Select Page

Topic: Summarize the uploaded Document Instructions: Need minimum 500 wordsNeed 3 APA ReferencesNo Plagiarism please

Unformatted Attachment Preview

Making IT Count1
rom the first time IT started making a significant dent in corporate balance
sheets, the holy grail of academics, consultants, and business and IT managers
has been to show that what a company spends on IT has a direct impact on its
performance. Early efforts to do this, such as those trying to link various measures
of IT input (e.g., budget dollars, number of PCs, number of projects) with various
measures of business performance (e.g., profit, productivity, stock value) all failed to
show any relationship at all (Marchand et al. 2000). Since then, everyone has properly concluded that the relationship between what is done in IT and what happens in
the business is considerably more complex than these studies first supposed. In fact,
many researchers would suggest that the relationship is so filtered through a variety
of “conversion effects” (Cronk and Fitzgerald 1999) as to be practically impossible to
demonstrate. Most IT managers would agree. They have long argued that technology
is not the major stumbling block to achieving business performance; it is the business
itself—the processes, the managers, the culture, and the skills—that makes the difference. Therefore, it is simply not realistic to expect to see a clear correlation between
IT and business performance at any level. When technology is successful, it is a team
effort, and the contributions of the IT and business components of an initiative cannot
and should not be separated.
Nevertheless, IT expenditures must be justified. Thus, most companies have
concentrated on determining the “business value” that specific IT projects deliver. By
focusing on a goal that matters to business (e.g., better information, faster transaction
processing, reduced staff), then breaking this goal down into smaller projects that IT
can affect directly, they have tried to “peel the onion” and show specifically how IT
delivers value in a piecemeal fashion. Thus, a series of surrogate measures are usually
used to demonstrate IT’s impact in an organization. (See Chapter 1 for more details.)
More recently, companies are taking another look at business performance metrics and IT. They believe it is time to “put the onion back together” and focus on what
This chapter is based on the authors’ previously published article, Smith, H. A., J. D. McKeen, and C. Street.
“Linking IT to Business Metrics.” Journal of Information Science and Technology 1, no. 1 (2004): 13–26. Reproduced
by permission of the Information Institute.
M03_MCKE0260_03_GE_C03.indd 49
12/3/14 8:35 PM
Section I • Delivering Value with IT
really matters to the enterprise. This perspective argues that employees who truly
understand what their business is trying to achieve can sense the right ways to personally improve performance that will show up at a business unit and organizational
level. “People who understand the business and are informed will be proactive and …
have a disposition to create business value every day in many small and not-so-small
ways” (Marchand et al. 2000). Although the connection may not be obvious, they say,
it is there nevertheless and can be demonstrated in tangible ways. The key to linking
what IT does to business performance is, therefore, to create an environment within
which everyone thoroughly understands what measures are important to the business
and is held accountable for them. This point of view does not suggest that all the work
done to date to learn how IT delivers value to an organization (e.g., business cases,
productivity measures) has been unnecessary, only that it is incomplete. Without close
attention to business metrics in addition, it is easy for IT initiatives and staff to lose their
focus and become less effective.
This chapter looks at how these controversial yet compelling ideas are being
pursued in organizations to better understand how companies are attempting to link
IT work and firm performance through business metrics. The first section describes
how business metrics themselves are evolving and looks at how new management
philosophies are changing how these measures are communicated and applied. Next
it discusses the types of metrics that are important for a well-rounded program of
business measurement and how IT can influence them. Then it presents three different ways companies are specifically linking their IT departments with business metrics and the benefits and challenges they have experienced in doing this. This section
concludes with some general principles for establishing a business measurement program in IT. Finally, it offers some advice to managers about how to succeed with such
a program in IT.
Business Measurement: An Overview
Almost everyone agrees that the primary goal of a business is to make money for its
shareholders (Goldratt and Cox 1984; Haspeslagh et al. 2001; Kaplan and Norton 1996).
Unfortunately, in large businesses this objective frequently gets lost in the midst of
people’s day-to-day activities because profit cannot be measured directly at the level
at which most employees in a company work (Haspeslagh et al. 2001). This “missing
link” between work and business performance leads companies to look for ways to
bridge this gap. They believe that if a firm’s strategies for achieving its goal can be tied
much more closely to everyday processes and decision making, frontline employees
will be better able to create business value. Proponents of this value-based management (VBM) approach have demonstrated that an explicit, firmwide commitment to
shareholder value, clear communication about how value is created or destroyed, and
incentive systems that are linked to key business measures will increase the odds of a
positive increase in share price (Haspeslagh et al. 2001).
Measurement counts. What a company measures and the way it measures
­influence both the mindsets of managers and the way people behave. The best
measures are tied to business performance and are linked to the strategies and
business capabilities of the company. (Marchand et al. 2000)
M03_MCKE0260_03_GE_C03.indd 50
12/3/14 8:35 PM
Chapter 3 • Making IT Count
Although companies ascribe to this notion in theory, they do not always act
in ways that are consistent with this belief. All too often, therefore, because they
lack clarity about the links between business performance and their own work,
­individuals and even business units have to take leaps of faith in what they do
(Marchand et al. 2000).
Nowhere has this been more of a problem than in IT. As has been noted often,
IT investments have not always delivered the benefits expected (Bensaou and Earl
1998; Holland and Sharke 2001; Peslak 2012). “Efforts to measure the link between
IT investment and business performance from an economics perspective have…
failed to establish a consistent causal linkage with sustained business ­profitability”
(Marchand et al. 2000). Value-based management suggests that if IT staff do not
understand the business, they cannot sense how and where to change it effectively
with technology. Many IT and business managers have implicitly known this for
some time. VBM simply gives them a better framework for implementing their
beliefs more systematically.
One of the most significant efforts to integrate an organization’s mission and
­strategy with a measurement system has been Kaplan and Norton’s (1996) balanced
scorecard. They explain that competing in the information age is much less about
­managing physical, tangible assets and much more about the ability of a company to
mobilize its intangible assets, such as customer relationships, innovation, employee
skills, and information technology. Thus, they suggest that not only should business
measures look at how well a company has done in the past (i.e., financial performance),
but they also need to look at metrics related to customers, internal business processes,
and learning and growth that position the firm to achieve future performance. Although
it is difficult putting a reliable monetary value on these items, Kaplan and Norton suggest that such nonfinancial measures are critical success factors for superior financial
performance in the future. Research shows that this is, in fact, the case. Companies that
use a balanced scorecard tend to have a better return on investment (ROI) than those
that rely on traditional financial measures alone (Alexander 2000).
Today many companies use some sort of scorecard or “dashboard” to track a variety of different metrics of organizational health. However, IT traditionally has not paid
much attention to business results, focusing instead on its own internal measures of
performance (e.g., IT operations efficiency, projects delivered on time). This has perpetuated the serious disconnect between the business and IT that often manifests itself
in perceptions of poor alignment between the two groups, inadequate payoffs from IT
investments, poor relationships, and finger-pointing (Holland and Sharke 2001; Peslak
2012; Potter 2013). All too often IT initiatives are conceived with little reference to major
business results, relying instead on lower-level business value surrogates that are not
always related to these measures. IT organizations are getting much better at this bottom-up approach to IT investment (Smith and McKeen 2010), but undelivered IT value
remains a serious concern in many organizations. One survey of CFOs found that only
49 percent felt that their ROI expectations for technology had been met (Holland and
Sharke 2001). “Despite considerable effort, no practical model has been developed to
measure whether a company’s IT investments will definitely contribute to sustainable
competitive advantage” (Marchand et al. 2000). Clearly, in spite of significant efforts
over many years, traditional IT measurement programs have been inadequate at
M03_MCKE0260_03_GE_C03.indd 51
12/3/14 8:35 PM
Section I • Delivering Value with IT
assessing business value. Many IT organizations believe, therefore, that it is time for
a different approach to delivering IT value, one that holds IT accountable to the same
measures and goals as the rest of the business.
Key Business Metrics for IT
No one seriously argues that IT has no impact on an organization’s overall financial
performance anymore. There may be disagreement about whether it has a positive or
a negative impact, but technology is too pervasive and significant an expense in most
firms for it not to have some influence on the corporate bottom line. However, as has
been argued earlier, we now recognize that neither technology nor business alone is
responsible for IT’s financial impact. It is instead a joint responsibility of IT and the business. This suggests that they need to be held accountable together for its impact. Some
companies have accepted this principle for individual IT projects (i.e., holding business
and IT managers jointly responsible for achieving their anticipated benefits), yet few
have extended it to an enterprise level. VBM suggests that this lack of attention to enterprise performance by IT is one reason it has been so hard to fully deliver business value
for technology investments. Holding IT accountable for a firm’s performance according
to key financial metrics is, therefore, an important step toward improving its contribution to the corporate bottom line.
However, although financial results are clearly an important part of any measurement of a business’s success today, they are not enough. Effective business metrics
programs should also include nonfinancial measures, such as customer and employee
satisfaction. As already noted, because such nonfinancial measures are predictive of
future performance, they offer an organization the opportunity to make changes that
will ultimately affect their financial success.
Kaplan and Norton (1996) state “the importance of customer satisfaction probably
cannot be overemphasized.” Companies that do not understand their customers’ needs
will likely lose customers and profitability. Research shows that merely adequate satisfaction is insufficient to lead to customer loyalty and ultimately profit. Only firms where
customers are completely or extremely satisfied can achieve this result (Heskett et al.
1994). As a result, many companies now undertake systematic customer satisfaction
surveys. However, in IT it is rare to find external customer satisfaction as one of the
metrics on which IT is evaluated. While IT’s “customers” are usually considered to be
internal, these days technology makes a significant difference in how external customers experience a firm and whether or not they want to do business with it. Systems that
are not reliable or available when needed, cannot provide customers with the information they need, or cannot give customers the flexibility they require are all too common.
And with the advent of online business, systems and apps are being designed to interface directly with external customers. It is, therefore, appropriate to include external
customer satisfaction as a business metric for IT.
Another important nonfinancial business measure is employee satisfaction. This
is a “leading indicator” of customer satisfaction. That is, employee satisfaction in one
year is strongly linked to customer satisfaction and profitability in the next (Koys
2001). Employees’ positive attitudes toward their company and their jobs lead to positive behaviors toward customers and, therefore, to improved financial performance
M03_MCKE0260_03_GE_C03.indd 52
12/3/14 8:35 PM
Chapter 3 • Making IT Count
(Rucci et al. 1998; Ulrich et al. 1991). IT managers have always watched their own
employee satisfaction rate intently because of its close links to employee turnover.
However, they often miss the link between IT employee satisfaction and customer
satisfaction—both internal customer satisfaction, which leads to improved general
employee satisfaction, and external customer satisfaction. Thus, only a few companies
hold IT managers accountable for general employee satisfaction.
Both customer and employee satisfaction should be part of a business metrics
program for IT. With its ever-growing influence in organizations, technology is just
as likely to affect external customer and general employee satisfaction as many other
areas of a business. This suggests that IT has three different levels of measurement and
1. Enterprise measures. These tie the work of IT directly to the performance of the
organization (e.g., external customer satisfaction, corporate financial performance).
2. Functional measures. These assess the internal work of the IT organization as a
whole (e.g., IT employee satisfaction, internal customer satisfaction, operational
performance, development productivity).
3. Project measures. These assess the performance of a particular project team in
delivering specific value to the organization (e.g., business case benefits, delivery
on time).
Functional and project measures are usually well addressed by IT measurement
programs today. It is the enterprise level that is usually missing.
Designing Business Metrics for IT
The firms that hold IT accountable for enterprise business metrics believe this approach
fosters a common sense of purpose, enables everyone to make better decisions, and
helps IT staff understand the implications of their work for the success of the organization (Haspeslagh et al. 2001; Marchand et al. 2000; Potter 2013; Roberts 2013). The
implementation of business metrics programs varies widely among companies, but
three approaches taken to linking IT with business metrics are distinguishable.
1. Balanced scorecard. This approach uses a classic balanced scorecard with measures in all four scorecard dimensions (see the “Sample Balanced Scorecard Business
Metrics” feature). Each metric is selected to measure progress against the entire
enterprise’s business plan. These are then broken down into business unit plans
and appropriate submetrics identified. Individual scorecards are then developed
with metrics that will link into their business unit scorecards. With this approach,
IT is treated as a separate business unit and has its own scorecard linked to the
business plan. “Our management finally realized that we need to have everyone
thinking in the same way,” explained one manager. “With enterprise systems, we
can’t have people working in silos anymore.” The scorecards are very visible in the
organization with company and business unit scorecards and those of senior executives posted on the company’s intranet. “People are extremely interested in seeing
how we’re doing. Scorecards have provided a common framework for our entire
company.” They also provide clarity for employees about their roles in how they
affect key business metrics.
M03_MCKE0260_03_GE_C03.indd 53
12/3/14 8:35 PM
Section I • Delivering Value with IT
Sample Balanced Scorecard Business Metrics

Shareholder value (financial)
Expense management (financial)
Customer/client focus (customer)
Loyalty (customer)
Customercentric organization (customer)
Effectiveness and efficiency of business operations (operations)
Risk management (operations)
Contribution to firmwide priorities and business initiatives (growth)
Although scorecards have meant that there is better understanding of the
business’s drivers and plans at senior management levels, considerable resistance
to them is still found at the lower levels in IT. “While developers see how they can
affect our customers, they don’t see how they can affect shareholder value, profit,
or revenue, and they don’t want to be held accountable for these things,” stated
the same manager. She noted that implementing an effective scorecard program
relies on three things: good data to provide better metrics, simplicity of metrics,
and enforcement. “Now if someone’s scorecard is not complete, they cannot get a
bonus. This is a huge incentive to follow the program.”
2. Modified scorecard. A somewhat different approach to a scorecard is taken by
one company in the focus group. This firm has selected five key measures (see the
“Modified Scorecard Business Metrics” feature) that are closely linked to the company’s overall vision statement. Results are communicated to all staff on a quarterly
basis in a short performance report. This includes a clear explanation of each measure, quarterly progress, a comparison with the previous year’s quarterly results,
and a “stretch” goal for the organization to achieve. The benefit of this approach is
that it orients all employees in the company to the same mission and values. With
everyone using the same metrics, alignment is much clearer all the way through the
firm, according to the focus group manager.
In IT these key enterprise metrics are complemented by an additional set
of business measures established by the business units. Each line of business
identifies one or two key business unit metrics on which they and their IT team
Modified Scorecard Business Metrics
• Customer loyalty index. Percentage of customers who said they were very satisfied with
the company and would recommend it to others.
• Associate loyalty index. Employees’ perception of the company as a great place to work.
• Revenue growth. This year’s total revenues as a percentage of last year’s total revenues.
• Operating margin. Operating income earned before interest and taxes for every dollar of
• Return on capital employed. Earnings before interest and tax divided by the capital used
to generate the earnings.
M03_MCKE0260_03_GE_C03.indd 54
12/3/14 8:35 PM
Chapter 3 • Making IT Count
will be measured. Functional groups within IT are evaluated according to the
same ­metrics as their b …
Purchase answer to see full