Linking strategy, IT Governance, and Performance Pertemuan ke-19 & 22 Matakuliah : Pengantar IT Governance Tahun : Feb - 2009 Linking strategy, IT Governance, and Performance Pertemuan ke-19 & 22

Six interlocking components of effective governance design Enterprises with effective IT governance clearly articulate and then harmonize six component in the governance design framework. Enterprises design IT governance arrangements for each of their six key assets including IT to both enable and influence strategy. The effectiveness of an enterprise’s strategies and its combined governance arrangements are reflected in its ability to achieve stated business performance goals. Bina Nusantara University

Governance Design Framework Enterprise strategy And organization IT organization and Desirable behavior Harmonize what ? Harmonize how ? IT Governance Arrangements Decision rights via Monarchies, federal, etc Mechanisms (committees, Budgets, etc) IT decisions Principles Architectures Infrastructure Application Investment Business Performance Goals IT Metrics and accountabilities Bina Nusantara University

Enterprise strategy and organization define the desirable behaviors motivating governance. Governance arrangements assign decision rights for the key decisions guiding each asset individually and collectively. Enterprises harmonize IT organization and desirable behaviors with enterprise strategy and organization. Enterprises harmonize IT organization structures with IT governance mechanisms. IT metrics and accountabilities define how IT will contribute to enterprise performance goals and provide the means for separately assessing IT effectiveness. Bina Nusantara University

Enterprise Strategy and Organization For IT governance purposes, enterprise strategy is a set of clear, concise statements clarifying the enterprise’s strategic intent. The strategy focuses the attention of all employees on simple and achievable messages. Bina Nusantara University

Competitive thrust of the enterprise Typically, statements of strategy express one or more of the following : Competitive thrust of the enterprise Relationships among business units (for example, autonomy of business units versus specific types of synergies) Intentions for the role and management of information and IT Bina Nusantara University

JPMorgan Chase’s IT Governance Enterprise strategy And organization : Build excellence in individual lines of bus. Provide integrated client solutions Improve efficiency Benefit from economies of scale Develop ‘one firm-one team’ culture Increase transparency and accountability IT organization and Desirable behavior : Develop unique business unit appl. Create shared infrastructure Simplify architecture firmwid to Facilitate sharing, integration, and Reuse Implement technical and project Management standards including Six sigma Harmonize what ? Harmonize how ? IT Governance Arrangements : Technology executive committee and tech. council : IT principles IT investment Technology council and business partners : IT strategies and priorities IT standards Businesses : Application needs Mechanisms : CIO on executive committee Vice chairs on tech. executive committee Business unit CIOs and infrastructure leaders form tech. council Architecture and engineering boards set tech. standards. Business Performance Goals : Distinct metrics for each business unit New language and culture Customer retention, cross selling recruiting IT Metrics and Accountabilities : ‘Shrink-to-grow’ budget process ROI Reduced number of IT products Used and elimination of nonapproved products Certification in standard project methodology Bina Nusantara University

IT Governance Arrangements Governance arrangements identify the archetype used for each of the IT decisions. IT governance arrangements reflect the demands of the firm’s strategy and organization. IT and business leaders jointly define IT principles and make IT investment decisions. Bina Nusantara University

Business Performance Goals Performance goals establish clear objectives for the governing bodies and a benchmark for assessing the success of governance efforts In the for-profit-sector, enterprise performance goals such as share price, profitability, and good citizenship are clear Bina Nusantara University

IT Organization and Desirable Behaviors Specify how the top three components will be implemented. Enterprise strategy and organization provides the direction for IT structure and desirable behavior. Desirable behaviors must be in harmony with strategic direction or an enterprise cannot achieve its performance goals. Bina Nusantara University

IT Metrics and Accountabilities IT desirable behaviors are feflected in the IT metrics and accountabilites. Measurement and accountabilities are critical to any good governance design. Bina Nusantara University

IT Governance Mechanisms Well-designed mechanisms convert IT desirable behaviors into the outcomes listed in the governance design framework. Well-designed mechanisms reinforce and encourage desirable behaviors and lead to outcomes specified in the IT metrics and accountabilities. Bina Nusantara University

Risks of IT Governance designs Every governance arrangements carries risks. Decisions by IT leaders risk resistance from business managers. Joint business / IT decisions can lead to large and unwieldy decision making bodies. Decentralized application decisions risk deterioration of firmwide standards and goals. Bina Nusantara University

Designing IT Governance for different Strategic and structural drivers Although effective IT governance requires harmonization of all six components of the governance design framwork, enterprise strategy and organization sets the direction. Bina Nusantara University

IT Governance for different Strategies : Value disciplines Operational excellence Customer Intimacy Product (or service) leadership Bina Nusantara University

Three Value Disciplines OPERATIONAL EXCELLENCE CUSTOMER INTIMACY PRODUCT LEADERSHIP Business processes End-to-end supply chain optimization Emphasis on efficiency and reliability Customer service, marketplace management Emphasis on flexibility and responsiveness Product development, time to market and market communications Emphasis on constant innovation Organization and skills Central authority, low level of empowerment Critical skills at core of organization Empowerment close to point of customer contact Critical skills at boundary of organization Ad hoc, organic, and cellular Critical technical skills abound in loose-knit structures Management systems for coordination Command and control, standard operating procedures Quality management Customer equity measures like lifetime value Satisfaction, share management Rewarding individuals’ innovative capacity Risk and exposure management Information and information systems Integrated low-cost transaction systems The system is the process Single view of customer databases Tools to identify segments and new offerings Systems for collaboration Modeling and simulation tools Out study Larger increases in ROA Lower margins Higher market cap growth and smaller increases in ROI and ROA Bina Nusantara University

Operational excellence Where businesses emphasize efficiency and reliability, lead the industry in price and convenience, minimize overhead costs, streamline the supply chain. Enterprises focused on operational excellence had larger increases in asset utilization (ROA) Examples of operationally excellent firms include : UPS Mead Westvaco BIC Graphic Europe ING Direct Bina Nusantara University

Operational excellenceat ING Direct Simple, transparent bank product through multiple channels Standardized business model Alignment between operations and IT Local businesses for innovations. Bina Nusantara University

Customer Intimacy Customer-intimate firms emphasize flexibility and responsiveness in customer service and marketplace management. Customer intimacy strategies are consistent with performance goals focused on high profitability. Examples of customer-intimate firms include : Federal Express USAA Capital One Panalpina Bina Nusantara University

Customer Intimacy at Panalpina Cost sensitive Varied and often complex shipping requirements Provide customized Integrated solution Minimizing the premium customers must pay for those services. Bina Nusantara University

Product Leadership Firms leading on product or service offerings are focused on product development and time to market, emphasizing constant innovation or breakthrough products. Management practices in product leadership firms focus on encouraging and rewarding innovation while managing the inherent risks of experimentation. Examples of product leadership firms include : DuPont Pfizer Motorola Bina Nusantara University

Encouraging Business Unit Synergies or Autonomy with IT Governance A key strategic decision for multibusiness unit enterprises is how to structure business unit relationships. A critical role of IT governance is to ensure that organizational boundaries do not constrain strategic objectives. Bina Nusantara University

Encouraging Business Unit Synergies or Autonomy with IT Governance 3 types of standardization reflect the synergies enterprises seek : Shared technology and infrastructure services to generate economies of scale Shared data, particularly customer, supplier, product, or employee data to facilitate process integration Standardized processes to facilitate process excellence, reusability and organizational learning. Bina Nusantara University

Business Unit Arrangements Key Strategic Driver BU synergy BU autonomy Business processes Some processes standard across several Bus Some processes integrated across several BUs Each Bus processes are distinct and independent Emphasis on BU decision making Organization and skills Top-down leadership specifying synergies Remove duplication Encourage BU innovative capacity BU skills focused on local value discipline Management systems for coordination Synergies centrally defined and coordinated BUs focused on both BU and firmwide strategy Few mandated processes Enterprise financial and risk management Information and information systems Substantial integrated firmwide infrastructure and shared services Thin layer of firmwide infrastructure Each BU infrastructure and systems tailored Out study Higher profit (ROI) Larger increases in market cap and revenue growth Bina Nusantara University

Encouraging Business Unit Autonomy with Some Synergies When enterprises want diverse business units to pursue world class excellence in their specific market or function, they may choose to minimize potential synergies. Bina Nusantara University

Encouraging Business Unit Synergies with Some Autonomy Enterprises citing high pressure for achieving synergies had higher profits as measured by ROI. But capitalizing on potential synergies is not easy. Organizational boundaries usually cause resistance to any kind of sharing, integrating, or standardizing. Bina Nusantara University

Summary of the Strategy-Governance Relationship Firms introduce synergies focused on shared and standardized technology, they must govern architecture and infrastructure at the enterprise level. Firms seeking data and process synergies add more governance mechanisms to ensure the integrity of data and to design and implement global processes. Technology standards require the support of business leaders, but data and process standards force the active leadership of business executives. Bina Nusantara University

Case Study on State Street Corporation : Changing Strategic Objectives One of America’s best-performing financial services firms. The case demonstrates how IT governance can be used to help implement significant strategic change. A Top-Performing Financial Services Firm One State Street Designing IT Governance Evolving IT Governance Bina Nusantara University

A Top-Performing Financial Services Firm State Street Corporation is a world leader in financial services , providing investment services, investment management, trading, and research to investment managers, corporations, mutual funds, pension funds, unions, not-for-profit organizations, and individuals. Bina Nusantara University

One State Street State Street Management believed that shared IT infrastructure was important to enable this single point of contact. Historically, State Street’s IT organization had been highly decentralized. Bina Nusantara University

State Street Corporation’s IT Governance Enterprise strategy And organization : Grow new business One state street Faster time to market Value management Shared services IT organization and Desirable behavior : Early adoption without penalty Common customer view and ‘one State street’ IT community Commercial orientation of IT Creation of business cases and Measurement of IT Impact Share and reuse technology Enterprisewide Federal IT organization Harmonize what ? Harmonize how ? IT Governance Arrangements : Business monarchy decides : IT principles IT investment IT monarchy decides : Infrastructure strategies Architecture IT duopoly decides : Business application needs Federal/IT monarchy for input Mechanisms : IT executive committee Office of architecture and exception CIO staff IT leadership group SLA and chargeback Web based portal Activity-tracking system and Service delivery managers Enterprisewide IT budget Business Performance Goals : Time to market Single face to the customer Cost efficiencies IT Metrics and Accountabilities : Benchmarking of project Implementation times Testimonials Reused technologies Cost per business transaction Bina Nusantara University

State Street Corporation’s It Governance Arrangement Matrix Domains Principles Architecture Infrastructure Business Applications Investment & Priorities Styles Input Decision Input Decision Input Decision Input Decision Input Decision Business Monarchy                     ITEC ITEC CIO IT Monarchy                     Arch. office CIO IT leaders CIO IT leaders Feudal                     CIO IT leaders IT org. Business leaders CIO IT leaders IT org. Business leaders Federal                 Budgets SLA Act.track IT leaders     Duopoly                 Business Leaders IT org. IT leaders     Anarchy                     Bina Nusantara University

Management principles for designing governance to address strategic objectives Make tough choices Develop metrics to formalize the strategic choices Determine where organizational structure limits desirable behaviors and design governance mechanisms to overcome the limitations. Allow governance to evolve as management learns the role of IT and how to accept accountability for maximizing IT value Bina Nusantara University