As one traverses organizations in a company, the further you get from a business group responsible for producing products and services that generate revenue, the more difficult it is to describe the business value delivered. Among all the Business Support organizations in a company (eg Sales, Support, HR, Finance, IT, etc) IT is probably the most challenged because not only is IT a Business Support organization positioned deep within the company, IT is also a very complicated subject area that most normal business-minded folk prefer not to burden themselves to try to understand. So, it’s often up to IT to put the hard work in to build the necessary business acumen to resonate with their business partners. It’s no surprise “Business and IT Alignment” is one of the most popular topics in IT forums for the past decade.
For the remainder of this blog post, I’ll focus on understanding Business Value and posit how to think of it in terms of alignment between IT or any other Business Support organization.
What is Business Value? Wikipedia’s definition of Business Value is very good but very lengthy. In my travels, I use a more simple definition, “Business Value is any perceived value of an organization by its stakeholders”. The point being only folks outside an organization can claim another organization delivered business value. The question now becomes “How should an organization measure business value?” The solution must be flexible to support all quantitative, qualitative, and probabilistic expressions of business value an organization’s stakeholders care about inclusive of informal expressions like “Good job!” statements from stakeholder organizations to the more formal expressions like Return on Investment, Net Present Value, or Key Performance Indicators like Contribution Margin, GMROII, Units Shipped, or % Risk Avoidance. In addition, the solution can’t require PhDs in advanced mathematics. The solution has to be simple, accurate and obvious to stakeholders.
Business Value measures success via KPIs
As it turns out, over the past 20+ years the top-rated business management schools in the world like Harvard Business School and Stanford University in collaboration with numerous business management groups (eg Bain and Company, Balanced Scorecard Institute) and thought leaders in the private sector (eg Southwest Airlines, Volkswagen and Cisco) have matured a powerful solution called the Balanced Scorecard methodology. The Balanced Scorecard is used in over 60% of Fortune 1000 companies with benchmarked case studies averaging 30%+ CAGR for organizations who adopted the methodology. The Balanced Scorecard methodology is considered the de fact standard for measuring and managing business value and it is done through a carefully managed scorecard of key performance indicators (KPI).
What is a KPI? A KPI is a performance indicator used to express a project’s success or an organization’s success. KPIs make strategic objectives quantifiable. But, what makes a performance indicator ‘key’? The answer is perspective. That is, if an organization or a project team feel a performance indicator represents it’s measurement of success, then that performance indicator is a ‘key’ performance indicator for that project or organization. An often overlooked property of KPIs, and I’d argue the most important property, is the KPI’s date-bound KPI Target. KPI Targets provide the explicit expectation what success looks like and when. By subtracting the KPI’s Baseline from the KPI Target, one can calculate how much business value was realized.
The KPI is the canonical representation of Business Value
Douglas Hubbard proved that “if a thing can be observed in any way at all, it lends itself to some type of measurement method” (see How To Measure Anything). KPIs support any expression so they are innately compatible with every known expression of business value known to man. In a sense, the KPI is the canonical representation of Business Value. Because the balanced scorecard is widely used to represent business strategy, not only do KPIs allow us to express any type of business value, but when KPIs are used in the balanced scorecard methodology, they also express strategic value by definition.
Another important use of KPIs is their use by leadership to incent change in an organization. I’ve witnessed KPIs and KPI Targets used to make an organization snap to attention and focus on improving important areas of the business. For example, I worked for a Business Support organization where the leadership wanted to improve stakeholder satisfaction from the stakeholder organizations they partnered with. Their scorecard already monitored the “Stakeholder NSAT” KPI. The leadership simply cranked up the KPI’s Target from the previous year’s KPI Target value by 25%. The organization definitely felt the pressure. They quickly organized themselves and brainstormed ideas how to achieve the new, and fairly daunting, KPI Target. After several sessions honing ideas, the organization decided to make a project investment scoped to increase the formality of their account management engage processes from the first point of contact, to project delivery, then sustainment. It also included a closed-loop feedback management process to capture and disposition all stakeholder feedback. The project was successful and the organization realized greater satisfaction with their stakeholders than ever recorded.
Good and bad quality KPIs. Let’s take a moment and talk about what a good KPI is. First of all, any KPI that a direct stakeholder considers ‘good’ is good. We always strive for perfection however when it comes to using KPIs as a measure of business value an organization must first start with what their stakeholders offer to us as our measure of success no matter how imperfect it may be. So, if a stakeholder prefers to provide the feedback of business value delivered via a “Thumbs Up” then that’s the measure of business value to start with, regardless how crude the expression is. Ideally, we wish to monitor more objective KPIs so we can be a bit more scientific and begin to classify them (eg leading and lagging) to mitigate risk of not achieving lagging indicators. Here is a set of simple guidelines for defining KPIs that I use:
Now that we’ve landed on using KPIs as a solid expression how to express business value that’s simple, obvious and accurate, let’s test the theory by applying it to two test cases below; IT project alignment and IT organization alignment.
Test Case #1: “How to measure the business value of a project”
Core to the balanced scorecard methodology is the ‘action plan’. The action plan is simply the set of projects accountable to make the necessary change in an organization to achieve one or more date-bound KPI Targets. A best practice is to require each project charter to include KPI Targets that the immediate organization has and/or its partners use to measure success. In addition, each project should require typical project ‘leading indicators’ to monitor delivery health such as on-time, on-budget and high-quality. A well-formed set of KPIs for any project include two dimensions of success; the immediate organization’s success as well as the stakeholder’s success. The result is a direct connection of business value delivered by the project as measured by the immediate organization and/or its stakeholder’s scorecard.
Here are examples of high-quality KPIs from a project’s perspective:
Launch New Software
Grow Product Lines
# Software Units Sold
New Order Management process
Provide Reliable Business Systems
Order Management Service Performance
Enable Self-Service Order Submission
% of Orders Completed Online
$ Support Cost per Order
Partner Account Management
Improve Customer Satisfaction
Stakeholder Satisfaction Rating
Note: The “Target” and “Date” columns are super important to get right in that the KPI Targets and dates are set by the Business organization. That is, the KPI Target and the dates are scoped by the Business organizatoin's success. The “Value” column is the measure captured on the “Date” date. The principle here is that the Business Support organization’s success is defined by its own organization’s scorecard and the sucees of the Business organization’s they serve.
A best practice method I’ve implemented here within Microsoft for Business Support organizations to monitor business value realized is to include a single KPI on the Business Support organization’s scorecard such as “% Business Value Realized”. This KPI is defined as the percentage of KPI Targets achieved or underperformed by all projects delivered by the organization. Because this is a lagging performance indicator that is incredibly important to the organization, we added a leading indicator “% Charters with Organization KPIs” to ensure project teams include the immediate organization and/or Stakeholder KPIs, and their targets, on the project charter, in addition to the typical project health indicators, at time of being funded.
Test Case #2: “How to measure the business value of an IT organization”
Again, we call upon the balanced scorecard methodology. Using the balanced scorecard methodology, we leverage the concepts of themes to group objectives and KPIs and the concept of cascading to link them to stakeholder organization scorecards. Here’s an example balanced scorecard for a Business Support organization.
In the above example, scorecard cascading is done via either mirroring stakeholder Objectives (ie rounded boxes) or KPIs. Cascading is the business management term for traceability between scorecards. A well-defined scorecard results a complete balanced scorecard used to measure the success of any organization as a reflection of self-defined success as well as stakeholders organization’s success in an enterprise.
Business Value Measurement Process fuels Continuous Improvement processes
To help simplify how to ensure business value realized, I’ve helped some organizations implement a process for defining, delivering and monitoring business value. The process model is no different from the closed-loop process prescribed by business performance management but filtered to the perspective of project delivery. Here’s an example of business value measurement process I’ve used.
Note: The above Business Value Measurement process assumes that the KPIs defined in project charters are of high-quality and refer to KPIs on organization scorecards. Also note that the process steps follow Dr. Edwards Deming’s Plan, Do, Check, Act method to make the connection to continuous improvement process popular in business management practices.
Using KPIs makes it simple to monitor and track business value realized
With the foundation set for understanding how a Business Support organization contributes to business value, tracking and monitoring business value realized is simple. Assuming that all project teams enter project KPIs, KPI Baselines, KPI Targets and capture actuals at the predefined KPI Target dates, an organization can produce views of business value achieved, exceeded or underperformed pivoting organization, and project portfolio. I’ve built such views but cannot show them to do confidentiality of the information. I will share with you that the views produced are very interesting to senior leadership primarily in the situations a dispute arises or a statement is made regarding the business value of a particular project or organization is made. The views are undisputable.
When associating business value information to financial information, one can view the financial comparison of cost versus business value realized. When associating it to Value Streams, one can view where business value is focused and which product lines and customers are positively impacted and by how much. When associating business value information to IT data (application portfolio management, incident management, configuration management data) one can view and compare business value realized per application, value stream, incidents, etc. This is why having a common reference data model articulating how all these concepts (Organization, Objective, KPI, Process, Project, Application w/Cost, Incident with/Cost, People with Cost, Asset with/Cost, etc) relate becomes incredibly powerful.
Using Business Performance Management to climb the ‘Strategic Alignment’ maturity curve
Because alignment is so incredibly important I thought I’d build a graph to help explain what it means to be aligned. In the context of business strategy, alignment is a word describing an organizational design resulting in some level of responsiveness to changing business needs. I’m sure there are better definitions out there; this is just one that I made up and makes sense to me. Anyway, assuming the intent in my definition above, I’ve built a graph illustrating the typical organizational states resulting in different levels of responsiveness ultimately measured by business performance. The assumption is that the highest form of alignment is convergence expressed by Business Support organizations adopting a Business’ scorecard wholesale with no modifications. And conversely, the less aligned a Business Support organization ultimately results in divergence resulting in a lesser performing business.
Strategic Alignment Maturity Spectrum:
Holding all Business Support organizations and projects accountable to achieving KPI Targets managed by a business performance management process is a streamlined method to ensuring business value. In a sense, business performance management processes break down the organizational reporting lines that all too often encourage silo-like behavior, and allow project portfolios to be directly responsive to changing business needs.
World Class Business Support Organizations
Although business performance management processes are well-known in Business organizations, adoption by Business Support organizations is slow and often non-existent. Through the adoption of the balanced scorecard methodology to track and manage an organizations performance arguably propels itself among the leading world-class organizations in the world in terms of strategic alignment focused on delivering business value.