IT Governance: delivering value from e-Business

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IT Governance: IT Governance: delivering value from e-delivering value from e-

Business Business

Chapter 12Chapter 12

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Business value and ITBusiness value and IT

• Successful organisations must face global Successful organisations must face global competition & deliver value to customers competition & deliver value to customers throughthrough– Effective, efficient business processes & Effective, efficient business processes &

activities by which products & services are activities by which products & services are created and delivered to customerscreated and delivered to customers

– Effective relationships with suppliers, business Effective relationships with suppliers, business partners, etc.partners, etc.

• Often now dependent on IT to enable Often now dependent on IT to enable these processes, activities & relationshipsthese processes, activities & relationships

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Business value of ITBusiness value of IT• How effectively IT is woven into How effectively IT is woven into

fabric of organisation and exploited fabric of organisation and exploited to create value for businessto create value for business

• Associated withAssociated with– Efficiency gains from IT Efficiency gains from IT

• Eg. Increased throughputs and/or Eg. Increased throughputs and/or decreased costsdecreased costs

– Effective gains from ITEffective gains from IT• Eg. Improved customer serviceEg. Improved customer service

– Organisational improvements created Organisational improvements created through timely & appropriate through timely & appropriate application & exploitation of information application & exploitation of information & IT& IT

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Business value of ITBusiness value of IT• Role of IT changingRole of IT changing

– Many investments now geared more towards Many investments now geared more towards revenue generation rather than cost reductionrevenue generation rather than cost reduction• Improved quality, quality controlsImproved quality, quality controls• Responsiveness to changing customer Responsiveness to changing customer

preferences, needspreferences, needs• Building relationshipsBuilding relationships

• Notion of value changes according to type Notion of value changes according to type of IT investmentof IT investment– Efficiency gains – more measurable through Efficiency gains – more measurable through

headcount reductions, increased throughputs, etcheadcount reductions, increased throughputs, etc– Effectiveness gains – more intangible, less direct, Effectiveness gains – more intangible, less direct,

more diffused across range of organisational more diffused across range of organisational activitiesactivities

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Required IT capabilitiesRequired IT capabilities• Value derived from IT depends on Value derived from IT depends on

building required IT capabilitiesbuilding required IT capabilities– Need IT capabilities to deliver timely, Need IT capabilities to deliver timely,

accurate reliable, quality information accurate reliable, quality information across enterprise and trading partnersacross enterprise and trading partners

– Need IT capabilities to provide appropriate Need IT capabilities to provide appropriate support for knowledge workerssupport for knowledge workers

– Need IT capabilities to support core Need IT capabilities to support core business processesbusiness processes

– Need to exploit opportunities for IT Need to exploit opportunities for IT innovationinnovation

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Return on IT investmentsReturn on IT investments• Concerns expressed about whether Concerns expressed about whether

organisations achieve acceptable organisations achieve acceptable returns from IT investmentsreturns from IT investments– Failures, disappointment with ISFailures, disappointment with IS– Failure to achieve expected business Failure to achieve expected business

benefitsbenefits– IT infrastructure unable to accommodate IT infrastructure unable to accommodate

business changebusiness change– Obsolescence, integration problemsObsolescence, integration problems

• Require sound IT governance principles, Require sound IT governance principles, mechanisms and practices to ensure mechanisms and practices to ensure value is derived from IT investmentsvalue is derived from IT investments

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IT and business valueIT and business value• Provide fast, accurate, secure, reliable, Provide fast, accurate, secure, reliable,

quality IS & information throughout quality IS & information throughout enterpriseenterprise

• Enhance ability to share knowledge & Enhance ability to share knowledge & expertise across enterpriseexpertise across enterprise

• Improve efficiencyImprove efficiency– Reduce costs, time, throughputs, Reduce costs, time, throughputs,

productivity…productivity…

• Enhance effectiveness Enhance effectiveness – Value-add from different perspectivesValue-add from different perspectives

• Customers, suppliers, partners, alliances…Customers, suppliers, partners, alliances…

• Take advantage of new opportunitiesTake advantage of new opportunities

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Understanding IT Understanding IT governancegovernance• Principles, processes, structures, Principles, processes, structures,

procedures & leadership that procedures & leadership that organisations implements to ensure IT organisations implements to ensure IT investments directly support the investments directly support the achievement of business goals and achievement of business goals and objectivesobjectives– business value is derived from IT & IT business value is derived from IT & IT

risks are managed risks are managed

• Ensure IT is managed from Ensure IT is managed from organisation-wide perspectiveorganisation-wide perspective– Build effective cross-functional Build effective cross-functional

relationships between IRT and rest of relationships between IRT and rest of businessbusiness

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Objectives of IT governanceObjectives of IT governance• Understand strategic importance of Understand strategic importance of

ITIT• Understand role of IT in strategic & Understand role of IT in strategic &

operational domainsoperational domains– Implement strategies for ITImplement strategies for IT– Future business growth, development, Future business growth, development,

innovationinnovation

• Set realistic expectations for ITSet realistic expectations for IT– Delivering expected benefits and valueDelivering expected benefits and value

• Ensure expectations are metEnsure expectations are met– Performance measurementPerformance measurement– Innovation, growthInnovation, growth

• Manage risks associated with ITManage risks associated with IT

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• Sound IT governance processesSound IT governance processes– Support an environment for the exercise Support an environment for the exercise

& exploitation of IT resources & & exploitation of IT resources & capabilitiescapabilities

– provide framework for exploitation and provide framework for exploitation and explication of relationships between IT explication of relationships between IT and rest of businessand rest of business

– Underpin series of organisational Underpin series of organisational routines and procedures through which routines and procedures through which the business value of IT is realised and the business value of IT is realised and IT risk containedIT risk contained

Aims of IT governanceAims of IT governance

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• Supports decision making about IT and Supports decision making about IT and e-Business e-Business – About high level IT maxims (principles)About high level IT maxims (principles)

• How IT is usedHow IT is used

– About IS/IT strategyAbout IS/IT strategy– About IT infrastructure About IT infrastructure

• Shared & standard services across Shared & standard services across enterprise…local requirementsenterprise…local requirements

– About IT architectureAbout IT architecture• Technical choicesTechnical choices

– Business applications + information Business applications + information architecturearchitecture• Buy vs buildBuy vs build

– Investment & prioritisatonInvestment & prioritisaton(from Weill & Woodham 2002)

Effective IT governanceEffective IT governance

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Who makes decisions?Who makes decisions?

• Business – ‘C’ level execsBusiness – ‘C’ level execs• IT – CIOIT – CIO• SBU leaders – localised authoritySBU leaders – localised authority• Business + IT – ‘C’ levelsBusiness + IT – ‘C’ levels• Business + IT (‘C’ levels), plus SBU Business + IT (‘C’ levels), plus SBU

leaders, or process owners leaders, or process owners – Federal approachFederal approach

• AnarchyAnarchy(From Broadbent & Weill 2002)

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• IT infrastructure & architecture – IT IT infrastructure & architecture – IT makes decision, with federal inputsmakes decision, with federal inputs

• All other decisions – Federal All other decisions – Federal approachapproach

Who makes decisions?Who makes decisions?

(From Broadbent & Weill 2002)

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Effective IT governance Effective IT governance mechanismsmechanisms

• Executive committees (C level)Executive committees (C level)• Formal tracking of business value from ITFormal tracking of business value from IT

– Effective processes for planning, monitoring & Effective processes for planning, monitoring & controlling ITcontrolling IT

• Good (deliberate) relationships between Good (deliberate) relationships between business & ITbusiness & IT– Relationship managers?Relationship managers?

• Good mgmt of IT projectsGood mgmt of IT projects– Business Projects OfficeBusiness Projects Office– Formal exception handling processFormal exception handling process

• Capital approval committeesCapital approval committees• SBUs/Process teams with IT membershipSBUs/Process teams with IT membership


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Characteristics of good Characteristics of good governancegovernance

• More focused strategiesMore focused strategies• Clearer business objectives for IT Clearer business objectives for IT

investmentsinvestments• More involvement of senior non-IT More involvement of senior non-IT

executives in IT governanceexecutives in IT governance• Effective IT processes – IT strategy Effective IT processes – IT strategy

formulation, IT evaluation, IT benefits formulation, IT evaluation, IT benefits realisation, etc. – are formally realisation, etc. – are formally established & well understoodestablished & well understood

• Fewer ‘renegade’ IT behaviours, Fewer ‘renegade’ IT behaviours, activitiesactivities


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Set objectives• IT aligned with business

• IT used to exploit opportunities, • IT used to maximise benefits

• IT resources used responsibly• IT risks managed

IT activities• increase efficiency

• decrease costs• increase effectiveness

• manage risks

Monitorperformance

Compare

Provide directions

(ITGI: Broad Briefing on IT Governance 2001:11)

Overview of IT Governance

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Effective IT governanceEffective IT governance

isevidenced through

Effective IT Governance

Maxims

Structures Processes

with the aim of monitoring & controlling IT investments & associated activities to ensure the delivery of business

value from IT

Capabilities

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Steps towards IT Steps towards IT governancegovernance

Phase 1: Building the business case

• Support for business objectives

• Build compelling business case

• Originates in SBU (or SBU + IT)

Output: Specific proposal for IT investment

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Phase 2: Alignment & prioritisation

• higher level scrutiny by entity or committee• large projects to Board• 3-6 monthly reviews of planning• proposal considered against changing initiatives, priorities• resultant investment aligned with business goals & objectives

Output: Prioritised list of investments

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Phase 3: Evaluation

• Rigorous cost/benefit analysis• Development of risk profiles• Grapple with problem of intangible benefits• Cancellation still occurs at this stage

Output: Go/no-go decision

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Phase 4: System acquisition

• build vs buy vs outsource decision• on-going evaluation & scrutiny• rigorous project governance mechanisms

Output: Robust system for implementation

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Phase 5: Implementation

• post-implementation reviews• project mgmt success• PIRs consume resources• business benefits vs new opportunities?• 80% of expected benefits good enough?

Output: functioning system, not delivering all benefits expected

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Responsibilities of CIOResponsibilities of CIO

• Understand the businessUnderstand the business– internal + external environmentinternal + external environment

• Establish IS dept credibilityEstablish IS dept credibility– successful & reliablesuccessful & reliable

• Increase technological maturityIncrease technological maturity• Create corporate vision for ITCreate corporate vision for IT• Implement IS architectureImplement IS architecture

– based on view of how organisation will based on view of how organisation will operate in futureoperate in future

• Build relationships with rest of businessBuild relationships with rest of business

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Importance of evaluating IT Importance of evaluating IT investmentsinvestments• Find out if IT is meeting expectationsFind out if IT is meeting expectations• Senior executives unsure of whether IT is Senior executives unsure of whether IT is

delivering valuedelivering value• Justify large-scale investmentsJustify large-scale investments• Post implementation, to ensure IT is Post implementation, to ensure IT is

delivering expected benefits to delivering expected benefits to organisation, & therefore to stakeholdersorganisation, & therefore to stakeholders

• Contribution of IT to other business Contribution of IT to other business projectsprojects

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Issues in evaluating ITIssues in evaluating IT

• Existing measures such as cost Existing measures such as cost benefit analysis may be inadequatebenefit analysis may be inadequate

• Many benefits may be intangible, Many benefits may be intangible, and therefore difficult to precisely and therefore difficult to precisely measuremeasure

• Costs and benefits may extend Costs and benefits may extend beyond traditional organisational beyond traditional organisational boundariesboundaries

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Approaches to EvaluationApproaches to Evaluation• ROIROI

– all ROI methods based on proposition that an all ROI methods based on proposition that an investment now must yield a positive return investment now must yield a positive return over a period of timeover a period of time

• works best whenworks best when– application under review is expected to application under review is expected to

generate generate directdirect savings or savings or directly directly attributableattributable benefits benefits

– estimates of savings / benefits can be estimates of savings / benefits can be supported by reliable calculations or supported by reliable calculations or demonstrationdemonstration

– low uncertainty regarding the outcomeslow uncertainty regarding the outcomes

• least effective whenleast effective when– benefits cannot be precisely estimated in cash benefits cannot be precisely estimated in cash

flow termsflow terms– there is considerable uncertainty about the there is considerable uncertainty about the

value of estimatesvalue of estimates

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• Cost-Benefit AnalysisCost-Benefit Analysis– tries to overcome problem of valuing tries to overcome problem of valuing

intangibles intangibles • attempts to find attempts to find surrogate measure surrogate measure for for

intangible cost or benefit expressed in money intangible cost or benefit expressed in money termsterms

– Of particular valueOf particular value• when many costs & benefits are intangiblewhen many costs & benefits are intangible• where there is broad agreement on the measures where there is broad agreement on the measures

used to attach a value to the intangiblesused to attach a value to the intangibles– Fails Fails

• when there are different views on intrinsic value when there are different views on intrinsic value of intangibles & disagreement on the appropriate of intangibles & disagreement on the appropriate form of surrogate money valueform of surrogate money value

• where there is considerable uncertainty about where there is considerable uncertainty about the realisation of the intangible benefitsthe realisation of the intangible benefits

Approaches to EvaluationApproaches to Evaluation

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IT investment mappingIT investment mappingInvestment Orientation

Ben

efit

Infrastructure Business Process Market Influence

Bu

sin

ess

Exp

ansi

on

Ris

kM

inim

isat

ion

En

ha

nce

Pro

du

c tiv

ity

Current & Planned IT Investments- Focus on cost

Planned Business Strategy- Focus on Opportunity

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Information economicsInformation economics

Enhanced ROITechnology Domain

AssessmentBusiness Domain

Assessment+ +

Traditional Cost-Benefit

Innovation

Value-restructuring

Value-acceleration

Value-linking

Strategic Match

Competitive Advantage

Management Information

Competitive Response

Organisational Risk

Strategic IS Architecture

Definitional Uncertainty

Technical Uncertainty

IS Infrastructure Risk

VALUE

=

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IE for ECIE for EC

• + customer value + customer value

(Avram 2001)(Avram 2001)

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Create value forshareholders

Establish efficient, effectiveinternal processes

(& external?)

Generate satisfactory ROI& succeed financially

Create value forcustomers

Change over time need for on-going learning & development

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Balanced scorecardBalanced scorecard

Learning & Growth

Internal BusinessProcesses

Customers

Financial

Employeeskill Employee

morale

Employeesuggestions

Shortercycletime Process quality

Lowerrework

Customersatisfaction On-time

delivery

Accountsreceivable

Return onassetsROA Operating

expenses

Lea

din

g

Lag

gin

g

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Balanced scorecardBalanced scorecard• Rejects profit & ROI as only missionRejects profit & ROI as only mission

– investing in competence/capabilities, investing in competence/capabilities, cultivating relationships with customers, cultivating relationships with customers, creating databases, etc. important for creating databases, etc. important for future successfuture success

• Method for reaching agreement on Method for reaching agreement on where organisation should be heading where organisation should be heading & making sure it stays on course& making sure it stays on course

• Links short-term operational controls to Links short-term operational controls to long-term vision & strategylong-term vision & strategy

• Believes no single measure is adequateBelieves no single measure is adequate

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• Often applied as measure of IT Often applied as measure of IT department efficiency & department efficiency & effectivenesseffectiveness

• Caution needed to avoid Caution needed to avoid confusion between evaluating a confusion between evaluating a specific IT investment proposal specific IT investment proposal and evaluating performance of and evaluating performance of IT deptIT dept

Balanced scorecardBalanced scorecard

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• pre-investmentpre-investment, benefits from , benefits from IS/IT investment are IS/IT investment are potentialpotential (expected) benefits only(expected) benefits only

• subsequent events & managerial subsequent events & managerial actions will impact on whether or actions will impact on whether or not they are not they are actually realisedactually realised as benefits to organisationas benefits to organisation– need for need for post-implementationpost-implementation

evaluationevaluation

Deriving benefitsDeriving benefits

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Realising benefitsRealising benefits• most benefits derived post-most benefits derived post-

project implementationproject implementation– need to evaluate need to evaluate pre-projectpre-project to to

articulate / quantify articulate / quantify potentialpotential benefitsbenefits

– need to evaluate need to evaluate effectseffects of changes of changes post-projectpost-project to determine if benefits to determine if benefits have been realisedhave been realised

““If no measurable effects can be identified post-If no measurable effects can be identified post-project, other than the implementation of the project, other than the implementation of the technology itself, then one must conclude that technology itself, then one must conclude that no benefits have actually been realised.”no benefits have actually been realised.”

(Ward et al. 1996)(Ward et al. 1996)

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On-going evaluation of IT On-going evaluation of IT investmentsinvestments

Pre-investment Development and/or acquisition

Post-implementation

Potential benefits ofEC investments

Realised benefits ofIS/IT investments

Evaluation required

Time

Proactivebenefits

managementrequired

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Benefits management process Benefits management process modelmodel

Identifying & structuring

benefits

Potential forfurther benefits

Evaluating &reviewing results

Planning benefitsrealisation

Executing the benefits realisation

plan

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Identifying & structuring Identifying & structuring benefitsbenefits

• proposed benefits identifiedproposed benefits identified– suitable business measures suitable business measures

identifiedidentified•both financial & non-financialboth financial & non-financial

• structure benefits to understand structure benefits to understand linkage betweenlinkage between– technology effectstechnology effects– business changebusiness change– business objectivesbusiness objectives

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Planning benefits realisationPlanning benefits realisation

• allocate specific responsibilities allocate specific responsibilities for realising benefitsfor realising benefits– reject benefit if responsibility reject benefit if responsibility

cannot be allocatedcannot be allocated

• required business changes required business changes assessed and planned forassessed and planned for

• identify times when benefits will identify times when benefits will appearappear

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• Consider full cost ofConsider full cost of– IT development + on-going IT development + on-going

operations, etc.operations, etc.– business changesbusiness changes– is project viable?is project viable?

Planning benefits realisationPlanning benefits realisation

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Executing the benefits Executing the benefits realisation planrealisation plan

• implement IS/IT projectimplement IS/IT project

• carry out necessary business carry out necessary business changeschanges– change implementation planchange implementation plan

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Evaluating and reviewing Evaluating and reviewing resultsresults

• Measures identified in Stage 1 Measures identified in Stage 1 used to evaluate effects of used to evaluate effects of projectproject– review is of realisation of benefits, review is of realisation of benefits,

not of project progressnot of project progress– not a system quality reviewnot a system quality review– not a witch huntnot a witch hunt– not an auditnot an audit

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• Identify intended benefits that Identify intended benefits that have/have not been achievedhave/have not been achieved

• Identify benefits achieved that were Identify benefits achieved that were not anticipatednot anticipated

• Identify non-benefitsIdentify non-benefits– decide on action at deal with problemsdecide on action at deal with problems

• Identify future potential benefitsIdentify future potential benefits


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• Learn from success and failureLearn from success and failure

• Vital in multi-stage projects where Vital in multi-stage projects where subsequent benefits depend on subsequent benefits depend on capabilities developed early oncapabilities developed early on


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Potential for further benefitsPotential for further benefits

• Post-project reviewPost-project review– further benefits now realisable (not further benefits now realisable (not

envisaged earlier)envisaged earlier)

• Need now to plan to realise these Need now to plan to realise these further benefitsfurther benefits

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Planning/Alignment

Evaluation

Benefits

* Are we deriving the maximum benefit for the organisation?* Are we addressing change management issues? - processes - training - trading partners - job redesign

* Where are we headed?* What are our objectives?* How can IS/IT support / enable achievement of objectives?* Are we proposing coherent, strategic investments?

* Are we aware of the value of our IT investments at certain critical

points in the life cycle?* Can we establish a realistic business case?* Are we getting things well done?

Broadening Broadening considerations of considerations of value of ITvalue of IT

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IT Evaluation & Benefits IT Evaluation & Benefits Management Life CycleManagement Life Cycle

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SummarySummary• Chapter has focused Chapter has focused

– on business value from ITon business value from IT– need to implement sound IT governance need to implement sound IT governance

processes & practicesprocesses & practices– need to carefully evaluate IT need to carefully evaluate IT

investmentsinvestments– need to proactively manage realisation need to proactively manage realisation

of benefits from ITof benefits from IT– need to create ongoing cycle of need to create ongoing cycle of

planning, evaluation, benefits planning, evaluation, benefits managementmanagement

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IT Governance: delivering value from e-Business