Leaders throughout an enterprise must develop this competency. Our research shows that top-performing enterprises generate returns on their IT investments up to 40 percent greater than their competitors. Top-performing enterprises succeed where others fail by imple- menting effective IT governance to support their strategies.
For ex- ample, firms with above-average IT governance following a specific strategy for example, customer intimacy had more than 20 per- cent higher profits than firms with poor governance following the same strategy. IT governance is not about making specific IT decisions— management does that—but rather determines who systematically makes and contributes to those decisions. IT governance reflects broader corporate governance principles while focusing on the management and use of IT to achieve corporate performance goals.
This book is intended to alert both business and IT unit executives to the critical role they play in defining IT governance processes—a role that ultimately deter- mines how much value the enterprise receives from IT. All enterprises have IT governance. In these enterprises, IT can factor significantly into competitive strategy. Desirable behaviors changed to include optimization of enterprisewide as well as business unit objectives. State Street estab- lished and refined a set of governance mechanisms, including en- terprisewide IT budgeting and an Office of IT Architecture, to encourage the new behaviors.
One financial services firm was pursuing a cost reduction strategy. Rather than create a comprehensive set of mechanisms that would encourage cost sav- ing, this firm relied on a new chargeback system to curtail demand for IT services. When the chargeback system led to bickering among IT and business managers, the CIO assigned relationship managers to restore internal customer satisfaction. They improved satisfaction scores but did not lower IT or business process costs. Without a cohesive IT governance design, enterprises must rely on their CIOs to ameliorate problems through tactical solutions rather than position IT as a strategic asset.
To understand IT value creation, we studied IT governance in over multibusiness unit for-profit and not-for-profit enter- prises in twenty-three countries in the Americas, Europe, and Asia Pacific see appendix A.
Our research revealed that top-performing enterprises governed IT differently than did other enterprises. Mindful of competing internal forces, the top performers designed governance structures linked to the performance measure on which they excelled for example, growth or return on assets , thereby harmonizing business objectives, governance approach, gover- nance mechanisms, and performance goals and metrics. The net effect: Good governance design allows enterprises to deliver supe- rior results on their IT investments. What Is Governance? Before we dive into IT governance, we must look at the broader issue of corporate governance in enterprises.
Corporate governance be- came a dominant business topic in the wake of the spate of corpo- rate scandals of midyear —Enron, Worldcom, and Tyco, to name a few. Interest in corporate governance is not new, but the se- verity of the financial impacts of these scandals undermined the confidence of both the institutional and the individual investor and heightened concerns about the ability and resolve of private enter- prises to protect their stakeholders.
The crisis in confidence in the corporate sector contributed to the downward pressure on stock prices worldwide and particularly in the United States. The U. Good corporate governance is important to professional in- vestors. A McKinsey study found that professional investors are even prepared to pay large premiums for investments in firms with high governance standards.
A number of bodies have published guidelines for good corpo- rate governance. The board, in turn, works with a senior management team to implement governance principles that ensure the effectiveness of organizational processes. We propose a framework for linking corporate and IT gover- nance. Key asset governance IT governance. Used with permission.
What are the products and service offerings? What is the unique and valuable position targeted by the firm?
Desirable behaviors embody the beliefs and culture of the or- ganization as defined and enacted through not only strategy but also corporate value statements, mission statements, business prin- ciples, rituals, and structures. Behaviors, not strategies, create value. The lower half of figure identifies the six key assets through which enterprises accomplish their strategies and generate business value. Senior executive teams create mechanisms to govern the management and use of each of these assets both independently and together.
Some mechanisms are unique to a particular asset for example, the IT architecture committee and others cross and integrate multiple asset types the capital approval process, for example ensuring synergies between key assets. Maturity across the governance of the six key assets varies significantly in most enterprises today with financial and physical assets typically the best governed and information assets among the worst. At the bottom of figure are the mechanisms used to govern each of the six key assets.
IT Governance: How Top Performers Manage IT Decision Rights for Superior Results
We contend that enterprises with com- mon mechanisms across multiple assets perform better. For exam- ple, if the same executive committee governs both financial and IT assets, a firm can achieve better integration and create more value. Some mechanisms will always be unique to each asset—the audit committee for financial assets and the IT architecture committee for IT, for example—but some common mechanisms lead to better coordination of the six assets.
As a sobering exercise, quickly jot down the list of mechanisms used in your enterprise to govern each of the six assets. Could you complete the lists? How many of the mechanisms were common across more than one asset—more than two assets? Coordinating the six key assets of an enterprise is not easy. The average assess- ment of a group of forty-two CIOs on how well their enterprises integrated IT governance with the governance of the other key assets was less than three on a five-point scale.
Education of the senior management team about how governance mechanisms combine to work for the enterprise is an essential and ongoing task for effective governance. We contend that many tangible benefits await better IT governance. In governing IT, we can learn from good financial and corporate governance. Instead, he or she sets up financial gover- nance specifying who can make the decisions and how. Similar principles apply to who can commit the enterprise to a contract or a partnership. Exactly the same approach should be applied to IT governance.
IT governance: Specifying the decision rights and accountability framework to encourage desirable behavior in the use of IT This definition of IT governance aims to capture the simplicity of IT governance—decision rights and accountability—and its com- plexity—desirable behaviors that are different in every enterprise. Management is the process of making and implementing the decisions.
For exam- ple, governance determines who holds the decision rights for how much the enterprise invests in IT. Management determines the actual amount of money invested in a given year and the areas in which the money is invested. If desirable behavior involves independent and entrepreneurial business units, IT investment decisions will be pri- marily with the business unit heads.
In contrast, if desirable behav- ior involves an enterprisewide view of the customer with a single point of customer contact, a more centralized IT investment gover- nance model works better. Jeanne W. Peter Weil. These top performers have custom designed IT governance for their strategies. Just as corporate governance aims to ensure quality decisions about all corporate assets, IT governance links IT decisions with company objectives and monitors performance and accountability. Based on a study of enterprises worldwide, IT Governance shows how to design and implement a system of decision rights that will transform IT from an expense to a profitable investment.
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