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

Matakuliah : Pengantar IT GovernanceTahun : Feb - 2009

Bina Nusantara University 3

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.


Governance Design Framework

Enterprise strategyAnd organization

IT organization and Desirable behavior

Harmonize what ? Harmonize how ?

IT GovernanceArrangementsDecision rights viaMonarchies, federal, etc

IT GovernanceMechanisms(committees,Budgets, etc)

IT decisions•Principles•Architectures•Infrastructure•Application•Investment

BusinessPerformance Goals

IT Metrics andaccountabilities


• 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.


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.


• 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


JPMorgan Chase’s IT Governance

Enterprise strategyAnd 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 toFacilitate sharing, integration, andReuse•Implement technical and projectManagement standards includingSix sigma


IT GovernanceArrangements :Technology executive committee and tech. council :•IT principles•IT investmentTechnology council and business partners :•IT strategies and priorities•IT standardsBusinesses : Application needs

IT GovernanceMechanisms :•CIO on executive committee•Vice chairs on tech. executive committee•Business unit CIOs and infrastructureleaders form tech. council•Architecture and engineering boardsset tech. standards.

BusinessPerformance Goals :•Distinct metrics for each business unit•New language and culture•Customer retention, cross sellingrecruiting

IT Metrics andAccountabilities :•‘Shrink-to-grow’ budget process•Distinct metrics for each business unit•ROI•Reduced number of IT productsUsed and elimination of nonapproved products•Certification in standard projectmethodology


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.


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


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.


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.


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.


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.


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.


IT Governance for different Strategies : Value disciplines

• Operational excellence• Customer Intimacy• Product (or service) leadership


Three Value DisciplinesOPERATIONAL

EXCELLENCECUSTOMER 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


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


Operational excellenceat ING Direct• Simple, transparent bank product through

multiple channels• Standardized business model• Alignment between operations and IT• Local businesses for innovations.


Customer IntimacyCustomer-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


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.


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


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.


Encouraging Business Unit Synergies or

Autonomy with IT Governance3 types of standardization reflect the synergies

enterprises seek :1. Shared technology and infrastructure services to

generate economies of scale2. Shared data, particularly customer, supplier,

product, or employee data to facilitate process integration

3. Standardized processes to facilitate process excellence, reusability and organizational learning.


Business Unit ArrangementsKey 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


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.


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.


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.


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


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.


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.


State Street Corporation’s IT Governance

Enterprise strategyAnd 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 andMeasurement of IT Impact•Share and reuse technology EnterprisewideFederal IT organization


IT GovernanceArrangements :Business monarchy decides :•IT principles•IT investmentIT monarchy decides :•Infrastructure strategies•ArchitectureIT duopoly decides : •Business application needsFederal/IT monarchy for input

IT GovernanceMechanisms :•IT executive committee•Office of architecture and exception•CIO staff•IT leadership group•SLA and chargeback•Web based portal•Activity-tracking system andService delivery managers•Enterprisewide IT budget

BusinessPerformance Goals :•Time to market•Single face to the customer•Cost efficiencies

IT Metrics andAccountabilities :•Benchmarking of projectImplementation times•Testimonials•Reused technologies•Cost per business transaction


State Street Corporation’s It Governance Arrangement Matrix

DomainsDomains PrinciplesPrinciples ArchitectureArchitecture InfrastructureInfrastructure Business Business ApplicationsApplications

Investment & Investment & PrioritiesPriorities

StylesStyles InpuInputt DecisionDecision InputInput DecisionDecision InputInput DecisionDecision InputInput DecisionDecision InputInput DecisionDecision

Business Business MonarchyMonarchy

IT IT MonarchyMonarchy

FeudalFeudal

FederalFederal

DuopolyDuopoly

AnarchyAnarchy

CIOIT leadersIT org.Businessleaders

ITEC

Arch.office

CIOIT leaders

CIOIT leaders

CIOIT leadersIT org.Businessleaders

BusinessLeadersIT org.IT leaders

ITECCIO

BudgetsSLAAct.trackIT leaders


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

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

Documents

governance enterprise

governance purposes

governance tahun

bina nusantara university

statements of strategy

influence strategy

organization structures

enterprise performance