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Command Performance

Balanced scorecard applications do their current job well but will have to expand and evolve to support emerging e-business requirements

By Mark A. Smith

In the last year, the advent of e-business has heavily influenced Global 2000 companies to transform their business strategies in a manner that has stakeholders watching closely. The challenges of globalization, reduced competitive barriers, shifting industry lines, and information and capital security are just a few of many issues involved in this e-business transformation. In the e-business world, the agility with which a company moves into a market can dictate market position and perception in ways that ultimately drive profitability.

In the 1970s and 1980s, management theory held that organizations should optimize at the business-unit level to increase shareholder value. However, this approach usually failed to meet that goal. Rather, we’ve learned since then that business optimization must occur from end to end to respond to globalization, and that organizations must develop value chains among all customers and suppliers.

This management philosophy is now critical because “brick and mortar” e-business strategies are inseparable from the strategies of the business as a whole. Companies must develop business-related benchmarks for e-investment returns, or risk losing (or not gaining) CEO-level commitment to e-business initiatives. In this situation, the balanced scorecard application — with e-business modifications — can play a crucial role by managing e-business initiatives and strategy implementation.

The roots of the balanced scorecard go back to Nolan Norton Institute, the research arm of KPMG, which sponsored a one-year, multiclient study in 1990 called Measuring Performance in the Organization of the Future. Robert Kaplan and David Norton summarized this study in a 1992 Harvard Business Review article and then in their book The Balanced Scorecard (Harvard Business School Press, 1996). Since then, the balanced scorecard has given corporate management a structured approach to measuring business performance in four key areas: customers, financials, internal processes, and organizational learning and improvement.

But with the accelerated speed of change within business, new bumps have appeared on the road for balanced scorecard applications. New e-business strategies and processes are available that break from traditional approaches to determining the value of corporate investment and partnerships. In addition, e-business initiatives have introduced new methods of leveraging IT. Thus, to manage and optimize the business to achieve these new goals, the balanced scorecard will have to evolve to meet the new needs of the e-business economy.

ON THE TABLE

CorVu CorVu has long excelled at delivering a platform for building customized information delivery systems (now called CorBusiness) and was an early provider of the balanced scorecard, now called CorManage. In lieu of providing additional enterprise performance management applications, CorVu provides deep balanced scorecard functionality in CorManage, including unique collaborative feedback mechanisms that provide richer analysis of cause-and-effect relationships. Customers can also easily leverage CorBusiness for building additional applications that can meet various needs within the organization. In addition, CorVu has announced a portal offering to provide an even richer and integrated collaborative framework and is continuing to improve its Web deployment capability. Gentia Gentia was the first provider of a balanced scorecard application through its partnership with Renaissance Consulting. After early challenges, the test of time seems to be working to Gentia’s benefit; a large set of customers now use the application. With this lead in hand, Gentia has Web-enabled the application and delivered an underlying platform for additional analytic application development. In addition, Gentia has developed two new applications to help further distribute the shared responsibility of performance and profitability: Performance Impact, a distributed performance measurement application, and Profit Impact, a profit- and cost-focused activity-based costing application developed in conjunction with Arthur Andersen. Hyperion Solutions Hyperion provides a suite of applications under its Enterprise Performance Management suite, which includes Performance Measurement (Balanced Scorecard), Benchmarking, Activity-Based Management, Strategic Planning, and Financial Management products. Hyperion came out strong in 1999 after acquiring activity-based management and balanced scorecard capability from Sapling, and new releases in 2000 will address limitations on Web deployment and probably earn BSC certification. Oracle Oracle offers a suite of applications called Strategic Enterprise Management, which includes Balanced Scorecard, Activity-Based Management, and Value-Based Management. The company has also built a common planning module that customers can use across these applications for performing the rapid planning and simulation required in e-business initiatives. These offerings are built on top of Oracle’s enterprise data warehouse infrastructure and integrate with Oracle Discoverer as well as Oracle 11i Applications. Considering Oracle acquired these apps just recently, it has done a good job of integrating them into its core architecture and gaining initial customer traction. PeopleSoft PeopleSoft has created a suite of applications it calls Enterprise Performance Management, which provides business intelligence for strategy, planning, executing, measuring, and analyzing the business, work force, and customer. While PeopleSoft provides business process management applications such as Balanced Scorecard, Project Analysis, Supply Chain, and Activity-Based Management, it has also created additional linked analytic applications for the entire organization. These applications operate in conjunction with PeopleSoft ERP and CRM applications and its enterprise data warehouse infrastructure. PeopleSoft has just delivered on its first wave of these applications, but the company has already demonstrated viability with customers. SAP SAP has two goals: to create a strategic focus with balanced scorecard and translate strategy to action with strategic enterprise management. To those ends, it offers five key applications: Business Planning & Simulation, Corporate Performance Monitor, Stakeholder Relationship Management, Business Consolidation, and Business Information Collection. SAP has invested heavily in helping customers communicate and collaborate with stakeholders inside and outside the enterprise. It also provides shared models such as key performance indicators (KPIs) for organizational units (IT, HR, and so on) that link top-down strategy with human capital assets through knowledge networks, and offers a stakeholder relationship management application that supports value-chain collaboration and communication. To adapt to the continuous change of business and e-business initiatives, SAP also offers scenario planning through Business Planning & Simulation. All these capabilities are built on top of SAP R/3 and Business Information Warehouse infrastructure and enabled through point applications. They will also integrate with the mySAP workplace, which aligns content with functional roles. SAP clearly wins the award for breadth of applications, but not necessarily for depth. SAS SAS is the newest vendor to deliver a packaged solution, although it has been building expertise with its existing SAS Solution for Balanced Scorecard for some time. Later this year, SAS will release Strategic Vision, a much more integrated package that is expected to be BSC certified. SAS is focusing on providing a more adaptable framework that can meet the existing challenges in areas of communication, coordination, and collaboration around the balanced scorecard. SAS also offers separate applications — CFO Vision and IT Vision — that most people would consider part of enterprise performance management.

Breakdown

In late 1997, Meta Group identified a convergence among business intelligence, online analytic processing (OLAP), and analytic application products and created a corresponding model called business performance management (BPM). This model focuses on enabling the management and control of business processes and performance through technology, tools, and applications. As it has become popular, the term has stretched into different directions, but at its heart BPM defines business processes and requirements in the context of a business model prior to focusing on any technology solution. The model has four dimensions — business model, information supply chain, technology framework, and customization/assembly — and also involves the process by which organizations use them to make a decision on a particular software implementation approach.

The challenge today is that companies are investing significant resources (financial and human) in acquiring technology and tools, yet failing to integrate them with business processes — leading to increased operational costs and decreased productivity. Though the intentions are good, creating performance measurement systems with tools (business intelligence, OLAP, and so on) that are not linked to business processes or corporate strategies will not improve businesses operations.

Because of the fast pace of business and end users’ continual quest to automate and improve their business processes, analytic applications that focus on business processes (customer churn and retention, managing organizational performance, and so on) have become the latest information-management strategy. This trend has also influenced the traditional business intelligence tool vendors — such as Cognos, Business Objects, and Brio Technology Inc. — to refocus their product strategies and investments in providing analytic applications. But just like other terms that the industry has embraced, disparate vendor implementations have extended the definition of “analytic application” and confused the market. For example, some analytic applications move beyond performance measurement to support a decision-making process that can assess, monitor, optimize, and manage business processes.

We can segment analytic applications into three key categories: front office, or customer relationship management (CRM), that evolves around a customer life cycle; management office, or enterprise performance management, that evolves around an organization; and back office, or enterprise resource planning (ERP) or supply chain management (SCM), that evolves around resources and operational processes. Although these categories are distinct, an application in one category may very well need to access or integrate information from the other areas.

Enterprise performance management (also sometimes called strategic enterprise management) — our main focus here — is associated with systems that focus on managing the organization; it includes apps such as balanced scorecard, economic value-added, value-based management, and activity-based management. Initially, only a few vendors played in this category, but within the last year all major providers have moved in this direction.

For example, one set of vendors involved in this area are from the ERP industry or are niche providers; ERP vendors include Baan, Oracle, PeopleSoft Inc., and SAP, while niche providers include Corvu Corp., Gentia Inc., Hyperion Solutions Corp., Pilot Software, Prodacapo, and SAS Institute Inc. The ERP vendors are now enriching their packaged data warehouse with business models and metrics that can encapsulate the entire business as the foundation for their balanced scorecard applications. This approach addresses some of the common integration and infrastructure issues that have plagued them to date. While many industry observers initially doubted the ERP vendors’ ability to move beyond their current customer base, recent customer activity conflicts with this view.

Balanced Scorecard, Today and Tomorrow

As I’ve explained, the balanced scorecard is an application for measuring and managing an organization’s business strategy. It encapsulates business strategies and sets objectives and measures along the internal process, financial, customer, and learning-and-growth perspectives. It also provides the framework for feedback loops through cause-and-effect relationships to help organizations manage business strategy. However, the balanced scorecard — as well as the larger suite of enterprise performance management applications — must now expand to fully automate the planning, implementation, measurement, monitoring, and management of business strategy as well as to coordinate and communicate that strategy to any internal or external stakeholder.

Initially, organizations implemented balanced scorecards through custom applications and focused on high-level strategy management and relationships in four key areas: customers, financials, internal processes, and organizational learning and improvement. Eventually, the industry began to build packaged application environments to fully automate the balanced scorecard management theory. In 1997, Gentia Software and Renaissance Consulting teamed up to build the Renaissance Balanced Scorecard. (See Figure 1.) While this product was an innovation at the time, the mainstream market wasn’t ready for packaged applications; Gentia struggled initially but has begun to prosper based on its early investment. Since then, more than seven major software providers have introduced a balanced scorecard application, which, considering the unknown market size and focus, is probably an excessive number (although it has encouraged some interesting competition among vendors).

FIGURE 1 Gentia renaissance balanced scorecard.

In 1999, Kaplan and Norton founded the Balanced Scorecard Collaborative (BSC) to facilitate the worldwide awareness, use, enhancement, and integrity of the balanced scorecard application as a value-added management process. The organization provides education, training, and research and development to share best practices; it also certifies software vendors that meet initial functional standards that support the original definition. (These standards are fairly low, but we should expect to see continued enhancements in the near future.) The minimum acceptance criteria include proven functional capabilities for strategy definition, company perspectives, objective definition, measure management (definition and targets), cause-and-effect linkages, and strategic initiatives. Products from Gentia, CorVu, SAP, Oracle, and PeopleSoft have already earned certification, and by year-end, releases from Hyperion and SAS should also join that list. (See sidebar, “On the Table” on page 35.)

To address the e-business impact on balanced scorecards, the BSC has formed an alliance with Mainspring, a strategy-consulting firm, to research and develop extensions to the scorecard for encapsulating e-commerce. But beyond the BSC and its activities, the key area of improvement required involves establishing a communication and collaboration framework among all stakeholders, inside and outside the organization, that are part of the business management process. This framework will support the capture of strategy planning and scenario processes to properly leverage and manage corporate assets. Other areas of improvement include adding industry benchmarks as part of the scorecard process as well as adding more applications as part of a broader suite supporting business planning and activity-based management.

The E-Business Balanced Scorecard

As these efforts indicate, the rapid impact of e-business and the investment in technologies that leverage the Internet have left the balanced scorecard without the proper extensions and metrics for measuring or managing a company in the e-business world. Early adopters and new players are leveraging technology in this paradigm shift and challenging existing assumptions and barriers, so their competitors must update existing management practices to survive. For example, the new technologies have disrupted traditional business practices and value chains through changed and inverted customer and supplier relationships and introduced new forms of value and innovation in business. The exponential value of external constituents as part of a business ecosystem extends traditional value-chain development, because strategies evolving around decreasing costs and increasing revenue will not necessarily lead to increased shareholder value.

Thus, the expanded balanced scorecard must be able to represent e-business models, assess the sustainability of their positions in their respective ecosystems of networked partners, and understand the nature of the business value exchanged within the ecosystem. Next, it must help you determine the value propositions of the ecosystem constituents through explicit value linkages.

E-business paradigms have induced four important shifts: Business strategy has become dynamic, the planning horizon has extended from years to months, technology is considered a disrupter instead of an enabler, and intuition and insight are as pivotal as traditional analyses. Therefore, a corresponding shift from traditional transaction-based to value-based assessment must occur and include the right e-business metrics. To make the balanced scorecard support these metrics, scorecard measurements must evolve and extend the initially defined perspectives (see Figure 2):

FIGURE 2 The e-scorecard.

• From Financial to Business Impact Assessment. The scorecard application must measure the impact of organization-hidden assets: intellectual capital growth (internal and customer), network capital, human capital, and structural capital. New metrics involved here include network and human utilization, human capital misalignment, and market capitalization contribution.

• From Customer to Customer Relationship Management. The metrics that are now associated with the customer lifecycle — quality, delivery, and so on — must extend to include additional key items that tie-in to new value propositions. Measuring continuity along the customer life cycle and channels of communication will also be very important. New measurements such as customer bandwidth, total relationship value, and enterprise relationship coverage (inside and out) are important here.

• From Internal Process to Value Chain Management. Internal processes must evolve to become part of a business network inextricably linked to external constituents and where traditional enterprise barriers have been removed: new supply chains around communities of interest and customer wants and needs. New metrics such as total cost of ownership for business processes, time-to-value process, collaborative coefficients, and process scope are crucial. For example, the collaborative coefficient is a predictive measure that indicates an organization’s “agility” to partner with other organizations to achieve a common goal.

• From Learning and Growth to Organizational Learning and Process Improvement. This perspective must evolve to focus on the development of organizational knowledge resources because new technologies eliminate distinct organizational boundaries and capital and assets turn over ever more quickly. New measurements would include percentage of project failures and contribution to, and use of, information assets.

• Investment Impact. This new category would measure the “exposure” of e-business investments. These types of investments cannot be measured by ROI; rather, you must manage them as you would an investment portfolio with varying levels of risk. New real options analysis (ROA) measurements would be involved here.

One of the next goals to extend balanced scorecards and manage e-business activities should be to integrate activity-based management applications that focus on cost and cause-and-effect by understanding complex business drivers, streamlining business activities, and eliminating nonvalue processes. Two recent books explain these principles in detail: Cost & Effect by Robert S. Kaplan and Robin Cooper (Harvard Business Press, 1998) and Cornerstones of Decision Making by Steve Player (Oakhill Press, 1999). Indeed, the use of activity-based management principles as a foundation for balanced scorecards may not only ensure that e-business initiatives are done right, but that the right things are done at all.

Outlook

Meta Group believes that by 2003 more than half of the Global 2000 will use information policy to encourage directed autonomy. Furthermore, the highest performing business (in terms of agility and market valuation) will have transitioned to the use of information as its primary currency (or to infonomics, as we call it). The challenge is that business has not evolved to understand how to put a value on information and infrastructure/interface assets — an ideal application of the e-business-aware balanced scorecard. To evolve into e-businesses, companies must invest in areas where there are potential tangible, as well as intangible, returns on investment in information infrastructure. A traditional focus on the bottom line — operating margin improvement, cost reduction, and revenue growth — is not as important when implementing e-business infrastructure.

The balanced scorecard application will continue to evolve through corporate innovation and vendor evolution, but it will have to expand to better automate business management and to integrate additional analytic, operational, and collaborative capabilities. The exponential growth of the balanced scorecard industry in the last year proves that the future will bring the innovations and extensions required to support the e-business era.

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