This post is an extended version of one developed jointly with Professor Joe Peppard of the European School of Management and Technology in Berlin which appeared previously as an HBR blog on May 15th, 2014.
Sir Christopher Kelly, a former British senior civil servant, recently produced a damning report that reviewed the events which led to the £1.5 billion capital shortfall announced by the UK’s Co-operative Bank in June 2013. Running to 158 pages, it describes what happened, identifies the root causes and draws out lessons.
One section highlights the problems encountered as the bank attempted to replace its core banking systems, a programme that was cancelled in 2013 at a cost of almost £300 million. The report underlined a series of significant leadership and management failings that were to blame for the spiraling IT costs which contributed to the bank’s capital shortfall. This shortfall resulted in the Co-op Group ceding control of the bank to bondholders, including a number of U.S. hedge funds.
The investment objectives of the IT-transformation programme were laudable; leapfrogging the competition and gaining an advantage, through improved customer relationship management and quicker delivery of new products. Indeed, the age and complexity of the legacy systems meant that the bank’s technology platform was unstable, expensive to maintain, complex to change, and ill-equipped to support its current and future business requirements. There were particularly severe problems with the functionality of the online business-banking platform. These weaknesses resulted in high running costs, upgrading to comply with new regulatory requirements eating up considerable resource, and significant operational risk. It appeared to be an attractive investment.
However, Sir Christopher wrote: “The weight of evidence supports a conclusion that the programme was not set up to succeed. It was beset by destabilizing changes to leadership, a lack of appropriate capability, poor co-ordination, over complexity, underdeveloped plans in continual flux, and poor budgeting. It is not easy to believe that the programme was in a position to deliver successfully.” The bottom line – the benefits of the investment may have been attractive, but they were not achievable!
Not set up to succeed is a key phrase. More worryingly, the factors identified in the report as contributing to the failure are ones that we all too frequently encounter when we review challenged or failed projects. All of the reasons identified are well known and serve to highlight a low level of digital literacy across c-suites, and the failure of corporate governance and leadership to make informed IT investment decisions.
The report noted: “If the programme was ever to have had a chance of succeeding it would have had to have been robustly managed by people with the right capabilities and experience using the best possible project management discipline.” It went on to emphasize “It would also have had to be subject to searching challenge and scrutiny at Board, Executive and programme management levels. The Bank did not provide any of these things to the extent necessary to ensure success.”
Non-executive directors were also in Sir Christopher’s cross-hairs. He wrote: “It is unreasonable to expect non-executive Board members to audit information provided to them in detail. But it is their responsibility to question it [our emphasis]. It is difficult to avoid the conclusion that both Board and Executive failed to interrogate the programme sufficiently closely and paid inadequate attention to its obvious difficulties until it was too late.” Moreover, he found that former members of the Board’s Banking Transformation Programme Sub-Committee who, he noted, “should have been better placed than other directors to understand the programme, described being surprised that it failed.” His damning critique: “They should not have been.”
In our work, we find that not only are boards ill-equipped to deal with digitization but neither are many executive management teams. Most seem happy to abdicate anything to do with IT to their chief information officer (CIO). This is merely setting up the investment to fail.
Research that we have conducted reveals that leadership teams play a pivotal role in determining whether or not their organizations exploit the innovative opportunities provided by IT. Realizing value from IT or, more accurately, the change that IT both shapes and enables, requires the CEO’s attention and oversight. CEOs set the tone for IT, and their active participation determines whether their organization optimizes the return from spending on IT. Most leadership teams don’t seem to understand this, or quite know what they should do. The fiasco at the Co-op starkly illustrates this.
We have developed a simple yet powerful framework that leadership teams can use to navigate the digital landscape and avoid the kinds of problems that the Co-operative Bank suffered. It helps to ensure that they:
- make informed decisions, balancing the attractiveness of an investment with their organization’s capability to achieve the desired business outcomes; and
- continue to effectively monitor and assure the achievement of those outcomes.
The framework is based on four business-focused questions that are at the core of effective governance of IT that every member of a leadership team should have in his or her head. We call these questions, which were originally introduced in The Information Paradox, the four “ares” .
Are #1 – Are we doing the right things?
This is the strategic question. The first accountability of the CEO is to clearly and regularly communicate what constitutes value for the enterprise and the strategic objectives to which all investments must contribute, against which their performance will be measured. The second, is ensuring, through the initial investment selection process and regular portfolio reviews, that resources are allocated to investments that are both aligned with, and have the greatest potential to contribute to the strategic objectives.
In the case of the bank, while the strategic rationale for the investment was not in question, as the report noted, the bank “was over-estimating its capability to deliver such a complex programme.” Evaluating such risks is a key consideration is assessing any IT investment, especially one that is part of a major transformation. Two key questions are: “Do we understand the extent of change required for this investment to succeed? And is this achievable?” An investment of such complexity and risk had not been successfully undertaken by any UK full-service bank, or, with limited exceptions, any major banks in Europe or North America.
Moreover, the initiative also seems to have been championed by the CIO and when he left the organization in 2008 nobody on the leadership team took up the mantle, and the drive to make the investment a success seemed to have been lost. Although we are going beyond the evidence in the report, we do not think that it is unreasonable to suggest that the investment was considered as a technology programme and not a business change initiative.
Are #2 – Are we doing them the right way?
This is the architecture question. Because this question is usually thought of as relating to technical architecture, it is generally considered by CEOs as a technical issue and the domain of the CIO. Nothing could be further from the truth. What we are advocating here is a broader view of architecture – enterprise architecture – which has both organizational and technology components. The CEO is accountable for ensuring that there is an appropriate enterprise architecture in place.
Key questions here are: “Is our investment in line with our enterprise architecture?” and “Are we leveraging synergies between our investments?” The Kelly report didn’t consider this question, so we cannot comment specifically as to whether adequate consideration was given to the extent of process standardization and the degree of integration across all businesses. However, the observations in the report suggest that, if such consideration had been given, it may have raised a number of flags. As a full service retail bank, that also serves small and medium-sized enterprises, the Co-op provides a variety of products and services (e.g. deposit taking, lending, credit cards and payments) to customers via internet, mobile and branch channels, getting the overall operating model design right is paramount.
Are #3 – Are we getting them done well?
This is the delivery question. Although this is the area where there is a significant body of knowledge, it is the one where the failure of governance continues to result in significant and very visible failures. We continually find that most major transformation initiatives end up being managed as IT projects with responsibility abdicated to the CIO. Key questions here are: “Do we have effective and disciplined delivery and change management processes?” and “Do we have competent and available technical and business resources to deliver the required capabilities, and the organizational changes required to leverage them?”
This is clearly where the investment floundered. As the report states, “the Bank neither had the requisite levels of discipline before the programme began, nor built it during the programme.” Communication and coordination between different parts of the business involved in the programme was weak. Dysfunctional and unconstructive working relationships across these areas did not help matters. There was also a lack of clarity as to responsibilities for deliverables, with interviewees for the report describing “managers managing managers, managing managers.” A Board Sub Committee was supposed to provide closer oversight of the transformation programme, but, as Sir Christopher reported, the figures were neither analyzed in sufficient detail nor with sufficient consistency to give it insight into key drivers of cost escalations. The message consistently given to the board was that it was making satisfactory progress. Programme managers succumbed to communicate matters in a favorable light whenever possible. This obviously has a deeper organizational cultural implication.
Are #4 – Are we getting the benefits?
This is the value question. Surprisingly, this is the question that receives the least attention in most enterprises: few measure or assess whether expected benefits have been delivered. As in the case of the strategic question, this question cannot be delegated to the CIO although, all too often, is. In ensuring that expected benefits are realized and sustained, the CEO is accountable for maximizing value from the portfolio of business change investments. Key questions here are: “Do we have a clear and shared understanding of the expected benefits from the investment?” and “Do we have clear and accepted accountability for realizing the benefits, supported by relevant metrics?” The Kelly Report notes that there was a failure to develop a detailed business case and a complete lack of consistency about the expected benefits across the programme.
Addressing the four “ares” is not just something to be done on a one-time basis to secure funding for any proposed investment. Nor can they be addressed in a sequential, or “waterfall,” way. They must all be considered, both individually and collectively, on an on-going basis to ensure that value is realized from investments in IT- enabled change. Boards should ask these questions, and expect that CEOs and/or other executives will be able to answer them – not just at the time of the initial investment decision, and on an on-going basis. CEOs may balk at this, but they need to recognize that in today’s digital economy IT is increasingly embedded in all aspects of their business, and creating and sustaining value from the change that IT both shapes and enables, falls within their realm of accountabilities. The consequences of failing to do so are starkly illustrated by the Co-operative Bank’s crisis.
You can find more about the four “ares” here.