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Balanced scorecard founder on the business value of IT

Balanced scorecard framework co-developer Robert Kaplan discusses IT strategy and the ways CIOs can demonstrate the business value of IT.

Robert Kaplan, Harvard Business School professor and co-creator of the balanced scorecard, recently spoke with about strategy execution. His most recent book, The Execution Premium, focuses on linking strategy to operations and developing an overarching management system to sustain strategy execution. In this first part of a two-part interview, he explains how CIOs can align IT strategy with corporate objectives and demonstrate the business value of IT.

Robert Kaplan
Robert Kaplan,

When developing an IT strategy, what can a CIO do to improve the value of IT to the business?
Kaplan: A certain amount of what IT does is provide basic infrastructure, a platform for handling transactions, whether with suppliers or customers, or for financial data. But that doesn't provide a basis for competitive advantage. It's like doing the wiring or plumbing in the house. You need to have it, but it doesn't make the house distinctive. If [IT] wants to become more strategically relevant, they have to think, "Which applications are going to be the most significant for helping the business improve their strategy?"

There you can think of two applications: One is information provisioning, whether information is about customers, suppliers or products, so business units are kept up to date, on a robust platform. But the more powerful application is IT embedded within the product or service itself. I think of FedEx, where the IT function is part of what makes FedEx distinctive, in that the shipper and recipient both track a package and know where it is. In fact, they do the work, rather than call up the company. That's a case where there is an intimate partnership between IT function and the business strategy. That's the most powerful situation.

How can CIOs help the business measure the value IT is contributing to the corporate strategy?
Kaplan: You can't really justify the IT investment just by doing an analysis within IT. I mean, you can do it on cost savings. If you're using IT to replace people, you can measure the cash savings and calculate net present values. But if you want to evaluate the impact of IT on business value, then you have to go to a methodology -- a strategy map -- and balanced scorecard, because often IT doesn't directly produce revenue. What IT does do is support a critical process like innovation or a customer management process, and the output from IT is greater satisfaction or loyalty among customers, such as the FedEx example. And because of greater loyalty, the customers transact more business with the company.

Most IT value comes indirectly through improving processes and relationships with customers and suppliers. In turn, that leads to better financial results, but it has to work through the company's business model, and not be a standalone investment that could be justified in its own right.

Not every investment or application has to go directly to some financial number. And that's been so frustrating to IT, and 25 years later IT still hasn't solved this problem [of proving the business value of IT] because they don't deliver direct benefit by themselves. It's only when it's bundled in with strategic processes and customer relationships that the value is created.

After developing a strategy map with the business unit, what's the next step?
Kaplan: You can then develop a service agreement on routine transactional basics, but also the value that IT is creating for the business unit. You can measure that monthly or quarterly through surveys with the business units as to how well they feel IT is delivering on its commitment and on its value creation. IT can then think, "What are the critical processes we need to do well?" And it's not just buying applications, 24/7 operations, and security and privacy. Rather, some of the critical process is developing relationships with business unit heads, and that's still a real shift in the role and expansion of abilities for IT professionals.

They need to be able to have dialogues and discussions with business unit heads, so some of your IT people end up being account managers working with business unit people, not just software coders and people who keep applications up and running. That will make IT a much more valuable partner.

Most IT value comes indirectly through improving processes and relationships with customers and suppliers.

Robert Kaplan, co-creator, balanced scorecard framework

How can IT play a more active role in driving the business strategy?
Kaplan: Depending on the strategy the business is following, the demands on IT are very different. If you look at Wal-Mart, Toyota or Dell, they are trying to follow a low cost strategy. The role for IT in this case is to lower the cost of working with suppliers, handling the logistics, and the distribution. IT is doing that networking with suppliers and making a platform for which customers find it easier to transact business.

Another organization might be following a strategy of building long-lasting relationships with ongoing sales and services. There, IT is very much related to CRM, and perhaps data mining, to be able to understand customers better. Are we going to partner with businesses and customize the IT offering to the needs of individual businesses owners? That customer relationship strategy is the most winning strategy for internal functional units like IT.

But then there's innovation. IT might be the first to offer some new capability to the company's customers, and that provides [the company with] a competitive advantage. That requires continual innovation within the IT function, So, I think in some sense IT has to make a choice between those two [CRM or innovation] strategies to create the most value.

In the second part of this interview, Kaplan shares his thoughts on two of the latest buzzwords -- agile business and predictive analysis -- and discusses the reasons so many companies missed the signs of the coming recession and the ways they can correct this strategy gap.

Let us know what you think about the story; email Christina Torode, News Director.

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