Effective Governance – Aligning Culture, Strategy and IT to Create Value

Over the last two decades, I have worked with many organizations, led the development of a number of frameworks, methodologies and techniques, written a book and numerous articles, and give more presentations than I care to count on the topic of delivering on the promised value of IT. While I would like to think that I have made a difference, and know that in more than a few cases I have, there is still have a long way to go. Frameworks and methodologies are necessary, but not sufficient to address the challenge of realizing the full value potential of IT-enabled change. Last year, I authored a thought leadership report with the Benefits Management SIG of APM UK entitled Delivering benefits from investments in change: Winning hearts and mindsThe main message of this report is that we need to move beyond the current culture of delivery – build it and they will come, to one of value, and that this will require a new, and more effective approach to governance that promotes and supports such a culture.

A number of articles I have read over the last few days have caused me to further reflect on the relationship between value, culture, strategy and IT, and the role of governance in bringing this all together.

The first of these is a Fast Company article, Culture Eats Strategy For Lunch, in which Shawn Parr contends that culture is “often discounted as a touchy-feely component of business that belongs to HR”, whereas in fact “It’s not intangible or fluffy, it’s not a vibe or the office décor. It’s one of the most important drivers that has to be set or adjusted to push long-term, sustainable success.” Paraphrasing Shawn, it is culture that can install and nurture a feeling of “common purpose”, as described by Joel Kurtzman in his book of the same name, by providing focus, motivation, connection, cohesion and spirit. I came across a somewhat different , but reinforcing view of “common purpose” in a Cutter Consortium blog by Carl PritchardCommander’s Intent and Corporate Guidance. The concept of “commander’s intent” originated in the German military almost 200 years ago, in reaction to disastrous defeats. Defeats resulting from “malicious obedience” by the troops in the field to the tight control exercised from the top (sound familiar?). It’s premise is the, rather than apply such tight command and control, leaders should provide a clear sense of the outcomes they seek and the parameters they will accept – a “common purpose”, then give subordinate leaders freedom and flexibility in planning and execution. It’s a trusting relationship between manager and subordinate and, again, one that has clear application to the broader business environment.

The next article from strategy+business, Seven Value Creation Lessons from Private Equity, reinforces the importance of a culture of value, stating that “Companies are in business to create value for their stakeholders…” and that “A select number of them get it right…”. I would broaden these statements to include all enterprises, be they in the private or public sectors, for profit or not-for-profit (by choice, that is!). Unfortunately, most enterprises don’t do a good job of this. The article suggests that all enterprises could improve their performance by “following seven imperatives from private equity to build a value culture regimen”.  These are:

  1. Focus relentlessly on value.
  2. Remember that cash is king.
  3. Operate as though time is money.
  4. Apply a long-term lens.
  5. Assemble the right team.
  6. Link pay and performance.
  7. Select stretch goals.

While, as the article states, “Private equity firms enjoy a number of natural advantages when it comes to building efficient, high-growth businesses…, the article goes on to say “the best practices of top-tier PE firms still provide powerful and broadly applicable lessons” – my experience would certainly support that view.

Unfortunately, the problem for many enterprises starts with the first imperative above. A fundamental problem here is that in many enterprises there is limited understanding of what constitutes “value” for the enterprise, or how value is created. As Daryl Plummer said, in a recent Financial Times article Don’t go chasing ghosts in the cloud, discussing how to measure the value of the “cloud”, ROI all too often becomes the surrogate for value. Again, while his comments are specific to the “cloud”, they have broader application. ROI is usually totally focused on direct financial impact, while value in fact comes in many different forms. As the French actor and playwright, Molière, said ” Things only have the value that we give them”. We need to take a broader view of value – one where we recognize that value:

  • expresses the concept of worth;
  • is context specific, dynamic and complex;
  • can’t always be measured in financial terms;
  • to one person may not be valuable to another;
  • today may not be valuable tomorrow.

A clear and shared understanding of value is, or should be the foundation for a sense of “common purpose”  – providing the guiding light for why we do things, and how we do them.

My thinking about the next topic, strategy, was triggered by an Executive Street article by Joe Evans, Integrating Business Unit Strategies into a Synchronized Corporate Strategic Plan. Strategies, whose primary objective should be to to create and sustain value, are often poorly defined and even more poorly communicated. One study, described in a 2008 Harvard Business Review articleCan You Say What Your Strategy Is? by David J. Collis and Michael G. Rukstad, found that most executives cannot articulate the basic elements of strategy of their business – objective, scope and advantage – in a simple statement of 35 words or less – and that if they can’t, neither can anyone else. Joe contends that as businesses grow increasingly complex, with multiple, often globally dispersed, divisions and units supporting diverse lines of business, strategic planning models must adapt and change beyond a “command and control, one size fits all” approach if optimal results are to be realized. Linking back to “common purpose”, and “Commander’s intent”, the corporate strategy for a large and diversified business should serve as the umbrella strategy that provides overall structure, goals and measurement – the outcomes they seek and the parameters they will accept. Business units then have the freedom and flexibility to develop and execute their strategic plans under that umbrella, such that their results are consistent with, and contribute to overall corporate strategic goals. This approach leaves the accountability for leveraging intimate knowledge of customers, competitors, employees and culture to the business layer closest to the action – to the “troops in the field”,  allowing the flexibility to plan autonomously while remaining aligned with the overall corporate strategy and goals. One word of caution here – the more complex the business, and the more multidimensional the strategies, the more they may become interdependent –  to avoid falling victim to the “law of unintended consequences”, there must be effective communication and coordination between the business units to ensure that such interdependencies are recognized, and managed.

So, you might well be asking at this stage, where does IT fit in all of this? While I would argue that IT, in and of itself, delivers no value, how we use IT – the change that IT both shapes and enables can create create significant value. With the pervasiveness of IT today, embedded in more and more of what individuals, societies and enterprises do, it is a key element of most business strategies, and investments. Yet, the track record of actually realizing value from those investments is far from stellar, and the IT function, specifically the CIO, is often in the position of having to justify or defend IT’s contribution. While there is certainly still room for improvement in the IT function, they can only be held acceptable for the delivery of IT. The business, the users of the technology, must be ultimately accountable for defining the requirements for, meaningful use of, and value creation from the services that the IT function provides. If they are to deliver on this accountability, business leaders must adopt an effective, value-driven approach to governance that promotes and fosters a culture of value – one which incorporates:

  • A shared understanding what constitutes value for the enterprise, how value is created and sustained, and how different capabilities contribute, or can contribute to creating and sustaining value;
  • Clearly defined roles, responsibilities and accountabilities of the board, executive management, business unit and delivery function management in the realisation of benefits and business value from investments in IT-enabled change;
  • Effective governance processes and practices around value management, including business case development and use, investment evaluation and selection, programme and project execution, asset management, with active benefits and change management; and
  • Relevant metrics integrated into the business which monitor the effectiveness of the approach and encourage continual improvement of the relevant processes and practices.

There are many resources that can help business leadership in adopting such an approach. One such resource, the development of which I led, is the Val IT Framework from ISACA, which is available for free download.

 

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.