To realize the benefits of costly business process reengineering, companies need a control mechanism that links performance evaluation to strategic objectives. Yujong Hwang and Robert A. Leitch
Balanced Scorecard: Evening the Odds of Successful BPR
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ith intense competition and pressure from a rapidly changing business, economic, and technological environment, companies are eager to find ways in which IT can add value to their products and services. The results of such efforts, however, can be dismaying.The required changes are typically pervasive and complex, reaching into the organization’s socio-technical environment— far beyond the technical aspects of implementing a particular information system (IS). Researchers have long addressed how to control, measure, and evaluate this business process reengineering (BPR), but many so-called solutions continue to focus almost exclusively on the technical aspects of change. One study estimates that the IS development failure rate is greater than 65 percent, which should make it clear that the technical focus is not sufficient. Reshaping the organizational culture is critical to wide-scale acceptance and understanding of the new business processes (“A Process Model for Successful CRM System Development,” H. Kim, IEEE Software, July-Aug. 2004, pp. 22-28). Another study found that more than 40 percent of senResources ior managers and more than 90 What is a Balanced percent of all employees surScorecard? veyed did not believe they clearly understood their com-
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pany’s strategy (“Turning Strategy into Action in Financial Services,”Y. Rousseau and P. Rousseau, CMA Management, Dec. 2000, pp. 25-29). Less clear is why BPR—and by extension IS development—is often unsuccessful. Some believe the fault lies with the dearth of solid, easy-to-use management tools for evaluating,prioritizing,monitoring, and controlling IS development. Others believe the process is out of balance,skewed too far toward hardware and software details. We agree that balance is important, in that IS development must address both the technical and social environment in concert. Several IS studies suggest integrating BPR and a balanced scorecard (BSC) to control, measure, and evaluate BPR. Essentially, BSC is a set of measures linked to an organization’s critical success factors—a comprehensive system that measures key areas of business performance and links long-term strategies with short-term actions. As such, BSC becomes the foundation for a strategy that will accomplish the organization’s objectives and serves as an evaluation tool to monitor progress toward those objectives.The “What Is a Balanced Scorecard?” sidebar explains BSC’s characteristics in more detail. Despite BSC’s potential as a BPR control mechanism, relatively few applications, such as enterprise resource planning (ERP), use it. One reason might be that IS managers view BSC solely as a
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measurement system, failing to see its potential as a management system that can help them clarify the organization’s vision and strategy, and translate both into a set of actions. A few efforts have shown BSC’s value as a management tool. Maris Martinsons and colleagues used a BSC framework to evaluate the IT activities of three large companies in Hong Kong. The authors found that the companies failed to provide causeand-effect relationships for key measures and were unable to get a commitment from major stakeholders. They also suggested the need to tie BSC implementation to a standard theory such as BPR. In this article, we present a control and evaluation framework, BSC-IS, that integrates BSC and BPR in the context of an IS or ERP project. We view BSC-IS as the roots of a solid evaluation tool for companies struggling to make costly BPR pay off.
MANAGING THE DIMENSIONS OF CHANGE BPR is a strategy-driven organizational initiative to improve and redesign business processes, usually undertaken to gain a competitive advantage. Critical process measures such as quality, responsiveness, cost, flexibility, satisfaction, and shareholder value push changes in the relationships among management, information, technology, organization structure, and people. BPR initiatives identify processes, set reengineering performance goals, and plan for organizational changes, consistent with strategic objectives. In short, BPR is tremendously complex, requiring both quantitative and qualitative performance measures throughout IS development and implementation. Quantitative control measures address such project aspects as cycle time,cost,and defects, while qualitative control looks at employee morale and political forces. Without qualitative control, the IS implementation would drift away from the organizational strategy and objectives with little hope of a course correction. One reason for BPR’s complexity is that a company is in essence a socio-technical system—a mix of hardware, software, people, surroundings, regulations, data, and data structures. In such a system, a business process comprises constantly interacting technical and social subsystems.Sociotechnical designers aim to optimize the entire business process by identifying social-system boundaries, values, formal and informal information flows, and employee skill levels. IT or IS benefits are thus both financial and intangible,
What Is a Balanced Scorecard? When Robert Kaplan of Harvard Business School and management consultant David Norton developed the balanced scorecard (BSC) in the early 1990s, their intent was to bridge the gap between objectives set by high-level managers and the actions of frontline employees. Recognizing some of the weaknesses and vagueness of previous management approaches, the BSC approach provides a clear prescription as to what companies should measure to “balance” the four critical perspectives in the organization: financial, customer, internal process, and learning and growth perspectives. Kaplan and Norton suggest that the scorecard should do two things: measure performance against goals and address whether those goals are still appropriate. The “balanced” part of BSC is its consideration of both the tangible and intangible dimensions of change. The “scorecard” part fits because it scores components according to how they fit with an organization’s critical value-creating activities. Because it integrates both behavioral and output components, BSC is highly suitable as a framework for management control. Companies can use it to define specific actions or expected results for both units and individuals, and to link these to strategy. Most important, BSC is future oriented, with both leading and lagging indicators. Including future indicators is critical to any mechanism that must control the complex interrelations that determine a business’ success. Before BSC, companies looked at business performance mostly through financial and accounting measures, which are mostly lagging indicators of an organization’s health. Not surprising, this tendency transferred to enterprise resource planning (ERP) projects. Current financial measures provide little guidance on how to manage future development or on what the company must modify to enhance the development process. Financial performance measurement such as economic value added (EVA) is effective only for short-term control, not for setting long-term expectations. BSC overcomes this short-term myopia and focuses on the future by providing leading indicators to control development and link it to strategy. Performance measures support strategy and control ERP both short-(performance) and long-term (expectation). BSC also integrates quantitative and qualitative measures. This is important because most qualitative measures, such as customer satisfaction and employee attitudes, can be subjective and hard to measure, making their application to specific strategic objectives difficult. Finally BSC makes cause-andeffect links between short- and long-term measures explicit, which is also essential in managing complexity.
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Figure 1. Four performance perspectives in BSC-IS and sample measures for developing ERP systems.
CAPTURING PERFORMANCE DRIVERS
Most BPR efforts must consider what drives four performance domains: learning and growth,internal processes, customers, and finance. This is where Business value BSC has the most value because within • Long-term value benefit • Total cost of ownership these domains, or perspectives, BSC • Short-term profitability • ERP implementation cost links short-term drivers to long-term • Shareholder value • Economic value added (EVA) • Net product value (NPV) improvement • Strategic benefit performance using cause-and-effect • Strategic positioning • ERP budget control relationships.By making the cause-andeffect hypotheses among BSC objectives and measures explicit, companies can test their strategy in real-time and User orientation adapt as they learn. Customer satisfac• User information satisfaction • User information responsiveness tion, for example, is a leading indicator • Information quality • User friendliness of financial performance,but it can also • User information reliability • Customer satisfaction be a lagging indicator of on-time deliv• External data compatibility • Customer relationship • User information assurance • Service quality ery.Assessing multiple indicators gives IS managers much more control over strategy, in the same way a pilot uses different instrument panels to control a jet. Internal process BSC captures the organization’s crit• Workflow improvement • Standardization • Defects reduction • Interorganizational effectiveness ical value-creating activities and their • Intraorganizational effectiveness • Work design improvement interrelationships—recognizing, for • Cycle time reduction • Supply chain efficiency example, that one activity might be a • Process efficiency • Process reliability leading indicator of another—and explicitly links activities and relationships to organizational strategy and objectives.The result is a strategy map Future readiness that solidly connects critical value-cre• Organizational culture • Continuous learning ating activities within performance • Interpersonal trust • Communication • Employee turnover rate • Information integrity domains to what the organization • Commitment • IT goals and values views as ultimately value-adding— • ERP use motivation • IT competence value that is often expressed financially. • Information ownership • Multiskilled workers This concept fits particularly well with ERP system development and implementation. In a 2005 study, IS researcher Khawaja Saeed and colleagues successfully reflecting the immense variety of interacting social and techapplied a BSC framework to e-commerce systems develnical factors that complicate control and evaluation. opment using CRM, e-commerce competence, and shortBPR affects the socio-technical system by changing (economic value added, or EVA) and long-term (Tobin’s human resources and associated tasks, as it aims to improve Q ratio) performance measures. (EVA is a measure that employee well-being and process efficiency.The emphasis attempts to gauge an organization’s true economic profit. is on continual learning, constant change, and the perTobin’s Q ratio is the market value of a firm’s assets divided formance of multiskilled individuals in an environment by the replacement value of those assets.) comprising myriad cause-and-effect relationships. Figure 1 shows our proposed BSC-IS framework with a For most organizations, BPR fits under the umbrella of sampling of drivers (by no means comprehensive) for four some ERP implementation, an enterprise-wide software performance perspectives that roughly parallel the four solution designed to streamline the data flow among funcdomains described earlier.BPR drivers include change mantions in an organization and business partners. Key ERP agement, cultural issues, environmental factors, and sociovendors, such as SAP and PeopleSoft, support the idea of technical attributes with their cause-and-effect relationships. a socio-technical system through products that streamline Among those,the IS literature continually suggests that orgacustomer relationship management (CRM) and supply nizational culture, trust, commitment, and competence are chain management. 26
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Figure 2. Ouchi’s framework for organizational control. Ability to measure outputs
measures of future readiness.Workflow and supply chain improvements, process efficiency, and cycle-time reduction are measures of internal process, according to operational research and BPR studies. User (customer) satisfaction, information quality, reliability, and service quality are measures of user orientation, according to IS and marketing literature. Finally, short-term and long-term performance, shareholder value, net present value (NPV) improvement, EVA, and strategic benefit are measures of the business value, according to performance measurement and managerial accounting literature. As this partial list of measures demonstrates, attention to socio-technical requirements, such as stakeholder commitment, are an important part of using BSC to control and evaluate an ERP implementation. Moreover, anyone with a vested interest in the business process can be a stakeholder—not only employees involved in process activities, but also suppliers and customers within the company’s e-commerce environment. Commitment from all these stakeholders must be strong for BPR to take root.
High
Behavior/output measurement
Output measurement
Low
Behavior measurement
Culture, ritual, and ceremony
Perfect Imperfect Knowledge of the transformation process
Companies decide if certain measurements are possible by looking at two dimensions: their ability to measure output and their knowledge of the transformation process. If one of the two dimensions is low or imperfect, only certain measurements are possible. These relationships serve as the basis for control in BSC-IS.
ORGANIZATIONAL CONTROL Figure 2 shows how organizational control mechanisms could integrate output measures (vertical axis) with knowledge of the transformation process (horizontal axis)—a framework that business management professor and author William Ouchi proposed. Ouchi argued that if the capability to measure outputs is low and the knowledge of the transformation process is imperfect, culture, ritual, and ceremony will follow. The knowledge of the transforma-
tion process depends heavily on the number of programmable tasks—precisely defined behaviors necessary to, for example, produce a product. Thus, an organization with few programmable tasks and a low ability to measure task output must rely on organizational culture for control, rather than on formal controls, such as production line performance reports.
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Value-based management control
Figure 3. Organizational control in BSC-IS for types of ERP projects.
High (easy to measure)
ERP: Comprehensive (balanced scorecard) Honda and CauseCanon effect knowledge
ERP: Middle road (EVA/ financial performance) Xerox and Coca Cola
• Middle-of-the-road implementation falls between the vanilla and comprehensive extremes. This approach is popular with companies that want to implement ERP system according to their particular integration needs.
The primary difference between our framework and Ouchi’s is that we emphasize socio-technical requireERP: Middle-Road Low ments, rather than just the degree to (customer/ process (difficult ERP: Vanilla which an organization can program satisfaction) to measure) (clan control) Dell and Bose the tasks in the transformation St. Johns Health System process. Deep knowledge of the transformation process without the ability High Low (Well defined, known) (Not well defined, unknown) to measure output or action is not sufficient for BPR with BSC-IS control. Knowledge of the socio-technical process Those responsible for BPR must use The control mechanism depends on the tension between value-based manthe control strategy—clan control, agement and the knowledge of the company’s socio-technical process. BSC-IS, financial performance, and BSC-IS also considers cause-effect relationships among the four quadcustomer/process satisfaction—that rants. Without making these relationships explicit, there is little chance of fits the level of the organization’s a successful comprehensive ERP implementation with BSC-IS control. value-based management and sociotechnical knowledge. As Figure 3 shows, all these control strategies rely on how well the organization understands cause-and-effect This informal control has two major drawbacks. First, it relationships. takes time to work effectively because it is based on the organization’s history and governance structure. Second, benchmarking success factors or strategies can be challenging. Low-low: Clan control At the other end of the spectrum, if measurement capaAs Figure 3 shows, the low-low quadrant leads to clan bility is high and process knowledge is accurate, the use of control, which is typical in a vanilla ERP project. Clan conbehavior and output measurements can effectively control assumes that people ultimately determine their own trol an organization because it is far easier for control sysbehavior, meaning that influence comes only as shared tems to focus on actions that are likely to lead to valued goals, values, and norms—the social component of a sociooutcomes. The selection of strategies in Ouchi’s control technical environment. With no explicit restriction on mechanism is based on varying degrees of output measmembers’ behavior, clan control implies the presence of urability and task programmability, but the effectiveness of more interpersonal respect and less mistrust. Rajib Kohli an organization’s informal controls will also influence an and William Kettinger described one such ERP project for organization’s control mechanism. St. Johns’ Health System, an acute-care community hosFigure 3 shows the organizational control mechanism in pital, which used clan control as a knowledge management BSC-IS, which substitutes value-based management and and control tool. The implementation of a physician prothe knowledge of the company’s socio-technical process filing system was successful only after the hospital incorfor the two dimensions in Ouchi’s framework. We have porated physician clans into the control mechanism rather inserted examples of three types of ERP projects to give than depending on managerial authority to make control a practical reference for our theory: decisions.The cause-and-effect relationships among future readiness and other perspectives are unclear in this quad• Vanilla ERP is a noncustom ERP implementation poprant (even if the organization assumes them) since social ular with companies that want less BPR and require only measures are hard to evaluate. limited ERP functions. Clan control fits well with a vanilla ERP system because • Comprehensive is a custom implementation generally such implementations usually involve undocumented adapted from a vendor’s release to fit a particular set of development standards about the organizational culture business processes. This approach is popular with comor employee habits, which would be consistent with “difpanies that want a comprehensive effort (implementing ficult to measure.” For example, vanilla ERP systems all ERP modules) and have the resources to support it. require less BPR, emphasizing instead the social (future 28
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readiness) rather than technical change. Vanilla ERP systems also require only limited functions. Control is largely informal, but certain dimensions, such as cultural control, are still important to implementation success. Cultural control is part of evaluating how users perceive the IS implementation and project based on their values. It is particularly important in a vanilla ERP approach, although the other ERP approaches also emphasize these aspects. In this implementation environment, prototyping the change process for the various stakeholders to develop a more concrete appreciation of the process is an effective way to facilitate communication and build commitment. Individual and team activities, work design, and decision participation are also useful. It is important to engage in open and honest communication at all levels and throughout an ERP implementation. In 2005,Yujong Hwang verified empirically that informal control of ERP system development is an important antecedent of systems implementation success and adoption.
High-high: Balanced scorecard At the other extreme, in the high-high quadrant, are comprehensive ERP implementations, in which BSC-IS will be the most effective. Management control—and thus BPR control—is much easier because with high socio-technical understanding the organization can clearly delineate cause-and-effect relationships among output measures (business value) and behavioral measures (customer, process, and readiness). Honda leveraged itself in designing engines for specific market segments—motorcycles,automobiles,lawn mowers, and utilities—using total quality management and BPR. Canon also leveraged itself in designing cameras, copiers, fax machines, and printers.All these capabilities are based on a balanced strategy to select individual and organizational capabilities for the internal, customer, and financial objectives. BSC-IS can be useful in this situation, helping a company understand the causal relationship and specific measurements of behavior and output or actions. Comprehensive ERP implementation with the configuration of BPR modules fits well with BSC because it’s easy to manage a detailed system development methodology—one that involves all modules of the ERP package—with output, action, and behavior measures.
High-low: Financial performance
Resources Balanced scorecard approach to BPR ➤ “The Balanced Scorecard: A Foundation for the Strategic Management of Information Systems,” M. Martinsons, R. Davison, and D. Tse, Decision Support Systems, Sept. 1999, pp. 71-88. ➤ “Integration of Systemic Quality and the Balanced Scorecard,” J. Solano and colleagues, Information Systems Mgt., Winter 2003, pp. 66-81. ➤ “A Process Model for Successful CRM System Development,” H. Kim, IEEE Software, July-Aug. 2004, pp. 22-28. ➤ “Score It a Hit,” D. Young, CIO Enterprise, 15 Nov. 1998; http://www.cio.com/archive/enterprise/111598_score.html. ➤ “Using the Balanced Scorecard as a Strategic Management System,” R. Kaplan and D. Norton, Harvard Business Rev., Jan. 1996, pp. 75-85.
IS development ➤ “Enterprise Integration with ERP and EAI,” J. Lee, K. Siau, and S. Hong, Comm. ACM, Feb. 2003, pp. 54-60. ➤ “The Implementation of BPR,” V. Grover and colleagues, J. MIS, Jan. 1995, pp. 109-144. ➤ “Informating the Clan: Controlling Physician Costs and Outcomes,” R. Kohli and W. Kettinger, MIS Quarterly, Sept. 2004, pp. 363-394. ➤ “Investigating Enterprise Systems Adoption: Uncertainty Avoidance, Intrinsic Motivation, and the Technology Acceptance Model,” Y. Hwang, European J. Information Systems, May 2005, pp. 150-161. ➤ “Profiling Successful Reengineering Projects,” J. Teng, S. Jeong, and V. Grover, Comm. ACM, June 1998, pp. 96-102. ➤ “Sustaining Process Improvement and Innovation in the Information Services Function: Lessons Learned at the Bose Corporation,” W. Harkness, W. Kettinger, and A. Segars, MIS Quarterly, Nov. 1996, pp. 349-368.
Performance evaluation ➤ “A Conceptual Framework for the Design of an Organizational Control Mechanism,” W. Ouchi, Mgt. Science, Sept. 1979, pp. 833-848. ➤ “Information Systems Evaluation: Navigating Through the Problem Domain,” Z. Irani, Information and Mgt., Aug. 2002, pp. 11-24. ➤ Management Control Systems, K. Marchant and W. Van der Stede, Prentice Hall, 2003. ➤ “The Relationship of E-Commerce Competence to Customer Value and Firm Performance: An Empirical Investigation,” K. Saeed, V. Grover, and Y. Hwang, J. MIS, Summer 2005, pp. 223-256.
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Figure 4. Sample strategy map within the BSC-IS framework. Business value Achievement of user factors
Determine user measures
ESTABLISHING CAUSE AND EFFECT Measuring outputs or actions in a BSC-IS framework is possible only with a clear understanding of cause-and-effect relationships between behavioral and technical variables. Companies using this framework must establish cause-and-effect relationships to control the socio-technical aspects of BPR at each strategy link. In all three ERP implementation types, socio-technical issues are the key to forming a strategy map, a blueprint for implementation based on causal relationships; this blueprint is the main control vehicle. Figure 4 gives a sample strategy map for an ERP system implementation with BSC-IS’ control mechanism.
User orientation Achievement of process factors
Determine process measures Internal process Determine readiness measures
Achievement of readiness factors Future readiness
The map highlights key causal relationships among the four performance perspectives in Figure 1. Companies can use these relationships to drive and monitor implementation during comprehensive ERP implementation. In all cases, the organization must control socio-technical requirements.
conducive to middle-of-the-road ERP systems with moderate BPR and cause-and-effect understanding. In the highlow quadrant (where value-based management outcomes are easy to measure, but socio-technical process knowledge is fuzzy), EVA or another financial-performance measurement system will be the most effective. Xerox used earned revenue to control its overall business process until late 1970 with its monopoly on paper copiers. Coca-Cola is famous for successfully controlling its business process with EVA as a value-based management system. Both companies used advanced financial systems (output measures with moderate cause-and-effect understanding) for control rather than a socio-technical approach like BSC-IS.
middle-of-the-road ERP implementation. Bose Corp. has also realized dramatic improvements in the delivery of information and services for process management using BPR, according to a case study by Bose’s director of total quality Warren Harkness and colleagues.
C
ompanies can implement BSC-IS control under a variety of guises, in work driven by rapidly changing technologies and organizational environments.We have given a flavor of how an organization might use BSC-IS to control, measure, and evaluate the development of BPR within an ERP implementation—as a tight control system based on measurability and knowledge of the socio-technical process across different ERP implementation types. BSC-IS will also serve practitioners who want to enhance business value using ERP systems. Companies can add value by linking IS development to a long-term strategy for internal control and relationships with business partners. However, BPR and ERP implementation is never straightforward. Different situations call for different strategies, and organizations must also deeply consider their particular culture and strategic position in the context of this framework. In the end, ERP will always be work, but with proper control through a framework that leverages the power of BSC, that work will ultimately yield the envisioned benefits. ■
Low-high: Customer and process satisfaction In the last quadrant, low-high (difficult-to-measure management outcomes but well-defined or known socio-technical process with moderate cause-and-effect understanding), the most effective control mechanisms are based on measures of customer satisfaction and process effectiveness. Dell focuses on customer satisfaction and internal and external process effectiveness using the Internet. Its management control model is decentralized and depends on the sociotechnical approach rather than value-based management controls. These characteristics fit well with a decentralized, 30
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Yujong Hwang is an assistant professor of management information systems and e-business at the School of Accountancy and MIS at DePaul University. Contact him at
[email protected]. Robert A. Leitch is a professor of accounting and the Wilbur S. Smith Distinguished Foundation Fellow at the University of South Carolina’s Moore School of Business. Contact him at
[email protected].