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Topic: Summarize the uploaded Document

Instructions:

• Need minimum 500 words
• Need 3 APA References
• No Plagiarism please

 

49

C h a p t e r

3 Making IT Count1

1 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.

From 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 prop-
erly 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 differ-
ence. 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 met-
rics and IT. They believe it is time to “put the onion back together” and focus on what

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50 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 per-
sonally 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 differ-
ent ways companies are specifically linking their IT departments with business met-
rics and the benefits and challenges they have experienced in doing this. This section
concludes with some general principles for establishing a business measurement pro-
gram 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 manage-
ment (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)

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Chapter 3 • Making IT Count 51

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 sug-
gest 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 vari-
ety 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 per-
petuated 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 bot-
tom-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

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52 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 busi-
ness. 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 enter-
prise 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 contribu-
tion to the corporate bottom line.

However, although financial results are clearly an important part of any mea-
surement 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 satis-
faction 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 custom-
ers 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 informa-
tion 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 inter-
face 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 posi-
tive behaviors toward customers and, therefore, to improved financial performance

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Chapter 3 • Making IT Count 53

(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
accountability:

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 organi-
zation (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 mea-
sures 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 execu-
tives 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.

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54 Section I • Delivering Value with IT

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 com-
pany’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 mea-
sure, 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

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)

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

revenue.
• Return on capital employed. Earnings before interest and tax divided by the capital used

to generate the earnings.

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Chapter 3 • Making IT Count 55

will be measured. Functional groups within IT are evaluated according to the
same metrics as their business partners as well as on company and internal IT
team performance. For example, the credit group in IT might be evaluated on
the number of new credit accounts the company acquires. Shared IT services
(e.g.,  infrastructure) are evaluated according to an average of all of the IT func-
tional groups’ metrics.

The importance the company places on these metrics is reflected in the
firm’s generous bonus program (i.e., bonuses can reach up to 230 percent of an
individual’s salary) in which all IT staff participate. Bonuses are separate from
an individual’s salary, which is linked to personal performance. The percentage
influence of each set of business measures (i.e., enterprise, business unit, and
individual/team) varies according to the level of the individual in the firm.
However, all staff have at least 25 percent of their bonus linked to enterprise
performance metrics. No bonuses are paid to anyone if the firm does not reach its
earnings-per-share target (which is driven by the five enterprise measures out-
lined in the “Modified Scorecard Business Metrics” feature). This incentive sys-
tem makes it clear that everyone’s job is connected to business results and helps
ensure that attention is focused on the things that are important to the company.
As a result, interest is much stronger among IT staff about how the business is
doing. “Everyone now speaks the same language,” said the manager. “Project
alignment is much easier.”

3. Strategic imperatives. A somewhat different approach is taken by a third focus
group company. Here the executive team annually evaluates the key environmen-
tal factors affecting the company, then identifies a number of strategic imperatives
for the firm (e.g., achieve industry-leading e-business capability, achieve 10–15
percent growth in earnings per share). These can vary according to the needs of
the firm in any particular year. Each area of the business is then asked to identify
initiatives that will affect these imperatives and to determine how they will be
measured (e.g., retaining customers of a recent acquisition, increased net sales, a
new product). In the same way, IT is asked to identify the key projects and mea-
sures that will help the business to achieve these imperatives. Each part of the
company, including IT, then integrates these measures into its variable pay pro-
gram (VPP).

The company’s VPP links a percentage of an individual’s pay to business
results and overall business unit performance. This percentage could vary from a
small portion of one’s salary for a new employee to a considerable proportion for
senior management. Within IT, the weight that different measures are accorded in
the VPP portion of their pay is determined by a measurement team and approved
by the CIO and the president. Figure 3.1 illustrates the different percentages allo-
cated to IT’s variable pay component for a typical year. Metrics can change from
year to year depending on where management wants to focus everyone’s attention.
“Performance tends to improve if you measure it,” explained the manager. “Over
the years, we have ratcheted up our targets in different areas. Once a certain level
of performance is achieved, we may change the measure or change the emphasis on
this measure.”

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56 Section I • Delivering Value with IT

An important difference from the scorecard approach is the identification of key
IT projects. “These are not all IT projects, but a small number that are closely aligned
with the strategic business imperatives,” stated the manager. “Having the success of
these projects associated with their variable pay drives everyone’s behavior. People
tend to jump in and help if there’s a problem with one of them.” The goal in this process
is for everyone to understand the VPP measures and to make them visible within IT.
Targets and results are posted quarterly, and small groups of employees meet to discuss
ideas about how they can influence business and IT goals. “Some amazing ideas have
come out of these meetings,” said the manager. “Everyone knows what’s important,
and these measures get attention. People use these metrics to make choices all the time
in their work.”

Each of these business measurement programs has been implemented somewhat
differently, but they all share several key features that could be considered principles of
a good business metrics program for IT:

1. Focus on overall business performance. These programs all focus employees on
both financial and nonfinancial enterprise performance and have an explicit expecta-
tion that everyone in the organization can influence these results in some way.

2. Understanding is a critical success factor. If people are going to be held
accountable for certain business results, it is important that they understand
them. Similarly, if the organization is worried about certain results, this must be
communicated as well. Holding regular staff meetings where people can ask ques-
tions and discuss results is effective, as is providing results on a quarterly basis.
Understanding is  the goal. “If you can ask … a person programming code and
they can tell you three to four of their objectives and how those tie into the compa-
ny’s performance and what the measures of achieving those objectives are, you’ve
got it” (Alexander 2000).

3. Simplicity. Successful companies tend to keep their measures very simple and
easy to use (Haspeslagh et al. 2001). In each approach already outlined, a limited
number of measures are used. This makes it very easy for employees to calculate

Business Results
40%

Report Card Goals
30%

Partner
Satisfaction

10%

Application Delivery
Effectiveness

5%

Production
Availability

5%

Member
Retention

5%

Product
Recovery

5%

Key Projects
30%

IT Performance
60%

IT Variable Pay
100%

figure 3.1 Percentage Weightings Assigned to IT Variable Pay Components for a Particular Year

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Chapter 3 • Making IT Count 57

their bonuses (or variable pay) based on the metrics provided, which further
strengthens the linkage between company performance and individual effort.

4. Visibility. In each of the programs already discussed, metrics were made widely
available to all staff on a quarterly basis. In one case they are posted on the com-
pany’s intranet; in another they are distributed in a printed report; in a third they
are posted in public areas of the office. Visibility encourages employee buy-in and
accountability and stimulates discussion about how to do better or what is working
well.

5. Links to incentive systems. Successful companies tend to include a much
larger number of employees in bonus programs than unsuccessful ones
(Haspeslagh et al. 2001). Extending incentive schemes to all IT staff, not just
management, is important to a measurement program’s effectiveness. The
most effective programs appear to distinguish between fair compensation for
individual work and competencies and a reward for successfully achieving
corporate objectives.

aDvice tO Managers

The focus group had some final advice for other IT managers who are thinking of
implementing a business metrics program:

• Results will take time. It takes time to change attitudes and behavior in IT, but it
is worth making the effort. Positive results may take from six months to a year to
appear. “We had some initial pushback from our staff at the beginning,” said one
manager, “but now the metrics program has become ingrained in our attitudes and
behaviors.” Another manager noted, “We had a few bumps during our first year,
but everyone, especially our executives, is getting better at the program now [that]
we’re in our third year. It really gets our staff engaged with the business.” If there
has been no dramatic difference within three years, management should recognize
that it is either using the wrong measures or hasn’t got employee buy-in to the pro-
gram (Alexander 2000).

• Have common goals. Having everyone measured on the same business goals
helps build a strong team at all levels in the organization. It makes it easier to set
priorities as a group and collaborate and share resources, as needed.

• Follow up on problem areas. Companies must be prepared to take action about
poor results and involve staff in their plans. In particular, if companies are going to
ask customers and employees what they think, they must be prepared to act on the
results. All metrics must be taken seriously and acted on if they are to be used to
drive behavior and lead to continuous improvement.

• Be careful what you measure. Measuring something makes people pay attention
to it, particularly if it is linked to compensation. Metrics must, therefore, be selected
with care because they will be a major driver of behavior. For example, if incen-
tives are solely based on financial results, it is probable that some people may be so
driven that they will trample on the needs and interests of others. Similarly, if only
costs are measured, the needs of customers could be ignored. Conversely, if a metric
indicates a problem area, organizations can expect to see a lot of ingenuity and sup-
port devoted to addressing it.

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58 Section I • Delivering Value with IT

• Don’t use measurement as a method of control. A business metrics program
should be designed to foster an environment in which people look beyond their
own jobs and become proactive about the needs of the organization (Marchand
et al. 2000). It should aim to communicate strategy and help align individual and
organizational initiatives (Kaplan and Norton 1996). All managers should clearly
understand that a program of this type should not be used for controlling behavior,
but rather as a motivational tool.

Conclusion

Getting the most value out of IT has been a
serious concern of business for many years.
In spite of considerable effort, measurement
initiatives in IT that use surrogates of busi-
ness value or focus on improving internal
IT behavior have not been fully successful in
delivering results. Expecting IT to participate
in achieving specific enterprise objectives—
the same goals as the rest of the organiza-
tion—has been shown to deliver significant
benefits. Not only are there demonstrable
financial returns, but there is also consider-
able long-term value in aligning everyone’s
behavior with the same goals; people become
more supportive of each other and more

sensitive to the greater corporate good, and
decisions are easier to make. A good business
metrics program, therefore, appears to be a
powerful component of effective measure-
ment in IT. IT employees may initially resist
accountability for business results, but the
experiences of the focus group demonstrate
that their objections are usually short lived. If
a business measurement program is carefully
designed, properly linked to an incentive pro-
gram, widely implemented, and effectively
monitored by management, it is highly likely
that business performance will become an
integral part of the mind-set of all IT staff and
ultimately pay off in a wide variety of ways.

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