, , , , , , , , ,

”In a rapid changing environment and in most organizations, traditional IT governance (planning, budgeting and performance management) is the key source of competitive disadvantage. ”

Current research shows that traditional IT governance (based on planning, budgeting and performance management), as part of a command and control management approach, has a negative effect on corporate competitive advantage.  It is significant that 75% of respondents state that current governance method does not cope with unpredictable change and 90% state it does not bring value to business. This is a frightening scenario of IT organizations and businesses that do not have right perception of their environment and hence the right approach in governance.  But why is this? What are the mechanisms that jeopardizing the business’ market position?

Traditional governanceSource: Beyond Budgeting Roundtable Analytics 2013

Let us start with the “unpredictability” factor. It is fair to say that digitalization is the predominant force that is re-designing the business game plan. Some consultants are bold to call the digitalization disruptive force as the third industrial revolution (after steam engine and electricity) – to express the magnitude of the change. Advances in social media, mobility, cloud services and big data are creating a sense of that the revolution will come – but not how or its exact impact. We frankly don’t know what will be the end effects or end point of the digitalization revolution. But what we do know is that that it will come – like a big earthquake waiting to erupt (in some industries it has already erupted with devastating effects). The “unpredictability” and uncertainty is here stay and will influence our life and businesses a long time going forward.

Looking back 15-20 years ago, very few talked about a digital revolution. A very few industries were affected but it was seen as an isolated incidents rather than a systematic transformation of the business environment. Before that, business climate was stable and predictable. Sure, the introduction of PC, radio, Internet and other innovations changed the landscape but not fundamentally in its roots. We still believed that the same control mechanisms could be used – traditional governance. During the last 15-20 years with digitalization and financial crises has challenged that belief.

It is fair to say that the last 60 years have been quite stable from a business perspective. At the same time, there has been a growing belief in management models praising control, efficiency, and risk minimization.  For example, with the introduction of IT in banking, approximately 70% of its staff could be rationalized and removed – by more efficient process and structure (automation).  The idea of IT outsourcing to reduce cost further with long contracts, complex structures and extensive control mechanisms. Excess planning, control and budgeting could realize the benefits. Business, and primarily IT, has taken the role of production units (Operational Excellence) based on high level of control, organization obesity, and process infarction influenced by manufacturing industry with aim of productivity gains. It is has proven to be a very successful management model.

The “Operational Excellence” management model is based on the thesis of future predictability. Production chains are only efficient if changes and disturbances can be removed (lean = waste). But today’s business situation is not predictable but rather increasing in unpredictability – driven by digital disruptive trends. Changes and disturbances will be part of our daily life and will increase in frequency. The fundamental thesis therefore does not work.

So, the question is really – do we believe in the “Unpredictability” and the digitalization trends? If “yes”, then the governance model need to change and be more agile, or “no”, then continue with the current governance model.

The research shows that todays IT and business managers are confused of how to handle the situation. 90% of IT and business managers see that the current governance structure does not bring value but still over 50% of IT managers continue with old the system with limited effects. Why? 75% of IT and business managers see that the current governance does not cope with “unpredictability” but still a majority of IT managers continue with same old planning, budget and performance management model – jeopardizing the enterprise competitive advantage. Again – why?

It is interesting to notice that CEOs have already recognized the high level of “Unpredictability” in the market. In fact “unpredictability” has the most common word in CEO presentations during 2012 (Gartner 2012). The evidence is there, so why have not CIOs and IT organizations acted?

My point of view is that the expectation from the outside on the IT organization is to be “operational excellence” and act as a production unit in the same way as Toyota or Volvo – until proven otherwise.  Managers that can fulfill this expectation through a “control and command” management style chasing cost reduction are successful and rewarded. Why challenge the system – if it can affect my bonus? IT is in many cases seen as a “black box” that is hard to understand but cost enormous amount of money. Interestingly, when IT organization with an “operational excellence” approach face further cost reduction demand, then it is through further control and structure – reducing cost efficiency and business value creation.

Could it be as simple as a communication problem between IT and business? That IT cannot explain how IT work and how IT creates value? Yes, that can be a root cause of the problem. If CIO cannot express the value of IT in the business IT value chain, then it needs to adopt the false expectations on IT as a production unit. If IT cannot express how IT disruptive trends affect the business, and how IT can help – then IT is forced into a distance position in the business innovation work. But to express the value of IT takes business strategy knowledge, expertize in governance and a passion and drive change. Is that really the competence that is rewarded in today’s IT organization?

My recommendation:

  • Ask yourself how you view the news around “unpredictability” and digitalization. Do you believe in these trends? If yes, what can you do to change the governance style in your company?
  • Set up framework for measuring Value of IT based on the expectations on IT in business IT value chain.
  • Communicate with business on the benefits and value of the IT organization. How can IT support competitive advantage and revenue growth?
  • Obtain new competences in business strategy, governance, and change management.

The digitalization disruptive trends are re-shaping the business landscape in many industries. The effects are destroyed barriers of entry, definition of customer value, and the basis for competition challenging many businesses competitive advantage. The unpredictable and uncertain business landscape is meet by traditional governance – in terms of budgeting, planning and performance management (inflexible control systems) – leading to competitive disadvantage (boom and burst).  Many CIO (approximately 50%) still run traditional governance even though 75-90% are aware of the problem. It is time to act and make a difference! Let us move to a more agile management model that actually can meet unpredictability, create business value and re-brand IT as a contributor of competitive advantage.

Hans Legend 1