The Balanced Scorecard, Business Model Canvas, and Business Value of Information Technology
The Balanced Scorecard
A strategic planning and management system used in business, government, and nonprofits.
Aims to align business activities with the organization's vision and strategy.
Enhances internal and external communication.
Monitors organizational performance against strategic goals.
Four Perspectives of the Balanced Scorecard
The balanced scorecard has four perspectives:
Learning and Growth Perspective
Focuses on improving intangible infrastructure.
Includes:
Human Capital: Investing in people and ensuring they have the right skills.
Information Capital: Ensuring access to information and communication abilities.
Organization Capital: Creating a unique corporate identity and aligning employees with strategic objectives.
Process Perspective
Encompasses:
Operations management processes (supply, production, distribution, risk management).
Customer management processes (selection, acquisition, retention, market growth).
Innovation processes (identifying opportunities, R&D, product design and launch).
Regulatory and social processes (financial reporting, environmental, safety, health, employment, community issues).
Customer Perspective
Focuses on the value proposition that differentiates the company from competitors.
Includes product attributes (price, quality, availability, function) and service attributes (brand image).
Aims to create customer satisfaction, retention, and acquisition.
Financial Perspective
Confirms the success of investments and value delivery to customers.
Objective is shareholder value for for-profit companies.
Other objectives include long-term growth and productivity.
Leading and Lagging Indicators
The balanced scorecard uses both leading and lagging indicators.
It considers both internal and external perspectives.
Strategy Maps
Strategy maps are one-page representations of a firm's strategic priorities.
Show the cause-and-effect linkages among strategic priorities.
Allow organizations to assess and prioritize gaps between current and desired performance levels.
Roles of AIS/IT in Balanced Scorecard
Differentiates between investments in tangible IT and the capabilities created by that technology.
Information Capital in the Learning & Growth Perspective is an intangible asset reflecting the organization's technology readiness.
Information Capital includes computing hardware, infrastructure, applications, and employee abilities to use the technology.
Nature of Information Technology Investments
Function IT: Enhances worker productivity for standalone tasks.
Network IT: Allows people to communicate with one another.
Enterprise IT: Restructures interactions within and outside the organization.
IT Investment Categories
Function IT: Assists execution with discrete tasks; impact increases with user skill.
Network IT: Facilitates interactions; impact increases with user skill and teamwork.
Enterprise IT: Specifies business processes; requires complements and depends on user skills, teamwork, and changes in work performance and decision-making.
The Balanced Scorecard Management Process
Formulate: Examine the competitive environment and identify ways to compete.
Translate: Establish objectives, measures, targets, and initiatives, and develop budgets to guide resource allocation.
Link to operations: Prepare operating budgets, prioritize process improvements, and establish IT systems to support processes and reporting.
Monitor: Monitor performance and provide feedback for continuous improvement.
Adapt: Evaluate strategy effectiveness, conduct profitability analyses, test cause-and-effect assumptions, and identify alternatives.
Role of AIS/IT in Balanced Scorecard Management Process
IT supports strategy formulation.
Provides processing for budget development and distribution.
Collects data and converts it to information to assess performance.
Examples of AIS/IT Use
Executive dashboards.
Business intelligence systems.
Business analytics.
Enterprise IT for transaction processing.
Budgeting systems.
Communication and collaboration systems.
IT Governance Institute Val IT Framework
A structured framework for IT investment and management.
Aims to create business value from IT investments.
Aligns with and complements the COBIT framework.
Manages IT benefits over an investment's life-cycle, net of costs and adjusted for risk.
Defines value in terms of strategic objectives.
Focus of Val IT Framework
Are we doing the right things?
Are investments contributing to strategic objectives?
Are we doing them the right way?
Is each investment consistent with IT architecture and initiatives?
Are we getting them done well?
Does the organization have the right resources?
Are we getting the benefits?
Are there clear metrics to assess benefits?
Domains of Governance
Projects: Activities to deliver capability.
Programs: Groups of interdependent projects.
Portfolios: Groups of programs, projects, services, and IT resources.
Value governance monitors effectiveness of Val IT processes.
Portfolio management focuses on portfolio management.
Investment management focuses on programs and projects.
Implementing Val IT
Recognize problems with prior IT investments.
Define characteristics of the ideal future state.
Assess the organization's readiness for IT business value management.
Take action: Build awareness, redefine processes, roles, and responsibilities, identify IT investments, review business cases, and prioritize investments.
Business Model Canvas
Describes how a business operates or plans to operate.
Integrates business strategy, organization, and technology application.
Influenced by social, legal, industry, and technological forces.
Business Model Integration
Integrates business strategy, organization, and the application of technology.
Elements of the Business Model Canvas
The business model canvas contains nine elements.
Potential Impact of IT on Business Model Canvas
Key partners: Share information.
Key activities: Automate processes, improve security, manage staffing and inventory, monitor performance.
Key resources: Enhance capabilities to operate stores and serve customers.
Cost streams: Reduce costs.
Value proposition: Improve understanding, monitor quality, improve availability, reduce price.
Customer relationships: Manage rewards, tailor products, provide services.
Channels: Monitor sales and inventory levels.
Customer segments: Track satisfaction, retention, acquisition; expand market.
IT Projects Require Economic Justification
IT projects need a lot of money and resources, but those are limited
Picking one project means we can't pick others.
IT projects change how the company does things, which affects a lot of the company.
Capital budgeting techniques systematically evaluate investments, but many organizations find it hard to use them for IT projects.
Business Case for IT Initiatives
Answers key questions about the project's purpose, impact, cost, ROI, risks, alternatives, and success measurement.
The Economic Justification Process
A structured approach to evaluating IT investments.
Assessing Business Requirements
IT initiatives should reduce gaps between current and desired performance levels using a strategy map.
IT alone is usually not enough for important changes.
Consider other changes that, along with technology, will achieve significant business change.
Examples of Complementary Changes
Training employees.
Redefining job descriptions.
Reconfiguring tasks.
Offering incentives.
Estimating Benefits
Revenue enhancement - new sales.
Revenue protection - protecting existing sales.
Cost savings - reducing low-value activities and improve efficiency.
Cost avoidance - avoiding future cost increases.
Estimating Relevant Costs
Acquisition Costs: Direct costs to acquire and implement hardware, software, networking, development, project management, consulting and training and indirect costs from the disruption to current operations.
Operating Costs: Direct costs to operate, maintain, and administer the technology, for example, hardware replacements, software upgrades and maintenance contracts and indirect costs of user downtime and lost productivity.
Assessing Risks
Alignment risk: The solution doesn't align with the company's strategy.
Solution risk: The solution won't generate expected benefits.
Financial risk: The solution won't deliver expected financial performance.
Project risk: The project won't be completed on time within budget.
Change risk: The firm can't change.
Technological risk: The technology won't deliver expected benefits.
Identifying Risk Mitigation Techniques
Alignment Risk: Use the Balanced Scorecard Framework (Chapter 16) to assess the link to strategy.
Solution Risk: Use sensitivity analysis to consider likely alternative benefit levels.
Financial Risk: Interview other users of similar IT and follow a structured Balanced Scorecard Management Process (Chapter 16).
Project Risk: Ensure active top management support for the project.
Change Risk: Conduct training and create employee incentives for successful use of the new IT.
Technological Risk: Require hardware and software vendors to demonstrate that their systems can meet requirements.
Combining Benefits, Costs, and Risks
Understand the financial implications.
Determine the relevant time frame.
Select discount rates.
Prepare capital budgeting financial metrics.
Assess sensitivity to assumptions.
Select the best alternative.
Capital Budgeting Financial Metrics
Payback period and breakeven analysis compare the costs with benefits. The breakeven point is where total benefits equal total costs. The payback is how long it takes to recover the initial investment.
Payback Period = Initial Investment/Increased cash flow per period.
Example: An IT project is expected to cost up front and provide net benefits of per year for 3 years.
*Net present value:
Where:
CF = cash flow for period t, and r = discount rate (typically the firm’s weighted average cost of capital).
Internal rate of return (IRR):
Discount rate that makes the project’s net present value equal to zero.
Accounting rate of return (ARR):
Strengths and Weaknesses of Financial Metrics
Payback Period:
Strength: Easy to calculate and understand. Widely used.
Weakness: Ignores the time value of money as well as both costs and benefits occurring after the payback period.
Accounting Rate of Return:
Strength: Relates estimates to standard accounting ratios using accrual accounting and shows impact on operating income.
Weakness: Also ignores the time value of money, and assumes cash flows in all periods are similar.
Net Present Value:
Strength: Considers the time value of money and incorporates cash flows over the life of the IT initiative. Compares the dollar value of the benefits from an IT initiative to the initial investment.
Weakness: Larger projects tend to have larger net present values and doesn't show rate of return on investment. Sensitive to discount rate applied.
Example
Note that total cash flow is equal but NPV and IRR are not, due to the time value of money.
Discount rate: 10%
Test Sensitivity to Changes in Assumptions
Assess how changes in key assumptions impact financial metrics.
Prepare the Value Proposition
Assemble the analysis for each alternative IT initiative and recommend the preferred alternatives.
Change and technology proposed.
Anticipated benefits (related to the firm’s critical success factors).
The group(s) within the firm that will benefit.
The timing of the benefits.
The likelihood of achieving those benefits as planned.
Phases of the Systems Development Life Cycle
Planning Phase.
Analysis Phase.
Design Phase.
Implementation Phase.
Maintenance Phase.
Planning Phase
Begins with a business need for a new or better information system.
Summarizes the business needs with a high-level view of the intended project.
A feasibility study is often used to evaluate economic, operational, and technical practicability.
Starbucks marketing department may want to analyze what type of pastries sell best with its various hot and cold drinks.
Analysis Phase
Involves a complete, detailed analysis of the systems needs of the end user.
Further refines the goals of the project into carefully specified functions and operations of the intended system.
Starbucks systems analysis team meets with all of the desired users to ensure that considerable flexibility is built into the system in order to address both current and potential data analysis needs.
Design Phase
Involves describing in detail the desired features of the system that it uncovered in the analysis phase.
These features may be described using screen layouts, process and event diagrams and other documentation.
The Starbucks systems designers take the requested business requirements from the analysis stage and begin to design how the new what-if Starbucks analysis system would look on a screen and the business rules needed to make such a change in the system.
Implementation Phase
Involves development, testing, and implementation of the new proposed system.
Development is the process of transforming the plan from the design phase into an actual, functioning system.
The Starbucks systems developers write the computer code and test it. Once testing is complete and the business requirements are met, the users are trained and the new software begins to be used.
Maintenance Phase
Includes making changes, corrections, additions, and upgrades (generally smaller in scope) to ensure the system continues to meet the business requirements that have been set out for it.
The Starbucks system has continuous and regular maintenance to ensure that it meets the underlying business requirements.
The Recursive Nature of the SDLC
The SDLC is recursive. This means that the phases of the SDLC can be repeated.
Project Management
*Project management is the planning, organizing, supervising and directing of an IT project.
*A project manager is the lead member of the project team that is responsible for the project.
*The project sponsor will often be a senior executive in the company who takes responsibility for the success of the project.
Challenges of IT Project Management
Successful: Percentage of projects that meet initial goals.
Challenged: Percentage of projects that are partially successful.
Failed: Percentage of projects that do not meet initial goals.
Constraints of IT Projects
Scope: What work is to be done?
Time: How long should it take?
Cost: What resources are required?
Useful Rules in Project Management
100% Rule is the planning of all tasks.
15-15 Rule indicates the percentage over budget or off the planned schedule, chances are the project would not be considered successful.
Project Management Tools 1
PERT chart works to identify all tasks of a project.
Notes task sequencing and task dependence.
Notes critical path the path that represents the minimum amount of time needed for the completion of the project when sufficient resources are allocated.
Project Management Tools 2
A Gantt chart is a graphical representation of the project schedule by mapping the tasks to a project calendar.
Summary
The systems development life cycle is the foundation for all systems development, models, and methodologies that people use to develop such systems.
The SDLC has five phases: Planning, Analysis, Design, Implementation and Maintenance.
Project managers and project sponsors each play key roles in managing system development.
Many AIS and IT projects fail to meet expectations. If we can understand the reason these projects fail, we can better design the project management process to address these reasons.
Scope, time and cost represent the triple constraints of project management.
AIS developers, project managers and project sponsors should all be aware of how a new system is perceived by those who will ultimately be using the new system.