Don’t Just Lead, Govern! Effective IT Governance …ebusiness.mit.edu/sponsors/common/2003-AnnualConf... · Don’t Just Lead, Govern! Effective IT Governance MIT CIO Summit 2003

Professor Peter Weill Director, Center for Information Systems Research (CISR)

MIT Sloan School of Management Phone: (617) 253-2348, Fax: (617) 253-4424

http://web.mit.edu/cisr/www

Don’t Don’t Just Just Lead, Govern! Lead, Govern! Effective IT Governance

MIT CIO Summit 2003

This research was made possible by the support of CISR sponsors and, in particular, CISR patron Gartner.

Thursday, May 22, 2003

© MIT Sloan Center for Information Systems Research 2003 - Weill Center for Information Systems Research

Why is IT Governance Important?

n Links to corporate governancen IT is now completely embedded in enterprises => maturityn Demand for new use of IT comes from talented people in all areas

of the enterprisen Leadership has limited bandwidthn Some enterprises get consistently above industry returns => they

must make consistently better decisionsn Learn from good corporate and financial governancen IT Governance can be explained on two pagesn Top performing enterprises govern IT differently

=>Rethink IT Governance: set vision, decision rights, accountabilities and desirable behaviors.

Don’t Just Lead, Govern!

Because:


IT Governance Research Overview

ValuationValuation

AssetAssetUtilizationUtilization

ProfitProfit

GrowthGrowth ProductivityProductivity

SettingSetting Governance Governance ArrangementsArrangements

Governance Governance AwarenessAwareness

Governance Governance PerformancePerformance

Financial Financial PerformancePerformance

% of managers in leadership positions

WeightsWeights

FlexibilityFlexibility GrowthGrowth

AssetAssetUtilizationUtilization

CostCost

• ROA

• Market Cap change

• % Margin• ROE• ROI

• % Change in Revenue

• Revenue / Employee

•3 year averages•Industry adjusted•% change

StrategyStrategy•• 3 Value 3 Value

disciplines disciplines

SizeSize•• NumberNumber

of of BUsBUs

IT IntensityIT Intensity•• $, People$, People

Synergy &/or Synergy &/or Autonomy Autonomy of of BUsBUs

MechanismsMechanisms•• CouncilsCouncils•• SLAsSLAs•• IT IT

OrganizationOrganization•• ChargebackChargeback•• Architecture Architecture

CommitteeCommittee

Communication Approaches

• Meetings• Documented

procedures• Portal

Exceptions• % projects

Key IT DecisionsKey IT Decisions

ArchetypesArchetypes

Average of 4 performance

measures weighted by importance

Score out of 100

Domain

Archetype

IT Principles

IT Infrastructure

Strategies IT Architecture

Business Application

Needs IT Investment

Input Decision Input Decision Input Decision Input Decision Input Decision

Business Monarchy 0 27 0 7 0 6 1 12 1 30

IT Monarchy 1 18 10 59 20 73 0 8 0 9

Feudal 0 3 1 2 0 0 1 18 0 3

Federal 83 14 59 6 46 4 81 30 93 27

Duopoly 15 36 30 23 34 15 17 27 6 30

Anarchy 0 0 0 1 0 1 0 3 0 1

No Data or Don’t Know

1 2 0 2 0 1 0 2 0 0

• Cost-effective use of IT• Effective use of IT for

growth• Effective use of IT for

asset utilization• Effective use of IT for

business flexibility


What is IT Governance?Decision rights and accountability framework to encourage desirable behavior in the use of IT

n IT Principles—role for ITn IT Infrastructure—what is shared and put in firstn IT Architecture—integration & compatibilityn Business application needs—what is requiredn IT Investment & Prioritization—how much and when

Who has decision rights and input to key IT decisions.

What is desirable behavior in the enterprise.n Sharing, reuse, cost savings, innovation, growth

What mechanisms are used to implement governance.

How much business value.

n E.g., IT council, process teams, architecture office, SLAs

n Responsibilities, accountabilities, measurement and metricsSource: Don’t Just Lead, Govern! Empowering Effective Enterprise Use of IT, P. Weill & J. Ross, Harvard Business School Press: Boston, Forthcoming.


What IT decisions need to be made? — five major IT decisions

IT principles High level statements about how IT is used in the business

IT infrastructure strategies

Strategies for the base foundation of budgeted-for IT capability (both technical and human), shared throughout the firm as reliable services, and centrally coordinated (e.g., network, help desk, shared data)

IT architecture

An integrated set of technical choices to guide the organization in satisfying business needs. The architecture is a set of policies and rules that govern the use of IT and plot a migration path to the way business will be done (includes data, technology, and applications)

IT investment and prioritization

Decisions about how much and where to invest in IT including project approvals and justification techniques

Businessapplication needs

Identifying business applications to be acquired or built


IT Governance ArchetypesDecision rights or inputs to decisions for a particular IT domain are held by:

Note: Some governance styles inspired by Tom Davenport, Information Ecology.” Oxford University Press, 1997.

Business unit leaders, key process owners or their delegates

A group of, or individual business executives (i.e., CxOs). Includes committees comprised of senior business executives (may include CIO). Excludes IT executives acting independently.

Shared by C level executives and at least one other business group (e.g., CxO and BU leaders) – may also include IT executives. Equivalent of the center and states working together.

IT executives and one other group (e.g., CxO or BU leaders)

Individuals or groups of IT executives

Each individual user

Business Monarchy

Federal

IT Duopoly

Feudal

ITMonarchy

Anarchy


How do enterprises govern?

Most commonpattern for all firms.

The numbers in each cell are percentages of the 256 enterprises studied in 23 countries. The columns add to 100%.

Decision Domain

IT Principles

IT Infrastructure

Strategies

IT Architecture

Business Application

Needs IT Investment

Input Decision Input Decision Input Decision Input Decision Input Decision

Business Monarchy 0 27 0 7 0 6 1 12 1 30

IT Monarchy 1 18 10 59 20 73 0 8 0 9

Feudal 0 3 1 2 0 0 1 18 0 3

Federal 83 14 59 6 46 4 81 30 93 27

Duopoly 15 36 30 23 34 15 17 27 6 30

Anarchy 0 0 0 1 0 1 0 3 0 1 Gov

erna

nce

Arc

hety

pe

No Data or Don’t Know

1 2 0 2 0 1 0 2 0 0

© MIT Sloan Center for Information Systems Research 2002 – Weill. 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.


Best and Worst Governance Performers had:(in general without considering other factors)

Anarchy

Duopoly

Federal

Feudal

IT Monarchy

BusinessMonarchy

IT investment and

prioritization

Business application

needs

IT architecture

IT infrastructureIT principles

*Statistically significant relationship with governance performance. Governance performance is the effectiveness of governance assessed by the CIO to deliver four IT objectives weighted by importance: cost effective use of IT & effective use of IT for asset utilization, revenue growth & business flexibility.

Poor Performers (*) Top Performers (*)

—

+

— —

—

—

+

— +

Domain

Style


Top Three Governance Performers(in general without considering other factors)

Anarchy

Duopoly

Federal

Feudal

IT Monarchy

BusinessMonarchy

IT investment and

prioritization

Business application

needs

IT architecture

IT infrastructureIT principles

Top Three Performers - Governance performance is the effectiveness of governance assessed by the CIO to deliver four IT objectives weighted by importance: cost effective use of IT & effective use of IT for asset utilization, revenue growth & business flexibility.

1 2 3

Domain

Style

3 3 3

3

3

11

1

1

1

2

2

2

2

2

© 2003 MIT Sloan Center for Information Systems Research (Weill) and Gartner, Inc., drawing on the framework of Weill and Woodham, 2002.


Don’t Just Lead, Govern! – Critical Success Factors

1. Transparency: more transparency => more confidence.2. Actively design governance: ineffective governance is often the result

of governance by default and uncoordinated mechanisms.3. Know when to redesign: implementation takes months—only change

governance when desirable behaviors radically change.4. Educate: educate managers why governance is important—engage,

reinforce & redirect behaviors.5. Good governance requires choices: Only a small number of goals,

behaviors and metrics can be optimized by governance.6. Have a clear exception handling process: exceptions are how

enterprises learn—should encourage debate but escalate quickly to senior management.

7. Ensure IT governance is owned and has metrics.8. Design governance at enterprise and BU levels.

Can your enterprise pass the acid test?

Governance leverages the ingenuity of all the enterprise’s people, not just the leaders, while ensuring compliance with the overall vision and principles.


Supplementary Material


Assessing Governance Performance*

Governance Performance = the effectiveness of IT governance in delivering four objectives weighted by their importance to the enterprise:

1. Cost effective use of IT2. Effective use of IT for asset utilization3. Effective use of IT for growth 4. Effective use of IT for business flexibility

Maximum = 100 Average = 69 Top 1/3 > 74Maximum = 100 Average = 69 Top 1/3 > 74

Assessed by CIO

Only 17% of enterprises scored 80+ and 7% scored 90+ * Governance performance has statistically significant positive relationship withseveral measures of financial performance (I.e. ROA, ROE, market cap growth)


Enterprise Enterprise Strategy & Strategy & OrganizationOrganization

IT Organization& Desirable

Behavior

Business Business Performance Performance GoalsGoals

IT Metrics &

Accountabilities

Effective IT Governance requires harmony in two directions

Harmonize What Harmonize How

IT GovernanceIT GovernanceArrangementsArrangements-- Decision Rights via Decision Rights via Monarchies, Federal etc. Monarchies, Federal etc.

IT Governance Mechanisms

(e.g., Committees, budgets etc.)

IT Decision Domains•Principles•Infrastructure•Architecture•Applications•Investment


Board

Stakeholderse.g., employees,

customers, creditorsShareholders

DisclosureMonitoring

Senior Executive Team

Strategy DesirableBehavior

Key AssetsInformation (& IT)

AssetsFinancial Assets

Relationship Assets

IP AssetsPhysical Assets

Financial Governance Mechanisms

Executive CommitteeBudgeting ProcessCapital Approval ProcessCash Flow ManagementEtc.

IT Governance MechanismsExecutive CommitteeIT Steering CommitteeIT Budget ProcessIT OrganizationArchitecture CommitteeService Level AgreementsProcess Teams with IT Members

Key Asset Governance

Corporate and Key Asset GovernanceCorporate Governance

Human Assets

Source: D

on’t JustLead, G

overn! Em

powering E

ffective Enterprise U

se of IT

P. W

eill & J. R

oss, Harvard B

usiness School P

ress, Forthcom

ing.


Making Governance Mechanisms Work

Enabling coordination with business partners (e.g. suppliers)

Encourage sharing and reuse

Architectures and business needs

IT Principles

Top governance

performers use for2

ROA, ROEStagnation of functional skills and fragmented IT Infrastructure

End-to-end process management

Take process view using IT (and other assets) effectively

Process teams with IT membership

Market Cap Growth, ROA, ROE, ProductivityIT police and delays

Business drivenIT decision making

Identify strategic technologies and standards –enforcement?

Architecture Committee

Market Cap Growth, ROE

IT ignoredSeamless management incorporating IT

Holistic view business including IT

Executive and senior management committee

Arguments about charges and warped demand

Manage to SLA not business need

n Paralysis by analysisn Small projects to

avoid screen

n Separates IT from other assets

n Focus on $ not value

Undesirable Behavior Observed

ROA, ROIResponsible use of ITRecoup IT costs from businessChargeback

ROI, ROE, Market Cap Growth

Professional supply and demand

Specify and measure IT service

Service level agreements

Market Cap Growth

Prudent IT investing –different approaches for different investment types

Consider IT as another business investment

Capital investment approval and budgets

Growth, Market Cap Growth

Makes transparent: goals, benefits and costs

Measure IT investments and contribution to business value often using balanced scorecard

Formal tracking of business value of IT

Used effectively by leading

performers3

Desirable BehaviorObjectivesMechanisms1

1 Listed in decreasing order of predictor of governance performance2 Statistically significant relationship3 Statistically significant positive relationship between the use of the mechanism and the industry adjusted performance measure

Source: Don’t Just Lead, Govern! Empowering Effective Enterprise Use of IT,P. Weill & J. Ross, Harvard Business School Press, Forthcoming.


• Founded in 1974; CISR has a strong track record of practice-based research on how firms manage & generate business value from IT

• Research is disseminated via electronic research briefings, working papers, research workshops & executive education programs including CISR Summer Session “Current Issues in Managing IT”http://web.mit.edu/cisr/SS03

® CISR Research Patrons– Accenture– Gartner– Hewlett-Packard Company– IBM Corporation– Microsoft Corporation

MISSIONMISSION

• Effective IT Governance• Architecture-Driven Business Strategies• Infrastructure as Variable Cost• The IT Portfolio — Benchmarks & Performance• NSF Project on IT Impacts• Business Models & IT Investments• Assessing IT Architecture Outcomes• Managing IT-related Risk

20022002––2003 TOPICS2003 TOPICS

Contact Information: 3 Cambridge Center, NE20-336Cambridge, MA 02142Ph. 617-253-2348, Fax 617-253-4424 E-mail [email protected];http://web.mit.edu/cisr/www

CISR gratefully acknowledges the support and contributions of its Research Patrons and Sponsors

MIT Sloan Center for Information Systems Research (CISR)

PATRONS AND SPONSORSPATRONS AND SPONSORS

Center for Information Systems Research

– Merrill Lynch & Co., Inc.– MetLife– Mitsubishi Corp.– Mohegan Sun– National Kidney

Foundation (Singapore)– Nomura Research

Institute, Ltd.– Ortho Biotech

Products, L.P.– Pfizer Inc.– PFPC, Inc.– Qwest

Communications– State Street Corp.– TRW, Inc.

® CISR Sponsors– Aetna Inc.– Allstate Insurance Co.– Campbell Soup Co.– Celanese– Det Norske Veritas AS– EMC Corp.– Freddie Mac– The Gillette Co.– The Guardian Life

Insurance Co. of America

– ING– Intel Corp.– International Finance

Corp./World Bank– Marsh, Inc.

© 2003 MIT Sloan CISR

Documents

Don’t Just Lead, Govern! Effective IT Governance …ebusiness.mit.edu/sponsors/common/2003-AnnualConf... · Don’t Just Lead, Govern! Effective IT Governance MIT CIO Summit 2003