IT Governance

Dr. Andrew Schwarz Associate Professor, ISDS May 19, 2010

The Importance of IT Governance

The IT Governance Global Status Report (2004)
80% of CEOs recognized that IT governance or some thereof is required to resolve IT issues 57% of CEOs looked to IT governance to align IT strategy (and 53% to manage IT risks) The report concluded that solutions in this domain are not yet available

Gartner
Firms with superior IT governance have at least 20% higher profits (ROA) than firms with poor governance given the same strategic objectives

Blind consulting report

87% of executives believe that IT is critical to their companies strategic success 33% of leaders reported that IT is very involved 30% reported business executive responsible for strategy works closely with IT division
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Characteristics of High IT Governance Performers

More focused strategies Greater differentiation between customer intimacy, product innovation, or operational excellence Clearer business objectives for IT investment Greater differentiation between supporting new ways of doing business, improving flexibility, or facilitating customer communication High level executive participation in IT governance Greater involvement, impact of CEO, COO, Business Heads, Business Unit CIOs and CFO Who could accurately describe IT governance arrangements Stable IT governance, fewer changes year to year Well functioning formal exception processes Formal communication methods

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Governance and Strategy

If strategy is where we are headed, governance defines how we make the decisions that we need to execute our strategy Research has suggested that structure follows strategy (Chandler)
Strategy dictates what the organization needs
Single product, single plant, single function organizations tend to be single-owner with no clear functional differentiation of strategic, administrative, and operating decisions Single product, multi-plant, multi-function organizations tend to have a functional structure Multi product, multi-plant, multi-function organizations tend to have a multi-divisional structure
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Governance and Strategy (2)

However, structure also restricts strategy
Organization can restrict the ability of the organization to quickly react to changing market conditions

Thus, there is a mutually enhancing relationship between strategy and structure

However, at a higher level, it is crucial that strategy and structure align with one another Alignment is therefore the degree to which the information technology mission, objectives, plans, and technology support and are supported by the business mission, objectives, plans, and business processes

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Impact of IT-Business Alignment

Firm Performance IT-Business Alignment IT Effectiveness

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Impact of IT-Business Mis-Alignment

Poor utilization of IT resources Sub-optimal firm performance IT-Business Mis-Alignment Higher IT spending Missed IT opportunities Little return for IT investments
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Types of Alignment
Strategic alignment
Congruence of the firms IS strategy with the business strategy

Structural alignment
Congruence of the business and IS structures within the organization

Social alignment
The level of mutual understanding of and commitment to the business and IT mission, objectives and plans
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Key Issues in Strategic Alignment

Key considerations
Linked business and IS missions, priorities, and strategies Interconnected business and IS planning processes, and resulting plans

Goal
IS priorities, capabilities, decisions, and actions to support those of the entire business
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Key Issues in Structural Alignment

Key considerations
Location of IT decision-making rights Reporting relationships (De)centralization of IT services and infrastructure Deployment of IT personnel

Goal
IT and business structures to support organizational objectives
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Key Issues in Social Alignment

Key considerations
Ensure line and IS executives are communicating Obtain buy-in from line executive commitment to IS issues and initiatives

Goal
Ensure both business and IS executives have a similar view of the role of IT in the firm
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Study #1: European Firms

Randomly selected 500 organizations across Europe
Annual survey of IT diffusion CIO or IT executive respondent

Data modeled for organizations participating in two subsequent years

58 firms in 2003 and 2004
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Study 1 Results
Year 1 Strategic Impact Year 1 IT-Biz Alignment Impacts Y1 Strategy & Y1 Operations Year 2 Strategic Impact Year 1 Operational Impact Year 2 Operational Impact

Year 1 IT-Enabled Biz Processes Impacts Y1 Strategy & Y1/Y2 Operations

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Study #2: German Banks

1,020 questionnaires mailed to Germanys largest banks
Chief Lending or Chief Credit Officer

Data modeled for those returning the survey

136 fully answered

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Study 2 Results
IT Flexibility

Structural Alignment
Business Process Performance

Social Alignment

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IT Governance Defined
The assignment of decision rights and the accountability framework to encourage desirable behavior in the use of IT Governance is really composed of three things
What decisions are to be made Who will make each of those decisions What process will be used to make and communicate those decisions

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Decision Categories
1)

IT Principles
High-level statements about how IT will be used to create business value

2)

IT infrastructure strategies
State the approach for building shared and standard IT services across the enterprise (typically technical)

3)

IT architecture
The technical choices that will meet business needs

4)

Business application needs

Where the business defines its application needs

5)

IT investment and prioritization

Defines the process for moving IT-based investments through justification, approval, and accountability
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Decision Makers
Governance defines two types of rights
Decision rights = who has the right and responsibility to make a decision about how IT is used Input right = who has the right to provide input to a decision, but not make a decision?

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Decision Process
Style Business Monarchy IT Monarchy Definition C-level executives hold the right to make decisions IT executives hold the right to make decisions Business unit leaders have decision or input rights Rights are shared by C-level executives and one other tier of the business hierarchy One IT group and one business group share a right Individual end users hold a right Mechanism Executive committee or IT council with executive committee members IT leadership council that includes corporate and business unit CIOs Business-only committee Committees that draw from several organizational levels IT-business unit committee None

Feudal Federal

Duopoly Anarchy

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Allocating Decision and Input Right

Governance is concerned with who gets to make the decisions for the 5 areas versus who gets input
What role do users play? What role does top management play? Are there decisions that should be made by IT versus those that should be made other business units?

Who has the decision and input rights?

IT dominates or User dominates

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Drivers towards User Dominance User demand Need for flexibility Easy to buy pre-packaged software Users desire to control their own destiny Need for global firm, but local sensitivities

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Drivers towards IT Dominance

IT has skills that business unit does not Need for standardization and ensuring system stability Business leaders not adept at envisioning possibilities with IT, nor at determining feasibility Need for corporate-wide data management
Eliminate stovepipes

IT better at cost estimation and analysis

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Governance Framework
Business Monarchy IT Principles IT Monarchy Feudal Federal IT Duopoly Anarchy

IT Infrastructure IT Architecture Applications

IT Investment

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Input and decision style patterns in IT governance of a range of organizations

Domain Style

IT principles
Input Decision

IT infrastructure strategies
Input Decision

IT architecture
Input Decision

Business application needs

Input Decision

IT investment and prioritization

Input Decision

Business Monarchy IT Monarchy Feudal Federal Duopoly Anarchy Dont Know

0 1 0

27 27 18 3 14

0 10 1

0 20 0

1 0 1

12 8 18

1 0 0

30
10 3

59
2 6 23

73
0 4 15

83
15

59
30

46 34
0
0

81
17

30

93
6

27 30
1
0

36
0
2

27
3
2

0
1

0
0

1
2

1
1

0
0

0
0

Numbers are percentages of the 256 Gartner for-profit and not-for-profit enterprises studied in 23 countries in 2002

Common input styles Common decision rights styles

2002 MIT Sloan Center for Information Systems Research (CISR). This framework is adapted from Weill & Woodham's work originally published and copyrighted by the MIT Sloan CISR as Working Paper No. 326, "Don't Just Lead, Govern: Implementing Effective IT Governance," April 2002, and is used by Gartner with permission.
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Business and IT executive collaboration mark high IT governance performers

Domain

IT principles
Style

IT infrastructure strategies

IT architecture

Business application needs

IT investment and prioritization

Business Monarchy IT Monarchy Feudal Federal Duopoly Anarchy

Top three performers as measured by governance performance

2002 MIT Sloan Center for Information Systems Research (Weill) and Gartner, Inc, drawing on the framework of Weill and Woodham, 2002.
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Top IT governance mechanisms focus on business and IT relationships

IT Governance mechanism effectiveness
Business/IT relationship managers IT leadership committee IT council of business and IT executives Executive committee Process teams with IT members
% respondents using 85 87 71 89 86 96 89 56 67 62 79 62
1 2 3 4 5

Tracking of IT projects and resources

Service level agreements Capital approval committee

Architecture committee
Formally tracking ITs business value Web-based portals, intranets for IT Chargeback arrangements
Not
2002 MIT Sloan Center for Information Systems Research (Weill) and Gartner, Inc.
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Effective

Very

Example of an effective IT governance arrangements matrix

Domain Style

IT principles
Input Decision

IT infrastructure strategies
Input Decision

IT architecture
Input Decision

Business application needs

Input Decision

IT investment and prioritization

Input Decision
Cap appr comm

Business Monarchy IT Monarchy Feudal Federal Duopoly

Exec comm Biz leaders Exec comm IT leadership Exec comm Biz leaders Biz leaders Biz pro own Biz leaders Biz pro own Biz/IT rel mgs Biz leaders Biz pro own Exec comm Biz leaders CIO IT leadership CIO IT leadership

Governance mechanisms
Exec comm Biz leaders IT leadership Executive committee C levels) Business unit heads/presidents CIO, CIOs office and biz unit CIOs Cap appr comm Biz pro own Biz/IT rel mgs

Input rights

Decision rights

Exec comm subgroup, includes CIO Business process owners Business/IT relationship managers

2002 MIT Sloan Center for Information Systems Research (Weill) and Gartner, Inc. drawing on the framework of Weill and Woodham, 2002.

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Governance Best Practices

There is no one best governance arrangement
Tends to be.
Those seeking synergies among business units enforce-top down decisions Those with autonomous business units emphasize local decision making Those with both synergy and autonomy try to encourage faster decision making
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What is your Business Orientation?

Autonomy
Highly localized pressures Business processes distinct

Synergy
High standardization pressures Business processes integrated

Agility
High speed, flexibility pressures Business processes adaptable
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Business & IT Orientation

Autonomy
Emphasize BU decisions, negotiation, peer socialization

Synergy
Emphasize enterprise-wide styles and mechanisms

Agility
Emphasize ITs role in agility, the use of principles, education

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Implement key IT governance styles and mechanisms for your business orientation
Synergistic enterprises Decisionmaking styles Tight corporate coupling between business and IT executives Top down mandated technology decision making Well developed business and decision processes Executive-level committees High level centrally reporting business-IT relationship managers Agility-focused enterprises Business and IT leaders combine for specific purposes Enterprise-wide arrangements emphasize coordination & learning Extensive use of IT principles Business ownership of IT projects Planned IT-business education experiences Transparency and Communication Autonomy-focused enterprises IT works with individual business units and process owners Emphasis on local business decision making CIOs work through 1/1 negotiation Standards achieved through socialization and peer pressure Business-IT service arrangements are in place

Focus of key mechanisms

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Top Performing Enterprises

Top-performing enterprises govern IT differently from each other and from average enterprises Firms leading on growth decentralize more of their IT decision rights and place IT capabilities in the business units Firms leading on profit centralize more decision rights; senior business leaders make the major IT decisions Top performers design their IT governance to reinforce their performance goals and link IT governance to the governance of their other key enterprise assets and desired behaviors.

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Emerging Trends
Organizational governance is less likely to be centralized or decentralized
Hybrid, federal, or dispersed allocation of decision rights Focus on demand side and supply side governance Management of risk, finance, and outsourcing will become significant
We do not know how to do this yet

Emerging models for governance

Emergence/proliferation of new organizational roles

CIOs will have to balance their roles between

Managing the IT business of the business Seeding, stimulating, influencing, and driving IT-enabled business innovation

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Proliferation of IT Roles
IT Investment Board Head of IT Finance (e.g. CFO of IT) CIO CFO Selected Business SVPs Business Technology Council Head of IT Strategy CIO Selected Business SVPs Head of IT Applications Functional Area Leads Client Relationship Managers

Divisional Project Approval Committee Divisional Functional Heads Divisional CFO Divisional PMO and Finance rep. Divisional CIO, Divisional CTO Enterprise Functional Leads IT Directors

Corporate Project Approval Committee Head of Portfolio & Program Mgt. Head of Enterprise Architecture Head of IT Strategy Business Strategy Analyst Finance Representative

Office of Architecture & Standards Head of Enterprise Architecture Business Architects Technical Architects CIO CTO

Office of the CIO

Chief Information Officer (CIO) Chief Technology Officer (CTO) Head of IT Security Head of IT Risk Head of IT Finance Head of IT Strategy Head of IT HR Head of Vendor Management Head of IT Application Areas Head of Portfolio & Program Mgt. Head of Enterprise Architecture Head of IT Communications

Functional Groups IT Director IT Strategists Business Analysts

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Project Teams Project Managers Developers Business Analysts Trainers Technical Analysts

How do I Know if I am Successful?

Financial Goals How should we appear to stockholder? Vision: Metrics: Performance: Customer Goals How should we appear to our customer? Vision: Metrics: Performance: Internal Business Process What business processes should we excel at? Vision: Metrics: Performance: Learning and Growth Goals How will we improve internally? Vision: Metrics: Performance:

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Concluding Thoughts
Getting governance right matters Proliferation of methodologies
COBIG, ValIT, and others

All helping you to allocate decision and input rights using different approaches Innovation matters

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Thank You! Dr. Andrew Schwarz Louisiana State University E. J. Ourso College of Business
aschwarz@lsu.edu
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