Key performance indicators as a common vocabulary

April 5, 2004 by admin

In the past, the benefit of IT before and after an investment was not usually evaluated. This is particularly true of the benefit to a company’s core business. Many of the measures carried out were simply necessary in order to remain competitive, for example. These measures included the introduction of e-mail or a web site, for example. In addition, there were no effective methods for measuring the contribution made by IT to the success – or failure – of a company’ business.
The complexity of the technology and the staffing of an IT department with pure specialists means that communication between the various user departments and IT organization is not always clear. An understanding, or common language, was – and still is – lacking in many cases.

The question of business benefit is becoming more pressing

However, the question of the actual benefit of IT becomes more and more pressing as the budget is squeezed. Typically, cost-saving measures result in IT projects being postponed, reduced, or cancelled, without consideration of what the activity in question could offer in terms of business benefit.
Methods such as the balanced scorecard (BSC), or purely financial indicators such as the return on capital employed (ROCE) are used to control business units or companies. It is very difficult, and in some cases even impossible, to translate typical IT key performance indicators such as the availability of systems or other service level agreements (SLAs). However, an IT organizational can only speak the “language” of the business unit in question, and quantify the effects of initiatives if a procedure such as this is made reality, possibly with simplified models.
Basically, there are two methods of measuring the business benefit or the contribution made by IT:

  • Strategically – How does IT contribute to the strategic development of a division or a company?
  • Financially – What financial key performance indicators (KPIs) of a division are affected by IT?

Strategic influence

Simplified Balanced Scorecard

Simplified Balanced Scorecard

The anonymous and simplified balanced scorecard shows the extent to which certain projects have strategic influence. The company levels of learning, internal, customers, and finance are represented with their relationships and dependencies. The colors red, green, and white in the small boxes beneath a particular measure are intended to indicate the qualitative contribution made by a project (in this example, the projects G, S, C, N and O). Red means no contribution, green indicates a positive influence, and white is neutral. The example shown here reveals that the projects G, S, C, N and O do not make a contribution to any of the strategic measures and targets. Only project S influences the goal of Business Steering.
This overall result does not necessarily have to be regarded as negative, unless the IT projects were explicitly planned to make a strategic contribution to the company. What is important is that both the area of IT and other business areas inform each other of the common direction, and if necessary coordinate changes to the direction of the projects and activities.

Financial key performance indicators

Value Driver Tree

Value Driver Tree

Simplified value driver trees, which show the relationship between KPIs, are provided in the following diagrams as examples of how the contribution of IT projects can be measured on the basis of financial KPIs. They display the relation “is influenced by” from left to right. In the first diagram, for example, this means that a company’s research and development costs are influenced by project, overhead, and support costs. The project costs are naturally dependent on the number of costs and the costs per project. In the third diagram, the factors influencing the new product development lead time are displayed, among other things.

Value Driver Tree

Value Driver Tree

The right-hand part of these diagrams therefore shows values which can be specifically influenced, and moving to the left the KPIs shown become increasingly abstract. In addition to this visual presentation, it is at least equally important to initialize the quantitative dependencies, and to “bring these to life” (by specifying the current situation, for example). This information can then be used to derive a business unit’s goals, and to determine what initiatives are necessary to ultimately achieve these goals by influencing the KPIs. As a result, the value driver trees can be used to evaluate not only IT projects, but all a company’s measures. The different KPIs and the changes to them are not just estimated before activities are carried out, in the sense of a control cockpit, they also serve to determine the success of a project, both during and, in particular, after its execution.

Steffen Förster

Steffen Förster

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