Enhancing the Prognostic Power of IT Balanced Scorecards with Bayesian Belief Networks Stefan A....

Enhancing the Prognostic Power of IT Balanced Scorecardswith Bayesian Belief Networks

Stefan A. BlumenbergDaniel J. Hinz

HICSS 39 22. April 2023

Summary

Balanced Scorecard (BSC) is a widely used performance measurement system. Causal relationships are an integral part, however it is neither thoroughly introduced in theory nor applied in practice

Bayesian Networks (BBNs) can be employed to improve Balanced Scorecard methodology Balanced Scorecards and Bayesian Networks can be combined due to

structural similarities A combination of both approaches allows for an a priori validation of

causalities with reduced effort in validity maintenance and better prediction of value chain figures

A sample IT scorecard shows the applicability of both methods


Balanced Scorecard is widely adopted, also in IT management

BSC is a widely adopted performance measurement method that provides „a fast but comprehensive views of all businesses“[Kaplan, R.S., Norton, D.P., 1992], that

Combines classical financial figures and „soft“ factors Reduces information complexity Consists of 4 perspectives in its generic design

BSC is also a common tool for IT management (e.g. IT governance or IT contribution to firm performance) [Graeser et al., 1998; Van der Zee, J.T.M., De Jong, B., 1999]

Vision &Strategy

FinancialPerspective

Internal Business

Processes

CustomersPerspective

Innovation &Learning

Perspective


Thoroughly extracted cause-and-effect chains provide a good basis for a BSC to succeed [Kaplan, R.S., Norton, D.P., 1996] and allow Prediction of value chain performance measures [Kaplan, R.S., Norton, D.P., 2001]

Communication and realization of the corporate strategy [Kaplan, R.S., Norton, D.P., 2001]

Incentives based actions [Malina, M.A., Selto, F.H., 2004]

89% of surveyed companies agree to better understand the value of intangible assets with modeled cause-and-effect chains [Marr, B., 2004]

Causal relationships are the core and major strength of BSC

IT support of internal

communication

Customer satisfaction

Net income

Cause-and-effect chain example


However, most firms do not implement these powerful causal relationships

23%

54%[Marr, B., 2004]

Not modelledModelled

[Ittner et al., 2003]

46%

77%

Explanation for these findings The theoretical description of causalities by Kaplan and Norton within

BSCs is only vague [Norreklit, H., 2000]

From a practical point of view, extraction of corporate causalities and their reliability maintenance is complex and tedious [Malina, M.A., Selto, F.H., 2001; Grey, C., 2001]

Causal relationships within BSC

Empirical findings


Bayesian Belief Networks offer a promising method to substantiate BSCs…

I

PC

F

Bayesian Belief NetworkF

PC

I

Balanced Scorecard

BBN Principles A BBN models the cause-

effect relationships of its nodes

Each node is a conditional probability distribution describing the effect of the parent nodes on itself Prob(node|parent nodes)

Network allows for simulation in both directions Given a change in a parent

node, how do the target figures change?

Given a desired target value, which values do the parent nodes have to have?

…substantiated by …


… because of the structural similarities of both approaches

Balanced Scorecard (BSC)

Consists of entities (called figures), grouped within perspectives

Directed edges indicate causal relationships

Loops are allowed, but should be omitted to be compatible with BBNs

Bayesian Belief Networks (BBN)

Consists of entities (called nodes), may be grouped graphically

Directed edges describe causal relationships and are used to calculate conditional probabilities

Loops are not allowed (graphs has to be directed and acyclic)


Example: A sample BSC from literature…

Source: Journal of Management Information Systems, Van der Zee, J.T.M.; De Jong, B., 1999)

Lear

ning

and

Gro

wth

Per

spec

tive

Learn employees to useproductivity tools

Improve awareness about ITopportunities in the context

of business activities

Increase employee productivitythrough ubiquitous capabilities

Fin

anci

alP

ersp

ectiv

eC

usto

mer

Per

spec

tive

Inte

rnal

Per

spec

tive

Start up call centers andautomated electronic distribution

channels for Internet

Reduce costs by designingIT enabled processes

Make products moreaccessible through new and old

distribution channels

Operating costs down

Improve „low cost“ perception ofpotential & current customers

Standard sales growth

Net income growth

BSC from Journal of Management Information Systems

Implemented by a European bank

Boxes contain partial strategies (not already chosen figures)


… can be transformed into a BBNTransformation process

The simple steps… Transform every figure

of BSC into a BBN node Transform every

dependency arrow into a directed edge

Eliminate recursive loops (n/a in this example)

… and the challenge Discretize node values Add probability tables for

each node

Some dependencies are easy to determine (e.g. impact of sales growth on net income growth), others are not

Each assumption of the BSC has to be thoroughly revisited


More detail can be added by breaking down partial strategies

Lear

ning

and

Gro

wth

Per

spec

tive

Improve awareness about IT opportunities in the context


Likert scale

IT trainings

Percentage of taughtemployees

Business workshops


Lear

ning

and

Gro

wth

Per

spec

tive



Likert scale



Likert scale

IT trainings


IT trainings


Business workshops


Business workshops


Simulation 1 20% of all employees have yearly

business and IT trainings 80% only every trhee years Awareness increases by

0.9 points

Simulation 2 80% of all employees have yearly

business and IT trainings 20% only every trhee years Awareness increases by

2.1 points


Limitations and further research

BSC does allow loops, BBNs do not Integration of time component is difficult in BSC

as well as BBN

Limitations

Further research Empiricial validation can be done in two areas Companies in the process of implementing a

BSC:To demonstrate effectiveness in scorecard ramp-up

Companies with a working BSC:To test improvement capabilities of the proposed approach against traditional double loop learning


Contact

Stefan A. Blumenberg

[email protected]

Daniel J. Hinz

[email protected]

Enhancing the Prognostic Power of IT Balanced Scorecards with Bayesian Belief Networks Stefan A....

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