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?

Overview of Chapters

• Chapter 9– Discusses themes and issues in IT governance

• Chapters 10– Explores a way of defining and evaluating IT

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

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

The AtekPC Project Management Office

• AtekPC– 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

Governance of the IT Function

Key Learning Objectives for Chapter 9

1. Understand the concepts of enterprise governance and IT governance, and the connection between the two

2. Understand the need for IT governance and the potential benefits of good IT governance

3. Recognize the primary domains of IT governance and learn about effective approaches for developing an IT governance framework

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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When to outsource

When do benefits outweigh risks?

1. Position on

strategic grid

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When to Outsource

2. Development Portfolio• 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

3. Organizational Learning• Development work difficult to outsource• New areas mean company doesn’t understand what is required let

alone how to manage outsourcing

4. Market Position• Large, well established firms are difficult to transition to new systems

without outsourcing

5. Current IT organization• High structure easy to outsource• Contracts easy to write when know what is expected

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Structuring Alliance

• Contract Flexibility– 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

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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

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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

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What about the contractor?

• Business model for consulting/contracting companies

• Risks