Balanced Scorecard Approach to Sustainability and Value

Creation: A Challenge for Survival in the New Economy*

Rajendra P. Srivastava <rajendra@falcon.cc.ukans.edu>
Ernst & Young Professor and Director
Ernst & Young Center for Auditing Research and Advanced Technology
School of Business, The University of Kansas
Lawrence, KS 66045

Alexander Kogan <kogan@rutcor.rutgers.edu>
Associate Professor of Accounting and Information Systems
Faculty of Management, Rutgers University
Newark, NJ 07102-1895

and

Miklos A. Vasarhelyi <miklosv@andromeda.rutgers.edu>
Van Minden Professor of Accounting and Information Systems
Faculty of Management, Rutgers University
Newark, NJ 07102-1895







*This research has been partly funded by Ernst & Young LLP through the Ernst &
Young Center for Auditing Research and Advanced Technology at the University of
Kansas.






Balanced Scorecard Approach to Sustainability and Value
Creation: A Challenge for Survival in the New Economy

ABSTRACT
Business organizations are similar to living organisms. They need to adopt and
react to changes within their environment. Similar to biological systems, business
organizations need to have a system of sensors or metrics that will provide the
necessary signals to the entity to react in a timely fashion. Thus, metrics are essential not
only for measuring how the entity is doing at the present time but also to monitor risks
that they may face in the future. Monitoring risks are essential for mere survival,
especially in this fast changing environment of e-commerce and global economy. Thus,
we need to develop metrics not only for measuring performance but also for measuring
risks and ways to counteract with these risks. Risk could come from external and internal
environments. For example, risk from external environment could be: customer
satisfaction, quality of suppliers, quality of products and services, economic and political
environment, security of companys data and client information. Businesses need metrics
to measure the performance of controls in place to counteract with both kinds of risks,
internal and external risks. The main purpose of this paper is to discuss the balanced
scorecard approach to create value in the business in this ever-changing world of the
Internet, global economy, and information technology.
2
Balanced Scorecard Approach to Sustainability and Value
Creation: A Challenge for Survival in the New Economy
1. INTRODUCTION
Business organizations are similar to living organisms. They need to adapt to the
changes within their environment. Like biological systems, business organizations need
to have a system of sensors or metrics that will probe the environment and provide the
necessary signals to the entity to react in a timely fashion. Metrics are essential not only
for measuring how the entity is doing at the present time but also for monitoring its risks
associated with conducting the business in this ever changing world of the Internet. A
profitable strategy today does not necessarily guarantee profitability tomorrow. The
Internet is not only affecting how businesses conduct their routine transactions (placing
orders, making payments, receiving cash), but also creating new types of products and
services that were never envisioned. Moreover the ease of information accessibility
globally through the Internet has created a global economy. In this new environment
businesses have to compete globally. Another characteristic of this Internet environment
is the rapid change in technology, which changes every few months. Thus to stay
profitable, businesses need to monitor and manage risks associated with the changes in
the environment.
Kaplan and Norton (1992, see also 1992, 1993, 1996a, 1996b) first introduced the
concept of Balanced Scorecard (BSC). In the words of Kaplan and Atkinson (1998, p.
368), The Balanced Scorecard translates mission and strategy into objectives and
measures, organized into four perspectives: financial, customer, internal business process,
3
and learning and growth. Traditionally, businesses used to monitor and reward
performances based on financial measures only, such as net income, earning per share
(EPS), return on investment (ROI), etc. However, the Balanced Scorecard framework
provides a comprehensive approach to planning and implementation of the business
strategies for achieving the mission and objectives of the company. The Balanced
Scorecard concept is discussed in detail in Section II.
The recent surge in the use of technology, in particular information technology
(IT), for improving the efficiency and effectiveness of the internal business processes has
lead some researchers to apply the Balanced Scorecard concept to IT investment to
evaluate whether the IT investments are adding value to the company (Van Grembergen
and Van Bruggen 1997, and Van Grembergen and Timmerman 1998). Saull (2000) and
Van Grembergen (2000) have extended the concept of Balanced Scorecard to IT
governance. This topic will be discussed further in Section III.
The Internet has brought new types of risks that can be disastrous to the
companys success. The main characteristic of the Internet is that it lowers the barriers to
entry. It often takes not much more than just a computer with a modem to start a business
on the Internet, leading to a very intense competition. You have to be the first one to
imagine of the opportunity. You need to hire and retain smart and creative people. The
ease with which information can be retrieved globally has enabled the creation of a global
economy. Moreover, the opening of the old closed economy is further energizing the
global economy. This leads to new sets of opportunities and challenges. Thus, as we are
already experiencing, the Internet economy is not limited to national boundaries. What
does this mean to a business entity in a given country? Well, you cannot be running your
4
business in the status quo. You have to be imaginative; you need to find a way to change.
Change is the name of the game. You cannot survive if you dont change. A Balanced
Scorecard approach needs to be developed for the firms operating in the Internet
environment. This topic will be discussed further in Section IV.
2. BALANCED SCORECARD CONCEPTS
As mentioned earlier, Kaplan and Norton (1992, see also 1992, 1993, 1996a,
1996b) first introduced the concept of Balanced Scorecard. The Balanced Scorecard
translates mission and strategy into objectives and measures. In general, there are four
perspectives (see Figure 1): financial, customer, internal business process, and learning
and growth.
Figure 1: Balanced Scorecard







Vision
and
Strategy
Learning And Growth
To achieve our vision, how will we
sustain ability to change and
improve?
Objective
Measures
Targets
Initiatives
Internal Business Process
To satisfy our shareholders and
customers, what business processes
must we excel at?
Objective
Measures
Targets
Initiatives
Customer
To achieve our vision, how should
we appear to our customers?
Objective
Measures
Targets
Initiatives
Financial
To succeed financially, how should
we appear to our shareholders?
Objective
Measures
Targets
Initiatives

5
The financial perspective deals with the traditional objectives and measures such
as the return on investment (ROI) and earning per share (EPS). These measures provide a
way to assess how well the company has performed in terms of its financial goals.
However, these numbers represent the final results of the business performance. They do
not provide a timely input in terms of what the management should do or could have
done to achieve a better result. Under Customer perspective, a business entity
establishes metrics that measure the customers satisfaction. A satisfied customer is a
loyal customer and in turn creates more revenue for the entity. Under Internal Business
Process perspective, a business entity attempts to excel in the internal business processes
to stay profitable and compete well. Businesses have developed various metrics that
measure the efficiency, effectiveness, quality, and other relevant factors associated with
profitable strategies. Efficiency and effectiveness in the business processes results in
quality products, lower costs of production, and faster delivery, which in turn results in
satisfied customers, and thus higher revenues.
The Learning and Growth perspective deals with the preparedness of the
workforce to meet the challenges of the changing environment. These metrics deal with
the training and know-how of the workforce. Although these metrics, in general, serve as
sensors for the business entity to monitor its environment, the existing literature on
these metrics does not consider the ever-changing business environment of the Internet.
We plan to focus our efforts in this paper on this dimension.
The Balanced Scorecard approach provides a mechanism to manage not only the
tangible assets but also the intangible assets. The intangible assets, such as human capital,
have become even more important than ever in this age of the Internet. Using the
6
Balanced Scorecard approach, the companies can take full advantage of their tangible and
intangible assets. Kaplan and Norton compare the Balanced Scorecard approach to a
recipe (Kaplan and Norton 2000, p. 10):
Think how making a meal requires a combination of raw materials
(the ingredients), tangible capital and assets (cooking implements, an
oven, and a stove), and intangible, human capital (the chef). But a great
meal requires a recipe to take advantage of all these tangible and
intangible assets. The recipe is the critical soft asset. It transforms the raw
ingredients, physical assets, and intangible assetseach with little stand-
alone valueinto a great meal, with considerable value. The recipe
corresponds to a company strategy that combines internal resources and
capabilities to create unique value propositions for targeted customers and
market segments. The companies in our sample were successful with the
Balanced Scorecard because they engaged all employees, not just the lead
chef, to implement and improve the recipe.
Thus, the Balanced Scorecard
1
provides a general mechanism by which the
management can align their strategy and goals with the objectives and measures that will
provide a monitoring mechanism to evaluate how well the entity is doing in terms of
achieving its goals and objectives. If there are any deviations, then corrective action can
be taken in a timely manner.

1
See Kaplan and Norton (2000) for a list of companies who have implemented the Balanced Scorecard
approach and benefited from it.
7
3. BALANCED SCORECARD FOR INFORMATION TECHNOLOGY
Saull (2000) and Grembergen (2000) have extended the Balanced Scorecard
concepts to information technology (IT) for effective management of information
technology. In the information technology environment the customers are not necessarily
external users such as regulatory bodies and auditors, but also internal users such as the
Board of Directors, CEOs, Mangers at all levels, and the IT organization. The
information technology is perceived to be an enabler of achieving the corporate strategies
and goals.
In a recent article, Saull provides a conceptual mapping of the traditional BSC to
the IT BSC and provides a list of key factors, performance indicators and benchmarks for
the four perspectives related to the IT BSC. He suggests the following mapping from the
traditional BSC to the IT related BSC:
Financial Corporate Contribution
Customer Customer (User) Orientation
Internal Business Process Operational Excellence
Learning and Growth Future Orientation
Under the Corporate Contribution perspective, the main issue is whether the IT
investment is creating value to the corporation and providing a reasonable return on the
investment (ROI). Usually, the ROI for IT investments tends to be very high because of
the expected short life of IT investments. On the customer side, there are several users of
IT such as the board of directors, executive management committee, business
management, audit and regulatory bodies, and the IT organization. Each customer type
has its own key questions. For example, the board of directors would be interested in
8
knowing what value IT provides to the corporation, whether it enables or retards growth,
and whether it is well managed. From the audit perspective, one would be interested in
knowing whether proper controls are in place to protect the assets of the company and the
key technology, and whether the business risks are properly managed.
Grembergen (2000) has provided another framework for the IT Balanced
Scorecard very similar to the IT BSC by Saull (2000) discussed earlier. His framework is
represented in Figure 2 below:

Figure 2: Standard IT Balanced Scorecard (Grembergen, 2000)








Vision
and
Strategy
Future Orientation: How well is IT
positioned to meet future needs?
Mission: to develop opportunities to
answer future challenges
Strategies: training and education
for IT staff; expertise of IT staff;
research into emerging technologies;
age of application portfolio
Operational Excellence: How
effective and efficient are IT
processes?
Mission: to deliver effective and
efficient IT applications and services
Strategies: efficient and effective
developments; efficient and effective
operations
User Orientation: How do users
view the IT department?
Mission: to be the preferred supplier
of information systems
Strategies: preferred supplier of
applications and operations;
partnership with users; user
satisfaction
Business Contribution: How does
management view the IT
department?
Mission: to obtain a reasonable
business contribution of IT
investments
Strategies: control of IT expenses;
business value of IT projects;
provide new business capabilities.
9
For each perspective, one has to develop a set of goals and objectives, and
corresponding metrics to measure the current situation. It is important in IT that a cause-
effect relationship be established between the outcome measures and the performance
measures. The outcome depends on the performance drivers. Thus, it is essential to have
the understanding of the performance drivers and to monitor them on a frequent basis in
order to take corrective actions if the performance metrics deviate from the benchmarks.
Grembergen (2000) suggests that the relationship between the traditional
Balanced Scorecards and the IT Balanced Scorecards can be explicitly expressed through
a cascade of Balanced Scorecards (also, see Appendix III in COBIT, 2000; and van der
Zee 1999). Under this concept, the traditional Balanced Scorecards are used to set the
corporate goals, and the success is measured through the outcome metrics. These
outcome metrics are related to IT enablers, i.e., IT strategies, through cause-effect
relationships. The IT strategy scorecards measure the goals as outcomes of the strategies.
However, the proper planning and organization (PO) of IT makes it possible to achieve
the strategic goals. Thus, the IT PO serves as enabler of the IT strategies. However, the
IT PO is achieved by the proper IT acquisition and implementation (IT AI scorecards)
and the proper delivery and support of IT (IT DS scorecards). Along with the IT PO, AI
and DS Balanced Scorecards, the monitoring (MO) scorecards provide the assurance as
to whether controls are in place and IT processes are running effectively and efficiently.
COBIT provides a comprehensive list of key success factors (KSF), key goal indicators
(KGI), and key performance indicators (KPI) for each category of the IT BSC. KGI
focuses on what to be achieved, the target, and KPI focuses on How to achieve it, the
process. Table 1 below lists some KGIs and KPIs for IT processes.
10
Table 1: Examples of Key Goal Indicators (KGI) and Key Performance Indicators
(KPIs) for IT processes (See COBIT 2000 for a detailed list of KGIs and KPIs).
Key Goal Indicators (KGI)
Financial Perspective
Achieved targeted return on investment or business value benefits
Enhanced Performance Measurement (EPS, NI, etc.)
Internal Business Process Perspective
Reduced IT risks
Productivity improvements
Integrated supply chains
Standardized processes
Customer Perspective
Reaching new and satisfying existing customers
Creation of new service delivery channels
Number of customers and cost per customer served
Learning and Growth
Adherence to industry standards
Availability of bandwidth, computing power and IT delivery mechanisms,
uptime and downtime
Key Performance Indicators
Financial Perspective
Return on Investment (ROI)
Economic Value Added measure (EVA)
Earnings Per Share (EPS)
Internal Business Process Perspective
Reduced cycle times
Increased quality and innovation
Improved cost-efficiency of the processes
Amount of errors and rework
Benchmark comparisons
Number of non-compliance reporting
Customer Perspective
Utilization of communication bandwidth and computing power
Service availability and response times
Satisfaction of stakeholders (survey and number of complaints)
Learning and Growth
Number of staff trained in new technology and customer service skills
Staff productivity
11
4. BALANCED SCORECARD FOR INTERNET ENVIRONMENT
As discussed in the introduction, business entities are similar to living organisms.
Unless they adapt to the environment they are bound to become extinct. What does this
mean to a business entity? This means that the business entity needs to be monitoring all
the time the changes happening in its environment. This becomes more relevant in the
current environment of the Internet, which is the topic of this section.
The ease of accessibility of information through the Internet has brought many
problems of its own. It has become very easy to steal customers private information
(name address, age, earnings, credit card numbers etc.) from the companys files.
Hackers have broken into US military computers. They have interrupted regular business
functions. A common type of attack is the so-called denial of service. In early 2000,
several US major business sites were attacked, and their normal activities were paralyzed
for many hours. The most serious threat now being considered by the US government is
not a nuclear attack or a missile attack, but it is a cyber attack. One can think of how
serious it is. In a blink of an eye, one can paralyze the US Government, its
communication system, its nuclear defense, utilities production facilities, etc. The same
is true for a business entity. Security of information is important whether it is in transit, or
in the entitys computer. How can we incorporate these issues in the BSC framework?
Sriram et. al (2000) have made an initial attempt to deal with the e-commerce
issues in the Balanced Scorecard framework. However, their discussion is limited to the
B2C (Business to consumer) environment. Also, they do not consider the risks involved
in conducting business in the Internet environment. We develop a conceptual framework
12
similar to the one developed in COBIT (2000). We expect that our framework should be
a generic one applicable to all types of e-commerce (B2B, B2C, B2G, G2B, G2G, and
etc.).
Figure 3: Integration of Internet/E-Business Balanced Scorecard with Traditional
Balanced Scorecard and IT Balanced Scorecard
Measure
(Outcome)
Goals
Measure
(Performance)
Measure
(Performance)
Enabler
IT Planning &
Organization
Measure
(Performance)
Enabler
Enabler
Measure
(Outcome)
Goals
Measure
(Outcome)
Goals
Information
Technology
Strategies
E-Commerce
Strategies
Corporate
Strategies







Figure 3 describes a general framework for the Balanced Scorecards for the
Internet environment. In the upper left corner we have the traditional Balanced
Scorecards that determine the corporate strategies and goals. Next, we have the enabler of
the corporate strategies and goals, the Internet/E-Business Strategies, and the
corresponding Balanced Scorecard framework is further elaborated in Figure 4.
Information Technology Strategy serves as the enabler of the Internet/E-Business
Strategies, and one can follow the COBIT Framework for the corresponding IT Balanced
13
Scorecard as discussed in Section 3. Thus, the framework discussed in Figure 3 integrates
the traditional Balanced Scorecards of Kaplan and Norton with the IT Balanced Score
cards of COBIT, and introduces the important intermediate concept of the Internet/E-
Business Balanced Scorecard.
Figure 4: Internet/E-Business Balanced Scorecard (IEB BSC)








E-Business
Vision &
Strategy
Future Orientation: How well are
e-business processes and resources
positioned to meet future needs?
Objective: to develop e-business
competencies to meet future
challenges.
Measures
Targets
Initiatives
Operational Excellence: How
effective and efficient are E-Business
processes?
Objective: to execute efficient and
effective e-business processes.
Measures
Targets
Initiatives
User Orientation: How do users
view the E-Business Experience?
Objective: to be the preferred
provider of products and services
through e-business.
Measures
Targets
Initiatives
E-Business Financials: How does
E-Business contribute to the
corporate bottom line?
Objective: to achieve corporate
financial goals through e-business.
Measures
Targets
Initiatives
In Figure 4, we describe the four dimensions of E-Business Balanced Scorecard:
E-Business Financials, User Orientation, Operational Excellence, and Future Orientation.
The main purpose under E-Business Financials is to meet the companys financial
objectives through e-business. The User Orientation deals with the mission to be the
preferred provider of products and services through e-business. Operational Excellence
dimension deals with the mission to provide efficient and effective e-business processes
14
including manufacturing of products. The fourth dimension deals with Future Orientation
where the mission is to develop e-business competencies to meet future challenges by
training and educating staff in e-business; by researching into emerging technologies; and
questioning the age of application e-business technologies, etc.
5. CONCLUSIONS
We have discussed the basic concepts of the Balanced Scorecard for corporate
strategies and goals along with the Balanced Scorecard approach to determining the value
of information technology. Furthermore, we have extended the Balanced Scorecard
concepts to the e-business environment and have integrated these concepts with the
COBIT Framework of the Balanced Scorecard for information technology.
15
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