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

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

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 5

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 6

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 7

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 8

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 9

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 10

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 11

12 Governance Issue: 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

13 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

14 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

15 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

16 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

17 Drivers toward outsourcing today Costs and Quality –Tighter overhead cost control of fringe benefits –Aggressive use of low-cost labor –Tough standards –Effective bulk 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

18 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

19 When to outsource When do benefits outweigh risks? 1.Position on strategic grid

20 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

21 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

22 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

23 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

24 What about the contractor? Business model for consulting/contracting companies Risks

Exam Long Answer Questions Write in proper paragraphs Make one clear point per paragraph Use evidence and examples from class 25

Sample long answer question Your business has just decided to outsource part of their IT for the first time. What are some of the most important things you should know about negotiating and managing the outsourcing contract? 26