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 “It is the business environment that sets the pre-requisites for the governance method – and not the other way around.”

We are currently approaching a colder season with yellow leaves and snow around the corner. In a couple of weeks I with change tires on my car to better handle snow and ice on the roads. It is natural for all of us in the north to prepare for the winter with heavier coats, gloves and snow tires. It is the season that sets the pre-requisite for our behavior and equipment used in order to continue with our comfortable lives. To ignore winter and continue will summer shorts and summer tires are not recommended.

Seasons (variation in business demand) are present also for IT organizations. The thing is that it is harder and harder to predict the seasons and its effects of digitalization and unpredictability is increasing.  Still many companies think, based on their governance structure that it will summer for at least 5 more years – so no need for snow tires. The effects of this behavior (meting new season with old behavior and equipment) are evident when the first snow falls in November and the whole city is paralyzed because we have not foreseen this change in weather. Buses and trains won’t run, and cars with summer tires are stuck causing endless highway congestions. Not a great day we want to relive – but many companies do it over and over because of traditional governance models. Let me explain this a bit more!

In a recent survey by Beyond Budgeting Round Table (2013), it was concluded that traditional governance (planning, budgeting and performance management) did neither contribute to business success nor addressed an unpredictable environment. These are interesting conclusions considering that tradition planning and budgeting are still the most common method for managing cost and performance within IT organizations. The unpredictability in many industries is increasing, and the need for IT departments to create value and cost efficiency makes these conclusions extra interesting.

The first observation regards the time perspective of financial and business planning. The financial and political environment is uncertain due to economic turmoil and political instability. But the “biggest” threat to business models and competitive advantage (Gartner 2012) was the advances in technology and IT. The digitalization tsunami is washing over us and changing the game plan for all industries. The predictability has been drastically reduced to 6-12 months – after that it is foggy. There is no question that the business environment will change – and the effects will be enormous.

At the same time, many IT organizations continue with annual budgeting cycles. The budget is discussed and set in September for the coming year. This means, considering a predictability of 12 months, that the last 4 months (1/3 of budget period) of the budget are based on guessing. Nobody can say, with any certainty, anything about the conditions at that time – other that it will not be as predicted. One can also imagine how the annual budget would address a groundbreaking change in market conditions in the first 6 months of the budget. Would it be possible for the organization to easy reallocate resources to met the new business demand? In the same way as the first day of snow would cause chaotic effects on traffic – the adjustment is probably not in a smooth and efficient way.

“It is the business environment that sets the pre-requisites for the governance method – and not the other way around.”

The key problem is how IT organizations to strategic planning. There are many IT organizations developing long-term (> 3 years) IT strategies to set priority and resource allocations.  With the high level of unpredictability, the IT strategy is “old” when launched and is a competitive disadvantage. The fact is that the long-term performance contracts are based on assumptions that are most likely not to be correct. A CIO proudly stated that he had locked strategic KPIs for the next 4 years – his work was done! How can an organization and manager with any pride attempt to describe a scenario for next 4 years when they cannot predict more than 9 months into the future? Do they know something about the future that we ordinary people do not know? No, they are just ignoring how the business actually works – not considering that winter will come any day.

A year ago I had a discussion with a management consultant in IT strategy and governance to discuss the issue of unpredictability. His conclusion was that it takes at least 12 months to design and implement an IT strategy based on current frameworks. Any other time period was unrealistic. The problem with that reasoning is that it is not considering the effects of digitalization and increased unpredictability. It is not up to deciding the lead-time of developing and implementing an IT strategy; it is the level of unpredictability of the industry. My view is that the maximum lead-time for an IT strategy should be 10 weeks – and that is possible with a more agile and iterative approach (contact me to learn more). That is where competitive advantage is created!

It is clear that there is a miss-match between the level of unpredictability in many industries, and the methods used to create business value (governance and strategy). The budgeting rhythm is not in synch with the business rhythm – and is causing strange effects both organizational behavior and competitive advantage. The effects of this miss-match are devastating when companies have not adjusted their governance model to new business environment – and frankly gone out of business. Ask Kodak, and Blockbuster. A key learning is that it is the business environment that sets the governance method – and not the other way around. Think about that! New conditions require new governance methods!

“We trust data (often describing past events) rather than our own judgment. So, when our gut feeling tells us that something is wrong, it is worth nothing if it cannot be proven in at least one Excel sheet of past performance data.”

“So what does this mean for me? Our budgeting and planning system have worked beautifully the last 20 years showing great value for money. “ I am sure that the traditional budgeting and planning system to manage cost has worked well, but the problem is that the environment is changing. The interesting is that many IT organizations continue with traditional governance – because “that is something we always have done – and cannot be changed”.  What is the reason for this conclusion? Have senior managers lost power to run their business as they want? Are processes and Excel sheets the new kings around? Not far from the truth. My view is that we moving leadership from personal judgments, discussion and decisions to historical facts and figures in Excel sheets. We trust data (often describing past events) rather than our own judgment. So, when our gut feeling tells us that something is wrong, it is worth nothing if it cannot be proven in at least one Excel sheet of past performance data. The problem is that past performance data says nothing about the future digitalization and its impact. The summer temperature does not say anything about when the winter will come or how cold it will be – it is unpredictable.

So, what can you concretely do to address unpredictability and deliver more value to business and customers? Well, there are only two ways forward.

  1. Close your eyes and hope the unpredictability will go away.
  2. Act! Recognize the challenge and do something about it!

The fact is that HBR (2013) show in research that 57% of business executives expect a significant change in their IT function is business demand is not met. So, good luck with alternative 1 – it is most likely that you will be without a job in 12 months.

So, what are some concrete steps to take to move in to a more business driven governance of IT. The first step is always to build awareness and acceptance of the problem – and wanting to do something about it.  It is also popular to build strong management alliances (management buy-in) to drive the change. But considering that these basic steps have been taken – here are som ideas of what to do.

Step 1: Understand your role – how do you deliver value?

The first step is to go back to basic. What is your role in the value chain – and how do you deliver value. These basic questions are often neglected when processes and Excel sheets have the answers to all the questions.

  • What is our role? What does business/customers expect from us?
  • How unpredictable in our future (months)? What internal/external trends are impacting your business? How does this affect you?
  • Start trusting your own analysis and judgment! Take back leadership – you are correct!

There are models to help you do this – give me a call to continue the discussion.

Step 2 : Take charge of your governance model

As stated in this blog post, the governance model has to be adjusted to meet the pre-requisites of the business environment it is set to govern. Go for simplicity, adaptively and efficiency rather than complicated governance structure that bring little value. What is actually driving cost and performance? Start tracking these “drivers” and not much else. There are models used by companies that has been proven to be very successful:

  • Rolling Financial Forecasts
  • Agile Performance Management framework
  • Value of IT frameworks
  • And many more

Understand that performance of an organization is driven by continuous improvements, learning and transparency. It is therefore necessary to integrate the suggested models with continuous improvement, learning and transparency.

Step 3: Show employees and managers that you trust them

Trust in your employees is the key success factor for performance (see earlier blog post). It is important that you as a leader concretely show that you trust your employees and managers. Reduce control systems and unleash performance in the organization.

  • Let units themselves decide on how to deliver business value – they know their customers the best (self-governing).
  • Trust employees’ judgment rather than Excel sheets.
  • Encourage new ideas and discussions!
  • Remove control systems that have a negative effect on performance.

In this blog post, I have compared business forecasting and weather predictions to explain that different types of weather or business conditions impact our behavior (governance). Even though weather forecasting is using scientific data models, sophisticated technology and hundred of years of knowledge – still a majority of weather predictions are wrong. That is how complex weather prediction is. In the same way, predicting the future business climate is hugely complex – and we cannot foresee what will happen. That is the beauty of business and weather. In Swedish, we have a saying “There is no bad weather – there is only bad clothing” meaning that we need to get dress according to the weather conditions. The weather will not change for you. The same saying applies to business and IT “There are no bad business change – there is only bad IT governance”. Worth thinking about!

Hans Legend 1