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IT Governance Components, Process and Challenges

In today's rapidly evolving business landscape, Information Technology (IT) governance stands as a critical framework that ensures the effective and strategic management of IT resources within organizations. It serves as the linchpin aligning technological strategies with overarching business objectives, mitigating risks, optimizing resource utilization, and ensuring compliance with regulatory standards. This comprehensive guide delves into the multifaceted aspects of IT governance, exploring its components, processes, and the prevalent challenges faced in its implementation.

Understanding IT Governance

Defining its purpose.

IT governance encapsulates the policies, procedures, and frameworks governing IT investments, operations, and decision-making processes within an organization. The fundamental purpose lies in harmonizing IT strategies with business goals, enhancing operational efficiency, mitigating risks, fostering innovation, and ensuring regulatory compliance. By achieving these objectives, IT governance becomes instrumental in shaping and supporting an organization's success in the competitive market landscape.

Components of IT Governance

• Strategic Alignment : This component revolves around ensuring that IT initiatives and investments are in sync with the broader business strategies. It involves defining clear goals and objectives that IT should achieve to contribute effectively to the organization's success.
• Risk Management : Managing IT-related risks is a pivotal component of IT governance. This includes identifying potential threats, implementing robust security measures, disaster recovery plans, and ensuring data integrity to safeguard against cyber threats and vulnerabilities.
• Resource Management : Efficient utilization of IT resources, including human capital, infrastructure, and financial assets, is crucial. Effective governance ensures optimal resource allocation to support business objectives while controlling costs.
• Performance Measurement : Establishing measurable KPIs and metrics to evaluate the effectiveness and efficiency of IT operations is essential. Regular assessments aid in identifying areas for improvement and opportunities for innovation.
• Compliance : Adherence to regulatory requirements, industry standards, and internal policies is integral. This component focuses on ensuring that IT practices and operations comply with relevant laws and regulations.

IT Governance Processes

• Strategic Planning

Strategic planning serves as the foundation for IT governance. It involves a thorough analysis of the organization's current IT landscape and aligning it with overarching business objectives. This process encompasses identifying technological needs, opportunities, and challenges that can impact the organization's growth. By understanding these factors, strategic planning guides the formulation of robust IT strategies. These strategies not only address current needs but also anticipate future requirements, ensuring that IT initiatives are aligned with the organization's long-term vision.

• Decision-making

Structured decision-making processes are crucial within IT governance. These processes incorporate comprehensive risk assessments, resource allocation strategies, and compliance considerations. By integrating these elements, organizations can make informed decisions that support business objectives while mitigating potential risks. The decision-making framework ensures that investments in IT projects and initiatives align with the organization's strategic goals. This approach fosters agility and adaptability, allowing organizations to respond effectively to changing market dynamics and technological advancements.

• Performance Monitoring and Assessment

Continuous monitoring and evaluation of IT performance against predefined Key Performance Indicators (KPIs) are central to effective governance. This ongoing assessment ensures that IT activities remain aligned with organizational goals. By tracking metrics related to efficiency, effectiveness, security, and service delivery, organizations gain insights into areas that require improvement. This iterative process of evaluation enables timely adjustments and optimizations to enhance overall IT efficiency and effectiveness.

• Risk Management

Identifying, assessing, and mitigating IT-related risks is pivotal for safeguarding an organization's assets and ensuring business continuity. Proactive risk management involves evaluating vulnerabilities, implementing robust security measures, and devising contingency plans. With the evolving landscape of cyber threats, effective risk management strategies are crucial in protecting sensitive data and mitigating potential disruptions to business operations.

• Compliance Management

Ensuring adherence to applicable laws, regulations, and internal policies is a critical aspect of IT governance. Regular audits, assessments, and compliance checks are conducted to verify that IT operations comply with legal requirements and industry standards. Compliance management not only mitigates legal and reputational risks but also fosters a culture of accountability and responsibility within the organization.

Challenges in Implementing IT Governance

• Rapid Technological Evolution

The relentless pace of technological advancements presents an ongoing hurdle for organizations. Staying abreast of emerging technologies such as AI, IoT, and cloud computing while ensuring their integration into existing governance structures poses a substantial challenge. Implementing governance that adapts swiftly to these innovations, maintains security standards, and aligns with business goals requires continuous vigilance and agile strategies.

• Cybersecurity Threat Landscape

The ever-evolving threat landscape of cyberattacks presents a formidable challenge. Organizations face an array of sophisticated threats, including ransomware, phishing, and zero-day exploits. Implementing robust cybersecurity measures within the governance framework becomes a critical priority. Continuous updates, advanced security protocols, and employee education are essential to mitigate risks and safeguard sensitive data from breaches.

• Complexity at Scale

Large enterprises often grapple with the intricacies of managing governance frameworks across diverse systems, departments, and geographic locations. Coordinating governance practices uniformly while accommodating the specific needs and nuances of different business units can be exceptionally challenging. Achieving coherence and consistency in governance across the organization demands a concerted effort to streamline processes and communication channels.

• Resource Allocation Dilemmas

Balancing resource allocation poses a persistent challenge for organizations. Determining optimal resource allocation across IT initiatives, infrastructure upgrades, talent acquisition, and innovation endeavors requires careful strategic planning. Often, organizations face dilemmas in allocating resources between urgent security needs and long-term technological innovation, necessitating astute decision-making and trade-off analyses.

• Cultural Transformation

Implementing effective IT governance often necessitates a cultural shift within the organization. Resistance to change, lack of awareness, and varying levels of technological literacy among employees can impede the adoption and success of governance initiatives. Overcoming these cultural barriers requires proactive change management strategies, continuous education, and fostering a culture that values and embraces technological advancements.

IT governance serves as a cornerstone for organizations aiming to leverage technology for competitive advantage while effectively managing risks and resources. By understanding its components, processes, and the challenges involved, businesses can craft robust governance frameworks tailored to their unique needs. Overcoming these challenges demands a proactive approach, continuous assessment, and a commitment to aligning IT strategies with organizational objectives.

In the dynamic digital landscape, embracing adaptable and resilient IT governance practices is not just a necessity but a strategic imperative for organizations striving for sustainable growth and success.

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Winter 2005

A matrixed approach to designing it governance.

Every enterprise engages in IT decision making, but each differs considerably in how thoughtfully it defines accountability and how rigorously it formalizes and communicates decision-making processes. Without formal IT governance, individual managers are left to resolve isolated issues as they arise, and those individual actions can often be at odds with each other. Our study of almost 300 enterprises around the world suggests that IT governance is a mystery to key decision makers at most companies. On average, just one in three senior managers knows how IT is governed at his company. (See “About the Research.”) In this case, ignorance is definitely not bliss. When senior managers take the time to design, implement, and communicate IT governance processes, companies get more value from IT.

About the Research

This article is based on two studies led by the authors. The first was a survey of CIOs at 256 enterprises in the Americas, Europe and the Asia/Pacific region on how large enterprises across a wide range of industries — both for profit and not — govern IT. The survey was developed by MIT Sloan’s Center for Information Systems Research in 2001 and distributed throughout 2002, both electronically and on paper, by Gartner Inc. to members of its EXP group and by CISR to participants in executive programs. Gartner additionally contributed to the research by conducting 10 case studies on IT governance. The second study comprised a set of 40 interview-based case studies at large companies such as Johnson & Johnson, Carlson Companies, UPS, Delta Air Lines and ING DIRECT, which examined IT governance in the context of organizational changes such as enterprise resource planning implementations, e-business initiatives, enterprise architecture development and IT-enabled organizational transformations. These cases were developed by CISR researchers and affiliates between 1995 and 2004. To understand how top-performing enterprises governed IT, MIT CISR researchers analyzed the data using both statistical and qualitative analysis. This article draws on and extends the material in P. Weill and J. Ross, IT Governance: How Top Performers Manage IT Decision Rights for Superior Results (Boston: Harvard Business School Press, 2004).

While the research did not identify a single best formula for governing IT, one thing is abundantly clear: Effective IT governance doesn’t happen by accident. Top-performing enterprises carefully design governance. In those companies, managers at all levels throughout the enterprise apply that design as they make daily decisions about the use of IT. Further, 60% to 80% of senior executives in those companies have a clear understanding of and can describe their IT governance. In fact, senior management awareness of IT governance is the single best indicator of its effectiveness.

The effectiveness of an enterprise’s or business unit’s IT governance can be assessed by evaluating how well it enables IT to deliver on four objectives: cost-effectiveness, asset utilization, business growth and business flexibility. Our research, which weighed each factor according to its relative importance to each company, showed that governance performance varies significantly across enterprises in an approximately bell-shaped distribution. (See “Assessing IT Governance Performance.”) According to this measure, high IT governance performance correlated with the achievement of other desired measures of success. For example, companies that effectively govern information technology garner profits that are 20% higher than those of other companies pursuing similar strategies. 1 They also achieve higher returns on equity and growth in market capitalization.

Assessing IT Governance Performance

View Exhibit

The worksheet below allows you to assess how well your company’s IT governance facilitates its goals. The average score in our sample was 69 out of 100. The top third scored above 74. How does your company compare?

Although it cannot be concluded that superior governance performance causes superior financial performance, it can definitely be said that the two measures correlate quite well. It is certainly plausible that the two are linked. Effective governance aligns IT investments with overall business priorities, determines who makes the IT decisions and assigns accountability for the outcomes. IT is inextricable from other key enterprise assets (financial resources, human resources, intellectual property, physical structure and organizational relationships), and its governance overlaps with other enterprisewide governance processes. There is surely a good deal to learn from examining how successful enterprises govern their IT.

How Key IT Governance Decisions Are Made

IT governance encompasses five major decision domains. IT principles comprise the high-level decisions about the strategic role of IT in the business. IT architecture includes an integrated set of technical choices to guide the organization in satisfying business needs. IT infrastructure consists of the centrally coordinated, shared IT services that provide the foundation for the enterprise’s IT capability and were typically created before precise usage needs were known. Business application needs are the business requirements for purchased or internally developed IT applications. Last, prioritization and investment decisions determine how much and where to invest in IT.

Each of these decision areas can be addressed at the corporate, business unit or functional level or some combination of the three. And senior management can hold business unit or IT managers accountable for the related outcomes. Thus, the first step in designing IT governance is to determine who should make and be held accountable for each decision area. (See “Key Issues for Each IT Decision Area.”)

Key Issues for Each IT Decision Area

IT governance encompasses five major decision areas. In thinking about who should make and be accountable for these decisions, a number of the questions should be addressed.

There are six archetypal approaches to IT decision making, ranging from highly centralized to highly decentralized. Most companies employ a variety of them, using different approaches for different decisions. In a business monarchy — the most centralized approach — a senior business executive or a group of senior executives, sometimes including the CIO, makes all the IT-related decisions for the enterprise. In an IT monarchy, those decisions are made by an individual IT executive or a group of IT executives. In a federal system, C-level executives and business representatives of all the operating groups collaborate with the IT department. This is equivalent to the central government and the states working together. In an IT duopoly, a two-party decision-making approach involves IT executives and a group of business leaders representing the operating units. In a feudal system, business unit or process leaders make separate decisions on the basis of the unit or process needs. And, finally, the most decentralized system is anarchy, in which each individual user or small group pursues his, her or their own IT agenda.

A matrix that juxtaposes the five decision areas against the six archetypal approaches creates on a single page a valuable tool for specifying, analyzing and communicating where IT decisions are made. Take United Parcel Service of America Inc. as an example. (See “IT Governance on One Page.”) UPS’s governance arrangements reflect the company’s commitment to offering total, integrated solutions for customers’ global commerce needs. Senior management accountability for principles and investment decisions ensures that IT issues are incorporated into the company’s strategic decision-making processes. The CIO, who is a member of the senior management team, translates principles and investment decisions into IT architecture and infrastructure (such as standards, policies and processes). Business unit projects, delivered in the context of business and IT principles, define business application needs in a way that both enhances business unit performance and supports corporate objectives. 2

IT Governance on One Page

A matrix that juxtaposes the five IT decision domains against five of the six archetypal approaches creates, on a single page, a valuable tool for specifying, analyzing and communicating where IT decisions are made. UPS’s governance is clear and relatively centralized: A subset of the senior management team takes responsibility for defining IT principles and IT investment; the CIO’s team is held accountable for IT architecture and IT infrastructure; and business unit leaders and enterprisewide process managers are responsible for defining business application needs.

UPS’s IT governance creates strategic control at the top of the company while empowering decision making at multiple organizational levels. Senior management works to make IT governance transparent so that everyone understands and follows prescribed processes for proposing, implementing and using IT. This limits the role of organizational politics in IT-related decisions and shows in the company’s bottom-line performance.

Governance Mechanisms

Once the types of decisions and the archetypes for making those decisions are mapped out, a company must design and implement a coordinated set of governance mechanisms that managers will work with on a daily basis. Enterprises generally design three kinds of governance mechanisms: (1) decision-making structures, (2) alignment processes and (3) formal communications.

Decision-making structures.

The most visible IT governance mechanisms are the organizational committees and roles that locate decision-making responsibilities according to intended archetypes. Different archetypes rely on different decision-making structures. Anarchies (which are rarely used — or at least rarely admitted to!) require no decision-making structures at all. Feudal arrangements rely on local decision-making structures. But monarchy, federal or duopoly arrangements demand decision-making structures with the representation and authority to produce enterprisewide synergies.

Alignment processes.

Alignment processes are management techniques for securing widespread and effective involvement in governance decisions and their implementation. For example, the IT investment proposal process delineates steps for defining, reviewing and prioritizing IT projects, in determining which projects will be funded. Architecture exception processes provide a formal assessment of the costs and value of project implementations that veer from company standards. Service-level agreements and chargebacks help IT units clarify costs for IT services and instigate discussion of the kinds of services the business requires. Finally, formal tracking of business value from IT forces firms to determine the payback on completed projects, which can help firms focus their attention on generating intended benefits.

Formal communications.

A huge barrier to effective IT governance is lack of understanding about how decisions are made, what processes are being implemented and what the desired outcomes are. Management can communicate governance processes in a variety of ways: general announcements, the institution of formal committees, regular communication from the office of the CIO or the office of IT governance, one-on-one sessions, intranets and so on. Our research indicates that more communication generally means more effective governance.

Well-designed, well-understood and transparent mechanisms promote desirable IT behaviors and individual accountability. For example, UPS has designed four coordinated governance mechanisms to implement the company’s intended governance arrangements: (1) an IT steering committee, comprising four top executives who accept primary responsibility for principles and investment decisions, (2) an IT governance committee of senior IT executives responsible for key architecture decisions, (3) a formal “charter” process that winnows down the entire enterprise’s IT project proposals to those best aligned with strategic objectives and (4) an escalation process to handle exceptions to architecture standards at the appropriate organizational level. These four mechanisms clarify processes and accountabilities so that individuals throughout the company can make decisions that result in desirable behavior as defined at UPS.

How Top Performers Govern

There is no single best model of IT governance. Given different strategies and organizational forms, different enterprises will attempt to encourage different behaviors. Governance arrangements thus can vary from more centralized approaches (most notably monarchies) to more decentralized approaches (most notably feudal designs), with federal and some duopoly designs straddling the two. Similarly, some governance mechanisms support more centralized approaches (such as executive committees and centralized capital approval process). Others support more hybrid approaches (such as business/IT relationship managers and service-level agreements). 3 Decentralized governance designs involve very few mechanisms.

Ultimately, however, effective IT governance should be evident in business-performance metrics. We investigated the IT governance patterns of leaders relative to the following financial performance measures: 4 profit as measured by return on equity (ROE), return on investment (ROI) and percent profit margin; asset utilization as measured by return on assets (ROA); and growth as measured by percent change in revenue per year. It is clear that top-performing companies govern significantly differently from other companies. Even among top performers, governing styles differ according to which performance metric they emphasize. (See “Governance Lessons From Leaders”)

Governance Lessons From Leaders

Top-performing companies* govern significantly differently from other companies. Even among top performers, governing styles differ according to which performance metric they emphasize.

Centralized Approaches and Profitability

The most profitable companies tend to be centralized in their approach to IT governance. Their strategies emphasize efficient operations. Accordingly, it is desirable for IT governance to encourage a high degree of standardization in the pursuit of low business costs. Key mechanisms include executive committees for decision making, centralized processes for architecture compliance and exceptions, enterprisewide IT investment decision processes, and formal post-implementation assessments of IT-related projects. The United Nations Children’s Fund (UNICEF) is an example.

Although UNICEF is not for profit, its emphasis on cost-effectiveness and rapid organizational learning led it to adopt a centralized IT governance model. UNICEF operates in remote and sometimes dangerous locations, including sites affected by armed conflict, natural disasters and other tragedies. For years, IT at UNICEF supported administrative tasks at headquarters but was nearly nonexistent in the field offices, where the needs of children were directly addressed. In the mid-1990s, senior management recognized that the lack of IT in field offices was handcuffing operations, so the organization, led by CIO Andre Spatz, equipped remote locations with IT services. Spatz worked with other C-level managers to establish priorities and make important trade-offs among features like cost, reliability, speed and accessibility. The result was improved global knowledge, information flow, transparency and communication. Field offices now can serve their constituents based on transaction-level and value-added information that they could not access only a few years ago.

Decentralized Approaches and Growth

The fastest-growing companies are focused on innovation and time to market. They insist on local accountability. They measure success through growth in revenues, which are often generated from products introduced in the last two or three years. These companies seek to maximize responsiveness to local customer needs and minimize constraints on creativity and business unit autonomy by establishing few, if any, enterprisewide technology and business-process standards. Accordingly, they require few governance mechanisms, often relying only on an investment process that identifies high-priority strategic projects and manages risk.

Atlanta-based Manheim Auctions, the U.S. market leader in business-to-business car auctions, recognized during the early years of e-commerce that the Internet would offer opportunities to grow its business. 5 In the late 1990s, Manheim introduced online auction capabilities and experimented with related revenue-generating electronic capabilities. One service, the Manheim Market Report, generated significant value by providing online information on the company’s auctions to car dealers and other industry participants.

To launch its fast-growth online business, the company created an independent business unit, Manheim Online, a subsidiary of Manheim Interactive. Hal Logan, then the CEO of Manheim Interactive, worked with the senior management team to define principles and strategic business requirements. Like most high-growth startups, the company did not tightly govern architecture or infrastructure, focusing instead on managing projects for rapid development. A development team was made responsible for all aspects of each new Manheim Online service rollout: product management, deploying of the Web servers, development of the service and quality assurance of the service.

Manheim’s decentralized approach to IT governance allowed the company to innovate and grow its business base. As the development teams’ focus on speed of delivery became unsustainable in the context of the larger company, Manheim eventually identified a need for more centralized architecture and reusable infrastructure services. Its online business today is integrated into the overall Manheim Auctions business model, relying on a set of shared IT services. Accordingly, IT governance has transitioned to a blend of centralized and decentralized arrangements.

Hybrid Approaches and Asset Utilization

Companies seeking optimal asset utilization attempt to balance the contrasts between governance for profitability and governance for revenue growth and innovation. They focus on using shared services to achieve either responsiveness to customers or economies of scale — or both. Their IT principles emphasize sharing and reuse of processes, systems, technologies and data. Asset utilization demands a hybrid approach to governance, mixing elements of centralized and decentralized governance. Leaders who excel at asset utilization typically rely on duopolies and federal governance design. They introduce governance mechanisms to address the tensions between enterprisewide and local control. Those mechanisms include high-level business-IT relationship managers, service-level agreements and IT chargeback, IT leadership teams comprising business unit IT representatives, and enterprisewide business process teams with IT members. The hybrid approach is common, but it clearly demands a great deal of management attention.

ING DIRECT, the international direct banking unit of Dutch financial services conglomerate ING Groep N.V., takes a hybrid approach to IT governance. 6 ING DIRECT is organized into nine country-based businesses. Each country unit operates autonomously, but the units share a common business model. The bank leverages standardized business solutions as well as standardized technical and infrastructure components, offering a product set featuring savings accounts, term deposits, personal loans/mortgages, retirement savings plans and a few select mutual funds.

ING DIRECT’s IT governance uses duopoly arrangements for all its IT decisions. The key mechanism is the Information Technology and Operations Council (made up of the CIOs and COOs of the country-based businesses and the head office CIO/COO). The Council makes enterprisewide principles, architecture, infrastructure and investment decisions. Its semiannual meetings offer a forum for coordinating ING’s IT plan with the businesses’ mid-term plans. The outcome of this meeting serves as input for the ING DIRECT Council (executive team meeting), where the international business strategy is discussed and defined. In doing so, ING DIRECT allows IT capabilities to influence business strategy just as strategy influences IT.

To facilitate development and reuse of business process modules, ING DIRECT looks to its local businesses for innovations. If a country unit wants to introduce a new product, country managers develop a product proposal detailing financial and business implications and risks. A product committee at the company’s head office approves every new product, based on a thorough and detailed review process involving all business units. The outcome of this selection process is a global standard rather than an isolated local solution. In addition, ING DIRECT’s chief architect helps define application specifications so that the new application modules work effectively with existing modules and fit with the existing business, application and technical architecture. This arrangement supports ING DIRECT’s desirable behaviors of building modules for reuse, standardizing applications and achieving a universally compatible architecture.

Minneapolis-based Carlson Companies Inc. takes a different approach to hybrid IT governance. 7 Carlson is a $20 billion, privately owned conglomerate in the marketing, hospitality and travel business. It has grown through acquisition, with operating groups in relationship marketing services, loyalty programs (Gold Points Reward Network), hotels (Radisson Hotels and Resorts, Regent International Hotels), restaurants (T.G.I. Friday’s Inc.), cruises and travel services.

Traditionally, each Carlson operating group functioned independently and competed with other operating groups. But in 2000, chairman and CEO Marilyn Carlson sought to change that competitive relationship to a collaborative one. CIO Steve Brown, who reports directly to the CEO, was given responsibility for defining the role of IT for the integrated enterprise.

Toward that end, Brown articulated two key principles. First, application development could continue to take place within operating groups, but applications would be presented to users through a shared portal, and, where necessary, data would be shared across business units. Second, Carlson would have a shared IT infrastructure.

To translate these principles into IT architecture, infrastructure, business applications and IT investment decisions, Carlson assigned governance responsibilities to five decision-making structures: the Carlson Technology Architecture Committees (CTAC), which reside in each operating group and take responsibility for meeting the unique needs of each individual business; the Enterprise Architect Organization (EAO), a team of business unit IT representatives that sets corporatewide standards guiding the development efforts of all the operating units; the IT Council, made up of the CTOs and CIOs of each operating group, which meets monthly to talk about new technologies and ways technology can be leveraged across Carlson; the Carlson Shared Services Board, the business unit CIOs and CFOs, who meet to identify opportunities to provide shared IT and financial services to the company; and an Investment Committee, a subset of the Executive Committee, which renders final judgment on all large Carlson Companies investment projects.

With some responsibility for IT decisions being more centralized (investment, for example) and some less centralized (such as business application needs), Carlson’s governance arrangements attempt to maximize opportunities to leverage shared services while minimizing constraints on the unique needs of related but distinct operating requirements across diverse business units. (See “IT Governance at Carlson Companies.”)

IT Governance at Carlson Companies

Carlson Companies allocates IT decision making to encourage business unit autonomy while ensuring strategic use of corporate IT funds. Five decision-making mechanisms implement this objective. The IT investment committee, a subset of the senior executive committee, makes IT investment decisions. The CIO is responsible for establishing IT principles, and the CIO’s centralized enterprise architecture organization makes architecture decisions. Carlson uses a duopoly — members of the board of its shared services organization, as well as the CIOs and CTOs of the business units — to make infrastructure decisions. Application needs are feudal, allowing each business unit to meet unique business needs. In addition to these decision-making mechanisms, Carlson benefits from three alignment mechanisms to allocate accountability for daily decisions. First, an architecture exception process relies on the CTAC (Carlson Technology Architecture Committee) in each business unit to either make exception decisions or forward them to the Enterprise Architecture Organization. Second, a services catalog, compiled by the shared services unit, provides a listing of infrastructure services and their prices to help the Carlson Shared Services Board consider changes to infrastructure services. Finally, Carlson’s funding process requires the business unit and the CIO’s office to carefully develop authorization proposals for funding of IT projects as input to the IT funding process.

Large, global companies often require the benefits of a hybrid IT governance model to achieve both the synergies emphasized in more centralized models and the autonomy allowed by more decentralized models. In addition to Carlson and ING DIRECT, companies like DuPont, J.P. Morgan Chase and Johnson & Johnson achieve these benefits by implementing IT governance at three levels: the enterprise, the region or group of businesses and the business unit. J.P. Morgan Chase, for example, encourages autonomy in order to generate innovation and recognize the very different requirements of businesses that range from credit cards to investment banking. But the company has instituted some enterprisewide IT principles in order to encourage the use of standardized technologies where they can provide economies of scale. At the division level, J.P. Morgan Chase businesses have introduced governance mechanisms that facilitate sharing of customer data so that business units can, when appropriate, present a single face to the customer. At the individual business unit level, each business can design the IT governance arrangements that best address its own needs for synergy and autonomy.

Companies attempting to realize cost savings by capitalizing on business unit synergies often look to shared services to remove duplication or reduce IT unit costs. DuPont, for example, has an enterprise IT architecture group with representatives from all regions, all strategic business units and all competency centers. This group proposes architecture rules to a team consisting of the corporate CIO and the CIOs of the largest business units. That team makes sure the rules make sense for the businesses and takes responsibility for enforcing architectural standards. Enterprise-level governance mechanisms like DuPont’s establish parameters for IT governance design at lower organizational levels.

Recommendations to Guide Effective IT Governance Design

Effective IT governance demands that senior managers define enterprise performance objectives and actively design governance to facilitate behavior that is consistent with those objectives. Often companies have mature business governance processes to use as a starting point in designing IT governance. 8 For example, the Tennessee Valley Authority piggybacked its IT governance on its more mature business governance mechanisms, such as its capital investment process. The TVA’s IT governance included a project review committee, benchmarking and selective chargeback — all familiar mechanisms from the engineering side of the business. 9

Companies can use the one-page framework of IT governance to help design structures and processes that enhance their strategic use of IT. In order to use the framework effectively, management teams must first establish the context for IT governance. That means clarifying how the company will operate, how the company’s structure will support its operations and what governance arrangements will elicit the desirable behaviors that structure cannot ensure. Governance arrangements generally transcend organizational structure and can be more stable than structure.

IT governance design should encompass four steps:

Identify the company’s needs for synergy and autonomy.

Senior managers are often enamored of the potential to derive business value from synergistic efforts like cross-selling, standard technology platforms or enterprisewide business processes. Management teams should consider realistically both the benefits and costs of such synergies. Synergy-autonomy trade-offs force senior managers to make tough decisions and communicate those decisions throughout the enterprise. Clarifying those decisions establishes the parameters for the design of IT governance and accompanying managerial incentives.

Establish the role of organization structure.

Companies have long relied on organization structure to create the context for achieving organizational objectives. For some time, this resulted in pendulum-like swings between centralized and decentralized organizational forms. Companies eventually pursued both centralization and decentralization simultaneously by introducing more matrixed reporting relationships. However, the complexity of matrices can overwhelm managers and limit effectiveness. By establishing organizational priorities for autonomy and synergy, companies can introduce organizational designs and incentive systems that reinforce their priorities. Governance processes —and related incentives — can then compensate for the limitations and instability of the organizational structure. These governance processes can be easier to design if their objectives are clear and less disruptive to implement.

Identify the desirable IT-related behaviors that fall outside the scope of organizational structures.

Management teams that understand what behaviors organizational structures will enforce can identify the additional behaviors they must promote in order to achieve their objectives. Then, rather than restructuring each time priorities shift, new governance mechanisms can force new behaviors without requiring reorganization. Governance mechanisms can provide organizational stability by demanding disciplined processes. And governance itself appears to become more stable as companies learn good governance practices. 10 Together, organizational structure and IT governance design can allow companies to achieve seemingly conflicting objectives.

For example, even if organizational structures emphasize the autonomy of individual business units, a company can establish IT architecture principles that limit business unit technical choices —and achieve enterprisewide cost objectives. Similarly, IT investment decision processes can direct business unit priorities toward enterprise priorities by approving only projects that support enterprise strategies, even if organizational structures place responsibility for accomplishing project outcomes on business unit managers. Dual incentives are necessary in most companies to motivate senior-level managers to focus on both enterprisewide and business unit goals.

Thoughtfully design IT governance on one page.

When the objectives of IT governance are clear, companies can design IT governance by outlining governance arrangements and then specifying the mechanisms that will implement the intended arrangements. Companies that have not been effective in using IT strategically should expect to invest in organizational learning. Early in the learning cycle, those decision-making mechanisms may involve large numbers of managers.

For example, in the mid-1990s, the senior executive team at Dow Corning Corp. sought to transform IT from back-office function to strategic enabler. 11 The executive committee met regularly for several years to redefine the role of IT, articulate the role of the CIO, establish architectural principles, outline key projects — particularly the implementation of an enterprise system —and closely manage IT investment priorities. Once the full executive committee had entrenched IT as a key function, installed a capable CIO, and gained competence in articulating how IT should enable business strategy, ongoing IT governance responsibilities were assumed by a subset of executive committee members. The ability to reduce the size of the steering committee, indicated that Dow Corning had created sustainable senior management participation in high-level IT management. Making the CIO a member of both the business monarchy and the IT monarchy provided a natural linkage between business and IT strategy. EFFECTIVE IT GOVERNANCE certainly doesn’t happen accidentally. But companies that have followed the steps enumerated above have had demonstrable success designing, communicating and refining IT that creates real business value in their enterprises.

Acknowledgments

Both authors contributed equally to this article and would like to thank all the managers who participated in the research as well as Marianne Broadbent, Mark McDonald and their colleagues at Gartner Inc. We also would like to acknowledge the MIT Sloan CISR Patrons and Sponsors for supporting this research.

1. P. Weill and J. Ross, “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results” (Boston: Harvard Business School Press, 2004).

2. See J.W. Ross, “United Parcel Service: Delivering Packages and e-Commerce Solutions,” working paper 318, MIT Sloan School of Management, Center for Information Systems Research, Cambridge, Massachusetts, 2001.

3. For a discussion of hybrid governance arrangements, see C.V. Brown and S.L. Magill, “Reconceptualizing the Context-Design Issue for the Information Systems Function,” Organization Science 9, no. 2 (March–April 1998): 176–194.

4. The analysis was adjusted for industry differences so that companies were compared to competitors.

5. For more information see www.manheim.com and R. Woodham and P. Weill, “Manheim Interactive: Selling Cars Online,” working paper 4160-01, MIT Sloan School of Management, Center for Information Systems Research, Cambridge, Massachusetts, August 2001.

6. For a more complete description of governance and architecture at ING DIRECT, see D. Robertson, “ING DIRECT: The IT Challenge (A)” and “ING DIRECT: The IT Challenge (B),” IMD-3-1344 and IMD-3-1345, IMD International, Lausanne, Switzerland 2003.

7. For a more complete description of IT governance at Carlson Companies, see P. Weill and J. Ross, “Mechanisms for Implementing IT Governance,” chap. 4 in “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results” (Boston: Harvard Business School Press, 2004).

8. See V. Sambamurthy and R.W. Zmud, “Arrangements for Information Technology Governance: A Theory of Multiple Contingencies,” MIS Quarterly 23 (June 1999): 261–288. The authors find that corporate governance is one of three important contingencies influencing IT governance arrangements in organizations. The other two contingencies are absorptive capacity and economies of scope.

9. References to TVA excerpted with permission from Gartner. See M. Broadbent and P. Weill, “Effective IT Governance: By Design,” Gartner EXP Premier Report, Gartner Inc., January 2003.

10. In our research, we found that companies with effective governance changed some aspect of governance about once per year, whereas companies with less effective governance changed governance as many as three times per year.

11. J.W. Ross, “Case Study — Dow Corning Corporation: Business Processes and Information Technology,” Journal of Information Technology 14, no. 3 (1999): 253–266.

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