value insights

IT strategy based KPIs- Valutrics

IT performance management allows companies to implement and control IT strategies systematically and to realize improvements and value enhancements, be they of a financial and non-financial nature. The company and any IT service providers involved gain transparency and come to a mutual understanding of the services and value contributions that are provided by IT. This makes communication and the joint controlling of IT services between the business units and IT a lot easier. IT performance management also creates the methodological base for continuous benchmarking and the systematic exchange of best practices within and outside the company.   IT performance management lies to rest the perennial conflict between the business units, which are more content-oriented, and IT, which is more technically-oriented, and forges a mutual basis for communication on planning and developing IT.

All IT activities and IT projects should support the core business and corporate strategy. For this reason, IT performance management derives its objectives strictly from corporate strategy via IT strategy and quantifies them with the aid of clear, actionoriented variables – namely, the Key Performance Indicators (KPI). All business units have to develop a unified concept, whilst setting great store by taking into account the differences. If one business units pursue an entirely different line of business to the others in the group, this can be reflected in the IT performance management system. Yet, one must never lose sight of the search for a ‘common denominator’. Therefore, a binding, consistent framework should be used for all business units prescribing the perspectives for the balanced scorecard, definitions of standard KPIs and standard forms of documentation.   CIOs and IT management develop IT goals and top KPIs based on IT strategy. The second step is then to cascade these down into the business units. The balanced scorecards and KPIs from the business units are integrated into a joint reference model.

Areas of corporate strategy are then identified which have a direct, value-enhancing influence on IT. For example, implementing an external growth strategy via fusions and acquisitions requires the support of IT in terms of its high flexibility and technical integratability.
Value chains, value driver models or business unit strategies are all suitable for structuring the cornerstones of an IT strategy. And it is important to take into account the  varying levels of vertical IT scope (insourcing vs. outsourcing), organizational concepts (central vs. decentral) and standardization strategies (ERP standards vs. in-company developments) in the existing IT landscape. How far IT organization is evolved is also a factor that strongly impacts IT strategy: from having a systems-oriented data processing center as a partner through development partnerships with business units to integrated business partners for optimizing business processes.
To derive concrete IT goals, the IT strategy is summarized in one comprehensive top objective and broken down into smaller units (decomposition). A generic top objective of achieving a ‘high level of IT efficiency and effectiveness’ is then broken down into the components of ‘efficiency’ and ‘effectiveness’, in order to link these with real areas of action. The perspectives of the IT scorecard provide a balanced and complete basis for decomposing the top objective into individual goals. In practice, six perspectives for the IT scorecard have proven to be very useful: namely, personnel, projects, customers and market, infrastructure, operations, finance and costs.
The selection and designation of the perspectives is based on the balance between monetary/non-monetary and early/ late indicators, stakeholders and budget structures. When selecting the perspectives, it is important to find effective terms for describing them which all IT stakeholders can identify with and which can be used to represent IT performance to the outside world.

A system of goals, consisting of one top objective, a number of target areas that do not overlap and are defined in line with the IT scorecard perspectives, plus the resulting detailed individual goals – all these things form a structured basis for recording all of the relevant parameters for measuring performance . In practice, a high degree of flexibility, detailed IT knowledge and business expertise, and an good overview of the overall process are required for developing a system of goals that is consistent with IT strategy and corporate strategy and can be controlled using KPIs.
Based on the defined goal system, Key Performance Indicators (KPIs) are developed for measuring goal achievement. KPIs must be distinct from pure reporting variables, such as monthly data processing center costs, and must fulfill a number of requirements:

  •   Measurability and comprehensibility: KPIs must be easy to measure and to understand. As there are no universally valid KPIs, these should always be developed and specifically tailored to the concrete goals of the company, before establishing them on a company-wide basis.
  •   Clarity: Each IT goal can be allocated only one KPI, which measures goal achievement. For the point of view of transparency and effective control, a KPI should not be allocated to several IT goals at once.
  •  Broad scope: KPIs should represent a balanced mixture of financial and nonfinancial variables, and also early and late indicators. For example, employee satisfaction is a non-financial variable and also an early indicator and falling sales is a financial variable at the end of the cause-and-effect chain and also a late indicator.
  •   Responsibility: For each KPI a KPI manager should be appointed within the company who is responsible for influencing its value. For example, the head of the SAP Basis Administration is responsible for the KPIs ‘Availability’ and ‘Performance’ of the SAP system.
  •   Action orientation: KPIs should be action-oriented; a change in its value should be a direct trigger for concrete measures. For example, time and budget problems are reflected in the ‘Project’ perspective as negative fluctuations of the KPIs ‘Time deviation factor’ and ‘Cost deviation factor’, and as such should immediately trigger a meeting of the steering committee.

When amassing potential KPIs for IT goals, it is important to address the duties and  areas of responsibility of the IT organization as fully as possible. Only then should the most important goals and their KPIs be selected, namely according to the criteria of how relevant they are for achieving the top objective and how easily they can be implemented or rather how complex it is to measure goal achievement. This selection is important: A group-wide control instrument such as IT-PM should focus on the relevant and hard-toimplement IT goals that require special supervision. In practice, more than 130 strategic KPIs are developed and discussed to cover six perspectives, of which 40 are selected and defined for strategic control at CIO level. The most important KPIs are differentiated in line with the various balanced scorecard perspectives:

  •   Personnel: In the ‘personnel’ scorecard perspective, turnover rate, training days, employee satisfaction and qualifications are frequently named indicators. This perspective also takes into account legal frameworks and stipulations made by the personnel department. Important requirements are setting up an IT skills database and carrying out web-based satisfaction surveys, because this kind of information is generally not available in companies or is difficult to get hold of.
  •   Infrastructure: The ‘infrastructure’ perspective measures the technical basis for IT performance in terms of the degree of standardization and efficiency of technologies and security used. In this case, there tend to be less KPIs to discuss. On the other hand, the debate tends to be all the more intensive, for example, with the KPI ‘Degree of implementation of standards’, which frequently has emotions running high between headquarters and the business units. This also tends to be the case with security-related KPIs, which could imply restrictions for users. In cases such as these, conceptional preliminary work such as defining objects for standardization or correct asset management can be helpful.
  •  IT projects: For IT projects on developing and shaping the user landscape, important KPIs are the degree of goal achievement and cost and time deviance . In addition, it is frequently clear in the debate over these goals that project selection (‘doing the right thing’), and project planning and definition also need considerable management. For example, project activities must be clearly distinct from maintenance and small-scale developments that are assigned to operations as sustaining and not value-enhancing measures. Important conditions for management are setting up a tool-assisted project controlling system and formalizing project definition on the basis of project ‘wish lists’.
  •  IT operation: After the project is completed, a finished application is put into operation. Failures or omissions in the project management will make themselves noticed later during operation in the form of higher maintenance costs and service levels that cannot be maintained. For this reason, important KPIs for the ‘Operations’ scorecard perspective are ‘service level’ for measuring availability and performance of the applications in a structured way, ‘user support’ via all support levels and ‘managing the applications portfolio’. Depending on the productivity of the IT organization, process indicators can also be included: e.g. the duration and quality of IT processes and the measurement of automated business process applications. Important conditions for measurement are a structured process model for IT and business processes coupled with systematically structured and fully documented service level agreements from a customer perspective.
  •  Customer and market: Services in IT operation directly impact customer satisfaction and customer perception of IT. The most important KPIs in this perspective therefore measure customer satisfaction, and the quality and market success of services on the basis of non-monetary variables. Customer goals should be differentiated according to customer segments, for example, users, management or external customers, so that goal achievement measurement is done using several different KPIs. Important requirements are setting up questionnaires, web-based survey tools and important survey processes.
  •   Cost and finance: Finally, let us take a look of monetary indicators in the ‘cost and finance’ scorecard perspective. In cost center organizations, indicators such as ‘IT costs to sales’ ratios or ‘IT costs per employee’ are the most important KPIs because these are indicators for the relative efficiency of IT compared to other companies. In practice, global cost indicators are sometimes assessed as being irrelevant for control purposes because they are not action-oriented enough, whilst specific, universally recognized KPIs such as ‘PC workstation costs’ or ‘application user costs for standard applications’ are considered more advantageous in this respect. One initial challenge when defining the KPIs in this perspective lies in providing an action-oriented definition of the KPIs. At face value, an unfavorable ratio of IT costs to sales does not imply the need for immediate measures, whereas high ‘SAP user costs’ indicate a need for action. A second challenge lies in defining the KPIs in such a way as to make them truly measurable. The KPI ‘PC workstation costs’ is as concrete as it is action-oriented, but to be computed exactly it needs to be very precisely calculated, because not only hard- and software costs have to be assigned, but also those costs that result from implementation and maintenance.

After the KPIs have been developed, the CIO scorecard is drawn up. For this, all of the top KPIs are assigned to the defined perspectives. Experience shows that overall a manageable number of 10 to 15 KPIs results from prioritization (although the numbers fluctuate depending on the type of company) The selected KPIs are often subject to critical reflection from a number of different sides and thus given different priorities accordingly. The process demands a high level of flexibility and a sound understanding of IT from all those involved.

As an example, an international firm with sub-groups in   differing sectors decided to introduce IT performance management to control and measure IT at group and sub-group level. The group CIO was responsible for group-wide IT strategy. Each sub-group had its own sub-group CIO and its own service providers. It also had varying levels of IT value creation scope, ranging from fully outsourced IT to IT services developed completely in-house.
An IT performance management team   consisting of representatives from IT management and IT controllers or IT performance managers, developed the concept with the close involvement of the CIOs. At first, the corporate strategy and IT strategy for each sub-group was recorded and the IT goals and KPIs for each sub-group were then developed and prioritized on this basis (taking care to create standard KPI definitions for each sub-group). Based on this, the CIO balanced scorecard was set up and cascaded down into the business units or IT units.
The common IT scorecard covered some 40 detailed, well-defined strategic KPIs, taken from a base of some 140 IT-related KPIs. The IT performance management was then integrated into the control process and group reporting. Furthermore, the roles required for control were then anchored in the IT organization. Goal achievement for the performance indicators was then measured at the sub-group level in the group portal using a data warehouse solution. Based on benchmarking values, target values were then agreed on for selective KPIs, such as workstation costs or ERP user costs.

With IT performance management, the group was able to measure and control IT performance better. Furthermore, it was able to identify potential for improving efficiency and effectiveness more easily, and to develop suitable measures for achieving this. In addition, each CIO from the subsidiaries had a sub-group-specific IT scorecard for implementing specific IT strategy. All the CIOs were able to rely on a common basis for continuous benchmarking and exchanging best practice initiatives: The scorecard perspectives, KPI definitions and the overall methodology of their IT performance management system were all the same, and made communication and sharing experiences a lot easier.