Owners Deserve a Better Deal

Drucker said, "In every single business failure of a large company in the last few decades, the board was the last to realize that things were going wrong." In fact the owner was the last to realize.

Protecting the interests of the owner and ensuring that the owner achieves the goals for their investment, ethically and transparently, is the fundamental purpose of corporate governance. By extension, this is also the purpose of corporate governance of IT.

"Top management must take charge if profits are to result" - John Garrity, 1963

Boards of directors and business leaders, over the last 50 years, have failed to ensure that IT related investments create value, despite these investments being responsible for up to 50% of capital expenditure for businesses worldwide.

Consider Cranfield University's study of IS/IT investment appraisal processes of large UK firms (described in Ward and Daniels, "Benefits Management"):

• Only 30% of investment appraisals have adequate involvement of business managers
• Just 10% consider the implications of business changes
• Only 25% of decision makers understand the business case
• Not surprisingly, just 27% of projects deliver the benefits that justified the investment.

If managers are not doing their job then neither are the directors, whose job it is to make sure that management does its job.

"In law, all directors are responsible for the stewardship of the company’s assets. All directors, therefore, whether or not they have executive responsibilities, have a monitoring role and are responsible for ensuring that the necessary controls over the activities of their companies are in place - and working." - Report of the Committee on the Financial Aspects of Corporate Governance, Sir Adrian Cadbury, London, 1992 ("The Cadbury Report").

An effective system of corporate governance allows owners to direct and control the organization within a framework of effective transparency and accountability. It enables the owners to provide input into the organization's overall strategy and direction and receive assurance that the organization is growing in value, fulfilling its responsibilities to stakeholders, and limiting risk exposure to tolerable levels. It is the enabler of improved business performance.

After 50 years it is time to re-frame governance of the use of IT in these terms. We must start using language and concepts that business leaders at the very highest levels readily understand and can adopt. 

The ISO/IEC 38500 standard provides guidance for doing that. It is a business leaders’ framework, free of jargon, for managing risk and maximizing the value of IT. Business leaders that follow its guidance give owners assurance that managers are doing their job.

Consider the Benefits

John Garrity was the first to observe that, in firms with the highest returns on IT investment,  executive management dedicate their time to system projects in proportion to the cost and potential of the systems. They:

• Evaluate the plans for these systems; 
• Make the major IT decisions;
• Monitor and follow up on the results achieved.

In 2006, Dr Raymond Young, Macquarie University, analysed a variety of authoritative literature and reasoned (in "What is the ROI for IT Project Governance?") that currently:

• Overall Return on Investment (ROI) for IT related projects is 30%
• 2/3 of projects deliver no benefits whatsoever
• Overall, every effective dollar of IT investment is producing four dollars of tangible financial benefit to offset the failed and challenged projects. 

Dr Young further reasoned that improved IT project governance practices would ensure that more projects either realized their promised benefits or get put out of their misery. Doing so would:

• Increase overall ROI for projects to between 135% and 240% 
• Increase national GDP by between 1.6% and 3.1% (for Australia).

When governance considers the whole IT investment portfolio, the benefits are even more substantial. MIT Center for Information Systems Research found that the top five percent of firms, in terms of "IT Savvy," earned an average of $250 for each dollar invested in IT infrastructure in the year following the investment. (Weill and Aral, 2005).

These studies highlight that the way most organizations govern their IT investments is denying their owners, and the national economy, a considerable opportunity to create value. Business leaders and stakeholders that elect to do something about it stand to reap huge rewards.

"To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities." - OECD Principles of Corporate Governance, 2004

How the Mighty Fall

Mark McDonald, in his article How CIOs can sense if their companies are getting ready to fall, draws on Jim Collins book, How The Mighty Fall: And Why Some Companies Never Give In, to provide some useful insight into how five stages of company decline manifests in leadership attitude and use of IT.

Collins' five stages of decline are:

1. Hubris Born of Success.
2. Undisciplined Pursuit of More.
3. Denial of Risk and Peril.
4. Grasping for Salvation.
5. Capitulation to Irrelevance or Death.

McDonald maps these to five stages for IT:

1. A breakdown of investment and technology management disciplines.
   
2. Multiple and competing business unit initiatives pursuing more IT.
   
3. IT budgets increase focus on current operations as support requirements consume resources. Executives begin to doubt the ‘value of IT’ as they challenge the need for costs that seem to be rising faster than revenues.
   
4. Hope that a single integrated application system and infrastructure will erase systemic weaknesses. The silver bullet solution mobilizes IT resources and gives IT an apparent new relevance coming from the prior stage.
   
5. Good talent moves on and there are challenges attracting and retaining market leading talent – leading to reduced expectations for IT.

According to one reviewer of Collins' book, the book does a particularly good job of describing dysfunctional leadership behaviors of companies in decline.

I think McDonald does a good job describing the stages of dysfunctional leadership in the use of IT.

"Senior management teams often question the value they get for their IT investments....which sustain - but do not improve - [business] performance. Among the many knee jerk management team responses to these frustrations, firing the CIO and outsourcing all of IT have emerged as perennial favourites. The problem with these two solutions is that, for most enterprises, they do not attack the cause of the problem - poorly designed IT governance, often with a corresponding lack of business leadership participation in the key IT decisions...If IT is not generating value, senior management should first examine its IT governance practices - who makes decisions and how the decision makers are accountable." - Weill & Ross, MIT Sloan School of Management, in their book "IT Governance", p147.

Leadership is seriously absent in governance

I gave a presentation to the NZ SAP User Group meeting this week. My topic was IT Value Management and my objective was to present the case for managing value from IT, rather than just managing IT, and to show the behaviours needed to achieve it and why this must start at the top.

Research by MIT's Center for Information Systems Reseach identified how firms successfully drive value from the use of IT and generate returns on their IT investments that are up to 40 percent greater than their competitors. These IT savvy firms have three obsessions:

1. Fixing what’s broken about IT. Behind a spaghetti IT architecture is a broken accountability framework and decision-making model (in other words, governance). There must be agreement and commitment on how the organization will operate and how resources will be focussed on enterprise initiatives rather than product silos. This determines the high level requirements for a digitized platform.
2. Building a digitized platform that standardizes and automates core data and processes. They start by identifying what is not changing and can be reused over and over again.
3. Exploiting the platform for profitable growth. Executive leadership leads organizational change to drive value from the new asset (the digitized platform).

For more about this, check out Weill & Ross' outstanding book for C-level executives, IT Savvy: What Top Executives Must Know to Go from Pain to Gain. (Businesses should hope their competitors do not read this book.)

On the eve of my presentation, a timely news article aired on national television that New Zealand’s governance bodies are increasingly out of touch with the organisations they are meant to guide. Dr Liliana Erakovic, of the University of Auckland Business School, says her studies on board processes and practices shows New Zealand has a problem with some under-achieving governors who are not prepared to offer leadership.

"Even more concerning is the lack of knowledge and understanding of major customers/suppliers, company dynamics, organisational processes and practices, staff and users within organisations - along with the absence of passion and some governors juggling too many board positions to be effective,"she says.

Contrast this with the three obsessions of IT savvy firms and you can see that under-achieving boards are a major barrier to a firm becoming IT savvy. Dr Erakovic's conclusions help explain the difficulty we have getting the subject of IT value management on the board agenda.

"Boards should be actively involved in the strategy formation of that organisation, yet many governors don’t know enough about the organisation and its major stakeholders, and are not active in enquiring about more information – sometimes because they simply don’t think it is their job to ask for information outside the board papers," says Dr Erakovic.

Strategic IT direction is a board responsibility. The Val IT governance framework provides useful guidance for boards and it can even be used to improve an organization's overall governance processes.
Behaviours must change at the highest levels if firms can ever hope to leverage IT to outperform their competitors. Strong, leadership commitment to strategic governance is needed to:

• Align IT decisions with business objectives so that the right investments are selected and managed throughout their full economic life-cycle;
• Monitor the performance of the IT portfolio;
• Ensure clear accountability for achieving benefits and the requisite business and IT-enabling changes.