CIO

Governance the Key to Meaningful Federation

Whatever its merits in theory, a federated model can never be an effective compromise between the centralized and distributed models of IT unless the governance is right

All the evidence shows that effective governance creates greater value for IT. However, as Butler Group research director Tim Jennings and Datamonitor director Alistair Leathwood point out in an article prepared for the December 2005 Butler Group Review, it is just as clear that both the structure of the IT function and the role of IT within the organization determine the way IT governance is implemented.

Datamonitor's benchmarking shows that those organizations most effectively using IT tend to have a more highly centralized approach to IT governance and decision making

Datamonitor's IT spend benchmarking services show how best-in-class organizations rely on both low IT intensity and low cost/income ratio to help the business run efficiently, and also have a good grip on IT spending. IT intensity typically increases where additional IT spend enhances efficiency, while when low IT intensity is combined with a high cost/income ratio, it may be a sign there is room for improvement in productivity.

However, the authors say less important than the absolute level of spend on IT is how well it is spent. This is where IT governance and the way that IT is structured come in.

"Over many years, the popularity of centralized or distributed models for IT has shifted according to both business and technology climates. The centralized model is touted as offering greater economies of scale, avoiding duplication of effort and simplifying governance and compliance, but can be less responsive to business needs and makes it difficult to get business unit funding for centralized projects," they write. "Conversely, the distributed model offers closer alignment with business units, is more responsive to tactical needs and reduces the competition between divisions for funding, but makes it more difficult to get an enterprise-wide view of IT and is prone to increased costs through duplication.

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"For many organizations, a federated model has proved to be an effective compromise between these two ends of the spectrum, with a central function responsible for overall IT coordination and governance, whilst maintaining either a direct IT capability in each business unit, or a business unit IT liaison to represent the IT requirements of that department within the central function."

Datamonitor's benchmarking shows that those organizations most effectively using IT tend to have a more highly centralized approach to IT governance and decision making, particularly when it comes to overall IT strategy decisions and infrastructure policy. That centralized approach helps strategic decision making by fostering a closer relationship between senior IT executives and senior business leaders — important when it comes to ensuring IT concentrates on projects that are well aligned with business objectives.

It is also easier to achieve good IT governance under central control, even if operational IT is distributed. ("It becomes easier to define a governance framework and the associated policies and operational processes, and to mandate these across the IT function. This does not mean that a distributed IT model necessarily leads to poor governance, but indicates that developing individual governance efforts across business units is less effective, and can be difficult to standardize at a later stage," the authors say.)

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More Effective

The data also suggests decisions affecting IT infrastructure are considerably more effective when centrally made, because they encourage increased standardization, reduced supplier proliferation and better infrastructure use.

For all those reasons Butler Group recommends overall responsibility for IT governance should lie with a group CIO who enjoys autonomy from individual business units and who is charged with developing an enterprise-wide standard framework for governance. This framework should specifically mandate a joint business-IT approach to IT strategy decisions, should involve business units in decisions on enterprise applications, and endorse a common enterprise architecture across the organization. For routine run the business (RTB) strategies, they say the organization should focus on standardization and the definition of IT services that are decoupled from business units and can be delivered at the lowest possible cost consistent with efficient operations.

"The sponsorship, management and governance of strategic enterprise-wide programs in federated organizations require dedicated centralized resources," researcher Forrester says. "These resources must be free from day-to-day involvement in operational deliverables so they can be committed to strategic activities. And they must be positioned organizationally so their influence extends enterprise-wide. The office of the CIO (OCIO) is such a structure. Its primary function is to advance a strategic IT management agenda within a federated organization."

Forrester notes that federated organizations are optimized for the autonomy of the operating units and are ill-suited to coordination of enterprise-wide planning or the execution of enterprise-wide initiatives. Having operational resources reside within and funded by the business units, which expect to derive direct business value from deployment of their resources, makes it impossible to advance an enterprise-wide agenda without the addition of central organizational structures and processes. The typical structure for governing the enterprise-wide IT management agenda is the office of the CIO.

(See "When Egos Dare")