By Mitchell Weisberg
Managing Information Technology
Many companies have demonstrated that IT can be successfully managed as a business within the business—an organization focused on business strategy, operational efficiency, and delivery of both short-term and long-term value. The high-performance IT organizations that operate in this way have become strategic assets for their enterprises in today’s increasingly competitive and dynamic economy.
A critical element of managing the “IT Business” is the strategic alignment of the IT services and resources. While this may seem obvious, it is not as easily accomplished as it is described. Aligning the IT organization with the business is and has been one of the top 5 issue on the CIO’s list consistently for over 10 years. Many IT organizations have found success in addressing this challenge with the use of the balanced scorecard framework to create, measure and manage the strategic business alignment. In business, the Balanced Scorecard is one of the predominant management methodologies for effective organizational alignment and strategy execution. When deployed and used effectively, the balanced scorecard enables organizations to consistently align their resources and activities, develop and deploy the right measurements, and drive high performance. Likewise, IT organizations that have effectively deployed the balanced scorecard have achieved superior IT performance and business results.
Introduction Over the past 10 years, information technology (IT) management’s greatest challenges have been delivering high value to the business and aligning IT initiatives with business strategy. As organizations pursue achieving optimal performance, a common challenge is breaking down the barriers between the business operational areas and IT organization. Yet, if the organization is to achieve high performance, true integration of IT into and across the organization is critical. Managing IT as a “business within the business” is an approach that we have found to be successful in achieving this goal. Most organizations that have taken this approach recognize the IT organization as a partner with the rest of the business in meeting the needs of business clients and contributing to the profitability and success of the overall enterprise. The balanced scorecard, the predominant performance management and strategy execution methodology in use today provides a framework for describing and executing strategy. It contains four perspectives that create a logical flow that demonstrates how an organization creates increased profitability. Simply put, the logical flow of the balanced scorecard describes how capabilities and resources are focused on key strategic processes that meet customer needs to produce increased profitability. The four perspectives are: Financial, Customer, Process, and Learning/Growth. Managing IT as a business requires three capabilities: the business discipline to deliver value, effective business metrics, and strong governance. These capabilities also require skills that until recently, have not been widespread in IT departments. The following sections expand on these capabilities using the framework of the balanced scorecard. Business discipline is accomplished by the IT leadership and employees by recognizing that IT exists to support and contribute to the successful achievement of the business mission and strategy. A clear understanding of the business strategy is key to mastering business discipline. Business metrics that drive and assess the alignment of IT with organizational strategy are a cornerstone of running IT like a business. We have found that engagement of both business and IT staff in the development of the IT performance metrics is the largest factor in achieving meaningful metrics that align the organization. By starting with business, the methodology produces metrics aligned with and cascaded down from the corporate strategic goals and objectives. These metrics must include financial and nonfinancial—as well as external and internal—measurements.
Financial and Learning/Growth Perspectives – Investment and Return Ultimately, a business’ success is determined by the financial value (Financial Perspective) — both short-term and long-term— provided to its stakeholders or shareholders. This financial value is most commonly measured by ROI (Return on Investment). When IT is considered as a profit center, the ROI is sought to be positive, contributing to the bottom line of the business. If IT is considered a cost center, the ROI is measured against budget, seeking to avoid a negative impact on corporate profitability. For the IT business, short-term and direct ROI can be measured by evaluating returns from projects undertaken and services delivered. These financial measurements are typically assessed by examining the budgets and business cases for projects annually. These measures appear in the Financial Perspective of the balanced scorecard, and are the culmination of the logic flow for strategy execution. Assessing long-term ROI is less obvious. The long-term value contributed by the IT organization is related to its ability to acquire and maintain the necessary assets (i.e., people, technology, and information) and attract, develop, and retain the workforce for operating and converting those technologies to deliver business value. This long term investment and value is usually measured in the Learning/Growth Perspective of the balanced scorecard.
Customer and Process Perspectives – Effectiveness and Efficiency Achieving the right balance in metrics to drive performance is one of management’s greatest challenges. External metrics show how effectively IT is delivering good value to the business and, ultimately, to the shareholders. The IT organization must look at the rest of the company as its “market” (Customer Perspective). Meeting the needs of those internal customers—the users of IT services—and aligning with the business strategy ultimately is key to IT’s success. Including the customer-facing metrics in developing the IT scorecard assists the organization in avoiding the major pitfall that most IT organizations encounter—the use of standard or typical internally focused IT metrics only. An example of these metrics would be one of IT up-time (availability) that considers when the users need the system, not just the percentage of time the system is operational. These performance metrics also identify how well IT is supporting the business in meeting the needs of its ultimate customers, those who actually purchase products or services from the company. Examples of these metrics include increased sales or a higher customer retention rate due to better access of customer data. Internal performance or process (Process Perspective) metrics are also critical to drive the IT business toward efficiency. These metrics, such as resources required for services delivery and percent of uptime, look inside the IT organization and assess its processes and performance against internal or industry standards. The IT business must balance efficiency and effectiveness to deliver optimal value.
Strong Governance Creates Good Business Partnerships Understanding the business strategy and having meaningful measurements alone are not enough to operate IT as a “Business within the Business” and drive alignment. A high-performance organization must have a strong governance function with a clearly defined mission. Good IT governance builds and reinforces the partnership between the IT organization and the rest of the business. Through the clear definition of roles and responsibilities in both strategic and tactical IT decisions, good governance facilitates the delivery of value from all projects. One key element of good IT governance is the IT Steering Group. This group is chaired by IT and its membership is predominantly made up of business leadership. It is the suggested governance structure that has been shown to most effectively make strategic decisions on IT projects that align with and support implementation of the business strategy. On the tactical side, good governance ensures that IT projects have a business sponsor, who is typically from the organization that will benefit most from the investment. This business involvement ensures the effectiveness or functionality of the IT initiative. An IT project manager supervises technology selection and delivery and is responsible for the technical efficiency of the project. A program manager, typically from a functional business unit, coordinates IT-driven or supported business improvements.
Conclusion Managing IT like a business, ensures that the organization receives the support needed to provide value in implementing the corporate strategy. Strong governance and effective metrics provide the foundation for IT management to instill a culture of performance, align resources, and deliver strategic value from the IT organization. In addition, the business disciplines of customer focus and financial accountability help ensure that the IT organization will deliver high value to the business. As the IT business within the business matures, it should migrate to a more comprehensive set of performance measures, such as the balanced scorecard, to manage its performance and execute its strategy and deliver the value IT contributes to the enterprise. Progress in this direction would include measuring the IT organization’s contribution to the overall learning and growth of the core business. Because it is integral to each of the organization’s functional areas and processes, the IT organization enjoys a holistic view of the business. As a source of learning and growth, IT is a source of innovation by initiating new ideas or enabling the execution of new ventures in many organizations. In this way the IT organization becomes a true, aligned business partner to the enterprise, supporting or driving the organization to higher performance.