible assets contributed 62 percent to corporate value (i.e., "market cap ) m 1982, while
intangible assets accounted for 38 percent. By 1998, the relative proportions had reversed considerably, with
tangible assets contributing a mere 15 percent, and intangible assets a whopping 85 percent (Norton, 2001).

At the corporate level, many for-profit organizations have used the Balanced Scorecard successfully to
revitaliize their continuous improvement efforts as well as improve their competitive posture (Hoffecker and
Goldeiiberg, 1994; Kaplan and Norton, 1992, 1996a, 1996b). The Balanced Scorecard has been used m industnes
rangin]J from hospitality management to small businesses (Chow et al., 1997). A study by the Gartner Group
estimated that at least 40 percent of Fortune 500 companies would have implemented a Balanced Scorecard by 2001
(Schats, 2000). Therefore, there is mounting evidence that the popularity of performance measures such as the
Balanced Scorecard is on the rise. The focus of this paper is to illustrate how a Balanced Scorecard may be
developed for the IT function within an organization.

The remainder of the article is organized as follows: In the next section, we present an oveiwiew of the
Balanced Scorecard and its components. Then we discuss a survey of several IT executives, and the implications
therefrom. Next, we present a five-stage approach for implementing an IT Balanced Scorecard, highlighting some
pitfalls that must be avoided, as well as some success factors. We conclude with a summary of the study.

THE BALANCED SCORECARD

The Balanced Scorecard measures an organizational unit's (in this case IT) or an entire organization's
perl'onnance along four main perspectives, namely (a) Financial (b) Customer (c) Internal Business Process, and (d)
Innovation and Learning (Kaplan and Norton, 1992). Since the specific objectives and measures of a Balanced
Scorecard are derived from the organization's vision and strategy, these perspectives and their relative importance
will vary among firms or departments. However, it is largely accepted that the framework for a Balanced Scorecard
will include at least the four perspectives or components mentioned above (Kaplan and Norton, 1996a, Chow et al.,
1997). In employing this multidimensional measurement approach, the Balanced Scorecard provides a more
complete, accurate, and balanced assessment of the unit's performance. It also provides a mechanism for linking
this performance to strategy.

Balanced Scorecard Components

Component 1 - Financial: How well are we doing financially.^ The financial perspective serves as the
ultimate f^us for the objectives and measures in the other scorecard perspectives. This perspective reflects the
concern in for-profit enterprises that every action should be part of a network of cause-and-effect relationships that
culminate in improving short- and long-term financial performance. In the process of identifying goals and
measures, different financial metrics may be appropriate for different units within the organization, linking that
unit's financial objectives to the overall business strategy (Chow et al., 1997).

Component 2 - Customer: Customer Satisfaction/How do customers see us.^ The current wisdom, with
respect to achieving corporate financial goals, is that every company needs to pay attention to the needs and desires
of its customers because customers pay for the company's costs and provide for its profit. Even in the IT literamre,
as well as in practice, there has been a major shift in emphasis from product-driven planning to customer-driven
planning (Parker, 1996, Kalakota and Robinson, 1999). Companies need to identify the customer and market
segments in which they wish to compete. The customer perspective allows companies to align their measures of
customer values (i.e., satisfaction, loyalty, retention, acquisition, and profitability) with targeted customers and
market segments. In the case of IT, which provides technological capabilities and support to the other departments
in the organization, it is important to identify both intemal customers and external customers.

Component 3- Internal Business Process: In what business processes must we excel.^ These are those
processes that will deliver the objectives that the financial and customer perspectives have established for customers
and shareholders. This component goes beyond merely improving existing operating processes to defining a

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complete internal process value chain that includes identifying current and future customer needs and developing
solutions for those needs. This will be unique to each organization as it identifies the complete chain of processes
that add to the value customers receive from its particular products and services.

Component 4 - Innovation and Learning: Can we continue to improve and create value.^ Based on the
objectives established in the financial, customer, and internal business process perspectives, a company needs to
identify objectives and measures to drive continual organizational learning and grovrth. The objective in this
perspective should be to maximize the drivers of successful outcomes in the preceding three perspectives.

In expanding the firm's set of objectives beyond traditional financial measures, the Balanced Scorecard
allows managers to demonstrate and measure how their functional units create value for current and future
customers. The Balanced Scorecard also helps to determine the need for enhancing internal capabilities and the
firm's (or organizational unit's) investment in people, systems, and those procedures necessary to improve future
performance. In other words, the Balanced Scorecard is an attempt to capture the essence of the organization's
critical value-creating activities. Because of the financial perspective, the Balanced Scorecard retains an interest in
short-term performance but, at the same time, clearly reveals those drivers leading to long-term financial and
competitive performance (Chow et ah, 1997).

IT and the Balanced Scorecard

A Balanced Scorecard can be developed for the IT function within an organization in order to assess its
performance along the four perspectives of the scorecard. The impact of IT investments can be traced, directly or
indirectly, to changes in the financial performance of the organization. For example, investments in customer
relationship management (CRM) applications, decision support systems (DSS), knowledge management systems
(KMS), and/or data warehouse systems can have a positive impact on the quality of service that the IT function
provides to the other functional units (i.e., its internal clients). This, in turn, allows those units (e.g.. Marketing) to
provide better service to the organization's customers, resulting in greater customer loyalty, and leading ultimately
to increased market share and profitability for the firm. Figure 1 shows an example of how an IT Balanced
Scorecard can be used to link IT performance to its departmental strategic goals (e.g., increasing value to its internal
clients), as well as to the overall corporate strategic goals (e.g., increasing market share and stakeholder value). The
arrows in the figure show the cause-and-effect relationships among the scorecard's components.

For the IT function, the Balanced Scorecard can also aid in a deeper understanding of corporate goals and
can lead to the design and implementation of information systems that are congruent with corporate strategy. It can
also aid in identifying and rewarding those employees whose efforts enhance corporate goals, while redirecting the
efforts of those whose activities detract from those goals.

THE IT BALANCED SCORECARD SURVEY

For this study, a survey was conducted to determine the actual and potential use of a Balanced Scorecard in
the IT departments of several organizations. The survey was in the form of a questionnaire mailed out to selected
senior IT executives in various organizations located mostly in southern California, and one located on the east coast
of the United States. Prior to mailing out the surveys, the potential participants were each contacted by phone and
informed of the pending survey, and were asked if they wanted to participate in it. This approach was taken in order
to encourage a high response rate from the relatively small target sample size (logistical considerations precluded a
mass mailing to a very large number of organizations). A total of 33 senior IT executives gave their commitment to
participate in the study. Of these, 20 actually followed through and completed the surveys that were mailed to them.
(Follow-up telephone reminders failed to increase the response rate any further.) The participating executives were
from various industries, including high-tech (IT and telecomm), engineering, scientific research, consulting services,
healthcare, e-business, and the utilities. The organizations ranged in size from 22 to 45,000 employees (the mean
size being 13,238 employees). The respondents had titles such as Chief Information Officer (CIO), Vice President
of Information Systems, IT Manager, Chief Technology Officer (CTO), and Director of IT.

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Figure 1: Linking IT Performance to Strategy

These individuals were specifically targeted because their high positions in their respective organizations
give them the "big picture" perspective of the role that IT plays within their organizations. This perspective is
critical in the development of a Balanced Scorecard, which is intended to tie IT performance to corporate goals and
strategy. TTie professional experience of the respondents in the IT field ranged from 3 to 35 years, while the length
of time in their current positions ranged from 4 months to 22 years.

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The primary objective of the survey was to elicit responses that might form the basis for developing an
effective IT Balanced Scorecard. The questionnaire used for the survey explained the concept of the Balanced
Scorecard and gave a brief illustration. The survey asked respondents to specify, for each of the four major
Balanced Scorecard components, at least three to four goals that they believe their IT functions should have. For
each of these goals, they were to specify one or more appropriate performance measures (please see the Appendix
for a copy of the questionnaire). The results are shown in Tables 1 through 4. For purposes of simplicity and focus,
only the most popular responses (in descending order) are shown in these tables. There is no implication that every
IT department which undertakes a balanced scorecard initiative must necessarily have only, or all of, the goals and
performance measures listed in these tables. Each IT department will have to develop and customize its own
scorecard. Some scorecards will have a subset, and others a superset, of the goals and performance measures
indicated in the tables. The degree of customization will ultimately depend on corporate strategic goals, which
should then drive the development of departmental goals and performance measures.

Table 1: IT Balanced Scorecard—Financial Perspective

Goals Measures
Budget performance Performance within planned budgets; IT budget as a
percentage of revenue; IT budget as a percentage versus total
enterprise budget; Changes in IT budget allocations; IT trend
lines versus business trend lines; Average development costs
vs. industry average
Project ROI Revenue generation and cost reduction from IT projects and
applications; Risk (financial penalty) avoided or mitigated
from IT investments; Establishment of total economic impact
criteria for new projects
Net income Subscription rate of services versus operating costs; Positive
profitability trend; Percent change in net income
Financial management and performance Productivity gains due to software and hardware
implementations; Reduction in number of outdated/lapsed
service and maintenance contracts; Percent savings achieved
over prior year for recurring purchases
Recognized by customers for increased value Revenue trend with increased cost structure (high end);
Percent change in new customer revenue
Program efficiency Cost savings by automation efforts that reduce labor

Table 2: IT Balanced Scorecard—Customer Perspective

Goals Measures
Overall client/customer satisfaction with IT Customer feedback; Percent of Master Business Agreements
established; Number of new requests; Complaint rate vs.
accolades; Number of internal customer service awards
received; Number of positive customer references; Number of
clients retained for the long term; Percentage of new
purchases by existing clients
Quick response to customers/interrupts Customer satisfaction surveys; Time-to-recover
measurements; Number of trouble calls, repeat visits, &
complaints; On-time completion of projects within budget and
with desired results;
Average help request cycle time
Reputation for quality service Services offered meet or exceed industry standards; Quality of
services comparable to, or better than, those offered in similar
organizations of comparable size; Award fees (based on
contract type); Recognition by top tier services as
"consultants of choice"
Availability of services per Service Level Annual uptime percentage; Use of external monitors to

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measure success; Measures of system responsiveness;

Agreements
Meeting service level agreements
Application usage Application usage as a percentage of total process usage;
Changes (increase) in system usage; Track usage of
"ease-of-use" features
Let customers/users determine own needs Extent of customer/user involvement in decision and design
process; User versus IT time spent per project

Respondents were also asked to indicate, on a scale of 1 to 10, the extent to which their current IT
performance measures were similar to the Balanced Scorecard (with 1 being not at all similar and 10 totally
similar"). The results indicate that 20 percent of the respondents use a measurement system that is totally similar to
the Balanced Scorecard (score of 10), while 10 percent use performance measures that are not at all similar to the
Balanced Scorecard (score of 1). Overall, 35 percent of the respondents gave a score of 5 or less on this item, while
65 percent gave a score higher than 5. This indicates that the majority of the performance measures cumently m use
in the IT departments surveyed bear at least some similarity to the Balanced Scorecard.

Wtien asked to indicate the three biggest differences between their current performance measurement
system and the Balanced Scorecard (for the 80 percent who reported differences between their performance
measurement systems and the Balanced Scorecard), the responses/comments received included the following:

Table 3: IT Balanced Scorecard—Internal Business Process Perspective

Goals Measures
Quality of service/product Average time to solve customer support calls; Average number of
support calls due to bugs; Number of calls to help desk; Average help
request cycle time; Percent downtime versus Service Level Agreement;
Demand for new services versus number of errors fixed
Project success On-time, on-budget project rates (7)
IT enhancement Number of new IT products/services integrated; Average processing
efficiency of systems; Technology changeout time; Extent of
automation/reduction in staff
Process and quality Improvement Improvements in turnaround time; Extent of IT process reviews;
Extent of IT process improvements; Extent of process automation;
Number of new initiatives and/or improved products/upgrades offered
in key areas; Increase in competitiveness of products, services, and
methodologies; Time to implement new solutions; Average product
development time
Effective and open communication Extent to which all team members are clear on goals and objectives of
the team; Extent to which diverse opinions are encouraged and
explored
Support business change Percent reduction in time to incorporate new acquisitions; Shifting of
clerical tasks to technology; Extent of IT input to standard business
processes

Table 4: IT Balanced Scorecard—Innovation and Learning Perspective

Goals Measures
Continual technical training and No. of technical training courses/certificates; Dollars spent on relevant
education employee training/education; Review of training log and plans;
Periodic assessment of employee knowledge and competence; No. of
peer associations & conferences; No. of degrees; Extent to which
training targets are met; New technology used as a result of IT
personnel development
IT staff job satisfaction and motivation 18-month survey of IT staff satisfaction; Gallup Q'^ Management

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Survey; Individual interview with staff; Staff/Management

interactions; IT staff turnover versus industry averages; Staff retention
rate
Keep up with changing technology / Technology life-cycle trend; Dollars spent on latest technology and
replace obsolete technology software; No. of innovations deployed; Time required for
implementation; Extent of automation in organization
Clarity of roles, responsibilities, and Reduction in number of job cards without performance standards;
expectations Reduction in number of annual performance appraisals without clear
statements of performance/skill expectations
Continuous innovation in project Extent of project tracking and post-mortem analysis; Number of new
management projects offered
Formation of application teams Ability of team members to back each other up

We use only Service Level Agreements (SLAs)—do not incorporate clients' needs or views: We rely exclusively
on client feedback; We include Personnel as an additional key metric; Not all goals have been previously
defined; Some goals are not accurately measured; Unarticulated goals from the top; Metrics are not used
combined as an overall measurement; Unavailability of metrics; We have no means of looking at the overall
performance of the group; We do not separate out the different areas to see how we 're doing; Our current
performance measure is at a lower level—measures individual's characteristics instead of departmental or
company characteristics.

Respondents were also asked to indicate, on a scale of 1 to 10, the extent to which they thought that a
performance measurement system similar to the Balanced Scorecard would be beneficial to their department (with 1
being "not at all beneficial" and 10 "extremely beneficial"). Eighty-five percent of the respondents gave this item a
score of 7 or higher (with 25 percent scoring it a perfect 10). These results clearly indicate that the majority of the
respondents perceive the Balanced Scorecard as being potentially very beneficial to their departments, and point to a
strong need for such a performance measurement system. It is interesting to note, parenthetically, that one
respondent gave this item a score of 1 (i.e., indicating that the Balanced Scorecard would be "not at all beneficial" to
his/her organization). This respondent clearly holds the "traditional" (old-fashioned) view of IT, and sees no need to
link IT to overall corporate performance, commenting that "these are issues for the Customer Service department
and the Finance department to worry about!")

When asked to specify the three biggest benefits that they thought an IT Balanced Scorecard would
provide, the following responses/comments were obtained;

Forces the inclusion of the client's view in the measurement system; Provides consistency—baseline metrics for
year-to-year/month-to-month measurement and comparison; Expectations are well understood—clearly
communicated goals and measures; Provides quantitative assessment of goal achievement; Helps to understand
relationships betn'een goals and tradeoffs that often must be made; Ability to proactively manage long-term
plans; Focuses on key business initiatives and drivers; Results could lead to quicker organizational change;
Easier customer service reports; Emphasis on key metrics; Provides structure; Provides an entire picture, not
just parts of the picture; Focuses on higher level items—prevents people from digging into politics/resistance to
change.

Respondents were also asked in the survey to indicate, on a scale of 1 to 10, how difficult they thought it
would be for their IT departments to implement a Balanced Scorecard (with 1 being "not at all difficult" and 10
"extremely difficult"). Twenty-five percent of the respondents believe that it would be "not at all' difficult to
implement a Balanced Scorecard in their IT departments (score of 1). Another 20 percent report relatively low
levels of difficulty (scores ranging from 2 to 4). However, 55 percent of the respondents anticipate fairly high levels
of difficulty in implementing such a measurement system (scores ranging from 5 to 10), with 10 percent of those
indicating that it would be "extremely difficult" to implement the system (score of 10).

The main reasons (or challenges) given for the expected difficulty in implementing a Balanced Scorecard-
type measurement systems are captured in the following responses/comments from respondents:

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Difficulty in getting user/customer input; Need to develop several scorecards for a heterogeneous community;
Difficulty in getting buy-in across decentralized groups; Speed of market; Communication of requirements and
providing consolidated rewards; Difficulty and expense in accurately measuring some goals; Time availability
for collecting, measuring, and analyzing results; Organizational culture; Resistance to change; Adminisfiation
time; Actual development of the metrics; Getting people to agree on the measurements; Leadership stability-
each leader changes direction.

IMPLICATIONS OF THE SURVEY

A number of implications are readily apparent from the results of the survey. These are briefly discussed
below.

1 There is a general need for a comnrehensive performance measurement svstem. Virtually all of the
respondents in the survey stated that a performance measurement system, such as the Balanced Scorecard, would be
beneficial to their IT functions. Several cited the lack of suitable metrics as a glaring need in the industry. An IT
Balanced Scorecard would be an effective tool for meeting this need. In particular, the respondents noted the
following benefits that a Balanced Scorecard would bring: the comprehensiveness of the measures (in including all
relevant performance drivers), and the faet that the Balanced Scorecard forces a prioritization of, and a focus on, the
critical goals and measures. If used consistently across several decentralized divisions of an organization, an IT
Balanced Scorecard would assure consistency in focus, and also give the ability to assess the relative performance of
the divisions.

2, Peiibrmance measures must be flexible. Different organizations have different goals and priorities and,
therefore, may need to track and measure different performance factors. This was home out in this study. While
there v/as some commonality in the responses, there were also many differences in terms of goals and organizational
focus. Not every IT organization surveyed listed goals for each of the four major components of the Balanced
Scorecard, and at least one (the IT department of a consulting firm) listed an additional component that they use—
Personnel. The Balanced Scorecard allows for this. It is not a "one-size-fits-all" kind of tool but, rather, one that is
customizable to individual organizational needs.

3 Goals are important. Some respondents complained about improperly defined or unarticulated goals in
their organizations. This is a critical point. If organizational goals are not well understood or effeetively
communicated, it is difficult to ascertain what is important and what needs to be measured. (As Forrest Gump said
in the movie, "If you don't know where you're going, you're probably not gonna get there.") Defining and
communicating goals are at the heart of the Balanced Scorecard. It is important for corporate goals to be
communicated accurately, effectively, and consistently to all departments, including the IT department, so that there
would be little doubt as to what needs to be measured, and what measurement criteria need to be developed and
used.

4. Implementing a Balanced Scorecard is not easy. More than half of the executives surveyed indicated that it
would be difficult to implement an IT Balanced Scorecard in their organizations. This should come as no surprise
since the implementation of such a system represents a significant change in the organizational culture (especially
for those organizations not used to having such a disciplined measurement system). Additionally, it requires major
commitments of time and money (Kaplan and Norton, 1996b, McCunn, 1998; Schatz, 2000). Several respondents
mentioned the difficulties of time availability, organizational culture, and change management. Clearly, for an IT
Balanced Scorecard implementation to be successful, there must be strong leadership and commitment from within
IT and from senior management. Without a strong CIO-CEO relationship that is dedicated to the cause and can
effectively manage the accompanying organizational change, the effort is likely to fail. The importance of the CIO-
CEO relationship in organizations has received significant attention in the IT literature over the past several years
(Parker, 1996; Lundberg, 1997; Turban et ah, 2002; Luftman, 2004).

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IMPLEMENTATION OF AN IT BALANCED SCORECARD

The strong need for an IT Balanced Scorecard articulated by our survey participants, coupled with the
difficulty (real and perceived) in implementing such a system, indicates a need for some implementation guidelines.
The findings also confirm the general paucity of metrics in the business world. Kurtzman (1997) reports that 64
percent of American companies have heen experimenting with some sort of new performance measurement system.
In this section we provide some guidelines for implementing a Balanced Scorecard for the IT function within an
organization. It is important to emphasize that such a scorecard should not be developed and implemented in
isolation (i.e., based exclusively on what the IT department wants to do, with respect to technology). Instead,
development of the IT Balanced Scorecard—and hence the IT strategy—must be driven by the overall corporate
mission and strategy. Therefore, it should be undertaken only after a thorough understanding of the corporate
mission. There are five major stages in our proposed implementation process.

Stage 1: Agreeing on the corporate mission. The crucial first step, as indicated above, is getting agreement
on the overall mission of the organization as a whole. This is important because to be effective, the scorecard
measures must support the attainment of a common corporate mission. The IT department is in the unique position
of having to support all the other functional units within the organization, with respect to IT infrastructure and
information needs. Thus, it is imperative for the CIO to be in agreement with the CEO and other senior
management on the overall corporate mission. Indeed, for those organizations that rely significantly on IT for their
strategic positioning, the CIO must be actually involved in setting the overall corporate strategy (Parker, 1996;
Wysocki and dcMichiell, 1997; Lundberg, 1997).

Stage 2: Translating the vision and gaining consensus. The corporate vision is next translated into IT goals
and objectives. Because of IT's support of the other functional units in the organization, these IT goals and
objectives will be used to guide the development of IT strategies for the other functional units. To this end, there
needs to be strong agreement on goals and strategies between the CIO and the other functional managers.

Stage 3: Communicating objectives, setting goals, and linking strategies. This stage involves the
communication of the corporate vision, as well as the goals and objectives of all departments, to the IT staff. It is
important for the CIO to understand the cause-and-effect relationships within, as well as between, scorecard
components (including linkages to other departments' IT goals) in order to channel departmental efforts in the right
direction and, also, be able to identify and justify value-added contributions of the IT function. As Smith (1999)
points out, "[tjhe Balanced Scorecard should be an exercise in cause and effect." It is particularly important for the
IT function to demonstrate these cause-and-effect relationships because the benefits of some information systems
are manifested only as second-, third-, or even fourth-order benefits (i.e., they can be linked to corporate financial
performance only indirectly through other channels). For example, investments in an effective IT infrastructure,
together with appropriate training, can lead to the development of systems that improve the quality of customer
service and convenience. This, in turn, may result in increased customer satisfaction and retention, which then leads
to increased sales and market share (i.e., improved corporate financial performance). Thus, it is imperative for the
CIO to be always cognizant of the financial performance of the company as a whole, and be able to demonstrate the
contribution of the IT function to this performance through the various causal relationships and linkages.

Stage 4: Setting targets, allocating resources, and establishing milestones. This is the stage at which the IT
Balanced Scorecard is actually developed (such as Tables 1 through 4). An implementation team is established to
translate the vision of the organization into specific goals and action plans for the IT department along the four (or
as many as necessary) components of the Balanced Scorecard. Performance measures are developed for each of the
goals specified for each component of the scorecard. The CIO must be a member of this team. The team should
solicit feedback frequently from the rest of the IT staff to assure consensus and buy-in. The team also establishes
milestones for accomplishing its tasks, reporting periodically to the rest of the department. Most likely, it would he
necessary to go through several drafts of the scorecard before a final version is approved.

Stage 5: Feedback and learning. This stage involves learning from the previous stages and continuing to
improve. The IT Balanced Scorecard must be a living, organic system that can be modified, as needed, to reflect
changes and to incorporate new and relevant information. It should never be a "one-shot deal." As business and
market conditions change, strategies will change. This, most likely, would mean a change in goals and performance
measures and the need to modify the scorecard. Thus, this stage provides an opportunity for continual post auditing

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of the perforimance measures to see if they are still applicable. It presents the IT department with the opportunity to
collect data about the current IT strategy, to reflect on whether the strategy is working and still appropriate (in light
of new developments), and to seek ideas concerning new strategic opportunities and directions.

POTENTIAL IMPLEMENTATION PITFALLS TO AVOID

Kaplan and Norton (1996a) identify some common pitfalls that could lead to failure in implementing a
Balanced Scorecard. They also offer some suggestions for avoiding these pitfalls. Managerial thought from other
scholars, such as Tingle and Schiemann (1996), Chow et al. (1997), Birchard and Epstein (1999), and Smith (1999),
provide additional insights that could further guide the development and implementation of a Balanced Scorecard.
We now take a look at some of the common pitfalls to avoid in implementing an IT Balanced Scorecard.

Pitfall No.l: Designing the Balanced Scorecard without an articulated vision. The risk of falling into this
pitfall is greatly increased when there is little or no executive involvement in the development of the scorecard
(Smitl., 1999). Without executive guidance to help formulate and articulate a vision and a mission, the IT
department may fall into the temptation of acquiring and/or implementing technology simply because it is the latest
on the market, regardless of whether or not it contributes significantly to the organization's mission. Kaplan and
Noi-ton (1996a) caution prospective adopters of the Balanced Scorecard to not regard the scorecard as merely a
performance measurement system, but also as an aid in communicating the organization's goals and its strategies
toward attaining those goals. Designing the performance measures should be an integral part of the entire strategic
planning process. Thus, incorporating the corporate mission, goals, and strategies into the IT Balanced Scorecard is
critical in motivating IT-related actions that are congruent with these goals and strategies, and also give feedback
and guidance about progress toward the goals.

Pitfall No.2: Blindlv copving another Balanced Scorecard. Each organization has a unique set of
circumstances that makes it different from any other organization. This unique set of circumstances, ideally, would
be incorporated into that particular organization's IT Balanced Scorecard, and may be completely inappropriate for
another IT department. Thus, while another organization's IT Balanced Scorecard may be useful for reference
purposes, each IT department needs to develop its own (Chow et al.l997). Even more important, the development
process is perhaps the most important aspect of effectively implementing the balanced scorecard, because it leads to
mumal understanding and acceptance. No single IT Balanced Scorecard can serve as a universal model that is
applicable to all IT departments. Because the development of a Balanced Scorecard requires the commitment of
significant amounts of time and money, each organization needs to make the decision as to its readiness and
commitment to take on a balanced scorecard implementation project.

Pitfall No.3: Data Overload. A common temptation in Balanced Scorecard development is to attempt to
identify and measure every single item that one can think of. However, having too many measures leads to
difficulties in prioritization, as well as a dilution of attention on the part of employees—not to mention difficulties in
assigning responsibilities. Tingle and Schiemann (1996) call for a balance in this regard. They advocate having
enough detail to be actionable, but only enough to be meaningful. Kaplan and Norton (1992) suggest that an
effective way to develop the performance measures is to start with a blank page and generate ideas of the fewest and
best measures to use for each goal. This approach forces prioritization, and can lead to very fruitful discussions
(Birch ard and Epstein, 1999). Smith (1999) goes so far as to say that the total number of measures for the scorecard
shc uld not exceed 20 to 25.

Pitfall No.4: Failure to heed the results. Design and implementation of an IT Balanced Scorecard should be
a total commitment, which includes a willingness to accept whatever the outcome of a performance assessment
(Chov/ et al, 1997). For example, if it is determined, from scorecard measurements, that a manager's pet IT project
is not contributing significantly to the corporate mission—and, perhaps, even detracting from it—there should be a
willingness to either redesign the project or scrap it completely and focus resources on more value-adding projects.

Pitfall No.5: Failure to link Balanced Scorecard performance to reward svstems. It is very important for the
IT Balanced Scorecard to be tied to the departmental reward systems. It is a further demonstration of commitment
to the process. IT staff would thus be rewarded for focusing their talents and efforts on those projects that are in line
with the coiporate mission and which yield significant strategic benefits to the company. According to Norton
(2001), 75 percent of middle managers currently do not have incentives linked to strategy. Smith (1999) asserts.

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"Talking about strategy while basing compensation on short-term financial performance leaves little doubt what
managers will focus on."

Pitfall No.6: Failure to treat the IT Balanced Scorecard as an ongoing activitv. Development and
implementation of the IT Balanced Scorecard should not be viewed as a typical project, with definite "start" and
"end" points. As has been emphasized throughout this article, the IT Balanced Scorecard should reflect the
organization's mission. Changes in business conditions could result in changes in business strategy and goals
(Parker, 1996; Luftman, 2004), and the IT Balanced Scorecard should be adaptable to these changes. If the
scorecard is seen as a one-time, static document that does not change with changing conditions, it could end up
measuring the "wrong" (i.e., irrelevant) things over time, rendering it completely ineffective.

Pitfall No.7: Failure to institutionalize the IT Balanced Scorecard This is somewhat related to Pitfall No.6
above. Unless the IT Balanced Scorecard concept becomes institutionalized as an accepted way of life by the staff,
it runs the risk of becoming "just another fad" after a couple of years, and all the initial effort and investment put
into the process would have been wasted.

FACILITATING IMPLEMENTATION SUCCESS

In addition to the recommendations incorporated in the preceding section, there are a number of actions that
an organization can take to further increase the chances of success in implementing an IT Balanced scorecard. For
the critical first stage of articulating the corporate mission and goals, a one- or two-day retreat is highly
recommended (Chow et al., 1997). This gets staff away from their short-term day-to-day concerns and tasks during
the early part of the scorecard development stage and can sharpen their focus when identifying the long-term issues
related to mission, objectives, and strategies. Senior management commitment to the process should be strong and
very evident at this stage. Fogg (1997) calls for managers and "champions" who not only understand the purposes
of the Balanced Scorecard, but also have the mental toughness to lead the change.

After developing a generally accepted mission statement, a set of objectives, and strategies for meeting
these objectives at this retreat, it is recommended that the CIO also hold a similar retreat specifically for the IT
department. The objective would be to translate the corporate goals and strategies into corresponding IT goals and
strategies which would help in the attainment of the corporate goals and objectives. In addition to sharing the
corporate vision, it is also important for the IT staff to share a common IT vision for the organization (Parker, 1996).
A committee can be formed, consisting of representatives from all major interest groups. These interest groups
would not only be those internal to the organization (i.e., IT staff, functional managers and their staff) but, also,
those external to the organization (i.e., external clients and business partners with whom the organization shares
information and procedures). This committee's task would be to identify specific IT goals under each of the major
Balanced Scorecard perspectives agreed to by the organization's constituency in the more broadly defined mission
statement (Smith, 1999). Another task for the committee is to establish the relevant linkages within, as well as
between, the balanced scorecard components, and demonstrate the cause-and-effect relationships to the overall
financial performance of the organization. Frequent and open communication between the committee and the
general constituency is necessary to ensure agreement with, and acceptance of, the final product. Employee buy-in
is very important at this stage.

SUMMARY

The Balanced Scorecard methodology holds tremendous promise as an effective tool for measuring IT
performance in organizations. It can help translate the IT department's strategy into specific goals, action plans, and
performance measures. More importantly, it can help link IT performance to overall corporate strategy by
demonstrating causal linkages between IT systems and overall corporate goals. This paper has described the
essential elements of a Balanced Scorecard and provided a set of goals and performance measures that can serve as a
basis for the development of an effective IT Balanced Scorecard. Additionally, it has provided some useful
guidelines to assure successful implementation of such a scorecard. If properly implemented, a Balanced Scorecard
can be invaluable to an IT organization, insofar as demonstrating its contribution to overall corporate financial
performance is concerned.

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APPENDIX

Survey of IT Managers

Thiirsurvey seeks the insights of IT managers relating to performance measurement. Your assistance is
deeply appreciated.

This entire survey can be completed in no more than 40 minutes.

Increasingly, companies in the for-profit sector are extending and refining how they measure and track
perfonnance. A tool that is gaining acceptance is called the "Balanced Scorecard." This scorecard, or set of
performance measures, is referred to as being "balanced" because it encompasses several interrelated dimensions of
perfonnance which together assure the current and future success of the organization.

Since companies have different circumstances, the exact contents of balanced scorecards also differ across
adopters. Nevertheless, a typical scorecard generally contains at least four major components:

1) Financial Component: How well are we doing financially?

2) Customer Component: Customer satisfaction/How do customers see us?
3) Internal Process Component: What must we excel at?
4) Innovation and Learning Component: Can we continue to improve and create value?

The diagram below illustrates the four components, their relationships to each other and to the organization's
vision/mission and strategy.

Since organizations and industries have different circumstances and strategies, some organizations would
include other components, such as ones related to employees or the community, into their balanced scorecards. For
each component that an organization chooses to include, it would establish several key goals. Then, it would select
measures for tracking performance with respect to each goal over time. Through the balanced scorecard, an
organization monitors both its current performance (finance, customer satisfaction, and business process results) and
its effarts to improve processes, motivate and educate employees, and enhance information systems—its ability to
learn £ind improve.

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The following page presents a sample balanced scorecard for a manufacturing department. In later pages, we seek
your insights into how an effective balanced scorecard may look for your IT department. We would appreciate
your returning your completed survey at your earliest convenience. (A postage paid return envelope is
provided.)

A Sample Balanced Scorecard for a Manufacturing Department

Customer Perspective: How do customers see us?

Sample Goals Sample Measures

New products Percent of sales from new products

Responsive supply On-time delivery (defined by customer)

Internal Process Perspective: What must we excel at?

Sample Goals Sample Measures

Manufacturing excellence Cycle time

Yield

Productivity of our design Engineering efficiency

Defect or error rate

New product introduction How actual new product introduction schedule compares to plan

Innovation and Learning Perspective: Can we continue to improve

and create value?

Sample Goals Sample Measures

Technology leadership Time required to develop next generation of products or services

Time to market of new Time required to introduce new product as compared to our competition
products

Financial Perspective: How do we look to providers of financial resources?

(Or: How well are we doing financially?)

Sample Goals Sample Measures

Survive Cash flow; Breakeven

Succeed Steady increase in demand

Prosper Budget allocation

Return on assets

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Survey of IT Managers

In the spaces provided below, please share with us your thoughts about what major goals, and associated
performance measures, might form the basis for an effective balanced scorecard for your IT department. Please
focus on the specific department where you work.
We have listed the four major Balanced Scorecard components that are commonly used. Please use only
those components that you consider to be relevant to your department. For each component, please wnte in three
to four goals that you believe your department should have, and for each goal, one or more relevant performance
measures. If you feel that there are more applicable components than those listed, please feel free to cross out the
current labels and write in ones that you consider to be appropriate.

Thank you for your valuable input.

Customer Perspective: How do customers see us?

Examples of possible goals: Client satisfaction; Client engagement in IT projects and operations; High quality
service.
Examples of possible performance measures: Client satisfaction surveys; Number of clients engaged in projects.

Goals Measures

1.

2.

3.

4.

Internal Business Perspective: What must we excel at?

Examples of possible goals: Service excellence; Efficiency.

Examples of possible performance measures: Complaint rate; Cycle time.

Goalii Measures

1.

2.

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3.

4.

Innovation and Learning Perspective: Can we continue to improve and create value?

Examples of possible goals: Continuous innovation; IT personnel development..

Examples of possible performance measures: Number of new projects/products or programs offered in past year;
Expenditures for IT personnel development.

Goals Measures

1.

2.

3.

4.

Financial Perspective: How do we look to providers of financial resources (such as investors and banks)? (Or:
How well are we doing financially?)

Examples of possible goals: Succeed; Survive; Increased revenue generating activities.

Examples of possible performance measures: Cash flow; Return on investment; Budget allocation; Revenue
trend.

Goals Measures

I.

2.

3.

4.

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1) To what extent is your department's current performance measurement system similar to the Balanced
Scorecard?

Notatall 1 2 3 4 5 6 7 8 9 10 Totally

2) If your answer to question 1 is not 10, please indicate the three biggest differences between your department's
current pierformance measurement system and the Balanced Scorecard.

1.

2.

3.

3) To what extent do you think that a performance measurement system similar to the Balanced Scorecard can be
beneficial to your department?

Notatall 1 2 3 4 5 6 7 8 9 10 Extremely

If your answer to question 3 is "1" — please go to question 4a.

If your answer to question 3 is greater than "1" -- please go to question 4b.

4a) Please list the three biggest reasons why you believe the Balanced Scorecard would not benefit your
department. (Then please go to question 5.)

1.

2.

3.

4b) Please list the three biggest benefits that you believe your department would gain from implementing the Balanced
Scorecard.

1.

2.

3.

5) How difficult do you think it will be for your department to implement a balanced scorecard approach?

Not 1 2 3 4 5 6 7 8 9 10 Extremely
Difficult Difficult

6) If your answer to question 5 is not 1, please list the three biggest challenges:

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1.

2.

3.

7) What is the primary industry of your company?

8) How long have you worked in the IT area? About years.

9) What is your current job title?

10) How long have you worked in your current position? About years.

11) Approximately how many employees does your company have in total?

This is the end of the survey.

Please return your completed survey (a pre-stamped envelope

is attached for your convenience and confidentiality).

Thank you again for sharing both your time and your valuable insights.

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