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

IT Governance

Dr. Andrew SchwarzAssociate Professor, ISDS

May 19, 2010

Flores MBA Program E. J. Ourso College of Business

The Importance of IT Governance

• The IT Governance Global Status Report (2004)– 80% of CEO’s 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


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


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


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


Impact of IT-Business Alignment

IT-Business Alignment

FirmPerformance

ITEffectiveness


Impact of IT-Business Mis-Alignment

IT-Business Mis-Alignment

Little return for IT investments

Poor utilization of IT resources

Sub-optimal firm performance

Higher IT spending

Missed IT opportunities


Types of Alignment

• Strategic alignment– Congruence of the firm’s 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


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


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


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


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


Study 1 Results

Year 1IT-Biz Alignment

Year 1 IT-EnabledBiz Processes

Year 1StrategicImpact

Year 2StrategicImpact

Year 1OperationalImpact

Year 2OperationalImpact

Impacts Y1 Strategy & Y1 Operations

Impacts Y1 Strategy & Y1/Y2 Operations


Study #2:German Banks

• 1,020 questionnaires mailed to Germany’s largest banks– Chief Lending or Chief Credit Officer

• Data modeled for those returning the survey– 136 fully answered


Study 2 Results

ITFlexibility

SocialAlignment

StructuralAlignment

Business ProcessPerformance


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


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


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?


Decision ProcessStyle Definition Mechanism

Business Monarchy

C-level executives hold the right to make decisions

Executive committee or IT council with executive committee members

IT Monarchy IT executives hold the right to make decisions

IT leadership council that includes corporate and business unit CIOs

Feudal Business unit leaders have decision or input rights

Business-only committee

Federal Rights are shared by C-level executives and one other tier of the business hierarchy

Committees that draw from several organizational levels

Duopoly One IT group and one business group share a right

IT-business unit committee

Anarchy Individual end users hold a right None


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


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


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


Governance FrameworkBusiness Monarchy

IT Monarchy Feudal Federal IT Duopoly Anarchy

IT Principles

IT Infrastructure

IT Architecture

Applications

IT Investment


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

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

Input Decision

IT principles

0 27

1 18

0 3

83 14

15 36

Input Decision

IT infrastructurestrategies

0 7

10

1 2

59 6

30 23

Input Decision

IT architecture

0 6

20

0 0

46 4

34 15

Input Decision

Businessapplication needs

1 12

0 8

1 18

81 30

17 27

Input Decision

IT investment and prioritization

1

0 10

0 3

93 27

306

BusinessMonarchy

ITMonarchy

Feudal

Federal

Duopoly

0 0 0 1 0 1 0 3 0 1Anarchy

1 2 0 2 0 1 0 2 0 0Don’t Know

© 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.

Common decision rights styles

Common input styles

Domain

Style

30

7359

27


Business and IT executive collaboration mark high IT governance performers

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

IT principlesIT infrastructure

strategiesIT architecture



BusinessMonarchy

ITMonarchy

Feudal

Federal

Duopoly

Anarchy

Domain

Style

Top three performers as measured by governance performance

1 2 3


Not Effective Very

© 2002 MIT Sloan Center for Information Systems Research (Weill) and Gartner, Inc.

Top IT governance mechanisms focus on business and IT relationships

% respondentsusing

85

87

71

89

86

96

89

56

67

62

79

62

IT Governance mechanism effectiveness

1 2 3 4 5

Chargeback arrangements

Web-based portals, intranets for IT

Formally tracking IT’s business value

Architecture committee

Capital approval committee

Service level agreements

Tracking of IT projects and resources

Process teams with IT members

Executive committee

IT council of business and IT executives

IT leadership committeeBusiness/IT relationship managers


Example of an effective IT governance arrangements matrix

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

Exec commBiz leaders

Exec commIT leadership

CIOIT leadership


CIOIT leadership

Biz leadersBiz pro own

Biz/IT rel mgs



Cap appr comm


Business/IT relationship managersBiz/IT rel mgsCIO, CIO’s office and biz unit CIOsIT leadership

Business process ownersBiz pro ownBusiness unit heads/presidentsBiz leaders

Exec comm subgroup, includes CIOCap appr commExecutive committee ‘C’ levels)Exec comm

Input Decision

IT principles

Input Decision

IT infrastructurestrategies

Input Decision

IT architecture

Input Decision


Input Decision


BusinessMonarchy

ITMonarchy

Feudal

Federal

Duopoly

Governance mechanisms

Domain

Style

Input rights Decision rights


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


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


Business & IT Orientation

• Autonomy– Emphasize BU decisions, negotiation, peer

socialization

• Synergy– Emphasize enterprise-wide styles and mechanisms

• Agility– Emphasize IT’s role in agility, the use of principles,

education


Implement key IT governance styles and mechanisms for your business orientation

Synergistic enterprises Agility-focused enterprises

Autonomy-focused enterprises

Decision-makingstyles

•Tight corporate coupling between business and IT executives•Top down mandated technology decision making

•Business and IT leaders combine for specific purposes•Enterprise-wide arrangements emphasize coordination & learning

•IT works with individual business units and process owners• Emphasis on local business decision making

Focus of keymechanisms

•Well developed business and decision processes•Executive-level committees•High level centrally reporting business-IT relationship managers

• Extensive use of IT principles• Business ownership of IT projects• Planned IT-business education experiences• Transparency and Communication

•CIOs work through 1/1 negotiation•Standards achieved through socialization and peer pressure• Business-IT service arrangements are in place


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.


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


Business TechnologyCouncil

– Project Managers– Business Analysts– Technical Analysts

IT Investment Board

Office of Architecture& Standards

– Head of Enterprise Architecture– Business Architects– Technical Architects– CIO– CTO

– Head of IT Finance(e.g. CFO of IT)

– CIO– CFO– Selected Business

SVPs

– Developers– Trainers

– Head of IT Strategy– CIO– Selected Business SVPs– Head of IT Applications– Functional Area Leads– Client Relationship

Managers

Project TeamsFunctional Groups

– IT Director– IT Strategists– Business Analysts

Office of the CIO

– 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

– Chief Information Officer (CIO)– Chief Technology Officer (CTO)– Head of IT Security– Head of IT Risk– Head of IT Finance– Head of IT Strategy

Corporate Project Approval Committee

– Head of Portfolio &Program Mgt.

– Head of EnterpriseArchitecture

– Head of IT Strategy – Business Strategy Analyst – Finance Representative

Divisional Project Approval Committee

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

Proliferation of IT Roles


How do I Know if I am Successful?

Financial Goals

How should we appear to stockholder?

Vision:

Metrics:

Performance:

Internal Business Process

What business processes should we excel at?

Vision:

Metrics:

Performance:

Customer Goals

How should we appear to our customer?

Vision:

Metrics:

Performance:

Learning and Growth Goals

How will we improve internally?

Vision:

Metrics:

Performance:


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


Thank You!

Dr. Andrew SchwarzLouisiana State University

E. J. Ourso College of Business

[email protected]

Documents

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