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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
HICSS 39 22. April 2023
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
HICSS 39 22. April 2023
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
HICSS 39 22. April 2023
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
HICSS 39 22. April 2023
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 …
HICSS 39 22. April 2023
… 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)
HICSS 39 22. April 2023
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)
HICSS 39 22. April 2023
… 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
HICSS 39 22. April 2023
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
of business activities
Likert scale
IT trainings
Percentage of taughtemployees
Business workshops
Percentage of taughtemployees
Lear
ning
and
Gro
wth
Per
spec
tive
Improve awareness about IT opportunities in the context
of business activities
Likert scale
Improve awareness about IT opportunities in the context
of business activities
Likert scale
IT trainings
Percentage of taughtemployees
IT trainings
Percentage of taughtemployees
Business workshops
Percentage of taughtemployees
Business workshops
Percentage of taughtemployees
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
HICSS 39 22. April 2023
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
HICSS 39 22. April 2023
Contact
Stefan A. Blumenberg
Daniel J. Hinz