1. 1 How Do Organizations Need to Structure and Govern IT? Dr. Mary C. Lacity

2. 2 Assigned Readings: Weill, P., "Don't Just Lead: Govern: How Top Performing Firms Govern IT," MIS Quarterly Executive, Vol, 3, 1, March 2004, pp. 1-17.Don't Just Lead: Govern: How Top Performing Firms Govern IT Ross, J., Creating a Strategic IT Architecture Competency, MIS Quarterly Executive, Vol. 2,1, March 2003, pp.Creating a Strategic IT Architecture Competency Feeny, D. and Willcocks, L., “Core IS Capabilities for exploiting Information Technology, Sloan Management Review, Vol. 39, Spring, 1998, pp. 9-21.Core IS Capabilities for exploiting Information Technology Feeny, Lacity, and Willcocks, "12 Supplier Capabilities," Working Paper, Oxford Institute of Information Management, 2004.12 Supplier Capabilities

3. 3 “Don’t Just Lead, Govern: How Top- Performing Firms Govern IT” Peter Weill, MISQE, 2004, pp. 1-16 “Top performing enterprises succeed in obtaining value from IT where others fail, in part by implementing effective IT governance to support their strategies and institutionalize good practices.” Survey of 256 enterprises in 23 countries 20 detailed case studies 5 Major IT Decisions: Input & Decision: IT principles IT architecture IT infrastructure Business Application Needs IT Investment & Prioritization 6 Governance Archetypes: Business Monarchy IT Monarchy Feudal Federal IT Duopoly Anarchy Performance: 1. IT Governance as assessed by CIOs on scale of 20-100 2. Financial as measured by Return on assets Revenue growth Profit (Industry Adjusted)

4. 4 Governance Defined “IT governance—specifying the framework for decision rights and accountabilities to encourage desirable behavior in the use of IT.” –Weill, MISQE, 2004

5. 5 Govern- ance Arche- type Decision Domain IT PrinciplesIT ArchitectureIT Infrastructure Strategies Business Application Needs IT Investment inputdecisioninputdecisioninputdecisioninputdecisioninputdecision Business Monarchy IT Monarchy Feudal Federal IT Duopoly Anarchy Don’t Know

6. 6 Decision Domain IT PrinciplesIT ArchitectureIT Infrastructure Strategies Business Application Needs IT Investment High-level statements about how IT is to used in the business Ex: Leverage economies of scale Standardize processes and technologies wherever appropriate Common tools, i.e. one ERP system Cost control and operational efficiency Alignment and responsiveness to negotiated business requirements Bench-marked lowest total cost of ownership Rapid deployment of new applications An integrated set of technical choices to guide the organization in satisfying business needs. Hardware Data Dictionary Operating Systems Base foundation of centrally coordinated services such as firm-wide: communication network services Messaging services Disaster recovery Security Help desks Data centers Business need for purchased or internally developed IT applications CRM ERP KM SCM How much and where to invest in IT; Capital budgeting for IT Project approvals Prioritization

7. 7 Govern- ance Arche- type Decision rights or input rights are held by: CXO Level IT executiv es Business unit leaders; Process owners Business Monarchy CXOs; CIOs may be included X IT Monarchy IT executives only X Feudal Business unit leaders or key process owners Feudal lords maximizing own needs X Federal C level executive and at least one other business group; Like country and states working together Takes a long time; compromises may result in no one happy XXX XX IT Duopoly IT executives and one other group XX XX Anarchy Small group of individual users

8. 8 Govern- ance Arche- type Decision Domain IT PrinciplesIT ArchitectureIT Infrastructure Strategies Business Application Needs IT Investment inputdecisioninputdecisioninputdecisioninputdecisioninputdecision Business Monarchy 0270607112130 IT Monarchy 118207310590809 Feudal03001211803 Federal831446459681309327 IT Duopoly 1536341530231727630 Anarchy0001010301 Don’t Know 1201020200 MOST COMMON GOVERANCE PATTERNS:NOT TIED TO PERFORMANCE

9. 9 Govern- ance Arche- type Decision Domain IT PrinciplesIT ArchitectureIT Infrastructure Strategies Business Application Needs IT Investment Business Monarchy IT Monarchy Feudal Federal IT Duopoly Anarchy TOP THREE PERFORMING PATTERNS AS MEASURED BY CIO ASSESSMENT 3 3 3 33 1 1 11 1 2 2 22 2

10. 10 Govern- ance Arche- type Decision Domain IT PrinciplesIT ArchitectureIT Infrastructure Strategies Business Application Needs IT Investment Business Monarchy IT Monarchy Feudal Federal IT Duopoly Anarchy TOP THREE PERFORMING PATTERNS AS MEASURED BY: Asset Utilization (IT coordinates) Growth (Balance needs of entrepreneurial units Profit(Largely centralized to control costs) with business wide objectives) G G G G G AAAA A P P PPP P No dominant pattern Often multiple Architectures & infrastructures G

11. 11 Eight IT Governance Critical Success Factors 1. Transparency to all managers 2. Governance should be actively designed 3. Governance should be infrequently redesigned—takes 6 months to define one! 4. Educate managers to understand and use IT governance 5. Simplicity—based on small number of performance objectives 6. An exception handling process (UPS) 7. Governance should be designed at multiple organizational levels (enterprise/ division/geographic, business unit) 8. Align incentives

12. 12 Architecture Maturity ModularRationalized Data Standardized Technology Application Silo Local CustomizationsNon-core Business Needs Local Knowledge Worker Support Specific Business Needs Strategic Choices Process Optimization IT EfficiencyLocal/Functional Optimization Strategic Implications of IT Data Center Technology Standardization Core Process Integration Wired Business Core Creating a Strategy IT Architecture Competency “An enterprise architecture is the organizing logic for applications, data, and infra- Structure technologies, as captured in a set of policies and technical choices, Intended to enable the firm’s business strategy.” Ross, MISQE, 2003, p. 32

13. 13 Silo StandardizedRationalized Modular Practice facilitating reusability. Standardization and exception management. Strategic Agility.ROI of standardization. Create opportunities for new business models. React to enterprise- wide needs Components of technology, data & code; middleware provide access to shared data. Firm-wide technology standards; centralized or federal IT organization; data warehouse for shared data. Infrastructure includes core transaction processing; data integration for cross-functional processes. Silos of applications with a data center for efficient transaction processing. Create opportunities for core business support. React to local needs. Process integration for customer responsiveness. Technology- enabled change management. Speed to market.ROI of applications. IT Capability Approach to Alignment Business Case for Architecture Key Learning

14. 14 Lessons: 1. Focus architecture on key business processes, not all processes 2. Don’t skip or rush through stages 3. Recognize that complex organizations have multiple architectures which may be at different stages 4. Institutionalize learning about architecture in appropriate governance mechanisms 5.Continue the Dialog 6. Keep an architecture capability in-house

15. 15 Core IT Capabilities First developed by David Feeny and Leslie Willcocks: Feeny, D. and Willcocks, L., “Core IS Capabilities for exploiting Information Technology, Sloan Management Review, Vol. 39, Spring, 1998, pp. 9-21. Updated in: Lacity, M., and Willcocks, L., Global IT Outsourcing: Search for Business Advantage, Chichester, Wiley, 2000.

16. 16 Enduring Challenges in IT Exploitation Core IS Capabilities Delivery of IS Service Design of IT Architecture Business & IT Vision

17. 17 Business and IT Vision Delivery of IS Service Design of IT Architecture Business Systems Thinking Contract Facilitation Architecture Planning Contract Monitoring Vendor Development Making technology work Relationship Builder IS Leadership; Informed Buying Feeny & Willcocks: IT Capabilities

18. 18 Fosters relationships with senior management "I went to the city, I usually had one or two things to do. I made it a point when I went in, I went up to the chairman's office and many times his secretary was there when I'd get there. I'd say, 'tell the chairman and CEO, tell Harry I'm in the building. Could I talk to him? I'm available.' I went right down the hall to the president, who at the time was Michael, and said, 'I'm in town for a week if you have any questions about computing, I'd be happy to talk to you about it.' I would also visit every senior vice president on the executive floor. I would stick my head in the door and say, 'hey I'm in town, what can I do to help?'" -- VP of IS, PETRO2 IS Leadership

19. 19 What are the characteristics of good CIOs? Business and People skills are more important than technical skills: “My advice to CEOs is this: Your IT function should be run by a great general manager, not by a traditional technology manager…More and more, business considerations rather than technical ones drive investments in IT. Our businesses are asking, “Why not buy solutions rather than build them? and “How can IT serve the critical needs of the business rather than those narrowly defined by accounting and human resources?” Far too many IT professionals don’t know how to frame questions like these, much less answer them.” -- Gene Batchelder, CFO, GPM Gas IS Leadership

20. 20 In a survey of 64 CIOs, Applegate and Elam found that 30% had only a technical background; 33% had only a business background, and 37 had a “hybrid background”. Practice often prescribed: Have the CIO report to the CEO to ensure the CIO has enough authority and power to be effective. IS Leadership What are the characteristics of good CIOs?

21. 21 Business Systems Thinker Envisioning the business processes which technology makes possible Focus on business process improvement rather than just IS improvement “To serve customers well in 1995, companies need to be proficient in half a dozen key areas: reduced cycle times, reduced asset levels, faster development of new products, improved customer service, increasing empowerment of employees, and increased knowledge sharing and learning. Information technology is a key resource for accomplishing those goals” John Rockart, MIT

22. 22 Proven practices include: IT representation on major business initiatives: Business Strategic Planning Operating Committees Capital Budgeting Committees Educate senior managers on IT capabilities: "We'd make it a point that every one of our executives attended that four day class. Every time we got as many as ten or fifteen people at the general manager level who had not taken the course. I'd call to schedule the course. And we'd schedule it and we'd get the CEO's signature saying, 'You've been selected to attend a computer concepts class. Please be at the homestead on four o'clock on Sunday, signed, Harry Thompson, CEO." -- VP of IS, PETRO2 Business Systems Thinker

23. 23 User-Business Relationship Builder Getting the business constructively engaged in IS/IT issues. Focus on ability to speak “business” language to gain credibility Working with business community to understand cost/service trade-offs, what technology can and cannot do When a unit manager requested a new system that would save $250,000, IT manager had to explain it would cost $500,000 to build.

24. 24 Architect Planning Defining architecture standards Centralized computing environment Distributed computing environment Technology renewal (n, n-1, n-2?) Technology replacement Security Disaster recovery management Creating the coherent blueprint for a technical platform that responds to current And future business needs.

25. 25 Technical Doer: Making Technology Work Rapidly Troubleshoot Problems Technical work-arounds Bypass political bureaucracy What are the stereotypical characteristics of a technical doer?

26. 26 Outsourcing Roles Business and IT Vision Delivery of IS Service Design of IT Architecture Contract Facilitation Contract Monitoring Vendor Development Informed Buying

27. 27 Informed Buying Develops a sourcing strategy Analyzes external market for IT/IS services Leadership of the tendering, contract, and service management processes “If you are a senior manager in the company and you want something done, you come to me and I will go outside, select the vendor, and draw up the contract with the outsourcer, and if anything goes wrong it’s my butt that gets kicked by you.”

28. 28 Informed Buying Proven practices include: Joint senior executive/IT manager development of IT sourcing strategy Creating RFP and inviting internal & external bids Short term contracts Detailed contracts

29. 29 Contract Facilitation Provide one-stop shopping for the business user Develop user guides to the contract Help manage user expectations of the contract Assess and prioritize user demands Determine if user demands will trigger contract excess fees Determine if users are demanding too little

30. 30 Contract Monitoring Monitor vendor performance (service) Review monthly bills (cost) Solve disputes with vendor Refine performance measures as needed Benchmark existing contract against developing market capability Escalation procedures Negotiate detailed amendments

31. 31 Vendor Development Identifies opportunities for added-value: 1. Business value-added, in which the supplier applies their expertise to help the customer exploit IT for business advantage. 2. Capacity value-added, in which the supplier infuses new skills and technologies in an effective manner. 3. Utility value-added, in which the supplier provides cheaper IT services. Focus on innovation and exploiting opportunities Explores potential for new vendor services “Yes, [the vendor] can achieve all the things that were proposed ---but where is this famous "added-value" service? We are not getting anything over-and-above what any old outsourcer could provide.” -- IT Services Director, Aerospace Company

32. 32 Conclusion Most critically, the core IS capability model implies migration to a relatively small IS function, staffed by highly able people.

33. 33 The Capabilities Your Suppliers Need to Make Outsourcing Work Mary C. Lacity Professor of IS Leslie Willcocks David Feeny

34. 34 RESOURCES CAPABILITIES COMPETENCIES 12 Capabilities to evaluate in your supplier

35. 35 Relationship Competency Transformation Competency Delivery Competency Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management 12 Capabilities to evaluate in your supplier Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

36. 36 Delivery Delivery Competency is based on capabilities which determine the extent to which a supplier can respond to a customer’s day-to-day operational services minimum requirement that customers seek in all suppliers includes supplier’s domain expertise, business management capabilities, etc. a supplier’s delivery competency--although crucial for success--may not serve to meaningfully distinguish suppliers.

37. 37 Transformation Competency is based on capabilities which determine the extent to which a supplier is equipped to delivery radically improved services in terms of cost and quality vitally important if the customer is seeking radical transformation of its back office from the outsourcing relationship. includes the supplier's capabilities to exploit technology, redesign business processes, and empower staff to a customer-focused culture. transformation capabilities must be exploited for the customer's benefit, not just to increase the supplier's margin. Transformation

38. 38 Relationship Competency is based on capabilities which determine the extent to which a supplier is willing and able to align with the customer's needs and goals The relationship competency uses innovative plans, aligned contracts, and governance structures and processes to ensure the promise of win/win relationships. This is the most difficult competency to find in a partner. Size of deal important factor Relationship

39. 39 Leadership: the capability to identify, communicate, and deliver the balance of delivery, transformation, and relationship activities to achieve present and future success for both client and provider. Requires individuals who have the vision, experience, ability, and clout to serve as "CEO" of the relationship. 76 case studies of EDS, IBM, CSC, Accenture with similar contracts found customer/supplier leadership as main explanator of customer satisfaction Every customer expects the supplier’s A team Often customer demands a change in leadership with first few months—on both sides! Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

40. 40 Domain Expertise: the capability to apply and retain sufficient professional knowledge of the process domain to meet user requirements Customer wants the supplier to manage transitioned staff to eliminate poor performers, adjust capacity, leverage untapped potential of best people For body-shop outsourcing in which the customer hires suppliers for specific tasks, the customer should retain most of the domain expertise. For outsourcing relationships where the supplier has more responsibility, it may be more economical and effective for the supplier to employ most of the domain experts. Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

41. 41 Business Management: the capability to consistently deliver against both customer service level agreements and suppliers’ own required business plans Savvy customers know that it is in their best interest to protect and ensure the supplier's financial health Savvy suppliers are upfront about their margin requirements Supplier Winner's Curse 12 Cases 3 Cases No Curse19 Cases 51 Cases Negative Outcome Positive Outcome Customer Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

42. 42 Behavior Management: the capability to motivate and manage people to deliver service with a “front office” mindset How do suppliers orient new employees to their culture? How do suppliers reward and incent desired behaviors? S2Tech, an Indian offshore supplier, hires only Indians with a minimum six years experience living in the U.S. & sets their hours as 1:00 to 10:00 to minimize time zone effects Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

43. 43 Sourcing: the capability to access whatever resources are required to deliver service targets Customer wants to benefit from supplier’s access to: economies of scale lower unit labor costs from supplier’s offshore operations scarce professional skills superior infrastructure Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

44. 44 Process Improvement: the capability to design and implement changes to services processes to meet improvement targets Six Sigma, CMM, ISO certifications are only indicants of process improvement capability Customers complain certifications benefit suppliers more than customers Indian suppliers were all at level 4 or 5 U.S. customers were all at level 2 or below Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

45. 45 Questionable Value/Cost: "the overhead costs of documenting some of the projects exceeded the value of the deliverables." – Pam, Global Team Leader member, Biotech "You ask for one button to be moved and the supplier has to first do a twenty page impact analysis--we are paying for all this documentation we don't need." – Project Manager, Financial Services “Mistakes upstream replicate downstream” -- Retail “Certification is no substitute for experience” -- Everybody Process Improvement: the capability to design and implement changes to services processes to meet improvement targets Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

46. 46 Process Competency Goal is to redesign business processes to reduce costs and to improve quality through Six Sigma quality improvement discipline.  DPMO 63.499.99966% 523399.9770% 366,80793.3% Process Capability Defects Per Million Yield Opportunities % 46,21099.37% 2308,00069.2%

47. 47 Process Competency Redesigning Processes such as Senior Leader Peer Review Old process: 640 senior leaders did paper-based peer reviews, assisted face-to-face by HR personnel New process: e-hr online peer review "What would have happened before, thirty people would have happily expanded a task to fill three months and as it is now, eight people have been busy for a month--bang! Done." -- Mike Margetts, Head of Implementation, Xchanging HR Services

48. 48 Technology Exploitation the capability to swiftly and effectively deploy technology in support of critical service improvement targets Technology is expensive and must be the master, not the servant e-HR to implement standardization, shared services, and self-service CGI co-develops annual technology plan with customer and supplier Customer verses supplier investment Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

49. 49 Program management: the capability to prioritize, coordinate, ready the organization, and deliver across a series of inter- related change projects Multi-phased approaches Short cycles Balance paradox of rigorous project management with flexible pragmatism Operational Critical activity Preparation Service Set-Up Proces s People Technology Sourcing Environmen t Preparatio n Realignment Streamlining Continuous Improvement 2-3mths3-6mths6-9mths Source: Xchanging Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

50. 50 Customer Development: the capability to transition users of an internally provided service to customers who make informed decisions about service levels, functionality, and costs Requires aggressive communication and dissemination of the meaning of the partnership to all budget holders in the customer organization. To avoid excess costs caused by runaway user demand, customer development requires customer stakeholders to understand the financial consequences of their demands. Customer satisfaction monitoring and reporting Allows customers to define services, service levels Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

51. 51 Planning and Contracting: the capability to develop and contract for business plans which deliver ‘win/win’ results for customer and supplier over time. One supplier quipped, "If the customer says win/win, they really mean, the customer wins twice.“ Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

52. 52 Planning and Contracting Fee-for-service contracts are suitable when customers' requirements are definable and when customers are primarily seeking modest cost reductions, variable spend, and the ability to focus on more value-added activities Previous strategic partnerships falsely assumed the customer had exploitable world-class back offices. Newer partnerships focus upon the customer's back office transformation first, commercial exploitation second.

53. 53 Organizational Design: the capability to design and implement organizational arrangements to realize plans and contracts ? Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise

54. 54 Organizational Design: Offshore Onsite Supplier Engagement Manager Offshore Supplier Delivery Team Local Business Units Architects/ DBAs/etc. Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team PMO

55. 55 Onsite Supplier Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team Offshore Supplier Delivery Team Onsite Supplier Project Managers Offshore Supplier Delivery Team Offshore Supplier Delivery Team Offshore Supplier Delivery Team Architects/ DBAs/etc. Project Managers PMO Local Business Units Organizational Design: Offshore

56. 56 VP IS Team Lead Project Manager Director Development Staff Team Lead Development Staff Relationship Manager Team Lead Anchor Development Staff Team Lead Development Staff Kaiser & Hawk, 2004 Organizational Design: Offshore

57. 57 Governance: capability to define, track, assess and fix performance Joint Boards of Directors can create a managerial schizophrenia Multiple Joint Boards help provide checks and balances among competing objectives Joint Board of Directors Joint Service Review Board Joint Technology Review Board Planning & Contracting Organization Design Customer Development Behavior Management Governance Leadership; Program Management Process Re-engineering Technology Exploitation Sourcing Business Management Domain Expertise Example of Strategic/Enterprise Partnerships

58. 58 Prioritize supplier’s competencies based on your outsourcing objective Main Customer Objective: Supplier’s Delivery Competency Supplier’s Transformation Competency Supplier’s Relationship Competency Lower costs on baseline services 1 st 3 rd 2 nd Transformation of back office processes 2 nd 1 st 3 rd New business development 3 rd 2 nd 1 st ETC…

59. 59 Supplier Perspectives on Client Potential Growth Value of Client Present Revenue Value of Client HIGH LOW HIGHLOW DevelopRe-commit De-commit Reap and Retain