The essentials of this study were delivered at the ISACA International Meeting and Conference in July of 1999 in Denver, Colorado, USA by Ronald Saull. The discussion and study results were based on events that occurred and dynamics in place at Great-West Life Assurance Company/ London Life/Investors Group, Canada, signified by the acronym GLI.
As investments in information technology continue to increase, so too does the reliance of most organizations on their in-place technical infrastructure and the performance of their IT function. Boards of Directors, executive management, CIOs audit and regulatory bodies, and IT professionals are becoming increasingly focused on the issues of ensuring value is received for IT investments and managing the risks they introduce. This article discusses the application of the balanced scorecard as a management tool to assist a shared services IT organization in creating a governance model which best serves the interests of its sponsoring organizations and their stakeholders.
Defining the Balanced Scorecard (BSC)
Beginning in 1992, Kaplan and Norton wrote a series of articles which introduced the concept of the balanced scorecard. They proposed the development of a set of measures that would give top managers a fast but comprehensive view of the business. They believed that traditional financial measures needed to be supplemented with the key operational measures which determined financial success. These operational measures were to add three perspectives: customer, internal business and learning and innovation, thus creating a balance of emphasis on the desired outcomes and the means of achieving them.
Kaplan and Norton believed the real value of the BSC method was as a strategic management system. In order to do so, their balanced measurement framework should be used to clarify vision and strategy, translate them into business planning and resource allocation processes, align objectives down to the individual level, and establish a results measurement and feedback system. The structure they proposed for each of the four perspectives was: mission, objectives and measures from which targets would be set and initiatives created in each planning period. Figure 1 depicts the traditional balanced scorecard framework.
Effective application of the BSC method requires inclusion of sufficient numbers of "performance drivers," clarification of the cause-and-effect relationships between factors in the model, and eventual linkage of operational outcomes to financial measures. By doing so, management is able to activate the organization to the achievement of its strategy and to measure and control its achievement.
Moving toward the IT Balanced Scorecard (IT BSC)
In 1997, Van Grembergen and Van Bruggen adapted the traditional BSC for use by a corporate information technology department. They noted that since the IT department is an internal service provider, the perspectives should be changed accordingly. Recognizing internal users are its customers and its contribution will be considered from management's point of view, they proposed the changes shown in Figure 2.
The Scorecard Approach
From the outset, executive management made it clear that although they were committed to the achievement of inter-company IT synergies they wanted to ensure continued effective control over the IT organization. Their major concerns regarding the new organization were ensuring appropriate focus on company strategies and priorities, value received for their investments and a fair allocation of all costs. To address these concerns they requested the development of a measurement system to evaluate the performance of the new organization, along with an organizational structure and a cost allocation model.
The BSC method was selected as a means of satisfying management concerns regarding value received and IT performance. The nature of the shared services operation made it prudent to incorporate the perspectives of other governing entities, such as audit committees and regulatory bodies, and of other key stakeholders within the IT organization itself. The intent was to capture the key concerns of all IT governance partners, either directly or indirectly through senior sponsors, into a single framework to guide the new organization. Figure 3 illustrates the IT operating model as viewed by the organizations' key stakeholders and Figure 4 summarizes our current view of their major concerns.
We began by adopting the Kaplan and Norton BSC method and the IT BSC model as adapted by Van Grembergen, with a view to customizing it and evolving it over time. Figure 5 displays GLI's IT BSC framework populated with our key measures, based on our current strategies and objectives. To this model, we planned to add specific measures and benchmarks. Benchmarks were to be used primarily where the efficiency of delivery of "commodity" services was an important aspect of evaluating IT performance.
The key elements of our vision and strategy can be summarized as:
- Become a single IT organization focused on developing world-class capabilities to serve the distinct needs of the three sponsoring companies.
- Support the achievement of company strategies and goals through the industry consolidation period.
- Be the "supplier of choice" for the full range of information services required by our business partners.
- Operate IT as a full cost recovery, no profit business providing our internal customers with high levels of efficiency and effectiveness.
- Establish a forward looking enterprise architecture strategy which enables the use of technology as a competitive edge in the financial services marketplace.
- Become the "employer of choice" for career-oriented IT professionals in the key markets in which we operate.
The Corporate Contribution perspective evaluates the performance of IT from the viewpoint of executive management, the Board of Directors and the shareholders. The issues that we have focused on, as depicted in Figure 6, are strategic contribution, synergy achievement, business value of IT projects, Year 2000 compliance and the management of IT investments. Benchmarks have been used where an objective standard was available or could be determined, in most cases from external sources. For example, our synergy achievement targets were heavily influenced by the consulting firm (Bain & Co.) we used to assist in evaluating the LL acquisition and the tri-company IT merger potential.
The main measurement challenges are with the areas of strategic contribution and the business value of IT projects. In the strategy area, although we are focused on the successful completion of strategic initiatives, we recognize that the perception of IT success or value added is highly dependent on the specifics of each initiative. We accept that we must negotiate appropriate measures for each initiative with its corporate sponsor.
For IT projects, the measures flow from the nature of the business case prepared for each project. Those focused on cost reduction will use traditional financial measures such as Return on Investment (ROI); those based on service improvements will be measured on attainment of the higher service level targets; and those based on enabling the achievement of corporate strategy will be based on factors similar to strategic initiatives such as negotiated measures which demonstrate achievement of intended benefits.
These areas of measurement challenge represent some of the most important areas for IT in terms of building a strategic relationship with the business. The most effective time to establish the basis for these measures is at the point where business cases are being prepared and projects are evaluated. We are developing the capability to provide effective consultative services to the business at these key points to maximize the influence we have in project formulation and selection, as these are key leverage points. To do so, we have developed a senior role called account manager for each line of business or division to be the liaison between IT and business and to ensure the effective delivery of all IT services. The account manager develops and deploys a team of senior systems analysts and architects who have a deep understanding of the business plans, processes and systems and the potential impact of technology on business strategy.
The Customer Orientation perspective evaluates the performance of IT from the viewpoint of business users (our customers) and, by extension, the customers of the business units. The issues we have focused on, as depicted in Figure 7, are customer satisfaction, IT/business partnership, application development performance and service level performance. At this point our intent is to focus on developing the business relationships and implementing the new IT organization and processes. As such, we will present IT performance in relation to expectations and improvements over time (past performance) rather than relative to external benchmarks.
The main measurement challenges are in the "softer" relationship areas, i.e. customer satisfaction and IT/business partnership. In the customer satisfaction area, we are currently relying on annual interviews with key business managers. Our intent is to obtain external assistance in developing and implementing a systematic survey process which will provide us better insights into customer perceptions of our services.
In the IT/business partnership area, we currently have regular steering committee meetings between the IT account team and their business partners. However, we would like to improve our understanding of the degree of mutual influence in key areas. In particular, the degree of influence IT staff have in the key investment decisions concerning the use of information technology in the business (strategic applications) and the degree of business involvement in developing new applications. We believe these areas to be critical in the development of the strategic relationship and ensuring the success of both the business and IT in obtaining value for IT investments.
The Operational Excellence perspective evaluates the performance of IT from the viewpoint of IT management (process owners and service delivery managers) and the audit and regulatory bodies. The issues we have focused on, as depicted in Figure 8, are process excellence, responsiveness, backlog management and aging, and security and safety. We also intend to add internal cost of quality measures at some point in the future when our processes are more mature.
We will make significant use of external benchmarking here to assist us in developing and tuning our organizational structure and processes. Over the past several years we have used the services of Compass Canada to benchmark our efficiency and effectiveness in three service areas: data centre, client server and application delivery. Our intent is to continue to conduct such comparisons to top performing companies around the world every two years or so. We have engaged the services of the consulting firm Pink Elephant to conduct an operations process maturity assessment as a step in planning to adopt the ITIL operational process model1. We also plan to conduct an applications process maturity assessment using the SEI Maturity Model2. Our initial objective will be to reach Level 3 (Defined) in all process areas.
The main measurement challenge is in the area of security and safety. Today we focus on the occurrence and management of major incidents and the findings and responses to audit reports in key areas. Our intent is to work on an overall security and risk management scorecard with the two internal audit organizations which will indicate how well IT is managing the risks of new technologies and the operational changes introduced.
The Future Orientation perspective evaluates the performance of IT from the viewpoint of the IT organization itself: process owners, practitioners and support professionals. The issues we have focused on, as depicted in Figure 9, are service capability improvement, staff management effectiveness, enterprise architecture evolution and emerging technologies research. We also intend to add measures in the area of knowledge management once our specific strategies in this area are better defined.
The use of benchmarks will be primarily related to the level of internal investments in our processes and people and will be drawn from the markets in which we operate. Beyond the relationship between such investments and the improvements in service delivery, customer satisfaction, etc., these factors influence our ability to attract and retain the best IT professionals. We are interested in knowing how we are positioned in the minds of current and future employees as an employer of choice.
One of the measurement challenges we have faced is finding good comparative data in the area of emerging technologies research. Our intent is to find the level of investment which yields the maximum benefit to the organization. There seems to be little information available on how much organizations are spending on technology research, either in absolute dollars or as a percentage of the total IT budget.
The Road Ahead
Although we have covered a lot of ground there is still a long way to go to put in place an effective overall scorecard. To date, the IT management team has discussed the IT BSC and accepted its value and necessity. Each individual manager has developed a measurement and reporting framework which reflects business and IT operational plans and emphasizes the interests of client groups and internal management. However, these individual frameworks have not yet been consolidated into an overall reporting structure for executive management and confirmed with the major stakeholders.
- Consolidate the individual service area reporting frameworks.
- Reconfirm the primary areas of interest with all key stakeholders.
- Conduct a gap analysis between the current state and stakeholder needs.
- Design and confirm individual scorecards for each business unit and for IT management internal use.
- Develop plans for the ongoing evolution and review of scorecards.
I expect it will be a challenge to maintain our focus on this effort in the face of pressure from the business for management attention on key delivery challenges. However, I believe the development of an effective IT BSC to be an IT governance best practice and well worth the effort expended by business and IT leaders. The dialog will become an important means for ensuring IT alignment with the business and for ensuring we understand business values and expectations.
CSC Index, Foundation Operational Excellence Report (1998). Valuing the IS Contribution to the Business.
Gartner Group (1998). The IT Scorecard Program Introduction and Overview.
Kaplan, R. and Norton, D. (1996). The Balanced Scorecard: Translating a Strategy into Action. Harvard Business School Press, Boston.
Meyer, N. Dean (1998). Road Map: How to Understand, Diagnose, and Fix Your Organization. NDMA Publishing, Ridgefield, CT.
Parker, M. (1996). Strategic Transformation and Information Technology. Prentice Hall, Upper Saddle River, N.J.
Van Grembergen, W. and Van Bruggen, R. (1997). Measuring and Improving Corporate Information Technology through the Balanced Scorecard. University of Antwerp.
1 ITIL, Information Technology Infrastructure Library, contains a comprehensive description of the processes involved in managing IT infrastructures and is considered a best practice and a standard of quality for IT service management. ITIL provides a comprehensive, non-proprietary, publicly available reference model to describe IT management processes, job descriptions and control mechanisms. ITIL was introduced in the late 1980s and has become the de facto IT standard in Europe since its introduction. The Central Computer and Telecommunications Agency (CCTA) within the UK government is charged with maintaining and optimizing ITIL.
2 SEI, The Software Engineering Institute, is a federally funded research and development center established in 1984 by the U.S. Department of Defense with a broad charter to address the transition of software engineering technology. The SEI is an integral component of Carnegie Mellon University and is sponsored by the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics [OUSD (AT&L)].
Ronald Saull, MBA, CSP
is the Senior Vice President and Chief Information Officer of the Information Services Division of Great-West Life, London Life and Investors Group headquartered in Winnipeg, Canada. He has more than 25 years of experience as an information systems professional and manager in both the public and private sectors. He is the past chairman of the ISACF Research Board and is currently active as a member of the Research Board, the International Board of Trustees and the IT Governance Task Force. He was recently appointed to the COBIT Steering Committee which is engaged in the development of COBIT 3rd Edition, which includes the addition of the Management Guidelines.
The Great-West Life Assurance Company, London Life and Investors Group are members of the Power Financial Corporation group of companies with London Life as a wholly owned subsidiary of The Great-West Life Assurance Company.
The Great-West Life Assurance Company (GWL) is an international corporation offering life insurance, health insurance, retirement savings, specialty reinsurance and general insurance, primarily in Canada and the United States. Great-West serves the financial security needs of more than 13 million people through its Canadian operations and London Insurance Group Inc. in Canada, and through Great-West Life & Annuity Insurance Company in the United States. Great-West has more than $83 billion in assets under management and $477 billion of life insurance in force.
Founded in Winnipeg in 1891, Great-West is a leading life and health insurer in the Canadian market in terms of market share. The Company markets its products in Canada through a network of Great-West financial security planners, group representatives and brokers and through marketing agreements with other financial institutions.
Founded in London, Ontario in 1874, London Life (LL) has the leading market share of individual life insurance in Canada, under its widely recognized Freedom 55TM brand. London Life markets life insurance, disability insurance and retirement savings and investment products in Canada through its exclusive sales force. The Company is a supplier of reinsurance primarily in the United States and Europe, and is 39% participant in a joint venture life insurance company Shin Fu, in Taiwan.
Investors Group (IG) is a national leader in providing personal financial planning services to more than one million Canadians. Investors Group has more than 3,600 Representatives in 100 Financial Planning Centres across Canada, and manages assets of $40.5 billion.
Investors Group, with its corporate headquarters in Winnipeg, Manitoba was founded more than 70 years ago. Investors Group is Canada's leading provider of mutual funds, offering a wide spectrum of funds, including those created through strategic partnerships with some of the best known Canadian and international investment management firms. It also offers a wide range of insurance and mortgage options, and currently has $17.1 billion of life insurance coverage in force through three different carriers, and administers more than $7.6 billion of primarily residential mortgages.
The Tri-Company IT Merger
The trend in financial services industry consolidation was a motivating factor behind the acquisition of London Life by Great-West Life and the merger of the IT divisions of Great-West Life, London Life, and Investors Group (GLI) in November 1997. The ability to achieve true synergies and economies of scale within the IT operations was clearly a driver and an opportunity for the companies to realize. The merger enabled single systems solutions across all three companies to be explored and implemented as well as single operational processes. Forming a tri-company shared services organization positioned us to:
- achieve world-class status as an information services group,
- maximize our purchasing power and operating efficiency,
- leverage our technology investments, and,
- optimize technical infrastructure and application support costs.
The goal of this combined IT division is to achieve "best of breed" performance levels in service, reliability, and cost with a commitment to implement the highest quality solutions in technology, processes, and staff development.
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