Chapter 9 Governance of the IT Function Lecture 17 Chapter 9 Governance of the IT Function

Final Module: IT Leadership IT increasingly fundamental to business Leadership of the IT function must change Core leadership issues: How to organize IT to support and enhance business activities? How to govern IT to minimize risk and maximize value of information assets? What IT leadership approach best fits the role of IT in the company? In many companies, IT has become fundamental to support, sustain, transform, and grow the business. This pattern has elevated the importance of IT leadership and governance within the company, and dramatically changed the core management and leadership issues in many cases. What kind of leadership is appropriate, given the role that IT plays in the firm? How should IT be organized to best support and enhance business activities? How should IT be governed overall, in order to manage the risk and ensure the value of what is now a strategic and indispensable business asset? The chapters, article, and cases in this module provide a basis for discussing the high-level management, leadership, and governance activities that set the organizational context for leveraging IT-enabled strategic insight and ensuring IT-driven operational excellence.

Overview of Chapters Chapter 9 Chapters 10 Discusses themes and issues in IT governance Chapters 10 Explores a way of defining and evaluating IT leadership The chapters, article, and cases in this module provide a basis for discussing the high-level management, leadership, and governance activities that set the organizational context for leveraging IT-enabled strategic insight and ensuring IT-driven operational excellence. Chapter 9 explores the concept and practice of IT governance, discussing the connection between IT governance and corporate governance responsibilities, and offering recommendations for initiating and improving IT governance efforts. Chapter 10 presents a contingency framework for considering IT leadership needs and responsibilities, based on the role that IT plays in a company. Acknowledging that the role of IT is shaped by both internal and external factors in organizations and industries, it offers recommendations for practice that account for differences and transitions in the role of IT. The article and two cases integrate concepts discussed throughout this book. They are intended to help readers explore the dynamics of business strategy, information technology use, and leadership.

IT and the Board of Directors Increasing cost, complexity, and consequences of technology Organizations vary Operational dependence on information systems Strategic influence of information technology Board supervision of IT should “fit” company’s use of IT What can we learn from this article Why company boards should be involved in IT governance How boards can start to shape IT decisions Corporations are increasingly dependent on information technology, while information assets account for a large and growing percentage of their capital spending. Failure of boards to understand IT spending and strategy can put a firm at risk, while effective board-level IT governance can enable firms to reap competitive advantage from their IT. Companies that have established board-level IT governance committees are better able to control IT project costs and carve out competitive advantage. But there is no one-size-fits-all model for board supervision of a company's IT operations. The correct approach depends on what strategic "mode" a company is in--whether its operations are extremely dependent on IT and whether it relies heavily on keeping up with the latest technologies. This article describes how boards can determine an appropriate level of involvement in IT decisions, explaining how board members can recognize their firm’s IT risks. It offers recommendations for developing and modifying organizational structures and IT policies that take into account an organization’s changing operational and strategic needs. Appropriate board governance can go a long way toward helping a company avoid unnecessary risk and improve its competitive position.

Volkswagen of America Scarce IT resources Implementation of IT project prioritization process Aim to align IT activities with business strategy Pressure from businesses to bypass prioritization process Explore justifications for process Explore justifications for exceptions Examine CIO’s response What can we learn from this case Understand factors that affect project delivery and how IT leaders can better manage them In this case, Volkswagen’s U.S. subsidiary has launched a new process for allocating scarce IT budgets across a portfolio of project requests, in an effort to align IT activities better with corporate strategy. Now that they have used the process for the first time, though, and arrived at a list of approved projects, no one seems happy with the outcome. This case provides an opportunity to discuss the difficult governance issues that arise in making IT investment decisions. As you read the case, consider these questions: What is your assessment of the new process for managing priorities at Volkswagen? Are the criticisms justified? Is it an improvement over the old process? Who controls the budgets from which IT projects are funded at Volkswagen of America? Who should control these budgets? How should Matulovic respond to his fellow executives who are calling to ask him for special treatment outside the new priority management system?

The AtekPC Project Management Office Increasing price competition and consolidation in PC industry Focus on cost-reduction and renewed growth Formation of Strategic Planning Office IT at AtekPC Operational and maintenance focus Little cross-functional integration of applications or information services Project Management Office Goal of better and more coherent project delivery capability Possibility to leverage PM skill from IT projects to broader enterprise What can we learn from this case How key factors influence the success of PMO implementations Understand leaders’ role in shaping those factors With the ever increasing challenge of successfully managing information technology (IT), organizations are recognizing the need for greater discipline in managing IT projects. For many organizations, this means establishing or enhancing project management skills, processes, and governance structures within the organization. The case presents AtekPC’s efforts to implement a project management organization, or PMO, and the challenges they faced in doing so. John Strider, AtekPC's chief information officer (CIO), had strong convictions that the PMO-light model was the way to go. He had held back on hiring full-time employees for the PMO and was moving very slowly and cautiously so as not to violate AtekPC's culture. He was also concerned about the many issues that the PMO implementation had already raised. Were small steps building on small successes going to get the job done fast enough? Issues brought out in the case include defining the PMO's purpose and mission, the structure and governance of the PMO, and how to successfully implement it in what appears to be a resistant culture. As you read the AtekPC story, consider the following questions: What is the purpose and mission of a PMO? What are the main challenges and obstacles in implementing a PMO? Can you identify structures and governance mechanisms that are critical to effective PMO implementation?

Governance of the IT Function Key Learning Objectives for Chapter 9 Understand the concepts of enterprise governance and IT governance, and the connection between the two Understand the need for IT governance and the potential benefits of good IT governance Recognize the primary domains of IT governance and learn about effective approaches for developing an IT governance framework

What is governance? Governance is the process of structuring, operating and controlling the organization with a view to achieving its long-term strategic goals Serving the interests of stakeholders Complying with legal and regulatory requirements Governance involves establishing chains of responsibility, authority, policies, standards, measurements and control mechanisms Establishes expectations, allocate resources, manage risk, verify performance

IT Governance Responsibilities Increase effectiveness of organization through IT Align with corporate goals Protect investments Address IT-centric business issues Overall effort to devise integrated approach, operating performance, strategic control, risk management, value alignment Differs from project management in the strategic level of focus

Essentials of Enterprise Governance Enron example Ensures employs act in a way that benefits the company Set controls – what variables need to be monitored, how, and how to respond Good governance gains credibility in marketplace

Impetus for Better IT Governance Ensure that IT creates value by better alignment of IT with business Can you track where the IT money goes? Can you identify the benefits and risks? IT is an enabler of better governance No formal government requirements

Benefits of Effective IT Governance Correlated to good business performance in terms of cost reductions, customer satisfaction, security Emphasis on quality of IT, reduction of risk Reduction in major IT delivery problems Accurate understanding of support needs Good electronic archiving and storage processes have benefits

Scope and Practice of IT Governance IT-business alignment Investment Value Project Delivery Service delivery Resource Management Measurement of IT performance Risk of IT performance

Designing IT Governance Intentional but minimalist design Board-level leadership Broad-based executive involvement Clear ownership but broad participation Enforce Execution but Accommodate Exception Define benefits and target expectations Aim for evolution not revolution in implementation

Managing IT Outsourcing Focus on major projects rather than incremental Larger investments Higher risk Greater overall management complexity 8 to 10 years Environment of change makes long term difficult to project Benefits to each party very different Path uncertainty can lead to conflict Different from offshoring

Key challenges First year large capital spending from customer Later profit expected Incentives to meet contract change with changing environment Resolution of conflicts difficult and costly Evolution of technology changes perspective

History of outsourcing A few early examples 1960’s computer services for financial operations ADP started in 1949 as small punch card payroll company Grew to $8.5b company in 2005 Large-volume standard transactions Accenture software contractor Purchasing equipment and software steps toward full outsourcing of IT

Major early drivers toward outsourcing Cost-effective access to specialized or occasionally needed computing power/systems development Avoidance of building in-house skills Access to special functional capabilities 1990 Kodak decision to outsource IT legitimized idea Mainframes PC maintenance and service Telecom

Outsourcing Today More and more functions outsourced Acceptance of strategic alliances Opportunity to complement strengths and weaknesses Collaborative innovation Changes in Technology Most code development is outsourced Most IT departments integrate (select vendors, code etc.) rather than develop See table 9.1

Drivers toward outsourcing today Costs and Quality Tighter overhead cost control of fringe benefits Aggressive use of low-cost labor Tough standards Effective builk purchasing and leasing arrangements Better management of excess hardware capacity Better control of software licenses More aggressive management of service and response time Tighter inventory control Professional service at multiple levels Leaner management structure Higher level of IT staff skills More realistic lease structures

Drivers toward IT Outsourcing today (ctd) Breakdown in IT performance Complexity led to problems led to new models Intense Vendor Pressures Good sales and marketing teams plus positive results have lead to confidence in outsourcing Simplified General Management Agenda IT is messy! Financial Factors Lower risk of cost fluctuations Fixed (capital) cost business becomes variable cost business Opportunity to move group into acquiring company Corporate Culture IT team given clout to make major decisions Eliminating Internal Irritation

When to outsource When do benefits outweigh risks? Position on strategic grid

When to Outsource Development Portfolio Organizational Learning More maintenance/highly structured projects means more outsourcing potential High technology in specific field means more outsourcing potential Large, low structured projects pose difficult coordination problems for outsourcing Organizational Learning Development work difficult to outsource New areas mean company doesn’t understand what is required let alone how to manage outsourcing Market Position Large, well established firms are difficult to transition to new systems without outsourcing Current IT organization High structure easy to outsource Contracts easy to write when know what is expected

Structuring Alliance Contract Flexibility Standards and Control May change radically over time 6 to 8 months to write contracts Process of drafting more important than resulting document Standards and Control Should be explicitly written into contract Vendors often able to provide better performance measures Areas to Outsource All or nothing? Coordination costs

Structuring Alliance Cost Savings Supplier Stability and Quality 10 year contract is long time in high-tech! Keeping open to other outsourcing options Managing conflicts of interest Management Fit People working with people Conversion problems IT staff move leads to uncertainty

Managing Alliance Early results are key CIO Function Partnership/contract management Architecture planning Emerging Technologies Continuous learning Performance Measurement Some areas easier than others Cost savings vs. streamlining/simplification Mix and Coordination of Tasks Benefits can be overrun by management of complex project mix with multiple vendors Customer-Vendor Interface Final responsibility on both sides Who communicates what and when? Reporting expectations Relationship managers and coordinating groups

What about the contractor? Business model for consulting/contracting companies Risks