Balanced scorecard founder on the business value of IT

 Criador da metodologia do Balanced Scorecard- BSC fala sobre o valor da TI para os negócios.  O post (em duas partes) foi publicado no blog!


Balanced scorecard founder on the business value of IT
By Christina Torode, News Director
09 Mar 2010 |

// Robert Kaplan, Harvard Business School professor and co-creator of the balanced scorecard, recently spoke with about strategy execution. His most recent book, The Execution Premium, focuses on linking strategy to operations and developing an overarching management system to sustain strategy execution. In this first part of a two-part interview, he explains how CIOs can align IT strategy with corporate objectives and demonstrate the business value of IT. 

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When developing an IT strategy, what can a CIO do to improve the value of IT to the business?
Kaplan: A certain amount of what IT does is provide basic infrastructure, a platform for handling transactions, whether with suppliers or customers, or for financial data. But that doesn’t provide a basis for competitive advantage. It’s like doing the wiring or plumbing in the house. You need to have it, but it doesn’t make the house distinctive. If [IT] wants to become more strategically relevant, they have to think, “Which applications are going to be the most significant for helping the business improve their strategy?”

There you can think of two applications: One is information provisioning, whether information is about customers, suppliers or products, so business units are kept up to date, on a robust platform. But the more powerful application is IT embedded within the product or service itself. I think of FedEx, where the IT function is part of what makes FedEx distinctive, in that the shipper and recipient both track a package and know where it is. In fact, they do the work, rather than call up the company. That’s a case where there is an intimate partnership between IT function and the business strategy. That’s the most powerful situation.

How can CIOs help the business measure the value IT is contributing to the corporate strategy?
Kaplan: You can’t really justify the IT investment just by doing an analysis within IT. I mean, you can do it on cost savings. If you’re using IT to replace people, you can measure the cash savings and calculate net present values. But if you want to evaluate the impact of IT on business value, then you have to go to a methodology — a strategy map — and balanced scorecard, because often IT doesn’t directly produce revenue. What IT does do is support a critical process like innovation or a customer management process, and the output from IT is greater satisfaction or loyalty among customers, such as the FedEx example. And because of greater loyalty, the customers transact more business with the company.

Most IT value comes indirectly through improving processes and relationships with customers and suppliers. In turn, that leads to better financial results, but it has to work through the company’s business model, and not be a standalone investment that could be justified in its own right.

Not every investment or application has to go directly to some financial number. And that’s been so frustrating to IT, and 25 years later IT still hasn’t solved this problem [of proving the business value of IT] because they don’t deliver direct benefit by themselves. It’s only when it’s bundled in with strategic processes and customer relationships that the value is created.

Most IT value comes indirectly through improving processes and relationships with customers and suppliers.
Robert Kaplan
co-creator, balanced scorecard framework

After developing a strategy map with the business unit, what’s the next step?
Kaplan: You can then develop a service agreement on routine transactional basics, but also the value that IT is creating for the business unit. You can measure that monthly or quarterly through surveys with the business units as to how well they feel IT is delivering on its commitment and on its value creation. IT can then think, “What are the critical processes we need to do well?” And it’s not just buying applications, 24/7 operations, and security and privacy. Rather, some of the critical process is developing relationships with business unit heads, and that’s still a real shift in the role and expansion of abilities for IT professionals.

They need to be able to have dialogues and discussions with business unit heads, so some of your IT people end up being account managers working with business unit people, not just software coders and people who keep applications up and running. That will make IT a much more valuable partner.

How can IT play a more active role in driving the business strategy?
Kaplan: Depending on the strategy the business is following, the demands on IT are very different. If you look at Wal-Mart, Toyota or Dell, they are trying to follow a low cost strategy. The role for IT in this case is to lower the cost of working with suppliers, handling the logistics, and the distribution. IT is doing that networking with suppliers and making a platform for which customers find it easier to transact business.

Another organization might be following a strategy of building long-lasting relationships with ongoing sales and services. There, IT is very much related to CRM, and perhaps data mining, to be able to understand customers better. Are we going to partner with businesses and customize the IT offering to the needs of individual businesses owners? That customer relationship strategy is the most winning strategy for internal functional units like IT.

But then there’s innovation. IT might be the first to offer some new capability to the company’s customers, and that provides [the company with] a competitive advantage. That requires continual innovation within the IT function, So, I think in some sense IT has to make a choice between those two [CRM or innovation] strategies to create the most value.

In the second part of this interview, Kaplan shares his thoughts on two of the latest buzzwords — agile business and predictive analysis — and discusses the reasons so many companies missed the signs of the coming recession and the ways they can correct this strategy gap.

Let us know what you think about the story; email Christina Torode, News Director.


Balanced scorecard author talks agile business and risk management (Part II)

By Christina Torode, News Director
10 Mar 2010 |

In this second half of a two-part interview, Harvard Business School Professor and author Robert Kaplan discusses how he defines two subjects that are receiving a lot of buzz these days: agile business and predictive analysis. He also shares his thoughts on why companies overlooked signs of the recession and why risk management deserves its own scorecard.

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The first half of this Q&A focused on IT strategy and proving the value of IT to the business.

There is a lot of talk about agile business and agile methodologies. How do you define agile?
Kaplan: That’s one of those buzzwords that people have different meanings for. To be agile is the ability to sense changes in the markets and customer preferences faster, as they are evolving, and be able to respond to it. It’s not just information, but it’s really analysis to see patterns in customers’ purchasing decisions and preferences and have that [data] come into the company so they can respond to whatever these evolving needs are. It’s also keeping track of competitive forces as well, to be able to offset that. But the front end of agility is information because it’s what you’re being agile with respect to. It’s not just that you’re doing things within the company faster. It has to really respond to some market need.

Agile methodologies tie into the idea of being able to respond to change faster, but can companies get to a point of predictive analysis?
Kaplan: Predictive analyses comes from analytics that are being applied to historical data. In the old days, you were using historical data to evaluate performance and reward people. Now you’re trying to use data to help understand the future. Wal-Mart, for example, does a very good job of understanding the types of bundles consumers are likely to purchase. They’re trying to predict the patterns of consumer purchasing and then arrange the offerings to encourage the buying of multiple products and services. We have crystal balls, but they’re not very accurate. What we do have is data, and by having access to large quantities of data on consumer purchasing, then yes, that does help you predict the future.

The question is, are companies investing sufficiently in analytic methods to make sense out of the data? Raw data is useless, but if you can study the past and use various statistical methods to process the data, then you really can provide information and knowledge that’s actionable and that will be predictable in the future, as long as historical patterns are persistent.

Is there a technology or role that IT can play in taking that data and making sense of it, or is that something the business should be responsible for?
Kaplan: The more you can make the life of applied statisticians easier by providing that analytic interface between transactional data and the kinds of methods they want to use to explore the data — it could be just powerful ways to display that data on a screen so they can see patterns. I don’t think we’ve reached the stage where you can completely automate this process [with technology], though. There are judgments that need to be made as you build the models. It’s easy to get fooled by the data and make the statistics lie for you.

Why were so many financial institutions seemingly caught off guard by the falling housing market and mortgage lending crisis?
Kaplan: They didn’t have good models about the values of the securities they held and the risks they held. There were a couple of banks that had much better internal staff for looking at the transactions that were taking place in the market and then thinking what that meant to their own portfolio. But I think companies like Bear Stearns, Lehman Brothers and Wachovia … I mean, they failed miserably in understanding the deteriorating value of the securities they were holding, and this was knowable. If they had better models and analytics they could have seen this much earlier and perhaps not had the kind of failures that they did.

Risk management was siloed and considered more of a compliance issue. … Now we see that identification, mitigation and management of risk has to be on an equal level with the strategic process.
Robert Kaplan
co-author of the balanced scorecard

Many financial institutions had models and analytics in place, though?
Kaplan: The people who built the models didn’t fully understand the businesses that were behind the data that they were looking at. And they didn’t understand the pressure testing — the things to watch out for. The data they were seeing in a period of rising housing prices would not necessarily be representative of what that data would look like if housing prices were flat to declining. They needed someone to understand that the housing market had a boom and had gotten overpriced, and while you couldn’t predict when the housing price would level off or start to decline, you could test “what if” that happened and see the sensitivity of your asset holdings to that economic event. Very few banks did that type of pressure testing. We have to have some robust software that enables you to look at scenarios and do the “what ifs.” Even though you’re not predicting the future, you’re thinking about what the consequences are under various alternatives, and that’s what they failed to do. I don’t think it was a lack so much in software, but a lack of imagination. Maybe they didn’t want to think that the good times had a possibility of ending.

Have you adjusted the balanced scorecard methodology due to the recession?
Kaplan: If I had to say there was one thing missing that has been revealed in the last few years, it’s that there’s nothing about risk assessment and risk management. My current thinking on that is that I think companies need a parallel scorecard to their strategy scorecard — a risk scorecard. The risk scorecard is to think about what are the things that could go wrong? What are hurdles that could jump up, and how do we get early warning signals to suggest when some of these barriers have suddenly appeared so you can act quickly to mitigate that. [Risk management] turned out to be an extremely important function that was not done well by many of the [financial services] companies we talked about earlier. Risk management was siloed and considered more of a compliance issue and not a strategic function. Now we see that identification, mitigation and management of risk has to be on an equal level with the strategic process.

Let us know what you think about the story; email Christina Torode, News Director.


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