ICTOM 04 – The 4th International Co

ICTOM 04 – The 4th International Conference on Technology and Operations Management
591
BALANCED SCORECARD FOR ALIGNING IT STRATEGY WITH BUSINESS STRATEGY IN AN ENERGY COMPANY
Faisal Rachmadianto 1
1 School of Business Management ITB
[e-mail]
Abstract. In this paper, we look at the use of the Balanced Scorecard and how it can be used to align IT strategy with business strategy in an energy company called ABC. We can use Henderson and Venkatraman research on Strategic Alignment Model and link it with Balanced Scorecard defined by Kaplan and Norton and different variants such as IT scorecard. This paper presents a case study in analyzing alignment between information technology department and business at an energy company in Indonesia. The design of IT department BSC serving an energy company will be described and discussed. IT department is categorized as shared supporting group in this company. ABC Business Unit is one of biggest energy producer in Indonesia and IT department is playing an important role to achieve business strategy. We related Balanced Scorecard with their current strategies, objectives, targets and measurements on both the business and IT sides of the company to see if they have alignment between business and IT. The results of the case study analysis consist of a review against strategic alignment model and against a Balanced Scorecard. Future alignment research could take other method than balanced scorecard to analyze alignment between IT and business. In the future, it can also consider other energy company outside Indonesia so that it can cover a wider range of industry types, especially in energy industry
Keywords: Alignment, Balanced scorecard, Measurement models, IT management
Introduction
Survival not even success has become a major challenge in today's turbulent and competitive business environment. The basic foundation strategy that any type of business should follow is to align Information Technology (IT) with business strategies. A company should have clear business strategies and utilizes its IT system to accomplish company’s objectives. In addition, IT has become the crucial infrastructure of any company, the backbone for corporate information flow and the enabler or driver of business processes.
Many questions arise from business team regarding to business value generated by IT investments or expe/nses. That is the background that IT should measure its productivity to the business. The Balanced Scorecard (BSC) provides a methodology for measuring the value that IT achieved (Kaplan and Norton 1996, Maisel 1992).
Many contextual factors and forms part of the overall information system context influence the concept of value itself. Cronk and Fitzgerald (1997) states that “As the varying perspectives on value may moderate both the ‘actual value added to the organisation’ by the information system and ‘the value uncovered by the evaluation process’ they need to be included in appraisal techniques”. It recently kindled a heated debate on whether “IT matters” to companies anymore because of the difficulty in managing and getting value out of IT.
Practitioners and researches have long observed the importance of IT-business alignment (Chan, Copeland, & Barday, 1997; Croteau & Bergeron, 2001; Henderson & Venkatraman) IT team delivers system and services that vital to the company’s strategies and operations. At the output, executives can see contributions IT makes and IT customers are more likely to welcome and utilize IT resources.
Business value should not be seen as only a financial value although in the end run the final goal is certainly to generate revenue for the company. Business Value is the sum of the value provided to concerned parties, i.e. shareholders, customers/suppliers and employees. Balanced scorecard is one of the suitable framework to use because it looks at other perspectives than just the financial one. Nevertheless, it must be part of a process of evaluation to be successful
ICTOM 04 – The 4th International Conference on Technology and Operations Management
592
The company must outline clearly its vision, mission and strategy in building a BSC. These need to be communicated and passed on to the IT department in some way (Milis and Mercken 2003, Hu and Huang 2005). This is done by defining the IT strategy in alignment with the business strategy and bringing out which projects that will support the strategy.
In this article we look at the proposed design of the Balanced Scorecard and how it can be used to align business strategy and IT strategy. In particular, we have made a study of how the energy company ABC business unit uses their own scorecard method. We have related this to the Balanced Scorecard and compared how they have broken down strategies, objectives, targets and measurements on both the business and IT sides of the company to see if they have alignment between business and IT. We have analyzed the results of the case study in two parts firstly, a review against the Strategic Alignment Model and secondly, against a Balanced Scorecard as defined by Kaplan and Norton. We see how PT ABC has or has not accomplished alignment by the difficulty to breakdown IT strategies to lower levels and keeping them aligned with the business strategy.
ABC Indonesia Business Unit is a business unit from global energy corporation that operate diverse energy sources from oil, gas and renewable energy in Indonesia. To adhere production sharing contract between Government of Indonesia and contractor, ABC need to report all work program and budget to government body called SKK Migas. This also make additional alignment strategy for IT team in ABC besides alignment between IT and business but also alignment between IT and government body.
Many companies adopt the Balanced Scorecard but for it to gain success from an IT point of view there should be an alignment with the IT. The Balanced Scorecard for IT should be created and need to be broken down to business unit or lower level. Figure 1 show measures that is defined at each level.
Figure 1. Alignment of IT with Business BSC
In this way, the whole enterprise can pull together in the same direction to achieve its business purpose. We focus on how ABC has implemented its business and IT strategy and the scorecards they have defined to follow and to propose balanced scorecard that will make better alignment.
Research Approach
We have conducted a literature review and critical analysis of the BSC and different methods used in combination with it. We have made a case study, analyzing how fine the business and IT align by linking and examining their individual balanced scorecards.
Due to information protection at company, we took ABC as company name. The author of this paper is employed by and works “inside” ABC Company. The reasons for choosing the ABC were because they had implemented scorecards on both the business and IT and never been assessed alignment between the two.
ICTOM 04 – The 4th International Conference on Technology and Operations Management
593
The research methodology is fundamentally explanatory case study (Walsham 1995). All information regarding ABC Company were composed by reading different types of documents available through the author who is working at the company.
Analysis and evaluation between data sources were assisted by the widespread context access which let us reconfirm problems. This both strengthens validity and reduces prejudices. Workshops were used to confirm findings and enhance our understanding of certain problems
Theoretical framework
Business Value of Information System
There is no commonly agreed business value definition according to Grembergen in 2001. Cronk and Fitzgerald (1999) define “IS Business Value” as “the sustainable value added to the business by IS, either collectively or by individual system, considered from an organizational perspective, relative to the resource expenditure required”. Lundberg (2004) defines business value as consisting of two different types, value in the business itself and value in the form of reduced IT costs and can be calculated as the sum of four components: The cost savings after the introduction of an IT solution, Increased revenue after the introduction of an IT solution, Increases in key quality indicators used in the business, Difference in cost of IT since the change.
Business Value should be the difference in the value of the business after a change that has been made to that business. (Future Value - Current Value). This can be due to any type of change not necessarily IT. Another definition of the evaluation process given by Willcocks (1992) “is about establishing by quantitative and/or qualitative means the worth of IS to the organisation bringing into play notions of cost benefit, risk and value”. According to Cronk & Fitzgerald (1999) to understand “IS Business Value” one must first define the meaning of the term, which they do as: Value + Value for Money. They define the dimensions of Value as System, User and Business dependent. This is in line with Norton and Kaplan’s thinking with the Balanced Scorecard that there must be other dimensions than just financial ones.
Strategic Alignment
Lack of alignment between business and IT strategies of organizations is the main cause of the failure to realize value from any IT investments explained by Henderson and Venkatraman (1999). This strategic fit is inherently dynamic and strategic alignment is not an event but a process.
When business can utilize IT functionality on a continous basis then it can acquire competitive advantage. Lederer and Salmela (1996) stated that if the implemented project fit the business objectives, it is said to be an alignment between the two. Alignment is the degree to which the information technology plan follow the business plan, King (1978). Alignment can be seen as the degree to which tthe planning process resulted in strategic

Hasil (Bahasa Indonesia) 1:

ICTOM 04 – 4 konferensi internasional teknologi dan manajemen operasi591BALANCED SCORECARD UNTUK MENYELARASKAN STRATEGI DENGAN STRATEGI BISNIS PERUSAHAAN ENERGIFaisal Rachmadianto 11 sekolah bisnis manajemen [e-mail]. In this paper, we look at the use of the Balanced Scorecard and how it can be used to align IT strategy with business strategy in an energy company called ABC. We can use Henderson and Venkatraman research on Strategic Alignment Model and link it with Balanced Scorecard defined by Kaplan and Norton and different variants such as IT scorecard. This paper presents a case study in analyzing alignment between information technology department and business at an energy company in Indonesia. The design of IT department BSC serving an energy company will be described and discussed. IT department is categorized as shared supporting group in this company. ABC Business Unit is one of biggest energy producer in Indonesia and IT department is playing an important role to achieve business strategy. We related Balanced Scorecard with their current strategies, objectives, targets and measurements on both the business and IT sides of the company to see if they have alignment between business and IT. The results of the case study analysis consist of a review against strategic alignment model and against a Balanced Scorecard. Future alignment research could take other method than balanced scorecard to analyze alignment between IT and business. In the future, it can also consider other energy company outside Indonesia so that it can cover a wider range of industry types, especially in energy industryKeywords: Alignment, Balanced scorecard, Measurement models, IT managementIntroductionSurvival not even success has become a major challenge in today's turbulent and competitive business environment. The basic foundation strategy that any type of business should follow is to align Information Technology (IT) with business strategies. A company should have clear business strategies and utilizes its IT system to accomplish company’s objectives. In addition, IT has become the crucial infrastructure of any company, the backbone for corporate information flow and the enabler or driver of business processes.Many questions arise from business team regarding to business value generated by IT investments or expe/nses. That is the background that IT should measure its productivity to the business. The Balanced Scorecard (BSC) provides a methodology for measuring the value that IT achieved (Kaplan and Norton 1996, Maisel 1992).Many contextual factors and forms part of the overall information system context influence the concept of value itself. Cronk and Fitzgerald (1997) states that “As the varying perspectives on value may moderate both the ‘actual value added to the organisation’ by the information system and ‘the value uncovered by the evaluation process’ they need to be included in appraisal techniques”. It recently kindled a heated debate on whether “IT matters” to companies anymore because of the difficulty in managing and getting value out of IT.Praktisi dan penelitian telah lama mengamati pentingnya penyelarasan TI-bisnis (Chan, Copeland, & Barday, 1997; Croteau & Bergeron, 2001; Henderson & Venkatraman) tim memberikan sistem dan jasa yang penting untuk strategi dan operasi perusahaan. Pada output, eksekutif dapat melihat kontribusi itu membuat dan IT Pelanggan yang lebih mungkin untuk menyambut dan memanfaatkan sumber daya.Nilai bisnis tidak boleh dilihat sebagai hanya nilai keuangan meskipun dalam menjalankan akhir tujuan akhir adalah pasti untuk menghasilkan pendapatan bagi perusahaan. Nilai bisnis adalah jumlah dari nilai yang diberikan kepada pihak yang bersangkutan, yaitu para pemegang saham, pelanggan/pemasok, dan karyawan. Balanced scorecard adalah salah satu kerangka yang cocok untuk digunakan karena ini melihat pada perspektif lain daripada hanya satu keuangan. Namun demikian, itu harus menjadi bagian dari proses evaluasi untuk suksesICTOM 04 – 4 konferensi internasional teknologi dan manajemen operasi592Perusahaan harus menjelaskan dengan jelas visi, misi dan strategi dalam membangun BSC. Ini harus dikomunikasikan dan diteruskan kepada departemen TI dalam beberapa cara (Milis dan Mercken 2003, Hu dan Huang 2005). Hal ini dilakukan dengan mendefinisikan strategi TI sejalan dengan strategi bisnis dan membawa keluar yang proyek-proyek yang akan mendukung strategi.In this article we look at the proposed design of the Balanced Scorecard and how it can be used to align business strategy and IT strategy. In particular, we have made a study of how the energy company ABC business unit uses their own scorecard method. We have related this to the Balanced Scorecard and compared how they have broken down strategies, objectives, targets and measurements on both the business and IT sides of the company to see if they have alignment between business and IT. We have analyzed the results of the case study in two parts firstly, a review against the Strategic Alignment Model and secondly, against a Balanced Scorecard as defined by Kaplan and Norton. We see how PT ABC has or has not accomplished alignment by the difficulty to breakdown IT strategies to lower levels and keeping them aligned with the business strategy.ABC Indonesia Business Unit is a business unit from global energy corporation that operate diverse energy sources from oil, gas and renewable energy in Indonesia. To adhere production sharing contract between Government of Indonesia and contractor, ABC need to report all work program and budget to government body called SKK Migas. This also make additional alignment strategy for IT team in ABC besides alignment between IT and business but also alignment between IT and government body.Many companies adopt the Balanced Scorecard but for it to gain success from an IT point of view there should be an alignment with the IT. The Balanced Scorecard for IT should be created and need to be broken down to business unit or lower level. Figure 1 show measures that is defined at each level.Figure 1. Alignment of IT with Business BSCIn this way, the whole enterprise can pull together in the same direction to achieve its business purpose. We focus on how ABC has implemented its business and IT strategy and the scorecards they have defined to follow and to propose balanced scorecard that will make better alignment.Research ApproachWe have conducted a literature review and critical analysis of the BSC and different methods used in combination with it. We have made a case study, analyzing how fine the business and IT align by linking and examining their individual balanced scorecards.Due to information protection at company, we took ABC as company name. The author of this paper is employed by and works “inside” ABC Company. The reasons for choosing the ABC were because they had implemented scorecards on both the business and IT and never been assessed alignment between the two.ICTOM 04 – The 4th International Conference on Technology and Operations Management593The research methodology is fundamentally explanatory case study (Walsham 1995). All information regarding ABC Company were composed by reading different types of documents available through the author who is working at the company.Analysis and evaluation between data sources were assisted by the widespread context access which let us reconfirm problems. This both strengthens validity and reduces prejudices. Workshops were used to confirm findings and enhance our understanding of certain problems
Theoretical framework
Business Value of Information System
There is no commonly agreed business value definition according to Grembergen in 2001. Cronk and Fitzgerald (1999) define “IS Business Value” as “the sustainable value added to the business by IS, either collectively or by individual system, considered from an organizational perspective, relative to the resource expenditure required”. Lundberg (2004) defines business value as consisting of two different types, value in the business itself and value in the form of reduced IT costs and can be calculated as the sum of four components: The cost savings after the introduction of an IT solution, Increased revenue after the introduction of an IT solution, Increases in key quality indicators used in the business, Difference in cost of IT since the change.
Business Value should be the difference in the value of the business after a change that has been made to that business. (Future Value - Current Value). This can be due to any type of change not necessarily IT. Another definition of the evaluation process given by Willcocks (1992) “is about establishing by quantitative and/or qualitative means the worth of IS to the organisation bringing into play notions of cost benefit, risk and value”. According to Cronk & Fitzgerald (1999) to understand “IS Business Value” one must first define the meaning of the term, which they do as: Value + Value for Money. They define the dimensions of Value as System, User and Business dependent. This is in line with Norton and Kaplan’s thinking with the Balanced Scorecard that there must be other dimensions than just financial ones.
Strategic Alignment
Lack of alignment between business and IT strategies of organizations is the main cause of the failure to realize value from any IT investments explained by Henderson and Venkatraman (1999). This strategic fit is inherently dynamic and strategic alignment is not an event but a process.
When business can utilize IT functionality on a continous basis then it can acquire competitive advantage. Lederer and Salmela (1996) stated that if the implemented project fit the business objectives, it is said to be an alignment between the two. Alignment is the degree to which the information technology plan follow the business plan, King (1978). Alignment can be seen as the degree to which tthe planning process resulted in strategic