Is IT Governance Killing Innovation?

Return on investment is everyone's favorite metric. It allegedly demonstrates that the initiative under scrutiny - as well as the people managing it - are 'serious:'  about money, time and, presumably, their own job security.

ROI is a vestige of the Shareholder Era, when every institutional decision was supposed to benefit The Shareholder, whether it was good for customers, employees, the longevity of the enterprise, or not. But as managers learn more about the complexity of decision making and its implications in the networked economy, the more questions they raising about whether ROI is an accurate or even appropriate metric for the digital age.

In fact, the way ROI is currently applied suggests it may really stand for return on insecurity. The insecurity in question is likely to be that of the so-called decision makers whose fear of making judgements without 'perfect' information about the future, may be far more detrimental to the future of their enterprises than any financial return may indicate.

This may be especially true for information technology (IT)  investments. The rapidity with which IT is evolving, especially given the surging importance of mobile, means that there may not be time to conduct the sort of resource intensive (and, we're being honest, ass-covering) reviews once thought to be essential. Furthermore, the nature of networked enterprises means many more decision-makers, whose disparate strategies and needs may make consensus even more difficult.

The reality is that governance is essential, as is innovation. But for the two to thrive without one stifling the other, room must be made for flexible, less rigid approaches to oversight that accurately reflect the evolutionary and adaptive nature of business itself. JL

Andrew Horne and Brian Foster comment in Harvard Business Review:

The currency of most IT project prioritization meetings is the ROI-based business case. As mentioned above, this measure works very well for comparing projects that deliver hard benefits, but undermine the ability to invest in critical capabilities that have a long-term payoff horizon or highly innovative capabilities where the payoff is uncertain.

Recent CEB research shows that work has become much more interdependent — employees increasingly need to tap a broader array of internal and external colleagues and partners to be successful in their jobs. The emergence of this new work environment has significant implications for how IT should enable business growth and, more specifically, for the kinds of investments IT should be making to support employees.
Unfortunately, when it comes to IT's ability to allocate investments in response to the new work environment, traditional governance processes prove grossly outdated. Some of the key challenges:

• Companies don't identify the very best ideas for investment because most capital allocation processes start with business partners' existing ideas about projects to fund. As we've noted in our previous blog, senior business partners might not be that knowledgeable about what actually drives productivity on the front lines.


• Companies allocate capital to the wrong investments because our traditional emphasis on ROI-based business cases undermines IT's ability to invest in high-return-but-hard-to-measure areas like improving knowledge worker productivity.


• Companies tend to spread their capital allocation bets too thinly across business groups or functions, often for political reasons. This practice helps 'keep the peace' but means that often the most transformational opportunities get short-changed.

Across our year of research into this problem, we have identified a select group of companies that are rethinking their governance and investment processes to circumvent the problems outlined above. Expand First, Filter Second
Most CIOs will tell you that they have no shortage of ideas to invest in — the hard part is whittling down to the right ones. Push that a bit further and what most CIOs say is that those ideas are in the form of project requests from business partners. The problem is that these "bottom-up" project requests often miss the big picture as too many are incremental or uninspiring. Yes, while most of these requests are vetted for alignment with corporate strategy, what's often missing is how these requests fit within a broader context of how the business overall generates value. Furthermore, this lack of context prevents organizations from identifying other investment ideas that have high potential but haven't bubbled up organically through project requests.
To address this challenge, a global transportation company we spoke with is using a strategic lens to expand the list of project ideas to find the ones with the highest potential corporate value, before filtering them. They start with a map of the company's critical business capabilities — those concrete business activities that are vital to meeting a strategic goal (e.g. rapid new product roll-out). Then, they look at the health of the information available to business leaders who manage those capabilities. They find this leads them into all sorts of overlooked opportunities and provides them with a good proxy for where IT investment can have significant business impact, which can better inform prioritization decisions.
A global high-tech equipment provider is taking a different approach. Similar to the transportation company mentioned earlier, they start with a top down view of critical business capabilities and pillars required to support long-term business strategy. Then, using customer preference measurement methodologies like conjoint analysis, they survey senior business leaders to determine the relative criticality of each of these pillars. Based on this — and before any projects are even discussed — they are able to map out the relative level of IT investment each capability should receive. So, if the business leadership agrees that capability A is twice as important to realizing their goals as capability B, capability A is targeted for twice as much investment. Projects can then be assessed on contribution to the needs of that pillar, rather than purely on financial metrics like ROI.
CIOs are being asked to arm employees with the capabilities required for success in a new, much more integrated and interdependent work environment. But to do that requires more than capital: it requires a different approach to making decisions and, specifically, rethinking traditional IT project-centric approaches to identifying and funding capital investment opportunities.