Who is “Minding the Farm”?

Two recent articles, one about outsourcing, and the other about risk-management provide yet further evidence of the current shortcomings of enterprise governance, and the urgent need to take action.

Outsourcing – seen as one approach to deal with the current economic downturn – is the subject of a recent CBR article Euro business execs blind to outsourcing cost benefits by Kevin White in which he discusses the results of a new study.  The study, which was carried out by Cognizant in conjunction with Warwick Business School, found that:

  • Most CIOs and finance directors think the outsourcing of IT services can help them reduce costs but fewer than half of them could actually prove it, since they do not try or find it difficult to quantify its impact on the bottom line.
  • More than a third simply do not bother to assess the financial contribution to their businesses and 20% cannot remember if they have tried.
  • A third of CIOs and CFOs believe that the business value of outsourcing cannot be assessed beyond a one-time cost saving.

The research was carried out to assess attitudes to outsourcing and the impact of the current economic climate on IT and business decisions. The researchers polled executives in some of Europe’s biggest companies. The businesses reached across the UK, Germany, Switzerland, Benelux, France and the Nordics and a majority of the 263 respondents were reported to be spending between $5 and $100 million annually on outsourcing.

“They seem to believe outsourcing will save money, but fewer than 20% of the CFOs and CIOs had any confidence in their quantification,” said Sanjiv Gossain, VP and head of Cognizant in the UK. The study also showed that CFOs feel CIOs need more help to communicate the full benefits of outsourcing but only 37% of CFO respondents rate their CIOs ability to do this.

The study report concluded, “Senior executives appear to be making outsourcing decisions based upon short term cost cutting – which remains crucial – but outsourcing’s impact stretches well beyond the initial labour, skills and cost advantages.”

Shareholders and taxpayers alike should find it totally unacceptable that such major decisions would be made without a full understanding of their impact,  inadequate or no quantification of business value, and without even measuring whether cost savings are actually being realized.

Governance shortcomings also extend to risk-management – another recent article from Accenture Heeding lessons from economic downturn discusses the results of an an their 2009 Global Risk Management Strategy Study which found that the vast majority (85 percent) of corporate executives surveyed say they need to overhaul their approach to risk-management if the lessons of the economic crisis are to be used to improve business results.

The study, based on a survey of 260 chief financial officers, chief risk officers and other executives with risk-management responsibilities at large companies in 21 countries, also pointed to a lack of integration of current risk-management and performance-management processes. While nearly half the respondents said that their company’s risk-management function is involved to a great extent in strategic planning (48 percent) or in investment and divestment decisions (45 percent), only 27 percent said the risk-management function was involved to a great extent in objective-setting and performance management.

“Executives could improve their organizations’ performance and position themselves for economic recovery by linking and balancing risk management and performance management to aid their decision-making and increase shareholder returns,” said Dan London, managing director of Accenture’s Finance & Performance Management practice. “Being effective at this also requires companies to integrate their risk management capabilities enterprise-wide.”

Survey respondents identified a number of common problems with their risk-management functions, including:

  • Ineffective integration of risk, return and capital issues in decision-making (identified by 85 percent of respondents);
  • Lack of alignment between the company’s strategies and its risk appetite (85 percent);
  • Insufficient enterprise-wide risk culture (82 percent);
  • Inadequate availability of timely risk, finance and business data (80 percent);
  • Lack of integration and aggregation across all risk types (78 percent); and
  • Ambiguous risk responsibilities between corporate and business units (78 percent).

What I find particularly worrisome is that I could substitute the term “value” for “risk” above and the findings would still apply.

The Val IT™ definition of value is “the total life-cycle benefits net of related costs, adjusted for risk and (in the case of financial value) for the time value of money”. When management continues to focus on cost, with little understanding of, or attention to benefits or risk, or indeed of overall value, and also fails to manage actual performance, it should come as no surprise that we continue to have such a poor track record of actually creating and sustaining value – especially, but certainly not limited to IT-enabled investments! Enterprise governance needs to focus on creating and sustaining value, integrating all aspects of value – benefits, costs and risks –  to support the full life-cycle of investment decisions from ideation, definition, selection and execution of investments through to the operation and eventual retirement of resulting assets.

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