In order to understand this complex subject, we must first define value. Information theory teaches us that there is perceived value, real value, and normative value. Perceived value is intuitive and subjective. For example, no one questions the value of e-mail. Real value is measured. An IT project may reduce operational costs by x% or may increase revenues by y%. Normative value refers to valuation that is based on theory, for example financial models such as Net Present Value.
All three methods of valuation have challenges. Measurement is a challenge in getting the real value. What are the attributes to measure? How to measure each attribute? How do we handle measurement errors, validation, reliability, and longitudinal variations? How does each attribute affect value? How do each attribute affect each other? When does the learning curve end? Perceived value is subjective, and therefore difficult to assess. For example, most perceive that ERP systems have provided significant value, but in fact measurements have shown quite the opposite. Normative value relies on theory, and it is difficult to keep the practice of IT aligned with theory and visa versa.
Balanced Score Card (BSC) provides an integrated framework of developing IT that provides optimal value. The BSC approach integrates value across Financial, Customer, Process (internal) and Strategy/Knowledge (learning and growth). BSC places IT as a key component of Strategy and treats IT as an enabler for implementing Business Process Transformation. It also helps prioritize IT projects. The main drawback of the BSC approach is that it is very hard to distinguish value of IT when muddled with everything else. Furthermore, gaining consensus on vision and future scenarios is non-trivial.
Let us use a simple case study to illustrate the BSC approach. The company is a 5 year old manufacturing firm with 100 M$ revenues and 300 employees. The BSC approach looks at four areas: 1) Financial, 2) Customer, 3) Internal Process, and, 4) Learning and growth.
For the financial area, the objectives could be to increase revenues (target is 20%) and lower costs (target gross margin is 45%) . The resulting IT initiatives could be to develop key performance metrics and track them on a real-time basis using dashboards.
For customers, the objectives could be to improve service rating from 3.5 to 4.5 on a 1 to 5 point scale. The resutling IT initiative could be to enhance the existing Customer Relationship Management system with service tracking to measure actual performance and develop processes to improve the service.
For the internal process, a business initiative could be to improve the manfuacturing process. The key objectives are to improve manufacturing time and eliminate supplier delays. It is critical to define the measures for assessing IT value. Two measures defined for this initiative are time to manufacture (target is 1 day), and time to procure (target is 3 days). In order to achieve this target, three major decisions are to add a manufacturing channel, lock in suppliers with incentive programs, and implement web services for suppliers.
For the learning and growth area, the objectives could be fast turnaround on repair requests and reducing training costs. Measures for this initiative could be: hours to fix the device (target is 1 hr), and reduce training time (target is 5 hrs). Examples of IT initiatives that achieve these targets are computer based training and a built in diagnostics tool based on historical trends.
The key aspect of BSC is to rate the various measures and develop an overal score. This score helps provide a guideline as to the value of IT. Different IT initiatives could be reviewed to rank and test the overall score. Tools such as Assess OnDemand™ help organziations to classify measures, survey stakeholders, collect, score and rank various strategies to ensure they are getting optimal value from their IT investments.